##### Table of Contents

---




UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


---

FORM 10-K





xANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE


SECURITIES EXCHANGE ACT OF 1934





For the fiscal year ended December 31, 2001





Commission file number 0-27914


---

RIBOZYME PHARMACEUTICALS, INC.


(Exact Name of Registrant as Specified in Its Charter)





Delaware

34-1697351(State of incorporation)

(I.R.S. Employer Identification No.)





2950 Wilderness Place, Boulder, Colorado 80301


(Address of principal executive offices)





(303) 449-6500


(Registrants telephone number, including area code)


---

Securities
registered under Section 12(b) of the Exchange Act:





None





Securities registered under Section 12(g) of the Exchange Act:





Common
Stock, Par Value $0.01 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 registrants
knowledge, in definitive proxy of information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x





The aggregate market value of the voting stock held by non-affiliates of the registrant, as of March 27, 2002, was approximately $52,236,400.





As of March 27, 2002, the registrant had 20,016,808 shares of common stock, par value $.01 per share, outstanding.





DOCUMENTS INCORPORATED BY REFERENCE:





Registrants definitive Proxy Statement which will be filed on or before April 30, 2002 with the Securities and Exchange Commission in connection with Registrants annual meeting of stockholders to be held
on May 24, 2002 is incorporated by reference into Part III of this Report.





---





---

##### Table of Contents

TABLE OF CONTENTS





PagePART IItem 1

Business

3Item 2.

Properties

13Item 3.

Legal Proceedings

13Item 4.

Submission of Matters to a Vote of Security Holders

13PART IIItem 5.

Market for Registrants Common Equity and Related Stockholder Matters

14Item 6.

Selected Financial Data

15Item 7.

Managements Discussion and Analysis of Financial Condition and Results of Operations

16Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

21Item 8.

Financial Statements and Supplementary Data

21Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

21PART IIIItem 10.

Directors and Executive Officers of Registrant

22Item 11.

Executive Compensation

24Item 12

Security Ownership of Certain Beneficial Owners and Management. Changes in Control

24Item 13.

Certain Relationships and Related Transactions

24PART IVItem 14.

Exhibits, Financial Statements and Reports on Form 8-K

25ANGIOZYME, HEPTAZYME, HERZYMEand HepBzymeare
trademarks of Ribozyme Pharmaceuticals, Inc.




2




---

##### Table of Contents




BUSINESS





Forward-looking Statements





Statements in this Form 10-K, which are not strictly historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934 that involve risks and uncertainties. These uncertainties, which include, but are not limited to, 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; ability to obtain and retain collaborators; ability to manufacture ribozymes in adequate amounts for our collaborations and clinical
trials; 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 the like, are set forth in the section titled Risk Factors in our Form S-3 registration statement which was filed with the U.S. Securities and Exchange Commission on December 26, 2001 (File
No. 333-75976), a copy of which is available from us upon request. We undertake no obligation to release publicly the results of any revisions to these forward-looking statements to reflect events or circumstances arising after the date hereof.





An overview of our company





We are developing
a new class of therapeutics.





We are developing a new class of therapeutics based on engineered molecules called ribozymes.
A ribozyme is a sequence of nucleotides that has binding sequences along with a catalytic core capable of cleaving a specific RNA molecule, including mRNA and viral RNA. mRNA and viral RNA are essential to the synthesis of proteins or viral
replication responsible for disease. Ribozymes act as molecular scissors by cutting RNA molecules into two ineffective strands, which prevents abnormal protein production or viral replication. Because many diseases result from abnormal
protein production or viral replication, ribozymes are expected to be applicable in a broad range of pharmaceutical therapies. In principle, ribozymes can be applied to any RNA, so we have the potential to develop ribozymes into an entirely new
class of therapeutic agents.





Ribozymes have potentially significant advantages over traditional drugs.





Ribozymes have potentially significant advantages over traditional approaches to treat a disease:





| |  |  | Broad Therapeutic Application.    All diseases for which an abnormal gene function can be identified as a cause, or an essential contributing factor,
are potentially treatable with ribozyme drugs.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | Therapeutic Precision.    Side effects associated with traditional drugs may be reduced or avoided by using ribozymes designed to attach to and cut
only targeted RNA. Because ribozymes are highly selective, only precise functions of the genetic sequence are targeted and side effects are minimized; other molecules and normal gene functions are not altered.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | Target RNA Destruction.    Compared to most drugs which only temporarily prevent targeted gene function, ribozymes destroy the target RNA and stop
the associated abnormal protein production required for disease progression; otherwise, the disease inducing genes would remain active.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




We are developing drugs that address significant and unmet medical needs.





We are in clinical development and
preclinical testing for the following four product candidates:





| |  |  | ANGIOZYME, which we are developing in collaboration with Chiron Corporation, to treat solid tumor cancers. During 2001, we initiated Phase II clinical trials in metastatic
breast and colorectal cancer.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | HEPTAZYME, to treat chronic Hepatitis C. In the United States, there are approximately 3.9 million individuals that have been infected with Hepatitis C and over 170 million
worldwide. We initiated a Phase II clinical trial for HEPTAZYME during the fourth quarter of 2001.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | HERZYME, which we are developing in collaboration with Elan Corporation plc and its affiliates, to treat breast and other solid tumor cancers. We began a Phase I clinical trial
for HERZYME during the third quarter of 2001.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



3




---

##### Table of Contents




| |  |  | HepBzyme, for the treatment of Hepatitis B is in preclinical testing.
| | - |  | ---------------------------------------------------------------------




We believe our patent-protected technology platform will result in a significant new product pipeline.





Our
proprietary technology enables us to design ribozymes for many validated disease targets and to move quickly from target identification to pre-clinical development, which should facilitate frequent development of new products. We believe that our
technology is protected by over 170 issued or allowed patents worldwide, which we own or have exclusive licenses to use, and by more than 200 patent applications pending worldwide.





We believe our proprietary intellectual property in the field of nucleic acid technology will allow us to capitalize on additional drug discovery and development opportunities.





We use ribozymes for target discovery and validation to help companies in the life science industry identify genes that cause or contribute to human
disease. In 1998, we decided to focus on the therapeutic potential of ribozymes and transferred our target discovery and validation technology to a privately-owned German company, Atugen, in exchange for a significant equity interest in Atugen.
Currently, we own a 31.6% interest in Atugen.





Ribozymes also have shown applicability in the area of molecular diagnostics. In
May 2001, we entered into a collaborative agreement with Archemix, a privately-held company whose primary technology, RiboReporters, incorporates allosteric ribozymes which are ribozymes that are active only in the presence of a specific molecule.
This technology allows researchers to detect individual molecules in complex mixtures, facilitating the discovery and validation of new drug targets. Under the terms of our agreement with Archemix, we granted certain licenses and sublicenses to our
intellectual property covering the allosteric ribozyme technology in exchange for an equity position in Archemix and a seat on both Archemixs Board of Directors and its Scientific Advisory Board. We also received a license to Archemixs
intellectual property covering allosteric ribozymes for use in molecular diagnostic applications.





Genetic function and human disease





The abnormal production of proteins directly causes many human diseases. The abnormality may be due to a defective gene or
to the over- or under-production of a protein by a normal gene. The abnormal production of proteins may have direct effects on cells within the body or may initiate a series of events involving other proteins within the body, thereby
producing disease. The gene functions of infectious agents, such as viruses, allow replication and growth of infectious agents in the human body.





Production of proteins from genes, called protein expression, generally involves two steps. First, the information from the DNA sequence of the gene is transcribed to mRNA. The second step
involves translation of the mRNA and its information into a protein. The process by which genetic information is expressed in the form of a protein is highly selective; production of a particular protein generally requires
its own specific DNA sequence which leads to a corresponding mRNA sequence. Blocking a genes function, and hence the production of its associated proteins, is an increasingly vital tool in diagnosing and treating human disease.





Our ribozyme technology





Our approach
to drug discovery and development begins by either identifying a gene in humans causing or contributing to disease or identifying an essential gene in a disease-causing infectious agent. We analyze the nucleotide sequence of the mRNA corresponding
to the target gene and create a complementary ribozyme nucleotide sequence.





A ribozyme is a sequence of nucleotides that has
binding sequences along with a catalytic core capable of cleaving a specific RNA molecule, including mRNA and viral RNA. mRNA and viral RNA are essential to the synthesis of proteins or viral replication responsible for disease. Ribozymes act as
molecular scissors by cutting RNA molecules into two ineffective strands, which prevents abnormal protein production or viral replication. Each ribozyme destroys only a specifically targeted RNA sequence, thereby minimizing the risk of
unwanted side effects. Since ribozymes can be applied to any RNA in principle, we have the potential to develop ribozymes as an entirely new class of therapeutic agents having broad applicability.




4




---

##### Table of Contents




In addition, ribozymes can be used to identify gene function and to validate the disease
contributing function of a specific gene. In this way, ribozymes can be used to assist in the identification of new drug candidates. Our ribozyme technology is an important bridge between the growing knowledge regarding gene function and its
contribution to the treatment or prevention of human diseases.





We initially test the effectiveness of the ribozyme in cell
culture or in animal models. If the ribozyme reduces or stops production of the protein associated with the disease, or slows the associated growth or spread of the disease, not only has the disease contributing function of the gene been validated,
but also a drug candidate has been identified.





Once we identify a target gene and related ribozyme, we optimize the
ribozymes effectiveness by varying the length of the portion of the ribozyme which binds to the RNA to maximize the ribozymes selectivity and by modifying the chemical structure to increase the ribozymes stability in the human
body. To date, we have achieved a number of significant milestones important to the development of ribozymes including the following:





Design.    We have developed a proprietary computer program to design ribozymes against sites in a target RNA sequence. This program allows us to accelerate the identification of
potential ribozyme product candidates and to design multiple back-up candidates.





Stability.    To be useful as a treatment, a ribozyme must remain stable in human serum and cells long enough to destroy the targeted RNA and ideally long enough for each ribozyme molecule to destroy
several RNA molecules. Unmodified ribozymes are stable and fully active in human serum for only a few seconds. We have successfully produced chemically-modified ribozymes that are stable and fully active in human serum for more than 10 days. We
believe this level of stability will be sufficient for ribozymes to be effective drugs.





Selectivity.    Based on third-party studies and our internal work, we believe that a ribozyme with a binding region of approximately 15 nucleotides is optimal. A binding region of this length is expected
to match, on a statistical basis, only one specific RNA sequence in the coding region of the entire human genome. Since the ribozyme should interact only with the target RNA, it should not affect other genes functions and, therefore, should
not have significant side effects when used as a drug. The high degree of selectivity of ribozymes has been demonstrated both by us and by third parties, including our collaborators.





Delivery.    Successful development of any drug requires that the drug be delivered to the desired site in the body. We are exploring
a number of delivery possibilities, including local and systemic delivery of chemically synthesized ribozymes. For example, we have demonstrated systemic delivery of chemically synthesized ribozymes without any delivery vehicle using either
intravenous or subcutaneous delivery in several animal models and in humans. We also have shown that ribozymes can be delivered via a single subcutaneous injection by patients at home with extended presence of the ribozymes in the patients
blood. This method provides increased convenience to patients and facilitates compliance with prescribed protocols.





Safety.    We have completed single and multiple dose animal safety studies with several ribozymes that have confirmed the ribozymes lack of significant toxicity. For example, both ANGIOZYME and
HEPTAZYME have shown a lack of toxicity in rodents and monkeys for periods of up to three months. In clinical trials for ANGIOZYME, we have observed safety and tolerability for periods of up to sixteen months of daily subcutaneous injections.
HEPTAZYME has been administered and well tolerated for a one month duration in a Phase I trial. Ongoing clinical trials for both drugs are exploring even longer periods of exposure.





Effectiveness.    We have demonstrated through internal research and in conjunction with our collaborators that our ribozymes reduce
the amount of target mRNA and the level of corresponding protein produced as well as inhibit the development of disease. Internal and third party studies showing the effectiveness of ribozymes have been conducted in multiple animal models for cancer
in both models of solid tumor growth and metastasis, and in cell cultures and animals for viral replication.





Manufacturing.    To meet our needs for preclinical studies, clinical trials and the eventual commercialization of ribozymes, we must have the ability to manufacture a sufficient amount of ribozymes. We and
our collaborators have developed proprietary technology allowing us to synthesize up to 2000 stabilized ribozymes in hundreds of microgram quantities per month. These quantities are sufficient to permit us to perform direct cell-based screening of
multiple potential target sites in short periods of time. We also have developed the capability to manufacture kilogram quantities under the FDAs current good manufacturing practices, or cGMP. In 2001 and early 2002 we expanded our internal
manufacturing capabilities and increased our level of cGMP compliance to enable us to support the production of Phase III materials. In addition, in January 2000 we entered into an agreement with Avecia Limited providing for the transfer of our
proprietary manufacturing processes and




5




---

##### Table of Contents

intellectual property to enable Avecia to manufacture ribozyme products for us. During 2001, Avecia manufactured ANGIOZYME and HEPTAZYME in quantities that were sufficient to satisfy requirements
for our current Phase II trials. Under the terms of the agreement, we have no further obligation to Avecia; however, we have the option to utilize Avecia for future material requirements. We believe that we can obtain the drugs currently under
development in sufficient quantities and at appropriate levels of quality and cost through third parties or through the expansion of our internal manufacturing capacity.





Our business strategy





Our strategy is to use our unique and patented ribozyme technology
to identify and develop a new class of drugs to treat human diseases for which there are large numbers of patients and insufficient treatments. The primary elements of our strategy are to:





Develop Ribozyme Drugs by Pursuing Multiple Product Candidates Across a Number of Diseases.    Our strategy is to take advantage of the broad applicability of
ribozymes by expanding the number of diseases upon which we are focused. Our first four product candidates target large and diverse markets including solid tumor cancers, metastatic cancers and infectious diseases. We have research underway on
ribozymes which address multiple other diseases with large and unmet markets.





Maximize Value of New Product Candidates
through Expanded Internal Development.    We have entered into and intend to continue to collaborate with major pharmaceutical companies to develop and commercialize our leading product candidates. Prior to entering into
future collaboration agreements, we intend to demonstrate our new product candidates commercial potential through preclinical testing or clinical trials. We believe that by extending the period during which we maintain complete control over
new product candidates, we will be able to negotiate more favorable terms in future collaboration agreements. We also may pursue commercialization of certain new product candidates independently.





Capitalize on our ribozyme expertise through the development of allosteric ribozyme systems for diagnostics and pharmacogenomics.    Allosteric ribozymes
are versatile and specific compounds that only cleave and emit a signal in the presence of a target analyte. The potential applications for allosteric ribozymes include detecting and quantifying a wide range of small molecules, ions, proteins and
nucleic acids. This diagnostic technology can indicate the presence of certain diseases, viruses and other abnormalities. We have begun this process through licensing our allosteric ribozyme technology to Archemix, a privately held biotechnology
company. This license permits Archemix to use this technology to detect proteins in connection with drug development. The license also covers certain other molecular detection applications. We also recently completed a licensing agreement for this
technology with a major Japanese diagnostic company, Fujirebio, for certain diagnostic applications in Asia. We believe this technology has potential in the area of diagnostics and provides an opportunity for us to generate near term revenue.





Maintain and Expand Our Patent Portfolio and Proprietary Technology.    We currently own, or have
exclusive licenses to over 170 issued or allowed patents worldwide and have more than 200 patent applications pending worldwide. In 1999, we acquired certain ribozyme intellectual property from Innovir Laboratories, Inc. to further strengthen our
intellectual property portfolio. We dedicate substantial resources to the discovery of new inventions to maximize the value of our proprietary technology. We aggressively pursue patent protection to maintain worldwide rights to control the
development and sale of ribozymes.





Our product programs





The development process for our products starts with research and preclinical development. Research includes identification of a target protein, synthesis of an appropriate ribozyme to block expression of the target
protein, and testing the activity of the ribozyme in a specific cell population. Preclinical testing includes pharmacology and toxicology testing in cell culture and animal models, product formulation, dosage studies and manufacturing scale-up for
submission of the necessary data to comply with regulatory requirements of the FDA and similar agencies in other countries prior to commencement of human trials.





Angiozyme





We are developing ANGIOZYME primarily as a
treatment for advanced solid tumors such as colorectal, lung and breast. These cancers account for approximately 480,000 new cancer cases and over 250,000 deaths per year in the United States alone. In addition, ANGIOZYME may be used in products for
the treatment of other cancers and diseases in which angiogenesis is a contributor such as macular degeneration and diabetic retinopathy.




6




---

##### Table of Contents




For a cancerous tumor to grow, the body must generate new blood vessels in the tumor to supply
the blood necessary for tumor growth, a process known as angiogenesis. In many cases, the Vascular Endothelial Growth Factor (VEGF) molecule and its receptor are essential to angiogenesis. ANGIOZYME was developed to inhibit the production of the
high affinity VEGF receptor, thereby slowing or stopping angiogenesis and related tumor growth and metastasis. We and independent third parties have conducted animal studies which have shown dramatic reduction in tumor growth and metastasis using
ribozymes alone and in conjunction with existing cytotoxic cancer therapies.





In January 1999, we completed a Phase Ia clinical
trial in healthy volunteers. This trial, conducted on 14 healthy volunteers, demonstrated safety and tolerability and showed no drug related side effects. In 1999, we also completed a Phase Ib clinical trial to test for safety and tolerability in 16
cancer patients with a broad spectrum of solid tumors and metastasis. No clinically significant drug related side effects were seen, and the presence of ANGIOZYME in the blood of patients in excess of amounts needed to show efficacy in animals was
observed up to 24 hours when ANGIOZYME was administered subcutaneously.





We initiated a Phase I/II multi-dose clinical trial in
cancer patients in November 1999. This trial examined the effects of ANGIOZYME when given daily to cancer patients. ANGIOZYME was given via a subcutaneous injection once a day, at home, by the patients themselves. A total of 31 patients received
ANGIOZYME. The drug was well tolerated with minimal side effects consisting mostly of injection site reactions. The patients were on ANGIOZYME for a median of 90 days with a range of 2 days to 450 days. Based on the results of this trial, we have
initiated Phase II trials in patients with metastatic breast cancer and in patients with metastatic colorectal cancer. The goal of these trials is to detect clinical activity in these patients with advanced solid tumors.





We are developing ANGIOZYME in collaboration with Chiron. While we share development costs and profits equally with Chiron, we have the final decision-
making authority on all development decisions and activities and we have retained the right to manufacture ANGIOZYME. If one party discontinues funding its share of the costs of clinical development, that party would not share equally in the profits
from product sales but would receive a royalty based on net sales of that product. However, the non-participating party may regain its interest in the profits of ANGIOZYME by repaying the other party one-half of the development costs incurred solely
by the other party, plus a predetermined risk premium, at either the commencement of Phase III testing or the filing of a New Drug Application or Product License Application.








Heptazyme





Our anti-HCV
ribozyme, HEPTAZYME, is being developed to treat Hepatitis C, a viral disease of the liver. There are approximately 3.9 million individuals who have been infected in the United States and over 170 million worldwide. Of the 3.9 million individuals
who have been infected in the United States, 70% have chronic Hepatitis C and are potential candidates for treatment. Each year in the United States, Hepatitis C infects between 250,000 to 500,000 new individuals and leads to between 8,000 to 10,000
deaths. It is one of the most common blood borne infections in the United States and has been identified as a silent epidemic and a daunting challenge to public health by the United States Congress.





