|SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549



FORM 10-K



(Mark One)
|----------------------------------------------------------------------------------

|[X] |  | ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- |  | ------------------------------------------------------------------------------------

|For the
fiscal year ended December 31, 2000



OR
|-------------------------------------------------

|[_] |  | TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- |  | ----------------------------------------------------------------------------------------

|For the transition
period from ________ to ________



Commission
File Number 0-11749


SCIOS INC.


(Exact name of
registrant as specified in its charter)
|-----------------------------------------------------------------------------------------------------------------------------------------------------------

|DELAWARE(State or other jurisdiction ofincorporation or organization) | 95-3701481(I.R.S. EmployerIdentification No.)
|--------------------------------------------------------------------- | ---------------------------------------------

|820 West Maude Avenue,
Sunnyvale, California 94086 (Address of principal executive offices)


Registrants telephone
number, including area code: (408) 616-8200



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 Contingent
Payment 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. [_]


The
approximate aggregate market value of voting stock held by nonaffiliates of the
registrant as of March 16, 2001 was $737,569,844.


As of
March 16, 2001, 39,314,425 shares of the registrants Common Stock were outstanding.


DOCUMENTS INCORPORATED
BY REFERENCE
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Documents                                                                          | Form 10-K Part
|---------------------------------------------------------------------------------- | --------------
|Definitive Proxy Statement with respect to the 2001 Annual Meeting of Stockholders |               

|
|

|In
this Form 10-K, Scios, we, us, and
our refer to Scios Inc. The following discussion contains
forward-looking statements about our plans, objectives and future results. These
forward-looking statements are based on our current expectations. We assume no
obligation to update this information. Realization of our plans and hoped for
results involves risks and uncertainties, and our actual results could differ
materially from those discussed here. Factors that could cause or contribute to
such differences include, but are not limited to, those discussed below in this
Form 10-K for the year ended December 31, 2000, particularly in the section
entitled Risk Factors.


PART I




Item 1.
BUSINESS



Overview


We
are a biopharmaceutical company developing novel treatments for cardiovascular
and inflammatory diseases. We are distinguished by our disease-based technology
platform, which integrates expertise in protein biology with computational and
medicinal chemistry to identify novel targets and protein-based small molecule
compounds for large markets with insufficient treatments. Our lead product
candidates include Natrecor (nesiritide), for the treatment of acute congestive
heart failure, or acute CHF, for which we have filed a New Drug Application, or
NDA, with the FDA, and our p38 kinase inhibitor, SCIO-469, for the treatment of
inflammatory diseases such as rheumatoid arthritis, which is currently in Phase
Ib clinical trials.


We
were incorporated in California in 1981 under the name California Biotechnology Inc. and
reincorporated in Delaware in 1988. We changed our name to Scios Inc. in February 1992,
and to Scios Nova Inc. in September 1992 following our acquisition of Nova
Pharmaceuticals, Inc. We returned to using the name Scios Inc. in March 1996. Since
September 1999, our principal executive offices have been located at 820 West Maude
Avenue, Sunnyvale, California 94085. Our telephone number is (408) 616-8200.


Our
corporate website is located at www.sciosinc.com. We do not intend for
information found on our website to be part of this document.


We own various copyrights, trademarks and
trade names used in our business including the following: Natrecor, and
Fiblast®. This document also includes trademarks, service marks and trade
names of other companies, including the following: Gliadel®, Biodel®,
Enbrel®, Remicade®, Celebrex®, Vioxx®, Tezosentan®,
Risperdal®, Simdax®, Paxil®, Eskalith®, Eskalith CR®,
Stelazine®, Thorazine® and Parnate®.



Recent
Developments


Since
December 31, 2000, the following significant developments have occurred with
respect to our business:



Natrecor- for
the treatment of acute CHF
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | In
January 2001, we filed an amendment to our NDA for Natrecor with the FDA. We believe the
FDA will respond to our application by July 2001.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | In
January 2001, we entered into a marketing alliance with Innovex L.P. to commercialize
Natrecor for the treatment of acute CHF. Innovex will deliver a wide range of sales and
marketing solutions for us, including hiring, training and deploying a dedicated
cardiology and emergency medicine sales force of approximately 180 salespeople.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|1
|-

|p38 Kinase
Inhibitor Program- SCIO-469 for the treatment of inflammatory diseases
|---------------------------------------------------------------------------------

| |  |  | In
January 2001, we completed a Phase Ia trial of SCIO-469. The trial indicated that the
drug is safe and well-tolerated when given as a single dose to healthy volunteers.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | In
February 2001, we began a Phase Ib trial to evaluate the safety, tolerability and
pharmacokinetics of multiple oral doses of SCIO-469. The results of this trial are
expected in the second quarter of 2001.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Other
Developments


In
March 2001, we and GlaxoSmithKline Corporation, or GSK, agreed to terminate the exclusive
marketing agreement relating to certain GSK psychiatric products sold by us effective
March 31, 2001. Under the agreement, the Company will receive from GSK $4.0 million in
2001, $3.0 million in 2002 and $2.5 million in 2003. Approximately 40% of our total
revenues in 2000 were derived from these psychiatric products.



Our Lead
Products in Development


We
currently have two lead products in clinical development: Natrecor for the
treatment of acute CHF, and SCIO-469, a novel small molecule compound for the
treatment of inflammatory diseases.



Natrecor



Congestive
Heart Failure


According
to the 2001 American Medical Association Heart and Stroke Statistical
Update, five million Americans currently suffer from chronic CHF and 550,000
new cases of CHF will be diagnosed in the United States this year. Annual
expenditures for CHF are estimated to be $38 billion, including $23 billion for
inpatient care. CHF represents the largest single expenditure of the Medicare
system.


Chronic
CHF is characterized by a progressive loss in the hearts ability to pump
blood. It is attributable to weakening of the contractile cells of the heart and
accumulation of scar tissue. Different diseases can cause CHF, including
coronary artery disease, heart attacks, inflammation of the heart tissue and
diseases of the heart valves. Weakened heart muscle often results in poor
cardiac output because the heart is unable to empty blood adequately from the
ventricles to the circulation with each beat. Blood begins to back up and pool
in the ventricles, and the heart changes from its normal shape and becomes
enlarged. Subsequently, blood begins to back up into the blood vessels of the
lungs, causing marked increases in pulmonary vascular pressures. As pressure
increases, fluid moves from the pulmonary blood vessels into the air spaces,
causing pulmonary congestion. One frequently used measurement of pulmonary
vascular pressure is pulmonary capillary wedge pressure, or PCWP.


CHF
symptoms that result from the pooling of blood include dyspnea, or shortness of
breath, edema, or fluid retention, and swelling of the legs and feet. CHF
symptoms that result from the inefficiency of the heart to distribute or
adequately pump oxygen-rich blood to body tissues include fatigue and weakness
as well as a loss of appetite. As the disease progresses, these symptoms can
severely impact the patients quality of life, such that even the ability
to perform simple tasks, such as walking across the room, becomes limited.


In
the early stages of CHF, the body activates several hormonal pathways that help
the heart compensate in the short-term but have adverse long-term effects. These
hormones, which include adrenalin, angiotensin II, aldosterone and endothelin,
stimulate the heart to beat faster and stronger, thicken the wall of the heart
and maintain blood pressure by constricting blood vessels and stimulating the
kidney to retain sodium. If these pathways remain activated over a sustained
period of time, the beneficial effects are lost and injurious effects develop,
contributing to an eventual deterioration of heart function. Current medications
and medications under development generally focus on one or more of these
hormonal pathways.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2

|Many
CHF patients experience a rapid deterioration, or decompensation, of their
disease and require urgent treatment in the hospital. This is called acute CHF.
Acute CHF accounts for approximately one million hospital admissions each year
in the United States. Acute CHF is the most frequent cause of hospitalization in
patients older than 65 years. In addition, patients suffering from acute CHF
have a five-year mortality rate of approximately 50%. For more than a decade,
there have been no new FDA-approved drugs to treat acute CHF.



Current
Treatments for Congestive Heart Failure


While
some cardiac risk factors such as smoking, high cholesterol, high blood
pressure, diabetes and obesity can be controlled with lifestyle changes, the
majority of patients with CHF require additional treatments to help manage their
disease. Current medications for the treatment of CHF, including diuretics,
inotropes, vasodilators and beta blockers, only focus on single components of
the diverse pathways contributing to CHF. Diuretics help the kidneys rid the
body of excess fluid, thereby reducing blood volume and the hearts
workload. Inotropes strengthen the hearts pumping action. Vasodilators,
such as ACE inhibitors, cause the peripheral arteries to dilate, making it
easier for blood to flow. Beta blockers slow the heart rate and reduce blood
pressure by blocking the effects of adrenalin.


Upon
arrival at the emergency room, patients who experience acute episodes of CHF are
typically treated with a combination of oxygen, morphine and intravenous
diuretics. A small percentage of patients respond to this initial therapy and do
not require admission to the hospital; however, the majority of acute CHF
patients require additional medical intervention and are admitted. Additional
acute CHF treatments may include intravenous administration of inotropes, such
as dobutamine, and vasodilators, such as nitroglycerin. While each of these
therapies assist in managing acute CHF, each also has inherent limitations.
Inotropes strengthen the contractility of the heart but increase the incidence
of cardiac arrhythmias, or irregular heartbeats, and are associated with
increased mortality. Intravenously administered nitroglycerin requires careful
monitoring and slow dosage increases in small increments, resulting in delays in
attaining positive responses in acutely ill patients. Moreover, therapeutically
effective doses of IV nitroglycerin are:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | unpredictable
from patient to patient;
| | - |  | --------------------------------------

| |  |  | very
close to the toxic side effects of hypotension; and
| | - |  | --------------------------------------------------------

| |  |  | associated
with increased tolerance or loss of effectiveness.
| | - |  | -------------------------------------------------------------

|These complications of IV
nitroglycerin often require the transfer of acute CHF patients to more costly
treatment units within the hospital, such as the cardiac and intensive care
units, in order to provide careful patient monitoring.



Natrecor: Our
Solution for the Treatment of Acute Congestive Heart Failure


Natrecor
is a recombinant form of human b-type natriuretic peptide, or BNP, a naturally
occurring hormone in the body that aids in the healthy functioning of the heart.
BNP is secreted by the ventricles of the heart as a response to CHF. The
advantage of Natrecor, compared to existing forms of therapy for acute CHF, is
that it works on multiple components of the acute CHF disease pathway. In
particular, Natrecor:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | dilates
veins and arteries, decreasing the resistance against which the heart has to pump;
| | - |  | ------------------------------------------------------------------------------------------

| |  |  | stimulates
the kidney to excrete excess fluid; and
| | - |  | --------------------------------------------------

| |  |  | has
been shown to oppose many of the long-term injurious factors presented by hormones such
as adrenalin, angiotension II, aldosterone and endothelin.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

|3
|-

|In
clinical trials, Natrecor has also been shown to significantly improve blood
circulation and patient symptoms compared to IV nitroglycerin without the need
for labor-intensive monitoring, and its method of administration does not
require frequent dosing adjustments. In addition, Natrecor is not associated
with any increase in the incidence of cardiac arrhythmia and demonstrates no
evidence of drug interactions with other agents used concurrently in the
treatment of acute CHF.



Natrecor
Clinical Trials


We
have conducted numerous clinical trials evaluating Natrecor over the past eight
years. Approximately 1,000 patients have been treated with Natrecor in 12
trials, including four pivotal efficacy trials. In all of these trials, Natrecor
administration has been associated with improved blood circulation and vascular
filling pressures in the heart and lungs. Each of the efficacy trials further
demonstrated statistically significant improvement of symptoms in acute CHF
patients.


Amended
NDA Submission Trials


We
have completed two trials since the submission of our original NDA, the VMAC
trial, or Vasodilation in the Management of Acute CHF, and the PRECEDENT trial,
or Prospective Randomized Evaluation of Cardiac Ectopy with Dobutamine or
Nesiritide Therapy, and form the basis of our amended NDA.


The
VMAC Trial. We began enrollment in our VMAC study in July 2000 and in
October 2000, completed enrollment of 498 patients hospitalized for acute CHF in
the United States. This trial compared the effects of Natrecor, IV nitroglycerin
or placebo, when individually added to standard therapy, such as diuretics and
inotropes. The primary endpoints were a reduction in pulmonary capillary wedge
pressure, or PCWP  a measure of the pulmonary vascular pressure of the
heart, reflecting its workload  and improvement of the symptom of
shortness of breath. The VMAC trial achieved both of its primary endpoints. Key
results of the VMAC trial that were presented in November 2000 at the annual
scientific meeting of the American Heart Association include:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Natrecor
produced a 21% decrease in PCWP most of which occurred in the first 15 minutes, which was
significantly better than a __ % decrease in placebo;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Natrecor
improved shortness of breath significantly better than placebo;
| | - |  | ------------------------------------------------------------------------

| |  |  | Natrecor
decreased PCWP significantly faster and to a greater extent than IV nitroglycerin;
| | - |  | -------------------------------------------------------------------------------------------

| |  |  | Natrecor
significantly improved breathing in patients receiving standard active therapy; in
contrast, IV nitroglycerin did not significantly improve breathing in these patients;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Natrecor-treated
patients had significantly fewer adverse events than either placebo or IV nitroglycerin
patients;
| | - |  | ------------------------------------------------------------------------------------------------------------------

| |  |  | acute
CHF patients experiencing active ischemia, which is impaired blood flow to the heart,
showed no adverse side effects in response to Natrecor; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | patients
receiving Natrecor did not develop tolerance to the drug over time, consequently, unlike
IV nitroglycerin, the effects of Natrecor were sustained through 24 hours at the same
dosage.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|The
PRECEDENT Trial.The PRECEDENT trial compared Natrecor and dobutamine, the
most commonly used inotrope treatment for acute CHF. Key results of the
PRECEDENT trial indicated that:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Natrecor
produced fewer cardiac arrythmias than dobutamine; and
| | - |  | ---------------------------------------------------------------

|4
|-

|
|

| |  |  | use
of Natrecor was associated with fewer deaths than the use of dobutamine.
| | - |  | ----------------------------------------------------------------------------

|Initial
NDA Clinical Trials


We
conducted three pivotal Phase III clinical trials that were submitted to the FDA
in our original NDA for Natrecor.


Trial
704.311.Trial 704.311 was our first Phase III clinical trial that we
conducted to evaluate the efficacy of Natrecor in patients with acute CHF. In
this trial, we enrolled 103 patients who were treated with one of three
intravenously administered doses of Natrecor over a 24-hour period. This trial
demonstrated that Natrecor produced significant improvements in PCWP and cardiac
pump function. Results of this study were published in The Journal of the
American College of Cardiology in July 1999.


Trial
704.325. Trial 704.325, our second Phase III clinical trial, was a
double-blind, placebo-controlled trial which consisted of 127 patients and was
designed to determine the short-term efficacy of Natrecor with regard to
hemodynamic measures and symptoms. In this trial, Natrecor demonstrated
statistically significant improvements in multiple symptoms of acute CHF, such
as severe shortness of breath and fatigue. In addition, patients treated with
Natrecor also experienced improvements in blood circulation, vascular pressures
in the heart and lungs and cardiac pumping ability. The results from this trial
were published in the July 2000 issue of The New England Journal of
Medicine.


Trial
704.326. In our third Phase III clinical trial, we enrolled 305 patients and
demonstrated that Natrecor resulted in the rapid and statistically significant
improvement of the symptoms and clinical severity of acute CHF, when compared to
placebo. Patients not receiving Natrecor received one or more standard
intravenous drugs for acute CHF, most commonly dobutamine, milrinone or
nitroglycerin. The trial also compared Natrecor with standard intravenous agents
with respect to adverse events. The safety of Natrecor was demonstrated to be
equal to the safety of standard intravenous drugs for acute CHF. The trial also
demonstrated patients treated with Natrecor experienced a reduced need for
diuretics. The results from this trial were also published in the July 2000
issue of The New England Journal of Medicine.


In
each of these trials, Natrecor demonstrated efficacy with respect to symptoms
and hemodynamic parameters of acute CHF. The most common adverse event in the
patients treated with Natrecor was dose-related hypotension, which was usually
asymptomatic.


Current
Clinical Trials


In
March 2001, we began a new clinical trial aimed at investigating the potential
pharmaco-economic impact of Natrecor in improving treatment and outcomes for
acute CHF patients. This PROACTION trial, or Prospective Randomized Outcomes
Study of Acutely Decompensated Congestive Heart Failure Treated Initially in
Outpatients with Natrecor, is a pilot study designed to compare the clinical
effects, safety profile and costs of standard therapy plus Natrecor to standard
therapy plus placebo in 250 acute CHF patients treated in the emergency room or
an observation unit. We expect to complete this study during the third quarter
of 2001.



NDA Filings


In
April 1998, we submitted an NDA to the FDA for the use of Natrecor for the
treatment of acute CHF. This NDA was based on the efficacy trials, 704.311,
704.325 and 704.326. In January 1999, the Cardiovascular and Renal Advisory
Committee recommended that the FDA approve Natrecor for the treatment of acute
CHF. In April 1999, we received a non-approval letter from the FDA, requesting
that we conduct further studies with Natrecor. The FDA requested that in these
studies we demonstrate:



5
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|
|

| |  |  | the
clinical utility of Natrecor as compared to the current standard of care vasodilator
therapy, IV nitroglycerin;
| | - |  | -------------------------------------------------------------------------------------------------------------------

| |  |  | that
Natrecor is safe in acute CHF patients experiencing active ischemia; and
| | - |  | -----------------------------------------------------------------------------

| |  |  | that
the clinical benefits of Natrecor occur early after the initiation of therapy.
| | - |  | -----------------------------------------------------------------------------------

|The VMAC trial was designed
to address each of the issues raised by the FDA in its non-approval letter. The
data from the VMAC study and the PRECEDENT study were submitted to the FDA in
our amendment to the NDA for Natrecor in January 2001. We expect the FDA to
respond to our amended NDA by July 2001.



p38 Kinase
Inhibitor Program



The Immune System
and Inflammation


The
immune system is composed of multiple cell types, including white blood cells,
each with a specific functional role. This system is regulated by cytokines,
which are proteins produced by immune system cells. When the body encounters
foreign material, or when tissue injury occurs, numerous enzymes in the immune
system are activated, causing the production of various inflammatory cytokines
such as interleukin-1, or IL-1, and tumor necrosis factor, or TNF.


One
class of the immune systems family of enzymes is the mitogen-activated
protein kinases, or MAP kinases. The MAP kinases are a family of intracellular
signaling enzymes that are activated when cells are either stimulated or
stressed and mediate many beneficial and injurious cellular responses. One of
the MAP kinases, p38 kinase, is responsible for increased production of IL-1,
TNF and the inflammatory enzyme cyclooxygenase-2, or COX-2.


Autoimmune
diseases occur when the immune system is abnormally activated against its own
body. In the case of rheumatoid arthritis, the immune system is activated
against joint tissues. White blood cells then invade the joint space, and, when
activated, produce IL-1, TNF and COX-2, which result in pain, swelling and
eventual destruction of the affected joints. Other diseases that are worsened by
sustained high levels of TNF and IL-1 include inflammatory bowel disease, CHF
and neurodegenerative conditions such as Alzheimers disease and
Parkinsons disease.



Current
Therapy for Autoimmune and Inflammatory Diseases


Currently,
there is no cure or prevention for autoimmune disease. Optimal medical
management requires the early introduction of therapies in order to prevent the
long-term effects of the disease. In the case of rheumatoid arthritis, long-term
effects include irreversible joint damage and hypertrophy of joint tissues
limiting a patients ability to move the affected joints.


