<PAGE>   1
 
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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 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, 1996
 
                                       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 0-23012
 
                         NEXSTAR PHARMACEUTICALS, INC.
             (Exact name of registrant as specified in its charter)
 
                             ---------------------
 
<TABLE>
<C>                                              <C>
                    DELAWARE                                        84-1173453
            (State of incorporation)                   (I.R.S. Employer Identification No.)

             2860 WILDERNESS PLACE                                    80301
               BOULDER, COLORADO                                    (Zip Code)
    (Address of principal executive offices)
</TABLE>
 
                 REGISTRANT'S TELEPHONE NUMBER: (303) 444-5893
                             ---------------------
          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
 
                                      NONE
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
 
                     Common Stock, par value $.01 per share
                             ---------------------
     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 aggregate market value of the voting stock held by non-affiliates of
the registrant, as of March 24, 1997, was $185,889,019.
 
     The number of shares of the registrant's common stock, par value $.01 per
share, outstanding as of March 24, 1997, was 26,430,896.
 
                      DOCUMENTS INCORPORATED BY REFERENCE:
 
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<CAPTION>
                                                                 PART(S) INTO
                          DOCUMENT                            WHICH INCORPORATED
                          --------                            ------------------
<S>                                                           <C>
Proxy Statement to be used in connection with the Annual           Part III
Meeting of Stockholders to be held May 28, 1997 (the "Proxy
Statement"). With the exception of the pages of the Proxy
Statement specifically incorporated by reference herein, the
Proxy Statement is not deemed to be filed as a part of this
Form 10-K.
</TABLE>
 
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<PAGE>   2
 
                                     PART I
 
ITEM 1. BUSINESS
 
GENERAL
 
     NeXstar Pharmaceuticals, Inc., a Delaware corporation ("NeXstar
Pharmaceuticals" or the "Company"), is a leading biopharmaceutical company
engaged in the discovery, development, manufacture and marketing of proprietary
pharmaceutical products to treat life-threatening and other serious diseases.
NeXstar Pharmaceuticals employs a broad range of proprietary technologies in the
discovery and formulation of pharmaceutical products, including the Company's
liposome drug delivery technology; a powerful proprietary combinatorial
chemistry technology, known as the SELEX process, that rapidly identifies novel
oligonucleotide compounds with potential therapeutic and diagnostic benefits;
and the Parallel SELEX process, designed to rapidly discover small organic
molecules to serve as orally available drugs. The Company's technologies have
already produced two approved drugs and several drug candidates that are in
clinical or preclinical development and have provided the basis for a
significant pipeline of developmental drug candidates.
 
     Currently, the Company markets AmBisome, an antifungal agent, and
DaunoXome, an anticancer drug, which had combined 1996 revenues of $80.2 million
compared to 1995 revenues of $57.8 million. AmBisome has been approved for sale
by the regulatory authorities in 25 countries, including four countries in which
it has been approved as a primary therapy. In November 1996, a New Drug
Application ("NDA") was submitted to the U.S. Food and Drug Administration (the
"FDA") for the use of AmBisome in the United States as a primary treatment for
confirmed and presumptive fungal infections, prophylaxis in liver transplant
patients, empiric therapy in neutropenic patients and visceral leishmaniasis and
as a secondary treatment for fungal infections refractory to amphotericin B
treatment. DaunoXome has been approved for sale as a primary therapy for
HIV-associated Kaposi's sarcoma in 18 countries, including the United States,
Canada and most significant European markets. The Company is also conducting
clinical trials with a third product, the antibiotic MiKasome, for use in
serious gram-negative and mycobacterial infections. The Company's fourth
liposomal product, the anticancer drug VincaXome, is in the preclinical
development stage.
 
     Each of AmBisome, DaunoXome, MiKasome and VincaXome was developed using the
Company's liposomal technology. Liposomes are subcellular-sized spheres composed
primarily of molecules called phospholipids. By encapsulating in liposomes
certain drugs that in their free state are dosed at, or close to, toxic levels,
it is possible to increase the therapeutic index of the active drug (i.e., to
increase the efficacy of the active drug relative to the severity of its side
effects).
 
     The Company utilizes two other powerful proprietary technologies for drug
discovery and delivery. The first, a proprietary combinatorial chemistry
technology, is known as the SELEX process. The SELEX process can rapidly
identify novel oligonucleotide compounds with potential therapeutic and
diagnostic benefits. After selection of a disease target (e.g., a cancer causing
growth factor), the SELEX process can rapidly identify (in weeks or months
rather than years) oligonucleotide compounds (also referred to as aptamers) with
a high affinity for the specified disease target and therefore potential use as
a drug candidate.
 
     The Company has tested SELEX process-derived aptamers against numerous
disease targets since the Company's inception and currently has various aptamers
(or potential drug candidates) resulting from SELEX process experiments in the
research and early preclinical/preclinical development stages. In particular,
using the SELEX process, the Company has identified a number of aptamer
antagonists to cancer and other disease causing growth factors, including an
antagonist to vascular endothelial growth factor ("VEGF") (VEGF contributes to
disease progression by inducing the formation of blood vessels associated with
the particular disease state) and an inhibitor to platelet-derived growth factor
("PDGF") (PDGF appears to be a causative factor in certain cancers and other
proliferative diseases). Through the SELEX process, the Company has also
identified aptamers that recognize and inhibit the activity of L-selectin and
P-selectin (cell surface receptors thought to be involved in inflammation and
reperfusion injury).
 
     The Company's other proprietary drug discovery process is known as the
Parallel SELEX process. The Parallel SELEX process is designed to rapidly
identify small organic molecules intended to serve as orally
 
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<PAGE>   3
 
available drugs. The potential advantages of the Parallel SELEX process as
compared to current combinatorial chemistry drug-discovery methodologies
include: tagging chemistries are not necessary, high reaction yields are not
required and laborious screening steps are avoided.
 
     The Company also has developed a new proprietary technology called Product
Anchored Sequential Synthesis ("PASS"), which is a new method for synthesizing
the oligonucleotides (or aptamers) that are the basis for the products being
developed by the Company using the SELEX process. The Company's PASS technology
is expected to significantly lower the cost of oligonucleotide compounds (fewer
raw materials are needed) and improve the chemical reactions needed to create
these compounds. These new technologies are a significant improvement over the
traditional methods of making oligonucleotides and add to the Company's body of
proprietary technology for drug development and delivery.
 
     NeXstar Pharmaceuticals was formed in 1991 as NeXagen, Inc. On February 21,
1995, the Company was merged (the "Merger") with Vestar, Inc. ("Vestar"), a
Delaware corporation founded in 1981, and changed its name to NeXstar
Pharmaceuticals, Inc. Prior to the Merger, NeXstar Pharmaceuticals was primarily
engaged in the discovery and development of novel oligonucleotide-based
pharmaceuticals. As a result of the Merger, the Company combined its drug
discovery program and financial resources with Vestar's proprietary drug
delivery technology, existing products and product pipeline and Vestar's
manufacturing, marketing and regulatory capabilities.
 
                                        2
<PAGE>   4
 
PRODUCTS AND PRODUCT DEVELOPMENT
 
     The following table summarizes the principal products and certain product
development activities of the Company. Except as specifically noted below, all
commercial rights to such products are held exclusively by the Company.
 
<TABLE>
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      PRODUCT                        INDICATION                                 STATUS
      -------                        ----------                                 ------
<S>                    <C>                                      <C>
LIPOSOMAL PRODUCTS
AmBisome*              Systemic fungal infections               Approved for marketing in 25 countries;
                                                                  submitted as part of NDA to FDA.
                       First line therapy for fungal            Approved for marketing in 4 countries;
                         infections                               submitted as part of NDA to FDA.
                       Prophylaxis in liver transplant          Approved for marketing in 2 countries;
                         patients                                 submitted as part of NDA to FDA.
                       Visceral leishmaniasis                   Approved for marketing in several
                                                                  countries; submitted as part of NDA
                                                                  to FDA.
                       Therapy in neutropenic patients          Submitted as part of NDA to FDA.
                       Treatment of fever of unknown origin     Submitted as part of NDA to FDA;
                         (FUO)                                    confirmatory Phase III clinical trial
                                                                  completed in the U.S.; preliminary
                                                                  results are supportive.
                       Histoplasmosis                           Phase III clinical trial ongoing in the
                                                                  U.S.
DaunoXome              First line therapy for advanced          Approved for marketing in U.S., Canada
                         Kaposi's sarcoma                         and 16 European countries.
                       Non-Hodgkin's lymphoma                   Phase II clinical trials ongoing;
                                                                  preliminary results are supportive.
                       Breast cancer                            Phase II clinical trials ongoing.
                       Multiple myeloma, leukemia, sarcomas,    Phase II clinical trials ongoing as
                         cancers of the prostate, ovary and       single agent and in combination
                         brain                                    chemotherapy.
MiKasome               Serious gram-negative and mycobacterial  Phase I clinical trial ongoing.
                         infections
VincaXome              Cancer of various forms                  Preclinical development.
 
SELEX PROCESS-DERIVED PRODUCTS
VEGF Aptamers          Macular degeneration, cancer             Preclinical development (all
                                                                  indications).
PDGF Aptamer           Restenosis, fibrosis, cancer             Early preclinical development (all
                                                                  indications).
L-Selectin Aptamers    Inflammation, reperfusion injury         Early preclinical development (all
                                                                  indications).
P-Selectin Aptamers    Inflammation, post-stroke tissue damage  Late research/early preclinical
                                                                  development (all indications).
</TABLE>
 
---------------
 
* Fujisawa USA, Inc. and the Company co-develop and will, if and when AmBisome
  is approved, co-promote AmBisome in the United States pursuant to a
  collaborative relationship. Fujisawa USA, Inc. has sole marketing rights to
  AmBisome in Canada and Sumitomo Pharmaceuticals Co., Ltd. has marketing rights
  to AmBisome in Japan.
 
PRODUCTS AND MARKETS
 
  AMBISOME
 
     AmBisome is a liposomal formulation of amphotericin B, a well-established
antifungal agent that is effective against a broad spectrum of fungi. NeXstar
Pharmaceuticals has received marketing approval for AmBisome as a treatment for
life-threatening fungal infections in 25 countries, four of which have granted
approval as a first line therapy and the remainder of which have granted
approval for use when conventional amphotericin B treatment fails. AmBisome has
also been approved as a treatment for visceral leishmaniasis in several
countries and is approved in two countries for prophylactic treatment to prevent
fungal infection after liver transplantation. The Company is also selling
AmBisome through physician purchase requests in several
 
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<PAGE>   5
 
countries that permit special license or named-patient purchases prior to
obtaining regulatory approvals. In November 1996, a New Drug Application ("NDA")
was submitted to the U.S. Food and Drug Administration (the "FDA") for the use
of AmBisome as a primary treatment for confirmed and presumptive fungal
infections, prophylaxis in liver transplant patients, empiric therapy in
neutropenic patients and visceral leishmaniasis and as a secondary treatment of
fungal infections refractory to amphotericin B treatment. Additionally, NeXstar
Pharmaceuticals has submitted requests for approval with regulatory authorities
in a number of countries worldwide in which AmBisome has not been approved.
Regulatory procedures and review times vary from country to country.
 
     AmBisome was the subject of a joint venture formed in 1987 with Lyphomed
Corporation, which was subsequently acquired by Fujisawa USA, Inc. ("Fujisawa").
In August 1991, the Company and Fujisawa dissolved their joint venture and
distributed its assets. Under the terms of the dissolution agreement, as later
amended, Fujisawa owned the marketing rights for AmBisome in the United States
and Canada, and the Company retained the marketing rights in all other
territories of the world. Pursuant to an April 1995 amendment to their
agreement, the Company and Fujisawa have agreed to co-promote AmBisome in the
United States if and when AmBisome is approved. If AmBisome is ultimately
approved for commercial sale by the FDA, the Company will manufacture AmBisome
for sale in the United States. In addition, the Company will be reimbursed for
the cost of the product sold to Fujisawa and will receive 20% of the gross
profits from all U.S. sales of AmBisome.
 
     NeXstar Pharmaceuticals also has licensed the right to develop and market
AmBisome in Japan to Sumitomo Pharmaceuticals Co., Ltd. ("Sumitomo"). Under the
terms of the license, Sumitomo is required to make payments to the Company if
certain clinical and commercial milestones are met and to pay the Company
royalties on all Japanese sales of AmBisome.
 
     Product Profile. Amphotericin B, an antifungal agent used to treat a broad
spectrum of fungal infections, has been a commonly used drug for the treatment
of systemic fungal infections. The clinical usefulness of amphotericin B is
limited, however, because serious toxicity can occur at doses that are only
marginally effective. NeXstar Pharmaceuticals has used its proprietary
technology to develop AmBisome, a liposomal product that incorporates
amphotericin B. The maximum tolerated dose of AmBisome in some animal models is
up to 75 times that of the free drug, permitting higher daily and cumulative
doses of amphotericin B to be delivered to the diseased tissues, while
simultaneously greatly reducing the normal acute and chronic toxicity often
associated with conventional amphotericin B therapy. NeXstar Pharmaceuticals
believes that the increased safety profile of AmBisome is due to a proprietary
manufacturing process that tightly binds amphotericin B into the membrane of the
liposome, preventing the free drug from escaping into the blood stream.
 
     AmBisome is sold as a lyophilized (freeze-dried) cake that is easily
reconstituted by adding sterilized water and has an approved shelf life in most
countries of 30 months. However, some countries which originally approved
AmBisome with only a 12-month shelf life have yet to approve the longer period.
The Company is in the process of developing new formulations of AmBisome that do
not require lyophilization. However, no assurance can be given that any new
formulation will receive necessary governmental approvals or will be
commercially successful.
 
     Market. The Company's marketing efforts for AmBisome are primarily directed
at patients with systemic fungal infections, including for use as primary and
secondary therapy, presumptive fungal infections and as antifungal prophylaxis.
Systemic fungal infections are serious infections with a mortality rate of up to
70% and are commonly caused by species of Candida, Aspergillus or Cryptococcus,
as well as a variety of less common organisms. These infections can occur in
patients whose immune systems have been compromised by other diseases or by the
treatment of other medical conditions. The largest population of immune-impaired
patients consists of organ/bone marrow transplant patients, heavily treated
cancer patients (principally those with leukemias or lymphomas) and AIDS
patients. The product is also currently used in a number of countries for the
treatment of visceral leishmaniasis and has been demonstrated to be effective
against fungi and certain parasites that reside in macrophages.
 
                                        4
<PAGE>   6
 
  DAUNOXOME
 
     DaunoXome is a liposomal formulation of daunorubicin, a well-characterized
and long-used chemotherapeutic agent. The Company has demonstrated in animal
studies that its formulation delivers significantly more drug to malignant
tumors than do equal doses of the conventional drug. DaunoXome has been approved
in the U.S., Canada and 16 European countries as a primary therapy for Kaposi's
sarcoma ("KS").
 
     Product Profile. DaunoXome uses a proprietary tumor targeting technology
for delivering daunorubicin into tumor cells. This targeted liposomal delivery
system consists of small liposomes that encapsulate the daunorubicin in their
internal aqueous space. The size of the liposomes used in DaunoXome was
selected, in part, so that the liposomes can escape from circulation through the
more porous blood vessels that are generally found in tumors. In animal models,
DaunoXome's formulation permits a concentration of the therapeutic agent in
tumors of 5 to 10 times the concentration achieved with intravenous
administration of the free drug. Animal tests have also demonstrated up to 10
times the efficacy as the equivalent level of daunorubicin in its free drug
form. Further, these animal models have demonstrated a substantial reduction in
certain toxicities associated with daunorubicin.
 
     DaunoXome has an approved shelf life of 36 weeks in the United States, 40
weeks in the United Kingdom and between 20 and 26 weeks in most other European
countries. While the Company is attempting to obtain a longer shelf life than
those currently approved in most European countries, there can be no assurance
that the extension of the shelf life will be approved by any European regulatory
authority.
 
     Market. The Company's initial targeted market for DaunoXome has been AIDS
patients who suffer from KS, a malignant disease characterized by widely
disseminated lesions in the skin, mucous membranes, lymph nodes and viscera. KS
occurs in AIDS patients and alternative therapies are limited.
 
CLINICAL TRIALS, PRECLINICAL TRIALS AND REGULATORY STATUS
 
     The Company currently has a number of liposomal and SELEX process-derived
products in clinical trials or early preclinical development. No assurance can
be given that any clinical trials or preclinical development work will result in
any commercially successful new drugs, or, in the case of AmBisome and
DaunoXome, approval of any additional indications for the drugs.
 
  AMBISOME
 
     NeXstar Pharmaceuticals continues to conduct clinical trials with AmBisome
in a variety of settings with the aim of expanding the uses of this antifungal
drug. The Company has recently concentrated its clinical development of AmBisome
on empiric therapy for presumed fungal infections among patients at high risk
for such infections, first line therapy of systemic and/or deep fungal
infections and prophylaxis against systemic fungal infections following
chemotherapy and in patients receiving bone marrow transplantation. Toward these
ends, the Company has completed two randomized clinical trials comparing the
safety and efficacy of AmBisome to conventional amphotericin B in the empiric
treatment of patients with fever of unknown origin (FUO) and severe neutropenia
(a low white blood cell count), who have a presumed fungal infection. These
patients were receiving intensive chemotherapy or had underlying hematological
disease. One clinical trial enrolled adults (134 patients) and the other had
pediatric subjects (214 patients). These two clinical trials indicated that
AmBisome had an improved safety profile compared with amphotericin B and there
was a trend towards improved efficacy for AmBisome.
 
     The Company has also completed a double-blind, placebo-controlled,
randomized clinical trial in 85 patients of the efficacy and safety of AmBisome
as prophylaxis following liver transplantation. The clinical trial showed a
trend towards improved efficacy for AmBisome compared to amphotericin B.
 
     Additionally, the Company has completed five clinical trials in which
patients with confirmed systemic and/or deep fungal infections were treated with
AmBisome. In these trials, the overall fungal eradication rate in patients
treated with AmBisome was significantly greater than for amphotericin B, while
the clinical success rate was as great as amphotericin B. All of these studies
were filed as part of the NDA submitted to the FDA in November 1996.
 
                                        5
<PAGE>   7
 
     A Phase III clinical study conducted by Fujisawa in the U.S. with over 700
extremely ill patients has evaluated the use of AmBisome compared to
amphotericin B as empiric therapy in febrile neutropenia. The results of this
study are being reviewed and evaluated.
 
     NeXstar Pharmaceuticals, in conjunction with Fujisawa, is conducting a
Phase III clinical trial of AmBisome in the U.S. for the treatment of
histoplasmosis. The trial is being monitored and analyzed by the Mycology Study
Group of the National Institutes of Health. The European Organization for
Research and Treatment of Cancer (EORTC) has offered to perform a multicenter
trial of early versus late treatment of febrile neutropenia using AmBisome
versus amphotericin B at over 30 sites throughout Europe.
 
  DAUNOXOME
 
     The Company is seeking to expand the number of approved indications for
DaunoXome using a four-pronged approach. First, the Company has completed
clinical trials and is continuing to perform additional studies aimed at
optimizing the treatment of KS. The completed clinical trials in KS have
evaluated the safety and efficacy of higher dose regimens, the treatment of the
pulmonary manifestations of KS and the degree of cardiac toxicity associated
with the use of DaunoXome. Additional studies are ongoing or are planned to
include the use of DaunoXome as part of combination chemotherapy in KS and
further refinement of the dosing regimen to improve both safety and efficacy.
 
     Second, the Company has embarked on a series of clinical trials aimed at
determining the maximum tolerated dose of DaunoXome for different clinical
indications. The safety profile of DaunoXome suggests that higher doses of this
drug may be tolerated as compared with daunorubicin and other conventional
anthracyclines.
 
     Third, the Company is pursuing an aggressive strategy to gain approval of
expanded clinical indications for DaunoXome in a number of well-defined
malignancies, especially those in which daunorubicin has established safety and
efficacy. These include hematologic malignancies such as lymphoma, leukemia and
multiple myeloma as well as a broad range of sarcomas. In addition, the Company,
in a Phase II clinical trial, has substituted DaunoXome for doxorubicin in a
CHOP (cyclophosphamide, doxorubicin, vincristine and prednisone) regimen (COP-X)
in the treatment of high grade lymphomas. A COP-X protocol in the United Kingdom
has had response rates equivalent to or better than for the CHOP regimen. The
Company is currently planning Phase III clinical trials for the use of DaunoXome
against non-Hodgkin's lymphomas.
 
     Finally, the Company is conducting clinical trials with DaunoXome to
evaluate the susceptibility of a range of solid tumors, including cancers of the
breast, prostate, ovary and brain, to DaunoXome-containing regimens. Overall,
the Company is currently supporting the study of DaunoXome by numerous clinical
investigators. Many of these investigators are involved in multicenter trials in
the indications mentioned above.
 
  MIKASOME
 
     MiKasome is a liposomal formulation of amikacin, which is a member of a
class of antibiotic compounds called aminoglycosides. To date, the therapeutic
use of aminoglycosides has been limited by significant dose-limiting toxicities;
specifically, kidney damage and hearing loss. The target product profile for
MiKasome, as compared to free amikacin, includes significantly improved safety,
extended circulation times, increased penetration to sites of infection and a
broader range of antimicrobial activity.
 
     In October 1996, the FDA approved the Company's Investigational New Drug
Application ("IND") for MiKasome. The IND included a Phase I protocol that built
upon the results of earlier studies conducted by the Company in Europe. As well,
the Company completed a major toxicological and pharmacokinetic study in support
of the MiKasome IND prior to submission of the IND. This toxicological and
pharmacokinetic study consisted of three dose levels of MiKasome administered
repeatedly over a 30-day period in animal models. In this study, MiKasome was
found to be safer at higher doses and showed much higher circulation and tissue
levels of the drug than free amikacin. There were also several in vitro and in
vivo studies conducted during 1996 in support of the MiKasome IND, including
models in endocarditis, pneumonia, tuberculosis and other mycobacterial
infections. In preclinical studies, the pathogens against which MiKasome has
shown at least
 
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equivalent, if not improved efficacy compared to free amikacin, are Pseudomonas
aeruginosa, Staphylococcus aureus, Klebsiella pneumoniae, Mycobacterium avium
complex and Mycobacterium tuberculosis.
 
     In February 1997, a Phase I clinical trial of MiKasome was initiated. The
development plan for MiKasome includes indications in patients with moderate,
severe and life-threatening gram-negative bacterial infections including, but
not limited to, those infections which are the focus of the first planned Phase
II clinical trials (pulmonary exacerbations in cystic fibrosis,
hospital-acquired pneumonia, bacterial endocarditis and urinary tract
infections), as well as tuberculosis, intra-abdominal infections and
osteomyelitis.
 
  VINCAXOME
 
     VincaXome is a liposomal formulation of vincristine, an approved anticancer
agent that is presently used against several types of cancer, both as a single
agent and in combination drug regimens. Vincristine, as with many other cancer
chemotherapies, has severe dose-limiting toxicities, the most serious of which
is peripheral neuropathy, a side effect which causes numbness and pain in
patients' extremities. VincaXome has been shown to have reduced overall toxicity
compared to free vincristine in animal studies. Specific studies to evaluate
neurotoxicity are being designed.
 
     During 1996, NeXstar conducted various preclinical efficacy studies with
VincaXome. In one study, VincaXome demonstrated activity, in both single dose
and multiple dose studies, in inhibiting the growth of metastases in an animal
tumor model that was relatively resistant to free vincristine. In another animal
model study, VincaXome was shown to have efficacy similar to free vincristine,
with some reduction in toxicity, when dosed once per week or once every two
weeks. In the same study, VincaXome was shown to be significantly more effective
than free vincristine when administered on a once every three weeks dosing
schedule.
 
     The preclinical package needed to support a decision to pursue an IND for
VincaXome will continue to be developed during 1997.
 
  GROWTH FACTOR ANTAGONISTS
 
     Using its proprietary SELEX process, the Company has identified numerous
aptamer antagonists of growth factors. Growth factors are proteins capable of
stimulating the growth of various cells and tissues, including tumors and blood
vessels. The Company is currently developing aptamer antagonists of several
growth factors. The Company's VEGF aptamer antagonists and its PDGF aptamer
antagonist have advanced to the stage of preclinical/early preclinical
development.
 
     VEGF APTAMERS. Vascular endothelial growth factor ("VEGF") is a growth
factor that promotes the growth of new blood vessels (a process known as
angiogenesis). In healthy adults, angiogenesis is rare and tightly controlled.
However, in certain pathological conditions, such as macular degeneration and
cancer, angiogenesis is believed to contribute to disease progression. In
macular degeneration, blood vessels grow in an abnormal manner behind the
retina, resulting in a progressive loss of visual acuity and eventual blindness.
Recently published reports have implicated VEGF as the major angiogenesis
stimulator in the eye. Currently, there is no effective treatment for macular
degeneration. In cancer, it is now well established that in order for tumors to
grow beyond the size of a few cubic millimeters, there must be simultaneous
growth of blood vessels. Inhibitors of angiogenesis (including inhibitors of
VEGF) may impair tumor growth. Using its SELEX process, the Company has
identified several aptamers that bind to VEGF very tightly, in a manner that
inhibits the binding of VEGF to its cell-surface associated receptor, therefore
assisting in inhibiting angiogenesis and impairing tumor growth. The Company has
developed VEGF binding aptamers with improved pharmacokinetic properties and is
currently testing these aptamers in animal models of angiogenesis and tumor
growth. The preliminary results from these animal model studies have been
encouraging.
 
     PDGF APTAMER. Platelet-derived growth factor ("PDGF") is a growth factor
which promotes the growth of many cells and tissues. Like VEGF, PDGF promotes
tumor growth by causing angiogenesis associated with tumors. In addition, and as
a consequence of the expression of PDGF receptors on tumor cells, PDGF can be
directly responsible for stimulation of tumor cell growth. PDGF appears to be a
causative factor in cancer and other proliferative diseases such as restenosis
and fibrosis. Using its SELEX process, the Company has
 
                                        7
<PAGE>   9
 
identified a specific PDGF binding aptamer that potently inhibits PDGF activity
in vitro. The Company is currently testing this PDGF aptamer in animal models of
restenosis, fibrosis, cancer and angiogenesis. The preliminary results from
these animal model studies have been encouraging.
 
  SELECTIN INHIBITORS
 
     Using its proprietary SELEX process, the Company has identified aptamers
which inhibit L-selectin mediated activity in vivo and which inhibit P-selectin
mediated activity in vitro. Selectins are a family of three closely related cell
surface receptors that mediate adhesion between different types of cells. In
both normal and disease states the selectins participate in the movement
(extravasation) of white blood cells from the blood stream into tissues. Because
the extravasation of white blood cells into certain types of tissue may, if
uncontrolled, lead to host tissue damage, selectins are thought to play an
important role in inflammation and reperfusion injury (inflammation is a natural
response to injury; however, if uncontrolled, it can produce reactions which are
life threatening). In certain circumstances, such as severe trauma and coronary
bypass surgery, experimental evidence supports the theory that white blood cells
are involved in much of the cell injury that can trigger multi-organ failure. It
is believed that if the attraction of white blood cells to injury sites can be
blocked, or at least reduced, by inhibiting the activity of the selectins
involved in the extravasation of white blood cells into the injury site, the
adverse reactions which lead to cell death and organ failure might be prevented.
The Company currently has inhibitors of L-selectin in the early preclinical
development stage and inhibitors of P-selectin in the research/early preclinical
development stage.
 
     L-SELECTIN APTAMERS. L-selectin, one of the family of selectins, is found
on the surface of white blood cells (also known as leukocytes) and is thought to
be involved in the early stages of inflammation. Using its SELEX process, the
Company has identified a series of aptamer antagonists of L-selectin. The
Company has conducted in vitro experiments that have demonstrated that the
Company's L-selectin antagonists bind to L-selectin on the surface of certain
white blood cells (at least 10,000-fold more tightly to L-selectin than certain
other antagonists and 500-1,000 times less tightly to related cell adhesion
molecules). The Company has also conducted in vivo experiments that have
demonstrated that in animal models these L-selectin antagonist aptamers are able
to bind to leukocyte surfaces and inhibit the L-selectin mediated trafficking of
lymphocytes (a type of white blood cell) from the blood stream into tissue. The
results of these in vitro and in vivo experiments suggest that in inflammatory
reactions, L-selectin mediated leukocyte migration may be blocked by the
Company's L-selectin antagonist and life-threatening inflammation and
reperfusion injury prevented.
 
     P-SELECTIN APTAMERS. P-selectin, the second in the family of selectins,
like L-selectin, plays a significant role in the movement of white blood cells
from the blood stream into tissue and is thought to be involved in the early
stages of inflammation. Using its SELEX process, the Company has identified a
series of aptamer antagonists of P-selectin. The Company has conducted in vitro
experiments that have shown that these P-selectin antagonists have binding
affinities for P-selectin that are far greater than carbohydrate-based
antagonists and that block P-selectin mediated cell-cell adhesion. The Company
is designing animal models to evaluate the in vivo activity of these P-selectin
antagonists. If the Company's P-selectin antagonists can inhibit P-selectin
mediated migration of leukocytes to the sites of tissue injury, inflammation may
be reduced. The primary clinical indication for the Company's P-selectin
antagonists is tissue reperfusion injury after a cerebral ischemic event
(stroke).
 
RESEARCH AND DEVELOPMENT
 
     The Company focuses its research and development activities on its two
significant proprietary technologies (the SELEX process and the Parallel SELEX
process), on the identification, through these processes, of novel
oligonucleotide and small-molecule compounds that have potential as drug
candidates and on the development of the most suitable compounds into
oncological, immunological, hematological and infectious disease drug
candidates. In addition, the Company, in collaboration with other pharmaceutical
companies, is pursuing the development of SELEX process-derived oligonucleotide
compounds as other commercial products, including diagnostic agents. The Company
also conducts research involving its proprietary liposome technology (including
the encapsulation of compounds derived from the SELEX process in liposomes). The
Company devotes significant efforts to the efficient development of the
oligonucleotide
 
                                        8
<PAGE>   10
 
compounds that are the basis for the products being developed by the Company
using the SELEX process, including the development of the Company's new Product
Anchored Sequential Synthesis ("PASS") technology.
 
  SELEX: SYSTEMATIC EVOLUTION OF LIGANDS BY EXPONENTIAL ENRICHMENT
 
     GENERAL
 
     Drug discovery efforts focus on the identification of compounds that can
bind and inhibit molecular targets that cause disease. NeXstar Pharmaceuticals
has developed and patented a proprietary combinatorial chemistry technology
called the SELEX process and is utilizing this process to rapidly identify
compounds that bind tightly and selectively to molecular (i.e., disease)
targets.
 
     Complementary shape (sometimes described as a "lock and key") is
fundamental to drug discovery research. In searching for potential drug
candidates, the scientist is looking for the drug candidate (key) that best fits
the disease causing molecular target (lock). In this search, it is advantageous
to have a large library of potential drug candidates (keys) to test against the
target molecule (to attempt to fit into the lock). In developing effective drug
products, it is also advantageous to have a drug candidate that binds tightly to
the target molecule and not to other molecules (a drug compound with high
affinity binding properties is more likely to be effective at low doses and
induce fewer side effects than a drug compound with low affinity for the disease
target; high specificity also reduces the likelihood of potential side effects
since the drug compound is unlikely to interact with targets not involved in the
particular disease). The SELEX process generates an enormous library of
oligonucleotide compounds (keys) and then rapidly searches this library of
compounds to identify the compounds that bind tightly and with a high degree of
specificity to the chosen disease causing molecular target.
 