Current therapies for Hepatitis C are effective in less than 50% of patients and have serious side effects. Our research and preclinical testing have
indicated that HEPTAZYME selectively cuts Hepatitis C RNA in a manner that significantly inhibits viral replication in cell culture. It is also expected to be effective against all known Hepatitis C sub-types, which now number over 90. Preclinical
data of HEPTAZYME was published in the February 2000 issue of Hepatology.





Two clinical trials with HEPTAZYME have been
completed. In the first clinical trial, seventeen healthy volunteers received HEPTAZYME as a single dose. HEPTAZYME was well tolerated and no serious adverse events were reported. In the second clinical trial, 24 patients with compensated chronic
HCV infection were administered HEPTAZYME at escalating doses for a total of 28 days. The drug was well tolerated with no serious adverse events. Based on the results of these two trials, we initiated a Phase II study, expected to include 72
patients, to evaluate the effects of longer-term, higher doses of HEPTAZYME on the levels of HCV in patients with compensated chronic HCV infections.





In March 1999, we entered into a collaboration with Eli Lilly pursuant to which Eli Lilly was granted the exclusive worldwide right to develop and commercialize HEPTAZYME and any other ribozyme drug for the treatment
of Hepatitis C in return for payment of all research, development and commercialization costs of HEPTAZYME. In 1999, Eli Lilly paid us $9.2 million pursuant to this agreement which included a $7.5 million equity investment and $1.7 million of
research funding.




7




---

##### Table of Contents




In September 2000, we entered into an agreement with Eli Lilly to repurchase all rights to
HEPTAZYME. Eli Lilly had directed the clinical trials for HEPTAZYME to date under the licensing agreement. According to the repurchase agreement, we reacquired the global rights to HEPTAZYME and will direct all subsequent clinical trials. We agreed
to pay royalties to Eli Lilly on future net sales of HEPTAZYME, as well as milestone payments if we complete an agreement for the development or marketing rights to HEPTAZYME with a third party or if we file a New Drug Application for HEPTAZYME with
the FDA, whichever comes first. Pursuant to the repurchase agreement, Eli Lilly converted the outstanding five shares of our Series L Convertible Preferred Stock into 636,640 shares of our common stock on December 28, 2000, or the termination date.
The conversion price was based on a preferred share value of $1.5 million for each of the five shares outstanding. The price per share of the common stock was based on the average closing price of our common stock for the 30 days prior to the
termination date. In addition, we issued to Eli Lilly $3,000,000 of our common stock, which resulted in 252,632 shares, as payment for Eli Lillys efforts in generating and providing data. The price per share was based on the closing market
price of our common stock on the termination date. In return, Eli Lilly paid us a termination fee of approximately $2.8 million.








Herzyme





We are developing HERZYME, a potential product to
treat breast and other cancers. More than 180,000 new breast cancer patients are diagnosed each year in the United States. Estimates are 20% to 30% of these patients overexpress the Her-2 gene indicating that regulation of the Her-2 gene could have
a beneficial impact on the disease. HERZYME specifically targets and downregulates Her-2, and we expect it to have a favorable side effect profile similar to other ribozymes in clinical development. We filed an IND with the Therapeutics Products
Programme (TPP) in Canada on February 28, 2001. We initiated a Phase I clinical trial during 2001 to evaluate HERZYME in patients with metastatic cancer whose tumors overexpress Her-2.





In January 2000, we formed a joint venture with Elan. We licensed HERZYME and Elan licensed its MEDIPAD(R) drug delivery technology to the joint venture, Medizyme Pharmaceuticals. The
MEDIPAD(R) system is a disposable continuous subcutaneous drug delivery system that allows a patient to administer the drug at home over two days with a single MEDIPAD(R) device, thus avoiding hospitalization, intravenous delivery and doctor visits.
Medizyme paid a license fee of $15.0 million to Elan for the use of its MEDIPAD(R) drug delivery technology.





We contributed
$12.0 million in initial funding to Medizyme in exchange for 80.1% of Medizymes capital stock. Our capital contribution to Medizyme was funded by our sale to Elan of 12,015 shares of our Series A convertible, exchangeable preferred stock for
$12.0 million in January 2000. The Series A preferred stock has a term of six years and a dividend rate of 6.0%. After January 2002, but before the end of the HERZYME development period, expected to be mid-2003, Elan has the right to exchange our
Series A preferred stock for 30.1% of the capital stock of Medizyme owned by us. However, if Elan does not exchange the Series A preferred stock for Medizyme stock by the end of the development period, the exchange right will terminate. At any time
after January 2002 and prior to January 2006, Elan may convert our Series A preferred stock into approximately 1.2 million shares of our common stock, at which time the exchange right would terminate. As of December 31, 2001, the Series A preferred
stock was convertible into 1,125,567 shares of our common stock.





Elan purchased 641,026 shares of our common stock for $5.0
million in January 2000 and purchased an additional 500,500 shares of our common stock for $5.0 million in May 2001 at a per share price representing a premium of 30% of the price based on the average closing price for the 45 trading days preceding
the purchase. In January 2000, Elan also received warrants to purchase 500,000 shares of our common stock at an average exercise price of $18.00. In addition, Elan purchased 750,000 shares of our common stock and a five-year warrant to purchase
75,000 shares of our common stock at $5.00 per share, in December 2001 for $3.0 million.





We have estimated that Medizyme will
require $15.0 million in funding through the development period to cover future operating and development costs. Elan has provided us with a $12.0 million credit facility on a draw-down basis for us to use, if desired, to fund our portion of
Medizymes operating costs over a 30-month period. Elan may convert this debt into shares of our Series B Convertible Preferred Stock. The Series B Convertible Preferred Stock has a dividend rate of 12.0% and may be converted at any time into
our common stock at a 50% premium to the average price of our common stock for the 60 trading days prior to the time of the applicable draw down on the credit facility. As of December 31, 2001 we have provided Medizyme $8.9 million in funding, of
which $8.2 million was obtained through the credit facility. If converted at December 31, 2001, the outstanding borrowings would be convertible into 644,095 shares of our common stock.





In January 2002, we expanded our collaboration with Elan. Under the terms of the amended agreement, Medizyme licensed Elans liposome technology for the development of HERZYME. This
amendment permits Medizyme to assess tumor localization and pharmacokinetics with several liposome formulations in conjunction with HERZYME.




8




---

##### Table of Contents

HepBzyme





We are also developing HepBzyme, a potential product to treat chronic Hepatitis B viral infection. According to the World Health Organization, there are more than 350 million people world wide who have chronic HBV infection. The natural
progression of chronic HBV infection over a 10-20 year period leads to cirrhosis and hepatocellular carcinoma in many patients. Current therapies for chronic HBV infections are effective in less than 50% of patients and many have serious side
effects. Furthermore, treatment with approved antivirals leads to the development of resistance in up to 30% of the patients after 1 year. We have developed a ribozyme, HepBzyme, targeting several transcripts of the HBV virus. This ribozyme has
shown potent antiviral effects both in cell culture and in a transgenic model of HBV infection. HepBzyme is in pre-clinical development.








Other Collaborations





Archemix





In May 2001, we announced the formation of a strategic alliance with Archemix Corporation, a Massachusetts privately held biotechnology company, that we
believe will allow both companies to capitalize on reciprocal intellectual property in the field of proteomics and molecular diagnostics. Under the terms of the agreement, Archemix received exclusive licenses and sublicenses to our intellectual
property covering the allosteric ribozyme technology for use in detecting proteins in connection with drug development and in a wide range of molecular detection applications. In exchange for the licenses, we received an equity position in Archemix,
a seat on Archemixs Board of Directors and a seat on the Scientific Advisory Board. In addition, we received a license to Archemixs intellectual property covering allosteric ribozymes for use in molecular diagnostic applications.








Geron Corporation





In December 2001, we announced a collaboration with Geron Corporation, a biopharmaceutical company focused on developing and commercializing therapeutic and diagnostic products for
applications in oncology and regenerative medicine and research tools for drug discovery. The purpose of the collaboration is to accelerate process development of Gerons lead telomerase inhibitor, GRN163. Telomeres are believed to serve as a
molecular clock for cellular aging and the activation of telomerase by cancer cells is a means by which cancer cells continue to proliferate. Inhibiting telomerase represents a novel approach to treat cancer with potentially broader
utility and greater selectivity against cancer cells than currently available cancer agents. Initially, Geron will pay us for consultation in nucleic acid technology to improve process development, scale-up and the manufacturing process for GRN163.
In addition, we will collaborate with Geron to explore the potential for a ribozyme-based telomerase inhibitor, which Geron will have the first right to commercialize.








Fujirebio





In March
2002, we announced an agreement with Fujirebio, the largest domestic diagnostic company in Japan, to develop and commercialize ribozyme-based clinical diagnostic products. Under the terms of the agreement, Fujirebio will receive exclusive
commercialization rights for East Asia, including Japan, for any resulting products from the collaboration. Fujirebio, a major manufacturer of diagnostic reagents in Japan, will fund research for clinical diagnostic targets in the field of human
viral diseases and cancer. If the programs are successful, we will receive licensing fees, research funding, milestone payments, and royalties as well as retain certain manufacturing rights.








Atugen





We
also have used ribozymes and other oligonucleotides for target discovery and validation, the process by which we identify genes that cause or contribute to human diseases. These technologies use ribozymes and other oligonucleotides to block the
function of genetic sequences. The effect of the ribozyme or other oligonucleotides in cell cultures or animal models is then analyzed to determine whether the protein associated with the disease or the disease itself is reduced or eliminated.
Alternatively, a genetic sequence, the function of which is unknown, can be analyzed using ribozyme or other oligonucleotide inhibition in a collection of cell culture assays or animal models that represent a broad range of biological functions.




9




---

##### Table of Contents




In 1998, we decided to focus on the therapeutic potential of ribozymes and transferred our
target discovery and validation technologies to Atugen in exchange for equity interest in Atugen. Financing for Atugen consisted of a $2.0 million cash contribution by us and a venture capital investment by third parties of $7.0 million. In
addition, Atugen received commitments from the German government for grants and loans for up to $10.0 million.





We believe we
benefit from Atugens activities in several ways:





| |  |  | we currently own 31.6% of Atugens outstanding voting stock;
| | - |  | ------------------------------------------------------------




| |  |  | we are paid by Atugen for ribozymes and other materials manufactured by us pursuant to our manufacturing rights;
| | - |  | ----------------------------------------------------------------------------------------------------------------




| |  |  | we are paid by Atugen for a portion of our costs of prosecuting patents applicable to Atugens business; and
| | - |  | ------------------------------------------------------------------------------------------------------------




| |  |  | we retain the right to use the target discovery and validation technology in non-high throughput applications for our own use and in connection with limited research and
development collaborations with third parties.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Atugens primary goal is to accelerate discovery and
validation of human health therapeutic targets. It will provide a variety of technologies and services to utilize information emerging from human genome sequencing efforts to determine which genes are key factors causing human disease. The
technology base transferred by us to Atugen combined with the substantial initial capitalization should allow Atugen to improve the speed and certainty of identifying and validating new therapeutic targets both for corporate partners and for
internal use.





We have the right to name two designees to Atugens Board of Directors, including the Chairman of the Board,
as long as we own 30% of Atugens outstanding stock. Nonetheless, most corporate actions taken by Atugen require the approval of at least 75% of the holders of Atugens outstanding stock. Atugen currently has approximately 50 employees.





As part of the formation, Atugen received exclusive royalty-free licenses to our extensive patents and technologies for target
discovery and validation. We received a one-time $2.0 million license payment in 1999 for a portion of the licensed technology. The initial technology base includes our entire gene function identification and target validation technologies for both
chemically synthesized and expressed nucleic acids, including target site selection, cell culture assays, RNA and other assays, optimized delivery vehicles and animal pharmacology.








Our competition





We are engaged in the rapidly
changing business of developing treatments for human disease through regulation of gene expression. Competition among entities attempting to develop gene modulation products for disease treatment is intense and is expected to increase. We face
direct competition from other companies engaged in the research, development and commercialization of ribozyme-based technology as well as competition from companies attempting other methods of gene expression control. In addition, we compete with
large pharmaceutical companies and established biotechnology firms, many of whom are developing new products to treat the same diseases that we target. In some cases, those companies have already commenced clinical trials for their products. Many of
these companies have significantly greater financial resources and expertise in research and development, manufacturing, preclinical studies and clinical trials, obtaining regulatory approvals and marketing than we do. Our collaborators and
licensees may be conducting research and development programs using non-ribozyme technologies directed at the same diseases that we are targeting. Smaller companies also may prove to be significant competitors, particularly through collaborative
arrangements with large pharmaceutical and biotechnology companies. In addition, our competitors may complete clinical trials, obtain required regulatory approvals and commence commercial sales of their products before us, thus achieving a
significant competitive advantage.





Academic institutions, governmental agencies and other public and private research
organizations also conduct research, seek patent protection and establish collaborative arrangements for products and clinical development and marketing. These companies and institutions compete with us in recruiting and retaining highly qualified
scientific and management personnel.








Our patents and proprietary technology





Protecting patents and other proprietary rights is crucial to developing our business. In addition to patents, we rely upon trade secrets, know-how and
continuing technological innovations in the design, synthesis, and purification of ribozymes and in nucleic acid chemistry. We also rely on licensing opportunities to develop and maintain our competitive position. It is




10




---

##### Table of Contents

our policy to file patent applications when appropriate to protect technology, inventions, and improvements that are considered important in the development of
our business.





At the core of our technology are inventions and patents of the University of Colorado developed by Dr. Thomas R.
Cech and various of his associates. Pursuant to the Universitys policies, these inventions and the related patents became the property of the University. The Cech technology was assigned to the Universitys affiliate, University Research
Corporation, or URC, which in turn assigned the rights to license parts of the Cech technology to Competitive Technologies, Inc. United States Biochemical Corporation, or USB, licensed the Cech technology pursuant to two sublicenses. We have entered
into a license with URC and sublicenses with USB and Competitive Technologies pursuant to which we have obtained the exclusive (except for non-commercial academic research) worldwide right to the Cech technology to, among other things, make, use and
sell ribozymes and ribozyme products covered by the licensed patents. The licenses expire at the same time that the Cech patents expire, which is in 2008. The URC license and USB sublicense are fully paid. The Competitive Technologies license
provides for the payment of a royalty on sales of ribozyme products covered by the licensed patents. We may grant sublicenses to the licensed technology subject to the payment to Competitive Technologies of a share of royalty income from such
sublicenses or a royalty on sales from sublicensed products, methods or services, depending on the particular licensed patents involved. In addition, we must pay Competitive Technologies a share of any option fee, license fee, prepaid royalty or
other front-end fee other than equity or research and development funding paid in connection with such sublicense.





In August 1999, we acquired all of the non-external guide sequence ribozyme-based intellectual property assets of Innovir Laboratories, a subsidiary of NEXELL Therapeutics, Inc. The acquisition included 28 patents and patent applications
plus two trademarks. The intellectual property included ribozyme motifs, uses of oligonucleotides for therapeutics, target validation and diagnostics, chemical modifications of oligonucleotides and oligonucleotide delivery, detection, manufacturing
and purification. We acquired these assets from Innovir in exchange for 160,000 shares of our common stock, seven year warrants to purchase 350,000 shares of our common stock at $12.00 per share and $25,000.





As part of our overall intellectual property strategy, we selectively enter into agreements with academic institutions either to license pre-existing
technology or to support the development of new technologies and gain the commercial rights to such new technologies.





As a
result of these licenses and sublicenses, and our own internal research, we currently have certain rights to more than 170 issued or allowed patents, and more than 200 patent applications under consideration worldwide. This includes exclusive
worldwide rights to 124 patents issued in the United States, 5 patents issued in Europe, 2 patents issued in Japan, 2 patents issued in Korea, 7 patents issued in Mexico and 17 patents issued in Australia. In addition, Notices of Allowance have been
received for at least 14 patents from the United States Patent and Trademark Office. Eight of the 124 United States issued patents, 1 European patent and 1 Japanese patent cover enzymatic RNA and the use of an enzymatic RNA to cleave a single
stranded RNA (collectively the Cech Patents). We believe that the Cech Patents grant us the right to exclude others from practicing ribozyme technology as it is currently known to us in the United States, Europe and Japan irrespective of
the application, the method of production, the method of purification, or the ribozyme motif used. Unless extended, the Cech Patents will expire in December 2008 in the United States and December 2007 in Europe and in Japan. The additional issued
patents cover both ribozyme technology, such as ribozyme design, synthesis, chemical modifications, delivery, ribozyme motifs, vector production, target site selection, as well as application to specific therapeutic targets. None of our other
material patents expire before 2013.





In addition, we have filed or hold exclusive licenses to more than 200 pending United
States and related foreign patent applications. Our patent portfolio includes approximately 40 United States applications for various areas of interest in human therapeutics and diagnostics and agricultural uses. The portfolio also includes
approximately 80 United States applications related to the chemistry, design, optimization, manufacture and delivery of ribozyme products. These patents collectively extend our ribozyme patent coverage well beyond the life of the Cech Patents.





We have filed opposition documents against two patents granted to a competitor in Europe. In one of the opposition proceedings
in Europe, we were successful in invalidating various claims relating to the hammerhead ribozyme composition. The European patent office found that the claims of the granted patent drawn to the so-called Non-GUX (where X is U, A, C or G) ribozymes
were not patentable. We do not believe this European-granted patent covers those ribozymes that we have in clinical trials. Opposition proceedings against two of our European and Japanese patents were initiated by our competitors. The Japanese
Opposition Division has rejected competitor oppositions and has issued a notification that it will maintain our Japanese patent without change. The opposition proceedings against our European patent resulted in maintenance of the fundamental
Cech patent. Our competitors had initiated opposition proceedings against this patent in 1996. The patent expires in 2007. In July 2000 the European Opposition Division found no grounds for revoking the patent, but decided to




11




---

##### Table of Contents

clarify the scope of the claims to cover self-splicing intervening sequence derived ribozymes. The decision should have no impact on RPIs ability to
commercialize ribozymes, including its ongoing clinical programs, and will not affect its relationship with partner companies now engaged in ribozyme co-development. RPIs ability to enforce its patent remains in effect. We may not have
identified all United States and foreign patents that pose a risk of infringement. In addition, we anticipate interference proceedings involving some of our patents and patent applications in the United States.








Government regulation of our drug development activities





The development, manufacture and potential sale of therapeutics is subject to extensive regulation by United States and foreign governmental authorities. In particular, pharmaceutical
products undergo rigorous preclinical and clinical testing and other approval requirements by the FDA in the United States under the federal Food, Drug and Cosmetic Act and the Public Health Service Act and by comparable agencies in most foreign
countries.





Before testing agents with potential therapeutic value in healthy human test subjects or patients may begin,
stringent government requirements for preclinical data must be satisfied. The data, obtained from studies in several animal species, as well as from laboratory studies, are submitted in an Investigational New Drug, or, IND, application or its
equivalent in countries outside the United States where clinical studies are to be conducted. Preclinical data must provide an adequate basis for evaluating both the safety and the scientific rationale for the initiation of clinical trials.