Traditionally,
initial drug treatment of inflammatory diseases involves the use of
non-steroidal anti-inflammatory agents. Steroids, such as glucocorticoids, are
often added as the disease or symptoms progress. Although these agents help
patients increase function and improve symptoms, they do not stop progression of
the disease. Moreover, these drugs have been demonstrated to cause both stomach
and kidney problems. In addition, persistent steroid treatment may result in
excess suppression of the immune system,which can lead to infection,
decreased bone marrow function and osteoporosis. Recently, more selective
anti-inflammatory agents, or COX-2 inhibitors, such as Celebrex and Vioxx, have
been introduced for symptom relief; however, they do not alter the progression
of inflammatory disease. Sales of COX-2 inhibitors for the treatment of
inflammatory disease were approximately $4.8 billion in 2000.


More
powerful drugs exist for patients that do not respond to initial drug therapy.
In the case of rheumatoid arthritis, drugs such as methotrexate,
hydroxychloroquine and sulfasalazine can have individual side effects which must
be monitored closely, and a delay of one to six months for a clinical response
is common.


6
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Within
the past four years, inhibition of inflammatory cytokines has become an
established treatment for autoimmune disease. In the case of rheumatoid
arthritis, two new protein therapeutics, Enbrel and Remicade, were introduced to
inhibit the effects of TNF. These treatments have been shown to be effective at
reducing disease activity; however, they must be given by injection or infusion
on a repeated basis, which is cumbersome for chronic diseases. In addition, when
taken on a chronic basis, increased rates of infections have been reported in
patients taking these medications because these new therapies result in an
excessive inhibition of TNF upon injection due to the limited ability to adjust
the dose of drug administered. Resistance to the treatment is also an issue with
these new drugs. This is due in part to increasing production by a
patients immune system of antibodies that neutralize administered
proteins.


We
are focusing our initial drug development efforts on creating an orally
available small molecule drug for the treatment of rheumatoid arthritis. The
Arthritis Foundation estimated that approximately 2.1 million Americans
currently suffer from rheumatoid arthritis. Decision Resources, an independent
market research group, suggests that the global market for rheumatoid arthritis
therapies will be approximately $6.6 billion by 2009, up from almost $1.5
billion in 1999. Rheumatoid arthritis patients generate more than nine million
physician office visits and more than 250,000 hospitalizations each year. It is
estimated that, in aggregate, the average yearly earnings deficits for all
working individuals with rheumatoid arthritis is approximately $6.5 billion.



SCIO-469: Our
p38 Kinase Inhibitor for the Treatment of Inflammatory Diseases


A
small molecule inhibitor of p38 kinase may have advantages in the treatment of
inflammatory disease since it could inhibit the production of TNF, IL-1 and
COX-2. Our lead p38 kinase inhibitor is SCIO-469. We believe that patients
treated with a p38 kinase inhibitor could experience a reduction in both the
symptoms of rheumatoid arthritis and the progression of the disease. We also
believe another key potential advantage of our approach resides in the ability
of our oral product to be prescribed in a manner that allows for careful dosage
adjustment. Dosage adjustment may allow the physician to inhibit TNF
sufficiently to obtain a useful therapeutic effect without subjecting the
patient to the risk of infection associated with complete TNF inhibition.


In
preclinical studies of acute and chronic inflammatory arthritis, orally
administered doses of SCIO-469 reduced cellular production of COX-2 in a
dose-dependent manner and reduced COX-2 and TNF levels in whole blood assays.
Statistically significant reductions in inflammation also were observed in
animal models of arthritis. In October 2000, we presented preclinical data
involving our p38 kinase inhibitors at the annual scientific meeting of the
American College of Rheumatology. The study demonstrated that our p38 kinase
inhibitors had statistically significant anti-inflammatory effects in both acute
and chronic animal models of inflammation.


In
January 2001, we completed a Phase Ia trial of SCIO-469 in which single oral
doses were shown to be safe and well tolerated. This Phase Ia trial enrolled 30
volunteers. In February 2001, we initiated a Phase Ib clinical trial with
SCIO-469. This Phase Ib trial is a double-blind, placebo-controlled, multiple
oral dose study to evaluate the safety and tolerability of multiple doses of
SCIO-469. This trial is designed to enroll 20 healthy volunteers. If the results
of our Phase Ib clinical trial are favorable, we plan to initiate a Phase II
trial in rheumatoid arthritis patients in the fourth quarter of 2001. This will
consist of testing the drug in patients with active disease, evaluating for both
safety and efficacy over a range of doses.



Marketing and
Sales



Natrecor


Pre-launch
Objectives


7
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|In
anticipation of possible FDA approval in July 2001, we are working to position
Natrecor for maximum market penetration in the United States at the time of
launch. We are developing awareness for Natrecor among key target audiences
through a variety of tactical programs, including medical seminars, continuing
medical education programs, advisory boards and publications. We have identified
and are developing relationships with physicians and nurses who play a leading
role in the diagnosis and treatment of CHF. We intend for these individuals to
communicate the benefits of Natrecor through a series of medical symposia and
lecture programs.


Our
Agreement with Innovex


In
January 2001, we entered into a marketing alliance with Innovex, which will
deliver a wide range of sales and marketing solutions for us. We will lead
strategic and tactical planning for the sales and marketing of Natrecor, and we
will also maintain control over the clinical development for additional
indications for Natrecor. Innovex will identify, hire, train and deploy a
dedicated cardiology and emergency medicine sales force of approximately 180
people to launch Natrecor. Together with Innovex, we have established hiring,
training and deployment criteria for the sales force. Commencing three years
after Innovex begins to supply us with dedicated salespeople, we have the option
to acquire all or any portion of this sales force from Innovex for a fee upon 90
days notice.


We
will create a field support team of approximately 32 people. Twelve scientific
affairs managers have already been hired and trained and are currently working
in the field to build relationships with opinion-leading cardiologists. We have
hired two area business directors and have begun the recruitment efforts to hire
and train 18 area business managers to support the Natrecor sales force.


PharmaBio,
an affiliate of Innovex, has agreed to fund $30.0 million of our costs to launch
Natrecor over the first 24 months of Natrecors commercialization and to
loan us up to $5.0 million. Of the $30.0 million, we anticipate that $10.0
million will paid to us in 2001 following FDA approval of Natrecor. We will
receive 100% of the revenues from sales of Natrecor. In turn, we will pay
PharmaBio a declining royalty rate on those revenues for the period from 2003 to
2007. We also granted PharmaBio a warrant to purchase 700,000 shares of our
common stock at an exercise price of $20.00 per share.



Licensing
Arrangements with Third Parties


We
have licensed some of our product candidates to third parties, who are now
responsible for product development. Under these arrangements, we typically
receive a combination of upfront payments, milestone payments upon their
achievement of scientific and clinical benchmarks and royalties on commercial
sales of products by our partners.


BNP
Diagnostics. We have licensed to Biosite Diagnostics, Inc. and Abbott
Laboratories the right to use our patents on BNP for diagnostic purposes.
Biosite has developed and is currently marketing a point-of-care diagnostic test
for BNP levels in the United States and Europe. This test is used to identify
individuals with CHF or to monitor progression of their disease or their
response to treatment. We are currently receiving royalties from Biosite on the
sales of their diagnostic products. Abbott is continuing to develop its BNP
diagnostic product.



In
1998, we entered into a cross-license agreement with Shionogi and Co., Ltd.
under which we granted Shionogi a royalty-free, nonexclusive license to our BNP
patent rights for the diagnostic field. In exchange, Shionogi granted us a
royalty-bearing, exclusive license under Shionogis BNP patents to develop
therapeutic products. For therapeutic products, we pay royalties on net sales
for the life of the patent in countries where Shionogi holds one or more BNP
patents. In countries where Shionogi has BNP patents pending, we are obligated
to pay a reduced royalty on the net sales of our therapeutic products until the
earlier of the invalidity of the BNP patents pending or four years from the
commencement of sales in that country of such therapeutic products.



8
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|Fibroblast
Growth Factor.FGF, a naturally-occurring protein, stimulates the growth of
new blood vessels. In November 1999, we granted a license to Chiron Corporation
covering rights to FGF in the areas not previously licensed by us. We may
receive up to $12.0 million in milestone payments upon Chirons completion
of certain development objectives. In addition, we will receive royalties based
on sales of FGF products in countries where we hold patents. Chiron has
completed separate Phase II human clinical trials evaluating FGF as treatment
for coronary artery and peripheral vascular disease. In 1988, we licensed our
FGF technology to Kaken Pharmaceutical Co., Ltd. Kaken has an approval pending
in Japan to market an FGF-based product for the treatment of recalcitrant dermal
wounds. We will receive royalties on any sales of FGF products by Kaken in Asia.
We have also granted nonexclusive licensesunder our FGF patents and
technology to Orquest, Inc., for the development of products for the treatment
of bone fractures.


We
are obligated to make payments to Organon International based on amounts
received by us upon commercialization of FGF. Approximately $218,000 remains to
be paid under this obligation, which stems from our 1989 reacquisition of
certain FGF rights previously licensed to Organon.


Vascular
Endothelial Growth Factor121.VEGF121 is a
naturally-occurring protein used to stimulate the growth of new blood vessels.
In May 1996, we granted a license to GenVec, Inc. for the use of the gene
encoding VEGF121 in gene therapy products. GenVec is currently
conducting clinical trials of its BIOBYPASS angiogen which incorporates the use
of our licensed technology. This product is being evaluated to treat coronary
artery disease and peripheral vascular disease. We will receive royalties on any
future sales of these products.


Glucagon-like
Peptide-1. GLP-1 is a potent peptide that stimulates insulin release
when blood sugar levels are above normal. In 1988, we licensed from
Massachusetts General Hospital the exclusive use of certain patent applications
for GLP-1 and certain analogs upon which we will pay a royalty on any future
sales. In 1996, we granted Novo Nordisk A/S an exclusive license to our GLP-1
technology and the additional rights we acquired pursuant to the Massachusetts
General Hospital license. We will receive royalties on product sales made by
Novo Nordisk A/S. Novo Nordisk A/S is responsible for development activities for
GLP-1 and has initiated Phase II human clinical trials of a GLP-1 analog that
they are developing as a treatment for Type 2 diabetes.


Alzheimers
Disease. We have separate research collaborations with Eli Lilly and Company
and with DuPont Pharmaceuticals Corporation to develop new therapies for
Alzheimers Disease. The joint research phase of our collaboration with
DuPont ended in November 2000. DuPont is continuing its efforts to develop a
therapeutic for Alzheimers disease based in part on our technology. The
joint research phase of our collaboration with Eli Lilly is fully funded by Eli
Lilly and has been extended through December 2001. We are entitled to receive
potential milestone payments if certain events are achieved, and Eli Lilly is
entitled to commercialize any resulting products subject to royalty payments to
us.


Drug
Delivery Systems.Prior to our acquisition of Nova Pharmaceutical
Corporation in 1992, Nova had been developing several drug delivery systems,
including the Gliadel implant to treat primary brain cancer. The Gliadel
technology was developed pursuant to a license agreement with the Massachusetts
Institute of Technology relating to MITs Biodel drug delivery technology.
We licensed Gliadel to Guilford Pharmaceuticals Inc. in 1994. Gliadel was
approved for marketing in the United States in 1996. We assigned our Biodel
license rights back to MIT, which will administer the licensing of this
technology, including the license with Guilford. We and MIT are receiving
royalty and milestone payments under the license agreement with Guilford. We
conducted the Gliadel project on behalf of Nova Technology Limited Partnership,
the limited partnership that funded Novas research and development on
these projects.



Psychiatric
Sales and Marketing Division


Since
1990, our Psychiatric Sales and Marketing Division (PSMD) has had the exclusive
right to market certain products in the United States under an agreement with
GSK, including Eskalith and Eskalith CR, Thorazine, Stelazine, and Parnate. GSK
was responsible for the manufacture and distribution of these products. As part
of our agreement with GSK, we paid GSK 40% of our net profits from sales of
these products.



9
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|From
time to time, our PSMD has also marketed various psychiatric products on behalf of other
companies under co-promotion agreements. We were compensated for our services based upon
the number of sales calls we made. The last of these other agreements ended as of March
31, 2001.


In
March 2001, we entered into an agreement with GSK under which GSK reacquired the
right to market the GSK products. This agreement is effective as of March 31,
2001 and entitles us to receive payments from GSK of $4.0 million in 2001, $3.0
million in 2002 and $2.5 million in 2003. Given our decision to exit this line
of business, we decided to terminate the employment of our part-time sales force
and certain full-time support personnel in this division.



Research and
Development


Our
technical capabilities now include disease-based gene microarray,
bioinformatics, structural informatics, and state-of-the-art medicinal
chemistry, including computational chemistry modeling, all of which have added
to our traditional technical strengths in protein cloning and expression.


In
order to discover new pathways of disease, our research has assembled tissue
samples from a broad array of human and experimental diseases of the
cardiovascular system. We analyze these tissues for the expression of new genes
that may be involved in particular diseases. We do this by a technique known as
microarray gene display, in which fluorescent tags identify which genes may be
up regulated or down regulated during the course of a particular disease. We
then apply commercial and proprietary software analysis to the sequence of these
genes and to the patterns of their expression in order to highlight cellular
pathways that may be playing a particular role in a disease process. This
process is known as bioinformatics.


Particular
attention is paid either to the presence of a known enzyme participating
unexpectedly in a disease process or to a novel enzyme. Our molecular biologists
then express these candidate target enzymes in an activated state as pure
proteins and develop high throughput screening assays to discover inhibitors of
those enzymes within our chemical compound library, which we have developed over
the last several years. Applying the tools of structural informatics, our
protein chemists develop computer-based three-dimensional structures of these
enzymes that guide our chemists in developing lead inhibitory molecules with
respect to potency and selectivity. Once we have brought a drug candidate to the
optimum level of potency and safety, we test the drug at both the cellular and
animal level, again applying gene microarray technology. This allows the rapid
evaluation of the drug for efficacy while ensuring that potential toxicities are
minimized before testing in the clinic.


We
are focused on diseases of the cardiovascular system, with a particular emphasis
on inflammation in both its acute and chronic forms and scarring as a cause of
chronic organ failure. Our research has emphasized an emerging family of protein
therapeutic targets known as protein kinases. Kinases are naturally occurring
intracellular signaling switches that work by attaching phosphate
groups to other proteins, thereby activating cellular processes controlled by
those proteins, including the transcription of new proteins. While the vast
majority of protein kinases are engaged in beneficial work on behalf of the
cells of the body, medical research over the last decade has clearly
demonstrated that cellular pathways abnormally activated by certain kinases
contribute to both the symptoms and progression of many diseases. By applying
the most advanced technologies available with proprietary methodology, including
the development of gene analysis software, we have dedicated ourselves to the
identification of kinases participating in diseases within our strategic focus
and developing and testing inhibitors of those enzymes for potential therapeutic
value. The rapid preclinical and clinical development of our p38 kinase
inhibitor, SCIO-469, represents the initial success of this innovative
approach.


Our
aggregate research and development expense totaled $39.3 million in 2000, $34.3
million in 1999 and $46.6 million in 1998.


10
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|Manufacturing


Our
products are manufactured for us by third parties. In 1995, we entered into an
agreement with Biochemie GmbH in Austria for the manufacture of Natrecor. If
Natrecor is approved by the FDA in 2001, we expect the agreement to run through
2009. Biochemie ships Natrecor in powder form to Abbott Laboratories in
McPherson, Kansas, where it is blended, filled and packaged for shipment. We
also maintain arrangements with several companies to manufacture our p38 kinase
inhibitor compounds and intend to enter into a long-term supply relationship if
our compounds continue to proceed through development.



Patents and
Proprietary Rights


We
seek patent protection for proprietary technology and products in the United
States and abroad to prevent others from unfairly capitalizing on our investment
in research. Other companies engaged in research and development of new health
care products also are actively pursuing patents for their technologies. We also
rely upon trade secrets and know-how to reinforce our competitive position.
However, trade secret protection will not preclude others from independently
developing technology similar to ours, nor can there be any assurance that third
parties who have signed confidentiality agreements with us will honor those
agreements.


We
currently own or hold exclusive rights to approximately 69 issued U. S. patents
and approximately 58 U. S. pending patent applications covering our proprietary
technology and products. We also own or hold exclusive rights to foreign patents
and patent applications corresponding to most of the U.S. patents and patent
applications in our portfolio. Our issued patents include patents on Natrecor,
certain of our p38 kinase inhibitors, FGF, VEGF121 and GLP-1. Our
proprietary position with respect to certain principal products under
development is described below. If a patent issues prior to marketing approval,
as has been the case with all of our issued patents to date, we can apply for
extension of the patent term for a limited period of time to make up for a
portion of the patent term lost to the regulatory approval period. The absence
of a patent covering products which we have licensed to third parties could
reduce the royalties due to us under the agreements with those parties.


Natrecor.
We have been issued United States, Canadian and European patents covering the
endogenous form of Natrecor, human BNP. Our U.S. patents on Natrecor are subject
to possible extension due to time taken up in the regulatory approval process.
We believe our key patent on Natrecor, which currently expires in May 2009, may
be extended to late 2013 or early 2014. Pursuant to an exclusive license granted
to us by Shionogi & Co., Ltd., we also have the exclusive right to develop
therapeutic products using BNP under certain patents and applications on BNP
originally filed by Daiichi Pharmaceutical Co., Ltd. and subsequently acquired
by Shionogi. Although we were granted a Japanese patent on BNP, the patent was
revoked in 1998 in an opposition filed against the patent by an unidentified
party. The opposition did not challenge the originality of our BNP discovery but
based its challenge solely on an interpretation of utility requirements for
patentability peculiar to Japanese patent law. We appealed the revocation to the
Tokyo High Court. On March 13, 2001, the Tokyo high court affirmed the
revocation. Because we believe the decision is contrary to both Japanese
precedent and patentability requirements in the United States and Europe, we
intend to appeal the revocation to the Japanese Supreme Court. The decision does
not affect our patent rights outside of Japan, nor does the revocation impact
our ability to exclusively market BNP in Japan insofar as our exclusive license
under the patent rights of Daiichi includes several Japanese patents of Daiichi
directed to BNP.


p38
kinase inhibitors. We have filed a series of patent applications in the
United States covering the classes of p38 kinase inhibitors that we have
identified. To date, we have been issued two U.S. patents directed to certain of
these p38 inhibitors. These patents will expire in 2018, subject to possible
extension for FDA regulatory delays. While the classes of small molecule
compounds identified by our researchers appear to be unique, we are aware that
other companies are also working to develop p38 kinase inhibitor compounds, and
have filed patent applications on and received patents covering certain classes
of compounds that these competing companies have identified, and covering
various aspects of identifying such compounds.


11
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|FGF.
After an interference with The Salk Institute for Biological Studies, we were
awarded a U.S. patent on DNA sequences, expression vectors, and microorganisms
used in the recombinant production of human basic FGF. Our basic FGF patent will
expire in 2012, and may be extended for FDA regulatory delays. We also hold
European patents on human basic FGF. Synergen, Inc., now owned by Amgen Inc.,
has obtained patents directed to a form of FGF that we believe is different from
the form of FGF produced by us. A U.S. patent issued to Salk contains claims
directed to substantially pure mammalian basic FGF containing the 146 amino acid
sequence of bovine basic FGF or a naturally occurring homologous sequence of
another mammalian species. Although we have been advised by counsel that the
Salk patent would be invalid if read broadly enough to cover our form of FGF,
there is still risk that an assertion of this patent could block our
partners ability to develop and market human basic FGF in the absence of a
license, or if such a license is granted, could reduce the royalty income to us.
We successfully opposed Salks European patent, the revocation of which is
currently under appeal by Salk. Our European patent was opposed by Chiron and
Pharmacia. Our patent was upheld and both opponents appealed. As a result of our
license to Chiron, Chiron, who is also a licensee of Salk, withdrew from the
opposition against our European patent, and we have withdrawn from our
opposition against the Salk patent.