     The SELEX process can be used to screen a pool of up to one million billion
(10(15)) oligonucleotides and to select from this pool the compounds that have
the highest affinity for a specified molecular target. The SELEX process begins
by creating in a test tube a pool containing a million billion candidate
oligonucleotides (molecules belonging to the same family as DNA and RNA, but
modified to resist degradation by DNA- and RNA-destroying enzymes). When this
pool is mixed with a molecular (i.e., disease) target whose biological activity
is to be altered or inhibited, a small subset of the larger pool binds to this
target. The oligonucleotides in this smaller subset are then amplified. The new
copies of the surviving candidates form an enriched pool containing more high
affinity oligonucleotides than the prior pool. This second generation pool is
again exposed to the molecular/disease target and those oligonucleotides with
the best binding properties are again selected and amplified. These steps of
binding, selection and amplification are repeated several times with each round
of the SELEX process generating a smaller pool of oligonucleotides that bind to
the target molecule with increasing specificity and affinity. Typically, the
SELEX process creates drug candidates in a matter of weeks or months, rather
than years. The lead oligonucleotide compound resulting from the application of
the SELEX process to a particular disease target is also sometimes referred to
as an aptamer.
 
     NeXstar Pharmaceuticals has demonstrated that the SELEX process is
applicable to a broad range of molecular targets, including proteins, peptides,
organic compounds, lipids, polysaccharides, carbohydrates, glycoproteins,
hormones, receptors, growth factors, whole cells and tissue.
 
     The Company believes that its SELEX process technology has certain
advantages over existing drug discovery technologies, including the creation of
large libraries of oligonucleotide compounds, rapid identification of lead
compounds, high affinity and high specificity of target recognition and lack of
requirement of knowledge of the target molecule's structure. As a result, the
Company believes that its SELEX process technology will reduce the time and cost
involved in identifying lead compounds and ultimately will reduce the time and
cost involved in discovering and developing effective pharmaceutical products.
 
     SCIENTIFIC ADVANCES WITH SELEX PROCESS-DERIVED APTAMERS
 
     During 1996, the Company made significant progress in improving the
stability and the pharmacokinetic activity of aptamers which are developed using
the SELEX process.
 
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<PAGE>   11
 
     STABILITY. A major challenge to the development of SELEX process-derived
aptamers as drug candidates has been the rapid clearance of the drug from the
body due to enzymatic degradation. In living systems, there are families of
nucleic acid destroying enzymes, called nucleases, which attack and break down
RNA and DNA molecules. This activity of nucleases (i.e., degradation of the RNA
or DNA-based drug product) leads to clearance of the drug from the body and
therefore, in many cases, ineffectiveness of the drug. During 1996, the Company
focused its stability enhancement efforts on making its RNA-based aptamers
resistant to degradation. To this end, the Company created an assortment of
proprietary nucleotides (the building blocks for RNA and DNA), modified at the
primary point of entry of the nuclease attack. Compared to natural RNA, the
SELEX process-derived RNA (modified) aptamers have now been shown to be up to
200 times more stable in the blood of test animals. These advances have given
the Company the ability to achieve an array of circulation times for its
aptamers to match the circulation time best suited for the specific disease
target. Using its modified aptamers, the Company has demonstrated specific
pharmacologic activity in animal models representing different types of
simulated disease processes.
 
     PHARMACOKINETICS. A second major challenge to the development of SELEX
process-derived aptamers as drug candidates is also the rapid clearance of the
drug from the body, this time due to excretion by the kidneys. During 1996, the
Company achieved improved pharmacokinetic performance of SELEX process-derived
aptamers through a variety of formulation modifications which alter the size of
the aptamers and therefore alter the circulation time of the drug products (the
rate of kidney excretion is, among other things, dependent on the size of the
drug molecule). The formulation modifications made to the aptamers are, for the
most part, made after completion of the SELEX process and alter the size and
weight of the aptamers. The increased size and weight of the modified aptamers
reduce the rate at which they are cleared from circulation, primarily by
blocking filtration of the aptamers by the kidneys.
 
     During 1996, the Company encapsulated aptamers into liposomes using the
Company's proprietary liposomal technology. This liposomal encapsulation of
SELEX process-derived aptamers also led to improved pharmacokinetic performance
of aptamers and has contributed to the demonstrated activity of the aptamers in
animal models.
 
     The Company will continue to study the behavior of aptamers in the body and
will continue to attempt to engineer the aptamers to be cleared at various rates
that might be desirable for different medical applications.
 
     THERAPEUTIC APPLICATIONS OF SELEX PROCESS-DERIVED COMPOUNDS
 
     DISEASES IMPACTED BY GROWTH FACTORS. Growth factors are proteins capable of
stimulating the growth of various cells and tissues, including tumors and blood
vessels. Using its SELEX process, the Company has identified several aptamers
that bind to VEGF very tightly, in a manner that inhibits the binding of VEGF to
its cell-surface associated receptor and therefore assists in the inhibiting of
angiogenesis and the impairment of tumor growth. Using its SELEX process, the
Company has also identified a specific PDGF aptamer that potently inhibits PDGF
activity in vitro and therefore has potential to inhibit tumor growth and the
progression of other proliferative diseases such as restenosis and fibrosis. See
"Clinical Trials, Preclinical Trials and Regulatory Status." The Company is also
conducting research on other growth factors implicated in various disease
states. Using its SELEX process, the Company has identified antagonists to basic
Fibroplast Growth Factor (bFGF) (implicated in restenosis, fibrosis and cancer),
Transforming Growth Factor beta (TGFb) (believed to play a role in restenosis,
fibrosis and cancer) and Keratinocyte Growth Factor (KGF) (involved in certain
skin related cancers and psoriasis). The Company is continuing to test and
develop these growth factor antagonists.
 
     SELECTINS. Selectins are cell surface receptors that mediate adhesion
between different types of cells. In both normal and disease states selectins
participate in the movement (extravasation) of white blood cells from the blood
stream into tissues. Because the extravasation of white blood cells into certain
types of tissue may, if uncontrolled, lead to host tissue damage, selectins are
thought to play an important role in inflammation and reperfusion injury. Using
its SELEX process, the Company has identified a series of aptamer antagonists of
L-selectin and P-selectin. The results of experiments with these antagonists
suggest that in inflammatory reactions, L-selectin and P-selectin mediated white
blood cell migration may be blocked by the Company's
 
                                       10
<PAGE>   12
 
aptamers and life-threatening inflammation and reperfusion injury prevented. See
"Clinical Trials, Preclinical Trials and Regulatory Status."
 
     HUMAN NEUTROPHIL ELASTASE. Human neutrophil elastase ("hNE") is a protease
(enzyme) that is capable of degrading a wide variety of connective tissue
proteins. Because of its potentially destructive effects, hNE activity is
tightly controlled or regulated under normal circumstances. The failure of the
body to regulate hNE is thought to be a major factor in the pathology of
inflammation. Excessive hNE activity has been implicated in emphysema, cystic
fibrosis, rheumatoid arthritis, ischemia-reperfusion injury and acute
respiratory distress syndrome ("ARDS").
 
     Using a variation on the SELEX process called a blended SELEX process (a
small organic molecule is linked to a SELEX process library), the Company has
isolated irreversible inhibitors of hNE that are faster and more potent than any
other inhibitors of hNE described in scientific literature. The results of the
Company's experiments show that low doses of this hNE inhibitor completely
suppress lung injury in an ex vivo animal lung model of ARDS and that lung
injury can also be suppressed in vivo by intratracheal administration to
animals. It is thought that an effective hNE inhibitor could significantly
reduce inflammation and subsequent tissue damage thought to be impacted by hNE
activity.
 
     IN VIVO SELEX PROCESS
 
     The Company has extended its SELEX process to identify aptamers that bind
to complex targets in vivo, i.e., instead of using its SELEX process to target
disease molecules in vitro, the Company is using this In vivo SELEX process to
target diseased or damaged tissue such as arterial plaque or malignant tumors in
living animals and in humans. The aptamers obtained by the Company from this In
vivo SELEX process are useful as specific in vivo imaging agents (in vivo
imaging agents are the subject of a collaboration between the Company and
Schering A.G. See "Collaborative Relationships and License Agreements"). The
Company is exploring the application of aptamers identified through the In vivo
SELEX process as a therapeutic option, including chemically linking the aptamers
to appropriate cell killing compounds for indirect killing of malignant cells.
 
     During 1996, a demonstration of the In Vivo SELEX process was made in an
animal model of restenosis (re-blockage of the artery) following balloon
angioplasty. In this demonstration, the Company used the In Vivo SELEX process
to target an isolated, damaged artery. After identification and enrichment of
those aptamers having the highest affinity for the target, the aptamer pool was
injected into an animal with the damaged artery. This demonstration eventually
led to identification of an aptamer with high affinity and greater than ten-fold
specificity for the damaged artery, results consistent with requirements for in
vivo imaging agents.
 
     The Company is continuing to work to extend its In Vivo SELEX process in an
effort to identify aptamers against human atherosclerotic plaque (hardening of
the arteries) and to develop aptamers for in vivo diagnosis and treatment of
major human cancers.
 
     OTHER COMMERCIAL APPLICATIONS OF SELEX PROCESS-DERIVED COMPOUNDS
 
     In addition to research and development efforts aimed at the potential use
of SELEX process-derived products as therapeutic targets, the Company is
devoting significant research and development efforts to demonstrating that
products derived from its SELEX process have utility in other commercial
applications and, in particular, in the development of SELEX process-derived
aptamers as laboratory reagents and diagnostic agents as more specifically set
forth below.
 
     TAQ (THERMUS AQUATICUS) POLYMERASE APTAMERS. The development of the
polymerase chain reaction ("PCR") has revolutionized many aspects of modern
molecular biology. PCR allows the rapid and efficient amplification of specific
sequence DNA molecules. The molecule responsible for PCR is the thermostable DNA
Polymerase enzyme Taq Polymerase. While the utility of PCR is high, it is also
flawed (it can function at low temperatures, allowing the DNA primers to
non-specifically bind to each other and to the target DNA
 
                                       11
<PAGE>   13
 
molecule to be amplified, resulting in undesirable amplification of DNA and
making interpretation of the PCR results difficult).
 
     In collaboration with Roche Molecular Systems, Inc., NeXstar
Pharmaceuticals has identified and developed SELEX process-derived DNA aptamers
that bind to Taq Polymerase and inhibit its activity at low temperatures where
the non-specific binding problem described above occurs. At low temperatures
(where non-specific primer binding is problematic), the DNA aptamers bind to Taq
Polymerase and prevent it from undesirable DNA amplification. Then, at high
temperatures (where primer binding is highly specific for the DNA to be
amplified and where Taq Polymerase functions in the manner desired), the DNA
aptamers lose their structure and no longer bind and inhibit Taq Polymerase,
allowing this enzyme to amplify only the desired DNA target. The Company's DNA
aptamers have been shown to provide substantial advantages to PCR applications,
especially in clinical diagnostics. The Company will continue to work, in
collaboration with its partner, towards commercialization of these DNA aptamers.
 
     ELONA: ENZYME-LINKED OLIGONUCLEOTIDE ASSAY. Using its SELEX process, the
Company has identified aptamers that can be used for diagnostic applications.
For example, the Company has demonstrated that a SELEX process-derived aptamer
that binds to VEGF can be used in place of an antibody in a diagnostic assay
commonly used in the clinical laboratory. The common diagnostic assay used in
this demonstration is known as a sandwich enzyme-linked immunosorbant assay
(ELISA) and usually requires two antibodies that bind simultaneously to the
molecule to be assayed. The first antibody captures the target and the second
antibody is used for detection (the two antibodies are thought of as two pieces
of bread that "sandwich" the target molecule). The use of two antibodies greatly
reduces the probability of misdiagnosis. In the Company's demonstration, the
detection antibody in the diagnostic assay was replaced with a SELEX
process-derived aptamer specific for VEGF. The demonstration, known as
enzyme-linked oligonucleotide assay ("ELONA"), demonstrates that SELEX
process-derived aptamers may be effective and useful diagnostic reagents.
 
     SELEX process-derived aptamers have several advantages over antibodies for
use as clinical diagnostic reagents, including: aptamers are approximately ten
times smaller than antibodies and are completely chemically defined (allowing
for more consistent manufacturing, at least at the research level, and ease of
modification); "rational" design is possible with aptamers, i.e., the SELEX
process can be designed so that the resulting aptamer is capable of binding to
the target molecule in the desired assay solution or with the desired target
specificity; and, because the entire SELEX process is in vitro, aptamers can be
developed for any target, including those for which it is difficult to obtain
antibodies. The Company also believes that it will be able to use its PASS
technology for inexpensive, large-scale manufacturing of these aptamers (another
advantage of aptamers over antibodies).
 
     In addition to ELONA, the Company will continue to explore the development
of SELEX process-derived aptamers for a wide range of in vitro diagnostic
applications.
 
     APTAMER AFFINITY CHROMATOGRAPHY. Monoclonal antibody technology has made
immunoaffinity purification a powerful and routine laboratory technique. With
proper experimentation, 1,000 to 10,000-fold purifications can routinely be
achieved from complex mixtures. However, there are major constraints that reduce
the effectiveness of antibody-based purifications, especially for large-scale or
industrial applications, including: antibody cross-reactivity; linkage of
antibodies to columns that often results in couplings that are not uniform,
leading to reduced capacity; inability of antibodies to survive cleaning; harsh
elution conditions (leading sometimes to destruction of the purified target, as
well as the antibody); and difficulty of large-scale manufacturing of monoclonal
antibodies.
 
     To alleviate the problems associated with monoclonal antibody affinity
purification, scientists are exploring alternative affinity purification
reagents created through combinatorial chemistry technologies. The new reagents
being developed are generally smaller in size and complexity than antibodies,
easier to manufacture, offer gentler elution schemes and are generally more
resistant to sanitation procedures.
 
     Using its SELEX process, the Company is developing an alternative affinity
purification reagent, specifically, aptamers for the purification of recombinant
human proteins from complex mixtures. Preliminary results indicate that the
Company's aptamers can be as effective as antibodies in their ability to purify
target
 
                                       12
<PAGE>   14
 
molecules from complex mixtures (1,500 to 4,500-fold purifications) and these
aptamers are currently being used for protein purifications required for the
Company's own research efforts. On a larger scale, the Company believes that its
PASS technology may allow for the inexpensive, large-scale manufacturing of
aptamer affinity reagents and therefore potential commercialization of these
aptamers.
 
     The Company is also continuing to focus its development activities in this
area on the requirements of the biotechnology industry for a synthetic affinity
purification reagent.
 
  PARALLEL SELEX PROCESS
 
     The Parallel SELEX process is a proprietary process being developed by the
Company to discover small-molecule drug candidates. The potential advantages of
the Parallel SELEX process as compared to current combinatorial chemistry
drug-discovery methodologies are several, including: tagging chemistries are not
necessary and high reaction yields are not required, so that both known and
unknown reaction chemistries (with numerous regiochemical and stereochemical
outcomes) currently inaccessible with combinatorial chemistry can be utilized to
provide extended small-molecule libraries and laborious and database-intensive
screening steps common in other combinatorial chemistry approaches are avoided.
 
     The focus of research efforts of the Parallel SELEX process group at the
Company has been to expand the repertoire of reactions that may be used to form
chemically diverse small-molecule libraries. Of the numerous bond-forming
reactions that could be useful for the assembly of small-molecule
pharmacophores, those which have been proven to work using the Parallel SELEX
process technology are amidation, peptide acylation and Diels-Alder cyclization.
These reactions have been used in traditional medicinal chemistry for the
assembly of small-molecule pharmaceuticals and their use for lead compound
identification using the Parallel SELEX process is being explored. During 1996,
scientists at the Company succeeded in showing the applicability of these
chemistries to the Parallel SELEX process. These reactions represent only a
subset of possibly useful reactions and further efforts to prove the
applicability of the Parallel SELEX process methodology to other classes of
reactions, especially those with diverse regiochemical and stereochemical
possibilities, are ongoing.
 
     During 1997, the Company will continue to expand the chemistries available
for drug discovery using the Parallel SELEX process and will begin to construct
small-molecule libraries for the discovery of new orally available
pharmaceuticals to treat oncological and infectious diseases.
 
  PASS: PRODUCT ANCHORED SEQUENTIAL SYNTHESIS
 
     All products produced by the SELEX process are oligonucleotide based. An
oligonucleotide is a chain of nucleotides (or monomers). During the SELEX
process, billions of oligonucleotides are put through the repeat steps of
binding, selection and amplification. The lead oligonucleotide compound
resulting from the application of the SELEX process to a particular disease
target is also sometimes referred to as an aptamer.
 
     Traditional methods for the manufacture of oligonucleotides are suitable
for research-scale production of these compounds, but are severely limited for
larger-scale or commercial production. Limitations to traditional manufacturing
methods include: the solid phase synthetic methods used are not capable of scale
up in a predictable fashion; the adaptation of traditional manufacturing methods
to a particular oligonucleotide (aptamer) is laborious and costly; and the crude
product which results from traditional manufacturing methods is contaminated and
requires further purification.
 
     The Company has developed a new proprietary technology called Product
Anchored Sequential Synthesis ("PASS"), which is a new method for synthesizing
oligonucleotides (aptamers). The PASS technology allows for predictable scale-up
of oligonucleotide products, using conventional chemical engineering techniques.
The PASS technology improves the economics of oligonucleotide synthesis in
several ways. The PASS technology uses fewer (costly) monomers in each step
needed to construct an oligonucleotide chain (monomers are the raw materials
used to make oligonucleotides). The PASS technology also reduces purification
costs associated with oligonucleotide synthesis as a result of the removal of
contaminants, using a proprietary product anchoring process, after each monomer
is added to the chain. The PASS technology also
 
                                       13
<PAGE>   15
 
uses newly identified chemical activators to speed up the chemical reactions
that assemble monomers into a chain (the use of these chemical activators is
proprietary to the Company). In addition, the in-process controls and
documentation of PASS-manufactured oligonucleotides (not present with
traditional manufacturing methods) are believed to be another advantage of this
process and may prove beneficial in obtaining regulatory approval for
oligonucleotide-based products.
 
     The Company's PASS technology is expected to add to the Company's ability
to make oligonucleotide-based drugs in commercial quantities in a predictable
and cost-effective manner. As well, the PASS technology may be adaptable to the
production of other polymeric compounds, including drug molecules, peptides,
peptide nucleic acids, polysaccharides and carbohydrates.
 
  LIPOSOME TECHNOLOGY
 
     NeXstar Pharmaceuticals believes that it has substantial technological
strengths in the development of liposome products. The Company's proprietary
liposome drug delivery technology enables it to develop products with
significant advantages over intravenous administration of a conventional drug,
including concentrating the drug on the targeted disease, extending the time the
drug remains in the blood stream to prolong the therapeutic effect and reducing
toxic side effects. The Company's liposome technology may be used as a method of
drug delivery in connection with drugs developed or being developed pursuant to
the Company's other technologies. The use of liposomes may have the potential
for increasing the efficacy and safety of such drugs.
 
     NeXstar Pharmaceuticals intends to continue to develop products based on
its liposome platforms for oncological, immunological, hematological and
infectious diseases. The Company has identified certain generic and proprietary
oncological compounds that may benefit substantially from encapsulation in
tumor-targeted liposomes and has begun formulation studies for these compounds.
Other liposomal compounds are being investigated for use in treating microbial,
viral and parasitic infections.
 
     The Company is also testing liposomes for use in delivering SELEX
process-derived aptamers to specific targets. In vivo experiments involving a
VEGF antagonist aptamer developed by the Company have demonstrated that a
liposomal formulation of the aptamer bound with high affinity to VEGF and
inhibited the growth of endothelial cells and cancer cells. In all experiments,
the liposomal formulation substantially enhanced the inhibitory activity of the
aptamer.
 
COLLABORATIVE RELATIONSHIPS AND LICENSE AGREEMENTS
 
     To apply and develop its technologies as widely as possible, NeXstar
Pharmaceuticals has entered into and expects to enter into strategic
collaborative research agreements, joint ventures and licensing arrangements
with pharmaceutical and other health care companies and research institutions
directed at expanding the scope of its technologies and applying those
technologies toward a wide variety of specific molecular targets or disease
indications. NeXstar Pharmaceuticals is currently a party to collaborative
research agreements with major pharmaceutical companies which relate to the
SELEX process technology, including the development of aptamers for certain
types of diagnostic products and devices.
 
     In February 1997, Schering A.G. ("Schering AG") agreed to increase its
annual funding to the Company to $2.4 million from $1.0 million in connection
with a collaborative research agreement first entered into in 1993. Under the
terms of their arrangement, the Company and Schering AG are using the Company's
SELEX process to discover and develop aptamers for use as in vivo imaging
agents. If successfully developed, the aptamers would be capable of binding to
specific targets in the body and could then be detected by a number of imaging
techniques, including gamma camera imaging.
 
     Schering AG has specified that aptamers be developed for certain cardiac
and oncology targets. NeXstar Pharmaceuticals has already developed an aptamer
capable of identifying arteries undergoing restenosis, a condition that often
develops after angioplasty to open arteries clogged by fat and cholesterol
deposits. As part of the work to create an aptamer that binds with high
specificity to arteries undergoing restenosis, the
 
                                       14
<PAGE>   16
 
Company has developed a procedure for using the SELEX process to discriminate
between diseased and healthy tissue, including tumors.
 
     The license agreement entered into in connection with the collaborative
research agreement requires Schering AG to make milestone and royalty payments
to the Company upon commercialization and sale of any of the products developed
in the collaboration. If an aptamer identified during the research is utilized
by the Company outside of the field of in vivo imaging, the Company will be
required to pay a royalty to Schering AG.
 
     NeXstar Pharmaceuticals has a significant ongoing collaborative
relationship with the University of Colorado at Boulder ("CU") relating to the
SELEX process technology. The relationship is formally with University Research
Corporation ("URC"), a for-profit, wholly owned subsidiary of the University of
Colorado Foundation, Inc. URC is designed to serve as the corporate vehicle for
commercial exploitation of inventions by the CU faculty. URC has assigned to
NeXstar Pharmaceuticals all of URC's present and future rights to (i) inventions
falling within the scope of the claims contained in issued patents and pending
patent applications for the SELEX process technology, (ii) improvements to such
technology made or discovered by researchers at CU, (iii) oligonucleotides or
other molecules that are derived through the application of such technology by
researchers at CU, (iv) results of certain sponsored research and (v) computer
software related to such technology. In connection with the rights assigned by
URC to the Company, URC is to receive certain royalties on the Company's net
sales of products and on royalties received by the Company from non-affiliates.
 
     The Company's rights to market AmBisome are pursuant to an agreement
between the Company and Fujisawa. Under the terms of the agreement, as amended,
the Company has the sole marketing rights to AmBisome in all countries except
the United States and Canada and subject to the Company's obligation to pay
royalties in connection with sales in most significant Asian markets. The
agreement provides that the Company and Fujisawa will co-promote AmBisome in the
United States, if AmBisome is ultimately approved for commercial sale by the
FDA, and that the Company will manufacture AmBisome for sale in the U.S. In
addition, the Company will be reimbursed for the cost of the product sold to
Fujisawa and will receive 20% of the gross profits from the sales of AmBisome in
the United States.
 
     NeXstar Pharmaceuticals has also licensed the right to develop and market
AmBisome in Japan to Sumitomo. Under the terms of the license, Sumitomo is
required to make payments to the Company if certain clinical and commercial
milestones are met and to pay the Company royalties on all Japanese sales of
AmBisome.
 
MARKETING
 
     NeXstar Pharmaceuticals has established marketing subsidiaries in the
United Kingdom, Germany, Italy, Spain, France, Portugal, The Netherlands and
Australia and a marketing branch operation in Greece to promote and sell its
existing products. In addition, NeXstar Pharmaceuticals has agreements with
third-party distributors, including distributors in certain of the countries in
which the Company has marketing operations, to promote, sell and distribute its
products.
 
     In certain countries, AmBisome and DaunoXome can be prescribed by
individual physicians, who request the products, even though a regulatory
approval in that country has not yet been obtained. In those cases, the
Company's marketing professionals provide information and assistance requested
by physicians.
 
     NeXstar Pharmaceuticals has created a U.S. sales and marketing organization
in connection with the sale of DaunoXome, which was approved by the FDA in
mid-1996, and in anticipation of the approval of AmBisome by the FDA. The
Company is considering a number of other options in connection with marketing
 
                                       15
<PAGE>   17
 
its products throughout the world and may hire additional personnel and/or seek
additional partners to assist with sales and distribution.
 
MANUFACTURING
 
     The Company's existing products are manufactured at its current facility in
San Dimas, California (the "650 Facility"), which has been inspected by the FDA
and by the Medicines Control Agency of the United Kingdom (the "MCA") and
licensed for the commercial production of AmBisome and DaunoXome by the MCA and
for DaunoXome by the FDA. In addition, the local FDA district office has
indicated that it will recommend approval of the application to permit the use
of the 650 Facility for the manufacture of AmBisome. The 650 Facility has also
been inspected by the State of California for compliance with "current Good
Manufacturing Practices" and must be licensed annually by the State of
California for pharmaceutical manufacture.
 
     AmBisome is sold as a lyophilized (freeze-dried) cake. Although the Company
has internal capacity to perform lyophilization in smaller clinical batches,
larger commercial batches of the Company's products are sent to third parties to
perform the filling and lyophilization processes. NeXstar Pharmaceuticals also
utilizes a manufacturer in Europe to perform certain quality control testing and
final labeling and packaging of both DaunoXome and AmBisome. The Company has
agreed to acquire the European facility where the quality control testing,
labeling and packaging are currently being conducted and expects, beginning in
the third quarter of 1997, to be solely responsible for these manufacturing
functions. The Company's manufacturing operations utilize no more than 50% of
current capacity of the 650 Facility.
 
     NeXstar Pharmaceuticals is manufacturing DaunoXome in quantities sufficient
to support current sales and clinical trials and the Company believes that it
has sufficient capacity for its anticipated DaunoXome sales. However, the
Company has limited experience in the larger-scale manufacture of DaunoXome and
there can be no assurance that the Company will be able to scale up its
manufacture of DaunoXome. The Company has received an approved shelf life for
DaunoXome of 36 weeks in the United States, 40 weeks in the United Kingdom and
between 20 and 26 weeks in most other European countries. While the Company is
attempting to obtain a longer shelf life than those currently approved in most
European countries, there can be no assurance that the extension of the shelf
life will be approved by any European regulatory authority.
 
     NeXstar Pharmaceuticals has leased and completed construction and equipping
of a manufacturing facility adjacent to the 650 Facility in San Dimas,
California (the "502 Facility"). The 502 Facility provides in excess of 70,000
square feet of space, including approximately 45,000 square feet of
manufacturing space. Various regulatory authorities, including the MCA and the
FDA, require NeXstar Pharmaceuticals to validate the 502 Facility prior to its
use for commercial production. Validation is designed to establish, through
documented evidence, that a specific manufacturing process will consistently
produce a product meeting its pre-determined specifications and quality
characteristics with a degree of assurance acceptable to such regulatory
authorities. The Company has completed the work necessary to apply for MCA, FDA
and state approval to manufacture AmBisome at the 502 Facility. It is
anticipated that the Company will also seek, through appropriate application
amendments, approval from these agencies to manufacture larger-scale batches of
DaunoXome at this site. The MCA has determined that the 502 Facility is in
general compliance with the principles and guidelines of good manufacturing
practice and has indicated that it will support the licensing of AmBisome and
DaunoXome in the 502 Facility. The 502 Facility has lyophilization capability
that will limit the need for third parties to perform the filling and
lyophilization of larger batches of product. There can be no assurance that the
regulatory approvals, which the Company is currently seeking in connection with
its manufacturing facilities, will be granted.
 
     NeXstar Pharmaceuticals currently leases 5,260 square feet of industrial
space in Boulder, Colorado. This space is used for the manufacture of bulk drug
candidate materials for eventual use in clinical trials and product development
programs in connection with oligonucleotide-based compounds derived using the
SELEX process. The Company intends to use this facility for piloting a qualified
pre-production process on at least one-tenth of the ultimate expected production
scale. In addition, this facility can be utilized for the initial full scale
production of clinical trial material. Although construction of the facility,
utilities and selected
 
                                       16
<PAGE>   18
 
environmental qualifications has been completed, there can be no assurance that
the production facility will ultimately obtain "current Good Manufacturing
Practices" status or that any drug substance proposed to be manufactured there
will be suitable for larger-scale production. In November 1996, the Company
entered into a lease for 9,800 square feet of space near its principal executive
offices in Boulder, Colorado. Following renovation this space will be used as a
development lab in connection with drug candidates discovered using the
Company's SELEX process.
 
     NeXstar Pharmaceuticals concentrates on developing internal manufacturing
capabilities for its products at the same time as it develops those products.
The Company anticipates that its existing capacity for the manufacture of
AmBisome and DaunoXome will support commercial needs until the various
regulatory amendments needed to manufacture at the 502 Facility are approved.
While each liposomal formulation requires unique variations in process methods,
NeXstar Pharmaceuticals believes that it possesses the necessary technical
skills to design and implement scaled-up manufacturing capabilities for the
liposomal products it is currently developing. However, there can be no
assurance that the Company will be able to achieve such capabilities in
connection with new liposomal products or will be able to cost-effectively
manufacture any compounds derived using the Company's non-liposomal
technologies.
 
     All of the component steps of the manufacturing process use equipment that
is commercially available and that can be obtained in larger sizes if required.
Currently, high quality amphotericin B, daunorubicin HCl and high quality
cholesterol, each of which is used in the Company's manufacture of liposome
products, are obtained only from single approved suppliers. Additional suppliers
of each of these components are presently under evaluation. In the event that
the materials become unavailable from their respective suppliers, the Company
believes that alternative supplies of such materials are or will become
available at reasonable prices. Other lipid materials and other raw materials
are available from a number of suppliers and NeXstar Pharmaceuticals believes
that supplies are adequate for the foreseeable future.
 
COMPETITION
 
     Generally, competition in the pharmaceutical field is based on such factors
as product performance, safety, acceptance by doctors, patient compliance,
patent protection, ease of use, price, distribution, marketing and adaptability
to various modes of administration. The Company's products compete or may
compete with new chemical substances as well as improved delivery of current
drugs. The Company's products and potential products are in various stages of
development and no assurance can be given that any of these products or
potential products will be sufficiently more effective than existing treatment
alternatives to generate meaningful commercial demand.
 
     NeXstar Pharmaceuticals anticipates that it will face increased competition
in the future as new products enter the market and advanced technologies become
available. Many of the Company's existing or potential competitors have
substantially greater financial, technical and human resources than NeXstar
Pharmaceuticals and may be better equipped to develop, manufacture and market
products. In addition, many of these companies have extensive experience in
research, preclinical testing and human clinical trials; obtaining FDA and other
regulatory approvals; and manufacturing and marketing their products. As a
result, these companies may develop and introduce products and processes more
rapidly than, and competitive with or superior to, those of NeXstar
Pharmaceuticals. There can be no assurance that existing products or new
products developed by the Company's competitors will not be more effective than
any that may be developed by NeXstar Pharmaceuticals. Competitive products may
render the Company's technology and products obsolete or noncompetitive.
 