Clinical trials are typically conducted in three sequential phases, although these phases may overlap. In Phase I, which
frequently begins with initial introduction of the compound into healthy human subjects prior to introduction into patients, the product is tested for safety, adverse affects, dosage, tolerance, absorption, metabolism, excretion and clinical
pharmacology. Phase II typically involves studies in a small sample of the intended patient population to assess the efficacy of the compound for a specific indication to determine dose tolerance and the optimal dose range as well as to gather
additional information relating to safety and potential adverse effects. Phase III trials are undertaken to further evaluate clinical safety and efficacy in an expanded patient population at geographically dispersed study sites to determine the
overall risk-benefit ratio of the compound and to provide an adequate basis for product labeling. Each trial is conducted in accordance with certain standards under protocols that detail the objectives of the study, the parameters to be used to
monitor safety and the efficacy criteria to be evaluated. Each protocol must be submitted to the FDA as part of the IND.





Data
from preclinical and clinical trials are submitted to the FDA as a New Drug Application, or NDA, for marketing approval and to other health authorities as a marketing authorization application. The process of completing clinical trials for a new
drug is likely to take a number of years and requires the expenditure of substantial resources. Preparing an NDA or marketing authorization application involves considerable data collection, verification, analysis and expense. There can be no
assurance that FDA or any other health authority approval will be granted on a timely basis, if at all. The approval process is affected by a number of factors, primarily the risks and benefits demonstrated in clinical trials as well as the severity
of the disease and the availability of alternative treatments. The FDA or other health authorities may deny an NDA or marketing authorization application if the authoritys regulatory criteria are not satisfied or may require additional testing
or information.





Even after initial FDA or other health authority approval has been obtained, further studies, including Phase
IV post-marketing studies, may be required to provide additional data on safety and will be required to gain approval for the use of a product as a treatment for clinical indications other than those for which the product was initially tested. Also,
the FDA or other regulatory authorities may require post-marketing reporting to monitor the side effects of the drug. Results of post-marketing programs may limit or expand the further marketing of the products. Further, if there are any
modifications to the drug, including changes in indication, manufacturing process or labeling or a change in manufacturing facility, an application seeking approval of such changes will be required to be submitted to the FDA or other regulatory
authority.





Whether or not FDA approval has been obtained, approval of a product by regulatory authorities in foreign countries
must be obtained prior to commencing commercial sales of the product in such countries. The requirements governing the conduct of clinical trials and product approvals vary widely from country to country, and the time required for approval may be
longer or shorter than that required for FDA approval. Although there are some procedures for unified filings for certain European countries, in general, each country at this time has its own procedures and requirements. Further, the FDA regulates
the export of products produced in the United States and may prohibit the export of such products even if they are approved for sale in other countries.




12




---

##### Table of Contents




We are also subject to regulation under the Occupational Safety and Health Act, the
Environmental Protection Act, the Toxic Substances Control Act, the Resources Conservation and Recovery Act and other present and potential future federal, state and local regulations.





Completing the multitude of steps necessary before marketing can begin requires the expenditure of considerable resources and a lengthy period of time. Delay or failure in obtaining the
required approvals, clearances or permits by us, our corporate partners or our licensees would have a material adverse affect on our ability to generate sales or royalty revenue. The impact of new or changed laws or regulations cannot be predicted
with any accuracy.








Our manufacturing and marketing strategies





To support our preclinical and clinical trial manufacturing requirements, we constructed in our leased buildings manufacturing facilities that we
believe comply with applicable regulatory requirements. We have also established operational quality assurance and quality control procedures. We believe that our existing facilities and those available from contract manufacturers will be
satisfactory for production of ribozymes needed through clinical trials for our products currently in development.





We do not
currently have the internal facilities or means to manufacture, market, distribute or sell on a commercial scale any products we may develop. We have expanded our quality control and quality assurance program internally, including adopting a set of
standard operating procedures designed to assure that any products manufactured by or for us are made in accordance with cGMP and other applicable domestic and foreign regulations.





We expect to market and sell most products developed, at least initially, directly and through co-promotion or other licensing arrangements with third parties, including our
collaborators. In some markets, we may enter into distribution or partnership agreements with pharmaceutical or biotechnology companies that have large, established sales organizations.








Our employees





As of December 31,
2001, we had 130 full-time employees, including a technical scientific staff of 104. Our future performance depends significantly on the continued service of our key personnel. None of our employees are covered by collective bargaining arrangements.
We believe our employee relations are good.








ITEM 2.PROPERTIES





We lease approximately 57,000 square feet of laboratory, manufacturing and office space in two
adjacent buildings in Boulder, Colorado, under operating leases that last through October 2007 and June 2007. Our facilities are sufficient to meet our needs at least through 2002.








ITEM 3.LEGAL PROCEEDINGS





We are a defendant in several class action lawsuits brought on behalf of purchasers of our common
stock on November 16 and 17, 1999. The lawsuits, which are substantially identical, allege that we violated certain federal securities laws based upon our having made an allegedly misleading announcement on November 15, 1999. The cases are
consolidated and are now pending in the United States District Court, District of Colorado. The discovery phase has been completed and the parties have filed motions for summary judgement. A jury trial is scheduled to commence on September 9, 2002.
Although the ultimate outcome of these lawsuits cannot be ascertained, on the basis of present information, we do not believe that these legal proceedings will have a material adverse effect on the Company.








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





None.




13




---

##### Table of Contents

PART II





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





Our common stock is traded on the NASDAQ National Market under the symbol RZYM. The last
sale price of the common stock as reported on the NASDAQ National Market on March 27, 2002, was $3.03 per share. At March 27, 2002, there were approximately 210 holders of record of our common stock. The following table sets forth, for the periods
indicated, the high and low sales prices per share of our common stock as reported on the NASDAQ National Market.





High

LowYear Ended December 31, 1999First Quarter

$
5.75

$
4.06Second Quarter

$
6.88

$
3.88Third Quarter

$
7.00

$
4.25Fourth Quarter

$
22.00

$
4.81Year Ended December 31, 2000,First Quarter

$
71.88

$
9.50Second Quarter

$
29.38

$
12.00Third Quarter

$
32.75

$
20.25Fourth Quarter

$
29.00

$
6.50Year Ended December 31, 2001,First Quarter

$
13.69

$
5.25Second Quarter

$
10.21

$
5.71Third Quarter

$
9.99

$
4.54Fourth Quarter

$
6.98

$
3.66Year Ended December 31, 2002,First Quarter (through March 27, 2002)

$
5.12

$
2.84








Dividend Policy





We have never declared or paid cash dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future. We also are
party to agreements restricting our ability to pay dividends.




14




---

##### Table of Contents




ITEM 6.SELECTED FINANCIAL DATA





The following selected financial data are derived from our audited financial statements. Our
financial statements for 2001, 2000, 1999, 1998 and 1997 have been audited by Ernst & Young LLP, independent auditors. These historical results do not necessarily indicate future results. When you read this data, it is important that you also
read our financial statements and related notes, as well as the section Managements Discussion and Analysis of Financial Condition and Results of Operations.





Year Ended December 31,2001


2000


1999


1998


1997(In Thousands)Statement of Operations Data:RevenuesCollaborative agreements

$
3,318


$
8,302


$
5,797


$
8,963


$
1,976Collaborative agreements-joint venture


3,960



6,052











Collaborative agreements-related parties


1,030



1,191



1,867







Total revenues


8,308



15,545



7,664



8,963



1,976ExpensesResearch and development


56,689



21,721



15,395



16,941



15,170General and administrative


4,512



3,723



2,132



1,813



1,886Total operating expenses


61,201



25,444



17,527



18,754



17,056Operating loss


(52,893
)


(9,899
)


(9,863
)


(9,791
)


(15,080
)Other income (expense):Interest income


2,165



3,196



614



634



795Interest expense


(820
)


(151
)


(552
)


(704
)


(844
)Other income


51



4







25



7Equity in loss of unconsolidated affiliates


(8,341
)


(9,032
)


(860
)


(1,082
)


Total other income (expense)


(6,945
)


(5,983
)


(798
)


(1,127
)


(42
)Net loss


(59,838
)


(15,882
)


(10,661
)


(10,918
)


(15,122
)Accretion of dividends on preferred stock


775



716











Net loss applicable to common stock

$
(60,613
)

$
(16,598
)

$
(10,661
)

$
10,918


$
15,122Net loss per share (basic and diluted)

$
(3.59
)

$
(1.15
)

$
(1.05
)

$
(1.22
)

$
(2.04
)Shares used in computing net loss per share (basic and diluted)


16,883



14,390



10,158



8,978



7,420Balance Sheet Data:Cash, cash equivalents and securities available-for-sale

$
34,995


$
64,475


$
14,000


$
6,512


$
16,102Working capital


31,908



65,002



14,086



4,467



13,238Total assets


52,023



83,897



25,092



19,224



24,850Capital lease obligations and long-term debt, current portion


169







200



498



2,078Capital lease obligations and long-term debt, net of current portion


12,591



3,757



6,811



4,545



2,752Accumulated deficit


(159,803
)


(99,965
)


(84,083
)


(73,422
)


(62,505
)Total stockholders equity


33,905



75,994



14,881



11,034



18,870




15




---

##### Table of Contents




ITEM 7.MANAGEMENTS DISCUSSION AND ANALYSIS FINANCIAL CONDITION ANDRESULTSOF OPERATIONS





The following Managements Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with our financial statements and related notes included elsewhere in this Form 10-K. Our discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties,
such as our plans, objectives, expectations and intentions. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of factors we identify in the section
titled Risk Factors in our Form S-3 registration statement filed with the U.S. Securities and Exchange Commission on December 26, 2001 (File No. 333-75976).





Overview of our Business





We are developing a new class of therapeutics based on
engineered molecules called ribozymes. A ribozyme is a sequence of nucleotides that has binding sequences along with a catalytic core capable of cleaving a specific RNA molecule, including mRNA and viral RNA. mRNA and viral RNA are essential to the
synthesis of proteins or viral replication responsible for disease. Ribozymes act as molecular scissors by cutting RNA molecules into two ineffective strands, which prevents abnormal protein production or viral replication. Because many
diseases result from abnormal protein production or viral replication, ribozymes are expected to be applicable in a broad range of pharmaceutical therapies. In principle, ribozymes can be applied to any RNA, so we have the potential to develop
ribozymes into an entirely new class of therapeutic agents. Currently we are in clinical development and preclinical testing for four product candidates.





We are developing ANGIOZYME, our lead product candidate to treat solid tumor cancers, in collaboration with Chiron Corporation. During 2001, we initiated Phase II clinical trials in metastatic breast and colorectal
cancer. Also, we initiated a Phase II clinical trial in 2001 for HEPTAZYME, our product candidate to treat chronic Hepatitis C. In addition, in 2000 we formed a joint venture with Elan Corporation to develop HERZYME, a treatment for breast and other
cancers. During 2001, we filed an Investigational New Drug application, or IND, for HERZYME in Canada and began a Phase I clinical trial during the third quarter of 2001. Our fourth product candidate, HepBzyme, for the treatment of Hepatitis B, is
in pre-clinical testing.





Critical Accounting Policies





Revenue Recognition.    To date, we have committed substantially all our resources to our research and product development programs. We have not generated any revenues from product sales,
nor do we anticipate generating any revenues in the foreseeable future. Revenue recorded from our collaborative agreements consists of:





| |  |  | Up-front revenue.    Up-front non-refundable fees are fully recognized upon signing an agreement and are related to the value of the research at that
point in time. Up-front revenue may also include a reimbursement to us of recent expenses related to product development which we incurred.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | Research revenue.    Typically, research revenue is based on the fully burdened cost of a researcher working on a collaboration. Rates are billed per
employee, per year, pro-rated for time worked on a project. This revenue is typically invoiced on a monthly basis, either up front or in arrears. Revenue is recognized ratably over the period, with the balance reflected as deferred revenue until
earned. The revenue is typically recurring over the term of a collaboration.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | License revenue.    License revenue is recognized ratably over the term of the license. Payments received in advance are recorded as deferred revenue
until earned.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | Milestone revenue.    Milestone revenue is recognized in full when the related milestone performance goal is achieved. Milestone revenue is typically
not consistent or recurring in nature.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Our revenue has consisted primarily of research revenue payments from
our collaborators. All revenues are either deferred as a liability or recognized upon satisfying revenue criteria. As of December 31, 2001, all revenues that have been recognized are earned, and no further obligation exists for recognized revenue.
We depend upon funding from external financing and corporate collaborations for our research and product development programs and expect to depend upon this funding for the foreseeable future.





We have not been profitable since inception and have an accumulated deficit of $159.8 million as of December 31, 2001. Losses have resulted primarily from expenses associated with
our research and development programs. We expect to incur additional losses as ANGIOZYME, HEPTAZYME, HERZYME and HepBzyme and other potential product candidates advance through development and commercialization. In addition, future milestone
payments under some of our collaborations are contingent upon our meeting particular research or development goals. The amount and timing of future milestone payments




16




---

##### Table of Contents

are contingent upon the terms of each collaboration agreement. In some instances, we may forfeit milestone payments if we fail to accomplish a predetermined goal within a certain time frame.
Therefore, we are subject to significant variation in the timing and amount of our revenues and results of operations from period to period.





Our revenues are denominated in U.S. dollars. Therefore, we have not been exposed to foreign currency translation risks and have not engaged in any hedging instruments.





Deferred Patent Costs.We capitalize legal costs directly incurred in pursuing patent applications as deferred patent
costs. When such applications result in an issued patent, the related costs are amortized over the remaining legal life of the patents, which is assumed to be 17 years, using the straight-line method. On a quarterly basis, we review our issued
patents and pending patent applications and if we determine to abandon a patent application, or an issued patent no longer has economic value, the unamortized balance in deferred patent costs relating to that patent is immediately expensed.





It is possible the estimates of future economic life of our commercialization revenues, the amount of anticipated future
commercialization revenues, or both, will be reduced significantly in the near term due to alternative technologies developed by other biotechnology or pharmaceutical companies. As a result, the carrying amount of deferred patent costs may be
reduced in the future.





Equity in loss of unconsolidated affiliates.    In January 2000, we formed a
joint venture with Elan for the development and commercialization of HERZYME. As part of the joint venture, we licensed HERZYME and Elan licensed its MEDIPAD ® drug delivery technology to the joint venture, Medizyme Pharmaceuticals, Ltd. While we own 80.1% of the outstanding common stock of Medizyme, Elan has retained significant minority investor
rights that are considered participating rights as defined in EITF 96-16 Investors Accounting for an Investee When the Investor Owns a Majority of the Voting Stock but the Minority Shareholder or Shareholders Have Certain Approval or
Veto Rights. Therefore, we do not consolidate the operations of Medizyme, but instead account for our investment in Medizyme under the equity method.





The 1999 equity in loss of unconsolidated affiliates was in connection with our initial cash investment of $2.0 million and the subsequent transfer of our gene identification and target validation technology to Atugen
AG in 1998. During 1999, we owned 83.2% of Atugens outstanding common stock and as a result we recorded our share of Atugens net losses for 1999. Similar to the above discussion on Medizyme, minority investors of Atugen retained
significant investor rights and therefore we did not consolidate operations but instead accounted for our investment in Atugen under the equity method. In 1999, we completely expensed our investment in Atugen. We currently own 31.6% of Atugen and
will record our share of any future profits.





Results of Operations for Twelve Months Ended December 31, 2001 and 2000





Revenues.Generally, revenue fluctuations result from changes in the number of funded research projects as well as the
timing and completion of contract milestones. Our revenues are split into three categories: (i) Collaborative agreements, (ii) Collaborative agreements-joint venture, and (iii) Collaborative agreements-related parties. Collaborative agreement
revenues primarily include revenues recorded from Chiron. Chiron revenues are related to our joint collaboration on ANGIOZYME. Collaborative agreements-joint venture includes revenues from Medizyme, our joint venture with Elan. Collaborative
agreements-related parties, includes revenues recorded from Atugen.





Collectively, collaborative revenues decreased to $8.3
million for the year ended December 31, 2001 compared to $15.5 million for the year ending December 31, 2000. The decrease of $7.2 million in 2001 compared to 2000 was primarily due to $3.8 million recorded from Lilly in 2000 for the Hepatitis C
collaboration which terminated in 2000. The 2000 Lilly revenues included $1.5 million in milestone payments and $2.3 million in research revenues. In addition, revenues recorded from Chiron decreased $1.4 million during 2001 from the year ended
December 31, 2000. The decrease is due to the progression of ANGIOZYME in clinical trials and as ANGIOZYME progresses, it requires fewer researchers working on the project which, in turn, has resulted in lower research revenues. Also, because of the
progression of HERZYME in clinical trials, and therefore fewer researchers working on the project, revenues from Medizyme decreased in 2001 compared to 2000 by $2.1 million.





However, while revenues have decreased, reimbursements that offset manufacturing and clinical trial expenses in connection with Chiron have increased. Reimbursements from our
collaborators are recorded as credits against expenses. For the year ending December 31, 2001, reimbursements from Chiron were $8.9 million compared to $1.3 million for the corresponding period in 2000. Approximately $8.4 million of the
reimbursement in 2001 was related to third party contract




17




---

##### Table of Contents

manufacturing costs of ANGIOZYME. Revenues and reimbursement of expenses are expected to fluctuate due to timing of research and the progress of our drugs in
clinical trials.





Expenses.    Research and development expenses increased to $56.7 million for the year ended December 31, 2001, compared to $21.7 million for the corresponding period in 2000. The increase of $35.0 million for the
year ended December 31, 2001 compared to the same period in 2000 was primarily due to $29.4 million of expense, net of reimbursements, related to expansion of third party maufacturing capacity and to third party manufacturing costs for ANGIOZYME and
HEPTAZYME to support our current and planned clinical trials. In addition, clinical and pre-clinical trial expenses increased $3.5 million to $5.8 million in 2001, compared to $2.2 million in 2000. Also, increased staffing to accommodate clinical
trials and support for research resulted in an increase in personnel expense of $2.6 million. We expect research and development expenses, including pre-clinical studies, clinical trials and manufacturing expenses, to continue to increase as we
expand our development programs for ANGIOZYME, HEPTAZYME and HERZYME.





General and administrative expenses increased $800,000 to
$4.5 million the period ended December 31, 2001,compared to $3.7 million for the corresponding period in 2000.The increase in 2001 is the result of increased staffing and related expenses necessary to manage and support our expanding product and
business development efforts. We expect general and administrative expenses to continue to increase as a result of increasing legal and other professional fees in connection with the overall scale-up of our operations, business development efforts
and patent protection.





Interest income.    Interest income decreased $1.0 million to $2.2 million
for the year ended December 31, 2001, compared to $3.2 million, for the corresponding period in 2000. The decrease is due to lower average balances in our cash, cash equivalents and securities available-for-sale as compared to the same period in
2000. Cash and equivalent balances were higher in 2000 because of our public offering completed in April 2000 which resulted in $52.9 million net proceeds compared to the subsequent decrease of cash in 2001 for the manufacturing and clinical trial
expenses. Interest income generally fluctuates as a result of the average amount of cash available for investment and prevailing interest rates.