In
March 1994, we obtained a non-exclusive license to make, use and sell FGF under
a U.S. patent issued to Harvard University containing claims to purified
cationic (basic) FGF. The Harvard patent is based on a patent application having
a filing date earlier than the application which formed the basis for the Salk
patent. Sublicense rights under this patent are included in the rights granted
by us to our FGF licensees, Kaken and Chiron.


VEGF121.
Seven isoforms of human VEGF (hVEGF) are known, having 121, 145, 148, 165, 183,
189 and 206 amino acids, respectively. We believe that our researchers were the
first to identify, clone and produce by recombinant DNA technology the 121 amino
acid form of hVEGF (hVEGF121). hVEGF121 is the only human
VEGF isoform known not to bind to heparin. We own two U.S. patents issued in
1993 covering hVEGF121, and in 1996 received a European patent
covering this VEGF isoform. Our U.S. patents on hVEGF121 will expire
2010 but may be extended for FDA regulatory delays. We have patent applications
pending in Canada and Japan. Other companies and institutions, including
Genentech, Inc., Pharmacia and the Regents of the University of California, hold
patents and pending patent applications claiming various isoforms of hVEGF and
certain VEGF variants.



Competition


For
patients treated with acute CHF, many therapeutic options are available.
Currently used drugs fall into three main categories: vasodilators, inotropes
and diuretics. Natrecor would compete against both vasodilators and inotropes in
the acute CHF market. Many of these drugs are available in generic formulation
and have an associated low cost. In addition, milrinone, an inotrope, is
currently promoted by Sanofi-Synthelabo Inc. and is expected to lose patent
protection in November 2001. We intend to price Natrecor above the cost of these
existing drugs, which may harm our competitive position relative to these drugs.
We may not be able to compete effectively with these long-standing existing
forms of therapy.


New
drugs in development for the treatment of acute CHF would compete with Natrecor
if approved by the FDA or other regulatory agencies. Tezosentan, a non-selective
endothelin receptor antagonist, is being developed by Actelion Ltd. and is
currently being used in Phase III clinical trials as a vasodilator for the
treatment of acute CHF. Abbott had previously submitted an NDA for Simdax, a
calcium sensitizer described as an inotrope, but withdrew the application in
2000. To our knowledge, Abbott has not announced its intent to refile an NDA for
Simdax.


Current
commercial competition for the inhibition of TNF in rheumatoid arthritis
includes injectible proteins such as Johnson and Johnsons Remicade and
Immunex Corporations Enbrel. Current COX-2 inhibitors include
Pharmacias Celebrex and Merck & Co., Inc.s Vioxx. In addition,
many pharmaceutical companies have expressed interest in pursuing the
development of p38 kinase inhibitors. We are unable to determine if they are
actively developing these compounds internally. If they are developing these or
similar products, several of these companies possess both greater access to
capital and research and development resources. We may be unable to compete
effectively with any of these development projects. We are also aware that
Vertex Pharmaceuticals is conducting Phase II clinical trials of its p38 kinase
inhibitor compound. If we are successful in developing our own p38 kinase
inhibitor compound we may face intense competition.



12
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--------------------------------------------------------

|We
expect that competition for our products, when approved for sale, will be based,
among other things, on efficacy, reliability, product safety, price and patent
position. Our ability to compete effectively and develop products that can be
manufactured cost-effectively and marketed successfully will depend on our
ability to:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | advance
our technology platforms;
| | - |  | ---------------------------------

| |  |  | license
additional technology;
| | - |  | ------------------------------

| |  |  | maintain
a proprietary position in our technologies and products;
| | - |  | -----------------------------------------------------------------

| |  |  | obtain
required government and other public and private approvals on a timely basis;
| | - |  | ------------------------------------------------------------------------------------

| |  |  | attract
and retain key personnel; and
| | - |  | -------------------------------------

| |  |  | enter
into corporate partnerships.
| | - |  | ----------------------------------

|Our failure to achieve any of the
above goals could impair our business.





Government
Regulation


Our
industry is heavily regulated. Our research and development activities and the
production and marketing of our products are subject to extensive regulation for
safety and efficacy by numerous governmental authorities in the United States
and other countries. The procedure for seeking and obtaining the required
governmental approvals for a new product involves many steps, beginning with
animal testing to determine safety and potential toxicity. In addition,
extensive human clinical testing is required to demonstrate the efficacy,
optimal dose and safety of each product. The time and expense required to
perform clinical testing can far exceed the time and expense of developing the
product prior to clinical testing. Whether undertaken by us or our commercial
partners, the process of seeking and obtaining these approvals for a new product
is likely to take a number of years and involves the expenditure of substantial
resources. In addition, there can be no assurance that any of our products will
receive the necessary approvals on a timely basis, if at all.


Even
if initial FDA approval is obtained for a product, further studies may be
required to provide additional data or to gain approval for the use of a product
as a treatment for clinical indications other than those initially targeted.
Moreover, the FDA may reconsider its approval of any product at any time and may
withdraw such approval. In addition, before our products can be marketed in
foreign countries, they are subject to regulatory approval in such countries
similar to that required in the United States. Accordingly, numerous factors
will impact the timing, extent and value of any regulatory approvals that may be
obtained for our products, including changes in regulatory requirements, which
may either decrease or increase the burden on us, the level of side effects
exhibited by our products as compared to their beneficial effects, the
availability of adequate resources to regulatory agencies which will impact the
speed of regulatory review, and the prices we are able to charge for our
products.


FDA
regulations require that any drug to be tested in humans must be manufactured
according to current Good Manufacturing Practices, or cGMPs. The cGMPs set
certain minimum requirements for procedures, record-keeping and the physical
characteristics of the facilities used in the production of these drugs. In
addition, various foreign and U.S. federal, state and local laws and regulations
relating to safe working conditions, laboratory practices, the experimental use
of animals, and the storage, use and disposal of hazardous or potentially
hazardous substances, including radioactive compounds and infectious disease
agents, used in connection with our research and manufacturing work are or may
be applicable to such activities. They include, among others, the United States
Atomic Energy Act, the Clean Air Act, the Clean Water Act, the Occupational
Safety and Health Act, the National Environmental Policy Act, the Toxic
Substances Control Act, the Resource Conservation and Recovery Act, national
restrictions on technology transfer, import, export and customs regulations, and
other present and possible future foreign, federal, state and local
regulations.



13
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|Employees


We
had 194 full-time employees as of December 31, 2000. As of December 31, 2000, we
also employed 94 part-time field sales representatives whose employment has
since been terminated in our psychiatric sales and marketing division.



14
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|RISK FACTORS


You
should carefully consider the risks described below before making an investment
decision. Our business, financial condition or results of operations could be
harmed by any of these risks. The risks described below are not the only ones
facing our company. Additional risks not presently known to us or that we
currently deem immaterial may also impair our business operations.


This
document also contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of the risks faced by us,
including those described below and elsewhere in this document.



Risks Related
to Natrecor (nesiritide)


If the U.S. Food and
Drug Administration, or FDA, finds that our amended New Drug Application, or
NDA, for Natrecor does not support approval for marketing, the commercialization
of Natrecor may be delayed or prevented.


In
April 1999, the FDA issued us a non-approval letter for Natrecor. To address the
FDAs concerns, we conducted a Phase III clinical trial; and in January
2001, we submitted an amendment to our NDA seeking approval to market Natrecor
in the United States. We are initially seeking FDA approval for use of Natrecor
as a treatment for acute congestive heart failure, or acute CHF. The FDA may not
find our clinical data adequate to support Natrecor as a treatment for acute CHF
or any other disease. Moreover, the FDA may require us to commence and complete
additional clinical trials to generate additional data to support product
approval for the treatment of acute CHF, which may lead to a substantial delay
in its approval of Natrecor or prevent Natrecor from being approved for any
medical use.



If Natrecor
does not gain market acceptance, our business will suffer.


Even
if clinical trials demonstrate the safety and efficacy of Natrecor and the
necessary regulatory approvals are obtained, Natrecor may not gain market
acceptance among physicians, patients, healthcare payors and the medical
community. We will need to educate doctors and other healthcare advisors of the
safety and clinical efficacy of Natrecor and its potential advantages over other
treatments. The degree of market acceptance of Natrecor will also depend on a
number of factors, including:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | the
degree of clinical efficacy and safety;
| | - |  | -------------------------------------------

| |  |  | cost-effectiveness
of Natrecor;
| | - |  | -------------------------------

| |  |  | its
advantage over alternative treatment methods; and
| | - |  | -----------------------------------------------------

| |  |  | reimbursement
policies of government and third-party payors.
| | - |  | ------------------------------------------------------------

|To the extent market
acceptance of Natrecor is limited, our revenues may suffer.


If the FDA determines
that our third-party manufacturing facilities are not adequate, either before or
after receipt of FDA marketing approval, we may lose the ability to manufacture
and sell Natrecor.


As
part of the NDA approval process and periodically thereafter, the FDA is likely
to inspect each of the facilities involved in manufacturing Natrecor. Natrecor
is manufactured for us by Biochemie GmbH, a subsidiary of Novartis, in Austria
and is shipped in powder form to Abbott Laboratories in McPherson, Kansas where
it is blended, filled and packaged for shipment. Although each facility has
previously passed FDA inspections, future inspections may find deficiencies in
the facilities or processes that may delay or prevent the manufacture or sale of
Natrecor. Even if the FDA approves Natrecor for marketing, the FDA will
subsequently conduct periodic inspections of these manufacturing facilities and,
if deficiencies are identified, we may lose the ability to supply and sell
Natrecor for extended periods of time.


15
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|We rely on
third-party manufacturers, and if they experience any difficulties with their
manufacturing processes, we may not obtain sufficient quantities of Natrecor to
assure availability.


We
rely on third parties for the manufacture of bulk drug substances and final drug
product for clinical and commercial purposes relating to Natrecor.Biochemie GmbH is responsible for manufacturing Natrecor in bulk quantities
and Abbott Laboratories is responsible for blending, filling and packaging
Natrecor, and if they encounter problems in these processes, our revenues from
future sales of Natrecor could decrease. Natrecor is manufactured using industry
accepted recombinant manufacturing techniques which must be conducted under
strict controls and tight timelines. Natrecor is subject to strict quality
control testing during all phases of production and prior to its release to the
market. Any quality control testing failures could lead to a reduction in the
available supply of Natrecor. Biochemie depends on outside vendors for the
timely supply of raw materials used to produce our products, including Natrecor.
Once a suppliers materials have been selected for use in Biochemies
manufacturing process, the supplier in effect becomes a sole or limited source
of that raw material due to regulatory compliance procedures. We depend on these
third parties to perform their obligations effectively and on a timely basis. If
these third parties fail to perform as required, our ability to deliver Natrecor
on a timely basis would be impaired.


In
addition, in the event of a natural disaster, equipment failure, power failure,
strike or other difficulty, we may be unable to replace our third party
manufacturers in a timely manner and would be unable to manufacture Natrecor to
meet market needs.


The success of Natrecor is highly
dependent on our partner, Innovex L.P., a division of Quintiles Transnational Corp., for
marketing, promotion and sales activities.


We
believe that for Natrecor to be widely adopted, the efforts of an experienced
sales force are needed. We have limited experience in managing or operating a
marketing organization. Accordingly, we have entered into an exclusive agreement
with Innovex to co-promote, sell and distribute Natrecor in the United States.
As part of our agreement with Innovex, we intend to build a sales force of
approximately 180 people solely dedicated to the sale of Natrecor. If Innovex
and we fail to devote appropriate resources to promote, sell and distribute
Natrecor, sales of Natrecor could be reduced. If Innovex breaches or terminates
its agreement with us or otherwise fails to conduct its Natrecor-related
activities in a timely manner or if there is a dispute about its obligations, we
may need to seek another partner. In that event, we cannot assure you that we
will be able to obtain another partner on favorable terms, if at all.


The failure of
PharmaBio Development, Inc.,an affiliate of Innovex, to fulfill
its obligation to partially fund the commercialization of Natrecor may affect
our ability to successfully market Natrecor.


PharmaBio
has agreed to fund $30.0 million of our costs to launch Natrecor over the first
24 months of Natrecors commercialization and to loan us up to $5.0
million. Of the $30.0 million, we anticipate that $10.0 million will be paid to
us in 2001 following FDA approval of Natrecor. If PharmaBio breaches or
terminates its agreement with us or otherwise fails to fulfill its financial
obligations under the agreement and we are unable to secure alternative funding,
we may lose our ability to successfully market Natrecor.


In the area of acute
CHF, we face competition from companies with substantial financial, technical
and marketing resources, which could limit our future revenues from Natrecor.



16
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|Many
therapeutic options are available for patients with acute CHF. Currently used
drugs fall into three main categories: vasodilators, inotropes and diuretics.
Natrecor would compete against both vasodilators and inotropes in the acute CHF
market. Many of these drugs are available in generic formulation with an
associated low cost. In addition, milrinone, an inotrope, is currently promoted
by Sanofi-Synthelabo Inc. We may not be able to compete effectively with these
long-standing current forms of therapy. In addition, we will price Natrecor
above the cost of these existing drugs, which may harm our competitive position
relative to these drugs.


New
drugs in development for the treatment of acute CHF would also compete with
Natrecor if approved by the FDA or other regulatory agencies. Tezosentan, a
non-selective endothelin receptor antagonist, is being developed by Actelion Ltd
and is currently being evaluated in Phase III clinical trials as a vasodilator
for the treatment of acute CHF. In addition, Abbott had previously submitted an
NDA for Simdax, a calcium sensitizer described as an inotrope, but withdrew the
application in 2000. To our knowledge, Abbott has not announced its intent to
refile an NDA for Simdax. If any such new drug in development is approved by the
FDA or other regulatory agencies, we may not be able to compete effectively with
these new forms of therapy.


If we fail to gain
approval for Natrecor and our other product candidates in international markets,
our market opportunities will be limited.


We
have not yet filed for marketing clearance for the use of Natrecor or any other
product candidates in foreign countries, and we may not be able to obtain any
international regulatory approvals for Natrecor or any other product we develop.
If we fail to obtain those approvals or if such approvals are delayed, the
geographic market for Natrecor or our other product candidates would be limited.


We will require a
partner to market and commercialize Natrecor and our other product candidates in
international markets.


We
plan to partner with other companies for the sale of Natrecor and our other
product candidates outside of the United States. We cannot assure you that we
will be able to enter into such arrangements on favorable terms or at all. In
addition, partnering arrangements could result in lower levels of income to us
than if we marketed our products entirely on our own. In the event that we are
unable to enter into a partnering arrangement for Natrecor or our other product
candidates in international markets, we cannot assure you we will be able to
develop an effective international sales force to successfully market and
commercialize those products. If we fail to enter into partnering arrangements
for our products and are unable to develop an effective international sales
force, our revenues would be limited.


If we fail to obtain
additional marketing approvals from the FDA for the use of Natrecor for
additional therapeutic indications or if after approval such approval is
subsequently revoked, our revenues from Natrecor will suffer.


In
order to expand the medical uses, or therapeutic indications, for which we may
market Natrecor, we must successfully complete additional clinical trials which
could be lengthy and expensive and will require the allocation of both
substantial management and financial resources. Thereafter, we will have to
apply separately to the FDA for clearance to market Natrecor for other
indications. We cannot assure you that we will be able to successfully complete
the required clinical trials or that the FDA will approve Natrecor for any
additional indications. In addition, even if Natrecor is approved by the FDA, we
cannot exclude the possibility that serious adverse events related to the use of
Natrecor might occur in the future, which could either limit its use or cause
the FDA to revoke our approval to market Natrecor.



Other Risks
Related to Scios


We have a history of
losses, expect to operate at a loss for the foreseeable future and may never be
profitable.



17
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|We
may not be able to achieve or earn a profit in the future. We began operations
in December 1981, and since that time, with the sole exception of 1983, we have
not earned a profit on a full-year basis. Our losses have historically resulted
primarily from our investments in research and development. As of December 31,
2000, we had an accumulated deficit of approximately $411.4 million.


To
date, nearly all of our revenues have come from:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | one-time
signing fees from our corporate partners under agreements supporting the research,
development and commercialization of our product candidates;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | one-time
payments from our corporate partners when we achieved regulatory or development
milestones;
| | - |  | ----------------------------------------------------------------------------------------------------

| |  | research |  | funding
from our corporate partners; and
| |  | -------- |  | ----------------------------------------

| |  | our |  | psychiatric
sales and marketing division.
| |  | --- |  | -----------------------------------------

|We expect
that our research, development and clinical trial activities and regulatory
approvals, together with future general and administrative activities and the
costs associated with launching and commercializing our product candidates and
launching and commercializing Natrecor in the United States, will result in
significant expenses for the foreseeable future.


If we fail to obtain
the capital necessary to fund our operations, we may have to delay or scale back
some of our programs or grant rights to third parties to develop and market our
products.


We
will continue to expend substantial resources developing new and existing
product candidates, including costs associated with research and development,
acquiring new technologies, conducting preclinical studies and clinical trials,
obtaining regulatory approvals and manufacturing products. We believe our
current working capital and future payments, if any, from our collaboration
arrangements will be sufficient to meet our operating and capital requirements
for at least the next 12 months. Our need for additional funding depends on a
number of factors including:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | higher
costs and slower progress than expected in developing product candidates and obtaining
regulatory approvals, particularly for Natrecor;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | acquisition
of technologies and other business opportunities that require financial commitments; or
| | - |  | ---------------------------------------------------------------------------------------------------

| |  |  | lower
revenues than expected from the commercialization of our potential products.
| | - |  | ----------------------------------------------------------------------------------

|Additional
funding may not be available to us on favorable terms, if at all. We may raise
funds through public or private financings, collaborative arrangements or other
arrangements. Debt financing, if available, may involve covenants which could
restrict our business activities. If we are unable to raise additional funds
through equity or debt financing when needed, we may be required to delay, scale
back or eliminate expenditures for some of our development programs or grant
rights to develop and market product candidates that we would otherwise prefer
to develop and market internally. If we are required to grant such rights, the
ultimate value of these product candidates to us may be reduced.


Our operating results
are subject to fluctuations that may cause our stock price to decline.


Our revenues
and expenses have fluctuated significantly in the past. This fluctuation has in
turn caused our operating results to vary significantly from quarter to quarter
and year to year. We expect the fluctuations in our revenues and expenses to
continue, and thus, our operating results should also continue to vary
significantly. These fluctuations may be due to a variety of factors including:



18
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|
|

| |  |  | the
timing and realization of milestone and other payments from our corporate partners;
| | - |  | ---------------------------------------------------------------------------------------

| |  |  | the
timing and amount of expenses relating to our research and development, product
development and manufacturing activities; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------

| |  |  | the
extent and timing of costs related to our activities to obtain patents on our inventions
and to extend, enforce and/or defend our patents and other rights to our intellectual
property.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Because
of these fluctuations, it is possible that our operating results for a
particular quarter or quarters will not meet the expectations of public market
analysts and investors, causing the market price of our common stock to decline.
We believe that period-to-period comparisons of our operating results are not a
good indication of our future performance, and you should not rely on those
comparisons to predict our future operating or share price performance.


We depend on our key
personnel and we must continue to attract and retain key employees and
consultants.