     The current regulatory approvals for AmBisome principally relate to
situations in which traditional amphotericin B therapy has failed. However, if
the Company succeeds in its effort to expand the approved indications for
AmBisome, such as it has in obtaining approval as a primary therapy in four
countries, AmBisome will increasingly compete with traditional amphotericin B
therapy. Amphotericin B is currently produced and marketed by Bristol-Myers
Squibb Company. Moreover, if the Company succeeds in broadening the indications
for AmBisome, it will also face competition from other antifungal products,
including those produced by major pharmaceutical companies. In addition, there
are a number of other
 
                                       17
<PAGE>   19
 
companies that are focused on the development of lipid-based products. In the
antifungal area, two companies have lipid-based amphotericin B products that
have been approved in the United States and in several European countries. These
products are offered at prices that are less than AmBisome's price on a
milligram for milligram basis, although the Company believes that the total cost
of therapy for the competitive products is substantially equal to or greater
than that of AmBisome. In the anticancer area, another company has a lipid-based
anticancer drug which competes with DaunoXome and which has been approved by the
FDA and in a number or European countries for use as second line therapy for the
Kaposi's sarcoma indication. If the Company is successful in broadening the
indications for DaunoXome, it will face competition from a number of oncology
drugs, some of which are owned by companies with substantially greater resources
than the Company's.
 
     The Company believes that earlier entry into a market is an advantage for a
new drug, but it also believes that therapeutic index and cost-effectiveness are
important to a product's success. Ultimately, therefore, the Company believes
that its products and those of its competitors, whether or not lipid-based, will
compete on their merits in the markets where they are approved.
 
PATENTS, TRADE SECRETS AND LICENSES
 
     NeXstar Pharmaceuticals believes that patents and other proprietary rights
are important to the Company's business. NeXstar Pharmaceuticals also relies
upon trade secrets, know-how, continuing technological innovations and licensing
opportunities to develop and maintain its competitive position. NeXstar
Pharmaceuticals actively seeks patent protection both in the U.S. and
internationally. As of December 31, 1996, NeXstar Pharmaceuticals had 136
pending U.S. patent applications and had 48 issued U.S. patents to protect its
technology. Corresponding applications for certain of the U.S. applications have
been or will be filed in other countries. The Company, as of December 31, 1996,
had 469 issued foreign patents. The patents and patent applications primarily
relate to the Company's liposome products and liposome technology and various
aspects of its SELEX and Parallel SELEX processes.
 
     NeXstar Pharmaceuticals believes that its foreign and U.S. patents and
patent applications are soundly based, but the extent of protection provided may
vary in individual countries and no assurance can be given that any patent will
provide commercially significant protection or will not be challenged,
invalidated or circumvented. Litigation could be necessary to protect the
Company's patent position, which would result in substantial cost to, and
diversion of efforts by, the Company. NeXstar Pharmaceuticals has in the past
been involved, and is currently involved, in litigation involving patent and
infringement claims with respect to the Company's products. NeXstar
Pharmaceuticals is aggressively defending its interests and seeking appropriate
relief in such proceedings.
 
     NeXstar Pharmaceuticals has licensed certain technology from and pays
royalties to the Regents of the University of California in connection with the
production and sale of AmBisome. The royalty rate varies depending on the amount
of revenues, among other things. Currently, the royalty rate is approximately 1%
of net sales. NeXstar Pharmaceuticals has also licensed technology from and
agreed to pay royalties to The City of Hope National Medical Center in
connection with the production and sale of DaunoXome. The royalty rate varies
depending on the amount of revenues. The Company has entered into license
agreements with various medical and educational institutions and an individual
to obtain certain exclusive and nonexclusive patent rights. Under these
agreements, NeXstar Pharmaceuticals will pay royalties of varying rates based
upon levels of revenues from the licensed products, as defined in the
agreements. The Company intends to continue to seek other such rights as
appropriate.
 
     European and Japanese patents have a defined term following grant during
which opposition to the grant can be filed, and both NeXstar Pharmaceuticals and
certain of its competitors have filed such oppositions against each other with
respect to certain patents in Europe and Japan. Specifically, NeXstar
Pharmaceuticals has opposed the grant to The Liposome Company ("TLC") of the
European and Japanese counterparts of U.S. Patent No. 4,880,635 and U.S. Patent
No. 5,578,320. See "Legal Proceedings." NeXstar Pharmaceuticals has also opposed
the grant of other TLC European and Japanese patents, and is involved in an
interference proceeding with a U.S. patent application owned by the University
of California, relating to
 
                                       18
<PAGE>   20
 
certain active drug loading techniques that the owners of this patent or
application could claim are used in the manufacture of products such as
DaunoXome.
 
     Although patents are enforceable from the date of issuance and presumed to
be valid, future litigation or reexamination proceedings regarding the
enforcement or validity of the Company's existing patents or future patents, if
issued, could result in a ruling adverse to the Company that could invalidate
such patents or substantially reduce the scope of the protection afforded by
such patents. As to any issued patent or patent application, it is also possible
that the U.S. Patent and Trademark Office ("USPTO") could declare an
interference proceeding to determine, inter alia, priority of inventorship
between applications claiming the same invention. An adverse ruling in any such
interference proceeding could result in cancellation of claims in issued patents
or patent applications, limitations on the scope of issued patents or claims in
patent applications or in the awarding of the rights to third parties
participating in such interference. If the Company elects to, or is required to
participate in, interference proceedings declared by the USPTO, substantial cost
to the Company could result.
 
     The Company also relies on trade secrets, proprietary know-how and
continuing technological innovation which it seeks to protect with
confidentiality agreements with its collaborators, employees and consultants.
There can be no assurance that these agreements will not be breached, that the
Company will have adequate remedies for any breach or that the Company's trade
secrets and proprietary know-how will not otherwise become known or be
independently discovered by competitors. Under certain of the Company's research
and development agreements, inventions discovered in certain cases become
jointly owned by the Company and the corporate partner or research institution
and in other cases become the exclusive property of the Company or the corporate
partner or research institution. Disputes may arise with respect to ownership of
any such inventions.
 
GOVERNMENT REGULATION
 
     The production and marketing of the Company's products, developed through
the Company's technologies, and its ongoing research and development activities,
including its preclinical studies and clinical trials, are subject to regulation
by numerous federal, state and local governmental authorities in the United
States and by similar regulatory agencies in other countries where the Company
tests and markets, or intends to test and/or market, its current or potential
products. There can be no assurance that the Company will obtain further
regulatory approvals to conduct clinical trials or to market its products, or
that the Company will obtain regulatory approvals to conduct clinical trials or
to market products developed in the future, if any, on a timely basis. Prior to
marketing any drug developed by the Company or marketed under license, the
Company must undergo an extensive regulatory approval process by the FDA and
comparable regulatory authorities in foreign countries. The regulatory process,
which includes preclinical testing and clinical trials of each compound to
establish its safety and efficacy, can take many years and require the
expenditure of substantial resources.
 
     Before obtaining regulatory approvals for the commercial sale of any of its
products under development, the Company must demonstrate through preclinical
studies and clinical trials that the product is safe and efficacious for use in
each target indication. The results from preclinical animal studies and early
clinical trials may not be predictive of results that will be obtained in large
scale testing, and there can be no assurance that the Company's clinical trials
will demonstrate the safety and efficacy of any products or will result in
marketable products. A number of companies in the biotechnology industry have
suffered significant setbacks in advanced clinical trials, even after
experiencing promising results in early animal and human testing. In addition,
the rate of completion of the Company's clinical trials is dependent upon, among
other factors, the rate of patient enrollment. Patient enrollment is a function
of many factors, including the size of the patient population, the nature of the
protocol, the Company's ability to manage the clinical trial, the proximity of
patients to clinical sites and the eligibility criteria for the study. Several
factors, such as delays in planned patient enrollment, may result in increased
costs and delays or termination of clinical trials prior to completion, which
could have a material adverse effect on the Company. Preclinical studies must
also be conducted in conformity with the FDA's good laboratory practice
regulations. Clinical trials generally must meet requirements for institutional
review board oversight and informed consent, as well as regulatory agency prior
review, oversight and good clinical practice requirements.
 
                                       19
<PAGE>   21
 
     The procedure for obtaining regulatory approval for a new human
pharmaceutical product involves many steps. Initially, NeXstar Pharmaceuticals
conducts animal studies to secure data relevant to potential safety and
efficacy. Based on the data from these animal studies, NeXstar Pharmaceuticals
files applications to conduct clinical trials of the products in humans. Such
applications, known as Investigational New Drug Applications (IND) in the United
States, must be made in each country in which NeXstar Pharmaceuticals proposes
to conduct clinical trials. Once such applications have been approved, NeXstar
Pharmaceuticals can commence clinical trials.
 
     Clinical trials are generally conducted in three phases. Phase I trials are
designed to test basic human safety. Phase II trials test dosage and involve a
detailed evaluation of human efficacy and safety. Phase III trials involve
large-scale evaluation of general efficacy and safety and a comparison with
existing alternative therapies. To the extent possible, NeXstar Pharmaceuticals
designs such clinical trials to meet the standards of both foreign and U.S.
regulatory authorities, but there can be no assurance that the authorities in
any country will be satisfied with the conduct of any particular clinical trial.
Data obtained from preclinical and clinical activities are susceptible to
varying interpretations which could delay, limit or prevent regulatory approval.
In addition, delays or rejections may be encountered based upon changes in the
policies of regulatory authorities for drug approval during the period of
product development and regulatory review of each submitted new drug application
or product license application. The Company may be required to demonstrate that
the proposed product represents an improved form of treatment over existing
therapies. There can be no assurance that, even after such time and
expenditures, regulatory approvals will be obtained for any drugs developed or
discovered by the Company or its collaborative partners utilizing the Company's
technologies.
 
     Based on the results of clinical trials, NeXstar Pharmaceuticals may file
for regulatory approvals of the product. Such filings, which in the United
States are known as New Drug Applications ("NDA") and in Europe as Product
License Applications, are made in each country in which NeXstar Pharmaceuticals
intends to sell its products. In November 1996, an NDA was submitted to the FDA
for AmBisome. There can be no assurance that the FDA will grant product approval
based on the current database for AmBisome and the FDA may require additional
clinical trials in the United States before approving AmBisome. Also, there can
be no assurance that, if approved, AmBisome will be commercially successful in
the U.S.
 
     When a regulatory authority approves the sale of a drug, regulations also
govern the manufacturing process and marketing activities, including the types
of information that the Company may provide to health care providers, and may
require post-marketing testing and surveillance programs to monitor the effects
of the Company's products. Moreover, if regulatory approval of a drug is
granted, such approval is likely to entail limitations on the indicated uses for
which it may be marketed. Further, even if such regulatory approval is obtained,
a marketed drug and its manufacturer are subject to continual review, and
discovery of previously unknown problems with a product or manufacturer may
result in restrictions on such product or manufacturer, including withdrawal of
the product from the market. The Company is currently responding to an FDA
warning concerning certain promotional materials supplied by the Company in
connection with the sale of DaunoXome in the U.S. While the Company does not
believe that any action, which the Company is required to take in connection
with its promotions of DaunoXome, will be material to the operations of the
Company, no assurance can be given.
 
     Regulatory approval of prices is generally required in most foreign
countries. In particular, certain European countries will condition their
approval of a product on the agreement of the seller not to sell that product
for more than a certain price in that country and in the past have required
price reductions after or in connection with product approval. There can be no
assurance that European regulatory authorities in the future will not establish
lower prices or that any regulatory action reducing the price of AmBisome or
DaunoXome in any one European country will not have the practical effect of
requiring the Company correspondingly to reduce its prices in other European
countries. There can be no assurance that the resulting prices would be
sufficient to generate an acceptable return on the Company's investment in its
products.
 
     NeXstar Pharmaceuticals is aggressively pursuing worldwide
commercialization of its products. In some countries, regulatory procedures
allow for product sales under certain circumstances before final regulatory
approvals are obtained. The Company has submitted and will continue to submit
requests for approval of
 
                                       20
<PAGE>   22
 
AmBisome and DaunoXome with regulatory authorities worldwide. Regulatory
procedures and review times vary from country to country. There can be no
assurance that any of the Company's pending applications for approvals will be
granted or that regulatory actions will be taken in a timely fashion.
 
     The Company has received an approved shelf life for DaunoXome of 36 weeks
in the United States, 40 weeks in the United Kingdom and between 20 and 26 weeks
in most other European countries. While the Company is attempting to obtain a
longer shelf life than those currently approved in most European countries,
there can be no assurance that the extension of the shelf life will be approved
by any European regulatory authority. The Company in the past has replaced, and
in the future expects, under certain circumstances, to replace, vials of
DaunoXome with expired shelf lives and the likelihood that customers would seek
to return material amounts of DaunoXome to the Company because of the expiration
of its shelf life may be increased if shelf lives longer than those currently
approved are not obtained.
 
     In addition, the Company's manufacturing facilities are subject to
inspection and regulation by U.S., foreign and state regulatory agencies. The
Company's facilities in San Dimas, California have been inspected by the FDA,
the MCA and the State of California. These agencies may reinspect at any time,
and other countries' regulatory authorities may inspect the Company's facilities
as well. Furthermore, although the Company's current products do not require an
export license, there can be no assurance that export licenses will not be
required in the future. See "Manufacturing."
 
     The Company's research and development involves the controlled use of
hazardous materials, chemicals, viruses and various radioactive compounds.
Although the Company believes that its safety procedures for handling and
disposing of such materials comply with the standards prescribed by state and
federal regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of such an accident, the
Company could be held liable for any damages that result and any such liability
could exceed the resources of the Company or otherwise adversely affect the
Company. NeXstar Pharmaceuticals is subject to numerous environmental and safety
laws and regulations, including those governing the use of hazardous materials.
In June 1995, the Company was contacted by the U.S. Environmental Protection
Agency (the "EPA") informing the Company that it is a potentially responsible
party relating to the disposal of the Company's waste products by a third party
at a hazardous waste disposal facility. The Company has complied with all
requests by the EPA relating to this matter and believes that its environmental
liability with respect to this matter is not material; however, there can be no
assurance that this matter or any violation of, or the cost of compliance with,
environmental and safety laws and regulations will not adversely impact the
Company's operations.
 
EMPLOYEES
 
     As of March 1, 1997, NeXstar Pharmaceuticals and its subsidiaries employed
543 persons on a full-time basis, of whom 315 were engaged in research,
development, clinical research, regulatory affairs, quality control and
manufacturing and 228 were engaged in marketing, finance and administration.
There can be no assurance that NeXstar Pharmaceuticals will be able to continue
to attract and retain qualified personnel in sufficient numbers to meet its
needs. NeXstar Pharmaceuticals believes that it maintains good relations with
its employees.
 
                                       21
<PAGE>   23
 
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
 
     The following table sets forth certain information with respect to the
executive officers, directors and key employees of the Company.
 
<TABLE>
<CAPTION>
                NAME                  AGE                       POSITION
                ----                  ---                       --------
<S>                                   <C>   <C>
Lawrence M. Gold, Ph.D..............  55    Chairman of the Board, Chief Scientific Officer
Patrick J. Mahaffy..................  34    President, Chief Executive Officer and Director
Michael E. Hart.....................  44    Vice President and Chief Financial Officer
Raymond A. Bendele, D.V.M., Ph.D....  51    Vice President, Life Sciences
Michael T. Burke....................  50    Vice President, Business Development
Anthony D. Caracciolo...............  40    Vice President, Manufacturing
Adam Cochran........................  56    Vice President and General Counsel
Bruce E. Eaton, Ph.D................  43    Vice President, Chemistry
Crispin G.S. Eley, D. Phil..........  39    Vice President, Pharmaceutical Operations
David W. Flamberg...................  52    Vice President, Compliance
George B. Herron....................  49    Vice President, Sales and Marketing
Barbara B. Kazmier..................  40    Vice President, Human Resources
Barry A. Polisky, Ph.D..............  51    Vice President, Drug Discovery
Paul G. Schmidt, Ph.D...............  52    Vice President, Drug Delivery Research
John D. Baldeschwieler, Ph.D........  63    Director
James A. Eskridge...................  54    Director
David I. Hirsh, Ph.D................  57    Director
Rodman W. Moorhead, III.............  53    Director
Carl F. Pollard.....................  58    Director
</TABLE>
 
     Dr. Gold, a founder of the Company, has been a director of the Company
since its inception in 1991 and has served as Chairman of the Board of Directors
since February 1993. He was Executive Vice President of Research and Development
of NeXstar Pharmaceuticals from March 1991 to February 1995. In February 1995,
Dr. Gold was named Chief Scientific Officer of the Company. Dr. Gold was
Chairman of the Department of Molecular, Cellular and Developmental Biology at
the University of Colorado at Boulder ("CU") from 1988 to 1992. In addition to
his full-time duties at the Company, Dr. Gold has been a professor at CU since
1970 and has received the CU Distinguished Lectureship Award. From January 1981
to June 1988, Dr. Gold served as Founder and Co-Director of Research for
Synergen, Inc., a biopharmaceutical company located in Boulder, Colorado. Dr.
Gold is a recipient of the National Institutes of Health Merit Award and Career
Development Award. Dr. Gold received an A.B. in Biochemistry from Yale
University and a Ph.D. in Biochemistry from the University of Connecticut. Dr.
Gold is a member of the National Academy of Sciences.
 
     Mr. Mahaffy has been President and Chief Executive Officer of NeXstar
Pharmaceuticals since June 1992 and has served as a director since the Company's
inception in 1991. Prior to joining NeXstar Pharmaceuticals, Mr. Mahaffy was
employed beginning in 1986 by E.M. Warburg, Pincus & Co., LLC ("Warburg"), a
specialized financial services firm, where he last served as a Vice President.
Mr. Mahaffy received a B.A. in International Affairs from Lewis and Clark
College and an M.A. in International Affairs from Columbia University.
 
     Mr. Hart served as Executive Vice President and Chief Financial Officer of
Vestar, Inc. ("Vestar") from November 1990 to February 1995. In February 1995,
Mr. Hart was named Vice President and Chief Financial Officer of NeXstar
Pharmaceuticals. He was employed by Avantek, Inc. as Treasurer and Director of
Finance from June 1982 through November 1990. From May 1980 to June 1982, he was
employed by Magnuson Computer Systems as Assistant Treasurer. Prior to 1980, Mr.
Hart was employed by Memorex Corporation where he held various financial
positions. Mr. Hart received a B.A. in Business Economics and a B.A. in
Geography from the University of California at Santa Barbara. He received an
M.B.A. from California State University, Fresno.
 
                                       22
<PAGE>   24
 
     Dr. Bendele has been Vice President, Life Sciences of NeXstar
Pharmaceuticals since December 1996 after serving as the Senior Director, Life
Sciences of the Company from September 1995 to December 1996. From February 1993
until August 1995, Dr. Bendele was the Company's Director of Pharmacology and
Toxicology. From 1979 to 1993, he worked at Eli Lilly and Company where he
served in numerous capacities, including Director of Pharmaceutical Projects
Management and Director of Pathology. Dr. Bendele received a B.S. in Veterinary
Science, a D.V.M. and a Ph.D. in Veterinary Pathology from Texas A&M University.
 
     Mr. Burke was President and Director of Supragen, Inc. from November 1994
until he became Vice President, Business Development of the Company in September
1995. From 1974 until November 1994, he was with Burroughs Wellcome Co., serving
in a number of positions including Licensing Director from May 1993 until
November 1994 and Licensing Manager from January 1990 until May 1993. Mr. Burke
has a B.S. in Chemistry from the New Mexico Institute of Mining and Technology
and an M.S. in Chemistry from the University of Colorado.
 
     Mr. Caracciolo became the Company's Vice President, Manufacturing in March
1997. From September 1991 to February 1997, Mr. Caracciolo was the Vice
President, Operations of Bausch & Lomb Pharmaceuticals Inc., after having been
the Vice President and General Manager of Sterling Pharmaceuticals Inc. from
1989 to 1991. Mr. Caracciolo has over 18 years of pharmaceutical experience and
has held various positions in manufacturing and operational management. Mr.
Caracciolo has a B.S. in Pharmaceutical Science from St. John's University.
 
     Mr. Cochran has served as Vice President and General Counsel of NeXstar
Pharmaceuticals since February 1995, after serving as Vice President and General
Counsel of Vestar from 1994 to February 1995. From 1988 until 1994, he was
Vestar's Patent Counsel. Prior to August 1988, Mr. Cochran was a partner in the
law firm of Nilsson, Robbins in Los Angeles. He received a B.A. in Chemistry and
in Business Administration from Hanover College in 1962 and has a Master's
degree from Purdue University and a Juris Doctor from Loyola University of
Chicago.
 
     Dr. Eaton has been Vice President, Chemistry of NeXstar Pharmaceuticals
since January 1, 1995. During 1994, he was the Company's Director of Medicinal
Chemistry. From 1989 to 1994, he was an Assistant Professor and in 1995 an
Associate Professor of Chemistry at Washington State University. From 1986 to
1989, Dr. Eaton was a Research Chemist at Amoco Corporation studying the
computer aided design and synthesis of macromolecules. From 1981 to 1986, he was
a consultant and Research Associate in bioconjugate chemistry with HANA
Biologics. Dr. Eaton has a B.S. degree in Biology, a B.S. in Chemistry and an
M.S. in Organic Chemistry from the University of Oregon, Eugene. He received a
Ph.D. in Organic Chemistry from the University of California, Berkeley.
 
     Dr. Eley served as the Vice President of Product Development of Vestar from
March 1993 until February 1995 when he was appointed the Vice President,
Pharmaceutical Operations of NeXstar Pharmaceuticals. From August 1985 until
March 1993, Dr. Eley held the following positions with Vestar: Senior Research
Scientist (August 1985 until March 1988), Director, Chemistry Research (March
1988 until March 1989), Director, Chemistry (March 1989 until January 1992) and
Senior Director, Product Development (January 1992 until March 1993). Dr. Eley
has a B.A. in Chemistry and a D.Phil. in Chemistry from Oxford University.
 
     Mr. Flamberg served as Vice President of Compliance of Vestar from January
1994 until February 1995 when he was appointed Vice President, Compliance of
NeXstar Pharmaceuticals. Mr. Flamberg served as Director, QA/QC of Vestar from
1986 to 1990 and as Vestar's Senior Director of Compliance from 1990 to 1994.
Prior to joining Vestar in 1986, Mr. Flamberg spent 20 years serving in a
variety of posts in pharmaceutical quality operations and product development
for Ben Venue Laboratories, Inc. in Bedford, Ohio. Mr. Flamberg holds a B.S. in
Chemistry-Biology from Bucknell University and an M.B.A. from Baldwin-Wallace
College.
 
     Mr. Herron has been Vice President, Sales and Marketing of the Company
since July 1995 after having served as Senior Director, Marketing of the Company
from February 1995 until June 1995. From April 1990 until March 1993, he was the
General Manager of Vestar's United Kingdom office and from April 1993 until
 
                                       23
<PAGE>   25
 
February 1995, he was Senior Director, Marketing of Vestar. Prior to joining
Vestar, Mr. Herron held several senior marketing positions for various
pharmaceutical companies, including Kirby-Warrick Pharmaceuticals Ltd. (August
1986 until November 1989), Schering Corporation (September 1984 until August
1986), Novo Laboratories (November 1982 until July 1984) and Smith Kline &
French Laboratories (January 1975 until November 1982). Mr. Herron received a
B.S. from Queen's University in Belfast, Northern Ireland.
 
     Ms. Kazmier has been Vice President, Human Resources of the Company since
December 1995 after having served as Director, Human Resources of the Company
from August 1994 until December 1995. From October 1987 until August 1994, Ms.
Kazmier served in various human resources management positions at Syntex
Chemicals, Inc. Ms. Kazmier has a B.A. from Metropolitan State College and an
M.S. in Management and Organization from the University of Colorado.
 
     Dr. Polisky served as Vice President of Research of NeXstar Pharmaceuticals
from August 1993 to February 1995 when he was named Vice President, Drug
Discovery. Prior to that time, he was Associate Director of Research at NeXstar
Pharmaceuticals beginning in July 1992. Prior to coming to NeXstar
Pharmaceuticals, Dr. Polisky was an Assistant, Associate, then full Professor of
Biology at Indiana University during the period 1977 to 1992, where he also
chaired the Molecular, Cell and Developmental Biology Program. Dr. Polisky
received a B.A. in Biochemistry from the University of Chicago and his Ph.D. in
Molecular Biology from the University of Colorado at Boulder.
 
     Dr. Schmidt served as Executive Vice President, Research Operations of
Vestar from March 1993 to February 1995. In February 1995, Dr. Schmidt was named
Vice President, Drug Delivery Research of NeXstar Pharmaceuticals. From December
1988 to July 1991, Dr. Schmidt was Vestar's Vice President, Research and
Development and from July 1991 until March 1993, he was Vestar's Executive Vice
President, Research and Development. Prior to joining Vestar in 1983, he served
as Associate Professor of Biochemistry and Molecular Biology at Oklahoma Medical
Research Foundation where he received a Research Career Development Award from
the National Institutes of Health, and as Assistant Professor of Chemistry and
Biochemistry at the University of Illinois, Urbana. Dr. Schmidt received a B.S.
in chemistry from Pomona College and a Ph.D. in Physical Chemistry from Stanford
University. He is a member of the American Chemical Society and the American
Society of Biochemistry and Molecular Biology. From 1984 until 1992, Dr. Schmidt
was a Visiting Associate at the California Institute of Technology.
 
     Dr. Baldeschwieler is a founder of Vestar and served as Chairman of the
Vestar Board of Directors from Vestar's inception in April 1981 to January 1993
and as a director through February 1995. He has served as a director of NeXstar
Pharmaceuticals since February 1995. He is currently a Professor of Chemistry at
the California Institute of Technology and was Chairman of the Division of
Chemistry and Chemical Engineering from 1973 to 1978. Dr. Baldeschwieler was
Deputy Director of the Office of Science and Technology, Executive Office of the
President from 1971 to 1973, and previously served on the faculties of Stanford
and Harvard Universities. He received a Ph.D. in Physical Chemistry from the
University of California at Berkeley. Dr. Baldeschwieler is a member of the
National Academy of Sciences and the American Philosophical Society.
 
     Mr. Eskridge served as a director of Vestar from July 1992 to February
1995. He was appointed a director of NeXstar Pharmaceuticals in February 1995.
Mr. Eskridge has been Senior Consultant for Mattel, Inc. since March 1996 and
from January 1996 to March 1996, he was Group President, Mattel Worldwide. From
April 1995 to December 1995, he was the Group President-U.S., Mattel, Inc. and
Fisher-Price, Inc. and from November 1993 until April 1995 he was the President
and Chief Executive Officer of Fisher-Price, Inc. From 1988 to November 1993,
Mr. Eskridge served as the Executive Vice President and Chief Financial and
Administrative Officer of Mattel, Inc. Mr. Eskridge is a director of Golden
Family Entertainment. Mr. Eskridge has notified the Company that he does not
intend to continue as a director of the Company after the Company's Annual
Meeting of Stockholders on May 28, 1997.
 
     Dr. Hirsh has been a director of NeXstar Pharmaceuticals since February
1993. He currently is the Robert Wood Johnson Professor and Chairman of the
Department of Biochemistry and Molecular Biophysics at Columbia University's
College of Physicians and Surgeons. Dr. Hirsh has been a professor at Columbia
 
                                       24
<PAGE>   26
 
University since July 1990. Dr. Hirsh received a B.A. in Biology from Reed
College and a Ph.D. in Biochemistry from Rockefeller University.
 
     Mr. Moorhead has served as a director of NeXstar Pharmaceuticals since June
1992 and was a director of Vestar from 1984 to February 1995. He has been
employed since 1973 by Warburg, where he currently serves as a Senior Managing
Director. He is a director of Value Health, Inc., a managed health care company,
Transkaryotic Therapies, Inc., Xomed Surgical Products and a number of privately
held companies. Mr. Moorhead received an A.B. and an M.B.A. from Harvard
University. He is a trustee of The Taft School and a member of the Overseers'
Committee on University Resources, Harvard College.
 
     Mr. Pollard served as a director of Vestar from October 1989 to February
1995. He was appointed a director of NeXstar Pharmaceuticals in February 1995.
Since January 1995, Mr. Pollard has been the owner and operator of Hermitage
Farm, a thoroughbred breeding operation. From 1991 to 1993, Mr. Pollard served
as President and Chief Operating Officer of Humana, Inc. ("Humana"). In March
1993, Mr. Pollard was elected Chairman and Chief Executive Officer of Galen
Health Care, Inc., a hospital company spun-off from Humana. In connection with a
reorganization of Galen Health Care, Mr. Pollard served as the Chairman of
Columbia/HCA Healthcare Corporation from September 1993 to February 1994. From
1984 to 1991, Mr. Pollard was the Senior Executive Vice President of Humana.
Prior to his association with Humana, Mr. Pollard was a partner with Coopers &
Lybrand, an international public accounting firm. Mr. Pollard is also a member
of the Board of Directors of Churchill Downs Incorporated, National City Bank,
Kentucky, and the University of Kentucky's Business Partnership Foundation and
is President of the Kentucky Derby Museum Board. Mr. Pollard has notified the
Company that he does not intend to continue as a director of the Company after
the Company's Annual Meeting of Stockholders on May 28, 1997.
 
ITEM 2. PROPERTIES
 
     The Company's corporate headquarters, including its principal executive
offices, are located in Boulder, Colorado. The Company leases three significant
facilities and subleases one other facility in Boulder which consist of: a
sublease of approximately 32,000 square feet of space (the "Subleased Office
Space"), which space is being used as administrative offices; a lease of
approximately 60,000 square feet of space (the "Research Facilities"), which
space is being used as administrative offices and as research laboratories; a
lease of approximately 9,800 square feet of space (the "Development Lab"), which
space the Company is renovating for use as a development lab in connection with
drug candidates discovered using the Company's SELEX process; and a lease of
5,260 square feet of industrial space (the "Manufacturing Facility"), which
space is being prepared for piloting a qualified pre-production process on at
least one tenth of the ultimate expected production scale and which will be used
for the manufacture of bulk drug substance pharmaceuticals in connection with
oligonucleotide-based compounds derived using the SELEX process. The sublease to
the Subleased Office Space expires in July 2003. The lease for the Research
Facilities expires in October 2001, but can be renewed at the option of the
Company for two successive five-year periods. The lease to the Development Lab
expires in November 2001, but can be renewed by the Company for an additional
three years. The lease for the Manufacturing Facility expires in January 2002,
but may be renewed at the option of the Company for two successive seven-year
periods.
 
     NeXstar Pharmaceuticals also occupies a facility in San Dimas, California
(the "650 Facility") under a noncancelable operating lease which expires in May
2003 and has two five-year renewal options. This plant provides 51,500 square
feet of space and houses research and development activities, manufacturing and
certain administrative functions. The 650 Facility has been inspected by the
State of California for compliance with "current Good Manufacturing Practices"
and is licensed by the State of California for pharmaceutical manufacturing. The
license is renewable annually. The 650 Facility has been licensed for the
commercial production of AmBisome and DaunoXome by the MCA and for DaunoXome by
the FDA. In addition, the local FDA district office has indicated that it will
recommend approval of the application to permit the use of the 650 Facility for
the manufacture of AmBisome.
 
     In April 1992, the Company entered into a long-term lease agreement for a
manufacturing facility adjacent to the 650 Facility in San Dimas, California
(the "502 Facility"). The 502 Facility, the lease to
 
                                       25
<PAGE>   27
 
which expires in November 2003 and has two five-year renewal options, provides
in excess of 70,000 square feet of space including approximately 45,000 square
feet of manufacturing space, and will become the Company's primary injectable
pharmaceutical production plant. Construction of the 502 Facility has been
completed and the product specific validation processes required by various
regulatory authorities in connection with AmBisome and DaunoXome are ongoing. In
addition, the Company has agreed to acquire the European facility, located in
Dublin, Ireland, where the EU quality control testing, final labeling and
packaging are currently being conducted for AmBisome and DaunoXome. The Company
has agreed to pay 1 million Irish Punts (approximately $1.6 million) for the
facility and expects to finalize the acquisition in the third quarter of 1997.
 