Interest expense.    Interest expense increased $669,000 to $820,000 for the period ended December 31, 2001, compared to $151,000 for the corresponding period in 2000. The low interest
expense in 2000 was due to our repayment of $6.9 million on a $7.9 million loan from Schering AG with proceeds from our public offering in 2000. At Schering AGs option, the remaining balance of $997,000 was converted into 42,435 shares of our
common stock in June 2000. Subsequently we borrowed an additional $1.0 million from Schering AG in each of October 2000, January 2001 and April 2001, as well as an additional $5.5 million from Elan in 2001 related to our joint venture, therefore,
interest expense increased for the period ended December 31, 2001. Interest expense is expected to continue to increase in the future as we arrange for additional financing for operations.





Equity in loss of unconsolidated affiliate.    Equity in loss of unconsolidated affiliate was $8.3 million for the period ended December 31, 2001, compared to
$9.0 million for the corresponding period in 2000. The expense is our 80.1% share of Medizymes 2001 expenses. The decrease in the losses recognized for the year ended December 31, 2001 are due to the decreases in Medizymes expenses
related to the development of HERZYME. The decrease for the year is the result of the transition of HERZYME from research to clinical trials. Medizymes 2001 expenses include $1.25 million amortized expense in each quarter for payment of a
$15.0 million license fee paid to Elan in January 2000, as well as $5.0 million we invoiced as of December 31, 2001 for research we conducted and clinical trial expenses we incurred with HERZYME.





Results of Operations for Twelve Months Ended December 31, 2000 and 1999





Revenues.    Revenues from collaborative agreements increased $7.8 million to $15.5 million for the year ended December 31, 2000 from $7.7 million for the corresponding period in 1999. The increase is primarily
due to $6.1 million of revenue recognized in 2000 from Medizyme, our joint venture with Elan related to the development of HERZYME. The joint venture began in January 2000 and therefore no revenues existed for Medizyme in 1999. In addition, the
increase was due to milestone payments we received of $1.5 million in 2000 from Lilly related to our development of HEPTAZYME. The payments were for filing an IND and commencing clinical trials for
HEPTAZYME.





Expenses.    Research and development expenses increased $6.3 million to $21.7 million in 2000 from $15.4 million in 1999. The increase is due to the cost of manufacturing, preclinical and clinical activities to
support our drugs in clinical trials. Research and development expenses consist primarily of:




18




---

##### Table of Contents




| |  |  | clinical and preclinical supplies and related costs;
| | - |  | ----------------------------------------------------




| |  |  | salaries and benefits for scientific, regulatory, quality control and pilot manufacturing personnel;
| | - |  | ----------------------------------------------------------------------------------------------------




| |  |  | consultants;
| | - |  | ------------




| |  |  | supplplies;
| | - |  | -----------




| |  |  | occupancy costs; and
| | - |  | --------------------




| |  |  | depreciation for laboratory equipment and facilities.
| | - |  | -----------------------------------------------------




We
expect future research and development expenses to increase from current levels as ANGIOZYME, HEPTAZYME, HERZYME and HepBzyme, proceed through clinical and preclinical trials. The effect of increased expenses related to HERZYME will be absorbed by
us indirectly through our equity investment in Medizyme, our unconsolidated affiliate.





General and administrative expenses
increased $1.6 million to $3.7 million for the year ended December 31, 2000 from $2.1 million for the corresponding period in 1999. The increase was primarily due to approximately $1.7 million of non-cash, stock option compensation expense recorded
for performance stock options that vested during 2000. During 2000, a number of corporate milestones were accomplished, including achieving a market capitalization of $150 million or more and a number of other financial goals which were satisfied by
the consummation of our agreement with Elan and the completion of our stock offering in April 2000. We expect general and administrative expenses to increase as a result of increasing legal and other professional fees in connection with the overall
scale-up of our operations, business development efforts and patent protection.





Interest
income.    Interest income increased $2.6 million to $3.2 million for the year ended December 31, 2000 from $614,000 for the corresponding period in 1999. The increase is due to higher average balances in our cash and cash
equivalents and securities available-for-sale during 2000. Cash balances were higher as a result of public offerings completed in both July 1999 and April 2000 that resulted in $58.1 million of cumulative net proceeds. In addition, we received $5.0
million in January 2000 for the sale of common stock to Elan pursuant to our collaboration with Elan. Interest income generally fluctuates as a result of the average amount of cash available for investment and prevailing interest rates.





Interest expense.    Interest expense decreased $401,000 to $151,000 for the year ended December 31,
2000 from $552,000 for the corresponding period in 1999. The decrease is due to our repayment of $6.9 million on a debt facility from Schering AG with proceeds from our 2000 public offering. The remaining balance of $997,000 was converted into
42,435 shares of our common stock in June 2000. Subsequently, we borrowed an additional $1.0 million from Schering AG in October 2000 and $2.7 million from Elan related to our joint venture. Therefore, interest expense is expected to increase in the
future as we borrow additional funds from our partners and arrange for additional financing for operations.





Equity in loss
of unconsolidated affiliate.    Equity in loss of unconsolidated affiliates was $9.0 million for the year ending December 31, 2000, compared to $860,000 for the corresponding period in 1999. The expense in 2000 is our 80.1%
share of Medizymes recorded loss. Medizymes expenses include $1.25 million amortized expense in each quarter for payment of a $15.0 million license fee paid to Elan in January 2000, as well as $6.1 million we invoiced during 2000 for
research we conducted on HERZYME.





The 1999 equity in loss of unconsolidated affiliate was in connection with our investment in
Atugen AG in 1998. During 1999, we owned 83.2% of Atugens outstanding common stock and as a result we recorded our share of Atugens net losses for 1999 resulting in equity in loss of unconsolidated affiliate of $860,000. During 1999, we
completely expensed our remaining investment in Atugen and therefore no expense related to Atugen was recorded during 2000.





Liquidity and Capital
Resources





Since our inception, we have financed our operations through sales of equity securities in public offerings,
private placements of preferred and common stock, funds received under our collaborative agreements and financing under equipment and tenant improvement loans. From inception through December 31, 2001, we have received approximately:





| |  |  | $29.0 million in net proceeds from private placements;
| | - |  | ------------------------------------------------------




| |  |  | $97.6 million in net proceeds from public offerings;
| | - |  | ----------------------------------------------------




| |  |  | $129.1 million from our collaborations; and
| | - |  | -------------------------------------------



19




---

##### Table of Contents

| |  |  | $10.4 million from equipment financing.
| | - |  | ---------------------------------------




We had cash, cash equivalents and securities available-for-sale of $35.0 million at December 31, 2001 compared with $64.5 million at December 31, 2000. The $29.5 million decrease in cash, cash equivalents and securities available-for-sale
is primarily the result of $44.7 million used for operations, net of revenues of $8.3 million; $3.7 million used for investments in equipment, leasehold improvements and patents; net $750,000 in loans to executives; $5.5 million invested in our
joint venture; $17.0 million received in proceeds from equity transactions; and, $8.2 million received in proceeds from debt facilities.





We invest our cash, cash equivalents and securities available-for-sale in interest-bearing, investment-grade securities.





Accounts receivable at December 31, 2001 were $1.5 million compared to $3.6 million at December 31, 2000. Accounts receivable at December 31, 2001 included $341,000 due from Atugen for administrative services and patent expenses, $491,000
due from Medizyme for research support for HERZYME and $500,000 due from Chiron for reimbursement of ANGIOZYME expenses, as well as $208,000 due from miscellaneous other sources.





Total additions for property, plant and equipment for the year ended December 31, 2001 were $2.8 million, of which $2.0 million were financed through our existing equipment loan facility
with Schering AG and $643,000 were financed through a $4.0 million loan facility through a credit institution. As of December 31, 2001, no additional funding was available through the Schering AG loan facility and $3.4 million was available through
the credit institution. The Schering AG loan matures in April 2004 and accrues at an 8% interest rate. The loan facility through the credit institution is available for draw downs through November 2002, currently averages an interest rate of 9.5%,
and matures in 36 or 48 months depending on the type of equipment collateralized. We anticipate future property, plant and equipment needs to be financed through the existing loan facility and additional credit facilities yet to be determined.





The following table summarizes our debt obligations as of December 31, 2001:





Payments Due by Period2002

2003

2004

2005

2006

Thereafter

TotalLong-term debt

$
169,117

$
185,562

$
3,414,091

$
94,366

$
3,082,273

$
5,814,385

$
12,759,794Operating leases


936,288


940,048


954,755


974,451


894,368


196,014


4,895,924Total debt obligations

$
1,105,405

$
1,125,610

$
4,368,846

$
1,068,817

$
3,976,641

$
6,010,399

$
17,655,718





In July 1994, we entered into an agreement with Chiron to collaborate exclusively
on up to five specific targets selected by Chiron. ANGIOZYME is being developed in collaboration with Chiron and we share equally all development costs and future profits with Chiron. In March 2001, we issued 38,920 shares of our common stock to
Chiron in exchange to reacquire all rights to develop any product containing or utilizing an HIV target. We recorded an expense of $275,000 in March 2001 in connection with the issuance of the stock. During the year ended December 31, 2001, we
recorded $3.1 million and $8.9 million in revenues and reimbursement of expenses, respectively, from Chiron for costs incurred for the clinical development of ANGIOZYME.





In April 1997, we entered into a purchase agreement, subsequently amended, with Schering AG and Schering Berlin Venture Corporation, or SBVC, an affiliate of Schering AG as part of our
target discovery and validation program. SBVC made a $2.5 million equity investment in us in April 1997 in exchange for 212,766 shares of our common stock and made an additional equity investment of $2.5 million for 465,117 shares of our common
stock in April 1998. Separately, Schering AG provided loans of $2.0 million in each of 1997, 1998, 1999, 2000 and 2001. We received our final draw-down of $1.0 million from Schering AG in April 2001. The loans, which carry an interest rate of 8.0%
per annum, are immediately convertible into equity at the option of Schering AG. Additionally, 50.0% of any borrowings we make on the line of credit must be collateralized by equipment purchases. In April 2000, after the completion of our public
offering, we repaid $6.9 million of our outstanding borrowings to Schering AG. In June 2000, Schering AG converted $997,000 of the loan balance into 42,435 shares of our common stock at a conversion price of $23.50. At December 31, 2001, we had $3.2
million in outstanding loans and accrued interest from Schering AG, which was convertible into approximately 705,000 shares of our common stock. Principal and interest payments are deferred until maturity of the loans in April 2004. As a result of
the Atugen formation in 1998, we now subcontract all of our existing target discovery and validation programs to Atugen, which does not effect the terms of our loan agreement with Schering AG.





In January 2000, we completed a joint venture with Elan for the development and commercialization of HERZYME, our potential product to treat breast and other cancers. In accordance
with the collaboration, we sold to Elan our Series A




20




---

##### Table of Contents

Convertible Preferred Stock for $12.0 million and, in turn, used those funds for initial funding of Medizyme. As of December 31, 2001, the Series A preferred
stock and accrued dividends were convertible into 1,125,567 shares of our common stock. Also, as part of the collaboration, Elan purchased 641,026 shares of our common stock for a purchase price of $5.0 million. In addition, Elan purchased 500,500
shares of common stock for $5.0 million in May 2001, which was at a premium to the market price. We have estimated that the development of HERZYME will require additional funds of up to $15 million and, therefore, Elan has made available to us a
$12.0 million credit facility to fund our portion of Medizyme operating costs over a 42-month period. At the end of December 2001, we utilized the credit facility and had borrowed $8.2 million. The note carries an interest rate of 12% compounded on
a semi-annual basis. Elan may convert this debt into shares of our Series B Convertible Preferred Stock at any time. In lieu of conversion, principal and interest payments on the note are deferred until the note matures in 2006. At December 31,
2001, the outstanding borrowings would be convertible into 644,095 shares of our common stock. In addition, Elan purchased 750,000 shares of our common stock and a five-year warrant to purchase 75,000 shares of our common stock at $5.00 per share in
December 2001 for $3.0 million.





On July 27, 2001, we filed a Form S-3 Registration Statement to register 3,000,000 shares and
an aggregate of $10,000,000 in proceeds from the sale of our common stock, preferred stock and warrants for our common or preferred stock. In November 2001, we utilized the registration statement and sold 2,261,905 shares of our common stock and a
five-year warrant to purchase 226,191 shares of our common stock at $5.00 per share, for gross proceeds of $9.5 million.





We
anticipate that our existing financial resources and expected revenues from collaborations, should be sufficient to meet our anticipated operating and capital requirements through 2002. We expect to incur substantial additional costs, including,
costs related to:





| |  |  | our research, drug discovery and development programs;
| | - |  | ------------------------------------------------------




| |  |  | preclinical studies and clinical trials of our products, if developed;
| | - |  | ----------------------------------------------------------------------




| |  |  | prosecuting and enforcing patent claims;
| | - |  | ----------------------------------------




| |  |  | general administrative and legal items; and
| | - |  | -------------------------------------------




| |  |  | manufacturing and marketing of our products, if any.
| | - |  | ----------------------------------------------------




In the future we may raise additional capital through public or private financing, as well as from new collaborative relationships, new credit facilities and other sources.





At December 31, 2001, we had available net operating loss carryforwards and research and development credit carryforwards of $140.7 million and $5.7
million, respectively, for income tax purposes. Our ability to utilize our net operating loss carryforwards is subject to an annual limitation in future periods pursuant to the change in ownership rules under Section 382 of the Internal
Revenue Code.





ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





We are exposed to changes in interest rates primarily from our investments in certain short-term
investments. We invest our excess cash in highly liquid short-term investments that are typically held for the duration of the term of the respective instrument. We do not utilize derivative financial instruments, derivative commodity instruments or
other market risk sensitive instruments to manage exposure to interest rate changes. Accordingly, we believe that, while the securities we hold are subject to changes in the financial standing of the issuer of such securities, we are not subject to
any material risks arising from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices or other market changes that affect market risk sensitive instruments.





ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





Submitted as part of Item 14(a) of this Form 10-K and incorporated herein by reference.





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





Not applicable.




21




---

##### Table of Contents




PART III





ITEM 10.DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT





The directors, executive officers and key employees of Ribozyme Pharmaceuticals are as follows:





Name

Age

PositionHoward W. Robin (1)

49

Chief Executive Officer, President and DirectorMarvin Tancer

51

Chief Financial Officer and Vice President of OperationsNassim Usman, Ph.D

42

Chief Scientific Officer and Vice President of Research and DevelopmentLawrence Blatt

40

Vice President of ResearchLawrence E. Bullock

46

Vice President of Finance and Administration and SecretaryAlene A. Campbell

45

Vice President of Corporate DevelopmentFrancine E. Wincott, Ph.D.

38

Senior Director of Manufacturing OperationsRalph E. Christoffersen, Ph.D. (1)

64

Chairman of the BoardDavid T. Morgenthaler (1) (2)

82

DirectorJeremy L. Curnock Cook (1) (2) (3).

52

DirectorJohn Groom (2)

63

DirectorSamuel R. Saks, M.D.(3)

47

DirectorAnders P. Wiklund (2) (3).

61

Director


---

|(1) |  | Member of the Executive Committee
|--- |  | ---------------------------------

|(2) |  | Member of the Compensation Committee
|--- |  | ------------------------------------

|(3) |  | Member of the Audit Committee
|--- |  | -----------------------------




Howard W. Robin has served as Chief Executive Officer, President and Director since July 2001. From January 2001 to June 2001, Mr. Robin was Chief Operating Officer, President and Director. From 1991 to 2001 Mr. Robin was Corporate
Vice President and General Manager at Berlex Laboratories, Inc. and from 1987 to 1991 he served as Vice President of Finance and Business Development and Chief Financial Officer. From 1984 to 1987 Mr. Robin was Director of Business Planning &
Development at Berlex. He was a Senior Associate with Arthur Anderson & Company prior to joining Berlex. He received his B.S. in Accounting & Finance from Farleigh Dickinson University in 1974.





Marvin Tancer has served as Chief Financial Officer and Vice President of Operations since June 2001. Prior to joining RPI in 2001, Mr. Tancer
served as National Sales Director of Oncology and Area Sales Director for the Western United States for Berlex Labs, Inc. from 1999 to 2000. From 1992 to 1998 he held the position of Director of Finance and Administration and Chief Financial Officer
at Berlex Biosciences. From 1986 to 1992 he held the position of Corporate Controller for Berlex Labs, Inc. and from 1982 to 1986 was Pharmaceutical Division Controller and Director of Financial Analysis. He earned his BS in Business Administration
from the Wharton School of Business.




22




---

##### Table of Contents




Nassim Usman, Ph.D., has served as Chief Scientific Officer since February 2002 and Vice
President of Research and Development since August 2000. From December 1999 to July 2000, Dr. Usman served as Senior Vice President of Research. From May 1996 to December 1999, Dr. Usman served as Vice President of Research at Ribozyme
Pharmaceuticals. From April 1994 until May 1996, Dr. Usman served as Director of Chemistry and Biochemistry Research and from September 1992 until April 1994 Dr. Usman served as Senior Scientist in Chemistry and Biochemistry. From January 1987 to
September 1992, Dr. Usman was a Postdoctoral Fellow and Scientist in the Departments of Biology and Chemistry at the Massachusetts Institute of Technology. Dr. Usman received his Ph.D. in chemistry from McGill University.





Lawrence M. Blatt,Dr. P.H., has served as Vice President of Research since August 2000. From January 1999 to July 2000, Dr. Blatt served
as Research Vice President, BioPharmacology and Preclinical. From January 1998 until January 1999, Dr. Blatt served as Senior Director of Preclinical and Clinical Development. Prior to joining the Company, Dr. Blatt served as Vice President of
Product Development for the National Genetic Institute, a molecular diagnostic company, from August 1996 to January 1998. From August 1984 to January 1996, Dr. Blatt served in various managerial and scientific positions at Amgen Inc., a
bio-pharmaceutical company. He received his Doctorate in Public Health Administration from the University of La Verne in 1996 and his M.B.A. degree from California Sate University, Northridge in 1988.





Lawrence E. Bullock has served as Vice President of Administration and Finance and Secretary since January 1996. From December 1990 to January
1996, Mr. Bullock was Chief Financial Officer, Director of Finance and Administration and Secretary of La Jolla Pharmaceutical Company, a biopharmaceutical company. Mr. Bullock received his M.B.A. from the University of Utah.





Alene A. Campbell has served as Vice President of Corporate Development since December 1999. Ms. Campbell served as Vice President of
Business Development and General Manager of Target Validation and Discovery Business from April 1997 to December 1999. From January 1990 to March 1997, Ms. Campbell was Vice President of ChemTrak Corporation, a medical technology firm, where she was
responsible for finance, business development and marketing and sales. From 1987 to 1990, she was Vice President of CytoSciences, Inc., a biomedical company, and from 1981 to 1987 she was Vice President of Marketing and Sales for Hana Biologics,
Inc. (now Cell Genesys Corporation), a biotechnology firm. Ms. Campbell received her M.B.A. from the University of California at Berkeley.





Francine E. Wincott, Ph.D., has served as Senior Director of Manufacturing since April 1999. From March 1997 to March 1999, Dr. Wincott served as Director of Chemistry and Biochemistry Research and from 1993 to
1997 she was a Senior Scientist. From 1990 to 1993 Dr. Wincott was a Scientist involved in developing therapeutics directed against auto immune diseases at Cortech, Inc., a biotechnology company . From 1989 to 1990 she was a Scientist in the
Medicinal Chemistry Group at Merck, Inc., a pharmaceutical company. Dr. Wincott earned a B.A. in Chemistry from the University of Pennsylvania and a Ph.D. from Yale University.