We
depend on our key scientific and management personnel. Our ability to pursue the
development of our current and future product candidates depends largely on
retaining the services of our existing personnel and hiring additional qualified
scientific personnel to perform research and development. We also rely on
personnel with expertise in clinical testing, government regulation,
manufacturing and marketing. Attracting and retaining qualified personnel will
be critical to our success. We may not be able to attract and retain personnel
on acceptable terms given the competition for such personnel among
biotechnology, pharmaceutical and healthcare companies, universities and
non-profit research institutions. Failure to retain our key scientific and
management personnel or to attract additional highly-qualified personnel could
delay the development of our product candidates and harm our business.


Other than Natrecor,
our product candidates are at early stages of development, and if we are unable
to develop and commercialize these product candidates successfully, we will not
generate revenues from these products.


To
date, none of our product candidates has been commercialized. Other than
Natrecor, all of our product candidates are in early stages of development. We
face the risk of failure normally found in developing biotechnology products
based on new technologies. Successfully developing, manufacturing, introducing
and marketing our early-stage product candidates will require several years and
substantial additional capital.


Our operations depend
on compliance with complex FDA and comparable international regulations. If we
fail to obtain approvals on a timely basis or to achieve continued compliance,
the commercialization of our products could be delayed.


We
cannot assure you that we will receive the regulatory approvals necessary to
commercialize our product candidates, which could cause our business to fail.
Our product candidates are subject to extensive and rigorous government
regulation by the FDA and comparable agencies in other countries. The FDA
regulates, among other things, the development, testing, manufacture, safety,
efficacy, record-keeping, labeling, storage, approval, advertising, promotion,
sale and distribution of biopharmaceutical products. If our potential products
are marketed abroad, they will also be subject to extensive regulation by
foreign governments. None of our lead product candidates has been approved for
sale in the United States or any foreign market. In addition, we have only
limited experience in filing and pursuing applications necessary to gain
regulatory approvals, which may impede our ability to obtain such approvals.


The results of
preclinical studies and clinical trials of our products may not be favorable.


In
order to obtain regulatory approval for the commercial sale of any of our
product candidates, we must conduct both preclinical studies and human clinical
trials. These studies and trials must demonstrate that the product is safe and
effective for the clinical use for which we are seeking approval. We are
currently conducting Phase Ib clinical trials of our lead p38 kinase inhibitor
small molecule compound. The results of these or other clinical trials that we
may conduct in the future may not be successful. Adverse results from our
current or any future trials would harm our business.


19
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|We
also face the risk that we will not be permitted to undertake or continue
clinical trials for any of our product candidates in the future. Even if we are
able to conduct such trials, we may not be able to satisfactorily demonstrate
that the products are safe and effective and thus qualify for the regulatory
approvals needed to market and sell them. Results from preclinical studies and
early clinical trials are often not accurate indicators of results of
later-stage clinical trials that involve larger human populations.


Our products use
novel alternative technologies and therapeutic approaches which have not been
widely studied.


Many
of our product development efforts focus on novel alternative therapeutic
approaches and new technologies that have not been widely studied. These
approaches and technologies may not be successful. We are applying these
approaches and technologies in our attempt to discover new treatments for
conditions that are also the subject of research and development efforts of many
other companies.


Rapid changes in
technology and industry standards could render our potential products
unmarketable.


We
are engaged in a field characterized by extensive research efforts and rapid
technological development. New drug discoveries and developments in our field
and other drug discovery technologies are accelerating. Our competitors may
develop technologies and products that are more effective than any we develop or
that render our technology and potential products obsolete or noncompetitive. In
addition, our potential products could become unmarketable if new industry
standards emerge. To be successful, we will need to enhance our product
candidates and design, develop and market new product candidates that keep pace
with new technological and industry developments.


Many other companies
are targeting the same diseases and conditions as we are. Competitive products
from other companies could significantly reduce the market acceptance of our
products.


The
markets in which we compete are well-established and intensely competitive. We
may be unable to compete successfully against our current and future
competitors. Our failure to compete successfully may result in pricing
reductions, reduced gross margins and failure to achieve market acceptance for
our potential products. Our competitors include pharmaceutical companies,
biotechnology companies, chemical companies, academic and research institutions
and government agencies.


For
example, many pharmaceutical and biotechnology companies have initiated research
programs similar to ours. Many of these organizations have substantially more
experience and more capital, research and development, regulatory,
manufacturing, sales, marketing, human and other resources than we do. As a
result, they may:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | develop
products that are safer or more effective than our product candidates;
| | - |  | ------------------------------------------------------------------------------

| |  |  | obtain
FDA and other regulatory approvals or reach the market with their products more rapidly
than we can, reducing the potential sales of our product candidates;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | devote
greater resources to market or sell their products;
| | - |  | ----------------------------------------------------------

| |  |  | adapt
more quickly to new technologies and scientific advances;
| | - |  | ---------------------------------------------------------------

| |  |  | initiate
or withstand substantial price competition more successfully than we can;
| | - |  | ----------------------------------------------------------------------------------

| |  |  | have
greater success in recruiting skilled scientific workers from the limited pool of
available talent;
| | - |  | --------------------------------------------------------------------------------------------------------

| |  |  | more
effectively negotiate third-party licensing and collaboration arrangements; and
| | - |  | ------------------------------------------------------------------------------------

|20
|--

|
|

| |  |  | take
advantage of acquisition or other opportunities more readily than we can.
| | - |  | ------------------------------------------------------------------------------

|In
addition, our product candidates, if approved and commercialized, will compete
against well-established existing therapeutic products that are currently
reimbursed by government health administration authorities, private health
insurers and health maintenance organizations. We face and will continue to face
intense competition from other companies for collaborative arrangements with
pharmaceutical and biotechnology companies, for relationships with academic and
research institutions and for licenses to proprietary technology. In addition,
we anticipate that we will face increased competition in the future as new
companies enter our markets and as scientific developments continue to expand
the understanding of various diseases. While we will seek to expand our
technological capabilities to remain competitive, research and development by
others may render our technology or product candidates obsolete or
noncompetitive or result in treatments or cures superior to any therapy
developed by us.


If we are unable to
protect our intellectual property rights adequately, the value of our potential
products could be diminished.


Our
success is dependent in part on obtaining, maintaining and enforcing our patents
and other proprietary rights. Patent law relating to the scope of claims in the
biotechnology field in which we operate is still evolving and surrounded by a
great deal of uncertainty. Accordingly, we cannot assure you that our pending
patent applications will result in issued patents. Because certain U.S. patent
applications may be maintained in secrecy until a patent issues, we cannot
assure you that others have not filed patent applications for technology covered
by our pending applications or that we were the first to invent the technology.


Other
companies, universities and research institutions have or may obtain patents and
patent applications that could limit our ability to use, manufacture, market or
sell our product candidates or impair our competitive position. As a result, we
may have to obtain licenses from other parties before we could continue using,
manufacturing, marketing or selling our potential products. Any such licenses
may not be available on commercially acceptable terms, if at all. If we do not
obtain required licenses, we may not be able to market our potential products at
all or we may encounter significant delays in product development while we
redesign potentially infringing products or methods.


In
addition, although we own a number of patents, including issued patents and
patent applications relating to Natrecor and certain of our p38 kinase
inhibitors, the issuance of a patent is not conclusive as to its validity or
enforceability, and third parties may challenge the validity or enforceability
of our patents. We cannot assure you how much protection, if any, will be given
to our patents if we attempt to enforce them and they are challenged in court or
in other proceedings. It is possible that a competitor may successfully
challenge our patents or that challenges will result in limitations of their
coverage. In addition, the cost of litigation to uphold the validity of patents
can be substantial. If we are unsuccessful in such litigation, third parties may
be able to use our patented technologies without paying licensing fees or
royalties to us.


Moreover,
competitors may infringe our patents or successfully avoid them through design
innovation. To prevent infringement or unauthorized use, we may need to file
infringement claims, which are expensive and time-consuming. In addition, in an
infringement proceeding, a court may decide that a patent of ours is not valid
or may refuse to stop the other party from using the technology at issue on the
grounds that its technology is not covered by our patents. Policing unauthorized
use of our intellectual property is difficult, and we cannot assure you that we
will be able to prevent misappropriation of our proprietary rights, particularly
in countries where the laws may not protect such rights as fully as in the
United States.


In
addition to our patented technology, we also rely on unpatented technology,
trade secrets and confidential information. We may not be able to effectively
protect our rights to this technology or information. Other parties may
independently develop substantially equivalent information and techniques or
otherwise gain access to or disclose our technology. We require each of our
employees, consultants and corporate partners to execute a confidentiality
agreement at the commencement of an employment, consulting or collaborative
relationship with us. However, these agreements may not provide effective
protection of our technology or information or, in the event of unauthorized use
or disclosure, they may not provide adequate remedies.


21
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|If we fail to
negotiate or maintain successful arrangements with third parties, our
development and marketing activities may be delayed or reduced.


We
have entered into, and we expect to enter into in the future, arrangements with
third parties to perform research, development, regulatory compliance,
manufacturing or marketing activities relating to some or all of our product
candidates. If we fail to secure or maintain successful collaborative
arrangements, our development and marketing activities may be delayed or
reduced. We may be unable to negotiate favorable collaborative arrangements
that, if necessary, modify our existing arrangements on acceptable terms.


Most
of our agreements can be terminated under certain conditions by our partners. In
addition, our partners may separately pursue competing products, therapeutic
approaches or technologies to develop treatments for the diseases targeted by us
or our efforts. Even if our partners continue their contributions to the
collaborative arrangements, they may nevertheless determine not to actively
pursue the development or commercialization of any resulting products. Also, our
partners may fail to perform their obligations under the collaborative
arrangements or may be slow in performing their obligations. In these
circumstances, our ability to develop and market potential products could be
severely limited.



Risks Related
to our Industry



We face
uncertainties over reimbursement and healthcare reform.


In
both domestic and foreign markets, future sales of our potential products, if
any, will depend in part on the availability of reimbursement from third-party
payors such as government health administration authorities, private health
insurers and other organizations. Third-party payors are increasingly
challenging the price and cost-effectiveness of medical products and services.
Significant uncertainty exists as to the reimbursement status of newly-approved
health care products. Even if we were to obtain regulatory approval, our product
candidates may not be considered cost-effective and adequate third-party
reimbursement may not be available to enable us to maintain price levels
sufficient to realize an appropriate return on our investments in product
development. Legislation and regulations affecting the pricing of
pharmaceuticals may change before any of our product candidates is approved for
marketing. Adoption of such legislation and regulations could further limit
reimbursement for medical products and services. If the government and
third-party payors fail to provide adequate coverage and reimbursement rates for
our potential products, the market acceptance of our products may be adversely
affected.


We may be required to
defend lawsuits or pay damages in connection with the alleged or actual harm
caused by our product candidates.


We
face an inherent business risk of exposure to product liability claims in the
event that the use of our product candidates is alleged to have resulted in harm
to others. This risk exists in clinical trials as well as in commercial
distribution. In addition, the pharmaceutical and biotechnology industries in
general have been subject to significant medical malpractice litigation. We may
incur significant liability if product liability or malpractice lawsuits against
us are successful. Although we maintain product liability insurance, we cannot
be sure that this coverage is adequate or that it will continue to be available
to us on acceptable terms.


We use hazardous
materials in our business, and any claims relating to improper handling, storage
or disposal of these materials could harm our business.


Our
research and development activities involve the controlled use of hazardous
materials, chemicals, biological agents and radioactive compounds. We are
subject to federal, state and local laws and regulations governing the use,
manufacture, 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 such 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 resulting damages, and any such liability could
exceed our resources. We may be required to incur significant costs to comply
with these laws in the future. Failure to comply with these laws could result in
fines and the revocation of permits, which could prevent us from conducting our
business.


22
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Our stock price
continues to experience large fluctuations, and you could lose some or all of
your investment.


The
market price of our stock has been and is likely to continue to be highly
volatile. These price fluctuations have been rapid and severe. The market price
of our common stock may fluctuate significantly in response to the following
factors, most of which are beyond our control:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | variations
in our quarterly operating results;
| | - |  | ----------------------------------------------

| |  |  | changes
in securities analysts estimates of our financial performance;
| | - |  | -----------------------------------------------------------------------

| |  |  | changes
in market valuations of similar companies;
| | - |  | --------------------------------------------------

| |  |  | announcements
by us or our competitors of significant contracts,
| | - |  | ----------------------------------------------------------------

| |  |  | acquisitions,
strategic partnerships, joint ventures or capital commitments;
| | - |  | ----------------------------------------------------------------------------

| |  |  | additions
or departures of key personnel;
| | - |  | -----------------------------------------

| |  |  | future
sales of common stock;
| | - |  | -----------------------------

| |  |  | announcements
by us or our competitors of technological innovations of new therapeutic products,
clinical trial results and developments in patent or other proprietary rights;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | announcements
regarding government regulations, public concern as to the safety of drugs developed by
us or others or changes in reimbursement policies; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | fluctuations
in stock market price and volume, which are particularly common among securities of
biopharmaceutical companies.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------

|We are at risk of securities
class action litigation.


In
the past, securities class action litigation has often been brought against a
company following a decline in the market price of its securities. This risk is
especially relevant for us because biotechnology companies have experienced
greater than average stock price volatility in recent years. Several years ago,
we were the subject of a securities class action lawsuit, which was eventually
dismissed with a determination that the plaintiffs had no basis for their claim.
If we face such litigation in the future, it could result in substantial costs
and a diversion of managements attention and resources, which could harm
our business.


We have implemented
provisions in our charter documents that may ultimately delay, discourage or
prevent a change in our management or control of us.




Our
certificate of incorporation and bylaws contain provisions that could make it
more difficult for our stockholders to replace or remove our directors or to
effect any other corporate action. These provisions include those which:


23
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|
|

| |  |  | prohibit
holders of less than ten percent of our outstanding capital stock from calling special
meetings of stockholders;
| | - |  | -------------------------------------------------------------------------------------------------------------------------

| |  |  | prohibit
stockholder action by written consent, thereby requiring stockholder actions to be taken
at a meeting of our stockholders; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------

| |  |  | establish
advance notice requirements for nominations for election to the board of directors or for
proposing matters than can be acted upon by stockholders at stockholder meetings.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Moreover, our certificate
of incorporation does not provide for cumulative voting in the election of
directors, which would otherwise allow less than a majority of stockholders to
elect director candidates.


Some
of the above provisions may also have possible anti-takeover effects, which may make an
acquisition of us by a third party more difficult, even if such an acquisition could be
beneficial to our stockholders. In addition, our certificate of incorporation also
authorizes us to issue up to 20,000,000 shares of preferred stock in one or more
different series with terms to be determined by our board of directors at time of
issuance. As of December 31, 2000, an aggregate of 71,053 shares of preferred stock had
been authorized for issuance by the board of directors and 4,991 shares were issued and
outstanding. Issuance of other shares of preferred stock could also be used as an
anti-takeover device.



MANAGEMENT



Executive
Officers


Our
executive officers and their ages at January 30, 2001 are as follows:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Name                     | Age | Position
|------------------------ | --- | --------
|Richard B. Brewer        |     | 49      
|George F. Schreiner, M.D |     | 51      
|David W. Gryska          |     | 44      
|John H. Newman           |     | 50      
|Patricia Baldwin, Ph.D   |     | 45      
|Thomas L. Feldman        |     | 50      
|Darlene P. Horton, M.D   |     | 39      

|Richard
B. Brewer joined Scios in September 1998 as President, Chief Executive Officer and
Director on our Board of Directors. From February 1996 to June 1998, he served as our
Executive Vice President of Operations and then Chief Operating Officer of Heartport,
Inc., a medical device company. From 1984 to 1995, Mr. Brewer served in various
capacities for Genentech Europe Ltd., Genentech Canada, Inc. and Genentech, Inc., most
recently as Senior Vice President, U.S. Sales and Marketing. Mr. Brewer holds a B.S. from
Virginia Polytechnic Institute and a M.B.A. from Northwestern University.


Dr.
George F. Schreiner joined Scios in January 1997 as Vice President, Cardiorenal Research.
He became our Chief Scientific Officer in August 2000, responsible for leading our
research group. From 1980 to 1992, Dr. Schreiner served on the faculties of Harvard
Medical School and Washington University School of Medicine and in 1993 joined CV
Therapeutics, Inc., a biopharmaceutical company, as Vice President, Medical Science and
Preclinical Research. Dr. Schreiner holds an M.D. from Harvard Medical School and a Ph.D.
in Immunology from Harvard University.


24
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|David
W. Gryska joined Scios in December 1998 as Vice President of Finance and Chief Financial
Officer and became our Senior Vice President of Finance in November 2000. From 1993 to
December 1998, Mr. Gryska was Vice President, Finance and Chief Financial Officer of
Cardiac Pathways Corporation, a medical device company. Mr. Gryska was with Ernst & Young
LLP from 1982 to 1993 and served as a partner from 1989-1993.


John
H. Newman joined Scios in 1983 as Vice President, General Counsel and Secretary, and
became our Vice President of Commercial Development, General Counsel and Secretary in
1989, our Vice President of Legal Affairs, General Counsel and Secretary in 1992 and our
Senior Vice President, General Counsel and Secretary in February 1998. Prior to joining
Scios, Mr. Newman was an attorney in private practice.


Dr.
Patricia Baldwin joined Scios in 1986 as a Scientist in the Novel Drug Delivery
Department. In 1990, she moved to the Pharmaceutical Research and Development Department
and in 1995, Dr. Baldwin became our Director of Analytical Chemistry. In September 1999,
she became our Senior Director of Analytical Methods and Quality Control and then, in
March 2000, Dr. Baldwin was promoted to our Vice President, Quality and Product
Development. Dr. Baldwin received a B.S. in Chemistry from Stanford University and a
Ph.D. in Chemistry from University of California, Berkeley.


Thomas
L. Feldman joined Scios in 1995 as Vice President of Commercial Operations and in
November 1999, became our Vice President, Sales and Marketing. Prior to joining Scios,
Mr. Feldman was responsible for sales and marketing activities at pharmaceutical
companies affiliated with Johnson & Johnson. From 1993 through 1994, Mr. Feldman was
National Sales Manager at Ortho Pharmaceutical Corporation. From 1973 to 1993, Mr.
Feldman held various sales and marketing positions at McNeil Pharmaceutical, where he
most recently served as National Sales Manager from 1990 to 1993.


Dr.
Darlene P. Horton joined Scios in July 1996 and is responsible for directing and managing
our clinical research programs. In August 2000, Dr. Horton was appointed our Vice
President, Medical Affairs. Prior to joining Scios, she was a Pediatric Cardiology Fellow
at UCSFs Cardiovascular Research Institute, and she remains on the clinical faculty at
the University of California, San Francisco. Dr. Horton received a B.S. in
Microbiology and an M.D. from the University of Florida in Gainesville.



Item 2.
PROPERTIES


We
lease a 52,000 square foot office building in Sunnyvale, California which expires on
January 31, 2002. We also lease a neighboring 33,600 square foot office building which
expires on January 31, 2002. Our annual lease payments for the Sunnyvale facilities are
approximately $1.5 million. We believe our facilities are sufficient for the foreseeable
future.



Item 3. LEGAL
PROCEEDINGS


In
November 1995, we were notified by the United States Environmental Protection Agency
(EPA) that we might have a liability in connection with the clean-up of a toxic waste
site arising out of the alleged disposal of hazardous substances by a subcontractor of
Nova Pharmaceutical Corporation, the company we acquired in 1992. We have executed a
settlement agreement proposed by the EPA under which we have agreed to contribute
approximately $81,000 to clean-up costs. This amount was accrued at December 31, 2000.
Final court approval of the settlement is expected in 2001 so that payment can be made.