ITEM 3. LEGAL PROCEEDINGS
 
     The Company believes that its patents and applications are soundly based,
but the extent of protection may vary in different countries and no assurance
can be given that any patent will provide commercially significant protection or
will not be challenged, invalidated, or circumvented. Litigation could be
necessary to protect the Company's patent position, which would result in
substantial cost to, and diversion of efforts by, the Company.
 
     Additionally, a number of other patents have issued to other persons, some
to competitors, relating to technology similar to that used by the Company. Both
the Company and certain of its competitors have filed oppositions against each
other as to patents granted by the European Patent Office (the "EPO") and
patents granted by the Japanese Patent Office. The Liposome Company ("TLC") and
the University of California each have patents or patent applications relating
to active drug loading techniques that the owners could claim are used in the
manufacture of products such as DaunoXome. The Company has opposed the grant of
a European and a Japanese patent owned by TLC and is involved in an interference
proceeding with a U.S. patent application owned by the University of California
relating to such loading technology.
 
     Competitors or other patent holders could bring legal actions against the
Company involving the Company's patents, patent applications or rights to use
proprietary technology. If any actions are successful, in addition to any
potential liability for damages, the Company could be enjoined from selling the
affected product, or be required to obtain a license in order to continue to
manufacture or market the product. There can be no assurance that the Company
would prevail in any such action or that any license required under any such
patent would be made available on acceptable terms, if at all. There has been,
and the Company believes that there will continue to be, significant litigation
in the pharmaceutical industry regarding patent and other intellectual property
rights. Any additional litigation could consume a substantial portion of the
Company's resources regardless of the outcome.
 
     On May 17, 1993, the Company filed a complaint in the United States
District Court for the District of Delaware asking the court to declare U.S.
Patent No. 4,880,635 (the "TLC '635 Patent") invalid, unenforceable and not
infringed following allegations by TLC that freeze-dried AmBisome infringes the
TLC '635 Patent. The United States District Court for the District of Delaware
stayed the lawsuit pending the outcome of a reexamination of the TLC '635 Patent
instituted by TLC in the U.S. Patent and Trademark Office ("USPTO"). On July 2,
1996, certain amended claims were allowed by the USPTO. The stay was lifted on
July 11, 1996 and an amended complaint was filed by the Company on July 29,
1996. On August 16, 1996, TLC answered the amended complaint and filed a
counterclaim against the Company for damages and an injunction based on
infringement of the reexamined patent. On January 17, 1997, TLC filed an amended
complaint asserting that the Company's method of lyophilizing AmBisome also
infringes U.S. Patent 5,578,320 (the "TLC '320 Patent") which was granted by the
USPTO to TLC on November 26, 1996. The TLC '635 Patent and the TLC '320 Patent
(collectively, the "TLC Patents") cover essentially the same subject matter. On
February 26, 1997, the Company filed an amended and supplemental complaint
asserting antitrust and business tort actions against TLC. The amended complaint
states that TLC had fraudulently obtained the TLC Patents by withholding
information from, and intentionally misleading, the USPTO and has attempted to
use the TLC Patents in order to injure NeXstar Pharmaceuticals and competition
generally, including attempting to affect the Company's proposed stock offering
in June 1996. Trial for the TLC Patents is currently scheduled for October 1997.
 
                                       26
<PAGE>   28
 
     Upon review of the claims included in the reexamination certificate
relating to the TLC '635 Patent and the claims of the TLC '320 Patent, the
Company has concluded that no valid claim should be found to be infringed by the
Company. In addition, the Company believes that TLC's efforts in crafting claims
for the TLC Patents to avoid prior liposome work reported by others has
presented the Company with additional avenues of defense in any litigation. For
example, because of the amendments made to the TLC '635 Patent during
reexamination, the Company would also have a defense based upon the doctrine of
"intervening rights." This doctrine would provide a clear defense to any damage
claim for any Company activity prior to the actual issuance of the reexamined
patent on July 2, 1996 and would empower the court to permit the Company to
continue its activities to the extent and under such terms as the court deems
equitable for the protection of investments made by the Company prior to
issuance of the reexamination certificate.
 
     In addition, the Company has opposed the grant to TLC of the European and
Japanese patents that are counterparts of the TLC Patents. The European
opposition is expected to be heard in the EPO in the spring or summer of 1997.
At the opposition hearing, the EPO will rule on the validity of all of the
European Union counterparts to the TLC Patents. TLC initiated legal actions
against the Company on October 18, 1996 in the Chancery Division of the Patents
Court in the United Kingdom, on November 4, 1996 in the Regional Court of The
Hague, The Netherlands and on October 18, 1996 in the Regional
Court -- Dusseldorf in Germany for alleged infringement of the respective
national counterparts to the TLC Patents. In connection with each suit, TLC is
seeking an injunction and damages. The Company anticipates that TLC may bring
additional actions against the Company in connection with its other European
counterparts to the TLC Patents and, even if the EPO determines that the
European counterparts to the TLC Patents are invalid, TLC may pursue its
European patent suits pending an appeal of the EPO's decision.
 
     If the U.S. or a European court were to determine that the TLC '635 Patent
or the TLC '320 Patent or one of their European counterparts, as applicable, is
both valid and infringed as a result of the freeze drying of AmBisome, the
Company could be enjoined from using its current method of manufacturing and/or
could be required to pay damages in connection with sales in the applicable
country or countries. In such event, the Company could experience substantial
interruption in its ability to produce AmBisome and/or incur significant royalty
obligations. In addition, the expense of litigation is expected to be
significant regardless of the outcome.
 
     Although the Company has been successful in its recent litigation with TLC
regarding a different freeze drying patent, past success is not a predictor of
success in the future and, in general, adverse results in litigation could have
a material adverse effect on the Company.
 
     Certain statements set forth above with respect to the litigation and
potential litigation with TLC constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such statements
involve known and unknown risks, uncertainties and other factors which may cause
the actual results of the litigation to be materially different from the results
expressed or implied by such forward-looking statements. Such factors include,
among other things: (i) adverse facts adduced in discovery or at trial; (ii)
contrary conclusions of law by the court; (iii) the court refusing to exercise
its equitable powers in a manner favorable to the Company; and (iv) other
uncertainties of litigation.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     There were no matters submitted to a vote by the Company's security holders
during the fourth quarter of the Company's fiscal year ending December 31, 1996.
 
                                       27
<PAGE>   29
 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
     The Company's common stock is traded on the Nasdaq National Market (Symbol:
NXTR). The following table sets forth, for the periods indicated, the high and
low closing sales prices per share of the Company's common stock as reported on
the Nasdaq National Market.
 
<TABLE>
<CAPTION>
                                                              HIGH     LOW
                                                              -----   -----
<S>                                                           <C>     <C>
1995:
  First Quarter.............................................  $ 8 5/8 $ 5 1/2
  Second Quarter............................................    9 1/4   6 1/8
  Third Quarter.............................................   17       8 1/2
  Fourth Quarter............................................   18 5/8  10 5/8
1996:
  First Quarter.............................................  $26 3/4 $15 1/2
  Second Quarter............................................   25 1/2  16 3/4
  Third Quarter.............................................   22 3/4  16 3/8
  Fourth Quarter............................................   21      13 1/16
</TABLE>
 
     As of March 24, 1997, there were approximately 537 stockholders of record
of the Company.
 
DIVIDEND POLICY
 
     The Company has not declared or paid any cash dividends on its common stock
since its inception. The Company does not anticipate paying any cash dividends
on its common stock in the next several years. One of the Company's current loan
agreements does not permit the Company to pay cash dividends. In addition,
certain of the Company's other bank and equipment lease facilities require the
Company to maintain financial ratios and levels of cash and/or stockholders'
equity which may have the effect of limiting the Company's ability to pay
dividends.
 
SALES OF UNREGISTERED SECURITIES
 
     On February 13, 1996, the Company completed a private sale of 1,425,000
shares of its common stock to a group of private investors (the "Private
Investors") for $18.50 per share. The net proceeds to the Company from the sale
were approximately $24.9 million. In connection with the transaction, the
Company filed a "shelf" registration statement on Form S-3 registering for
resale the shares acquired by the Private Investors. Pursuant to its agreement
with the Private Investors, the Company is required to keep the "resale"
registration statement effective for up to three years.
 
     During 1996, two of the Company's warrant holders exercised their warrants
and received unregistered shares of the Company's common stock. On February 21,
1996 and March 31, 1996, respectively, a company, which in the past has provided
equipment leasing to the Company, exercised its warrants for 17,540 and 6,619
shares of the Company's common stock, respectively, for the per share exercise
prices of $6.20 and $11.21, respectively. The warrant exercise for 17,540 shares
was for $108,748 in cash and the 6,619 shares were acquired in a cashless
exercise using the leasing company's rights to acquire additional shares of the
Company's common stock. On June 10, 1996, one of the Company's warrant holders
exercised a warrant for 232,941 shares of the Company's common stock for
$1,125,000 ($4.83 per share).
 
     On August 26, 1996, the Company issued a warrant exercisable for 50,000
shares of its common stock at $15 per share to an educational institution. The
warrant, which had a term of seven years, was issued in consideration for the
institution's transferring to the Company certain potential interests in
patents.
 
                                       28
<PAGE>   30
 
     In selling the shares of common stock to the Private Investors and in
connection with the issuance and exercise of its warrants, the Company relied on
the exemption from registration provided by Section 4(2) of the Securities Act
of 1933, as amended, since the shares of common stock and warrant were
transferred to a small number of sophisticated investors, none of whom was an
individual.
 
ITEM 6. SELECTED FINANCIAL DATA
 
     The following selected consolidated financial data are derived from the
Consolidated Financial Statements of NeXstar Pharmaceuticals, Inc. which have
been audited by Ernst & Young LLP, independent auditors. The selected
consolidated financial data give retroactive effect to the merger of NeXagen,
Inc. and Vestar, Inc. on February 21, 1995, which has been accounted for as a
pooling of interests. The selected consolidated financial data also include the
acquisition of Supragen, Inc., a research-oriented biotechnology company, on
September 8, 1995, which has been accounted for using the purchase method of
accounting. Certain reclassifications, including adjustments to conform
accounting practices, have been made to prior year amounts to agree with the
current year presentation. The data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the Consolidated Financial Statements of the Company and
related notes thereto appearing elsewhere herein.
 
<TABLE>
<CAPTION>
                                                           YEARS ENDED DECEMBER 31,
                                            ------------------------------------------------------
                                              1996        1995        1994       1993       1992
                                            ---------   ---------   --------   --------   --------
                                                   (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                         <C>         <C>         <C>        <C>        <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
  Product revenues........................  $  80,153   $  57,770   $ 43,967   $ 30,518   $ 25,999
  License fee.............................      7,000          --         --         --         --
  Collaborative agreements and
     contracts............................      1,548       2,920      4,054      2,098        591
  Interest income.........................      1,821       1,736      2,409      2,424      2,518
                                            ---------   ---------   --------   --------   --------
Total revenues............................     90,522      62,426     50,430     35,040     29,108
Expenses:
  Cost of goods sold......................     18,320      13,246      8,091      5,024      3,896
  Research and development................     47,760      37,356     31,595     24,574     13,067
  Selling, general and administrative.....     44,939      35,300     22,108     16,279     11,627
  Purchased research and development......         --      11,824         --         --         --
  Retirement agreement expense............         --          --      4,097         --         --
  Interest expense........................      1,558       1,148        587        308         48
                                            ---------   ---------   --------   --------   --------
Total expenses............................    112,577      98,874     66,478     46,185     28,638
                                            ---------   ---------   --------   --------   --------
Income (loss) before provision for income
  taxes...................................    (22,055)    (36,448)   (16,048)   (11,145)       470
Provision for income taxes................        926         183        159        167        392
                                            ---------   ---------   --------   --------   --------
Net income (loss).........................  $ (22,981)  $ (36,631)  $(16,207)  $(11,312)  $     78
                                            =========   =========   ========   ========   ========
Net income (loss) per share...............  $   (0.88)  $   (1.57)  $  (0.71)  $  (0.53)  $   0.00
                                            =========   =========   ========   ========   ========
Shares used in computing net income (loss)
  per share...............................     26,029      23,374     22,825     21,336     21,891
BALANCE SHEET DATA:
Cash, cash equivalents and marketable
  securities..............................  $  41,965   $  26,734   $ 40,284   $ 54,495   $ 72,015
Working capital...........................     48,199      35,029     44,099     62,094     79,373
Total assets..............................    144,500     112,449    126,927    103,912     97,633
Long-term obligations.....................     15,206       9,848     10,500      2,107      1,899
Accumulated deficit.......................   (125,976)   (102,995)   (66,364)   (50,157)   (38,845)
Total stockholders' equity................     87,622      81,164     97,374     91,135     89,841
</TABLE>
 
                                       29
<PAGE>   31
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS
 
OVERVIEW
 
     NeXstar Pharmaceuticals is a leading biopharmaceutical company engaged in
the discovery, development, manufacture and marketing of proprietary
pharmaceutical products to treat life-threatening and other serious diseases.
 
     The Company markets AmBisome, a liposomal formulation of amphotericin B,
for the treatment of life-threatening fungal infections when conventional
treatment fails, and DaunoXome, a liposomal formulation of the anticancer agent
daunorubicin, which is used as a first line therapy for the treatment of
advanced, HIV-associated Kaposi's sarcoma ("KS"). The Company currently relies
on sales of AmBisome in Europe for a substantial majority of its product
revenues and expects sales of AmBisome in Europe to account for a majority of
its revenues in 1997. AmBisome has been approved for sale by the regulatory
authorities in 25 countries for the treatment of fungal infections, including
four countries in which it has been approved as a primary therapy. In November
1996, a New Drug Application was filed with the U.S. Food and Drug
Administration (the "FDA") for the use of AmBisome as a primary treatment for
confirmed and presumptive fungal infections, prophylaxis in liver transplant
patients, empiric therapy in neutropenic patients and visceral leishmaniasis and
as a secondary treatment for fungal infections refractory to amphotericin B
treatment. In April 1996, the Company received approval for DaunoXome as a first
line treatment for KS from the FDA and formally launched the drug in the U.S. on
May 1, 1996. In addition, DaunoXome has been approved for sale as a primary
therapy for KS in Canada and 16 European countries. Revenue growth will be
substantially dependent upon increased penetration of existing markets,
establishing new markets, development of new indications for AmBisome and
DaunoXome and introduction of new products.
 
     In connection with most of its European sales, the Company prices its
products in the currencies of the countries into which they are sold (the
"Payment Currencies"), and revenues in the past have been and in the future
could be adversely affected by currency fluctuations. A significant majority of
the Company's manufacturing costs are in U.S. dollars. Therefore, any fall in
the value of the Payment Currencies relative to the U.S. dollar is likely to
negatively impact gross margins for the Company's products since the Company's
manufacturing costs would stay approximately the same while its revenue in terms
of U.S. dollars would decline. Sales in Germany, the U.K., Italy and Spain
together accounted for 58% of AmBisome revenues for the year ended December 31,
1996. The Company prices its products in each of these four countries in the
local currency. Between January 1, 1997 and March 24, 1997, the value of the
U.S. dollar increased 9%, 6%, 10% and 9%, respectively, against the German Mark,
the British Pound, the Italian Lira and the Spanish Peseta. Absent an increase
in the price of the Company's products throughout Europe or a general decline in
the value of the U.S. dollar versus most leading European currencies, the
continued strength of the U.S. dollar may significantly impact the Company's
revenues as denominated in U.S. dollars.
 
     NeXstar Pharmaceuticals hedges certain of its foreign currency exposures,
with respect to its outstanding trade accounts receivable and accounts payable,
through the use of forward contracts. In the future, the Company may begin
currency hedging in connection with anticipated revenues and expenses and may
use options in addition to forward contracts. Such hedging will be done solely
for the purpose of protecting the Company from foreign currency fluctuations.
NeXstar Pharmaceuticals does not enter into speculative foreign currency
transactions and does not write speculative options. The Company recognizes a
gain or loss for each forward contract for the difference between the contract
rate and the market rate on each balance sheet date which is recorded as a
selling, general and administrative expense. At present, no deferred accounting
is used in connection with the Company's hedging activities. Notwithstanding its
hedging activities (which have not always included fully hedging against
potential gains or losses), the Company has in the past recognized foreign
exchange gains and losses. There can be no assurance that significant gains or
losses will not be incurred in the future.
 
     NeXstar Pharmaceuticals was formed in 1991 as NeXagen, Inc. The Company is
the result of a merger (the "Merger") between NeXagen, Inc. and Vestar, Inc.
("Vestar") on February 21, 1995. In connection with the Merger, NeXagen, Inc.
changed its name to NeXstar Pharmaceuticals, Inc. The Merger was
 
                                       30
<PAGE>   32
 
accounted for as a pooling of interests. Except where otherwise indicated, the
following Management's Discussion and Analysis of Financial Condition and
Results of Operations gives effect to the Merger and the pooling-of-interests
accounting treatment, and thus includes the results of Vestar for all periods
discussed.
 
RESULTS OF OPERATIONS
 
  YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
 
     Product revenues increased 39% to $80.2 million, 31% to $57.8 million and
44% to $44.0 million in 1996, 1995 and 1994, respectively, primarily due to
increased unit sales of AmBisome in existing markets. Sales of DaunoXome, which
was initially approved in the U.S. during the second quarter of 1996, totaled
$3.9 million for 1996.
 
     During 1996, the Company recorded as revenue an initial $7.0 million
licensing fee (less withholding taxes of $700,000) in connection with a
licensing agreement with Sumitomo Pharmaceuticals Co., Ltd. ("Sumitomo")
pursuant to which Sumitomo will develop and market AmBisome in Japan.
 
     Collaborative agreement and contract revenues were $1.5 million, $2.9
million and $4.1 million for 1996, 1995 and 1994, respectively. Collaborative
agreement and contract revenue fluctuations are generally the result of changes
in the number of funded research projects as well as the timing and performance
of contract benchmarks. Certain of the Company's collaborative research
agreements with corporate partners, which provided revenues for the Company
during 1995, expired or were terminated in 1996.
 
     Interest income was $1.8 million, $1.7 million and $2.4 million in 1996,
1995 and 1994, respectively. Interest income generally fluctuates as a result of
the average amount of cash available for investment and prevailing interest
rates.
 
     Cost of goods sold was $18.3 million, or 23% of product revenues, $13.2
million, or 23% of product revenues, and $8.1 million, or 18% of product
revenues, in 1996, 1995 and 1994, respectively. The increase in cost of goods
sold was primarily due to increased sales of AmBisome and DaunoXome. The
increase in cost of goods sold as a percentage of product revenues in 1996 and
1995 compared to 1994 was primarily the result of (i) an increase in sales of
AmBisome at cost to Fujisawa USA, Inc., the Company's U.S. promotion and
development partner, for use in clinical trials and (ii) validation costs and
overhead expenses attributable to the Company's new manufacturing facility in
San Dimas, California. In 1995 and 1994, the Company recorded charges for
certain AmBisome lots produced in prior years which subsequently failed to pass
certain of the Company's stringent internal quality control specifications of
$932,000 and $1.4 million, respectively. Since 1993, NeXstar Pharmaceuticals has
incurred manufacturing scale-up costs for the production of DaunoXome which have
negatively impacted cost of goods sold as a percentage of product revenues.
Additional scale-up costs are expected to be incurred in 1997. If the Company is
successful in increasing its product revenues, the Company expects to gain
manufacturing efficiencies from increased production thereby decreasing its cost
of goods sold per unit of product. Cost of goods sold consists primarily of raw
materials, allocations of overhead, labor and equipment costs and charges
associated with lyophilization services provided by outside vendors.
 
     Research and development expenses increased 28% to $47.8 million, 18% to
$37.4 million and 29% to $31.6 million for 1996, 1995 and 1994, respectively.
The increase in research and development expenses is primarily attributable to
increased product development and research activities (including an increase in
personnel as a result of the acquisition of Supragen, Inc., a research-oriented
biotechnology company, in September 1995). In addition, in 1996 the Company had
a charge to research and development of $1.2 million in connection with a write
down of an investment that the Company holds in a biotechnology company, an
expense of $1.0 million in connection with the Company's decentralization of its
medical/regulatory operations in Europe and an expense of $1.2 million in
connection with the acquisition of additional laboratory facilities. In 1996,
$1.2 million of research expenses was sponsored by third parties, as compared to
$2.1 million and $2.6 million in 1995 and 1994, respectively. Research and
development expenses consist primarily of salaries and benefits for scientific,
regulatory, quality control and pilot manufacturing personnel, consultants,
supplies, occupancy costs and depreciation of laboratory equipment and
facilities. The Company
 
                                       31
<PAGE>   33
 
expects research and development expenses, including those for clinical trials,
to continue to increase as personnel and research and development facilities are
expanded.
 
     Selling, general and administrative expenses increased 27% to $44.9
million, 60% to $35.3 million and 36% to $22.1 million, or 56%, 61% and 50% of
product revenues in 1996, 1995 and 1994, respectively. The increase for 1996
primarily relates to (i) the expansion of the Company's marketing efforts, in
particular, in connection with the launch of DaunoXome and the continued
expansion of the Company's international operations; (ii) increased litigation
costs in connection with two U.S. patents and their European and Japanese
counterparts held by The Liposome Company; (iii) an expense of $741,000 in
connection with the termination of distribution agreements in Australia and
France; and (iv) an increase of $520,000 in the Company's allowance for doubtful
accounts due to an increase in accounts receivable resulting primarily from
increased sales of the Company's products. The increase in 1995 was primarily
due to (a) merger-related costs of $2.7 million; (b) costs due to expansion of
the Company's sales and marketing distribution network of $4.2 million,
including establishment of a sales force in the U.S. in anticipation of final
marketing approval for DaunoXome; (c) a $2.4 million note receivable allowance
relating to a loan previously made to Phytogen Life Sciences Inc., a Canadian
company in which the Company owns a minority interest; and (d) $584,000 related
to the cost of a registration statement filed in September 1995 for the sale of
the Company's common stock, which was withdrawn in October 1995. The 1995
increase was also due to other expenses incurred in connection with increased
sales of AmBisome and to an increase in legal expenses, including expenses
related to the Company's European operations and other corporate matters. In
addition, the Company recognized foreign exchange gains (losses) of
approximately ($362,000), $371,000 and $272,000 in 1996, 1995 and 1994,
respectively, principally due to the revaluation of the Company's accounts
receivable denominated in foreign currency.
 
     Interest expense was $1.6 million, $1.1 million and $587,000 in 1996, 1995
and 1994, respectively. The increase for 1996 was primarily due to interest
payable under the term loan agreement for $10 million entered into by the
Company in June 1996, other short-term borrowings and additional borrowings in
connection with several equipment lease arrangements. The increase for 1995 was
due primarily to additional borrowings in connection with several equipment
lease arrangements.
 
     Results for 1994 were impacted by a charge to earnings of $4.1 million, as
a result of an agreement with Dr. Roger Crossley who retired on May 25, 1994 as
the President and Chief Executive Officer of Vestar. Vestar and Dr. Crossley
entered into an agreement effective May 25, 1994 in connection with his
retirement (the "Agreement"). Under the terms of the Agreement, the Company
during 1994 and 1995 paid Dr. Crossley (i) approximately $2.1 million in
connection with his sale of certain shares of the Company's common stock, (ii)
approximately $158,000 for health insurance and (iii) a salary through June 1995
at an annual rate of $300,000. The $2.1 million payment in 1995 related to the
Company's guarantee to him that in the event that prior to May 25, 1997 he sold
certain shares of the Company's common stock which he owned at a price less than
$15.77 per share, the Company would pay him the difference between the sales
price and $15.77 per share. During June and July, 1995, Dr. Crossley sold all
but 44,000 of the shares covered by the Agreement. In March 1996, he sold the
remaining 44,000 shares covered by the Agreement at no cost to the Company.
 
     The Company reported a net loss for 1996 of $23.0 million, or $0.88 per
share, compared to a net loss of $36.6 million, or $1.57 per share, and a net
loss of $16.2 million, or $0.71 per share, for 1995 and 1994, respectively. The
net loss for 1995 included a one-time, non-cash charge of $11.8 million for
purchased research and development in connection with the Supragen, Inc.
acquisition.
 
  PATENT MATTERS
 
     The Company is currently involved in litigation matters and interference
proceedings involving patent and infringement claims with respect to the
Company's products. To date, the outcomes of these litigation matters and
interference proceedings have been favorable to the Company although they have
resulted in significant litigation expenses. The Company believes that there
will continue to be significant litigation in the pharmaceutical industry
regarding patents and other intellectual property rights, but cannot predict the
 
                                       32
<PAGE>   34
 
likelihood of it being involved in any additional disputes. Any additional
litigation could consume a substantial portion of the Company's resources
regardless of the outcome of such litigation.
 
     On May 17, 1993, the Company filed a complaint in the United States
District Court for the District of Delaware asking the court to declare U.S.
Patent No. 4,880,635 (the "TLC '635 Patent") invalid, unenforceable and not
infringed following allegations by The Liposome Company ("TLC") that
freeze-dried AmBisome infringes the TLC '635 Patent. The United States District
Court for the District of Delaware stayed the lawsuit pending the outcome of a
reexamination of the TLC '635 Patent instituted by TLC in the U.S. Patent and
Trademark Office ("USPTO"). On July 2, 1996, certain amended claims were allowed
by the USPTO. The stay was lifted on July 11, 1996 and an amended complaint was
filed by the Company on July 29, 1996. On August 16, 1996, TLC answered the
amended complaint and filed a counterclaim against the Company for damages and
an injunction based on infringement of the reexamined patent. On January 17,
1997, TLC filed an amended complaint asserting that the Company's method of
lyophilizing AmBisome also infringes U.S. Patent 5,578,320 (the "TLC '320
Patent") which was granted by the USPTO to TLC on November 26, 1996. The TLC
'635 Patent and the TLC '320 Patent (collectively, the "TLC Patents") cover
essentially the same subject matter. On February 26, 1997, the Company filed an
amended and supplemental complaint asserting antitrust and business tort actions
against TLC. The amended complaint states that TLC had fraudulently obtained the
TLC Patents by withholding information from, and intentionally misleading, the
USPTO and has attempted to use the TLC Patents in order to injure NeXstar
Pharmaceuticals and competition generally, including attempting to affect the
Company's proposed stock offering in June 1996. Trial for the TLC Patents is
currently scheduled for October 1997.
 
     In addition, the Company has opposed the grant to TLC of the European and
Japanese patents that are counterparts of the TLC Patents. The European
opposition is expected to be heard in the EPO in the spring or summer of 1997.
At the opposition hearing, the EPO will rule on the validity of all of the
European Union counterparts to the TLC Patents. TLC initiated legal actions
against the Company on October 18, 1996 in the Chancery Division of the Patents
Court in the United Kingdom, on November 4, 1996 in the Regional Court of The
Hague, The Netherlands and on October 18, 1996 in the Regional
Court -- Dusseldorf in Germany for alleged infringement of the respective
national counterparts to the TLC Patents. In connection with each suit, TLC is
seeking an injunction and damages. The Company anticipates that TLC may bring
additional actions against the Company in connection with its other European
counterparts to the TLC Patents and, even if the EPO determines that the
European counterparts to the TLC Patents are invalid, TLC may pursue its
European patent suits pending an appeal of the EPO's decision.
 
     If the U.S. or a European court were to determine that the TLC '635 Patent
or the TLC '320 Patent or one of their European counterparts, as applicable, is
both valid and infringed as a result of the freeze drying of AmBisome, the
Company could be enjoined from using its current method of manufacturing and/or
could be required to pay damages in connection with sales in the applicable
country or countries. In such event, the Company could experience substantial
interruption in its ability to produce AmBisome and/or incur significant royalty
obligations. In addition, the expense of litigation is expected to be
significant regardless of the outcome. The Company does not believe that the TLC
Patents present a material risk to the Company. See "Legal Proceedings" in Part
I of this Report and "Risk Factors" in Part II of this Report.
 
                                       33
<PAGE>   35
 
LIQUIDITY AND CAPITAL RESOURCES
 
     The Company's cash, cash equivalents and marketable securities position at
December 31, 1996 was $42.0 million, compared to $26.7 million on December 31,
1995. The $15.2 million increase in cash, cash equivalents and marketable
securities position was primarily the result of the following:
 
<TABLE>
<S>                                                         <C>            <C>
Net loss..................................................  $(22,981,000)
Depreciation and amortization.............................    11,300,000
Write down of investment in life science enterprise.......     1,241,000
Other non-cash items......................................       391,000
Working capital...........................................   (10,282,000)
                                                            ------------
          Net cash used in operating activities...........                 $(20,331,000)
Investment in equipment and leasehold improvements........                  (11,198,000)
Proceeds from short-term borrowings, net..................                    9,436,000
Proceeds from sale-leaseback transactions.................                    2,978,000
Payments on capital lease obligations.....................                   (4,258,000)
Proceeds from issuance of long-term debt..................                   11,527,000
Repayments on long-term debt..............................                   (1,667,000)
Proceeds from sale of common stock, net...................                   29,364,000
Other.....................................................                     (620,000)
                                                                           ------------
          Total increase in cash, cash equivalents and
            marketable securities.........................                 $ 15,231,000
                                                                           ============
</TABLE>
 
     The Company invests its cash in interest-bearing investment grade
securities.
 
     The Company's accounts receivable balance at December 31, 1996 was $30.0
million as compared to $18.3 million on December 31, 1995. The growth in
receivables was primarily due to increased sales of AmBisome and proportionately
increased sales of the Company's products in countries in which payments tend to
be slower than the average payment periods historically experienced by the
Company. The Company considers the credit risk of its customers taken as a whole
to be low. However, payment practices between countries vary significantly and
increased sales in countries in which payments tend to be slower, often as a
result of the slowness by governmental entities in reimbursing the Company's
customers, have in the past increased, and in the future may increase, the
average length that accounts receivable are outstanding and may increase the
financial risk of certain of the Company's customers. During 1996, the Company
was granted a security interest in accounts receivable owed to one of the
Company's distributors by hospitals in the country in which such distributor
operates. The Company continually seeks improvements in its collection process
to maximize its cash flow from product sales in a timely manner. As a result of
the growth of accounts receivable, the Company increased its allowance for
doubtful accounts by $520,000 during 1996.
 
     As of December 31, 1996, the Company's inventory value was $15.6 million
compared to $9.5 million as of December 31, 1995 which represents a 65% increase
for the period ended December 31, 1996. The increase resulted primarily from an
overall increase in inventory to meet product demand. If the Company is
successful in increasing its product revenues, the Company expects to gain
manufacturing efficiencies from increased production thereby decreasing cost of
goods sold per unit of product.
 
     For the year ended December 31, 1996, the Company had proceeds from sales
and leaseback transactions of $3.0 million related to the purchase of capital
equipment. As of December 31, 1996, $601,000 was available under equipment lease
agreements relating to the lease of manufacturing equipment, general laboratory
and scientific equipment, office equipment, furniture and fixtures.
 
     At December 31, 1996, the Company had borrowings of $10 million under a $10
million unsecured line of credit. The line of credit was terminated in March
1997. The line of credit was entered into in November 1996 and replaced a prior
credit facility with the same bank that was for borrowings of up to $7 million.
The amount, which the Company was permitted to borrow under the prior credit
facility, was raised from $5 million to $7 million in September 1996.
 