Ralph E. Christoffersen, Ph.D., has served as a director since June 1992 and was elected Chairman of the Board in July 2001. Dr. Christoffersen was Chief Executive Officer of
Ribozyme Pharmaceuticals from June 1992 until his retirement in July 2001 and from June 1992 until January 2001 Dr. Christoffersen also served as President. From 1989 to June 1992, Dr. Christoffersen was Senior Vice President and Director of U.S.
Research at SmithKline Beecham Pharmaceuticals, a pharmaceutical company. From 1983 to 1989, he held senior management positions in research at The Upjohn Company, a pharmaceutical company. Prior to joining The Upjohn Company, Dr. Christoffersen
served as a Professor of Chemistry and Vice Chancellor for Academic Affairs at the University of Kansas and as President of Colorado State University. He received his Ph.D. in physical chemistry from Indiana University.





Jeremy L. Curnock Cook has served as a director since July 1995. Mr. Cook was a director of Rothschild Asset Management, an investment management
company, where he was responsible for the Rothschild Bioscience Unit from 1987 until his retirement in 2000. Mr. Cook founded the International Biochemicals Group in 1975, which he subsequently sold to Royal Dutch Shell in 1985, remaining as
Managing Director until 1987. He is Executive Chairman of Bioscience Managers Ltd., a corporate advisory company, and Non-Executive Chairman of Targeted Genetics Inc. He is also a director of Virogen Ltd., AMRAD Corporation, GlycoDesign, Inc.,
Valigen, N.V., Inflazyme Pharmaceuticals, Inc. and Biocompatibles International plc. Mr. Cook received an M.A. in Natural Sciences from Trinity College Dublin.





John Groom has served as a director since April 2000. Mr. Groom served as President and Chief Operating Officer of Elan Corporation plc from 1996 until his retirement in 2001. Mr. Groom continues as a director
of Elan Corporation plc. He served as President and Chief Executive Officer of Athena Neurosceiences, Inc. from 1987 to 1996. Mr. Groom is also a director of Ligand Pharmaceuticals, Inc., CV Therapeutics Inc. and Amarin Corporation Inc. Mr. Groom is
a Fellow of the Association of Certified Accountants (UK).




23




---

##### Table of Contents




David T. Morgenthaler has served as a director since February 1992. From December 1995
until July 2001, Mr. Morgenthaler was Chairman of the Board. Mr. Morgenthaler was a founder of and has been Managing Partner of Morgenthaler Ventures, a private venture capital firm, since 1968. He has been a director of a number of public and
private companies. Mr. Morgenthaler received his M.S. degree from the Massachusetts Institute of Technology.





Samuel R. Saks,
M.D. has served as a director since April 2000. Dr. Saks is Company Group Chairman, ALZA Corporation, a operating company of Johnson & Johnson. In 1992, Dr. Saks joined ALZA as the Vice President for Medical Affairs and subsequently served
as Senior Vice President, Medical Affairs and Group Vice President, ALZA Pharmaceuticals. Prior to joining ALZA, Dr. Saks was Vice President of Clinical Research at XOMA Corporation and also worked in the clinical research departments of
Schering-Plough and Genentech. Dr. Saks received his M.D. with honors from the University of Illinois and completed his residency in Internal Medicine at the University of Texas Southwestern Medical Center at Dallas and his fellowship in oncology at
the University of California, San Francisco. Dr. Saks is board certified in oncology and is a diplomat of the American Board of Internal Medicine.





Anders P. Wiklund has served as a director since August 1994. Since January 1997, Mr. Wiklund has been the principal of Wiklund International, an advisory firm to the biotechnology and pharmaceutical
industries. From 1967 through 1996, Mr. Wiklund served in numerous executive positions for the Kabi and Pharmacia group of companies, including President and CEO of Kabi Vitrum Inc. and Kabi Pharmacia, Incorporated. Mr. Wiklund is also a director of
Glyco Design, Inc., Medivir, A.B. and InSite Vision, Inc., as well as serving on private company boards. Mr. Wiklund received a Master of Pharmacy degree from the Pharmaceutical Institute in Stockholm.





ITEM 11.EXECUTIVE COMPENSATION





The information required by this item is incorporated by reference from the information under the
caption Executive Compensation contained in the Proxy Statement.





ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT





The information required by this item is incorporated by reference to the information under the
caption Security Ownership of Certain Beneficial Owners and Management contained in the Proxy Statement.





ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS





The information required by this item is incorporated by reference to the information under the
caption Compensation Committee Interlocks and Insider Participation and Certain Transactions contained in the Proxy Statement.




24




---

##### Table of Contents




PART IV





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





(a)(1)  Financial Statements





PageReport of Independent Auditors

F-1Balance Sheets

F-2Statements of Operations

F-3Statements of Stockholders Equity

F-4Statements of Cash Flows

F-5Notes to Financial Statements

F-6





(a)(2)  Financial Statement Schedules





Schedules have been omitted since they are either not required or are not applicable.





(a)(3)  Exhibits





Number

Description3.1

Amended and Restated Certificate of Incorporation of Ribozyme Pharmaceuticals dated April 17, 1996(5)3.2

Bylaws of Ribozyme Pharmaceuticals, as amended(1)3.3

Certificate of Correction to the Amended and Restated Certificate of Incorporation of Ribozyme Pharmaceuticals dated September
15, 1997(23)3.4

Articles of Amendment to the Certificate of Incorporation of Ribozyme Pharmaceuticals dated May 1, 2000(23)4.1

Specimen Stock Certificate(1)4.2

Certificate of Designation, Preferences and Rights of Series L Preferred Shares(10)4.3

Certificate of Designations, Preferences and Rights of Series A Preferred Stock and Series B Preferred Stock(11)4.4

Rights Agreement, dated November 22, 2000 between Ribozyme Pharmaceuticals, Inc., and American Stock Transfer & Trust
Company, which includes the form of Certificate of Designation of Series AA Junior Participating Preferred Stock attached as Exhibit A thereto(14)4.5

Amendment to the Certificate of Designation, Preferences and Rights of the Series L Preferred Stock of Ribozyme Pharmaceuticals
dated February 18, 2000(23)4.6

Amendment to the Certificate of Designation, Preferences and Rights of the Series L Preferred Stock of Ribozyme Pharmaceuticals
dated May 1, 2000(23)4.7

Amendment to the Certificate of Designations, Preferences, and Rights of Series A Preferred Stock and Series B Preferred Stock of
Ribozyme Pharmaceuticals(23)10.1

Form of Indemnity Agreement entered into between Ribozyme Pharmaceuticals and its directors and officers, with related
schedule(1)10.2

Ribozyme Pharmaceuticals Incentive Stock Option Plan, including form of Incentive Stock Option Agreement(1)10.3

Ribozyme Pharmaceuticals Non-Qualified Stock Option Plan, including form of Non-Qualified Stock Option
Agreement(1)10.4

Ribozyme Pharmaceuticals 1996 Stock Option Plan, including forms of Incentive Stock Option Nonstatutory Stock Option
Agreements(1)10.5

Ribozyme Pharmaceuticals 1996 Stock Employee Stock Purchase Plan(1)10.6

Employment Agreement dated January 1, 1997 between Ribozyme Pharmaceuticals and Ralph E. Christoffersen(5)10.7

Incentive Stock Option Agreement between Ribozyme Pharmaceuticals and Ralph E. Christoffersen dated December 23,
1992(1)10.8

Incentive Stock Option Agreement between Ribozyme Pharmaceuticals and Ralph E. Christoffersen dated September 23,
1994(1)10.9

Warrant Purchase Agreement dated March 15, 1995, between Ribozyme Pharmaceuticals and Hambrecht & Quist Guaranty
Finance(1)10.10

Warrant to Purchase Common Stock dated March 15, 1995, issued to Hambrecht & Quist Guaranty Finance(1)10.11

Warrant to Purchase Common Stock dated February 22, 1993, issued to LINC Scientific Leasing(1)10.12

Warrant to Purchase Common Stock dated July 30, 1993, issued to Douglas E. Olson(1)10.13

Warrant to Purchase Common Stock dated July 30, 1993, issued to Richard J. Warburg and Ruth P. Warburg(1)10.14

Warrant to Purchase Common Stock dated December 28, 1994, issued to Competitive Technologies, Inc.(1)10.15

Warrant to Purchase Common Stock dated December 29, 1995, issued to Silicon Valley Bank(1)




25




---

##### Table of Contents

Number

Description10.16

Warrant to Purchase Common Stock dated July 26, 1996, issued to Silicon Valley Bank(1)10.17

Warrant to Purchase Common Stock dated April 17, 1996, issued to Chiron Corporation(1)10.18

Collaborative Research, Development and Commercialization Agreement dated July 15, 1994, between Ribozyme Pharmaceuticals and
Chiron Corporation(1)10.19

Research Collaboration and Licensing Agreement dated November 1, 1995, between Ribozyme Pharmaceuticals and Pharmacia Biotech,
AB(1)10.20

Research and Development Collaboration Agreement dated April 19, 1993, between Ribozyme Pharmaceuticals and Parke-Davis Division
of Warner-Lambert Company(1)10.21

First Amendment to the Research and Development Collaboration Agreement dated April 17, 1995, between Ribozyme Pharmaceuticals
and Parke-Davis Division of Warner-Lambert Company(1)10.22

Second Amendment to the Research and Development Collaboration Agreement dated February 8, 1996, between Ribozyme Pharmaceuticals
and Parke-Davis Division of Warner-Lambert Company(1)10.23

Financing Agreement dated March 16, 1995, among Wilderness Place Holdings L.L.C., Hambrecht & Quist Guaranty
Finance, L.P. and Ribozyme Pharmaceuticals(1)10.24

Negotiable Promissory Note dated October 7, 1992, between Ribozyme Pharmaceuticals and Ralph Christoffersen and Addendum
dated June 25, 1993(1)10.25

Employment Agreement dated January 8, 1996, between Ribozyme Pharmaceuticals and Lawrence E. Bullock(1)10.26

Promissory Note dated February 8, 1996, between Ribozyme Pharmaceuticals and Lawrence E. Bullock(1)10.27

Lease for Real Property dated May 20, 1992, between Aero-Tech Investments and Ribozyme Pharmaceuticals(1)10.28

Non-Disturbance and Attornment Agreement dated March 31, 1995, among General American Life Insurance Company, Aero-Tech
Investments, Wilderness Place Holdings L.L.C. and Ribozyme Pharmaceuticals(1)10.29

Master Lease Agreement dated September 2, 1992, between Ribozyme Pharmaceuticals and LINC Scientific Leasing(1)10.30

Loan and Security Agreement dated February 28, 1994, between Ribozyme Pharmaceuticals and Silicon Valley Bank(1)10.31

Loan Modification Agreement dated December 21, 1994, between Ribozyme Pharmaceuticals and Silicon Valley Bank(1)10.32

Loan and Security Agreement dated December 29, 1995, between Ribozyme Pharmaceuticals and Silicon Valley Bank and MMC/GATX
Partnership No. 1(1)10.33

Warrant to Purchase Common Stock dated December 29, 1995, issued to MMC/GATX Partnership No. 1(1)10.34

Agreement dated February 29, 1996, between Ribozyme Pharmaceuticals and Chiron Corporation relating to research and development
funding(1)10.35

Amendments to original Employment Agreements between Ribozyme Pharmaceuticals and Ralph E. Christoffersen, Lawrence E.
Bullock and Nassim Usman, pursuant to letters dated November 14, 1996, November 22, 1996, and December 15, 1996(3)10.36

Promissory Note dated June 4, 1996, between Ribozyme Pharmaceuticals and Nassim Usman(3)10.37

Amendment to Lease for Real Property dated March 13, 1997, between AeroTech Investments and Ribozyme
Pharmaceuticals(3)10.38

Employment Agreement dated May 2, 1996, between Ribozyme Pharmaceuticals and Nassim Usman(2)10.39

Collaboration Agreement Regarding Use of Ribozymes to Determine Gene Function dated May 13, 1996, between Ribozyme
Pharmaceuticals and Chiron Corporation(2)10.40

Amended and Restated License Agreement dated November 20, 1996, between Ribozyme Pharmaceuticals, University Research
Corporation, University of Colorado and United States Biochemical Corporation(3.5)*10.41

Amended and Restated Sublicense Agreement dated November 20, 1996, between Ribozyme Pharmaceuticals and United States Biochemical
Corporation(3.5)*10.42

Amended and Restated License Agreement dated November 20, 1996, between Ribozyme Pharmaceuticals and Competitive Technologies,
Incorporated(3.5)*10.43

Memorandum of Understanding dated March 1, 1996, between Ribozyme Pharmaceuticals and DowElanco(1)10.44

Stock Subscription Agreement dated September 1996 between Ribozyme Pharmaceuticals and University of Research
Corporation(3.5)*10.45

Stock Subscription Agreement dated November 20, 1996, between Ribozyme Pharmaceuticals and United States Biochemical
Corporation(3.5)*10.46

Assignment of License and Restated License Agreement dated November 20, 1996, among Ribozyme Pharmaceuticals, United States
Biochemical Corporation and Competitive Technologies(3.5)*10.49

License Agreement dated February 14, 1997, between Ribozyme Pharmaceuticals and IntelliGene, Ltd.(3.5)*




26




---

##### Table of Contents

Number

Description10.50

Subscription Agreement dated April 17, 1995, between Ribozyme Pharmaceuticals and Parke-Davis Division of Warner-Lambert
Company(1)10.51

Stock Purchase Agreement dated June 28, 1995, among Ribozyme Pharmaceuticals and investors(1)10.52

Agreement dated March 1, 1996, between Ribozyme Pharmaceuticals and DowElanco Corporation relating to the conversion of preferred
stock(1)10.53

Stock Subscription Agreement dated October 30, 1995, between Ribozyme Pharmaceuticals and Gewestelijke Investeringsmaatschappij
voor Vlaanderon n.v.(1)10.54

Research, License, Supply and Royalty Agreement between Schering Aktiengesellschaft and Ribozyme Pharmaceuticals dated April 9,
1997(4)*10.55

Purchase Agreement dated April 9, 1997, among Ribozyme Pharmaceuticals, Schering Berlin Venture Corporation and Schering
Aktiengesellschaft(4)*10.56

Employment Agreement dated February 27, 1997, between Ribozyme Pharmaceuticals and Alene Holzman(5)10.57

Employment Agreement dated July 5, 1997, between Ribozyme Pharmaceuticals and Thomas Rossing(5)10.58

Executive Bonus Plan dated March 27, 1998(6)10.59

Research, Collaboration and License Agreement dated May 19, 1998, between Ribozyme Pharmaceuticals and Roche Bioscience, a
division of Syntex (U.S.A.) Inc.(7)*10.60

Employment Agreement dated September 8, 1998, between Ribozyme Pharmaceuticals and Nassim Usman(8)10.61

Participation Agreement dated August 31, 1998, as amended, and related documents between Ribozyme Pharmaceuticals and Atugen
Biotechnology GmbH(9)*10.62

Research Collaboration and License Agreement dated March 17, 1999, between Ribozyme Pharmaceuticals and Eli Lilly and Company*
(10.6)10.63

Stock Purchase Agreement dated April 30, 1999, between Ribozyme Pharmaceuticals and Eli Lilly and Company (10.5)10.64

Employment Agreement dated May 10, 1999 between Ribozyme Pharmaceuticals and Dr. Wayne Cowens(10.7)10.65

Securities Purchase Agreement dated January 7, 2000, among Ribozyme Pharmaceuticals, Elan International Services, Ltd. and Elan
Corporation, plc(11)10.66

License Agreement dated January 7, 2000 among Elan Pharmaceutical Technologies (a division of Elan Corporation, plc), Elan Pharma
International Limited and Medizyme Pharmaceuticals, Ltd.(11)*10.67

Warrant dated January 7, 2000, issued to Elan International Services, Ltd. to purchase up to 200,000 shares of Ribozyme
Pharmaceuticals common stock(11)10.68

Warrant dated January 7, 2000 issued to Elan International Services Ltd. to purchase up to 300,000 shares of Ribozyme
Pharmaceuticals common stock(11)10.69

Convertible Promissory Note dated January 7, 2000, from Ribozyme Pharmaceuticals to Elan International Services,
Ltd.(11)10.70

Subscription, Joint Development and Operating Agreement dated January 7, 2000, among Ribozyme Pharmaceuticals, Elan Corporation,
plc, Elan Pharma International Limited, Elan International Services, Ltd. and Medizyme Pharmaceuticals, Ltd.(11)*10.71

Funding Agreement dated January 7, 2000 among Ribozyme Pharmaceuticals, Elan Pharmaceutical Technologies (a division of Elan
Corporation, plc), Elan Pharma International Limited and Elan International Services, Ltd.(11)10.72

License Agreement dated January 7, 2000, among Ribozyme Pharmaceuticals and Medizyme Pharmaceuticals, Ltd.(11)*10.73

Registration Rights Agreement dated January 7, 2000, between Ribozyme Pharmaceuticals and Elan International Services,
Ltd.(11)10.74

Registration Rights Agreement dated January 7, 2000 among Ribozyme Pharmaceuticals, Elan International Services, Ltd. and
Medizyme Pharmaceuticals Ltd.(11)10.75

Agreement dated January 31, 2000, between Ribozyme Pharmaceuticals and Avecia Limited(11)*10.76

Employment Agreement dated July 6, 2000 between Ribozyme Pharmaceuticals and Dr. Nassim Usman(12)10.77

Employment Agreement dated July 6, 2000, between Ribozyme Pharmaceuticals and Dr. Lawrence Blatt(12)10.78

Repurchase of Ribozyme Product agreement dated September 28, 2000 between Ribozyme Pharmaceuticals and Eli Lilly and
Company(13)*10.79

Common Stock Purchase Agreement dated December 29, 2000 by and between Ribozyme Pharmaceuticals, Inc. and Acqua Wellington North
America Equities Fund, Ltd.(15)10.80

Employment Agreement dated January 4, 2001 between Ribozyme Pharmaceuticals and Howard Robin(16)10.81

Warrant to Purchase Shares of Common Stock between the Company and Heidrick & Struggles dated January 4,
2001(17)10.82

Amendment to Chiron CorporationRibozyme Pharmaceuticals, Inc. Collaborative Research, Development and Commercialization
Agreement dated March 20, 2001(17)10.83

Employment Agreement dated May 29, 2001 between Marvin Tancer and the Company(18)




27




---

##### Table of Contents

Number

Description10.84

Amendment to Employment Agreement dated April 30, 2001 between Lawrence Blatt and the Company(18)10.85

Amendment to Employment Agreement dated April 30, 2001 between Lawrence E. Bullock and the Company(18)10.86

Amendment to Employment Agreement dated April 30, 2001 between Ralph E. Christoffersen and the Company(18)10.87

Amendment to Employment Agreement dated April 30, 2001 between J. Wayne Cowens and the Company(18)10.88

Amendment to Employment Agreement dated April 30, 2001 between Alene A. Holzman and the Company(18)10.89