For a
discussion of certain litigation relating to our intellectual property, see Item 1.
Business-Patents and Proprietary Rights.


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 the
fiscal year covered by this report.


25
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|PART II



Item 5. MARKET FOR
REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS


Our
Common Stock is traded on the NASDAQ Stock Market under the symbol SCIO. The
table below sets forth the high and low sales prices (converted to decimals and
rounded to the nearest whole cent) as reported by Nasdaq for the Common Stock
during the last two fiscal years. Prices represent quotations among dealers
without adjustment for retail markups, markdowns or commissions, and may not
represent actual transactions. To date, no cash dividends have been paid on our
Common Stock, and we do not anticipate paying cash dividends in the foreseeable
future. As of December 31, 2000, there were approximately 3164 stockholders of
record of the our Common Stock.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|     | Common Stock
|---- | ------------
|
|
|Q1   |             
|Q2   |             
|Q3   |             
|Q4   |             
|Year |             

|Item 6.
SELECTED FINANCIAL DATA


The
following selected consolidated historical information has been derived from the audited
consolidated financial statements of the Company. The financial information as of
December 31, 2000, 1999, 1998, 1997, and 1996 and for each of the five years in the period ended December
31, 2000 are derived from audited consolidated financial statements and are included elsewhere in
this Annual Report on Form 10-K. The following Selected Consolidated Financial Data
should be read in conjunction with Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations and Item 8. Consolidated Financial
Statements and Supplementary Data included elsewhere in this Annual Report on Form 10-K.
The historical results are not necessarily indicative of the results of operations to be
expected in the future.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                 | Year Ended December 31,
|---------------------------------------------------------------- | -----------------------
|
|
|Revenues(1)                                                      |                        
|Loss from operations                                             |                        
|Other income (expense) net                                       |                        
|Net loss                                                         |                        
|Net loss per common share and per common share assuming dilution |                        
|
|
|
|
|Cash and securities                                              |                        
|Working capital (deficits)                                       |                        
|Total assets                                                     |                        
|Long-term obligations                                            |                        
|Stockholders equity                                             |                        
|Employees at year end                                            |                        
|Field sales representatives                                      |                        

|(1) |  | As
reclassified for EITF 99-19.
|--- |  | -------------------------------

|26
|--

|Item 7. MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


The
following discussion should be read in conjunction with our consolidated
financial statements, including the related notes, contained elsewhere in this
document. The following discussion also contains forward-looking statements
about our plans, objectives and future results. These forward-looking statements
are based on our current expectations, and we assume no obligation to update
this information. Realization of these plans and results involves risks and
uncertainties, and our actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include those set forth under Risk Factors.



Overview


We
are a biopharmaceutical company developing novel treatments for cardiovascular
and inflammatory diseases. Our disease-based technology platform integrates
expertise in protein biology with computational and medicinal chemistry to
identify novel targets and protein-based small molecule compounds for large
markets with unmet medical needs.


We
have primarily focused on the development of two product candidates 
Natrecor for the treatment of acute CHF, and SCIO-469, an oral small molecule
inhibitor of p38 kinase, for the treatment of rheumatoid arthritis. We submitted
an amendment to our NDA for Natrecor to the FDA in January 2001, and we expect
the FDA to respond to our application by July 2001. Also in January 2001, we
completed a Phase Ia clinical trial evaluating the safety of SCIO-469, and we
expect to complete a Phase Ib clinical trial in the second quarter of 2001.



New Accounting
Pronouncements



Emerging Issues Task Force 99-19. We adopted Emerging Issues Task Force 99-19,
Reporting Revenue Gross as a Principal Versus Net as an Agent in the fourth
quarter of 2000. The effect of EITF 99-19 resulted in netting revenues against related
direct costs. The financial statements for all periods presented have been reclassified accorrding to
EITF 99-19. We have a number of agreements that were impacted by EITF 99-19, including the
Psychiatric Sales and Marketing Division, or PMSD, agreement with GSK, and the
co-promotion arrangements with GSK for Paxil and Janssen Pharmaceutica Inc. for Risperdal.



Staff Accounting Bulletin 101. We have
completed our evaluation of the effects of SAB 101 and have concluded that the cumulative
effect of adoption as of January 1, 2000 is immaterial to our financial position and
results of operations. SAB 101 requires that license and other up-front fees received from
research collaborators be recognized as earned over the term of the agreement unless the
fee is in exchange for products delivered or services performed that represent the
culmination of a separate earnings process. However, certain revenue recognized in periods
prior to January 1, 2000 would have been recognized in different periods in accordance
with the provisions of SAB 101. In accordance with implementation provisions of SAE 101
the financial statements for years prior to January 1, 2000 have not been restated. In the
year ended December 31, 1998, we recorded a $20.0 million license fee in connection with
the Natrecor commercialization agreement with Bayer AG. Under SAB 101, $19.1 million of
this license fee would have been reallocated from 1998 to the year ended December 31,
1999, the year in which the Bayer AG commercialization agreement was terminated. As a
result, the loss for the year ended December 31, 1998 would have increased by $19.1
million and the loss for the year ended December 31, 1999 would have decreased by $19.1
million.


Financial
Accounting Standards No. 133. In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS
133 establishes new standards of accounting and reporting for derivative
instruments and hedging activities. SFAS 133 requires that all derivatives be
recognized at fair value in the statement of financial position and that the
corresponding gains or losses be reported either in the statement of operations
or as a component of comprehensive income, depending on the type of relationship
that exists. As amended, SFAS 133 is effective for fiscal years beginning after
June 15, 2000. We do not currently hold derivative instruments or engage in
hedging activities and believe that the implementation of SFAS 133 will be
immaterial to our financial position and results of operations.


27
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Financial
Accounting Standards Board Interpretation No. 44. In March 2000, the Financial Accounting
Standards Board issued Interpretation No. 44, Accounting for Certain Transactions
Involving Stock Compensation, an interpretation of the Accounting Principals Board
Opinion No. 25, Accounting for Stock Issued to Employees. This interpretation clarifies
the definition of an employee for purposes of applying APB No. 25, the criteria for
determining whether a plan qualifies as a noncompensatory plan, the accounting
consequence of various modifications to the terms of a previously-fixed stock option or
award and the accounting for an exchange of stock compensation awards in a business
combination. FIN No. 44 was effective July 1, 2000, but certain conclusions cover
specific events that occured after either December 15, 1998 or January 12, 2000. The
adoption of FIN No. 44 did not have any material impact on our financial position or
results of operations.



Results of
Operations



Years ended
December 31, 2000, 1999 and 1998


Revenues


Total
Revenues.Total revenues, after the reclassification required by EITF 99-19,
were $12.6 million, $28.4 million and $44.7 million for the years ended December
31, 2000, 1999 and 1998, respectively. In 2000, approximately 40% of our total
revenue was derived from PSMD product sales under our license agreement with
GSK. This license agreement was terminated in March 2001, and effective April 1,
2001, we will no longer sell these products. In 1999, no customer accounted for
more than 10% of our total revenue. In 1998, research and development contract
revenue from Bayer AG accounted for approximately 55% of our total revenue.


Net
Product Sales and Co-Promotion Commissions.Net product sales and
co-promotion commissions were $6.9 million, $10.0 million and $6.6 million for
the years ended December 31, 2000, 1999 and 1998, respectively, and were
primarily derived from sales of PSMD products. The $3.0 million decrease in net
product sales and co-promotion commissions from 1999 to 2000 was primarily the
result of reduced distributor inventories caused by manufacturing and product
shelf life issues of Eskalith CR, coupled with sales erosion due to increased
competition and the introduction of generic drugs. The $3.4 million increase
from 1998 to 1999 was primarily attributable to an increase in prescriptions for
PSMD products resulting from increased marketing programs.


Research
and Development Contract Revenues. Research and development contract
revenues were $5.7 million, $18.4 million and $38.1 million for the years ended
December 31, 2000, 1999 and 1998, respectively. The $12.7 million decrease from
1999 to 2000 was primarily attributable to $9.0 million in one-time milestone
payments received in 1999 from corporate partners Chiron Corporation and Novo
Nordisk A/S, $2.3 million in clinical research funding from Bayer AG and $1.9
million in royalty payments from GenVec, Inc. and Guilford Pharmaceuticals Inc.
The $19.7 million decrease from 1998 to 1999 was primarily due to $20.0 million
received from Bayer AG in 1998 for the commercialization of Natrecor. The
agreement with Bayer AG was terminated in May 1999 after non-approval of
Natrecor in April 1999 by the FDA.


Costs
and Expenses


Research
and Development.Research and development expenses were $39.3 million, $34.3
million and $46.6 million for the years ended December 31, 2000, 1999
and 1998, respectively. The $5.0 million increase from 1999 to 2000 was
primarily attributable to the increased clinical expenses related to Natrecor
and increased research expenses related to our p38 kinase inhibitor program. The
$12.3 million decrease from 1998 to 1999 was primarily due to our corporate
restructuring in 1999 that included the layoff of personnel and the closure of a
manufacturing facility.


28
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Marketing,
General and Administrative.After the reclassification required by
EITF 99-19, marketing, general and administrative expenses were $16.7 million,
$12.0 million and $10.0 million for the years ended December 31, 2000, 1999 and
1998, respectively. The $4.7 million increase from 1999 to 2000 was primarily
the result of Natrecor pre-launch activities, a proxy contest in early 2000,
outside consulting expenses relating to strategic planning, increased headcount
and bonuses paid during the period. The $2.0 million increase from 1998 to 1999
was primarily attributable to increased outside consulting fees related to
Natrecor pre-launch activities, our corporate restructuring in 1999 and product
licensing activities.


Restructuring
Charges.We incurred a one-time restructuring expense in 1999 of $6.4
million resulting from a corporate reorganization, which included the closure of
our Mountain View manufacturing facility and a 30% reduction in our workforce.
All restructuring activities were complete by the end of the second quarter of
2000, leaving a remaining balance of $1.0 million in the restructuring reserve.
This unused reserve primarily resulted from changes in the estimates of the cost
of workforce reductions and the gain on the sale of excess capital assets that
were unanticipated. The reserve was credited to restructure expense in the
second quarter of 2000.


Other
Income (Expense)


Net
other income (expense) was ($0.1) million, $4.3 million and $11.1 million in the
years ended December 31, 2000, 1999 and 1998, respectively. The $4.4 million
decrease from 1999 to 2000 was primarily attributable to the 1999 net gain on
the sales of securities in Guilford. The $6.8 million decrease from 1998 to 1999
was primarily attributable to a reduction in realized gains on the sale of
securities in Guilford in 1999 and the increase in royalty expense to
Biotechnology Research Partners due to the licensing of Fiblast to Chiron.


Equity
in Net Loss of Affiliate


We
had $1.3 million in equity in net loss of affiliate in 1998, which was the
result of Guilfords net losses. Our ownership in Guilford declined from
62% in May 1994 to 7% at December 31, 1998 as a result of Guilfords public
stock offerings and our sale of Guilford common stock. In the fourth quarter of
1998, we reclassified our investment in Guilford common stock as marketable
securities. In 1999, we sold our entire holdings of Guilford common stock.



Liquidity and
Capital Resources


To
date, our operations and capital requirements have been financed primarily with
the proceeds of public and private sales of common stock and preferred stock,
research and development partnerships, collaborative agreements with
pharmaceutical firms, product sales and investment income. At December 31, 2000,
our combined cash, cash equivalents and marketable securities, both current and
non-current, totaled $71.5 million.


29
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|In
anticipation of the launch of Natrecor in the third quarter of 2001, we entered
into a sales and marketing agreement with Innovex, a subsidiary of Quintiles
Transnational Corp. We believe that this marketing alliance will allow us to
quickly commercialize Natrecor in the United States. Under the terms of the
three and a half year agreement, PharmaBio Development, Inc., an affiliate of
Innovex, has agreed to fund $30.0 million of our costs to launch Natrecor over
the first 24 months of Natrecors commercialization and to loan us up to
$5.0 million. Of the $30.0 million, we anticipate that $10.0 million will be
paid to us in 2001 following FDA approval of Natrecor. Innovex will also
identify, hire, train and deploy a dedicated cardiology and emergency medicine
sales force of approximately 180 people to launch and market Natrecor.


Net
cash used in operating activities of $34.5 million in 2000 was primarily
attributable to the net loss in 2000 of $42.5 million, partially offset by
non-cash charges. For 1999, net cash used in operating activities of $8.5 million was primarily attributable
to funding net operating losses, partially offset by non-cash expenses and increases in
operating assets and liabilities. Net cash provided by operating activities of $9.0
million in 1998 was largely due to deferred contract revenue of $5.2 million, depreciation
and accrued interest payable, partially offset by operating losses and decreases in
operating assets and liabilities.


Net
cash provided by investing activities of $20.8 million in 2000 consisted of net
sales of marketable securities of $22.1 million, offset by purchases of fixed
assets of $1.3 million. Net cash provided by investing activities of $5.7
million in 1999 consisted of net purchases of marketable securities of $11.1
million and purchases of fixed assets of $5.0 million, offset by the proceeds
from the sales of facilities and equipment of $21.8 million. For 1998, net cash
used by investing activities of $18.3 million consisted of net purchases of
marketable securities of $16.3 million and purchases of fixed assets of $2.5
million, partially offset by the sale of investments in an affiliate of $0.4
million.


Net
cash provided by financing activities of $5.4 million in 2000 was primarily due
to the proceeds from the issuance of common stock and the collection of notes
receivables from stockholders of $10.0 million, partially offset by the payment
of notes payable of $4.6 million. Net cash provided by financing activities of
$7.7 million in 1999 was largely due to proceeds from notes payable of $7.5
million and proceeds from the issuance of common stock of $1.3 million,
partially offset by the purchase of treasury stock of $1.0 million. Net cash
provided by financing activities of $5.7 million for 1998 was primarily due to the
proceeds from the issuance of common stock of $6 million for 1998, partially offset by
the purchase of treasury stock of $1.5 million and the payment of notes payable
of $0.3 million.


We
anticipate that our existing cash, cash equivalents and marketable securities
and proceeds from existing collaborations, including our agreement with Innovex
and PharmaBio, will enable us to maintain our current and planned operations for
the next twelve months. In the long-term, and in the event that we do not
receive FDA approval to market Natrecor, we will need to arrange additional
financing for the operation of our business, including the commercialization of
our products currently under development. We will consider collaborative
arrangements and additional public or private financings, including additional
equity financings. Factors influencing the availability of additional financing
include our progress in product development, investor perception of our
prospects and the general conditions of the financial markets.



Income Taxes


At
December 31, 2000, we had federal and state net operating loss carryforwards of
approximately $349.0 million and $41.5 million, respectively. We also had
federal and state research tax credit carryforwards of approximately $13.3
million and $5.1 million, respectively. The federal net operating loss and other
tax credit carryforwards will expire at various dates beginning in the year 2001
through 2020, if not used. Our state net operating loss and other tax credit
carryforwards will expire at various dates beginning in the year 2001 through
2005, if not used. These net operating loss and other tax credit carryforwards
provide an additional source of liquidity only to the extent that profitable
operations are achieved prior to the expiration of the carryforward periods. The
use of losses generated through the date of our 1992 merger with Nova
Pharmaceutical Corporation may be subject to substantial annual limitations due
to the ownership change provisions of the Internal Revenue Code of
1986.


30
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Item 7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


We
are exposed to a variety of risks, including changes in interest rates affecting
the return on our investments and foreign currency fluctuations. In the normal
course of our business, we employ established policies and procedures to manage
our exposure to fluctuations in interest rates and foreign currency values.


Our
exposure to market rate risk for changes in interest rates relates primarily to
our investment portfolio. We attempt to place our investments with high quality
issuers and, by policy, limit the amount of credit exposure to any one issuer
and do not use derivative financial instruments in our investment portfolio. We
maintain an investment portfolio of various issuers, types and maturities, which
consist of both fixed and variable rate financial instruments. These securities
are classified as available-for-sale, and consequently, are recorded on the
balance sheet at fair value with unrealized gains or losses reported as a
separate component in stockholders equity, net of applicable taxes. At any
time, sharp changes in interest rates can affect the value of our investment
portfolio and its interest earnings. Currently, we do not hedge these interest
rate exposures. However, through our money manager, we maintain management
control systems to monitor interest rate risk. The risk management control
systems use analytical techniques as well as other procedures to review interest
rate risk. Assuming a hypothetical interest rate increase of 10%, the fair value
of our total investment portfolio as of December 31, 2000 would have potentially
incurred a loss of $379,000.


Our
exposure to foreign currency fluctuations is currently limited to our supply
contract for Natrecor, which is denominated in German Marks. Changes in the
exchange rate between German Marks and the U.S. dollar could adversely affect
our manufacturing costs. All of our other contracts are denominated in U.S.
dollars. Exposure to foreign currency exchange rate risk may change over time as
our business evolves and our products are introduced into international markets.
Currently, we do not hedge against any foreign currencies and, as a result,
could incur unanticipated gains or losses.



Item 8.
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


See
Index to Consolidated Financial Statements appearing on page F-1 of this Form 10-K.


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


None.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|PART III




Item 10. DIRECTORS AND
EXECUTIVE OFFICERS OF THE REGISTRANT


Identification
of Directors. The information required by Item 10 of Form 10-K with respect
to identification of directors is incorporated by reference to the information
contained in the sections captioned Election of Directors and
Compliance with Section 16(a) of the Exchange Act of our definitive
Proxy Statement for the 2001 Annual Meeting of Stockholders.


Identification of Executive
Officers. See Management above.



Item 11.
EXECUTIVE COMPENSATION


The
information required by Item 11 of Form 10-K is incorporated by reference to the
information contained in the sections captioned Executive
Compensation, Stock Option Grants and Exercises,
Employment and Severance Agreements, Information About the Board of
Directors and Committees of the Board: Compensation of Directors  Standard
Arrangements and Compensation Committee Interlocks and Insider
Participation of our definitive Proxy Statement for the 2001 Annual
Meeting of Stockholders.


Item 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT


The
information required by Item 12 of Form 10-K is incorporated by reference to the
information contained in the section captioned Security Ownership of
Management and Principal Stockholders of the our definitive Proxy
Statement for the 2001 Annual Meeting of Stockholders.



Item 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


The
information required by Item 13 of Form 10-K is incorporated by reference to the
information contained in the section captioned Certain Relationships and
Transactions of the our definitive Proxy Statement for the 2001 Annual
Meeting of the Stockholders.