                                       34
<PAGE>   36
 
     In June 1996, the Company entered into a term loan agreement for $10
million (the "Loan Agreement"). The loan is being repaid in 48 monthly
installments with the first installment having been paid in July 1996. As of
December 31, 1996, the Company had borrowings of $8.75 million under the Loan
Agreement. The Loan Agreement requires the Company to meet certain financial
covenants, including maintaining net cash, cash equivalents and/or investment
grade securities equal to the outstanding principal loan balance plus $10
million, of which an amount of cash, cash equivalents and/or investment grade
securities equal to the outstanding principal loan balance plus three months'
interest thereon must be maintained in an unrestricted account.
 
     In May 1996, the Company's Spanish subsidiary entered into an agreement to
borrow up to 500 million Spanish Pesetas (approximately $3.5 million) with such
borrowing being secured by the subsidiary's accounts receivable in Spain. In
February 1997, the agreement was amended to increase the amount that the
subsidiary may borrow up to 750 million Spanish Pesetas (approximately $5.2
million). In connection with the agreement, the Company is maintaining $2.0
million in an unrestricted account. As of December 31, 1996, the subsidiary had
borrowings of 338 million Pesetas (approximately $2.6 million on December 31,
1996) under the agreement. The Company's Spanish subsidiary is required to repay
the borrowings under the agreement in May 1997.
 
     On February 13, 1996, the Company completed a private sale of 1,425,000
shares of its common stock to a group of private investors (the "Private
Investors"). The net proceeds to the Company from the sale were approximately
$24.9 million. In connection with the transaction, the Company filed a "shelf"
registration statement on Form S-3 registering for resale the shares acquired by
the Private Investors. Pursuant to its agreement with the Private Investors, the
Company is required to keep the "resale" registration statement effective for up
to three years. In addition to the Private Investors, a holder of 297,619 shares
of the Company's common stock and two holders of warrants to acquire 250,481
shares of the Company's common stock exercised registration rights granted to
them by the Company and had their shares of common stock, or the shares of
common stock which relate to their warrants, included in the registration
statement.
 
     During May 1996, the Company filed a registration statement with the
Securities and Exchange Commission for the issuance of 2.5 million shares of the
Company's common stock. In June 1996, the Company withdrew its plan to issue
such shares.
 
     In June 1996, one of the Company's warrant holders exercised a warrant for
232,941 shares of the Company's common stock for $1,125,000 ($4.83 per share).
 
     The Company in the past several years has had substantial costs in
connection with building and equipping its facilities, including spending
approximately $22 million for the development of its new manufacturing facility
in San Dimas, California and obtaining approximately $12 million of equipment
for use therein. The Company anticipates significant additional cash outlays
during 1997 in connection with developing and equipping additional laboratory
space in Boulder, Colorado.
 
     The Company believes that it is advisable to augment its existing cash in
order to fund all of the activities, including conducting clinical trials, which
the Company believes are necessary to continue its growth. Therefore, the
Company anticipates raising cash whenever market conditions are favorable and is
currently exploring alternatives for obtaining funds. Such capital may be raised
through additional public or private financing, as well as collaborative
relationships, borrowings and other available sources. In addition, in the
course of its business, the Company evaluates products and technologies held by
third parties which, if acquired, could result in the development of product
candidates by the Company or which complement technologies currently being
developed by the Company. The Company expects from time to time to be involved
in discussions with other entities concerning the Company's potential
acquisition of rights to additional pharmaceutical products. In the event that
the Company acquires such products or third-party technologies, the Company may
find it necessary or advisable to obtain additional funding.
 
     The Company's future capital requirements will be substantial and will
depend on, and could increase as a result of, many factors, including progress
of the Company's research, drug discovery and development programs; whether the
Company acquires interests in products currently held by third parties; the
results and
 
                                       35
<PAGE>   37
 
costs of preclinical and clinical testing of the Company's products, if
developed; the time and costs involved in obtaining regulatory approvals; the
costs involved in filing, prosecuting and enforcing patent claims; competing
technological and market developments; payments received under collaborative
agreements; changes in collaborative research relationships; the costs
associated with potential commercialization of its products, if any, including
the development of additional manufacturing, marketing and sales capabilities;
the cost and availability of third-party financing for capital expenditures; and
administrative and legal expenses. In particular, the Company expects to have
significant cash requirements in the near future as a result of, but not limited
to: (i) increased clinical studies which are required in order to expand the
indications and markets for AmBisome and DaunoXome; (ii) the cost of obtaining
approval for pharmaceuticals which have been and are being developed by the
Company, including MiKasome (the Company's liposomal formulation of amikacin, a
potent aminoglycoside antibiotic); (iii) the cost of equipping new facilities;
and (iv) costs in connection with the Company's litigation involving the TLC
Patents and their European and Japanese counterparts. There can be no assurance
that additional or sufficient financing will be available, or, if available,
that it will be available on acceptable terms. If additional funds are raised by
issuing equity securities of the Company, dilution to then existing stockholders
may result. If adequate funds are not available, the Company may be required to
significantly curtail one or more of its research and development programs or
commercialization efforts or obtain funds through arrangements with
collaborative partners or others on less favorable terms than might otherwise be
available.
 
RECENT EVENTS
 
     The Company has entered into an agreement with its European toll
manufacturer to acquire for one million Irish Punts (approximately $1.6 million)
the Dublin, Ireland facilities at which the toll manufacturer is providing
quality control testing, final labeling and packaging for the Company's products
in Europe. The Company anticipates acquiring the facilities in the third quarter
of 1997.
 
     In February 1997, Schering A.G. agreed to increase its annual funding to
the Company to $2.4 million from $1.0 million in connection with a collaborative
research agreement first entered into in 1993.
 
     In March 1997, the Company substantially restructured its bank financing by
(a) terminating an unsecured line of credit pursuant to which it had a right to
borrow up to $10 million, (b) entering into a credit agreement pursuant to which
the Company and certain of its subsidiaries may borrow up to $15 million, with
the borrowings being collateralized by certain of the non-U.S. accounts
receivable of the Company and the subsidiaries and (c) entering into a revolving
line of credit (the "Credit Line") pursuant to which the Company may borrow up
to $15 million. An affiliate of Warburg, Pincus Investors, L.P. ("WPI"), a
beneficial owner of more than 5% of the Company's common stock, is a guarantor
of the Credit Line in return for WPI's receipt of a warrant to acquire 125,000
shares of the Company's common stock at a purchase price of $12.50 per share.
 
                                       36
<PAGE>   38
 
                                  RISK FACTORS
 
     The following risk factors should be read in conjunction with information
appearing elsewhere in this Report. Special Note: Certain statements set forth
below constitute "forward-looking statements" that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the "forward-looking statements." See "Special Note
Regarding Forward-Looking Statements" on page 45 for additional factors relating
to such statements.
 
DEPENDENCE ON PRINCIPAL PRODUCT
 
     The Company has relied on sales of AmBisome for most of its product
revenues with a substantial majority of those sales occurring in European
countries. A reduction in demand for AmBisome could have a material adverse
effect on the Company's results of operations. Additional regulatory approvals
will be needed in order to market AmBisome in the United States and to expand
the indications for which it may be marketed in the countries where it is
already approved. There can be no assurance as to whether or when such approvals
will be obtained.
 
     The Company has only one other product, DaunoXome, that has received
regulatory approval and such approvals were generally obtained during 1996.
Sales to date for DaunoXome have been limited and there can be no assurance as
to the volume of sales that will be achieved. The Company will seek to expand
the market for DaunoXome by obtaining approvals for indications in addition to
Kaposi's sarcoma. However, there can be no assurance that the drug will be
effective for the treatment of other diseases or that such additional approvals
will be obtained.
 
     The Company has one other product that has reached clinical development,
MiKasome, for which Phase I clinical trials are currently being initiated in the
United States. While the results of animal and early human tests have been
encouraging, the results of animal studies may not be indicative of efficacy in
humans, and further human testing of MiKasome may not achieve the desired
result, may reveal unduly harmful side effects or may be less efficacious than
other drug entities or delivery systems for the desired indication. No assurance
can be given that MiKasome will be more effective than existing drugs or other
technologies that may be developed in the future or that MiKasome will reach
commercialization or be accepted by the medical community.
 
     The Company's other potential products that are based on liposomal or other
technologies are in development, and there can be no assurance that such
potential products will be successfully developed, achieve therapeutic efficacy,
be approved by regulatory authorities or be successfully marketed. Nor can there
be any assurance that the Company will be able to develop any additional
products, that the approval of its current products will not be revoked or that
named-patient purchases will be permitted to continue in countries that have not
granted approval for AmBisome or DaunoXome.
 
RISK OF CURRENCY FLUCTUATIONS
 
     Substantially all of the sales of AmBisome occurred in Europe with 58% of
the Company's AmBisome sales for the year ending December 31, 1996 occurring in
the United Kingdom, Germany, Italy and Spain. In most significant European
markets, the Company prices AmBisome and DaunoXome in the currency of the
country in which such products are sold. Accordingly, the prices of such
products in dollars will vary as the value of the dollar fluctuates against such
local currencies. Increases in the value of the dollar against such currencies
as have occurred during the first quarter of 1997 may reduce the dollar return
to the Company on the sale of its products. Furthermore, there can be no
assurance that significant additional fluctuations in foreign currency values
will not occur that will create substantial differences in the relative prices
of the Company's products in different countries. In addition, although the
Company implements hedging techniques with respect to its foreign currency
accounts receivable and accounts payable, these techniques have not completely
eliminated the effects of foreign currency fluctuations in the past, and there
can be no assurance that such techniques will be successful in the future. The
Company currently hedges certain of its foreign currency exposures, with respect
to its outstanding trade accounts receivable and accounts payable, through the
use of forward contracts. In the future, the Company may begin currency hedging
in connection
 
                                       37
<PAGE>   39
 
with anticipated revenues and expenses and may use options in addition to
forward contracts. Such hedging will be done solely for the purpose of
protecting the Company from foreign currency fluctuations and not for the
purpose of speculating in foreign currency.
 
TECHNOLOGICAL UNCERTAINTY
 
     A significant portion of the Company's research is focused upon the
discovery and development of novel pharmaceuticals based upon oligonucleotides.
There can be no assurance that any of the Company's approaches to drug discovery
will result in commercially successful drugs. Although the Company has
demonstrated an ability to efficiently identify oligonucleotides that bind with
high affinity to and inhibit selected molecular targets, the Company has not
successfully demonstrated the efficacy of such oligonucleotides as human
therapeutic agents, nor have any human clinical trials been initiated with
products based upon such oligonucleotides. Additionally, the Company has yet to
demonstrate the efficacy or therapeutic usefulness of any compounds derived from
its SELEX process or Parallel SELEX process. There remain numerous challenges
which the Company must address to successfully develop commercial products from
the lead compounds which it identifies through its SELEX process or Parallel
SELEX process. These challenges include developing and implementing appropriate
clinical protocols and developing manufacturing methods which are efficient,
cost-effective and capable of meeting stringent regulatory standards. In
addition, although many targets with potential therapeutic significance have
already been identified, there can be no assurance that the targets selected by
the Company will ultimately prove to have the requisite medical significance
such that a compound binding tightly to such target will prove to be a useful
pharmaceutical product. There can be no assurance that the Company will
successfully address any of these or other challenges that may arise in the
course of its research and development.
 
     In addition to developing products based on its liposome, SELEX process and
Parallel SELEX process technologies the Company has a longer-term strategy of
providing pharmaceuticals to treat patients with cancer, infectious diseases and
immunological and hematological disorders by employing other technologies.
However, there can be no assurance that the Company will be successful in
developing marketable products using such technologies or will have the
scientific or financial resources necessary to develop all of the potential drug
candidates or technologies which its scientists may discover or the Company may
acquire.
 
UNCERTAINTY OF HEALTH CARE REIMBURSEMENT
 
     The Company's ability to commercialize its current and any future products
depends in part on the extent to which reimbursement for the cost of such
products and related treatments are available from government health agencies,
private health insurers and other third-party payors. Third-party payors are
increasingly challenging the price and cost-effectiveness of medical products.
Significant uncertainty exists as to the reimbursement status of newly-approved
health care products, and there can be no assurance that adequate third-party
coverage will be available for the Company to obtain satisfactory price levels
for its products. Government and other third-party payors are increasingly
attempting to contain health care costs by a variety of means, including
limiting both the degree of coverage and the level of reimbursement for new
therapeutic products or new indications for therapeutic products. If adequate
coverage and reimbursement levels are not provided by government and third-party
payors for use of the Company's existing and potential products, the market
acceptance of these products would be adversely affected.
 
RELIANCE ON PROPRIETARY RIGHTS
 
     The Company's success depends in part on its ability to continue to obtain
patent protection in the United States and other countries for its technologies
and the products, if any, resulting from the application of such technologies.
The patent positions of pharmaceutical and biotechnology firms, including the
Company, are uncertain and involve complex legal and factual questions. The
Company intends to continue to file applications as appropriate for patents
covering its technologies and any products resulting from the application of
such technologies. No assurance can be given that patents will issue from any of
the Company's applications or that patents will be issued in connection with
technology licensed by the Company or, if patents do issue, that the claims
allowed will be sufficiently broad to protect the Company's proprietary rights,
 
                                       38
<PAGE>   40
 
that such patents will not be challenged, invalidated or circumvented or that
the rights granted pursuant to such patents will provide competitive advantages
to the Company.
 
     The commercial success of the Company will also depend in part on the
Company not infringing patents or proprietary rights of third parties nor
breaching any technology licenses that relate to the Company's technologies and
products. A number of pharmaceutical and biotechnology companies and research
and academic institutions have developed technologies, filed patent applications
or received patents on various technologies that may be related to the Company's
business. In addition, such entities may file applications for or be issued
future patents with respect to technology potentially necessary or useful to the
Company. The Company is aware of third parties that have filed patent
applications with claims allegedly covering technologies similar to the basic
aspects of the Company's SELEX process. Some of these technologies, applications
or patents may conflict with the Company's technologies and existing or future
patents, if any, or patent applications. Such conflict could limit the scope of
the patents that NeXstar Pharmaceuticals has obtained or may be able to obtain
or result in the Company's patent applications failing to issue as patents. In
addition, if patents that cover the Company's activities are issued to other
companies, there can be no assurance that NeXstar Pharmaceuticals would be able
to obtain licenses to these patents at a reasonable cost, or at all, or be able
to develop or obtain alternative technology. In addition, as more patents are
issued to third parties, the risk increases that the Company's products may give
rise to claims that they infringe the patents of others.
 
LITIGATION RISKS RELATED TO PROPRIETARY RIGHTS
 
     See "Business -- Patents, Trade Secrets and Licenses" and "Legal
Proceedings" in Part I of this Report.
 
MANUFACTURING RISKS
 
     The Company is manufacturing AmBisome in commercial quantities in its 650
Facility in San Dimas, California and is in the process of completing the
validation of the 502 Facility in San Dimas, California, in part, to increase
its production capacity for AmBisome and DaunoXome. However, the manufacture of
AmBisome and DaunoXome in the 502 Facility has not yet been approved by the
Medicines Control Agency of the United Kingdom (the "MCA") or the U.S. Food and
Drug Administration (the "FDA") and the Company has limited experience in
operating this facility. While the Company currently has internal capacity to
perform lyophilization (product freeze-drying) in smaller clinical batches, it
relies on third parties to lyophilize larger commercial batches. There can be no
assurance that problems with such lyophilization vendors will not occur and have
an adverse effect on the Company's results of operations or that the product
manufacturing operations in the 502 Facility will be approved by the MCA and FDA
and provide the Company with its own lyophilization capability.
 
     The Company in the past has manufactured DaunoXome in quantities sufficient
to support clinical trials and has increased batch sizes in connection with
commercial sales. The Company currently has regulatory approval from the MCA to
manufacture both AmBisome and DaunoXome for commercial distribution at the 650
Facility. The Company has obtained FDA approval to manufacture DaunoXome for
commercial distribution in the 650 Facility and has sought MCA, FDA and state
approval to manufacture AmBisome and DaunoXome at the 502 Facility and FDA
approval to manufacture AmBisome at the 650 Facility. The local FDA district
office has indicated that it will recommend approval of the application to
permit the use of the 650 Facility for the manufacture of AmBisome. In addition,
the MCA has determined that the 502 Facility is in general compliance with the
principles and guidelines of good manufacturing practice and has indicated that
it will support the licensing of AmBisome and DaunoXome in the facility. The
Company has limited experience in the larger-scale manufacture of DaunoXome and
there can be no assurance that the Company will be successful in the
larger-scale manufacture of DaunoXome or that the regulatory approvals which the
Company is currently seeking in connection with its manufacturing facilities
will be granted.
 
     Additionally, to import its products into the European Union (the "EU"),
the Company must receive quality control release of its products in the EU. The
Company currently obtains quality control release of its products through a toll
manufacturer which it uses in Ireland pursuant to an agreement which terminates
on
 
                                       39
<PAGE>   41
 
June 30, 1997. NeXstar Pharmaceuticals has entered into an agreement with its
toll manufacturer to acquire the manufacturer's current toll manufacturing
facility in Dublin, Ireland for one million Irish Punts (approximately $1.6
million). The Company currently anticipates acquiring the Dublin facility in the
third quarter of 1997 and expects its current toll manufacturer to continue
providing services until then. Although no assurance can be given, the Company
anticipates that it will be able to timely obtain all of the validations which
it may need to perform its own quality control release after its acquisition of
the Dublin facility. In the event that the Company is unable to complete the
acquisition of the Dublin facility or is delayed in receiving all necessary
validations for such facility, the Company will be required to obtain quality
control release in the EU through other means. While the Company believes that
it will be able to continue to obtain quality control release for its products
in the EU through other means, no assurances can be given.
 
     The manufacture of AmBisome and DaunoXome involves a number of technical
steps and requires meeting stringent quality control specifications imposed by
government regulatory bodies and by the Company itself. Additionally, such
products can only be manufactured in facilities that comply with applicable
regulatory standards. Because of these factors, the Company may not be able to
quickly and efficiently replace its manufacturing capacity in the event that it
is unable to manufacture its products at one or more of its facilities. In the
event of a natural disaster (including an earthquake), equipment failure, strike
or other difficulty, the Company may be unable to manufacture its products in a
manner necessary to fulfill the demand for the products. If the Company does not
receive approval to manufacture its products in the 502 Facility, it could
become unable to meet its manufacturing requirements, which could have a
material adverse effect on the Company's business and results of operations.
 
     The Company depends on single suppliers for high quality amphotericin B,
daunorubicin HCl and high quality cholesterol, each of which is used in the
Company's manufacture of its liposome products. Additional suppliers of these
components are presently under evaluation. If any of these materials becomes
unavailable from its respective supplier, the Company would be unable to
manufacture at least some of its liposome products until alternative sources of
supply are obtained and the substitution of such replacement supplies has been
granted by the appropriate regulatory authorities. The Company believes that
alternative supplies of such materials are or will become available at
reasonable prices. However, no assurance as to the availability of such supplies
can be given.
 
     While the Company has experience in manufacturing drug products based on
liposome technologies, it lacks experience in the manufacture of other
pharmaceuticals, including oligonucleotide-based products. The Company has
leased 5,260 square feet and 9,800 square feet of space for use as a bulk
pharmaceutical manufacturing facility and as a development lab, respectively, in
connection with compounds derived using the SELEX process. The manufacturing
facility has not been validated for the production of any product and there can
be no assurance that it will ultimately obtain "current Good Manufacturing
Practices" status. The Company has not yet determined which, if any, drug
substances it will attempt to develop or produce at the facilities, and there is
no assurance that any drug substance selected for development and/or production
at the facilities will be suitable for production on a larger scale. To the
extent that the Company's current facilities are unsuitable for the manufacture
on an adequate scale of new drug substances developed by the Company, the
Company will need to develop additional facilities or contract with third
parties for the manufacture of drug substances, if any, that it may develop for
its own account or in connection with collaborative arrangements in which it has
retained manufacturing rights. If the Company is unable to develop needed
manufacturing facilities or to obtain or retain third party manufacturing on
acceptable terms, the Company's ability to conduct preclinical and clinical
testing will be adversely affected and it will be unable to obtain regulatory
approval for or supply commercial quantities of products it may successfully
develop. There can be no assurance that the Company will be successful in the
further development of its manufacturing capabilities for its potential
products.
 
MARKETING RISKS
 
     The Company has formed a network of subsidiaries in Europe to promote and
sell AmBisome and DaunoXome. The Company has also entered into a number of
agreements with distributors for the promotion, sale and/or distribution of
AmBisome and DaunoXome. To date, the Company has not relied on larger
 
                                       40
<PAGE>   42
 
corporate partners in its primary markets to perform these functions. The
Company competes with many other companies that currently have extensive and
well-funded marketing and sales operations. There can be no assurance that
either the Company's marketing or sales efforts will compete successfully
against other companies. The Company has assembled a marketing group for the
sale of the Company's products in the United States, where DaunoXome was
approved in mid-1996, and in other countries worldwide. The Company has had
limited experience in the marketing of pharmaceuticals in the United States and
there can be no assurance that the Company's marketing and sales efforts in the
United States will be successful.
 
COMPETITION
 
     See "Business -- Competition" in Part I of this Report.
 
EUROPEAN PRICING CONSTRAINTS
 
     As a result of deriving most of its revenues from European countries, the
Company is subject to the risk of parallel imports, governmental regulation of
prices and potential price competition.
 
     Under European Union laws, the Company is limited in its ability to
restrict the distributors of its products and third parties from selling the
Company's products in other countries when customers from such other countries
offer to buy the product from such distributors or third parties. To the extent
that the Company's product prices vary among countries, the Company is
susceptible to parallel importing between the countries. To date, the Company
does not believe that its revenues have been significantly reduced by parallel
import activities among European countries.
 
     Differing product prices among countries occur in part because many foreign
countries require regulatory approval of prices. In particular, certain European
countries will condition their approval of a product on the agreement of the
seller not to sell that product for more than a certain price in the country.
There can be no assurance that any regulatory action reducing the price of
AmBisome or DaunoXome in any one European country will not have the practical
effect of requiring the Company to correspondingly reduce its prices in other
European countries as a result of government mandated price reductions or price
pressures resulting from the potential of parallel importing. If the Company is
successful in developing additional products or obtaining approval for
additional indications for its current drugs, the Company may also face
increased price competition from potential competitors, including European-based
companies.
 
HISTORY OF LOSSES; FUTURE CAPITAL NEEDS ANTICIPATED
 
     The Company has incurred substantial losses during its history. At December
31, 1996, the Company's accumulated deficit was $126.0 million. There can be no
assurance that the Company will ever achieve or maintain profitability.
 
     The Company believes that it is advisable to augment its existing cash in
order to fund all of the activities, including conducting clinical trials, which
the Company believes are necessary to continue its growth. Therefore, the
Company anticipates raising cash whenever market conditions are favorable and is
currently exploring alternatives for obtaining funds. Such capital may be raised
through additional public or private financing, as well as collaborative
relationships, borrowings and other available sources. In addition, in the
course of its business, the Company evaluates products and technologies held by
third parties which, if acquired, could result in the development of product
candidates by the Company or which complement technologies currently being
developed by the Company. The Company expects from time to time to be involved
in discussions with other entities concerning the Company's potential
acquisition of rights to additional pharmaceutical products. In the event that
the Company acquires such products or third-party technologies, the Company may
find it necessary or advisable to obtain additional funding.
 
     The Company's future capital requirements will be substantial and will
depend on, and could increase as a result of, many factors, including progress
of the Company's research, drug discovery and development programs; whether the
Company acquires interests in products currently held by third parties; the
results and costs of preclinical and clinical testing of the Company's products,
if developed; the time and costs involved in
 
                                       41
<PAGE>   43
 
obtaining regulatory approvals; the costs involved in filing, prosecuting and
enforcing patent claims; competing technological and market developments;
payments received under collaborative agreements; changes in collaborative
research relationships; the costs associated with potential commercialization of
its products, if any, including the development of additional manufacturing,
marketing and sales capabilities; the cost and availability of third-party
financing for capital expenditures; and administrative and legal expenses. In
particular, the Company expects to have significant cash requirements in the
near future as a result of, but not limited to: (i) increased clinical studies
which are required in order to expand the indications and markets for AmBisome
and DaunoXome; (ii) the cost of obtaining approval for pharmaceuticals which
have been and are being developed by the Company, including MiKasome (the
Company's liposomal formulation of amikacin, a potent aminoglycoside
antibiotic); (iii) the cost of equipping new facilities; and (iv) costs in
connection with the Company's litigation involving the TLC '635 Patent and the
TCL '320 Patent and their European and Japanese counterparts. There can be no
assurance that additional or sufficient financing will be available, or, if
available, that it will be available on acceptable terms. If additional funds
are raised by issuing equity securities of the Company, dilution to then
existing stockholders may result. If adequate funds are not available, the
Company may be required to significantly curtail one or more of its research and
development programs or commercialization efforts or obtain funds through
arrangements with collaborative partners or others on less favorable terms than
might otherwise be available.
 
IMPACT OF GOVERNMENT REGULATION
 
     See "Business -- Government Regulation" in Part I of this Report.
 
POTENTIAL PRODUCT LIABILITY CLAIMS AND UNINSURED RISKS
 
     Although the Company is not currently a party to any product liability
litigation, the use of any of the Company's products or potential products in
clinical trials and the sale of such products may expose the Company to
liability claims. These claims may be made directly by consumers, health care
providers, pharmaceutical companies or others selling such products. While the
Company currently has liability insurance in amounts that it believes to be
adequate for its business as currently conducted, such insurance is expensive
and may be difficult (or impossible) to obtain in the future. In the event
liability insurance becomes unobtainable, the Company's ability to clinically
test and to market its products could be significantly impaired. Moreover, the
amount and scope of any coverage may be inadequate to protect the Company in the
event of a successful product liability claim.
 
     Additionally, with the approval of DaunoXome in the United States, the
Company has significantly greater risk in connection with product liability
claims due to the greater frequency of lawsuits and higher damages awarded in
courts in the United States as opposed to most other countries. The Company is
required by governmental regulations to test its products even after they have
been sold and used by patients. As a result of such tests, the Company may be
required to, or may determine that, it should recall products when most of such
products have already been sold or used. Such later testing and product recalls
may increase the Company's potential exposure to product liability claims.
 
LIKELY VOLATILITY OF STOCK PRICE
 
     The market prices for securities of biopharmaceutical and biotechnology
companies, including the Company, have been highly volatile, and it is likely
that the market price of the Company's common stock will continue to be highly
volatile. Announcements of technological innovations or new commercial products
by the Company, its collaborative partners or its present or potential
competitors, announcements by the Company or its present or potential
competitors of results in preclinical testing and clinical trials, developments
or disputes concerning patent or proprietary rights, developments in the
Company's relationships with its collaborative partners, adverse litigation,
changes in reimbursement policies, adverse legislation, regulatory decisions or
public concern regarding the safety, efficacy or other implications of the drugs
sought to be developed or biotechnology in general and economic and other
external factors, as well as period-to-period fluctuations in the Company's
operating results have had, and may continue to have, a significant impact on
the market price of the Company's common stock.
 
                                       42
<PAGE>   44
 
REGISTRATION RIGHTS, OPTIONS AND WARRANTS
 
     As of March 27, 1997, the holders of 6,792,877 outstanding shares of the
Company's common stock were entitled to certain piggyback and demand
registration rights with respect to such shares. If such holders, by exercising
their demand registration rights, cause a large number of shares to be
registered and sold in the public market, such sales may have an adverse effect
on the market price for the common stock. In addition, if the Company is
required to include in a Company initiated registration shares held by such
holders pursuant to the exercise of their piggyback registration rights, the
sale of such shares may have an adverse effect on the Company's ability to raise
needed capital. As of March 27, 1997, there were warrants outstanding to
purchase an aggregate of 1,338,972 shares of common stock at a weighted average
exercise price of $6.34 per share. There are piggyback and/or demand
registration rights in connection with such warrants which can be exercised for
an aggregate of 1,272,252 shares. As of March 24, 1997, there were outstanding
stock options for an aggregate of 2,598,072 shares of the Company's common stock
at a weighted average exercise price of $12.25 per share.
 
INFLUENCE BY EXISTING STOCKHOLDER
 
     E.M. Warburg, Pincus & Co., LLC ("Warburg") and its affiliates own or have
the right to acquire a substantial minority of the common stock of NeXstar
Pharmaceuticals and may influence corporate actions, including influencing
elections and significant corporate events. One of the Company's directors is a
Senior Managing Director of Warburg.
 
RELIANCE ON RELATIONSHIPS AND EFFECTS OF INVESTMENTS
 
     The Company has entered into collaborative arrangements pursuant to which
other companies are entitled to certain product, manufacturing, marketing and
royalty rights, including collaborative arrangements relating to aspects of the
SELEX process. Although the agreements with these companies provide for the
funding by such companies of certain research and development efforts conducted
by the Company, such funding may be terminated by such companies under certain
circumstances. Furthermore, there can be no assurance that any of the Company's
current collaborative arrangements will be successful.
 
     The Company may seek future collaborative relationships with corporate
partners to fund certain research and development expenses and to develop and
commercialize certain of its potential products. Further, the Company's receipt
of revenues from collaborative agreements will be affected by the timing of
efforts expended by the Company under existing agreements, as well as by the
timing of drug development programs of the Company's collaborators. There can be
no assurance that the Company will be able to negotiate acceptable collaborative
arrangements in the future, or that such collaborative arrangements will be
successful. To the extent that the Company elects not to or is unable to
establish such relationships it could incur increased capital expenditures as it
is required to undertake research, development, marketing and manufacturing of
its proposed products at its own expense. In addition, there can be no assurance
that existing or future collaborative partners will have sufficient economic
motivation to continue their funding or to develop any products to which they
may have rights, or that such partners will not pursue alternative technologies
or attempt to develop alternative compounds either independently or in
collaboration with others.
 
     In the past, the Company has invested in privately held entities and at
December 31, 1996 recorded these investments as investment in life science
enterprise with a book value of $2.7 million. Most of the value of these
entities is based on unproven technology. Additionally, the Company does not
have significant control over these entities. In the event that these entities
are unsuccessful, the Company may incur significant future accounting
write-offs. Currently, the Company has no obligation to make any additional
investments in any of these entities. The Company periodically undertakes a
review of the value of its investment in life science enterprise to determine if
the value of its investments has been permanently impaired. In connection with
the Company's review for the year ending December 31, 1996, the Company incurred
a write down of $1.2 million with regard to an investment in a biotechnology
company.
 
     The Company's rights to market AmBisome are pursuant to an agreement
between the Company and Fujisawa. Under the terms of the agreement, as amended,
the Company has the sole marketing rights to
 
                                       43
<PAGE>   45
 
AmBisome in all countries except the United States and Canada and subject to the
Company's obligation to pay royalties in connection with sales in most
significant Asian markets. The agreement provides that the Company and Fujisawa
will co-promote AmBisome in the United States, if AmBisome is ultimately
approved for commercial sale by the FDA, and that the Company will manufacture
AmBisome for sale in the U.S. In addition, the Company will be reimbursed for
the cost of the product sold to Fujisawa and will receive 20% of the gross
profits from the sale of AmBisome in the United States. In the event that the
Company and Fujisawa are unable to cooperate in obtaining approval for AmBisome
in the U.S. or in connection with the promotion of the product, the Company's
potential revenues from the sale of AmBisome in the U.S. may be substantially
reduced.
 