Amendment to Employment Agreement dated April 30, 2001 between Nassim Usman and the Company(18)10.90

Amendment to Employment Agreement dated April 30, 2001 between Fran Wincott and the Company(18)10.91

Amendment to Employment Agreement dated June 18, 2001 between Howard W. Robin and the Company(19)10.92

Amendment to Employment Agreement dated July 1, 2001 between Ralph E. Christoffersen and the Company(19)10.93

Amendment to Employment Agreement dated July 15, 2001 between Marvin Tancer and the Company(19)10.94

Securities Purchase Agreement dated December 21, 2001 by and between Ribozyme Pharmaceuticals and Elan International Services,
Ltd.(20)10.95

Warrant Agreement dated November 28, 2001 by and between Ribozyme Pharmaceuticals and ABN AMRO Incorporated(21)10.96

Form of Warrant to purchase Common Stock dated November 28, 2001 issued to selected institutional investors(22)23.1

Consent of Ernst & Young LLP, Independent Auditors(23)


---

|* |  | Ribozyme Pharmaceuticals has applied for and received confidential treatment with respect to portions of these exhibits.
|- |  | ------------------------------------------------------------------------------------------------------------------------

|(1) |  | Documents incorporated by reference herein to certain exhibits to Ribozyme Pharmaceuticals Form SB-2 Registration Statement, File No. 333-1908-D.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Documents incorporated by reference herein to certain exhibits to Ribozyme Pharmaceuticals Form 10-QSB for the quarter ended June 30, 1996.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Documents incorporated by reference herein to certain exhibits to Ribozyme Pharmaceuticals Form 10-KSB and amendment for the year ended December 31, 1996.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------

|(3.5) |  | Documents incorporated by reference herein to certain exhibits to Ribozyme Pharmaceuticals Form 10-KSB/A for the year ended December 31, 1996.
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Documents incorporated by reference herein to certain exhibits to Ribozyme Pharmaceuticals Form 8-K dated June 12, 1997.
|--- |  | -------------------------------------------------------------------------------------------------------------------------

|(5) |  | Documents incorporated by reference herein to certain exhibits to Ribozyme Pharmaceuticals Form SB-2 Registration Statement, File No. 333-34981.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------

|(6) |  | Documents incorporated by reference herein to certain exhibits to Ribozyme Pharmaceuticals Form 10-KSB for the year ended December 31, 1997.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

|(7) |  | Documents incorporated by reference herein to certain exhibits to Ribozyme Pharmaceuticals Form 10-Q/A for the quarter ended June 30, 1998.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------

|(8) |  | Documents incorporated by reference herein to certain exhibits to Ribozyme Pharmaceuticals Form 10-Q for the quarter ended September 30, 1998.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------

|(9) |  | Documents incorporated by reference herein to certain exhibits to Ribozyme Pharmaceuticals Form 8-K/A dated June 16, 1999.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------

|(10) |  | Documents incorporated by reference herein to certain exhibits to Ribozyme Pharmaceuticals Form S-1 Registration Statement and amendments, File No. 333-75079.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.5) |  | Documents incorporated by reference herein to certain exhibits to Ribozyme Pharmaceuticals Form S-1 Registration Statement, Amendment No. 3, File No. 333-75079.
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.6) |  | Documents incorporated by reference herein to certain exhibits to Ribozyme Pharmaceuticals Form S-1 Registration
|------ |  | -----------------------------------------------------------------------------------------------------------------



28




---

##### Table of Contents

|Statement, |  | Amendment No. 5, File No. 333-75079.
|---------- |  | ------------------------------------

|(10.7) |  | Documents incorporated by reference herein to certain exhibits to Ribozyme Pharmaceuticals Form S-1 Registration Statement, Amendment No. 7, File No. 333-75079.
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

|(11) |  | Documents incorporated by reference herein to certain exhibits to Ribozyme Pharmaceuticals Form 8-K dated February 8, 2000.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------

|(12) |  | Documents incorporated by reference herein to certain exhibits to Ribozyme Pharmaceuticals Form 10-Q for the quarter ended June 30, 2000.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------

|(13) |  | Documents incorporated by reference herein to certain exhibits to Ribozyme Pharmaceuticals Form 8-K dated October 10, 2000.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------

|(14) |  | Documents incorporated by reference herein to certain exhibits to Ribozyme Pharmaceuticals Form 8-K dated December 5, 2000.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------

|(15) |  | Documents incorporated by reference herein to certain exhibits to Ribozyme Pharmaceuticals Form 8-K dated January 5, 2001.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------

|(16) |  | Documents incorporated by reference to certain exhibits to Ribozyme Pharmaceuticals Form 10-K for the year ended December 31, 2000.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------

|(17) |  | Documents incorporated by reference to certain exhibits to Ribozyme Pharmaceuticals Form 10-Q for the quarter ended March 31, 2001.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------

|(18) |  | Documents incorporated by reference to certain exhibits to Ribozyme Pharmaceuticals Form 10-Q for the quarter ended June 30, 2001.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------

|(19) |  | Documents incorporated by reference to certain exhibits to Ribozyme Pharmaceuticals Form 10-Q for the quarter ended September 30, 2001.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------

|(20) |  | Documents incorporated by reference to certain exhibits to Ribozyme Pharmaceuticals Form 8-K dated January 16, 2002.
|---- |  | ---------------------------------------------------------------------------------------------------------------------

|(21) |  | Documents incorporated by reference to certain exhibits to Ribozyme Pharmaceuticals Form 8-K dated February 25, 2002.
|---- |  | ----------------------------------------------------------------------------------------------------------------------

|(22) |  | Documents incorporated by reference to certain exhibits to Ribozyme Pharmaceuticals Form 8-K dated December 11, 2001.
|---- |  | ----------------------------------------------------------------------------------------------------------------------

|(23) |  | Filed herewith
|---- |  | --------------




(b)  Reports on Form 8-K





A report on Form 8-K was filed on December 11, 2001 announcing the public offering
to selected institutional investors of shares of Common Stock and warrants to purchase Common Stock.





A report on Form 8-K was
filed on January 16, 2002 announcing the sale in a private placement transaction of Common Stock and five-year warrants to purchase additional shares of Common Stock.





A report on Form 8-K was filed on February 25, 2002 announcing that ABN AMRO Incorporated, placement agent for the public offering conducted on November 29, 2001, received as part of its
compensation a warrant to purchase Common Stock.




29




---

##### Table of Contents

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 in Boulder, Colorado, on
March 29, 2002.








RIBOZYME PHARMACEUTICALS, INC.By:

/s/    HOWARD W. ROBINHoward W. Robin Chief Executive Officer and
President








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





Signature

Title

Date/s/    HOWARD W. ROBIN Howard W. Robin

Chief Executive Officer and President (Principal Executive Officer)

March 29, 2002/s/    MARVIN TANCER Marvin Tancer

Chief Financial Officer, Vice President, Administration Finance, and Secretary (Principal Financial and Accounting
Officer)

March 29, 2002/s/    RALPH E. CHRISTOFFERSEN Ralph E. Christoffersen

Chairman of the Board of Directors

March 29, 2002/s/    JEREMY C. COOK Jeremy C. Cook

Director

March 29, 2002/s/    JOHN GROOM John Groom

Director

March 29, 2002/s/    DAVID T. MORGENTHALER David T. Morgenthaler

Director

March 29, 2002/s/    SAMUEL R. SAKS Samuel R. Saks, M.D.

Director

March 29, 2002/s/    ANDERS WIKLUND Anders Wiklund

Director

March 29, 2002




30




---

##### Table of Contents




REPORT OF INDEPENDENT AUDITORS





To the Stockholders and Board of Directors


Ribozyme
Pharmaceuticals, Inc.





We have audited the accompanying balance sheets of Ribozyme Pharmaceuticals, Inc., as of December 31,
2001 and 2000, and the related statements of operations, stockholders equity, and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements based on our audits.





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





In our
opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Ribozyme Pharmaceuticals, Inc. at December 31, 2001 and 2000, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States.





| | /s/ | ERNST & YOUNG LLP
| | --- | -----------------




Denver, Colorado


February 22, 2002




F-1




---

##### Table of Contents




RIBOZYME PHARMACEUTICALS, INC.





BALANCE SHEETS





December 312001


2000ASSETSCurrent assets:Cash and cash equivalents

$
23,497,986


$
32,170,518Securities available-for-sale


11,497,084



32,304,162Accounts receivable


711,470



1,278,161Accounts receivablejoint venture


491,194



1,972,788Accounts receivablerelated parties


340,533



344,934Notes receivablerelated parties


324,000



101,437Prepaid expenses and other


173,466



176,186Total current assets


37,035,733



68,348,186Property, plant, and equipment:Machinery and equipment


9,368,007



7,867,836Leasehold improvements


4,799,381



3,913,222Office furniture and equipment


2,001,064



1,859,38916,168,452



13,640,447Accumulated depreciation


(11,580,139
)


(10,074,081
)4,588,313



3,566,366Notes receivablerelated parties


541,000



214,750Deferred patent costs, net of accumulated amortization (2001$772,157; 2000$574,288)


5,544,614



4,858,036Investment in joint venture


3,577,340



6,373,545Other assets


736,208



536,110Total assets

$
52,023,208


$
83,896,993LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payabletrade

$
2,100,144


$
1,085,197Accrued wages


810,922



214,003Accrued liabilities


1,647,253



1,646,810Deferred revenue, current portionrelated parties


400,000



400,000Current portion of long-term debt


169,117



Total current liabilities


5,127,436



3,346,010Deferred revenue, long-term portionrelated parties


400,010



800,006Long term debt


474,018



Convertible debtjoint venture


8,896,658



2,743,213Convertible debtrelated parties


3,220,000



1,013,333Commitments and contingenciesStockholders equity:Preferred stock, $.01 par value; 5,000,000 shares authorized;Series A convertible exchangeable, 12,015 shares issued and outstanding at December 31, 2001 and 2000, respectively (preference in
liquidation of $12,015,000)


120



120Accreted preferred stock dividend


1,491,802



716,456Common stock, $.01 par value; 60,000,000 shares authorized; 20,012,608 and 16,261,477 shares issued and outstanding at December 31,
2001 and 2000, respectively


200,126



162,615Additional paid-in capital


192,004,535



175,099,769Accumulated deficit


(159,802,790
)


(99,964,629
)Unrealized gain (loss) on securities available-for-sale


11,293



(5,424
)Deferred compensation






(14,476
)Total stockholders equity


33,905,086



75,994,431Total liabilities and stockholders equity

$
52,023,208


$
83,896,993





See accompanying notes.




F-2




---

##### Table of Contents




RIBOZYME PHARMACEUTICALS, INC.





STATEMENTS OF OPERATIONS





Year ended December 312001


2000


1999Revenues:Collaborative agreements

$
3,318,246


$
8,301,545


$
5,797,456Collaborative agreementsjoint venture


3,959,411



6,052,429



Collaborative agreementsrelated parties


1,030,226



1,191,338



1,866,942Total revenues


8,307,883



15,545,312



7,664,398Expenses:Research and development


56,688,960



21,721,055



15,394,602General and administrative


4,512,197



3,723,158



2,132,252Total expenses


61,201,157



25,444,213



17,526,854Operating loss


(52,893,274
)


(9,898,901
)


(9,862,456
)Other income (expense):Interest income


2,164,638



3,195,989



614,045Interest expense


(819,576
)


(150,840
)


(551,954
)Other income


50,950



4,000



Equity in loss of unconsolidated affiliates


(8,340,899
)


(9,031,805
)


(860,216
)Total other expense


(6,944,887
)


(5,982,656
)


(798,125
)Net loss


(59,838,161
)


(15,881,557
)


(10,660,581
)Accretion of dividends on preferred stock


775,346



716,456



Net loss applicable to common stock

$
(60,613,507
)

$
(16,598,013
)

$
(10,660,581
)Net loss per share (basic and diluted)

$
(3.59
)

$
(1.15
)

$
(1.05
)Shares used in computing net loss per share


16,883,324



14,390,068



10,158,244








See accompanying notes.




F-3




---

##### Table of Contents




RIBOZYME PHARMACEUTICALS, INC.





STATEMENTS OF STOCKHOLDERS EQUITY





Preferred Stock

Additional Paid-In Capital


Accumulated Deficit


Unrealized Loss on Securities


Deferred Compensation


TotalCommon Stock

Shares


Amount

Accreted DividendShares

AmountBalance at December 31, 1998

9,181,455

$
91,815




$


$


$
84,434,213


$
(73,422,491
)

$



$
(69,149
)

$
11,034,388Issuance of common stock for cashpublic offering net of issuance costs of $976,588

1,800,000


18,000











5,305,412















5,323,412Issuance of preferred stock for cash






5









7,500,000















7,500,000Issuance of common stock and warrants in exchange for patents

160,000


1,600











1,039,140















1,040,740Issuance of common stock under stock option employee stock purchase and 401(k) plans

121,797


1,218











575,981















577,199Expense for repricing warrants
















42,222















42,222Compensation for issuance of common stock and options
















(2,868
)










28,531



25,663Net loss




















(10,660,581
)










(10,660,581
)Change in unrealized loss on securities
























(2,399
)






(2,399
)Comprehensive loss
































(10,662,980
)Balance at December 31, 1999

11,263,252


112,633

5









98,894,100



(84,083,072
)


(2,399
)


(40,618
)


14,880,644Issuance of common stock for cashpublic offering net of issuance costs of $3,886,887

3,150,000


31,500











52,841,653















52,873,153Issuance of common stock for cashElan Corporation net of issuance costs of $38,547

641,026


6,410











4,954,099















4,960,509Issuance of preferred stock for cash






12,015



120





12,014,880















12,015,000Issuance of common stock for cashEli Lilly & Company

252,632


2,526











2,997,474















3,000,000Conversion of convertible preferred stock for common shares

636,640


6,366

(5
)








(6,366
)














Conversion of convertible debt for common shares

42,435


424











996,781















997,205Issuance of common stock upon the exercise of warrants

20,250


203











(203
)














Issuance of common stock under stock option, employee stock purchase and 401(k) plans

255,242


2,553











1,394,358















1,396,911Expense for vesting of performance stock options
















1,732,198















1,732,198Compensation for issuance of common stock options
















(2,749
)










26,142



23,393Preferred stock dividends accrued













716,456


(716,456
)














Net loss




















(15,881,557
)










(15,881,557
)Change in unrealized loss on securities
























(3,025
)






(3,025
)Comprehensive loss
































(15,884,582
)Balance at December 31, 2000

16,261,477


162,615

12,015



120


716,456


175,099,769



(99,964,629
)


(5,424
)


(14,476
)


75,994,431Issuance of common stock and warrants for cashpublic offering, net of issuance costs of $931,604

2,261,905


22,619











8,545,777















8,568,396Issuance of common stock and warrants for cashElan Corporation, net of issuance costs of $61,105

1,250,500


12,505











7,926,390















7,938,895Issuance of common stock in exchange for product rightsChiron Corporation

38,920


389











274,611















275,000Issuance of common stock under stock option and employee stock purchase plan

128,364


1,284











446,616















447.900Issuance of common stock under 401(k) plan

71,442


714











288,804















289,518Issuance of warrants in exchange for professional services
















197,914















197,914Compensation for issuance of common stock options




























14,476



14,476Preferred stock dividends accrued













775,346


(775,346
)














Net loss




















(59,838,161
)










(59,838,161
)Change in unrealized gain on securities
























16,717







16,717Comprehensive loss
































(59,821,444
)Balance at December 31, 2001

20,012,608

$
200,126

12,015


$
120

$
1,491,802

$
192,004,535


$
(159,802,790
)

$
11,293






$
33,905,086


See accompanying notes.




F-4




---

##### Table of Contents




RIBOZYME PHARMACEUTICALS, INC.





STATEMENTS OF CASH FLOWS





Year ended December 312001


2000


1999Operating activitiesNet loss

$
(59,838,161
)

$
(15,881,557
)

$
(10,660,581
)Adjustments to reconcile net loss to net cash used by operating activities:Depreciation


1,756,186



1,626,197



1,544,142Amortization


197,869



194,730



108,230Equity in loss of unconsolidated affiliates


8,340,899



9,031,805



860,216Write-off of deferred patent costs










50,232Compensation related to common stock and options


303,994



1,975,189



223,337Compensation for forgiveness of notes receivablerelated parties


201,187



136,466



102,466Stock issued in exchange for product rights


275,000







Expense related to issuance of warrants


197,914







Expense related to warrant repricing










42,222Revenue recognized for stock received in licensing agreement


(205,443
)






Gain on disposal of equipment


(50,950
)






Accrued interest included in convertible debtrelated parties


819,576



141,864



465,925Recognition of deferred revenuerelated parties


(399,996
)


(399,995
)


(399,999
)Changes in operating assets and liabilities:Accounts receivable


2,052,686



(1,565,990
)


1,868,688Prepaid expenses and other


2,720



(58,518
)


(32,902
)Other assets


5,345



(79,519
)


3,924Accounts payabletrade


1,014,947



110,888



223,795Accrued wages and liabilities


597,362



1,234,660



230,010Net cash used by operating activities


(44,728,865
)


(3,533,780
)


(5,370,295
)Investing activitiesAdditions to property, plant, and equipment


(2,822,972
)


(1,388,657
)


(1,125,854
)Proceeds from the disposition of property, plant and equipment


95,788







Additions to deferred patent costs


(884,445
)


(821,461
)


(415,254
)Purchase of Innovir patents










(28,200
)Net sales (purchases) of securities available-for-sale


20,823,794



(28,056,928
)


(4,252,657
)Initial investment in unconsolidated affiliate






(12,015,000
)


Additional investment in joint venture


(5,544,694
)


(3,390,350
)


Loan repaymentsrelated parties


988,148







33,000Loan advancesrelated parties


(1,738,148
)






(307,187
)Net cash provided (used) by investing activities


10,917,471



(45,672,396
)


(6,096,152
)Financing activitiesNet proceeds from issuance of common stock and exercised warrants


16,955,191



74,025,976



13,202,936Payments under loan facilities






(7,100,455
)


(498,179
)Borrowings under loan facilities


8,183,671



4,701,351



2,000,000Net cash provided by financing activities


25,138,862



71,626,872



14,704,757Net increase (decrease) in cash and cash equivalents


(8,672,532
)


22,420,696



3,238,310Cash and cash equivalents at beginning of year


32,170,518



9,749,822



6,511,512Cash and cash equivalents at end of year

$
23,497,986


$
32,170,518


$
9,749,822Non-cash activityPreferred stock dividends accreted


775,346



716,456









See accompanying notes.




F-5




---

##### Table of Contents




RIBOZYME PHARMACEUTICALS, INC.





NOTES TO FINANCIAL STATEMENTS


December 31, 2001





1.    Summary of Significant Accounting Policies





Description of Business





Ribozyme Pharmaceuticals, Inc. (RPI or the Company) was founded in 1992 to capitalize on the broad potential of ribozymes for use in the
development of human therapeutics and therapeutic target validation services. To date, the Company has engaged in the research and development of its ribozyme technology and has experienced significant operating losses in each fiscal year since
inception. The Company has not generated any revenue from the commercialization of its ribozyme technology and it expects to continue to incur significant operating losses over at least the next several years.