PART IV



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

| |  | (a) |  | (1)  
Consolidated Financial Statements. See Index to Consolidated Financial Statements at page F-1 of this Form 10-K.
| |  | --- |  | ----------------------------------------------------------------------------------------------------------------------

| | (2)  
Financial Statement Schedules. Omitted because they are not required, are not applicable,
or the information is included in the consolidated financial statements or notes thereto.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3)  
Exhibits. See Exhibit Index at page 33 of this Form 10-K.
| | ---------------------------------------------------------------

| |  | (b) |  | Reports
on Form 8-K. None.
| |  | --- |  | --------------------------

|32
|--

|EXHIBIT INDEX
|-------------

|ExhibitNumber |   | Reference                                                                                                                                                                                                                                                                                                 
|------------- | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
|
|3.1           |   | Certificate of Incorporation                                                                                                                                                                                                                                                                              
|3.2           |   | Bylaws                                                                                                                                                                                                                                                                                                    
|10.1          |   | Biotechnology Research Partners, Ltd. Agreement of Limited Partnership dated October 29, 1982; Development Contract, Technology License Agreement and Joint Venture Agreement
between Biotechnology Research Partners, Ltd. and the Registrant dated December 29, 1982; Promissory Note dated December 29,
|10.2          | * | 1983 Incentive Stock Option Plan, as amended, and form of Stock Option Agreement, Promissory Note and Pledge Agreement                                                                                                                                                                                    
|10.3          |   | Common Stock Purchase Agreement dated April 15, 1985 between the Registrant and American Home Products Corporation                                                                                                                                                                                        
|10.5          | * | 1986 Supplemental Stock Option Plan, as amended, and form of Stock Option Agreement, Promissory Note and Pledge Agreement                                                                                                                                                                                 
|10.6          |   | Rights Exercise Agreement between the Registrant and American Home Products Corporation dated February 28, 1986 and Letter
            of March 26 and May 16, 1986                                                                                                                                       
|10.11         | * | 1992 Equity Incentive Plan                                                                                                                                                                                                                                                                                
|10.18         |   | Form of Purchase Option Agreement between each of the limited partners of Nova Technology Limited Partnership and Nova                                                                                                                                                                                    
|10.19         | * | Nonemployee Director Stock Option Plan                                                                                                                                                                                                                                                                    
|10.29         |   | CNS Psychiatric Products Agreement dated June 30, 1990 between SmithKline Beecham Corporation and Nova                                                                                                                                                                                                    
|10.33         |   | Preferred Stock Purchase Agreement dated December 30, 1994 between the Registrant and Genentech, Inc.                                                                                                                                                                                                     
|10.34         |   | Note Agreement dated December 30, 1994 between the Registrant and Genentech, Inc. (See Exhibit Number 10.41 below amending the Note Agreement)                                                                                                                                                            
|10.35         |   | Assignment of Lease dated March 22, 1995 for premises located at 820 West Maude Avenue, Sunnyvale, California                                                                                                                                                                                             
|10.38         | * | Employment Letter dated September 8, 1998 between the Registrant and Richard B. Brewer                                                                                                                                                                                                                    
|10.3          |   | Purchase and Sale Agreement and Joint Escrow Instructions (Mountain View Real Estate Sale) dated May 24, 1999 between Alexandria Real Estate Equities, Inc. and Registrants
wholly owned Subsidiary Bio-Shore Holdings, Ltd. Portions of the exhibit have been omitted                                   
|10.41         |   | First Amendment to Note Agreement and Preferred Stock dated November 3, 1999 between the Registrant and Genentech, Inc. (See Exhibit 10.34 above)                                                                                                                                                         
|10.42         |   | Promissory Note dated December 27, 1999 by the Registrant to Chiron Corporation                                                                                                                                                                                                                           
|10.43         | * | Change of Control Severance Plans with Employees, Officers and Chief Executive Officer                                                                                                                                                                                                                    
|10.44         |   | Alliance Agreement dated January 10, 2001 between the Registrant, Innovex L.P. and PharmaBio Development Inc. (including a Warrant Agreement between the Registrant and PharmaBio
Development Inc. attached thereto as Exhibit B). Portions of the exhibit have been omitted                              
|21.2          |   | Subsidiaries of the Registrant                                                                                                                                                                                                                                                                            
|23.1          |   | Consent of PricewaterhouseCoopers LLP                                                                                                                                                                                                                                                                     
|24.1          |   | Powers of Attorney. Reference is made to page 35.                                                                                                                                                                                                                                                         

|33
|--

|
|

|  | 
|- | 
|
|
|* | 
|A | 
|B | 
|E | 
|G | 
|H | 
|I | 
|J | 
|N | 
|Q | 
|R | 
|T | 
|U | 
|V | 
|W | 

|34
|--

|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.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Date: March 27, 2001 |  | SCIOS INC.By: /s/ Richard B. Brewer
Richard B. BrewerPresident and Chief Executive Officer
|-------------------- |  | --------------------------------------------------------------------------------------------------------

|Power of
Attorney


KNOW
ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Richard B. Brewer his attorney-in-fact, with the power
of substitution, for him in any and all capacities, to sign any amendments to
this Annual 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, hereby ratifying and confirming all that the said attorney-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 on behalf of the registrant and in the
capacities and on the dates indicated.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Signature                                                        | Title                                                               | Date          
| | ---------------------------------------------------------------- | ------------------------------------------------------------------- | --------------
| | /s/ Richard B. Brewer
 Richard B. Brewer               | President and Chief Executive Officer
(Principal Executive Officer) | March 27, 2001
| | /s/ David W. Gryska
David W. Gryska                    | Chief Financial Officer (Principal Accounting Officer)              | March 27, 2001
| | /s/ Donald B. Rice, Ph.D.
Donald B. Rice, Ph.D.        | Chairman of the Board                                               | March 27, 2001
| | /s/ Samuel H. Armacost
 Samuel H. Armacost             | Director                                                            | March 27, 2001
| | /s/ Randal J. Kirk
Randal J. Kirk                      | Director                                                            | March 27, 2001
| | /s/ Charles A. Sanders, M.D.
 Charles A. Sanders, M.D. | Director                                                            | March 27, 2001
| | /s/ Solomon H. Snyder, M.D.
Solomon H. Snyder, M.D.    | Director                                                            | March 27, 2001
| | /s/ Burton E. Sobel, M.D.
Burton E. Sobel, M.D.        | Director                                                            | March 27, 2001
| | /s/ Eugene L. Step
 Eugene L. Step                     | Director                                                            | March 27, 2001

|35
|--

|INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS
|------------------------------------------

|                                                                                           | 
|------------------------------------------------------------------------------------------ | 
|Report of Independent Accountants                                                          | 
|Consolidated Balance Sheets at December 31, 2000 and 1999                                  | 
|Consolidated Statements of Operations and Comprehensive Income (Loss)                      | 
|for the years ended December 31, 2000, 1999, and 1998                                      | 
|Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 | 
|Consolidated Statement of Stockholders Equity for the years ended                         | 
|December 31, 2000, 1999 and 1998                                                           | 
|Notes to Consolidated Financial Statements                                                 | 

|Financial Statement Schedules
(Omitted because they are not required, are not applicable, or the information is
included in the consolidated financials statements or notes thereto.)



F-1
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|REPORT OF INDEPENDENT
ACCOUNTANTS




To the Board of Directors and
Stockholders of Scios Inc.


In our
opinion, the accompanying consolidated balance sheets and the related consolidated
statements of operations and comprehensive income (loss), of stockholdersequity and
of cash flows present fairly, in all material respects, the financial position of Scios
Inc. and its subsidiary at December 31, 2000 and 1999, and the results of their
operations and comprehensive income (loss) and their cash flows for each of the three
years in the period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America. 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 of
these statements in accordance with auditing standards generally accepted in the United
States of America, which require that we plan and perform the audits 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP San
Jose, CaliforniaFebruary 7, 2001, except for Note 18b as to which the date is March 27, 2001.



F-2
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|
|

|December 31,                                                    | 2000 | 1999    
|--------------------------------------------------------------- | ---- | --------
|(in thousands, except share data)                               |      |         
|                                                                |     
|ASSETS                                                          |     
|Current assets:                                                 |     
|Cash and cash equivalents                                       |      | $3,291  
|Marketable securities                                           |      | 35,356  
|Accounts receivable                                             |      | 5,217   
|Prepaid expenses                                                |      | 722     
|                                                               
|Total current assets                                            |      | 44,586  
|                                                                |     
|Marketable securities, non-current                              |      | 32,884  
|Property and equipment, net                                     |      | 8,910   
|Other assets                                                    |      | 2,007   
|                                                               
|TOTAL ASSETS                                                    |      | $88,387 
|                                                               
|                                                                |     
|LIABILITIES AND STOCKHOLDERS EQUITY                            |     
|Current liabilities:                                            |     
|Accounts payable                                                |      | $4,587  
|Other accrued liabilities                                       |      | 10,749  
|Deferred contract revenue                                       |      | 16,193  
|Current portion of long term debt                               |      |        
|                                                               
|Total current liabilities                                       |      | 31,529  
|                                                                |     
|Long-term debt                                                  |      | 39,095  
|                                                               
|Total liabilities                                               |      | 70,624  
|                                                               
|Commitments and contingencies (Notes 10,11, and 12)             |     
|Stockholders equity:                                           |     
|Preferred stock; $.001 par value; 20,000,000 shares authorized; |      |         
|issued and outstanding 4,991 shares and more respectively,      |      |         
|Common stock; $.001 par value; 150,000,000                      |     
|shares authorized; issued and outstanding                       |     
|39,166,373 and 38,468,652 shares, respectively                  |      | 39      
|Additional paid-in capital                                      |      | 428,987 
|Treasury stock; none and 735,036                                |     
|shares, respectively                                            |      |        
|Notes receivable from stockholders                              |      | (634    
|Deferred compensation, net                                      |      | (417    
|Accumulated other comprehensive income (loss)                   |      | 1,195   
|Accumulated deficit                                             |      | (411,407
|                                                               
|Total stockholders equity                                      |      | 17,763  
|                                                               
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                      |      | $88,387 
|                                                               

|The accompanying notes are an
integral part of these consolidated financial statements.


F-3
|---------------------------------------------------------------------------------------------

|CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
|---------------------------------------------------------------------

|Year ended December 31,                           | 2000 | 1999       | 1998
|------------------------------------------------- | ---- | ---------- | ----
|(in thousands, except share and per share data)   |      |            |     
|                                                  |     
|Revenues:                                         |     
|Product sales & co-promotion commissions, net of  |      | $6,914     |     
|expenses                                          |     
|Research & development contracts                  |      | 5,710      |     
|                                                 
|                                                  |      | 12,624     |     
|                                                 
|                                                  |     
|Costs and expenses:                               |     
|Research and development                          |      | 39,278     |     
|Marketing, general and administration             |      | 16,711     |     
|Restructuring charges (credits)                   |      | (993       | )   
|                                                 
|                                                  |      | 54,996     |     
|                                                 
|                                                  |     
|Loss from operations                              |      | (42,372    | )   
|Other income (expense):                           |     
|Investment income                                 |      | 4,774      |     
|Interest expense                                  |      | (3,796     | )   
|Realized gains (losses) on securities             |      | (152       | )   
|Other income (expense)                            |      | (973       | )   
|                                                 
|                                                  |      | (147       | )   
|                                                 
|                                                  |     
|Equity in net loss of affiliate                   |      |           |     
|                                                  |     
|Loss before provision for income taxes            |      | (42,519    | )   
|Provision for income taxes                        |      | (3         | )   
|                                                 
|Net loss                                          |      | (42,522    | )   
|                                                 
|                                                  |     
|Other comprehensive income (loss):                |     
|Change in unrealized gains (losses) on securities |      | 2,255      |     
|                                                 
|Comprehensive income (loss)                       |      | $(40,267   | )   
|                                                 
|                                                  |     
|Loss per common share:                            |     
|Basic and diluted                                 |      | $(1.12     | )   
|                                                  |     
|Weighted average number of common shares          |     
|outstanding used in calculation of:               |     
|Basic and diluted                                 |      | 37,997,872 |     
|                                                  |     
|Pro forma effect of adopting SAB 101:             |     
|Net loss                                          |      | $(42,522   | )   
|Basic and diluted loss per share                  |      | $(1.12     | )   

|The accompanying notes are an
integral part of these consolidated financial statements.


F-4
|---------------------------------------------------------------------------------------------

|CONSOLIDATED
STATEMENTS OF CASH FLOWS
|-------------------------------------

|Year ended December 31,                                | 2000 | 1999      | 1998
|------------------------------------------------------ | ---- | --------- | ----
|(in thousands)                                         |      |           |     
|                                                       |     
|Cash flows from operating activities:                  |     
|Net loss                                               |      | ($42,522  | )   
|Adjustments to reconcile net loss to net               |     
|cash provided by (used in) operating activities:       |     
|Depreciation and amortization                          |      | 3,717     |     
|Accrued interest payable                               |      | 3,791     |     
|Loss on disposal of property and equipment             |      | 253       |     
|Equity in net loss of affiliate                        |      |          |     
|Amortization of deferred compensation                  |      | 234       |     
|Change in assets and liabilities:                      |     
|Accounts receivable                                    |      | (2,149    | )   
|Accounts payable                                       |      | 3,015     |     
|Other accrued liabilities                              |      | 647       |     
|Other                                                  |      | 1,245     |     
|Deferred contract revenue                              |      | (1,697    | )   
|Restructuring charges                                  |      | (1,052    | )   
|                                                      
|Net cash provided by (used in) operating activities    |      | (34,518   | )   
|                                                      
|                                                       |     
|Cash flows from investing activities:                  |     
|Purchases of property and equipment                    |      | (1,346    | )   
|Proceeds from sale of investment in affiliate          |      |          |     
|Proceeds from sale of facilities and equipment         |      |          |     
|Sales/maturities of marketable securities              |      | 63,971    |     
|Purchases of marketable securities                     |      | (41,845   | )   
|                                                      
|Net cash provided by (used-in) investing activities    |      | 20,780    |     
|                                                      
|                                                       |     
|Cash flows from financing activities:                  |     
|Issuance of common stock and collection of notes       |     
|receivable from stockholders, net                      |      | 10,009    |     
|Purchase of treasury stock                             |      |          |     
|Payment of notes payable                               |      | (4,562    | )   
|Proceeds from notes payable                            |      |          |     
|                                                      
|Net cash provided by financing activities              |      | 5,447     |     
|                                                      
|                                                       |     
|Net increase (decrease) in cash and cash equivalents   |      | (8,291    | )   
|Cash and cash equivalents at beginning of year         |      | 11,582    |     
|                                                      
|Cash and cash equivalents at end of year               |      | $  3,291  |     
|                                                      
|                                                       |     
|Supplemental cash flow data:                           |     
|Cash paid during the year for interest                 |      | $  4,562  |     
|Supplemental disclosure of non-cash investing          |     
|and financing:                                         |     
|Converted Genentech notes payable into preferred stock |      | $  5,000  |     
|Change in net unrealized gains(losses) on securities   |      | $  2,255  |     
|Investment in affiliate                                |      | $        |     
|Write off of fully depreciated assets                  |      | $     904 |     
|Notes receivable from shareholders                     |      | $    423  |     
|Deferred compensation                                  |      | $    311  |     

|The accompanying notes are an
integral part of these consolidated financial statements.


F-5
|---------------------------------------------------------------------------------------------

|CONSOLIDATED
STATEMENTS OF STOCKHOLDERSEQUITY
|----------------------------------------------

|(in thousands, except share data)      | PreferredShares | CommonStockShares | CommonStockParValue | AdditionalPaid-InCapital | TreasuryStock | NotesReceivableFromStockholders | DeferredCompensation | AccumulatedOtherComprehensiveIncome(Loss) | AccumulatedDeficit | Total  
|-------------------------------------- | --------------- | ----------------- | ------------------- | ------------------------ | ------------- | ------------------------------- | -------------------- | ----------------------------------------- | ------------------ | -------
|Balances at January 1, 1998            |                 |                  |                     | 38,032,120               |               | $38                             |                      | $411,045                                  |                    | $(4,758
|                                      
|Common stock issued                    |                 |                   |                     | 262,283                  |               |                                 |                      | 3,048                                     |                    |        
|Purchase of treasury stock             |                 |                   |                     |                          |               |                                 |                      |                                           |                    | (1,509 
|Options exercised                      |                 |                   |                     | 677,249                  |               |                                 |                      | 4,524                                     |                    |        
|Treasury stock reissued                |                 |                   |                     | (603,000                 | )             |                                 |                      | (2,786                                    | )                  | 2,786  
|Notes receivable from                  |                
|stockholders                           |                 |                   |                     |                          |               |                                 |                      |                                           |                    |        
|Deferred compensation                  |                 |                   |                     | 100,000                  |               |                                 |                      | 597                                       |                    |        
|Amortization of deferred               |                
|compensation                           |                 |                   |                     |                          |               |                                 |                      |                                           |                    |        
|Changes in unrealized                  |                
|gains on available-for-sale            |                
|on securities                          |                 |                   |                     |                          |               |                                 |                      |                                           |                    |        
|Net loss                               |                 |                   |                     |                          |               |                                 |                      |                                           |                    |        
|                                      
|Balances at December 31, 1998          |                 |                  |                     | 38,468,652               |               | 38                              |                      | 416,428                                   |                    | (3,481 
|                                      
|Purchase of treasury stock             |                 |                   |                     |                          |               |                                 |                      |                                           |                    | (1,048 
|Options exercised                      |                 |                   |                     | 185,163                  |               |                                 |                      | 1,243                                     |                    |        
|Treasury stock reissued                |                 |                   |                     | (225,163                 | )             |                                 |                      | (1,223                                    | )                  | 1,071  
|Notes receivable from                  |                
|stockholders                           |                 |                   |                     |                          |               |                                 |                      |                                           |                    |        
|Deferred compensation                  |                 |                   |                     | 40,000                   |               |                                 |                      | 152                                       |                    |        
|Amortization of deferred               |                
|compensation                           |                 |                   |                     |                          |               |                                 |                      |                                           |                    |        
|Changes in unrealized                  |                
|gains (losses) on                      |                
|available-for-sale                     |                
|securities                             |                 |                   |                     |                          |               |                                 |                      |                                           |                    |        
|Net loss                               |                 |                   |                     |                          |               |                                 |                      |                                           |                    |        
|                                      
|Balances at December 31, 1999          |                 |                  |                     | 38,468,652               |               | 38                              |                      | 416,600                                   |                    | (3,458 
|                                      
|Preferred stock issued to              |                
|retire debt                            |                 | 4,991             |                     |                          |               |                                 |                      | 5,000                                     |                    |        
|Options exercised                      |                 |                   |                     | 1,432,757                |               | 1                               |                      | 10,534                                    |                    |        
|Treasury stock reissued                |                 |                   |                     | (735,036                 | )             |                                 |                      | (3,458                                    | )                  | 3,458  
|Notes receivable from                  |                
|stockholders                           |                 |                   |                     |                          |               |                                 |                      |                                           |                    |        
|Deferred compensation                  |                 |                   |                     |                          |               |                                 |                      | 311                                       |                    |        
|Amortization of deferred               |                
|compensation                           |                 |                   |                     |                          |               |                                 |                      |                                           |                    |        
|Changes in unrealized                  |                
|gains (losses) on                      |                
|available-for-sale                     |                
|securities                             |                 |                   |                     |                          |               |                                 |                      |                                           |                    |        
|Unrealized gain on Genvec common stock |                 |                   |                     |                          |               |                                 |                      |                                           |                    |        
|Net loss                               |                 |                   |                     |                          |               |                                 |                      |                                           |                    |        
|                                      
|Balances at December 31, 2000          |                 | 4,991             |                     | 39,166,373               |               | $39                             |                      | $428,987                                  |                    | $     
|                                      

|The accompanying notes are an
integral part of these consolidated financial statements.