     NeXstar Pharmaceuticals has licensed the right to market and develop
AmBisome in Japan to Sumitomo Pharmaceuticals, Co., Ltd. ("Sumitomo"). Under the
terms of the license, Sumitomo is required to make payments to the Company if
certain clinical and commercial milestones are met and to pay the Company
royalties on all Japanese sales of AmBisome. There can be no assurance that
Sumitomo will be required to pay any of the milestone payments or will be
successful in selling AmBisome in Japan.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
     Submitted elsewhere in this Report.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE
 
     Not applicable.
 
                                    PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
     Information involving the election of Directors is, in part, contained in
Part I of this Report under the caption "Executive Officers, Directors and Key
Employees" and, in addition, is incorporated herein by reference to the
Company's definitive proxy statement for the Annual Meeting of Stockholders to
be held on May 28, 1997, to be filed pursuant to Regulation 14A.
 
     Information concerning the Executive Officers of Registrant is contained in
Part I of this Report under the caption "Executive Officers, Directors and Key
Employees."
 
ITEM 11. EXECUTIVE COMPENSATION
 
     The information with respect to executive compensation is incorporated
herein by reference to the Company's definitive proxy statement for the Annual
Meeting of Stockholders to be held on May 28, 1997, to be filed pursuant to
Regulation 14A.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     The information with respect to security ownership of certain beneficial
owners and management is incorporated herein by reference to the Company's
definitive proxy statement for the Annual Meeting of Stockholders to be held on
May 28, 1997, to be filed pursuant to Regulation 14A.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     The information with respect to certain relationships and related
transactions is incorporated herein by reference to the Company's definitive
proxy statement for the Annual Meeting of Stockholders to be held on May 28,
1997, to be filed pursuant to Regulation 14A.
 
                                       44
<PAGE>   46
 
               SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
     Certain statements in this Report constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"). Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Company, or industry results, to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among other things, the
following: general economic and business conditions; competition; technological
advances; ability to obtain rights to technology; ability to obtain and enforce
patents; ability to commercialize and manufacture products; results of clinical
studies; results of research and development activities; business abilities and
judgment of personnel; availability of qualified personnel; changes in, or
failure to comply with, governmental regulations; ability to obtain adequate
financing in the future; and other factors referenced in this Report. See "Risk
Factors" in Part II of this Report.
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
 
     (a) 1. INDEX TO FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                               PAGE IN
                                                              FORM 10-K
                                                              ---------
<S>                                                           <C>
Report of Independent Auditors..............................     F-1
Consolidated Balance Sheets as of December 31, 1996 and
  1995......................................................     F-2
Consolidated Statements of Operations for the years ended
  December 31, 1996, 1995, and 1994.........................     F-3
Consolidated Statements of Stockholders' Equity for the
  years ended December 31, 1996, 1995, and 1994.............     F-4
Consolidated Statements of Cash Flows for the years ended
  December 31, 1996, 1995, and 1994.........................     F-5
Notes to Consolidated Financial Statements..................     F-6
</TABLE>
 
     2. INDEX TO FINANCIAL STATEMENT SCHEDULES
 
     All schedules are omitted because they are not applicable, or not required,
or because the required information is included in the Consolidated Financial
Statements or notes thereto.
 
     3. EXHIBITS
 
<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
          2.1            -- Agreement and Plan of Merger, dated as of October 30,
                            1994, among the Registrant, Neptune Merger-Sub Corp. and
                            Vestar, Inc.(1).
          2.2            -- Agreement and Plan of Merger, dated as of August 29,
                            1995, among the Registrant, Supra-Sub Merger Corp. and
                            Supragen, Inc.(2).
          3.1            -- Second Amended and Restated Certificate of Incorporation
                            of the Registrant(3).
          3.2            -- Amended and Restated Bylaws of the Registrant(4).
          4.1            -- Second Amended and Restated Certificate of Incorporation
                            of the Registrant (filed as Exhibit 3.1 to this Report).
          4.2            -- Form of Common Stock certificate of the Registrant(4).
         10.1            -- License Agreement between University Research Corporation
                            and the Registrant, effective as of July 17, 1991, as
                            amended on October 26, 1992(5).
</TABLE>
 
                                       45
<PAGE>   47
<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
         10.2            -- Amendment No. 2, effective April 5, 1996, and Amendment
                            No. 3, dated September 5, 1996, to the License Agreement
                            between University Research Corporation and the
                            Registrant, effective as of July 17, 1991, as amended on
                            October 26, 1992.
         10.3            -- Stock Purchase Agreement among the Registrant, Warburg,
                            Pincus Investors, L.P., University Research Corporation
                            and Lawrence M. Gold, dated as of July 17, 1991, as
                            amended on December 4, 1992, and as amended by letter
                            agreement on November 19, 1993(5).
         10.4            -- Employment Agreement, dated July 1, 1991, between the
                            Registrant and Lawrence M. Gold(5).
         10.5            -- Letter Agreement, dated May 1, 1992, between the
                            Registrant and Patrick J. Mahaffy(5).
         10.6            -- Master Equipment Lease Agreement between MMC/GATX
                            Partnership No. 1 and the Registrant, dated as of
                            November 23, 1992(5).
         10.7            -- Research and License Agreement between Eli Lilly and
                            Company and the Registrant, effective as of September 15,
                            1992, and Amendment No. 1 thereto dated as of April 1,
                            1994(4).
         10.8            -- Stock Purchase Agreement among the Registrant, Eli Lilly
                            and Company and Warburg, Pincus Investors, L.P., dated as
                            of September 15, 1992(5).
         10.9            -- Supplement to Stock Purchase Agreement among the
                            Registrant, Eli Lilly and Company, Warburg, Pincus
                            Investors, L.P. and certain additional investors, dated
                            as of September 30, 1992(5).
         10.10           -- Second Supplement to Stock Purchase Agreement among the
                            Company, Accel III, L.P., Accel Japan L.P., Accel
                            Investors '92 L.P., New Enterprise Associates V Limited
                            Partnership, Ven Sed I, Eli Lilly and Company and
                            Warburg, Pincus Investors, L.P., dated as of December 4,
                            1992(5).
         10.11           -- Collaborative Research Agreement between the Registrant
                            and Becton, Dickinson and Company, dated as of May 28,
                            1993(5).
         10.12           -- License Agreement between the Registrant and Becton,
                            Dickinson and Company, dated as of May 28, 1993(5).
         10.13           -- Amendment to the Collaborative Research Agreement and
                            License Agreement, effective as of June 1, 1995, between
                            the Registrant and Becton, Dickinson and Company(6).
         10.14           -- Collaborative Research Agreement between the Registrant
                            and Schering A.G., dated as of November 16, 1993(5).
         10.15           -- Letter Agreement between the Registrant and Schering
                            A.G., effective February 1, 1997, amending the
                            Collaborative Research Agreement between the Registrant
                            and Schering A.G., dated as of November 16, 1993.
         10.16           -- License Agreement between the Registrant and Schering
                            A.G., dated as of November 16, 1993(5).
         10.17           -- Master Equipment Lease Agreement between Phoenix Leasing
                            Incorporated and the Registrant, dated November 15,
                            1993(5).
         10.18           -- Master Lease Agreement between USL Capital Corporation
                            and the Registrant, dated as of November 9, 1995(7).
         10.19           -- Letter Agreement, dated January 24, 1994, between Eli
                            Lilly and Company and the Registrant(5).
</TABLE>
 
                                       46
<PAGE>   48
<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
         10.20           -- Common Stock Purchase Warrant issued to Warburg, Pincus
                            Capital Partners, L.P., dated May 11, 1990(8).
         10.21           -- Letter Agreement, dated April 20, 1995, between Warburg,
                            Pincus Capital Partners, L.P. and the Registrant
                            regarding amendments to warrants held by Warburg, Pincus
                            Capital Partners, L.P.(9).
         10.22           -- Vestar, Inc. 401(k) Retirement Savings Plan and Trust,
                            Amendment No. 1 thereto and the related adoption
                            agreement thereto, dated March 27, 1995(4).
         10.23           -- Supragen, Inc. 401(k) Profit Sharing Plan and Adoption
                            Agreement(2).
         10.24           -- Registrant's 401(k) Retirement Savings Plan, effective
                            January 1, 1996, and related adoption agreement(10).
         10.25           -- Adoption Agreement of the NeXagen, Inc. 401(k) Retirement
                            Plan, dated January 1, 1993(5).
         10.26           -- NeXagen, Inc. 1993 Incentive Stock Plan, adopted February
                            8, 1993, as amended(2).
         10.27           -- Amendment No. 4 to NeXagen, Inc. 1993 Incentive Stock
                            Plan, adopted February 8, 1993(3).
         10.28           -- Registrant's 1995 Director Option Plan, adopted July 25,
                            1995(2).
         10.29           -- Vestar, Inc. 1988 Stock Option Plan(4).
         10.30           -- Registrant's 1994 Employee Stock Purchase Plan, adopted
                            June 9, 1994(4).
         10.31           -- Amendment No. 1 to Registrant's 1994 Employee Stock
                            Purchase Plan, adopted June 9, 1994(3).
         10.32           -- Lease, dated March 26, 1987, between Vestar, Inc. and
                            Majestic Realty Co. and Patrician Associates, Inc. and
                            Amendment No. 1 thereto and Amendment No. 2 thereto,
                            dated as of June 8, 1992(4).
         10.33           -- Third Amendment, dated January 11, 1996, between Majestic
                            Realty Co. and Patrician Associates, Inc. and the
                            Registrant, to Lease, dated March 26, 1987, between
                            Vestar, Inc. and Majestic Realty Co. and Patrician
                            Associates, Inc.(7).
         10.34           -- Agreement, dated January 6, 1993, between Vestar, Inc.
                            and Vical Incorporated(7).
         10.35           -- Assignment and Royalty Agreement, dated December 21,
                            1990, effective as of June 2, 1989, between Vestar, Inc.
                            and City of Hope National Medical Center(8).
         10.36           -- License Agreement, effective as of August 12, 1986,
                            between Vestar, Inc. and The Regents of the University of
                            California(7).
         10.37           -- Agreement by and between Fujisawa USA, Inc. and Vestar,
                            Inc., dated August 9, 1991, and Amendment No 1 thereto,
                            dated as of May 17, 1994(4).
         10.38           -- Amendment No 2 to agreement between Fujisawa USA, Inc.
                            and Vestar, Inc., dated as of April 3, 1995, between
                            Fujisawa USA, Inc. and Vestar, Inc. (9) [Part of this
                            document has been redacted for purposes of
                            confidentiality pursuant to Rule 24b-2 of the Securities
                            Exchange Act of 1934, as amended].
         10.39           -- Amendment No. 3 to Agreement between Fujisawa USA, Inc.
                            and the Registrant, dated March 4, 1996, to the Agreement
                            by and between Fujisawa USA, Inc. and Vestar, Inc., dated
                            August 9, 1991(7).
         10.40           -- Lease, dated April 13, 1992, between Vestar, Inc. and
                            Majestic Realty Co. and Patrician Associates, Inc.(4).
</TABLE>
 
                                       47
<PAGE>   49
<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
         10.41           -- First Amendment to Lease, dated April 10, 1993, between
                            Majestic Realty Co. and Patrician Associates, Inc. and
                            Vestar, Inc. amending Lease, dated April 13, 1992,
                            between Majestic Realty Co. and Patrician Associates,
                            Inc. and Vestar, Inc.(7).
         10.42           -- Master Lease Agreement, dated June 29, 1994, between
                            Vestar, Inc. and Comdisco, Inc.(4).
         10.43           -- Lease Agreement, dated September 28, 1994, between the
                            Registrant and Deane Investment Co., Ltd.(4).
         10.44           -- License Agreement, dated December 23, 1992, between
                            Supragen, Inc. and National Jewish Center for Immunology
                            and Respiratory Medicine, as amended(2).
         10.45           -- Employment Agreement, dated November 4, 1994, between
                            Supragen, Inc. and Michael T. Burke(2).
         10.46           -- Royalty Agreement, dated October 30, 1995, between the
                            Registrant and Amplimed Corporation(7).
         10.47           -- Pharmaceutical Pricing Agreement between the Secretary of
                            Veterans Affairs and the Registrant, dated April 30,
                            1996(11).
         10.48           -- Master Agreement between Secretary of Veterans Affairs
                            and the Registrant, dated April 30, 1996(11).
         10.49           -- Pharmaceutical Pricing Agreement between the Secretary of
                            Health and Human Services and the Registrant, dated April
                            30, 1996(11).
         10.50           -- Rebate Agreement between the Secretary of Health and
                            Human Services and the Registrant, dated April 30,
                            1996(11).
         10.51           -- Industrial Real Estate Lease, dated July 1, 1996, by and
                            between Wilderness Place, Ltd. and the Registrant(12).
         10.52           -- Loan Agreement, dated as of June 28, 1996, by and between
                            the Registrant and The Sumitomo Bank, Limited(12).
         10.53           -- Sublease Agreement, dated July 31, 1996, between Sybase,
                            Inc. and the Registrant(13).
         10.54           -- Lease Agreement, dated November 6, 1996, between Avalon
                            Investment Company and the Registrant(13).
         10.55           -- Commercial Factoring Agreement between Santander de
                            Factoring, S.A. and NeXstar Farmaceutica, S.A., entered
                            into on May 21, 1996, as amended.
         10.56           -- License and Distribution Agreement, dated September 26,
                            1997, by and between Sumitomo Pharmaceuticals Co., Ltd.
                            and the Registrant. [Part of the document has been
                            redacted for purposes of confidentiality pursuant to Rule
                            24b-2 of the Securities Exchange Act of 1934, as
                            amended.]
         10.57           -- Credit Agreement, entered into as of March 24, 1997,
                            between Wells Fargo Bank (Colorado), National
                            Association, the Registrant and certain of the
                            Registrant's subsidiaries.
         10.58           -- Securities Purchase Agreement among Warburg, Pincus
                            Capital Partners, L.P., Humana Inc. and Vestar, Inc.,
                            dated May 11, 1990.
         11.1            -- Statement Re: Computation of Net Loss Per Share.
         21.1            -- Subsidiaries of Registrant.
         23.1            -- Consent of Independent Auditors.
         27.1            -- Financial Data Schedule.
</TABLE>
 
                                       48
<PAGE>   50
 
 (1) Previously filed on January 26, 1995, as Annex A to the Registration
     Statement on Form S-4 (File No. 33-88786), which exhibit is incorporated by
     reference herein.
 
 (2) Previously filed in the Exhibits to Form 10-Q (File No. 0-23012) for the
     Registrant for the quarterly period ended September 30, 1995, and
     incorporated by reference herein.
 
 (3) Previously filed in the Exhibits to the Registration Statement on Form S-3
     (File No. 333-04653), declared effective by the Securities and Exchange
     Commission on June 19, 1996, which exhibit is incorporated by reference
     herein.
 
 (4) Previously filed in the Exhibits to Form 10-K (File No. 0-23012) for the
     Registrant for the fiscal year ended December 31, 1994, and incorporated by
     reference herein.
 
 (5) Previously filed in the Exhibits to the Registration Statement on Form S-1
     (File No. 33-72142), declared effective by the Securities and Exchange
     Commission on January 28, 1994, which exhibit is incorporated by reference
     herein.
 
 (6) Previously filed in the Exhibits to Form 10-Q (File No. 0-23012) for the
     Registrant for the quarterly period ended June 30, 1995, and incorporated
     by reference herein.
 
 (7) Previously filed in the Exhibits to Form 10-K (File No. 0-23012) for the
     Registrant for the fiscal year ended December 31, 1995, and incorporated by
     reference herein.
 
 (8) Previously filed, on March 22, 1991, in the Exhibits to the Registration
     Statement on Form S-2 (File No. 33-39549), which exhibit is incorporated by
     reference herein.
 
 (9) Previously filed in the Exhibits to Form 10-Q (File No. 0-23012) for the
     Registrant for the quarterly period ended March 31, 1995, and incorporated
     by reference herein.
 
(10) Previously filed in the Exhibits to the Registration Statement on Form S-3
     (File No. 333-00758) declared effective by the Securities and Exchange
     Commission on February 9, 1996, which exhibit is incorporated by reference
     herein.
 
(11) Previously filed in the Exhibits to Form 10-Q (File No. 0-23012) for the
     Registrant for the quarterly period ended March 31, 1996, and incorporated
     by reference herein.
 
(12) Previously filed in the Exhibits to Form 10-Q (File No. 0-23012) for the
     Registrant for the quarterly period ended June 30, 1996, and incorporated
     by reference herein.
 
(13) Previously filed in the Exhibits to Form 10-Q (File No. 0-23012) for the
     Registrant for the quarterly period ended September 30, 1996, and
     incorporated by reference herein.
 
     (b) REPORTS ON FORM 8-K
 
     No reports on Form 8-K were filed during the quarter ended December 31,
1996.
 
                                       49
<PAGE>   51
 
                                   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.
 
                                            NEXSTAR PHARMACEUTICALS, INC.
 
                                            By:    /s/ PATRICK J. MAHAFFY
 
                                              ----------------------------------
                                                      Patrick J. Mahaffy
                                                President and Chief Executive
                                                            Officer
 
Date: March 28, 1997
 
     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.
 
<TABLE>
<CAPTION>
                      SIGNATURE                                       TITLE                    DATE
                      ---------                                       -----                    ----
<C>                                                      <S>                              <C>
 
                /s/ LAWRENCE M. GOLD                     Chairman of the Board and Chief  March 28, 1997
-----------------------------------------------------      Scientific Officer
                  Lawrence M. Gold
 
               /s/ PATRICK J. MAHAFFY                    Director, President and Chief    March 28, 1997
-----------------------------------------------------      Executive Officer (Principal
                 Patrick J. Mahaffy                        Executive Officer)
 
             /s/ JOHN D. BALDESCHWIELER                  Director                         March 28, 1997
-----------------------------------------------------
               John D. Baldeschwieler
 
                /s/ JAMES A. ESKRIDGE                    Director                         March 28, 1997
-----------------------------------------------------
                  James A. Eskridge
 
                 /s/ DAVID I. HIRSH                      Director                         March 28, 1997
-----------------------------------------------------
                   David I. Hirsh
 
             /s/ RODMAN W. MOORHEAD, III                 Director                         March 28, 1997
-----------------------------------------------------
               Rodman W. Moorhead, III
 
                 /s/ CARL F. POLLARD                     Director                         March 28, 1997
-----------------------------------------------------
                   Carl F. Pollard
 
                 /s/ MICHAEL E. HART                     Vice President and Chief         March 28, 1997
-----------------------------------------------------      Financial Officer (Principal
                   Michael E. Hart                         Financial Officer and
                                                           Principal Accounting Officer)
</TABLE>
 
                                       50
<PAGE>   52
 
                         REPORT OF INDEPENDENT AUDITORS
 
The Board of Directors and Stockholders
NeXstar Pharmaceuticals, Inc.
 
     We have audited the accompanying consolidated balance sheets of NeXstar
Pharmaceuticals, Inc. as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of NeXstar
Pharmaceuticals, Inc. at December 31, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
 
                                            /s/ ERNST & YOUNG LLP
                                            ERNST & YOUNG LLP
 
Denver, Colorado
February 27, 1997,
except for Note 13, as to which the
date is March 27, 1997
 
                                       F-1
<PAGE>   53
 
                         NEXSTAR PHARMACEUTICALS, INC.
 
                          CONSOLIDATED BALANCE SHEETS
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                                       DECEMBER 31,
                                                              ------------------------------
                                                                  1996             1995
                                                              -------------    -------------
<S>                                                           <C>              <C>
Current assets:
  Cash and cash equivalents.................................  $  21,542,000    $  20,893,000
  Marketable securities.....................................     20,423,000        5,841,000
  Accounts receivable, net of allowance for doubtful
     accounts of $1,025,000 and $505,000 at December 31,
     1996 and 1995, respectively............................     30,001,000       18,315,000
  Inventories...............................................     15,629,000        9,469,000
  Prepaid expenses and other................................      2,276,000        1,948,000
                                                              -------------    -------------
Total current assets........................................     89,871,000       56,466,000
Equipment and leasehold improvements, net of accumulated
  depreciation and amortization.............................     43,960,000       43,001,000
Investment in life science enterprise.......................      2,709,000        3,950,000
Patent and trademark costs, net of accumulated amortization
  of $880,000 and $461,000 at December 31, 1996 and 1995,
  respectively..............................................      4,633,000        3,732,000
Purchased technology, net of accumulated amortization of
  $2,490,000 and $1,485,000 at December 31, 1996 and 1995,
  respectively..............................................      2,010,000        3,015,000
Other noncurrent assets, net of allowance of $1,737,000 and
  $2,430,000 at December 31, 1996 and 1995, respectively....      1,317,000        2,285,000
                                                              -------------    -------------
Total assets................................................  $ 144,500,000    $ 112,449,000
                                                              =============    =============
 
                            LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Short-term borrowings.....................................  $  12,936,000    $   3,500,000
  Accounts payable..........................................     10,483,000        6,789,000
  Accrued compensation and employee benefits................      3,544,000        2,805,000
  Other accrued expenses....................................      7,174,000        4,030,000
  Long-term obligations due within one year.................      7,535,000        4,313,000
                                                              -------------    -------------
Total current liabilities...................................     41,672,000       21,437,000
Long-term obligations due after one year....................     15,206,000        9,848,000
Commitments and contingencies
Stockholders' equity:
  Preferred stock, $1.00 par value; 5,000,000 shares
  authorized
  Common stock, $.01 par value; 50,000,000 shares
  authorized; issued and outstanding shares -- 26,410,811 in
  1996 and 24,377,192 in 1995...............................        264,000          244,000
  Additional paid-in capital................................    213,931,000      184,290,000
  Deferred compensation.....................................       (367,000)        (235,000)
  Cumulative translation adjustment.........................       (230,000)        (140,000)
  Accumulated deficit.......................................   (125,976,000)    (102,995,000)
                                                              -------------    -------------
Total stockholders' equity..................................     87,622,000       81,164,000
                                                              -------------    -------------
Total liabilities and stockholders' equity..................  $ 144,500,000    $ 112,449,000
                                                              =============    =============
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       F-2
<PAGE>   54
 
                         NEXSTAR PHARMACEUTICALS, INC.
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                             YEARS ENDED DECEMBER 31,
                                                   --------------------------------------------
                                                       1996            1995            1994
                                                   ------------    ------------    ------------
<S>                                                <C>             <C>             <C>
Revenues:
  Product revenues...............................  $ 80,153,000    $ 57,770,000    $ 43,967,000
  License fee....................................     7,000,000              --              --
  Collaborative agreements and contracts.........     1,548,000       2,920,000       4,054,000
  Interest income................................     1,821,000       1,736,000       2,409,000
                                                   ------------    ------------    ------------
Total revenues...................................    90,522,000      62,426,000      50,430,000
                                                   ------------    ------------    ------------
Expenses:
  Cost of goods sold.............................    18,320,000      13,246,000       8,091,000
  Research and development.......................    47,760,000      37,356,000      31,595,000
  Selling, general and administrative............    44,939,000      35,300,000      22,108,000
  Purchased research and development.............            --      11,824,000              --
  Retirement agreement expense...................            --              --       4,097,000
  Interest expense...............................     1,558,000       1,148,000         587,000
                                                   ------------    ------------    ------------
Total expenses...................................   112,577,000      98,874,000      66,478,000
                                                   ------------    ------------    ------------
Loss before provision for income taxes...........   (22,055,000)    (36,448,000)    (16,048,000)
Provision for income taxes.......................       926,000         183,000         159,000
                                                   ------------    ------------    ------------
Net loss.........................................  $(22,981,000)   $(36,631,000)   $(16,207,000)
                                                   ============    ============    ============
Net loss per share...............................  $      (0.88)   $      (1.57)   $      (0.71)
                                                   ============    ============    ============
Shares used in computing net loss per share......    26,029,000      23,374,000      22,825,000
                                                   ============    ============    ============
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       F-3
<PAGE>   55
 
                         NEXSTAR PHARMACEUTICALS, INC.
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
                             PREFERRED STOCK         COMMON STOCK         ADDITIONAL                   CUMULATIVE
                            ------------------   ---------------------     PAID-IN        DEFERRED     TRANSLATION    ACCUMULATED
                            SHARES     AMOUNT      SHARES      AMOUNT      CAPITAL      COMPENSATION   ADJUSTMENTS      DEFICIT
                            -------   --------   ----------   --------   ------------   ------------   -----------   -------------
<S>                         <C>       <C>        <C>          <C>        <C>            <C>            <C>           <C>
Balance at December 31,
  1993....................   22,898   $ 22,000   15,155,242   $152,000   $141,721,000    $(470,000)     $(133,000)   $ (50,157,000)
  Issuance of common stock
    for cash..............       --         --    2,147,784     21,000     21,115,000           --             --               --
  Conversion of preferred
    stock upon initial
    public offering.......  (22,898)   (22,000)   5,655,396     56,000        (34,000)          --             --               --
  Stock repurchases.......       --         --      (50,422)        --             --           --             --               --
  Employee stock purchase
    plan..................       --         --        6,009         --         29,000           --             --               --
  Option exercises........       --         --       13,600         --         15,000           --             --               --
  Amortization of deferred
    compensation..........       --         --           --         --             --      117,000             --               --
  Compensation expense....       --         --           --         --      1,120,000           --             --               --
  Foreign currency
    translation
    adjustment............       --         --           --         --             --           --         29,000               --
  Net loss................       --         --           --         --             --           --             --      (16,207,000)
                            -------   --------   ----------   --------   ------------    ---------      ---------    -------------
Balance at December 31,
  1994....................       --         --   22,927,609    229,000    163,966,000     (353,000)      (104,000)     (66,364,000)
  Issuance of common stock
    for cash..............       --         --      309,861      3,000      5,093,000           --             --               --
  Retirement agreement
    transfer..............       --         --           --         --      1,688,000           --             --               --
  Issuance of common stock
    for purchase of
    Supragen, Inc.........       --         --      751,597      8,000     12,018,000           --             --               --
  Stock repurchases.......       --         --       (1,156)        --             --           --             --               --
  Employee stock purchase
    plan..................       --         --       46,600      1,000        306,000           --             --               --
  Option exercises........       --         --      198,328      2,000        553,000           --             --               --
  Warrant exercises.......       --         --      144,353      1,000        666,000           --             --               --
  Amortization of deferred
    compensation..........       --         --           --         --             --      118,000             --               --
  Foreign currency
    translation
    adjustment............       --         --           --         --             --           --        (36,000)              --
  Net loss................       --         --           --         --             --           --             --      (36,631,000)
                            -------   --------   ----------   --------   ------------    ---------      ---------    -------------
Balance at December 31,
  1995....................       --         --   24,377,192    244,000    184,290,000     (235,000)      (140,000)    (102,995,000)
  Issuance of common stock
    for cash..............       --         --    1,429,268     14,000     24,982,000           --             --               --
  Stock repurchases.......       --         --         (136)        --             --           --             --               --
  Employee stock purchase
    plan..................       --         --       58,357      1,000        807,000           --             --               --
  Option exercises........       --         --      289,030      3,000      2,320,000           --             --               --
  Warrant exercises.......       --         --      257,100      2,000      1,231,000           --             --               --
  Deferred compensation
    related to grants of
    stock options.........       --         --           --         --        301,000     (301,000)            --               --
  Amortization of deferred
    compensation..........       --         --           --         --             --      169,000             --               --
  Foreign currency
    translation
    adjustment............       --         --           --         --             --           --        (90,000)              --
  Net loss................       --         --           --         --             --           --             --      (22,981,000)
                            -------   --------   ----------   --------   ------------    ---------      ---------    -------------
Balance at December 31,
  1996....................       --   $     --   26,410,811   $264,000   $213,931,000    $(367,000)     $(230,000)   $(125,976,000)
                            =======   ========   ==========   ========   ============    =========      =========    =============
 
<CAPTION>
                                TOTAL
                            STOCKHOLDERS'
                               EQUITY
                            -------------
<S>                         <C>
Balance at December 31,
  1993....................  $ 91,135,000
  Issuance of common stock
    for cash..............    21,136,000
  Conversion of preferred
    stock upon initial
    public offering.......            --
  Stock repurchases.......            --
  Employee stock purchase
    plan..................        29,000
  Option exercises........        15,000
  Amortization of deferred
    compensation..........       117,000
  Compensation expense....     1,120,000
  Foreign currency
    translation
    adjustment............        29,000
  Net loss................   (16,207,000)
                            ------------
Balance at December 31,
  1994....................    97,374,000
  Issuance of common stock
    for cash..............     5,096,000
  Retirement agreement
    transfer..............     1,688,000
  Issuance of common stock
    for purchase of
    Supragen, Inc.........    12,026,000
  Stock repurchases.......            --
  Employee stock purchase
    plan..................       307,000
  Option exercises........       555,000
  Warrant exercises.......       667,000
  Amortization of deferred
    compensation..........       118,000
  Foreign currency
    translation
    adjustment............       (36,000)
  Net loss................   (36,631,000)
                            ------------
Balance at December 31,
  1995....................    81,164,000
  Issuance of common stock
    for cash..............    24,996,000
  Stock repurchases.......            --
  Employee stock purchase
    plan..................       808,000
  Option exercises........     2,323,000
  Warrant exercises.......     1,233,000
  Deferred compensation
    related to grants of
    stock options.........            --
  Amortization of deferred
    compensation..........       169,000
  Foreign currency
    translation
    adjustment............       (90,000)
  Net loss................   (22,981,000)
                            ------------
Balance at December 31,
  1996....................  $ 87,622,000
                            ============
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       F-4
<PAGE>   56
 
                         NEXSTAR PHARMACEUTICALS, INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                                        YEARS ENDED DECEMBER 31,
                                                              --------------------------------------------
                                                                  1996            1995            1994
                                                              ------------    ------------    ------------
<S>                                                           <C>             <C>             <C>
OPERATING ACTIVITIES
Net loss....................................................  $(22,981,000)   $(36,631,000)   $(16,207,000)
Adjustments to reconcile net loss to net cash used in
  operating activities:
  Depreciation and amortization of equipment and leasehold
    improvements............................................     9,759,000       8,490,000       3,781,000
  Amortization of intangible assets.........................     1,541,000       1,301,000         379,000
  Compensation expense related to grant of options and sales
    of stock, including amortization of deferred
    compensation............................................       169,000         118,000       1,237,000
  Retirement agreement expense..............................            --              --       3,939,000
  Write down of investment in life science enterprise.......     1,241,000              --              --
  Purchased research and development........................            --      11,824,000              --
  Allowance for loan loss...................................            --       2,430,000              --
  Other.....................................................       222,000         487,000         140,000
  Changes in operating assets and liabilities:
    Accounts receivable.....................................   (11,499,000)     (4,361,000)     (4,811,000)
    Inventories.............................................    (6,160,000)     (3,571,000)        163,000
    Prepaid expenses and other..............................      (328,000)      1,082,000        (430,000)
    Other noncurrent assets.................................       151,000        (141,000)        (88,000)
    Accounts payable........................................     4,174,000       2,527,000        (742,000)
    Accrued compensation and employee benefits..............       735,000         846,000         912,000
    Accrued retirement agreement............................            --      (2,150,000)             --
    Other accrued expenses..................................     2,645,000         671,000      (1,156,000)
                                                              ------------    ------------    ------------
Net cash used in operating activities.......................   (20,331,000)    (17,078,000)    (12,883,000)
INVESTING ACTIVITIES
Maturities (purchases) of marketable securities, net........   (14,582,000)     26,838,000      (4,577,000)
Additions to equipment and leasehold improvements...........   (11,198,000)     (8,663,000)    (23,695,000)
Cash acquired from purchase of Supragen, Inc................            --         418,000              --
Deletions (additions) to deposits...........................            --       5,606,000      (5,633,000)
Additions to investments in life science enterprises, net...            --              --      (3,286,000)
Additions to patent costs...................................    (1,320,000)       (702,000)       (626,000)
Deletions (additions) to other noncurrent assets............       700,000              --      (2,309,000)
                                                              ------------    ------------    ------------
Net cash provided by (used in) investing activities.........   (26,400,000)     23,497,000     (40,126,000)
FINANCING ACTIVITIES
Proceeds from short-term borrowings, net....................     9,436,000         550,000       2,950,000
Proceeds from sale-leaseback transactions...................     2,978,000       2,363,000      12,197,000
Payments on capital lease obligations.......................    (4,258,000)     (3,592,000)     (2,106,000)
Proceeds from issuance of long-term debt....................    11,527,000       1,019,000              --
Repayments on long-term debt................................    (1,667,000)             --              --
Proceeds from sale of common stock, net of offering costs...    29,364,000       6,529,000      21,180,000
                                                              ------------    ------------    ------------
Net cash provided by financing activities...................    47,380,000       6,869,000      34,221,000
                                                              ------------    ------------    ------------
Net increase (decrease) in cash and cash equivalents........       649,000      13,288,000     (18,788,000)
Cash and cash equivalents at beginning of period............    20,893,000       7,605,000      26,393,000
                                                              ------------    ------------    ------------
Cash and cash equivalents at end of period..................  $ 21,542,000    $ 20,893,000    $  7,605,000
                                                              ============    ============    ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Income taxes paid.........................................  $  1,030,000    $    235,000    $    111,000
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES:
  Purchase of equipment and leasehold improvements through
    accounts
    payable.................................................     1,020,000       1,500,000       1,300,000
  Issuance of stock through director deferred compensation
    plan....................................................        32,000          96,000              --
  Accrued retirement agreement..............................            --       1,688,000              --
DETAILS OF SUPRAGEN, INC. ACQUISITION:
  Fair value of assets acquired.............................            --    $  1,248,000              --
  Purchased research and development........................            --      11,824,000              --
  Liabilities assumed.......................................            --      (1,046,000)             --
  Stock issued..............................................            --     (12,026,000)             --
                                                              ------------    ------------    ------------
  Cash paid.................................................            --              --              --
  Add: cash acquired........................................            --         418,000              --
                                                              ------------    ------------    ------------
                                                                        --    $    418,000              --
                                                              ============    ============    ============
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       F-5
<PAGE>   57
 
                         NEXSTAR PHARMACEUTICALS, INC.
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 31, 1996
 
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  Business
 
     NeXstar Pharmaceuticals, Inc., a Delaware corporation ("NeXstar
Pharmaceuticals" or the "Company"), is a leading biopharmaceutical company
engaged in the discovery, development, manufacture and marketing of proprietary
pharmaceutical products to treat life-threatening and other serious diseases.
NeXstar Pharmaceuticals was formed in 1991 as NeXagen, Inc. On February 21,
1995, the Company was merged (the "Merger") with Vestar, Inc. ("Vestar"), a
Delaware corporation founded in 1981, and changed its name to NeXstar
Pharmaceuticals, Inc. Prior to the Merger, NeXstar Pharmaceuticals was primarily
engaged in the discovery and development of novel oligonucleotide-based
pharmaceuticals. As a result of the Merger, the Company combined its drug
discovery program and financial resources with Vestar's proprietary drug
delivery technology, existing products and product pipeline and Vestar's
manufacturing, marketing and regulatory capabilities. The Merger was accounted
for as a pooling of interests.
 