Capital Requirements and Managements Plans





The Company incurred a net loss of $59,838,161 for the year ended December 31, 2001 and has an accumulated deficit of $159,802,790 at December 31, 2001. The Company incurred significant costs during 2001 due to the scale up of clinical
trials and the cost of manufacturing drugs. Development of the Companys products will require a commitment of substantial additional funds to conduct the costly and time-consuming research, preclinical and clinical testing necessary to bring
its proposed products to market and to establish manufacturing and marketing capabilities. The Companys future capital requirements will depend on many factors, including, among others, the progress of the Companys research, development
and drug discovery efforts, the ability of the Company to establish collaborative arrangements for clinical testing, progress with preclinical studies and clinical trials, the time and costs involved in obtaining regulatory approvals, the costs
involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims, competing technological and market developments, changes in the Companys existing research relationships, determination as to the commercial
potential of the Companys potential products, effective commercialization activities and arrangements, and the cost and availability of third-party financing for capital expenditures. Management intends to address the future requirements of
the Company through corporate partnerships, potential equity and debt financing and management of resources as required. Management believes that its operational plans will be sufficient to allow the Company to sustain its operations through
December 31, 2002.





Use of Estimates





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





Financial Instruments





Financial instruments that
potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents and short-term investments. The Company places its cash equivalents and short-term investments with high credit-quality financial institutions.
The Company invests its excess cash primarily in money market instruments, and municipal and floating rate bonds. The Company has established guidelines relative to credit ratings, diversification and maturities that seek to maintain safety and
liquidity. To date, the Company has not experienced significant losses on any of these investments.







F-6




---

##### Table of Contents



RIBOZYME PHARMACEUTICALS, INC.





NOTES TO FINANCIAL STATEMENTS(Continued)







Cash and Cash Equivalents





The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. The Companys cash equivalents are comprised of
certificates of deposit, money market funds, and investment securities.





Property, Plant, and Equipment





Property, plant, and equipment is stated at cost. Depreciation is computed by the straight-line method over the estimated useful lives of the assets.
Useful lives of laboratory equipment and furniture are estimated at five years and all computer equipment is estimated at three years. Leasehold improvements and equipment subject to financing obligations are amortized on a straight-line basis over
the shorter of their estimated useful lives or the term of the lease.





Deferred Patent Costs





The Company capitalizes legal costs directly incurred in pursuing patent applications as deferred patent costs. When such applications result in an issued patent, the related costs
are amortized over the remaining legal life of the patents, using the straight-line method. On a quarterly basis, the Company reviews its issued patents and pending patent applications, and if it determines to abandon a patent application or that an
issued patent no longer has economic value, the unamortized balance in deferred patent costs relating to that patent is immediately expensed.





It is possible the above estimates of future economic life of the Companys commercialization revenues, the amount of anticipated future commercialization revenues, or both, will be reduced significantly in the
near term due to alternative technologies developed by other biotechnology or pharmaceutical companies. As a result, the carrying amount of deferred patent costs may be reduced in the future.





Revenue Recognition and Accounts Receivable





Revenue from collaborative
agreements typically consists of nonrefundable up-front fees, ongoing research and development funding and milestones, license fees and other payments. Revenue from nonrefundable up-front fees is recognized upon signing of the agreement. Revenue
from ongoing research and development funding is recorded as the expenses are incurred. Revenue from milestones, license fees and other payments will be recognized when earned. Payments received in advance under these agreements are recorded as
deferred revenue until earned. The Company has no further research commitments from our collaborators for any revenue recognized. The Companys accounts receivable are predominately collaborative agreement receivables, and to date, the Company
has not experienced any losses with respect to the collection of its accounts receivables.





In 2001, 2000 and 1999, Chiron
accounted for approximately 37%, 29%, and 52% of collaborative revenues, respectively. In 2001 and 2000 Medizyme accounted for approximately 48% and 39% of collaborative revenues, respectively. Revenues from Chiron and Medizyme were for
nonrefundable, ongoing research and development fees.





Research and Development Expenses





Research and development costs are expensed as incurred.




F-7




---

##### Table of Contents



RIBOZYME PHARMACEUTICALS, INC.





NOTES TO FINANCIAL STATEMENTS(Continued)







Segment Information





Statement of Financial Accounting Standards No. 131, Disclosure About Segments of an Enterprise and Related Information, establishes standards for the reporting of information about
operating segments. The Companys operations are one operating segment.





Accounting for Investments in Affiliates





The Company accounts for its investments in Medizyme Pharmaceuticals, Ltd. (Medizyme) and Atugen under the equity method. The Company has recorded its
share of Medizymes net losses against its cost basis. In 1999, the Company had absorbed its entire cost basis in Atugen through its share of Atugens net losses and since the Company has no other funding commitments to Atugen the Company
has ceased recording it share of Atugens net losses.





Impact of Recently issued Accounting Standards





In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities, (SFAS 133). The Company adopted SFAS 133 on January 1, 2001. The Company has no derivative instruments and therefore the adoption of SFAS No. 133 had no effect on the Companys financial
statements.





In June 2001, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting
Standards (SFAS) No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001.
SFAS No. 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets arising from business combinations completed after June 30, 2001. SFAS No. 142 prohibits the amortization of goodwill and
intangible assets with indefinite useful lives. SFAS No. 142 requires that these assets be reviewed for impairment at least annually. Intangible assets with finite lives will continue to be amortized over their estimated useful lives. The Company
has not undergone any business combinations and therefore SFAS No. 141 and SFAS No. 142 has had no effect on the Companys financial statements.





In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which establishes one accounting model to
be used for long-lived assets to be disposed of by sale and broadens the presentation of discontinued operations to include more disposal transactions. SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets to Be
Disposed Of, and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, Reporting the Results of OperationsReporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions. The Company will adopt SFAS No. 144 as of January 1, 2002 and does not anticipate any immediate impact from the adoption of this statement.





2.    Securities Available-for-Sale





At December 31, 2001
and 2000 management determined that certain marketable securities held by the Company were available-for-sale. Securities available-for-sale are carried at fair value, with unrealized gains and losses reported as a component of stockholders
equity. The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in investment income. Realized gains and losses and declines in value
judged to be other-than-temporary on securities available-for-sale are included in investment income. Interest and dividends on securities available-for-sale are included in investment income. The cost of securities sold is based on the specific
identification method. There were no gross realized gains or losses on sales of securities available-for-sale in 2001, 2000 or 1999.




F-8




---

##### Table of Contents



RIBOZYME PHARMACEUTICALS, INC.





NOTES TO FINANCIAL STATEMENTS(Continued)







3.    Long-Term Debt





Long-term debt as of December 31, 2001 and 2000, consists of the following:





2001

2000Equipment loan (I)

$
643,135

$
Convertible debtrelated parties (II)


3,220,000


1,013,333Convertible debtjoint venture (III)


8,896,658


2,743,213$
12,759,793

$
3,756,546


---

|I. |  | In December 2001, the Company negotiated an equipment credit facility of $4,000,000 with a financing company. The agreement requires monthly principal and interest payments for
36 or 48 months, depending on the type of equipment financed. The interest rate fixed to each draw down is 5.61% and 5.42% over the rates of 36 or 48 month treasury bills, respectively, at the time of the draw down. The facility expires in November
2002. The interest rate on these borrowings averaged 9.5% at December 31, 2001.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|II. |  | In April 1997, the Company entered into a collaboration agreement with a corporate partner whereby, among other items, the Company borrowed from the corporate partner up to
$2.0 million annually through 2001. The loans are collateralized 50% by equipment purchases. The loans carry an interest rate of 8% per annum and under certain circumstances are convertible into equity, at the then current market price, at the
option of the corporate partner. Principal and interest payments on the loans are deferred until their maturity which is in April 2004. In April 2000, the Company paid down $6.9 million of the outstanding debt with proceeds from a public offering.
In June 2000, the corporate partner elected to convert the remaining balance of approximately $997,000 into 42,435 shares of the Companys common stock. Since the June 2000 conversion of the balance, the Company has drawn down the final $3.0
million on the debt facility, which as of December 31, 2001 remains outstanding.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|III. |  | In January 2000, the Company entered into a joint venture agreement with a corporate partner for the development and commercialization of a potential product to treat breast
and other cancers. The development of the drug will require funds of up to $15 million and therefore the corporate partner has made available to the Company a convertible promissory note to fund up to $12,015,000 of development expenses through
January 2006. The note carries an interest rate of 12% compounded on a semi-annual basis. At the sole discretion of the corporate partner, the note is convertible into the Companys Series B Preferred Convertible Stock. In lieu of conversion,
principal and interest payments on the note are deferred until the note matures in 2006.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




The Company did not pay cash but accrued interest for the year ended December 31, 2001. Cash paid for interest for the years ended December 31, 2000 and 1999 was $892,199, and $84,029, respectively. At December 31, 2001 the carrying amounts
of the Companys long-term debt approximates the fair value as all borrowings bear interest rates which are comparable to the current market rate for such borrowings.





As of December 31, 2001, maturities of long-term debt are as follows:





Amount2002

$
169,1172003


185,5622004


3,414,0912005


94,3662006


3,082,273Thereafter


5,814,384$
12,759,793





4.    Leases





The Company leases office space in two buildings under noncancelable operating leases that expire in October 2006 and June 2007. According to the terms of the leases, rent for the
buildings will increase each year based on Consumer Price Index increases, with a minimum of 3.5% and a maximum of 6.0%. Total rent expense, including miscellaneous laboratory equipment rentals, was $782,819, $453,686, and $398,452 in 2001, 2000 and
1999, respectively.




F-9




---

##### Table of Contents



RIBOZYME PHARMACEUTICALS, INC.





NOTES TO FINANCIAL STATEMENTS(Continued)







The Companys minimum operating lease commitments at December 31, 2001 are as
follows:





2002

$
936,2882003


940,0482004


954,7552005


974,4512006


894,3682007 and thereafter


196,014$
4,895,924





Under a separate agreement, the Company subleases a portion of their building to
Atugen, an unconsolidated affiliate. Rental income from Atugen for 2001 and 2000 was $188,814 and $102,577, respectively. Estimated rental income for 2002 is $131,000. The sublease expires in October 2002.





5.    Stockholders Equity





Employee Stock Purchase PlanThe Company adopted an Employee Stock Purchase Plan (the Purchase Plan), authorizing the issuance of 600,000 shares pursuant to purchase rights granted to employees of the
Company. The Purchase Plan provides a means by which employees purchase common stock of the Company through payroll deductions. The Purchase Plan is implemented by offerings of rights to eligible employees. Generally, each offering is twenty-four
months duration with purchases occurring on each October 31 and April 30 during each offering. Common stock is purchased for accounts of employees participating in the Purchase Plan at a price per share equal to the lower of (i) 85% of the
fair market value of a share of common stock on the date of commencement of participation in the offering or (ii) 85% of the fair market value of a share of common stock on the date of purchase. Generally all regular employees, including executive
officers, may participate in the Purchase Plan and may authorize payroll deduction of up to 15% of their base compensation for the purchase of stock under the Purchase Plan. The Companys Board of Directors has the authority to terminate the
Purchase Plan at its discretion. Shares are deemed issued for accounting purposes in the year the shares are purchased. As of December 31, 2001, 305,671 shares have been issued under the Purchase Plan.





Stock Option Plans    The Company has established a Non-Qualified Stock Option Plan and an Incentive Stock Option Plan
(collectively, the Plans, as amended), under which it authorized stock option grants to purchase up to 3,767,154 shares of the Companys common stock to eligible employees, consultants, and other individuals, as defined in the Plans. Options to
purchase the Companys common stock are exercisable at a price as determined by the Board of Directors at the time the option is granted, which shall not be less than 100% of the fair market value (110% in the case of 10 percent shareholders)
at the date of grant. Vesting rights are determined by the Board of Directors at the time the option is granted and generally past options became exercisable at twenty percent at the end of each of years one through five. However, in December 2000
the Board of Directors approved future vesting of grants at twenty-five percent at the end of each of years one through four. If not exercised, the options expire after ten years. The Board of Directors has also granted certain employees options
that accelerate vesting upon achievement of certain contingent milestone events.





Changes in stock options for the
years ended December 31, 2001, 2000 and 1999 were as follows:





Options


Exercise PriceOutstanding at December 31, 1998.

1,347,572


$
.45$12.78Options granted

598,759


$
4.13$11.31Options exercised/canceled

(213,891
)

$
.45$12.78Outstanding at December 31, 1999.

1,732,440


$
.45$12.78Options granted

619,510


$
9.13$58.75Options exercised/cancelled

(276,037
)

$
.45$58.75Outstanding at December 31, 2000

2,075,913


$
.45$31.25Options granted

1,034,800


$
4.00$10.50Options exercised/cancelled

(246,960
)

$
.45$28.88Outstanding at December 31, 2001

2,863,753


$
.45$31.25




F-10




---

##### Table of Contents



RIBOZYME PHARMACEUTICALS, INC.





NOTES TO FINANCIAL STATEMENTS(Continued)







The weighted average exercise price of options outstanding at December 31, 2001,
2000 and 1999 was $8.44, $8.83 and $6.52, respectively.





Stock options vest as follows:





OptionsCurrently exercisable

1,025,4682002

585,2442003

534,6952004

420,7152005

296,0312006 and thereafter

1,600Total

2,863,753





The following table summarizes information concerning outstanding and exercisable
options as of December 31, 2001:





Range of Exercise Price

Options Outstanding

Options ExercisableNumber outstanding

Weighted Average Remaining Contractual Life

Weighted Average Exercise Price

Number Exercisable

Weighted Average Exercise Price$  0.45$  2.70

63,895

3.61

$
2.39

63,895

$
2.39$  3.00$  3.00

500,129

6.71


3.00

345,844


3.00$  3.60$  4.41

429,877

9.72


4.03

12,497


3.69$  4.44$  5.63

422,788

7.15


5.45

266,248


5.47$  5.75$  8.38

460,126

8.56


8.09

129,024


7.99$  8.44$11.50

628,958

8.92


10.42

86,717


11.29$11.88$31.25

357,980

8.63


22.89

121,243


22.69$  0.45$31.25

2,863,753

8.18

$
8.44

1,025,468

$
7.27





Stock Based Employee Compensation    The
Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related Interpretations in accounting for its employee stock. Under APB 25, if 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. During 2001, 2000, and 1999, the Company recorded $14,476, $23,393 and $25,663, respectively, of compensation
relating to the grant of stock options and the Anti-dilution Agreement, all of which relates to pre-IPO issuances that have been deferred until vesting has been completed. In addition, the Company recorded expense of $1.7 million during 2000 related
to performance stock options that vested due to achievement of specific performance criteria during the year.





Pro forma
information regarding net loss and loss per share is required by SFAS 123, which also requires that the information be determined as if the Company has accounted for its employee stock options under the fair value method of SFAS 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 2001, 2000 and 1999, respectively: risk-free interest rates of 4.3%, 5.6% and 6.1%; a dividend yield
of 0%; volatility factors of the expected market price of the Companys common stock of 1.04, 1.08 and .971; and a weighted-average expected life of the option of 6 years. The weighted average fair value of stock options granted during 2001,
2000 and 1999 was $7.03, $18.53 and $5.42, respectively.





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




F-11




---

##### Table of Contents



RIBOZYME PHARMACEUTICALS, INC.





NOTES TO FINANCIAL STATEMENTS(Continued)




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:





2001


2000


1999Pro forma net loss

$
(64,110,192
)

$
(17,699,435
)

$
(12,071,278
)Pro forma net loss applicable to common stock

$
(64,885,538
)

$
(18,415,891
)

$
(12,071,278
)Pro forma loss per share (basic and diluted)

$
(3.84
)

$
(1.28
)

$
(1.19
)





Equity Financing
Facility    In November 2000, the Company signed an agreement with Acqua Wellington North American Equities Fund Ltd. (Acqua Wellington) to set up an equity financing facility covering the sale of up
to $60 million of the Companys common stock. The financing will be made pursuant to a shelf registration filed by the Company with the Securities and Exchange Commission (SEC) covering the sale of up to 3 million shares of its common stock.
The shelf registration was declared effective by the SEC in November 2000. The shares may be sold at the Companys discretion and as market conditions warrant at a small discount to market at the time of sale. The Company will control the
quantity and timing of each incremental sale of stock. Proceeds from the sale of stock will be used by the Company for general corporate purposes.





Shareholder Rights PlanIn November 2000, the Company adopted a Shareholder Rights Plan (the Rights Plan) designed to protect and maximize
shareholder value and to assist the Board of Directors in ensuring fair and equitable benefit to all shareholders in the event of a hostile bid to acquire the Company. The Rights Plan imposes a significant penalty upon any person or group that
acquires 15 percent or more of the Companys outstanding common stock without the approval of the RPI Board. Under the Rights Plan, a dividend of one Preferred Stock Purchase Right was declared for each common share held of record as of the
close of business on December 8, 2000. The rights generally will not become exercisable unless an acquiring entity accumulates or initiates a tender offer to purchase 15 percent or more of the Companys common stock. In that event, each right
will entitle the holder, other than the unapproved acquirer and its affiliates, to purchase either the Companys common stock or shares in an acquiring entity at one-half of market value. The rights expire on December 8, 2010.





Common Stock Reserved    Below is a summary of common stock
reserved by the Company at December 31, 2001 for issuance upon the exercise of the various options, warrants and the 401(k) plan and Purchase Plan.





SharesStock option plans

3,315,090Employee stock purchase plan

294,329Employee 401(k) stock match

140,156Warrants at $5.00 per share (expires in 2006)

542,144Warrants at $5.47 per share (expires in 2004)

36,000Warrants at $12.00 per share (expires in 2006)

350,000Warrants at $15.00 per share (expires in 2002)

200,000Warrants at $15.75 per share (no expiration)

1,270Warrants at $20.00 per share (expires in 2007)

300,000Warrants at $22.50 per share (2,222 warrants expire in 2005, remainder in 2006)

448,8885,627,877





The Companys ability to pay dividends is restricted by the terms of its
collaborative, convertible debt and equipment loan facility agreements.




F-12




---

##### Table of Contents



RIBOZYME PHARMACEUTICALS, INC.





NOTES TO FINANCIAL STATEMENTS(Continued)







6.    Unconsolidated German AffiliateAtugen





In 1998, the Company transferred its gene function and target validation business and technology to Atugen, a separately funded German affiliate.
Financing for Atugen was accomplished through an equity investment of $2.0 million in cash from the Company in 1998, a venture capital investment of $7.0 million and a commitment by the German government to provide grants and loans of up to $10.0
million. As a result, at December 31, 1998, the Company retained a 49.5% ownership in Atugen. However, since formation, Atugen has had additional rounds of financing and as a result, the Company retained a 31.6% ownership in Atugen at the end of
2001. The Company accounts for its investment in Atugen under the equity method of accounting. In connection with its formation, Atugen received exclusive royalty-free licenses to the Companys patents and technologies for target validation and
discovery in exchange for a one-time $2.0 million payment which was received by the Company in January 1999. The entire amount of this one-time payment was deferred at December 31, 1998 and is being amortized over the five-year term of the license
agreement and is reflected in the Companys equity in earnings. As of December 31, 1999, the Company had absorbed its entire cost basis in this equity investment through its share of Atugens net losses. The Company will retain rights to
develop ribozyme therapeutic agents against targets validated by Atugen.