F-6
|---------------------------------------------------------------------------------------------

|NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
|------------------------------------------

|1. |  | Business
of the Company
|-- |  | -----------------------

| | Scios
Inc. (the Company) is a biopharmaceutical company developing novel treatments
for cardiovascular and inflammatory diseases. The Company is distinguished by its
disease-based technology platform, which integrates expertise in protein biology with
computational and medicinal chemistry to identify novel targets, and rationally design
small molecule compounds. The Companys psychiatric sales and marketing division
also markets seven products in the United States in cooperation with the Companys
partners. In the course of its development activities, the Company has sustained
operating losses and expects such losses to continue at least through fiscal year 2003.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2. |  | Restructuring
Charges and Expenses
|-- |  | ----------------------------------

| | In
1999, the Company recorded a one-time restructuring charge of approximately $6.4 million
for the disposal of certain excess assets and severance costs. All restructuring
activities were complete by the end of the second quarter of 2000, leaving a remaining
balance of $1.0 million in the reserve. The remaining reserve was credited to restructure
expense in the second quarter of 2000.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3. |  | Summary
of Significant Accounting Policies
|-- |  | ------------------------------------------

| | Principles
of consolidationThe consolidated financial statements include the accounts of the
Company and its wholly-owned and majority-owned subsidiary. Other affiliates, more than
20%, but less than 50% owned, are accounted for on the equity basis. Intercompany
transactions and balances are eliminated on consolidation.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Use
of estimatesThe preparation of financial statements in conformity with generally
accepted accounting principals requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ from those
estimates.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Cash
equivalentsThe Company considers all highly liquid investments with maturities of less
than 90 days, at the time acquired, to be cash equivalents. Cash equivalents are stated
at cost, which approximates market value.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Marketable
securitiesAll marketable securities at December 31, 2000 and December 31, 1999 were
deemed by management to be available-for-sale and are stated at fair market value with
net unrealized gains or losses reported in stockholdersequity. Realized gains and
losses on sales of all such securities are reported in earnings and computed using the
specific identification cost method.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Business
risk and credit concentrationApproximately 40% (reclassified for EITF 99-19, see recent
pronouncements) of the Companys total revenues in 2000 were derived from
psychiatric product sales, which consist entirely of sales in the United States under a
license agreement with GlaxoSmithKline Corp. (GSK) (see Note 4). In December
1999, the Company announced a temporary shortage of Eskalith CR (lithium carbonate), one
of five products developed and manufactured by GSK that are sold by the Company. As a
result of these manufacturing issues, the product shelf life has been reduced to six months.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
1999 license revenues from Chiron Corporation (Chiron) accounted for 27%, milestone
payments from Novo Nordisk accounted for 22%, and Alzheimers research reimbursement
with Eli Lilly and Company accounted for 22% of total research and development contract
revenues. Approximately 11% of 1999, and 33% of 1998 research and development contract
revenues were from the agreement with Bayer AG (Bayer) for commercialization
of Natrecor (nesiritide). The agreement with Bayer was terminated in May 1999, after
non-
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|F-7
|---

|
|

| | approval of Natrecor by the Food and Drug Administration (FDA). In 1999, no
individual customer or partner contributed more than 10% to total revenues.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------

| | At
December 31, 2000, the $5.2 million in accounts receivable included $3.5 million from
GSK, and $1.0 million from Janssen Pharmaceutica Inc. (Janssen).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| | At
December 31, 1999, the $3.1 million in accounts receivable included $1.5 million from
GSK, $1.1 million from Janssen, and $0.3 million from the National Institutes of Health.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The Companys excess cash is invested in a diversified portfolio of securities
consisting of United States Treasury Notes, deposits with major banks and financial
institutions, and investment-grade interest-bearing corporate securities issued by
companies in a variety of industries. In addition, the Company owns 201,742 shares of
Genvec Corporation (Genvec) common stock. Genvec completed its initial public stock offering on December 13, 2000.
All pre-IPO stockholders were required to lock up their stock for 180 days subsequent to the offering.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Certain Company products
require approval from the FDA and foreign regulatory agencies prior to commercialized
sales and are subject to continued regulations once approved. There can be no assurances
that the Companys new products will receive any of these required approvals. If the
Company were denied such approvals or such approvals were delayed, it could have a
materially adverse impact on the Company
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Depreciation
and amortizationBuildings and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets (3 to 7 years for
equipment and 40 years for buildings). Leasehold improvements are amortized on a
straight-line basis over the shorter of the asset life or fixed-lease term. Upon sale or
retirement of assets, the cost and related accumulated depreciation or amortization is
removed from the balance sheet, and the resulting gain or loss is reflected in
operations.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Treasury
stockTreasury stock of 735,036 shares at December 31, 1999 was stated at cost and was considered issued and outstanding.
All treasury stock was issued during 2000 in connection with the exercise of stock options.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Product
salesRevenue from product sales is recognized in the period in which the products are
shipped. Provision is made for estimated returns and allowances, cash discounts and
rebates attributable to Medicaid programs related to sales of the psychiatric products.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Co-promotion
commissionsRevenue from co-promotion commissions (see Note 4) is recognized based on
specified sales levels of Janssens psychiatric product Risperdal® (risperdone)
(Risperdal), and GSKs psychiatric product Paxil® (paroxetine
HCl) (Paxil), for their respective contract years.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Contract
revenuesResearch and development contract revenue from cost-reimbursement agreements with collaboration partners is
recorded as the related expenses are incurred, up to contractual limits. Payments
received that are related to future performance are deferred and recorded as revenue as
they are earned over specified future performance periods.  Charges to these collaboration partners
are based upon negotiated rates for full time equivalent employees of the Company  and such rates
are intended to approximate the Companys anticipated costs. All revenues recognized to date are not refundable
if the relevant research effort is not successful. Research and development expenses in 2000, 1999, and
1998 include approximately $5.7 million, $5.2. million, and $4.9 million, respectively,
incurred in connection with programs subject to cost reimbursement, collaborative or
other performance agreements.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Research and developmentResearch and
development costs are charged to operations as incurred. Certain research and
development projects are funded under agreement with collaboration partners, and the
costs related to these activities are included in research and development expense. The
charges to collaboration partners are based upon negotiated rates for full-time
equivalent employees of the Company, and such rates are intended to approximate the
Companys anticipated costs.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Fair
value of financial instrumentsCarrying amounts of certain
of the Companys financial instruments including cash and cash equivalents, accounts
receivable, accounts payable and other accrued liabilities approximate fair value due to
their short maturities. Based on borrowing rates currently available to the Company for
loans with similar terms, the carrying value of notes payable approximates fair value.
Estimated fair values for marketable securities, which are separately disclosed
elsewhere, are based on quoted market prices for the same or similar instruments.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|F-8
|---

|
|

| | Computation
of net loss per shareBasic net loss per share is
calculated using the weighted average number of vested common shares outstanding for the period.
Diluted net loss is calculated using the weighted average number of common and dilutive
common equivalent shares outstanding during the period. The outstanding options to
purchase common stock and the affect of converting preferred stock to common stock
were excluded from diluted earnings calculations because the effect would be anti-dilutive.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Comprehensive
income (loss)The Companys unrealized gains (losses)
on marketable securities represent the only component of comprehensive income that is
excluded from the Companys net loss. The Companys comprehensive income (loss)
has been presented in the consolidated financial statements. As the Company is in a loss
position, tax effects have not been allocated to the components of other comprehensive
income (loss).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Accumulated
other comprehensive income (loss) balances are as follows for the years ended:
| | ------------------------------------------------------------------------------------------

| | (in thousands) | UnrealizedGains (losses)on Securities | AccumulatedOtherComprehensiveIncome (loss)
| | -------------- | ------------------------------------- | ------------------------------------------
| |                | Balance, January 1, 1999              |                                           
| |                | Current period change                 |                                           
|
| |                | Balance, December 31, 1999            |                                           
| |                | Current period change                 |                                           
|
| |                | Balance, December 31, 2000            |                                           

| | Income
taxesThe Company accounts for income taxes under Statement
of Financial Accounting Standard No. 109, Accounting for Income Taxes, which
prescribes the use of the liability method whereby deferred tax asset or liability
account balances are calculated at the balance sheet date using current tax laws and
rates in effect for the year in which the differences are expected to affect taxable
income. Valuation allowances are established when necessary to reduce deferred tax assets
to the amounts expected to be realized.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Reclassification Certain amounts in the consolidated financial statements
have been reclassified to conform with the current years presentation. The
reclassification has no impact on previously reported net loss.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Recent
pronouncements In June 1998, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, (SFAS
133), Accounting for Derivative Instruments and Hedging Activities. SFAS
133 establishes new standards of accounting and reporting for derivative instruments and
hedging activities. SFAS 133 will be effective for the Companys first quarter of 2001.  The
Company does not currently hold derivative instruments or engage in hedging activities,
and does not believe that the implementation of SFAS 133 will have any significant impact
on its financial position or results of operations.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In March 2000, the FASB issued Interpretation No. 44 (FIN
No. 44), Accounting for Certain Transactions Involving Stock Compensation,an
interpretation of the Accounting Principles Board Opinion No. 25 (APB No. 25),
Accounting for Stock Issued to Employees. This interpretation clarifies the
definition of an employee for purposes of applying APB No. 25, the criteria for
determining whether a plan qualifies as a noncompensatory plan, the accounting
consequence of various modifications to the terms of a previously fixed stock option or
award and the accounting for an exchange of stock compensation awards in a business
combination. FIN No. 44 was effective July 1, 2000, but certain conclusions cover
specific events that occured after either December 15, 1998, or January 12, 2000. The
adoption of FIN No. 44 did not have any material impact on the Companys
consolidated financial statements.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|F-9
|---

|
|

| | Effective
January 1, 2001, the Company adopted Staff Accounting Bulletin No. 101 (SAB 101) Revenue
Recognition in Financial Statements. SAB 101 requires that license and other up from
fees received from research collaborators be recognized as earned over the term of the
agreement unless the fee is in exchange for products delivered or services performed that
represent the culmination of a separate earnings process.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The cumulative effect of adoption as of January 1, 2000 was immaterial to the results of Companys
operations and financial position. However, certain revenue recognized in periods prior
to January 1, 2000 would have been recognized in different periods in accordance with the
provisions of SAB 101. In the year ended December 31, 1998, the Company recorded a $20.0
million license fee in connection with the Natrecor commercialization agreement with
Bayer AG. Under SAB 101, $19.1 million of this license fee would have been reallocated
from 1998 to the year ended December 31, 1999, the year in which Bayer
commercialization agreement was terminated. As a result, the loss for the year ended
December 31, 1998 would have increased by $19.1 million and the loss for the year ended
December 31, 1999 decreased by $19.1 million. In accordance with the implementation
provisions of SAB 101, the accompanying financial data for periods prior to January 1,
2000, the date of adoption, have not been restated.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
pro forma effects of implementing SAB 101 on the results previously
reported for the year ended December 31, 1999 and 1998 are presented below:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Year ended December 31, 1999
| |  | ----------------------------
|
|
| |  | As Reported                 
| |  | Pro-forma                   

| |  | Year ended December 31, 1998
| |  | ----------------------------
|
|
| |  | As Reported                 
| |  | Pro-forma                   
| | 

| | Concurrent with the implementation of SAB 101, Scios has implementation the consensus reached in
EITF 99-19 Reporting Revenue Gross as a Principal Versus Net As an Agent. The effect of
the EITF results in netting the revenues received from the Psychiatric Sales and
Marketing Division (PMSD) with related direct costs, as such it had no effect on the
previously reported operating results. All periods presented reflect retroactive
application of this EITF consensus.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4. |  | Joint
Business Arrangements
|-- |  | ---------------------------

| | a. 
Agreement with Chiron CorporationIn
November 1999, the Company signed a license agreement with Chiron for the rights to
Fiblast ®(trafermin). Fiblast is a human basic fibroblast growth factor. The Company
received $5.0 million in license and technology transfer fees and $7.5 million from a
Promissory Note due on December 31, 2006. The note and related interest is forgiven if
Fiblast is approved in the United States before December 31, 2006. The Company will also
receive royalties based on future sales of Fiblast products.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. 
Agreement with Janssen Pharmaceutica Inc. The Company entered into a three-year
agreement, effective April 1998, with Janssen to jointly promote the anti-psychotic drug,
Risperdal, in the United States. Under the agreement, the Company receives base payments
plus incentive compensation on achieving specified sales levels over a contract year
beginning in April and ending in March. Janssen manufactures and distributes the product.
This agreement will end on March 31, 2001.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. 
Agreement with GlaxoSmithKline Corporation Under the terms of an agreement with GSK, the
Company has the exclusive rights to market certain GSK psychiatric products in the United
States. GSK is fully responsible for ancillary matters relating to product sales,
including various administrative tasks and maintenance of all New Drug Applications with
respect to the GSK Products, and certain product liability insurance. The Company pays
GSK 40% of net profits, as defined in the agreement, from sales of the GSK Products.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
September 1998, the Company entered into an agreement with GSK to co-promote Paxil®in
the United States.  Under the
agreement, the Company receives base payments plus incentive compensation on achieving
specified sales levels during a specified term. Although the agreement ended December 2000, the
 companies have agreed to extend the agreement through March 31, 2001.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. 
Agreement with DuPont Pharmaceuticals CompanyIn December 1997, the Company entered into
an agreement with DuPont Pharmaceuticals Company (DuPont) that established
research collaboration in the area of Alzheimers disease with the goal of
developing pharmaceuticals that prevent or retard the disease. Under the terms of the
agreement, DuPont will fund research at the Company and will have responsibility to
develop and commercialize products from this collaboration. DuPont also purchased $3.0
million of the Companys common stock in 1998 and will make milestone and royalty
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|F-10
|----

|
|

| | payments to the Company as products advance through development. On the basis of the
agreement, the research collaboration ended November 2000. Both Dupont and the Company
are in the process of finalizing closeout issues.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. 
Agreement with Eli Lilly and CompanyIn April 1997, the Company entered into a research
collaboration with Eli Lilly and Company (Eli Lilly) for the development of
drugs to prevent or retard the progression of Alzheimers disease. Under the terms
of the agreement, Eli Lilly will fund research and will have the first opportunity to
develop products from the collaboration. The Company may elect to develop other products
from the collaboration. The commercialization partner will make milestone and royalty
payments to the other partner. In 2000, the existing agreement was amended to decrease
the number of dedicated and non-dedicated employees that work on the project, and at that
time the program was further extended to December 31, 2001.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | f. 
Agreements with Kaken Pharmaceutical Co., Ltd.In September 1994, the Company entered
into a series of agreements with Kaken Pharmaceutical Co., Ltd. (Kaken), to
expand a previous agreement signed in 1988 for Fiblast. Under the 1994 agreements, the
Company will collaborate with Kaken to further develop the Fiblast manufacturing process,
provide Kaken a license to the Companys Fiblast manufacturing technology and supply
a specified amount of Fiblast product. In return, the Company has received milestone
payments, which are contingent on Kakens continuing development of the product. At
December 31, 2000, $15.9 million of the Companys deferred revenue consisted of
payments received for the supply of Fiblast material. Prior to closing its Mountain View
manufacturing facility in May 1999, the Company produced the amount of Fiblast due to
Kaken and the Company now holds it for delivery to Kaken upon regulatory approval of the
product in Japan.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | g. 
Agreement with Genentech, Inc.In December 1994, the Company entered into a collaboration
agreement with Genentech, Inc. (Genentech) for the development and
commercialization of Auriculin®(anaritide) (Auriculin) for the
treatment of acute renal failure. Concurrent with the collaboration agreement, Genentech
purchased $20.0 million of the Companys preferred stock, and provided a $30.0 million loan to the
Company in the form of a letter of credit (see Note 10), which the Company drew down in
March of 1997. As of December 31, 1997, Genentech had converted all shares of preferred
stock into 2.1 million shares of common stock. In 1997, the Company and Genentech discontinued development of
Auriculin based upon the negative results of an interim study. In 1999 the terms of the
loan were amended. The loan is repayable in the Companys preferred stock up to a
maximum of $25.0 million at the Companys option at any time through December 31,
2002. In the event the Company converts the loan to preferred stock, the stock cannot be
sold or registered until December 30, 2002 without the Companys approval. In addition,
if the Company should decide to convert the loan to preferred stock, a portion of the loan
that is not convertible will become due and payable before December 31, 2002. The amount of the loan that is due
before the maturity date is based on a formula that considers the amount of loan
converted to stock and the outstanding loan balance.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
the first quarter of 2000, the Company paid down $2,000,000 of the Genentech loan. In the
third quarter of 2000, the Company paid down the Genentech loan by $7,562,059, which
consisted of a cash payment of $2,562,054, and 4,991 shares of Series B Preferred Stock.
The preferred shares convert to 499,100 shares of common stock.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | h. 
Agreement with Bayer AGIn May 1998, the Company entered into an agreement with Bayer for
the commercialization of Natrecor. Upon signing the contract, the Company received a payment of
$20.0 million and would have received up to $40.0 million in milestone payments upon
regulatory approvals in the United States, Europe and Japan. The agreement provided the
Company the option to participate in co-promotion of Natrecor in the United States after
three years upon achievement of specified sales levels, and it provided for the Company
to actively participate in the further development of Natrecor with funding from Bayer at
specified minimum levels. In May 1999, Bayer terminated the agreement after the Company
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|F-11
|----

|
|

| | received a non-approval letter from the FDA in April 1999. All rights to Natrecor
reverted to the Company without any payment being due to Bayer from the Company.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|5. |  | Affiliate
|-- |  | ---------

| | The
Company used the equity method of accounting for its investment in Guilford Pharmaceuticals Inc. (Guilford) through
September 1998 because it had representation from Guilfords Board of Directors. In
October 1998, the Company reclassified its Guilford investment to marketable securities
because of a change in the Companys representation on Guilfords Board of
Directors. At December 31, 2000 and December 31, 1999, the Company had no ownership in
Guilford.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|6. |  | Marketable
Securities
|-- |  | ---------------------

| | Unrealized
gains and losses on marketable securities at December 31, 2000 by classification were as
follows:
| | ------------------------------------------------------------------------------------------------------------

| | (in thousands) | Cost Basis        | AccruedInterest | UnrealizedGains | UnrealizedLosses | Fair Value
| | -------------- | ----------------- | --------------- | --------------- | ---------------- | ----------
| |                | Debt securities:  |                 |                 |                  |           
| |                | U.S. Government & |                 |                 |                 
| |                | Government Agency |                 |                 |                 
| |                | Securities        |                 | $35,641         |                  | $614      
| |                | Corporate Bonds   |                 | 31,242          |                  | 567       
| |               
| |                | Total             |                 | $66,883         |                  | $1,181    
| |               

| | Unrealized
gains and losses on marketable securities at December 31, 1999 by classification were as
follows:
| | ------------------------------------------------------------------------------------------------------------

| | (in thousands) | Cost Basis        | AccruedInterest | UnrealizedGains | UnrealizedLosses | Fair Value
| | -------------- | ----------------- | --------------- | --------------- | ---------------- | ----------
| |                | Debt securities:  |                 |                 |                  |           
| |                | U.S. Government & |                 |                 |                 
| |                | Government Agency |                 |                 |                 
| |                | Securities        |                 | $46,083         |                  | $457      
| |                | Corporate Bonds   |                 | 43,142          |                  | 508       
| |               
| |                | Total             |                 | $89,225         |                  | $965      
| |               

| | The
scheduled maturities for marketable securities at December 31, 2000 by classification
were as follows:
| | ----------------------------------------------------------------------------------------------------------

|(in thousands)    |  | Maturity1 year or less | MaturityGreater than 1 year
|----------------- |  | ---------------------- | ---------------------------
|Debt securities:  |  |                        |                            
|U.S. Government & |  |                        |                            
|Government Agency |  |                        |                            
|Securities        |  |                        |                            
|Corporate Bonds   |  |                        |                            
|                  |  |                        |                            
|Total             |  |                        |                            
|                  |  |                        |                            
|                  | 

| | The
Company realized gains of $96,231 and losses of $277,473 on the disposal of marketable
securities in 2000, gains of $5,192,055 and losses of $259,402 on the disposal of
marketable securities during 1999 and gains of $9,099,000 and losses of $96,000 on the
deposits of marketable securities during 1998.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|7. |  | Property
and Equipment
|-- |  | ----------------------

| | December 31, | 2000                                      | 1999
| | ------------ | ----------------------------------------- | ----
| |              | (in thousands)                            |     
| |              |                                           |     
| |              | Laboratory equipment                      |     
| |              | Computer and related equipment            |     
| |              | Furniture and other                       |     
| |              | Buildings and building improvements       |     
| |             
| |              |                                           |     
| |              | Accumulated depreciation and amortization |     
| |             
| |              |                                           |     
| |              | Construction-in-progress                  |     
| |             
| |              | Total                                     |     
| |             