     On September 8, 1995, the Company acquired all of the equity interests of
Supragen, Inc. ("Supragen"), a research-oriented biotechnology company, for
approximately $12 million in the form of 751,597 shares of the Company's common
stock. The acquisition was accounted for as a purchase. As a result of the
Supragen acquisition, the Company recorded a one-time, non-cash charge of
purchased research and development in its 1995 third quarter results of
operations of $11.8 million.
 
     The following unaudited pro forma consolidated results of operations give
effect to the Supragen acquisition as though it had occurred at the beginning of
the periods presented:
 
<TABLE>
<CAPTION>
                                                            YEARS ENDED DECEMBER 31,
                                                          ----------------------------
                                                              1995            1994
                                                          ------------    ------------
<S>                                                       <C>             <C>
Total revenues..........................................  $ 62,484,000    $ 50,449,000
Net loss................................................   (39,832,000)    (18,968,000)
Net loss per share......................................         (1.67)          (0.80)
</TABLE>
 
     The unaudited pro forma information is not necessarily indicative either of
results of operations that would have occurred had the purchase been made on
January 1, 1994, or future results of operations of the Company.
 
  Principles of Consolidation and Basis of Presentation
 
     The accompanying consolidated financial statements include the accounts of
the Company and its wholly and majority-owned subsidiaries; significant
intercompany transactions have been eliminated. Certain reclassifications,
including adjustments to conform accounting practices, have been made to prior
year amounts to agree with the current year presentation.
 
  Long-Lived Assets
 
     Effective January 1, 1996, the Company adopted Financial Accounting
Standards Board ("FASB") Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("Statement No.
121"), which requires impairment losses to be recorded on long-lived assets used
in operations when indicators of impairment are present. Implementation of
Statement No. 121 was immaterial to the financial statements of the Company.
 
                                       F-6
<PAGE>   58
 
                         NEXSTAR PHARMACEUTICALS, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
  Accounting Estimates in the Preparation of Financial Statements
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount 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.
 
     It is possible that the future economic life of the Company's technologies,
the amount of anticipated future revenues or both could be reduced significantly
in the future due to alternate products or technologies being developed by other
biotechnology or pharmaceutical companies. As a result, the carrying amount of
patent and trademark costs and purchased technology costs could be reduced in
the future.
 
  Equipment and Leasehold Improvements
 
     Equipment and leasehold improvements are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization are provided by the
straight-line method over the shorter of the lease term or the estimated useful
life, which is as follows:
 
<TABLE>
<S>                                                   <C>
Laboratory and manufacturing equipment..............  5-7 years
Office furniture and equipment......................  3-7 years
Capitalized lease equipment.........................  3-5 years
Leasehold improvements..............................  Shorter of useful life or lease term
</TABLE>
 
  Patent Costs
 
     Effective January 1, 1996, the Company began amortizing its patent costs
over a period of ten years. Prior to January 1, 1996, patent costs were deferred
pending the outcome of patent applications. Successful patent costs were
amortized by the straight-line method over the lesser of the estimated useful
life or the patent life. Unsuccessful patent costs were expensed when so
determined. This change did not have a significant impact on the Company's
financial condition or results of operations.
 
  Product Revenues/Accounts Receivable
 
     Product revenues are recognized upon passage of legal title of the
inventory.
 
     A substantial majority of the Company's product revenues are export sales
of AmBisome primarily through Company subsidiaries and to distributors in
Europe. The Company performs credit evaluations of its customers' financial
condition and generally has not required collateral. The Company's accounts
receivable are predominantly trade receivables, and to date, the Company has
experienced only modest losses with respect to the collection of its accounts
receivable. During 1996, the Company increased its allowance for doubtful
accounts by $520,000 to $1,025,000 due to an increase in accounts receivable
resulting primarily from increased sales in the Company's products. During 1995,
the allowance for doubtful accounts was unchanged at $505,000.
 
     In 1996 and 1995, sales to one distributor accounted for approximately 18%
and 27% of product revenues, respectively. In 1994, sales to two distributors
accounted for approximately 22% and 18% of product revenues.
 
     In connection with most of its European sales, the Company prices its
products in the currencies of the country into which it is sold (the "Payment
Currencies"), and revenues in the past have been and in the future could be
adversely affected by currency fluctuations. A significant majority of the
Company's manufacturing costs are in U.S. dollars. Therefore, any fall in the
value of the Payment Currencies relative to the U.S. dollar
 
                                       F-7
<PAGE>   59
 
                         NEXSTAR PHARMACEUTICALS, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
is likely to negatively impact gross margins for the Company's products since
the Company's manufacturing costs would stay approximately the same while its
revenue in U.S. dollars would decline.
 
  Foreign Currency Transactions and Contracts
 
     Foreign exchange transaction gains (losses) included in the Consolidated
Statements of Operations in 1996, 1995 and 1994 were ($362,000), $371,000 and
$272,000, respectively.
 
     The Company hedges certain of its foreign currency exposures, with respect
to its outstanding trade accounts receivable and accounts payable, through the
use of forward contracts. In the future, the Company may begin currency hedging
in connection with anticipated revenues and expenses and may use options in
addition to forward contracts. Such hedging will be done solely for the purpose
of protecting the Company from foreign currency fluctuations. The Company does
not enter into speculative foreign currency transactions and does not write
speculative options. The Company recognizes a gain or loss for each forward
contract for the difference between the contract rate and the market rate on
each balance sheet date which is recorded as a selling, general and
administrative expense. At present, no deferred accounting is used in connection
with the Company's hedging activities. Notwithstanding its hedging activities
(which have not always included fully hedging against potential gains or
losses), the Company has in the past recognized foreign exchange gains and
losses. There can be no assurance that significant gains or losses will not be
incurred in the future.
 
     At December 31, 1996 and 1995, the Company had forward exchange contracts
outstanding of $17.9 million and $11.4 million, respectively. These contracts
have maturities that do not exceed one year, and gains/losses resulting from
these contracts were not material.
 
     The Company does not hedge any balance sheet exposure of its foreign
subsidiaries.
 
  Research and Development
 
     Expenditures for research and development, including costs related to
contract and collaborative agreements and technology defense costs, are charged
to operations as incurred.
 
  Net Loss per Share
 
     Beginning on April 1, 1994, net loss per share is computed using the
weighted average number of shares of common stock outstanding. Common equivalent
shares from stock options and warrants are excluded from the computation as
their effect is antidilutive. Prior to April 1, 1994, pursuant to the Securities
and Exchange Commission Staff Accounting Bulletins and Staff Policy, common and
common equivalent shares issued during the 12-month period prior to the initial
public offering at prices below the public offering price are presumed to have
been issued in contemplation of the public offering, even if antidilutive, and
have been included in the calculation as if they were outstanding for all
periods presented (using the treasury stock method and the initial public
offering price for common stock, stock options and warrants and the as converted
method for convertible preferred stock).
 
  Cash and Cash Equivalents
 
     Cash and cash equivalents represent highly liquid debt instruments with a
maturity of three months or less when purchased.
 
  Fair Value of Financial Instruments
 
     FASB Statement No. 107, "Disclosure about Fair Value of Financial
Instruments," requires disclosures of fair value information about financial
instruments for which it is practicable to estimate that value. The Company's
financial instruments consist principally of cash and cash equivalents,
marketable securities,
 
                                       F-8
<PAGE>   60
 
                         NEXSTAR PHARMACEUTICALS, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
accounts receivable, forward contracts, short-term borrowings, accounts payable
and long-term obligations. The Company believes all of the financial
instruments' recorded values approximate current values.
 
NOTE 2. MARKETABLE SECURITIES
 
     Management determines the appropriate classification of debt securities at
the time of purchase and re-evaluates such designation as of each balance sheet
date. Available-for-sale securities are carried at fair value, adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization is included in interest income. Realized gains and losses and
declines in value judged to be other than temporary are included in income. At
December 31, 1996 and 1995, aggregate amortized cost of marketable securities
approximates their aggregate fair value (based on dealer quotations).
 
     The following is a summary of the amortized cost of available-for-sale
marketable securities, which approximates estimated fair value:
 
<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                             -------------------------
                                                                1996           1995
                                                             -----------    ----------
<S>                                                          <C>            <C>
Corporate securities.......................................  $ 9,421,000    $4,897,000
U.S. government agency securities..........................    7,007,000            --
U.S. government securities.................................    1,995,000            --
Other debt securities......................................    2,000,000       944,000
                                                             -----------    ----------
Total marketable securities................................  $20,423,000    $5,841,000
                                                             ===========    ==========
</TABLE>
 
     The following is a summary of the amortized cost, which approximates
estimated fair value of marketable securities available for sale, by contractual
maturity:
 
<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                             -------------------------
                                                                1996           1995
                                                             -----------    ----------
<S>                                                          <C>            <C>
Due in one year or less....................................  $13,517,000    $4,897,000
Due after one year through three years.....................    6,906,000       944,000
                                                             -----------    ----------
Total marketable securities................................  $20,423,000    $5,841,000
                                                             ===========    ==========
</TABLE>
 
     At December 31, 1996 and 1995, $0 and approximately $5,841,000,
respectively, of marketable securities were held and managed by an affiliate of
Warburg, Pincus Investors, L.P. ("WPI"), a beneficial owner of more than 5% of
the Company's common stock.
 
NOTE 3. INVENTORIES
 
     Raw materials, work in process and finished goods inventories are recorded
at the lower of cost or market, based on currently adjusted standard costs,
which approximates cost on a first-in, first-out basis.
 
     Inventories are summarized as follows:
 
<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                             -------------------------
                                                                1996           1995
                                                             -----------    ----------
<S>                                                          <C>            <C>
Finished goods.............................................  $ 4,092,000    $2,804,000
Work in process............................................    8,358,000     4,846,000
Raw materials..............................................    3,179,000     1,819,000
                                                             -----------    ----------
Total inventories..........................................  $15,629,000    $9,469,000
                                                             ===========    ==========
</TABLE>
 
                                       F-9
<PAGE>   61
 
                         NEXSTAR PHARMACEUTICALS, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 4. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
 
     Equipment and leasehold improvements consist of the following:
 
<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                          ----------------------------
                                                              1996            1995
                                                          ------------    ------------
<S>                                                       <C>             <C>
Laboratory and manufacturing equipment..................  $ 13,060,000    $  7,536,000
Office furniture and equipment..........................     8,991,000       4,859,000
Capitalized leased equipment............................    21,027,000      20,891,000
Leasehold improvements..................................    27,335,000      25,586,000
Construction-in-progress................................       524,000       1,251,000
                                                          ------------    ------------
                                                            70,937,000      60,123,000
Less accumulated depreciation and amortization..........   (26,977,000)    (17,122,000)
                                                          ------------    ------------
Net equipment and leasehold improvements................  $ 43,960,000    $ 43,001,000
                                                          ============    ============
</TABLE>
 
NOTE 5. INVESTMENT IN LIFE SCIENCE ENTERPRISE
 
     At December 31, 1996, the Company recorded a $1,241,000 write-down to an
investment in a biotechnology company accounted for under the cost method due to
a permanent decline in value.
 
NOTE 6. PURCHASED TECHNOLOGY
 
     In 1992, the Company and Vical, Incorporated ("Vical") entered into an
agreement under which the Company purchased (for $3,000,000) exclusive rights to
develop applications of Vical's lipid conjugate technology for a limited number
of applications. This agreement was expanded in 1993 (for an additional
$1,500,000) to grant the Company exclusive rights to Vical's entire portfolio of
lipid conjugate technologies for all potential therapeutic applications. The
cost of such base-core technology has been capitalized and is included in
purchased technology on the accompanying Consolidated Balance Sheets. Prior to
January 1, 1995, the Company amortized the technology over the estimated life of
the related patents. Effective January 1, 1995, the Company began amortizing the
remaining value of the technology over a four-year period. The Company evaluates
the carrying amount of the technology for impairment at least quarterly by,
among other things, reviewing the status of applicable ongoing development
activities, as well as the progress of patent applications and issuances.
 
NOTE 7. OTHER ACCRUED EXPENSES
 
     Other accrued expenses consist of the following:
 
<TABLE>
<CAPTION>
                                                                    DECEMBER 31,
                                                              ------------------------
                                                                 1996          1995
                                                              ----------    ----------
<S>                                                           <C>           <C>
Commissions, distribution fees and royalties................  $2,346,000    $1,457,000
Other.......................................................   4,828,000     2,573,000
                                                              ----------    ----------
Total other accrued expenses................................  $7,174,000    $4,030,000
                                                              ==========    ==========
</TABLE>
 
                                      F-10
<PAGE>   62
 
                         NEXSTAR PHARMACEUTICALS, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 8. LONG-TERM OBLIGATIONS
 
     Long-term obligations consist of the following:
 
<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                            --------------------------
                                                               1996           1995
                                                            -----------    -----------
<S>                                                         <C>            <C>
Term loan: 48 monthly installments through June 30, 2000;
  interest payable monthly at LIBOR plus 1.50% or floating
  prime rate of bank (7.125% at December 31, 1996)........  $ 8,750,000    $        --
Capital lease obligations: interest payable monthly at
  6.89% to 12.43%.........................................   11,861,000     13,142,000
Other debt: monthly installments through 2000; secured by
  equipment; interest payable monthly at 9.69% to
  10.26%..................................................    2,130,000      1,019,000
                                                            -----------    -----------
Total long-term obligations...............................   22,741,000     14,161,000
Less current portion......................................   (7,535,000)    (4,313,000)
                                                            -----------    -----------
Long-term obligations due after one year..................  $15,206,000    $ 9,848,000
                                                            ===========    ===========
</TABLE>
 
     Maturities of all long-term obligations, including capital lease
obligations, due subsequent to December 31, 1996 are as follows:
$7,535,000 -- 1997; $6,895,000 -- 1998; $5,848,000 -- 1999; $1,994,000 -- 2000;
and $469,000 -- 2001. Cash paid for interest approximates interest expense.
 
     In June 1996, the Company entered into a term loan agreement with a bank
for $10 million (the "Loan Agreement"). The Loan Agreement requires the Company
to meet certain financial covenants, including maintaining net cash, cash
equivalents and/or investment grade securities equal to the outstanding
principal loan balance plus $10 million of which an amount of cash, cash
equivalents and/or investment grade securities equal to the outstanding
principal loan balance plus three months' interest thereon must be maintained in
an unrestricted account.
 
NOTE 9. COMMITMENTS AND CONTINGENCIES
 
  Leases
 
     The Company has entered into three long-term noncancelable operating leases
and one long-term noncancelable operating sublease for office, research and
manufacturing facilities in Boulder, Colorado and two long-term lease agreements
for office, research and manufacturing facilities in San Dimas, California. The
five leases and one sublease contain the following terms:
 
<TABLE>
<CAPTION>
   LOCATION     TERMINATION DATE   RENEWAL OPTIONS
   --------     ----------------   ---------------
<S>             <C>                <C>
Boulder, CO     October 2001       2 5-year terms
Boulder, CO     November 2001      1 3-year term
Boulder, CO     January 2002       2 7-year terms
Boulder, CO     July 2003          N/A
San Dimas, CA   November 2003      2 5-year terms
San Dimas, CA   May 2003           2 5-year terms
</TABLE>
 
     The Company has entered into certain sale-leaseback transactions and
related master equipment lease agreements for manufacturing equipment, general
laboratory and scientific equipment, office equipment, furniture and fixtures.
At December 31, 1996, $601,000 was available under such agreements. Title to
assets acquired under the lease lines of credit resides with the lessor. The
Company has the option to purchase the assets at the end of the lease term for
the fair market value. The leases have terms ranging from three to five years.
One of the master lease agreements required a security deposit of $5,476,000 to
be held by the lessor.
 
                                      F-11
<PAGE>   63
 
                         NEXSTAR PHARMACEUTICALS, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
The agreement was amended in September 1995 and the security deposit was
returned to the Company. The interest rates on borrowings under these lease
lines of credit range between 6.89% and 12.43% per annum.
 
     Rent expense for the years ended December 31, 1996, 1995 and 1994 was
approximately $3,485,000, $2,618,000 and $1,685,000, respectively.
 
     Future minimum rental payments under noncancellable operating and capital
leases with initial or remaining terms of more than one year as of December 31,
1996 are as follows:
 
<TABLE>
<CAPTION>
YEARS ENDING                                                    OPERATING       CAPITAL
DECEMBER 31,                                                     LEASES         LEASES
------------                                                   -----------    -----------
<S>          <C>                                               <C>            <C>
   1997......................................................  $ 3,884,000    $ 5,112,000
   1998......................................................    3,175,000      4,189,000
   1999......................................................    2,847,000      2,791,000
   2000......................................................    2,626,000        611,000
   2001......................................................    2,353,000        486,000
   Thereafter................................................    3,221,000             --
                                                               -----------    -----------
                                                               $18,106,000     13,189,000
                                                               ===========
   Less amount representing interest.........................                  (1,328,000)
                                                                              -----------
   Total capital lease obligations...........................                  11,861,000
   Less current portion......................................                  (4,450,000)
                                                                              -----------
   Capital lease obligations due after one year..............                 $ 7,411,000
                                                                              ===========
</TABLE>
 
  Loan Receivable
 
     The Company owns a 13.9% equity interest in Phytogen Life Sciences Inc.
("PLS"), a Canadian corporation incorporated in British Columbia. In June 1996,
the Company's holdings in connection with PLS were restructured. Pursuant to the
restructuring, the Company gave up its right to convert a Canadian $4,500,000
loan (the "Loan") (approximately $3,285,000 at the time of conversion and
approximately $3,348,000 at December 31, 1995), which it made to PLS, into a
49.9% interest in PLS, converted Canadian $968,784 (approximately $707,000 at
the time of conversion) of the Loan into 235,714 preference shares in PLS and
converted the Loan to a United States dollar-based loan. In addition, PLS issued
a warrant to the Company to acquire up to 300,000 PLS common shares for $3 per
share and repaid the Company approximately $700,000 in connection with the Loan.
The face amount of the Loan at December 31, 1996 was $2,443,000 with an
outstanding allowance for loan loss of $1,737,000. On December 31, 1995, the
Company recorded an allowance for loan loss of $2,430,000 for the Loan and
ceased accruing interest.
 
  Short-Term Borrowings
 
     At December 31, 1996, the Company had a $10.0 million unsecured line of
credit with a domestic bank. The short-term borrowings outstanding at December
31, 1996 included borrowings under this line of credit. The Company's working
capital needs were fulfilled by borrowing under this line of credit agreement
and the terms and interest rate were similar to those generally extended to
companies of comparable creditworthiness. This line of credit was terminated
subsequent to December 31, 1996 (See Note 13).
 
     In May 1996, the Company's Spanish subsidiary entered into an agreement to
borrow up to 500 million Spanish Pesetas (approximately $3.5 million) with such
borrowing being secured by the subsidiary's accounts receivable in Spain. In
February 1997, the agreement was amended to increase the amount that the
subsidiary may borrow up to 750 million Spanish Pesetas (approximately $5.2
million). In connection with the agreement, the Company is maintaining $2.0
million in an unrestricted account. As of December 31, 1996, the subsidiary had
borrowings of 338 million Pesetas (approximately $2.6 million on December 31,
1996) under
 
                                      F-12
<PAGE>   64
 
                         NEXSTAR PHARMACEUTICALS, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
the agreement. The Company's Spanish subsidiary is required to repay the
borrowings under the agreement in May 1997.
 
     The weighted average interest rates on short-term borrowings as of December
31, 1996 and 1995 were 8.13% and 8.50%, respectively.
 
  Licenses and Royalties
 
     The Company has entered into license agreements with various medical and
educational institutions to obtain certain exclusive and nonexclusive patent
rights for the purpose of developing, manufacturing and selling potential
products using these patented technologies. Under these agreements, the Company
will pay royalties at varying rates based upon levels of revenues from the
licensed products, as defined. Generally, the agreements continue as long as any
licensed patents remain in force.
 
     In September 1996, the Company and Sumitomo Pharmaceuticals Co., Ltd.
("Sumitomo") entered into an agreement (the "Sumitomo License") pursuant to
which Sumitomo will develop and market AmBisome in Japan. Under the terms of the
Sumitomo License, Sumitomo paid the Company an initial $7.0 million licensing
fee (less withholding taxes of $700,000) in October 1996. Sumitomo also is
required to make additional payments to the Company if certain clinical and
commercial milestones are met and to pay the Company royalties on all Japanese
sales.
 
  Patent Matters
 
     On May 17, 1993, the Company filed a complaint in the United States
District Court for the District of Delaware asking the court to declare U.S.
Patent No. 4,880,635 (the "TLC '635 Patent") invalid, unenforceable and not
infringed following allegations by The Liposome Company ("TLC") that
freeze-dried AmBisome infringes the TLC '635 Patent. The United States District
Court for the District of Delaware stayed the lawsuit pending the outcome of a
reexamination of the TLC '635 Patent instituted by TLC in the U.S. Patent and
Trademark Office ("USPTO"). On July 2, 1996, certain amended claims were allowed
by the USPTO. The stay was lifted on July 11, 1996 and an amended complaint was
filed by the Company on July 29, 1996. On August 16, 1996, TLC answered the
amended complaint and filed a counterclaim against the Company for damages and
an injunction based on infringement of the reexamined patent. On January 17,
1997, TLC filed an amended complaint asserting that the Company's method of
lyophilizing AmBisome also infringes U.S. Patent 5,578,320 (the "TLC '320
Patent") which was granted by the USPTO to TLC on November 26, 1996. The TLC
'635 Patent and the TLC '320 Patent (collectively, the "TLC Patents") cover
essentially the same subject matter. On February 26, 1997, the Company filed an
amended and supplemental complaint asserting antitrust and business tort actions
against TLC. The amended complaint states that TLC had fraudulently obtained the
TLC Patents by withholding information from, and intentionally misleading, the
USPTO and has attempted to use the TLC Patents in order to injure NeXstar
Pharmaceuticals and competition generally, including attempting to affect the
Company's proposed stock offering in June 1996. Trial for the TLC Patents is
currently scheduled for October 1997.
 
     In addition, the Company has opposed the grant to TLC of the European and
Japanese patents that are counterparts of the TLC Patents. The European
opposition is expected to be heard in the European Patent Office (the "EPO") in
the spring or summer of 1997. At the opposition hearing, the EPO will rule on
the validity of all of the European Union counterparts to the TLC Patents. TLC
initiated legal actions against the Company on October 18, 1996 in the Chancery
Division of the Patents Court in the United Kingdom, on November 4, 1996 in the
Regional Court of The Hague, The Netherlands and on October 18, 1996 in the
Regional Court -- Dusseldorf in Germany for alleged infringement of the
respective national counterparts to the TLC Patents. In connection with each
suit, TLC is seeking an injunction and damages. The Company anticipates that TLC
may bring additional actions against the Company in connection with its other
European
 
                                      F-13
<PAGE>   65
 
                         NEXSTAR PHARMACEUTICALS, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
counterparts to the TLC Patents and, even if the EPO determines that the
European counterparts to the TLC Patents are invalid, TLC may pursue its
European patent suits pending an appeal of the EPO's decision.
 
     The Company does not believe that the TLC Patents present a material risk
to the Company nor, based on factors currently known, does the Company believe
that the legal proceedings involving TLC will have a material adverse effect on
the financial position of the Company. However, no assurance can be given at
this time. If the U.S. or a European court were to determine that the TLC '635
Patent or the TLC '320 Patent or one of their European counterparts, as
applicable, is both valid and infringed as a result of the freeze-drying of
AmBisome, the Company could be enjoined from using its current method of
manufacturing and/or could be required to pay damages in connection with sales
in the applicable country or countries. In such event, the Company could
experience substantial interruption in its ability to produce AmBisome and/or
incur significant royalty obligations. In addition, the expense of litigation is
expected to be significant regardless of the outcome.
 
  Legal Proceedings Generally
 
     In addition to the legal proceedings involving TLC, the Company is
involved, from time to time, in legal proceedings arising in the ordinary course
of its business. In the opinion of management, none of these matters, based on
factors currently known to management, is expected to have a material adverse
effect on the financial position of the Company.
 
  Accrued Retirement Agreement Expense
 
     Results for the year ended December 31, 1994 were impacted by a charge to
earnings of $4,097,000 as a result of an agreement with Dr. Roger Crossley who
retired on May 25, 1994 as the President and Chief Executive Officer of Vestar.
Vestar and Dr. Crossley entered into an agreement effective May 25, 1994, in
connection with his retirement (the "Agreement"). Under the terms of the
Agreement, during 1995 Dr. Crossley was paid approximately $2.1 million in
connection with his sale of certain shares of the Company's Common Stock. Such
payment related to a guarantee that in the event that prior to May 25, 1997 he
sold certain shares of the Company's Common Stock which he owned at a price less
than $15.772 per share, the Company would pay him the difference between the
sales price and $15.772 per share. During June and July 1995, Dr. Crossley sold
all but 44,000 of the shares covered by the Agreement. In March 1996, he sold
the remaining 44,000 shares covered by the Agreement at no cost to the Company.
 
     The Company accounted for its liability to Dr. Crossley in accordance with
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" and related Interpretations ("APB 25"). Because of the price
guarantee of $15.772 per share, the Company recorded compensation expense at
December 31, 1994 based on the amount the Company would have been required to
pay Dr. Crossley based on the market value of the Company's Common Stock at
December 31, 1994. In accordance with APB 25, following the $2.1 million payment
to Dr. Crossley, the Company transferred $1.7 million from accrued retirement
agreement expenses to additional paid-in capital.
 
NOTE 10. STOCKHOLDERS' EQUITY
 
  Common Stock
 
     On February 13, 1996, the Company completed a private sale of 1,425,000
shares of its common stock to a group of private investors (the "Private
Investors"). The net proceeds to the Company from the sale were approximately
$24.9 million. In connection with the transaction, the Company filed a "shelf"
registration statement on Form S-3 registering for resale the shares acquired by
the Private Investors. Pursuant to its agreement with the Private Investors, the
Company is required to keep the "resale" registration statement effective for up
to three years. In addition to the Private Investors, a holder of 297,619 shares
of the
 
                                      F-14
<PAGE>   66
 
                         NEXSTAR PHARMACEUTICALS, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
Company's common stock and two holders of warrants to acquire 250,481 shares of
the Company's common stock exercised registration rights granted to them by the
Company and had their shares of common stock, or the shares of common stock
which relate to their warrants, included in the registration statement.
 
     On December 22, 1995, the Company sold 297,619 shares of its common stock
in a private offering for $5 million ($16.80 per share).
 
     In February 1994, the Company completed an initial public offering of its
common stock, whereby 2,000,000 shares of the Company's common stock were sold
at $11.50 per share, resulting in net proceeds of approximately $20,617,000.
 
     As a result of the Company's initial public offering, all preferred shares
outstanding (excluding preferred shares issuable upon exercise of outstanding
warrants), including the Series B preferred shares held by WPI, a beneficial
owner of more than 5% of the Company's common stock, automatically converted
into an aggregate of 5,655,396 shares of common stock upon consummation of the
offering.
 
     On November 19, 1993, the Company's Board of Directors approved the
conversion of the Company's Series B redeemable preferred stock into common
stock in connection with any public offering by the Company. The Series B
redeemable preferred stock was converted by dividing $4,000,000 by $11.50, the
price per share in the Company's public offering, with the holder waiving rights
to any dividends. In connection with the initial public offering, the Series B
stockholder, WPI, transferred to Lawrence M. Gold, the Chairman of the Company,
approximately 28% of the shares of common stock WPI acquired as a result of the
conversion in consideration for the termination of certain of his rights. At the
time of the transfer, the Company recorded non-cash compensation expense and a
corresponding credit to additional paid-in capital equal to the fair value of
the shares transferred (approximately $1,120,000).
 