7.    Collaborative Agreements





Chiron





In July 1994, the Company
entered into a research and development collaboration agreement with Chiron to research, develop and market products directed towards five genetic targets, and all human clinical indications associated with those targets. The Company and Chiron will
share equally in the costs and profits of any jointly developed products. In addition, Chiron may, at its option, finance the Companys portion of its Phase II and Phase III drug development costs for mutually approved programs. The Company
retains the option to reacquire its rights by reimbursing Chiron for such development costs plus a predetermined risk premium. As part of this agreement, Chiron made a $10,000,000 equity investment in the Company.





Chiron and the Company are jointly collaborating in the development of ANGIOZYME, the Companys lead product candidate for the treatment of solid
tumor cancers. The Company recorded revenues and credit to expenses from Chiron of $11,935,567, $4,529,795 and $4,015,010, in 2001, 2000 and 1999, respectively, for 50% of ANGIOZYME clinical development and manufacturing expenses incurred by the
Company. There are no future obligations between the Company and Chiron related to revenues that were recognized in 2001, 2000 and 1999.





In March 2001, the Company issued 38,920 shares of the Companys common stock to Chiron in exchange to reacquire all rights to develop any ribozyme product containing or utilizing an HIV target. An expense of $275,000 was recorded in
2001 in connection with the issuance of the stock.





Schering AG, Berlin





On April 9, 1997, the Company entered into a research collaboration with Schering AG, Berlin, (Schering AG) focusing on the use of ribozymes for therapeutic target validation, as well as
the development of ribozymes as therapeutic agents. The collaboration utilized the special selectivity of ribozymes to validate new molecular therapeutic targets and to discover new therapeutic agents based on those targets. The Company provided its
expertise in ribozyme design, synthesis and delivery, and Berlex Laboratories, Inc., a U.S. subsidiary of Schering AG (Berlex) provided candidate targets, cell culture screens, animal models and development and commercialization expertise to the
collaboration. Since the formation of Atugen in 1998, the Company subcontracted the work related to the collaboration to Atugen. Subsequently, all revenues related to the collaboration with Berlex have been transferred to Atugen as well.





Schering AG made an equity investment in the Company in May 1997 of $2.5 million in exchange for 212,766 shares of common
stock, and made an additional equity investment of $2.5 million for 465,117 shares in April 1998. Separately, Schering AG provided loans of $2.0 million in each of years 1997, 1998, 1999, 2000 and 2001. According to the terms of the Companys
agreement with Schering AG, 50% of borrowings on the line of credit were collateralized by equipment purchases. The loans, which carry an interest rate of 8% per annum, are convertible into equity at the option of




F-13




---

##### Table of Contents



RIBOZYME PHARMACEUTICALS, INC.





NOTES TO FINANCIAL STATEMENTS(Continued)




Schering AG under certain circumstances. In April 2000, after the completion of a public offering, the Company paid down $6.9 million of the
outstanding borrowings from Schering AG. In June 2000, Schering AG converted the remaining balance of $997,205 into 42,435 shares of the Companys common stock at the market closing price on June 19, 2000 of $23.50. At December 31, 2001, the
outstanding borrowings and accrued interest of $3.2 million were convertible into approximately 704,600 shares of the Companys common stock. Principal and interest payments are deferred until maturity of the loans which is in April 2004. The
Company may earn success fees upon product development milestones and will manufacture synthetic ribozyme products and receive royalties on sales of both ribozyme and non- ribozyme products resulting from the collaboration. All such payments are
subject to some restrictions, including receipt of certain third party consents. The agreement expires in April 2002, however, upon payment of termination fees paid to the Company, the research collaboration may be terminated at Schering AGs
option at any time.





Eli Lilly and Company





In March 1999, the Company entered into a collaboration with Eli Lilly and Company (Eli Lilly) to conduct research, development and commercialization of the Companys ribozyme for the treatment of Hepatitis C
virus infection, HEPTAZYME. Under the terms of the agreement, the Company received approximately $9.2 million in 1999, which included $1.7 million of funding for research and clinical trial expenses and a $7.5 million equity investment purchasing
five shares of the Companys non-voting convertible Series L preferred stock which was completed in April 1999. Each share of Series L Convertible Preferred Stock was convertible into shares of the Companys common stock based upon
milestones related to the development and commercialization of HEPTAZYME.





In September 2000, the Company entered into an
agreement with Eli Lilly to repurchase all rights to HEPTAZYME. Eli Lilly had directed the clinical trials for HEPTAZYME to date under the licensing agreement. According to the repurchase agreement, the Company reacquired the global rights to
HEPTAZYME and will direct all subsequent clinical trials. In addition, the Company agreed to pay royalties to Eli Lilly on future net sales of HEPTAZYME, as well as milestone payments if the Company completes an agreement for the development or
marketing rights to HEPTAZYME with a third party or if the Company files a New Drug Application for HEPTAZYME, whichever comes first. Pursuant to the repurchase agreement, Eli Lilly converted the outstanding five shares of the Companys Series
L Convertible Preferred Stock into 636,640 shares of common stock on December 28, 2000 (the Termination Date). The conversion price was based on a preferred share value of $1.5 million for each of the five shares outstanding. The price per share of
the common stock was based on the average closing price of the Companys common stock for the 30 days prior to the Termination Date. In addition, the Company issued to Eli Lilly $3,000,000 of its common stock, which resulted in 252,632 shares,
as payment for Eli Lillys efforts in generating and providing data. The price per share was based on the closing market price of the Companys common stock on the Termination Date. In return, Eli Lilly paid the Company a termination fee
of approximately $2.8 million. The Company recorded the $225,891 difference between the value of the stock issued and the termination fee as a collaboration expense in December 2000.





Elan Corporation





In January 2000, the Company formed a joint venture with Elan
Corporation (Elan) for the development and commercialization of HERZYME, the Companys product to treat breast and other cancers. As part of this arrangement, the Company licensed HERZYME and Elan licensed its MEDIPAD   ® drug delivery technology to the joint venture, Medizyme Pharmaceuticals, Ltd. (Medizyme). The MEDIPAD ® system is a
disposable continuous subcutaneous drug delivery system that allows a patient to administer the drug at home.





Initial funding
of Medizyme included $12.0 million from the Company and $3.0 million from Elan. The Companys $12.0 million capital contribution was funded by the sale to Elan of (i) 12,015 shares of the Companys Series A Convertible Exchangeable
Preferred Stock (the Series A Preferred Stock), (ii) a warrant to purchase up to 200,000 shares of the Companys common stock at an exercise price of $15.00 per share with a term of two years, and (iii) a warrant to purchase up to 300,000
shares of the Companys common stock at an exercise price of $20.00 per share with a term of seven years. The Series A Preferred Stock has a stated dividend rate of 6.0% which is payable semi-annually through the issuance of additional shares
of Series A Preferred Stock at a nominal value of $1,000 per share. The Series A Preferred Stock has a liquidation preference of $12,015,000. At December 31, 2001, the Company has recorded $1,491,802 as an accreted dividend related to this preferred
stock arrangement.




F-14




---

##### Table of Contents



RIBOZYME PHARMACEUTICALS, INC.





NOTES TO FINANCIAL STATEMENTS(Continued)







As a result of Medizymes initial capitalization, the Company owns 80.1% of
the outstanding capital stock of Medizyme and Elan owns 19.9%. However, Elan can exchange, at its option, all of its shares of the Companys Series A Preferred Stock for 30.1% of RPIs interest in Medizyme. After such redemption, Elan
would own 50% of the then outstanding capital stock of Medizyme. Elan also has the option of converting its shares of the Companys Series A Preferred Stock into approximately 1,200,000 shares of RPIs common stock. As of December 31,
2001, the Series A Preferred Stock was convertible into 1,125,567 shares of the Companys common stock.





Medizyme paid Elan
in cash a $15.0 million non-refundable license fee for the MEDIPAD ® drug delivery technology. As a result of this
licensing transaction, Medizyme capitalized the entire license fee and is amortizing the balance over the three-year term of the agreement. The Company estimates that funding for Medizyme will require approximately $15.0 million in additional
operating and development costs. In connection with expected funding requirements, Elan has agreed to provide the Company with a $12.0 million credit facility to fund the Companys pro rata portion of Medizymes operating costs over the
development period, which is expected to be 42 months. The debt has a 12% interest rate and may be converted at any time into shares of the Companys Series B Convertible Preferred Stock (the Series B Preferred Stock), which ultimately is
convertible into shares of the Companys common stock at a 50% premium to the average price of its common stock for the 60 days prior to the time of the applicable draw down on the credit facility. The Series B Preferred Stock has a stated
dividend rate of 12%, which is payable semi-annually through the issuance of additional shares of Series B Preferred Stock at a nominal value of $1,000 per share. As of December 31, 2001 the Company borrowed $8.2 million on the credit facility. If
converted at December 31, 2001, the outstanding borrowings would be convertible into 644,095 shares of the Companys common stock. For the year ended December 31, 2001, the Company recorded $4.0 million in revenue from Medizyme, of the total
$5.4 million of research and development expenses recorded by Medizyme, and recorded $8.3 million as equity in the net loss of Medizyme.





Also in connection with the Medizyme joint venture, Elan purchased 641,026 shares of the Companys common stock for a purchase price of $5.0 million in 2000. In addition, Elan purchased 500,500 shares of the Companys common stock
for $5.0 million in May 2001 at a premium to the average closing price for the 45 trading days preceding the purchase. Elan also purchased 750,000 shares of the Companys common stock and a warrant to purchase 75,000 shares of common stock in
December 2001 for $3.0 million.





In January 2002, the Company expanded its collaboration with Elan. Under the terms of the
amended agreement, for no cost Medizyme will license Elans liposome technology for the development of HERZYME. The purpose of the amendment is to assess tumor localization and pharmacokinetics with several liposome formulations in conjunction
with HERZYME.





The joint venture agreement provides for equal representation by the Company and Elan in the operating and
management decisions of Medizyme. Due to the significant minority investor rights retained by Elan Corporation, and its subsidiaries, the Company accounts for its investment in Medizyme under the equity method of accounting. The following table
presents unaudited summary financial information for Medizyme as of December 31, 2001.




F-15




---

##### Table of Contents



RIBOZYME PHARMACEUTICALS, INC.





NOTES TO FINANCIAL STATEMENTS(Continued)










Balance Sheet:ASSETSCash and cash equivalents

$
1,128License Fee, net


5,000,000Total Assets

$
5,001,128LIABILITIES AND STOCKHOLDERS EQUITYAccounts payable and accrued liabilities

$
535,942Convertible preferred stock, $1.00 par value; 6,000 shares authorized, 6,000 shares issued and outstanding at December 31,
2001


6,000Common stock, $1.00 par value; 6,000 shares authorized, 6,000 shares issued and outstanding at December 31, 2001


6,000Additional paid-in capital


14,988,000Contributed surplus


11,154,862Accumulated deficit


(21,689,676
)Total liabilities and stockholders equity

$
5,001,128Results of Operations:Net investment income

$
77Research and development expense


5,408,952License fee


5,000,000General and administrative


14,835Total operating expenses


10,423,787Net loss

$
(10,423,710
)





Archemix Corporation





In May 2001, the Company announced the formation of a strategic alliance with Archemix Corporation, a Massachusetts privately held biotechnology company, that will allow both companies
to capitalize on reciprocal intellectual property in the field of proteomics and molecular diagnostics. Under the terms of the agreement, Archemix received exclusive licenses and sublicenses to the Companys intellectual property covering the
allosteric ribozyme technology for use in detecting proteins in connection with drug development and in a wide range of molecular detection applications. In exchange for the licenses, the Company received an equity position in Archemix, a seat on
Archemixs Board of Directors and a seat on the Scientific Advisory Board. In addition, the Company received a license to Archemixs intellectual property covering allosteric ribozymes for use in molecular diagnostic applications.





Geron Corporation





In
December 2001, the Company announced a collaboration with Geron Corporation, a biopharmaceutical company focused on developing and commercializing therapeutic and diagnostic products for applications in oncology and regenerative medicine and
research tools for drug discovery. Initially, Geron will pay the Company for consultation in nucleic acid technology to improve process development, scale-up and the manufacturing process for GRN163. In addition, the two companies will collaborate
to explore the potential for a ribozyme-based telomerase inhibitor, which Geron will have the first right to commercialize.




F-16




---

##### Table of Contents



RIBOZYME PHARMACEUTICALS, INC.





NOTES TO FINANCIAL STATEMENTS(Continued)







8.    Commitments and Contingencies





At the core of the Companys technology are inventions and patents of the University of Colorado (CU) which were developed by Dr. Thomas R. Cech
and various associates of Dr. Cech. Pursuant to the policies of CU, these inventions and the patents issued thereon, (the Cech Technology) became the property of CU. The Cech Technology was assigned to CUs affiliate, University Research
Corporation (URC), which in turn assigned the rights to license certain of the Cech Technology to Competitive Technologies, Inc. (CTI), formerly known as University Patents, Inc. United States Biochemical Corporation (USB) licensed the Cech
Technology pursuant to two sublicenses. One of these sublicenses was for the Cech Technology held by CTI. In November 1996, USB assigned to the Company its rights under the sublicense from CTI and the Company entered into an amended and restated
license with CTI. The Company also has obtained a license from URC and a sublicense from USB for other Cech Technology held by URC. The CTI license, URC license and USB sublicense together grant the Company the exclusive (except for non-commercial
academic research) worldwide right, among other things, to make, use and sell RNA enzymes covered by licensed patents and products incorporating them. The URC license and USB sublicense are fully paid. The CTI license provides for the payment of a
royalty on sales of products incorporating RNA enzymes, covered by licensed patents, and for certain minimum annual royalties. The Company may grant sublicenses to the licensed technology subject to the payment to CTI of a share of royalty income
from such sublicenses or a royalty on sales from sublicensed products, methods or services, depending on the particular licensed patents involved. In addition, the Company must pay CTI a share of any option fee, license fee, prepaid royalty or other
front-end fee other than research and development funding paid in connection with such sublicense. At the Companys discretion, the payment may be in either cash or equity.





The Company, along with one or more of its officers or directors, are defendants in several related lawsuits which purport to be class actions on behalf of purchasers of common stock of
the Company on November 16 and 17, 1999. The lawsuits, which are substantially identical, allege the defendants violated certain federal securities laws based upon an allegedly misleading announcement made on November 15, 1999. The cases have been
consolidated in the United States District Court, District of Colorado. Trial to a jury has been scheduled to commence on September 9, 2002.





9.    Related Party Transactions





At December 31, 2001, 2000 and 1999, the Company had a total of $865,000, $316,187 and $295,000, respectively, of non-interest bearing loans due from executive officers. The balances may be forgiven by the Company under certain employment
agreement provisions. The loan balances are forgivable or payable to the Company under various terms not to exceed 5 years. The Company forgave $201,187, $136,466 and $88,000, of these loans during each of the years ending December 31, 2001, 2000
and 1999, respectively.





In 1998, the Company gave to its officers and certain other employees stock in the newly formed Atugen
at no personal cost to the individuals. As of December 31, 2001, these officers and other employees still retain an equity interest in Atugen. In addition, and related to the recent Archemix licensing agreement, certain executives are on the
Archemix Board of Directors and the Scientific Advisory Board, and accordingly, receive compensation in cash and stock options.





10.    Income Taxes





The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standard No. 109, Accounting for Income Taxes (SFAS 109). Under the provisions of SFAS 109, a deferred tax liability or asset (net of a valuation allowance) is provided in the financial statements by applying the provisions of
applicable tax laws to measure the deferred tax consequences of temporary differences that will result in net taxable or deductible amounts in future years as a result of events recognized in the financial statements in the current or preceding
years.




F-17




---

##### Table of Contents



RIBOZYME PHARMACEUTICALS, INC.





NOTES TO FINANCIAL STATEMENTS(Continued)







At December 31, 2001, the Company has the following net operating loss and tax
credit carryforwards for income tax purposes:





Expiration Date

Net Operating Losses

Research and Development Credits

State Investment Credits2001

$


$


$
2007


3,506,000


101,000


2008


7,363,000


185,000


2009


9,239,000


316,000


2010


11,953,000


139,000


2011


15,125,000


181,000


2012


15,291,000


296,000


2018


10,109,000


475,000


2019


8,215,000


405,000


2020


7,456,000


710,000


2021


52,403,000


2,869,000


Total

$
140,660,000

$
5,677,000

$






The Tax Reform Act of 1986 contains provisions that limit the utilization of net
operating loss and tax credit carryforwards if there has been a change of ownership as described in Section 382 of the Internal Revenue Code. Such a change of ownership may limit the Companys utilization of its net operating loss and tax
credit carryforwards, and could have been triggered by the Companys initial public offering or by subsequent sales of securities by the Company or its shareholders.





The components of the Companys deferred tax assets and liabilities, net of taxes, as of December 31, 2001 and 2000 are as follows:





2001


2000Deferred tax assets:Net operating loss carryforwards

$
52,403,000


$
32,276,000Research and development and state investmentcredit carryforwards


5,677,000



2,839,000Depreciation


967,000



804,000Equity in loss of unconsolidated affiliate


6,807,000



3,690,000Deferred income


298,000



298,000Other


53,000



20,00066,205,000



39,927,000Valuation allowance


(64,443,000
)


(38,407,000
)Net deferred tax assets


1,762,000



1,520,000Deferred tax liabilities:Deferred patent costs


1,632,000



1,407,000Deferred income






Other


130,000



113,000Total deferred tax liabilities


1,762,000



1,520,000$



$





F-18




---

##### Table of Contents



RIBOZYME PHARMACEUTICALS, INC.





NOTES TO FINANCIAL STATEMENTS(Continued)







11.    Employee Savings Plan





The Company has a 401(k) plan that allows participants to contribute 1% to 20% of their salary, subject to eligibility requirements and annual limits.
The Board may, at its sole discretion, approve matching contributions with the Companys common stock. In 2001, 2000 and 1999, the Board approved a 50% common stock match equal to total participant deferrals made in each respective year. The
Company stock match is subject to vesting restrictions.





12.    Quarterly Results (Unaudited)





1st Quarter


2nd Quarter


3rd Quarter


4th Quarter2001Total revenues

$
2,117,262


$
2,390,431


$
2,029,181


$
1,771,009Total expenses


12,159,553



11,085,040



17,693,655



20,262,909Other expense


1,870,069



1,652,032



1,720,299



1,702,486Accretion of dividends


191,267



190,677



197,005



196,397Net loss


(12,103,627
)


(10,537,318
)


(17,581,778
)


(20,390,783
)Basic and diluted net loss per share

$
(0.74
)

$
(0.64
)

$
(1.04
)

$
(1.14
)2000Total revenues

$
3,869,866


$
3,880,969


$
4,431,417


$
3,363,060Total expenses


5,903,705



4,980,378



6,643,395



7,916,735Other (expense) income


1,688,176



825,367



1,747,890



1,721,223Accretion of dividends






360,450



180,225



175,781Net loss


(3,722,015
)


(2,285,226
)


(4,140,093
)


(6,450,679
)Basic and diluted net loss per share

$
(0.31
)

$
(0.15
)

$
(0.27
)

$
(0.42
)




F-19