|F-12
|----

|
|

|8. |  | Other
Assets
|-- |  | ------------

| | December 31, | 2000                      | 1999
| | ------------ | ------------------------- | ----
| |              | (in thousands)            |     
| |             
| |              | Deposits                  |     
| |              | Other assets              |     
| |              | Employee notes receivable |     
| |             
| |              | Total                     |     
| |             

|9. |  | Other
Accrued Liabilities
|-- |  | -------------------------

| | December 31, | 2000                                                    | 1999
| | ------------ | ------------------------------------------------------- | ----
| |              | (in thousands)                                          |     
| |              |                                                         |     
| |              | Accrued Medicaid rebates                                |     
| |              | Accrued payroll                                         |     
| |              | Profit distribution to third parties                    |     
| |              | Accrued clinical trial expenses                         |     
| |              | Restructure reserve                                     |     
| |              | Accrued Biotechnology Research Partners, Ltd. royalties |     
| |              | Accrued R&D contract payable                            |     
| |              | Other                                                   |     
| |             
| |              | Total                                                   |     
| |             

|10. |  | Lease
and Debt Commitments
|--- |  | --------------------------

| | a. 
Operating leasesThe Company leases two facilities in Sunnyvale, California with
agreements that expire in 2002 with options to extend the leases, and a warehouse in
Mountain View, California that expires in 2003. In addition, the Company has entered into
operating leases covering certain laboratory and computer equipment.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Future
minimum payments under these leases are as follows:
| | ----------------------------------------------------------

| |  | Facilities andOperatingLeases |  | EquipmentOperatingLeases
| |  | ----------------------------- |  | ------------------------
| |  | (in thousands)                |  |                         
| |  |                               |  |                         
| |  | 2001                          |  | $1,682                  
| |  | 2002                          |  | 186                     
| |  | 2003                          |  | 33                      
| | 
| |  | Total                         |  | $1,901                  
| | 

| | Rent
expenses for all facilities operating leases were approximately $1,603,000, $2,170,000,
and $963,000 in 2000, 1999, and 1998, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------

| | b. 
Borrowing arrangementsAs part of the Auriculin agreement, Genentech committed to loan the
Company up to $30.0 million. The $30.0 million was drawn down in March of 1997, and bears
interest at the prime rate (9.5% at December 31, 2000). In 1999 the terms of the loan
were amended. The loan is repayable in the Companys preferred stock up to a maximum
of $25.0 million at the Companys option at any time through December 31, 2002. In
the event the Company converts the loan to preferred stock, the stock cannot be sold or
registered until December 30, 2002. In addition, if the Company should decide to convert
the loan to preferred stock, a portion of the loan that is not convertible will become
due and payable before December 31, 2002. The amount of the loan that is due before the
maturity date is based on a formula that considers the amount of the loan converted to
stock and the outstanding loan balance.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|F-13
|----

|
|

| | In
the first quarter of 2000, the Company paid down $2,000,000 of the Genentech loan. In the
third quarter of 2000, the Company paid down the Genentech loan by $7,562,059, which
consisted of a cash payment of $2,562,054 and 4,991 shares of Series B preferred stock.
(For rights and features of Series B preferred stock see Note 13a). Each share of Series
B preferred stock converts at a rate of 100:1 of common stock at Genentechs option.
The Series B preferred stock is convertible after December 30, 2002 and at Genentechs
option before January 20, 2003.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
part of the Fiblast agreement, Chiron loaned the Company $7.5 million in December 1999.
The Promissory Note bears interest at the rate of 8.5% compounded annually, and is due
December 31, 2006. The note and related interest will be forgiven if Fiblast is approved in
the United States before December 31, 2006.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. 
Natrecor supply contractThe Company has entered into a long-term supply agreement with a
manufacturer for the supply of bulk Natrecor. The contract provides for the purchase of
at least 25 kg of bulk solution over an eight-year period after the first delivery of
commercialized quantities, at a maximum price of 48.0 million German marks (United States
equivalent at December 31, 2000, $23.0 million).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|11. |  | Litigation
|--- |  | ----------

| | On
November 29, 1995, the Company was notified by the United States Environmental Protection
Agency (EPA), that it may have a liability in connection with the clean-up of
a toxic waste site arising out of the alleged disposal of hazardous substances by a
subcontractor of Nova Pharmaceutical Corporation, which the Company acquired in 1992. The
Company is one of many potentially responsible parties that have been identified as
associated with this specific site. The Company has held discussions with the EPA and
finalized the amount of potential liability. The Company has reserved $90,000 at December
31, 2000 as provision for the settlement thereof.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|12. |  | Research
and Development Commitments
|--- |  | ------------------------------------

| | a. 
Commitments to research partnershipsIn 1988, the Company purchased the interests of
Biotechnology Research Partners, a limited partnership in a joint venture, and made a
down payment of $575,000. The balance of the purchase price is to be paid in quarterly
installments in accordance with the following formula: (i) until the minority partners
have received payments of approximately $22.8 million, the Company will pay approximately
37% of the royalty income from third-party licenses and approximately 4% of the Companys
gross sales of Partnership products; (ii) thereafter, until the minority partners have
received aggregate payments of approximately $34.1 million, the Company will pay
approximately 31% of the royalty income and approximately 3% of the Companys
gross sales of Partnership products; and (iii) thereafter, until the earlier of 20 years
from the date of exercise of the option or the time all patents relating to the
Partnerships technology expire and all information relating to that technology
becomes part of the public domain, the Company will pay to the minority partners
approximately 21% of the royalty income and approximately 2% of the Companys
gross sales of Partnership products. Partnership products for which minority partners
will receive payments include Fiblast. The Company has accrued $1.7 million at December
31, 1999 as the partnerships share of license fees received from Fiblast in 1999,
and no amount was accrued at December 31, 2000.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In December 1992, the Company exercised its option to acquire all interests in Nova
Technology Limited Partnership for $20.4 million. The Company also issued contingent
payment rights to all limited partners of the partnership, pursuant to which the Company
is obligated until January 15, 2008 to pay royalties on the sale or license of certain
products that were under development by the partnership. The Company accrued $1.7 million
at December 31, 1999 as a result of royalties associated with the commercialization of Guilfords Gliadol® wafer. As of December 31, 2000, $43,597
was accrued.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|F-14
|----

|
|

| | b. 
Research collaborations with partnersAs part of the Joint Business Arrangements
described in Note 4 above, the Company from time to time agrees to provide and
receive resources and support as part of its collaborations with other companies. In the
course of such collaborations, issues may arise concerning the ownership of technology
that is developed and the fulfillment of each partys obligations to the other.
Generally these have been resolved by the parties without resorting to litigation.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|13. |  | StockholdersEquity
|--- |  | -------------------

| | a. 
Series B preferred stockThe Companys Series B preferred
stock may be issued in series that have such rights as may be designated by the Board of
Directors from time to time. There were no shares of Series B preferred stock issued and
outstanding at December 31, 1999 and at December 31, 2000 there were 4,991 shares
outstanding. As previously mentioned in Note 10 b, the Company paid down the Genentech
loan by $7,562,059 which consisted of a cash payment of $2,562,054 and 4,991 shares of
Series B preferred stock. Each share of Series B preferred stock converts at a rate of
100:1 of common and will not have voting rights until converted into shares of Scios
common stock. In addition, the holders of the Series B preferred stock are entitled to receive dividends
as payable on each share of common stock into which such shares could then be converted,
when and if declared by the board of directors. In the event of any liquidation,
dissolution or winding up of the Company, after payment of debts and other liabilities,
the holders of the Series B preferred stock (on an as converted basis) and the holders of the common stock shall be entitled to share ratably in the remaining
assets of the Company.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. Deferred
compensationIn August 2000, the Company granted shares of restricted stock to an
officer. The shares vest over a six month period provided that the recipient is still
employed by the Company. The market value of these shares was $311,000 and has been
recorded as a separate component of stockholdersequity. In August 1999, the Company
granted shares of restricted stock to an officer. The shares vest over a three-year
period provided that the recipient is still employed by the Company. The market value of
the shares awarded was $152,480 and has been recorded as a separate component of
stockholdersequity. In September 1998, the Company granted shares of restricted
stock to an officer and director. The shares vest over a two-year period provided that
the recipient is still employed by the Company. The market value of the shares awarded
was $597,000 and has been recorded as a separate component of stockholdersequity.
Deferred compensation for these share grants is being amortized over the applicable
period of the vesting. The restricted stock was granted under the 1992 Incentive Stock
Plan.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|14. |  | Employee
401(k) Benefit Plan
|--- |  | ----------------------------

| | The
Company has a qualified profit sharing plan and trust under Internal Revenue Service Code
sections 401(a) and 401(k). Employees are eligible to participate in the plan the first
day of the month after hire and can elect to contribute to the plan up to 15% of their
salary subject to current statutory limits. In 2000, the Company matched employee
contributions at a rate of 100% to a maximum of $3,000 per employee, except as restricted
by statutory limits. The Company contribution is 100% vested at the end of an employees
third year of employment. Company contributions to the plan totaled approximately
$632,000 in 2000, $779,000 in 1999, and $838,000 in 1998.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|15. |  | Stock
Option Plans
|--- |  | ------------------

| | Under
the Companys stock option plans, the Board of Directors has the authority to
determine to whom options will be granted, the number of shares, the vesting period and
the exercise price (which cannot be less than fair market value (FMV) at date
of grant for incentive stock options or 85% of FMV for non-statutory options). The
options are exercisable at times and in increments as specified by the Board of
Directors, generally expire ten years from date of grant and fully vest over periods from
three to five years. The following shares are authorized and available for grant as of
December 31, 2000:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|PlanTitle | SharesAuthorized | OptionsOutstanding | Availablefor Grant | Option Price
|--------- | ---------------- | ------------------ | ------------------ | ------------
|1983/86   |                  | 2,200,000          |                    | 115,911     
|          |                  |                    |                    |             
|1989      |                  | 170,000            |                    | 10,000      
|1992      |                  | 5,000,000          |                    | 2,133,326   
|          |                  |                    |                    |             
|1996      |                  | 2,475,000          |                    | 2,233,053   
|          |                  |                    |                    |             
|NQ        |                  | 443,161            |                    | 2,538       
|          |                  |                    |                    |             

|F-15
|----

|
|

| | Additional
information with respect to the activity of outstanding options  and restricted common stock is summarized in the
following table:
| | ---------------------------------------------------------------------------------------------------------------------------------------------

|                              | Number of         Shares | Option Price | Aggregate           Price(in thousands)
|----------------------------- | ------------------------ | ------------ | ---------------------------------------
|Balances at January 1, 1998   |                          | 3,986,142    |                                        
|                              |                         
|Granted                       |                          | 1,515,475    |                                        
|Exercised                     |                          | (677,249     | )                                      
|Canceled                      |                          | (318,533     | )                                      
|                             
|                              |                         
|Balances at December 31, 1998 |                          | 4,505,835    |                                        
|                              |                         
|Granted                       |                          | 2,119,200    |                                        
|Exercised                     |                          | (185,163     | )                                      
|Canceled                      |                          | (868,011     | )                                      
|                             
|                              |                         
|Balances at December 31, 1999 |                          | 5,571,861    |                                        
|                              |                         
|Granted                       |                          | 1,190,922    |                                        
|Exercised                     |                          | (1,432,757   | )                                      
|Canceled                      |                          | (835,198     | )                                      
|                             
|                              |                         
|Balances at December 31, 2000 |                          | 4,494,828    |                                        
|                             

| | The
options outstanding by range of exercise price at December 31, 2000 are as follows:
| | ---------------------------------------------------------------------------------------

|Exercise Price | Number ofOptionsOutstanding | WeightedAverageRemainingContractual Life (in years) | OutstandingWeightedAverageExercise Price | Number ofOptionsExercisable | ExercisableWeightedAverageExercise Price
|-------------- | --------------------------- | --------------------------------------------------- | ---------------------------------------- | --------------------------- | ----------------------------------------
|$3.00-$3.69    |                             | 575                                                 |                                          | 4                           | .85                                     
|$3.70-$3.81    |                             | 660,552                                             |                                          | 8                           | .60                                     
|$3.87-$5.43    |                             | 610,657                                             |                                          | 8                           | .02                                     
|$5.56-$6.12    |                             | 586,826                                             |                                          | 7                           | .24                                     
|$6.25 -$6.81   |                             | 113,925                                             |                                          | 5                           | .34                                     
|$7.12-$7.43    |                             | 282,334                                             |                                          | 2                           | .78                                     
|$7.50-$7.75    |                             | 423,624                                             |                                          | 7                           | .76                                     
|$8.00-$8.75    |                             | 578,603                                             |                                          | 8                           | .13                                     
|$9.00-$9.19    |                             | 112,124                                             |                                          | 2                           | .46                                     
|$9.62-$21.13   |                             | 1,055,608                                           |                                          | 7                           | .72                                     
|              
|$0.001-$21.13  |                             | 4,424,828                                           |                                          | 7                           | .38                                     
|              

| | Restricted common
Stock
| | -----------------------

| | At
December 31, 2000 there were 70,000 shares of restricted common stock granted to two officers
that were outstanding. The shares vest over a period ranging from six months to three
years and at December 31, 2000 none of these shares were vested.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Stock
based compensationThe Company is required under Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123), to disclose
pro forma information regarding option grants made to its employees based on specified
valuation techniques that produce estimated compensation charges. These amounts have not
been reflected in the Companys Consolidated Statements of Operations because no
compensation charge arises when the price of the employees stock options equals the
market value of the underlying stock at the grant date, as in the case of options granted
to the Companys employees. Pro forma information under SFAS 123 is as follows:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|F-16
|----

|
|

| | The
following pro forma information has been prepared following the provisions of SFAS No.
123:
| | -----------------------------------------------------------------------------------------------

|                                                          | For the Year Ended December 31, 2000
|--------------------------------------------------------- | ------------------------------------
|
|
|                                                         
|Net loss - as reported                                    |                                     
|Net loss - pro forma                                      |                                     
|Net loss per common share basic and diluted - as reported |                                     
|Net loss per common share - basic and diluted - pro forma |                                     

| | The
fair value of each option grant is estimated on the date of grant using the Black-Scholes
single option pricing method assuming the following parameters:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------

|                        | For the Year Ended December 31, 2000
|----------------------- | ------------------------------------
|
|Risk free interest rate |                                     
|Expected life (years)   |                                     
|Volatility              |                                     
|Dividend yield          |                                     

| | The
weighted average per share fair value of options granted in 2000, 1999, and 1998 was $7.73, $4.11
and $5.71, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------

|16. |  | Income
Taxes
|--- |  | ------------

| | The
Companys deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax basis of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to affect taxable
income. Valuation allowances are established when necessary to reduce deferred tax assets
to the amounts expected to be realized.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company has federal and state income tax net operating loss (NOL) and
research credit carryforwards at December 31, 2000 for tax purposes available as follows:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |                        
| |  | -----------------------
| |  | Federal NOL            
| |  | State NOL              
| |  | Federal Research Credit
| |  | State Research Credit  

| | These
federal and state NOL carryforwards expire in the years 2001 through 2020 and 2001
through 2005, respectively. The federal and state research credit carryforwards expire in
the years 2001 through 2020.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Due
to a change in the ownership of the Company, as defined, a portion of the federal and
state NOL carryover is subject to an annual utilization limitation. Should another change
in ownership occur, future utilization of the Companys NOL carryforwards may be
subject to additional limitations.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|F-17
|----

|
|

| | The
tax effects of temporary differences that give rise to significant portions of the
deferred tax assets are presented below:
| | -------------------------------------------------------------------------------------------------------------------------------

|                                                | December 31,
|----------------------------------------------- | ------------
|
|                                                | In thousands
|Net operating loss carryforward                 |             
|State (net of federal benefit)                  |             
|Credits                                         |             
|Assets subject to depreciation and amortization |             
|Deferred revenue                                |             
|Other accrued liabilities                       |             
|                                               
|Total deferred tax assets                       |             
|Valuation allowance                             |             
|                                               
|Net deferred tax asset                          |             
|                                               

| | Due
to the uncertainty surrounding the realization of the favorable tax attributes in future
tax returns, the Company has placed a valuation allowance against its otherwise
recognizablenet deferred tax assets.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|17. |  | Industry
and Geographic Segment Information
|--- |  | -------------------------------------------

| | The Company operates in one business segment, using one measurement of profitability for its
business. All long-lived assets are maintained in the United States. The Company receives
revenue from product sales and from licensing and development of products. The Company
received licensing revenue from partners in the United States, Europe and Asia Pacific.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Revenue (reclassified for EITF 99-19) by geographic area for the year
ended is as follows:
| | ------------------------------------------------------------------------------------------

|(in thousands)     | Revenues
|------------------ | --------
|December 31, 2000: |         
|United States      |         
|International      |         
|                  
|Total              |         
|                  
|                   |         
|December 31, 1999: |         
|United States      |         
|International      |         
|                  
|Total              |         
|                  
|                   |         
|December 31, 1998: |         
|United States      |         
|International      |         
|                  
|Total              |         
|                  

|18. |  | Subsequent
Events
|--- |  | -----------------

| | a.
Agreement with Innovex. In January 2001, the Company entered into an agreement with
Innovex, a subsidiary of Quintiles Transnational Corp. Under the terms of the agreement,
Innovex will identify, hire, train and deploy a dedicated cardiology and emergency
medicine sales force of approximately 180 people to launch Natrecor in 2001.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|F-18
|----

|
|

| | In
addition, Quintiles, through its corporate ventures group, PharmaBio Development, will
provide the Company up to $35.0 million in funding for the commercialization of Natrecor over a
period of 3.5 years.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company granted PharmaBio 700,000 warrants to purchase the Companys common stock at
a price of $20.00 per share. The warrants will vest over three years.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. 
Psychiatric Sales and Marketing Division.
| | ---------------------------------------------

| | In
March 2001, GSK and the Company agreed to terminate the exclusive marketing agreement
relating to certain GSK psychiatric products sold by the Company effective March 31,
2001. Approximately 40% of the Companys total revenues in 2000 were derived from this
marketing agreement. As part of the termination agreement, the Company will receive from
GSK $4.0 million in 2001, $3.0 million in 2002 and $2.5 million in 2003.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, the Company ended the deployment of the PSMD flex time sales force and
terminated certain full-time support personnel. The total cost of the severance for these
personnel amounted to $788,495.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|19. |  | Quarterly Financial Data (Unaudited)
|--- |  | ------------------------------------

| | The following tables summarize the quarterly financial data for the last two fiscal
years:
| | ------------------------------------------------------------------------------------------

|                                     | Fiscal 2000 Quarter Ended
|------------------------------------ | -------------------------
|
|
|Total revenues                       |                          
|Income (loss) from operations        |                          
|Net income (loss)                    |                          
|Basic and diluted net loss per share |                          

|                                     | Fiscal 1999 Quarter Ended
|------------------------------------ | -------------------------
|
|
|Total revenues                       |                          
|Income (loss) from operations        |                          
|Net income (loss)                    |                          
|Basic and diluted net loss per share |                          

|                                     | Fiscal 2000 Quarter Ended
|------------------------------------ | -------------------------
|
|
|Net income (loss)                    |                          
|Basic and diluted net loss per share |                          

|                                        | Fiscal 1999 Quarter Ended
|--------------------------------------- | -------------------------
|
|
|Net income (loss)                       |                          
|Basic and diluted gain (loss) per share |                          

|F-19
|----