  Warrants
 
     Common stock warrant activity was as follows:
 
<TABLE>
<CAPTION>
                                                          RANGE OF         SHARES      EXPIRATION
                                          WARRANTS     EXERCISE PRICES    RESERVED        DATE
                                          ---------    ---------------    ---------    -----------
<S>                                       <C>          <C>                <C>          <C>
Outstanding, December 31, 1995..........  1,431,774     $4.09 - $32.54    1,431,774    1996 - 2003
  Granted...............................     50,000             $15.00       50,000           2003
  Exercised.............................   (257,100)    $4.83 - $11.21     (257,100)   1998 - 2003
  Expired...............................     (6,301)            $11.21       (6,301)          1996
                                          ---------                       ---------
Outstanding, December 31, 1996..........  1,218,373                       1,218,373
                                          =========                       =========
</TABLE>
 
     In 1990, the Company issued to Warburg, Pincus Capital Partners, L.P.
("WPCP"), a beneficial owner of more than 5% of the Company's common stock, a
warrant to purchase 220,000 shares of common stock with a purchase price of
$4.09 per share in connection with the issuance of a letter of credit on behalf
of the Company, which has expired. In April 1995, the warrant was exercised for
40,000 shares of common stock and the warrant expired for the remaining 180,000
shares of common stock. In addition, WPCP has a warrant to purchase 1,035,294 of
the Company's common stock at an exercise price of $4.83 per share, which was
issued in 1990 in connection with the sale of certain equity securities of the
Company. In April 1995, WPCP's warrant was amended to change the expiration date
to December 31, 1997.
 
  Registration Rights
 
     Under certain circumstances, the Company's common stockholders and holders
of warrants to purchase common stock of the Company may require a registration
of the outstanding common shares or the shares underlying warrants, the cost of
which would be borne by the Company.
 
                                      F-15
<PAGE>   67
 
                         NEXSTAR PHARMACEUTICALS, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
  Stock Options and Stock-Based Compensation
 
     On February 8, 1993, the Company adopted the 1993 Incentive Stock Plan (the
"1993 Plan") for employees, directors, and consultants of NeXstar
Pharmaceuticals which provides for the sale of shares or the issuance of
incentive and nonstatutory stock options of up to 2,404,847 shares of common
stock. Options issued under the 1993 Plan are exercisable under conditions as
determined by the Board of Directors, with the term of each option being a
maximum of ten years from the date of grant. The Company has reserved 2,404,847
shares of its authorized common stock under its 1993 Plan.
 
     During the year ended December 31, 1996, the Company granted options to
purchase 72,500 shares of common stock under the 1993 Plan to executive officers
of the Company. Options granted prior to November 1993 vest 20% immediately and
20% on the grant date anniversary each year thereafter for four years. Options
granted after October 1993 generally vest 25% on each anniversary date of the
four years following the grant date. The option exercise prices range from $0.69
to $25.00 per share.
 
     The Company has reserved for issuance 1,204,904 shares of its common stock
to allow for the exercise of options under its 1988 Stock Option Plan (the "1988
Plan"). Options granted under the 1988 Plan are exercisable upon conditions
determined by the Board of Directors of the Company, and expire no later than
ten years from the date of grant. The Company does not intend to issue
additional options under the 1988 Plan.
 
     On July 25, 1995, the Company adopted the 1995 Director Option Plan (the
"Director Plan"). Under the Director Plan, each outside director of the Company
is entitled to receive an option for 10,000 shares of the Company's common stock
on the later of the effective date of the Director Plan or the date on which
such person first becomes an outside director. In addition, each outside
director who has served on the Board of Directors for at least six months
automatically is entitled to receive an option grant for 5,000 shares on the
last business day prior to each annual meeting of stockholders of the Company.
The options have a term of ten years, an exercise price equal to 100% of the
fair market value of the common stock on the date of grant and vest 50% on each
anniversary date of the two years following the grant date. Options for up to
500,000 shares of common stock may be issued under the Director Plan. In 1996
and 1995, options for 15,000 and 30,000 shares, respectively, were issued to
three outside directors.
 
                                      F-16
<PAGE>   68
 
                         NEXSTAR PHARMACEUTICALS, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Stock option activity was as follows:
 
<TABLE>
<CAPTION>
                                                                                        WEIGHTED
                                                                                        AVERAGE
                                                                        RANGE OF        EXERCISE
                                                         OPTIONS     EXERCISE PRICES     PRICE
                                                        ---------    ---------------    --------
<S>                                                     <C>          <C>                <C>
Outstanding, December 31, 1993........................  1,618,225    $ 0.69 - $18.47     $ 6.49
  Granted.............................................    574,330    $ 5.54 - $ 9.00     $ 8.90
  Exercised...........................................   (161,084)   $ 1.12 - $ 3.55     $ 3.26
  Forfeited...........................................    (80,699)   $ 2.56 - $17.33     $10.76
                                                        ---------
Outstanding, December 31, 1994........................  1,950,772    $ 0.69 - $18.47     $ 7.29
  Granted.............................................    783,640    $ 5.65 - $16.50     $13.79
  Exercised...........................................   (249,980)   $ 0.69 - $13.92     $ 3.92
  Forfeited...........................................   (294,098)   $ 0.69 - $15.91     $ 8.74
                                                        ---------
Outstanding, December 31, 1995........................  2,190,334    $ 0.69 - $18.47     $ 9.80
  Granted.............................................    654,300    $15.00 - $25.00     $19.20
  Exercised...........................................   (290,615)   $ 0.69 - $18.47     $ 5.43
  Forfeited...........................................   (130,385)   $ 1.12 - $25.00     $17.91
                                                        ---------
Outstanding, December 31, 1996........................  2,423,634    $ 0.69 - $25.00     $12.43
                                                        =========
Exercisable, December 31, 1994........................  1,020,853                        $ 6.98
Exercisable, December 31, 1995........................    997,798                        $ 7.89
Exercisable, December 31, 1996........................  1,090,662                        $ 8.75
Weighted-average fair value of options granted during
  1995................................................     $ 8.02
Weighted-average fair value of options granted during
  1996................................................     $12.05
</TABLE>
 
     The options outstanding at December 31, 1996 have been segregated into
ranges for additional disclosure as follows:
 
<TABLE>
<CAPTION>
                             OPTIONS OUTSTANDING                 OPTIONS EXERCISABLE
                  -----------------------------------------   -------------------------
                                     WEIGHTED
                     OPTIONS          AVERAGE      WEIGHTED      OPTIONS       WEIGHTED
                  OUTSTANDING AT     REMAINING     AVERAGE    EXERCISABLE AT   AVERAGE
   RANGE OF        DECEMBER 31,     CONTRACTUAL    EXERCISE    DECEMBER 31,    EXERCISE
EXERCISE PRICES        1996        LIFE IN YEARS    PRICE          1996         PRICE
---------------   --------------   -------------   --------   --------------   --------
<C>               <C>              <C>             <C>        <C>              <C>
$ 0.69 - $ 7.96       613,240          4.09         $ 4.06        441,148       $ 3.77
$ 8.38 - $14.75     1,074,114          5.99         $12.61        583,059       $11.73
$14.77 - $23.00       619,280          6.54         $16.88         66,455       $15.60
$23.75 - $25.00       117,000          7.53         $24.42             --           --
                    ---------                                   ---------
$ 0.69 - $25.00     2,423,634          5.72         $12.11      1,090,662       $ 8.75
                    =========                                   =========
</TABLE>
 
     At December 31, 1996, options for 1,073,925 shares were available for
future grants.
 
     The Company has elected to follow APB 25 in accounting for its employee
stock options because, as discussed below, the alternative fair value accounting
provided for under FASB Statement No. 123, "Accounting for Stock-Based
Compensation" ("Statement No. 123") requires use of option valuation models that
were not developed for use in valuing employee stock options. Under APB 25,
because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
 
     Statement No. 123 requires disclosure of pro forma net income and pro forma
earnings per share determined as if the Company has accounted for its employee
stock options granted subsequent to
 
                                      F-17
<PAGE>   69
 
                         NEXSTAR PHARMACEUTICALS, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
December 31, 1994 under the fair value method of Statement No. 123. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1996
and 1995, respectively: risk-free interest rates of 5.49% and 5.51%; a dividend
yield of 0%; volatility factors of the expected market price of the Company's
common stock of .7240 and .6206; and an expected life of the option after
vesting date of 1.23 years and 0.90 years.
 
     The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
 
     For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
 
<TABLE>
<CAPTION>
                                                           YEARS ENDED DECEMBER 31,
                                                        ------------------------------
                                                            1996              1995
                                                        ------------      ------------
<S>                                                     <C>               <C>
Pro forma net loss....................................  $(26,080,000)     $(37,269,000)
Pro forma net loss per share..........................  $      (1.00)     $      (1.59)
</TABLE>
 
     Because Statement No. 123 is applicable only to options granted subsequent
to December 31, 1994, its pro forma effect will not be fully reflected until the
fiscal year ended December 31, 1998.
 
     As a result of nonstatutory stock options granted to consultants in 1996,
the Company recorded deferred compensation of $301,000, which is being amortized
over a period of four years. The Company recognized $51,000 as a non-cash charge
to earnings during 1996 as a result of this amortization.
 
     As a result of compensatory stock issuances and option grants in 1993, the
Company recorded deferred compensation, non-cash charges to earnings and a
credit for additional paid-in capital of $470,000, $319,000 and $789,000,
respectively. The Company is amortizing the deferred compensation over a period
of four years.
 
  Restrictions on Payment of Dividends
 
     One of the Company's outstanding debt agreements does not permit the
Company to pay dividends in cash during the term of the agreement. In addition,
another of the Company's debt agreements requires the Company to maintain
certain financial ratios and levels of cash which may have the effect of
limiting the Company's ability to pay dividends.
 
NOTE 11. EMPLOYEE BENEFIT PLANS
 
  Employee Stock Purchase Plan
 
     On June 9, 1994, the Company adopted an employee stock purchase plan (the
"Stock Purchase Plan") with an effective date of August 1, 1994, under Internal
Revenue Code Section 423, which provides for the sale to employees of up to
500,000 shares of common stock. The Company has reserved 500,000 shares of its
authorized common stock in connection with the Stock Purchase Plan. Employees
who work at least twenty hours per week and at least five months per calendar
year may participate. The granting of rights to purchase common stock of the
Company shall be determined by the Board of Directors. As of December 31, 1996,
a total of 110,966 shares were purchased at prices per share from $4.78 to
$15.30, which represented 85% of the fair market value of the common stock on
the lower of the offering date or the date of exercise. Expenses associated with
the Stock Purchase Plan are not material.
 
                                      F-18
<PAGE>   70
 
                         NEXSTAR PHARMACEUTICALS, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Stock Purchase Plan activity was as follows:
 
<TABLE>
<CAPTION>
                                                                                WEIGHTED
                                                                                AVERAGE
                                                                RANGE OF        EXERCISE
                                                  OPTIONS    EXERCISE PRICES     PRICE
                                                  -------    ---------------    --------
<S>                                               <C>        <C>                <C>
Outstanding, December 31, 1993..................       --                 --         --
  Granted.......................................    6,009              $4.78      $4.78
  Exercised.....................................   (6,009)             $4.78      $4.78
Outstanding, December 31, 1994..................       --                 --         --
  Granted.......................................   46,600      $4.78 - $7.23      $6.60
  Exercised.....................................  (46,600)     $4.78 - $7.23      $6.60
Outstanding, December 31, 1995..................       --                 --         --
  Granted.......................................   58,357    $12.75 - $15.30     $13.85
  Exercised.....................................  (58,357)   $12.75 - $15.30     $13.85
                                                  -------
Outstanding, December 31, 1996..................       --                 --         --
                                                  =======
Weighted-average fair value of options granted
  during 1995...................................  $ 15.71
Weighted-average fair value of options granted
  during 1996...................................  $ 18.11
</TABLE>
 
  Retirement Savings Plan
 
     The Company maintains a retirement savings plan pursuant to which eligible
employees aged 21 or older may defer compensation for income tax purposes under
Section 401(k) of the Internal Revenue Code of 1986 (the "Savings Plan").
Employee contributions are discretionary, but are not to exceed 12% of eligible
annual compensation. The Savings Plan includes a Company match of 50% of
employee contributions up to a maximum of 6% of eligible annual compensation.
For the years ended December 31, 1996, 1995, and 1994, the Company recorded
expenses related to the Savings Plan of approximately $513,000, $160,000 and
$135,000, respectively. At December 31, 1996, approximately $1.5 million
representing 101,834 shares of the Company's common stock, was held by the
Savings Plan in trust for plan participants. Additional contributions of Company
stock are not allowed under the Savings Plan.
 
NOTE 12. INCOME TAXES
 
     For financial reporting purposes, loss before income taxes includes the
following components:
 
<TABLE>
<CAPTION>
                                                      YEARS ENDED DECEMBER 31,
                                             ------------------------------------------
                                                 1996           1995           1994
                                             ------------   ------------   ------------
<S>                                          <C>            <C>            <C>
Pretax loss:
United States..............................  $(20,890,000)  $(35,128,000)  $(14,543,000)
Foreign....................................    (1,165,000)    (1,320,000)    (1,505,000)
                                             ------------   ------------   ------------
                                             $(22,055,000)  $(36,448,000)  $(16,048,000)
                                             ============   ============   ============
</TABLE>
 
                                      F-19
<PAGE>   71
 
                         NEXSTAR PHARMACEUTICALS, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The current provision for income taxes includes the following:
 
<TABLE>
<CAPTION>
                                                          YEARS ENDED DECEMBER 31,
                                                       ------------------------------
                                                         1996       1995       1994
                                                       --------   --------   --------
<S>                                                    <C>        <C>        <C>
Federal income taxes.................................  $     --   $     --   $ 16,000
State income taxes...................................        --         --         --
Foreign income taxes.................................   926,000    183,000    143,000
                                                       --------   --------   --------
                                                       $926,000   $183,000   $159,000
                                                       ========   ========   ========
</TABLE>
 
     The difference between the Company's current provision for income taxes and
the federal statutory rate of 34% is reconciled as follows:
 
<TABLE>
<CAPTION>
                                                       YEARS ENDED DECEMBER 31,
                                               ----------------------------------------
                                                  1996           1995          1994
                                               -----------   ------------   -----------
<S>                                            <C>           <C>            <C>
Statutory rate applied to loss before income
  taxes......................................  $(7,499,000)  $(12,392,000)  $(5,565,000)
Tax effect of subsidiary losses without
  benefit....................................      396,000        296,000       144,000
Effect of foreign tax rates..................      926,000        183,000        41,000
In-process purchased research and
  development................................           --      4,020,000            --
Merger-related costs not deductible for tax
  purposes...................................           --      1,023,000            --
Net operating loss unused/(net of operating
  loss carryforwards utilized)...............    5,276,000      6,470,000     4,525,000
Other........................................    1,827,000        583,000     1,014,000
                                               -----------   ------------   -----------
                                               $   926,000   $    183,000   $   159,000
                                               ===========   ============   ===========
</TABLE>
 
     At December 31, 1996, the Company had net operating loss and tax credit
carryforwards available to reduce future taxable income. Utilization of these
losses and credits may be subject to substantial annual limitations due to the
separate return limitation years ("SRLY") and ownership change limitations
provided by the Internal Revenue Code of 1986. The annual limitation may result
in the expiration of the net operating losses and credits before utilization.
Tax loss and tax credit carryforwards are as follows:
 
<TABLE>
<CAPTION>
                                           FEDERAL                         STATE
                                 ---------------------------    ---------------------------
                                                RESEARCH AND                   RESEARCH AND
                                     NET        DEVELOPMENT         NET        DEVELOPMENT
                                  OPERATING      AND OTHER       OPERATING      AND OTHER
     EXPIRES DECEMBER 31,           LOSS          CREDITS          LOSS          CREDITS
     --------------------        -----------    ------------    -----------    ------------
<S>                              <C>            <C>             <C>            <C>
     2002......................  $ 3,732,000     $       --     $ 3,636,000     $       --
     2003......................    6,442,000             --       3,153,000             --
     2004......................    7,287,000             --       3,646,000             --
     2005......................    6,815,000             --       3,717,000             --
     2006......................    2,943,000             --       2,943,000             --
     2007......................    8,002,000        463,000       8,002,000             --
     2008......................   14,857,000      4,669,000      12,403,000      1,431,000
     2009......................    5,284,000        710,000       5,391,000          6,000
     2010......................   15,803,000        517,000       6,564,000        371,000
     2011......................   15,519,000      1,391,000      10,702,000        500,000
                                 -----------     ----------     -----------     ----------
                                 $86,684,000     $7,750,000     $60,157,000     $2,308,000
                                 ===========     ==========     ===========     ==========
</TABLE>
 
                                      F-20
<PAGE>   72
 
                         NEXSTAR PHARMACEUTICALS, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The components of the Company's deferred tax asset and related valuation
allowance as of December 31, 1996 and 1995 are as follows:
 
<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                         -----------------------------
                                                             1996             1995
                                                         ------------      -----------
<S>                                                      <C>               <C>
Net operating loss carryforwards
  Federal..............................................  $ 29,473,000      $26,295,000
  State................................................     1,985,000        1,811,000
Tax credit carryforwards
  Federal..............................................     7,750,000        6,379,000
  State................................................     2,308,000        1,513,000
Other --  net..........................................     7,266,000        3,846,000
                                                         ------------      -----------
                                                           48,782,000       39,844,000
Valuation allowance....................................   (48,782,000)     (39,844,000)
                                                         ------------      -----------
Deferred tax asset recognized..........................  $         --      $        --
                                                         ============      ===========
</TABLE>
 
NOTE 13. SUBSEQUENT EVENTS
 
     In February 1997, the Company entered into an agreement with its European
toll manufacturer to acquire for one million Irish Punts (approximately $1.6
million) the Dublin, Ireland facilities at which the toll manufacturer is
providing quality control testing, final labeling and packaging for the
Company's products in Europe. The Company anticipates acquiring the facilities
in the third quarter of 1997.
 
     In March 1997, the Company substantially restructured its bank financing by
(a) terminating an unsecured line of credit pursuant to which it had a right to
borrow up to $10 million, (b) entering into a credit agreement pursuant to which
the Company and certain of its subsidiaries may borrow up to $15 million with
the borrowings being collateralized by certain of the non-U.S. accounts
receivable of the Company and the subsidiaries and (c) entering into a revolving
line of credit (the "Credit Line") pursuant to which the Company may borrow up
to $15 million. An affiliate of WPI, a beneficial owner of more than 5% of the
Company's common stock, is a guarantor of the Credit Line in return for WPI's
receipt of a warrant to acquire 125,000 shares of the Company's common stock at
a purchase price of $12.50 per share.
 
                                      F-21
<PAGE>   73
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
          2.1            -- Agreement and Plan of Merger, dated as of October 30,
                            1994, among the Registrant, Neptune Merger-Sub Corp. and
                            Vestar, Inc.(1).
          2.2            -- Agreement and Plan of Merger, dated as of August 29,
                            1995, among the Registrant, Supra-Sub Merger Corp. and
                            Supragen, Inc.(2).
          3.1            -- Second Amended and Restated Certificate of Incorporation
                            of the Registrant(3).
          3.2            -- Amended and Restated Bylaws of the Registrant(4).
          4.1            -- Second Amended and Restated Certificate of Incorporation
                            of the Registrant (filed as Exhibit 3.1 to this Report).
          4.2            -- Form of Common Stock certificate of the Registrant(4).
         10.1            -- License Agreement between University Research Corporation
                            and the Registrant, effective as of July 17, 1991, as
                            amended on October 26, 1992(5).
         10.2            -- Amendment No. 2, effective April 5, 1996, and Amendment
                            No. 3, dated September 5, 1996, to the License Agreement
                            between University Research Corporation and the
                            Registrant, effective as of July 17, 1991, as amended on
                            October 26, 1992.
         10.3            -- Stock Purchase Agreement among the Registrant, Warburg,
                            Pincus Investors, L.P., University Research Corporation
                            and Lawrence M. Gold, dated as of July 17, 1991, as
                            amended on December 4, 1992, and as amended by letter
                            agreement on November 19, 1993(5).
         10.4            -- Employment Agreement, dated July 1, 1991, between the
                            Registrant and Lawrence M. Gold(5).
         10.5            -- Letter Agreement, dated May 1, 1992, between the
                            Registrant and Patrick J. Mahaffy(5).
         10.6            -- Master Equipment Lease Agreement between MMC/GATX
                            Partnership No. 1 and the Registrant, dated as of
                            November 23, 1992(5).
         10.7            -- Research and License Agreement between Eli Lilly and
                            Company and the Registrant, effective as of September 15,
                            1992, and Amendment No. 1 thereto dated as of April 1,
                            1994(4).
         10.8            -- Stock Purchase Agreement among the Registrant, Eli Lilly
                            and Company and Warburg, Pincus Investors, L.P., dated as
                            of September 15, 1992(5).
         10.9            -- Supplement to Stock Purchase Agreement among the
                            Registrant, Eli Lilly and Company, Warburg, Pincus
                            Investors, L.P. and certain additional investors, dated
                            as of September 30, 1992(5).
         10.10           -- Second Supplement to Stock Purchase Agreement among the
                            Company, Accel III, L.P., Accel Japan L.P., Accel
                            Investors '92 L.P., New Enterprise Associates V Limited
                            Partnership, Ven Sed I, Eli Lilly and Company and
                            Warburg, Pincus Investors, L.P., dated as of December 4,
                            1992(5).
         10.11           -- Collaborative Research Agreement between the Registrant
                            and Becton, Dickinson and Company, dated as of May 28,
                            1993(5).
         10.12           -- License Agreement between the Registrant and Becton,
                            Dickinson and Company, dated as of May 28, 1993(5).
         10.13           -- Amendment to the Collaborative Research Agreement and
                            License Agreement, effective as of June 1, 1995, between
                            the Registrant and Becton, Dickinson and Company(6).
         10.14           -- Collaborative Research Agreement between the Registrant
                            and Schering A.G., dated as of November 16, 1993(5).
</TABLE>
<PAGE>   74
 
                                 EXHIBIT INDEX
<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
         10.15           -- Letter Agreement between the Registrant and Schering
                            A.G., effective February 1, 1997, amending the
                            Collaborative Research Agreement between the Registrant
                            and Schering A.G., dated as of November 16, 1993.
         10.16           -- License Agreement between the Registrant and Schering
                            A.G., dated as of November 16, 1993(5).
         10.17           -- Master Equipment Lease Agreement between Phoenix Leasing
                            Incorporated and the Registrant, dated November 15,
                            1993(5).
         10.18           -- Master Lease Agreement between USL Capital Corporation
                            and the Registrant, dated as of November 9, 1995(7).
         10.19           -- Letter Agreement, dated January 24, 1994, between Eli
                            Lilly and Company and the Registrant(5).
         10.20           -- Common Stock Purchase Warrant issued to Warburg, Pincus
                            Capital Partners, L.P., dated May 11, 1990(8).
         10.21           -- Letter Agreement, dated April 20, 1995, between Warburg,
                            Pincus Capital Partners, L.P. and the Registrant
                            regarding amendments to warrants held by Warburg, Pincus
                            Capital Partners, L.P.(9).
         10.22           -- Vestar, Inc. 401(k) Retirement Savings Plan and Trust,
                            Amendment No. 1 thereto and the related adoption
                            agreement thereto, dated March 27, 1995(4).
         10.23           -- Supragen, Inc. 401(k) Profit Sharing Plan and Adoption
                            Agreement(2).
         10.24           -- Registrant's 401(k) Retirement Savings Plan, effective
                            January 1, 1996, and related adoption agreement(10).
         10.25           -- Adoption Agreement of the NeXagen, Inc. 401(k) Retirement
                            Plan, dated January 1, 1993(5).
         10.26           -- NeXagen, Inc. 1993 Incentive Stock Plan, adopted February
                            8, 1993, as amended(2).
         10.27           -- Amendment No. 4 to NeXagen, Inc. 1993 Incentive Stock
                            Plan, adopted February 8, 1993(3).
         10.28           -- Registrant's 1995 Director Option Plan, adopted July 25,
                            1995(2).
         10.29           -- Vestar, Inc. 1988 Stock Option Plan(4).
         10.30           -- Registrant's 1994 Employee Stock Purchase Plan, adopted
                            June 9, 1994(4).
         10.31           -- Amendment No. 1 to Registrant's 1994 Employee Stock
                            Purchase Plan, adopted June 9, 1994(3).
         10.32           -- Lease, dated March 26, 1987, between Vestar, Inc. and
                            Majestic Realty Co. and Patrician Associates, Inc. and
                            Amendment No. 1 thereto and Amendment No. 2 thereto,
                            dated as of June 8, 1992(4).
         10.33           -- Third Amendment, dated January 11, 1996, between Majestic
                            Realty Co. and Patrician Associates, Inc. and the
                            Registrant, to Lease, dated March 26, 1987, between
                            Vestar, Inc. and Majestic Realty Co. and Patrician
                            Associates, Inc.(7).
         10.34           -- Agreement, dated January 6, 1993, between Vestar, Inc.
                            and Vical Incorporated(7).
         10.35           -- Assignment and Royalty Agreement, dated December 21,
                            1990, effective as of June 2, 1989, between Vestar, Inc.
                            and City of Hope National Medical Center(8).
         10.36           -- License Agreement, effective as of August 12, 1986,
                            between Vestar, Inc. and The Regents of the University of
                            California(7).
         10.37           -- Agreement by and between Fujisawa USA, Inc. and Vestar,
                            Inc., dated August 9, 1991, and Amendment No 1 thereto,
                            dated as of May 17, 1994(4).
</TABLE>
<PAGE>   75
 
                                 EXHIBIT INDEX
<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
         10.38           -- Amendment No 2 to agreement between Fujisawa USA, Inc.
                            and Vestar, Inc., dated as of April 3, 1995, between
                            Fujisawa USA, Inc. and Vestar, Inc. (9) [Part of this
                            document has been redacted for purposes of
                            confidentiality pursuant to Rule 24b-2 of the Securities
                            Exchange Act of 1934, as amended].
         10.39           -- Amendment No. 3 to Agreement between Fujisawa USA, Inc.
                            and the Registrant, dated March 4, 1996, to the Agreement
                            by and between Fujisawa USA, Inc. and Vestar, Inc., dated
                            August 9, 1991(7).
         10.40           -- Lease, dated April 13, 1992, between Vestar, Inc. and
                            Majestic Realty Co. and Patrician Associates, Inc.(4).
         10.41           -- First Amendment to Lease, dated April 10, 1993, between
                            Majestic Realty Co. and Patrician Associates, Inc. and
                            Vestar, Inc. amending Lease, dated April 13, 1992,
                            between Majestic Realty Co. and Patrician Associates,
                            Inc. and Vestar, Inc.(7).
         10.42           -- Master Lease Agreement, dated June 29, 1994, between
                            Vestar, Inc. and Comdisco, Inc.(4).
         10.43           -- Lease Agreement, dated September 28, 1994, between the
                            Registrant and Deane Investment Co., Ltd.(4).
         10.44           -- License Agreement, dated December 23, 1992, between
                            Supragen, Inc. and National Jewish Center for Immunology
                            and Respiratory Medicine, as amended(2).
         10.45           -- Employment Agreement, dated November 4, 1994, between
                            Supragen, Inc. and Michael T. Burke(2).
         10.46           -- Royalty Agreement, dated October 30, 1995, between the
                            Registrant and Amplimed Corporation(7).
         10.47           -- Pharmaceutical Pricing Agreement between the Secretary of
                            Veterans Affairs and the Registrant, dated April 30,
                            1996(11).
         10.48           -- Master Agreement between Secretary of Veterans Affairs
                            and the Registrant, dated April 30, 1996(11).
         10.49           -- Pharmaceutical Pricing Agreement between the Secretary of
                            Health and Human Services and the Registrant, dated April
                            30, 1996(11).
         10.50           -- Rebate Agreement between the Secretary of Health and
                            Human Services and the Registrant, dated April 30,
                            1996(11).
         10.51           -- Industrial Real Estate Lease, dated July 1, 1996, by and
                            between Wilderness Place, Ltd. and the Registrant(12).
         10.52           -- Loan Agreement, dated as of June 28, 1996, by and between
                            the Registrant and The Sumitomo Bank, Limited(12).
         10.53           -- Sublease Agreement, dated July 31, 1996, between Sybase,
                            Inc. and the Registrant(13).
         10.54           -- Lease Agreement, dated November 6, 1996, between Avalon
                            Investment Company and the Registrant(13).
         10.55           -- Commercial Factoring Agreement between Santander de
                            Factoring, S.A. and NeXstar Farmaceutica, S.A., entered
                            into on May 21, 1996, as amended.
         10.56           -- License and Distribution Agreement, dated September 26,
                            1997, by and between Sumitomo Pharmaceuticals Co., Ltd.
                            and the Registrant. [Part of the document has been
                            redacted for purposes of confidentiality pursuant to Rule
                            24b-2 of the Securities Exchange Act of 1934, as
                            amended.]
         10.57           -- Credit Agreement, entered into as of March 24, 1997,
                            between Wells Fargo Bank (Colorado), National
                            Association, the Registrant and certain of the
                            Registrant's subsidiaries.
</TABLE>
<PAGE>   76
 
                                 EXHIBIT INDEX
<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
         10.58           -- Securities Purchase Agreement among Warburg, Pincus
                            Capital Partners, L.P., Humana Inc. and Vestar, Inc.,
                            dated May 11, 1990.
         11.1            -- Statement Re: Computation of Net Loss Per Share.
         21.1            -- Subsidiaries of Registrant.
         23.1            -- Consent of Independent Auditors.
         27.1            -- Financial Data Schedule.
</TABLE>
 
 (1) Previously filed on January 26, 1995, as Annex A to the Registration
     Statement on Form S-4 (File No. 33-88786), which exhibit is incorporated by
     reference herein.
 
 (2) Previously filed in the Exhibits to Form 10-Q (File No. 0-23012) for the
     Registrant for the quarterly period ended September 30, 1995, and
     incorporated by reference herein.
 
 (3) Previously filed in the Exhibits to the Registration Statement on Form S-3
     (File No. 333-04653), declared effective by the Securities and Exchange
     Commission on June 19, 1996, which exhibit is incorporated by reference
     herein.
 
 (4) Previously filed in the Exhibits to Form 10-K (File No. 0-23012) for the
     Registrant for the fiscal year ended December 31, 1994, and incorporated by
     reference herein.
 
 (5) Previously filed in the Exhibits to the Registration Statement on Form S-1
     (File No. 33-72142), declared effective by the Securities and Exchange
     Commission on January 28, 1994, which exhibit is incorporated by reference
     herein.
 
 (6) Previously filed in the Exhibits to Form 10-Q (File No. 0-23012) for the
     Registrant for the quarterly period ended June 30, 1995, and incorporated
     by reference herein.
 
 (7) Previously filed in the Exhibits to Form 10-K (File No. 0-23012) for the
     Registrant for the fiscal year ended December 31, 1995, and incorporated by
     reference herein.
 
 (8) Previously filed, on March 22, 1991, in the Exhibits to the Registration
     Statement on Form S-2 (File No. 33-39549), which exhibit is incorporated by
     reference herein.
 
 (9) Previously filed in the Exhibits to Form 10-Q (File No. 0-23012) for the
     Registrant for the quarterly period ended March 31, 1995, and incorporated
     by reference herein.
 
(10) Previously filed in the Exhibits to the Registration Statement on Form S-3
     (File No. 333-00758) declared effective by the Securities and Exchange
     Commission on February 9, 1996, which exhibit is incorporated by reference
     herein.
 
(11) Previously filed in the Exhibits to Form 10-Q (File No. 0-23012) for the
     Registrant for the quarterly period ended March 31, 1996, and incorporated
     by reference herein.
 
(12) Previously filed in the Exhibits to Form 10-Q (File No. 0-23012) for the
     Registrant for the quarterly period ended June 30, 1996, and incorporated
     by reference herein.
 
(13) Previously filed in the Exhibits to Form 10-Q (File No. 0-23012) for the
     Registrant for the quarterly period ended September 30, 1996, and
     incorporated by reference herein.