SEC Info - Exelixis, Inc. - IPO: ‘424B4’ on 4/11/00

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Exelixis, Inc. – IPO: ‘424B4’ on 4/11/00

On: Tuesday, 4/11/00 · Accession #: 1012870-0-2035 · File #: 333-96335

  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 4/11/00  Exelixis, Inc.                    424B4                  1:329K                                   Donnelley R R & S… 13/FA

Initial Public Offering (IPO): Prospectus — Rule 424(b)(4)
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 424B4       Final Prospectus                                     110    492K

Document Table of Contents

Page	(sequential)	\|	(alphabetic)	Top
			Alternative Formats (Word, et al.) Assets Balance Sheets Bayer Bristol-Myers Squibb Business Capitalization Certain Transactions Change in Control Arrangements and Employment Agreements Common Stock Deferred stock compensation Description of Capital Stock Dilution Director Compensation Dividend Policy Employee Benefit Plans Equity in net loss of affiliated company Executive Compensation Experts Index to Financial Statements Limitations of Liability and Indemnification Matters Management Management's Discussion and Analysis of Financial Condition and Results of Operations Net loss Notes to Financial Statements Notes to Unaudited Pro Forma Combined Financial Statement Offering, The Pharmacia & Upjohn Pharmacia & Upjohn AB Preferred Stock Principal Stockholders Pro forma Prospectus Summary Report of Independent Accountants Risk Factors Selected Financial Data Shares Eligible for Future Sale Statements of Cash Flows Statements of Members' Equity (Deficit) Statements of Operations Statements of Stockholders' Deficit Table of Contents The Offering Total revenues Unaudited Pro Forma Combined Financial Statement Unaudited Pro Forma Combined Statement of Operations Underwriting Use of Proceeds Validity of the Common Stock Where You Can Find More Information 2000 Non-Employee Directors' Stock Option Plan
1	1st Page - Filing Submission
"	Common Stock
3	Table of Contents
4	Prospectus Summary
7	The Offering
9	Risk Factors
18	Use of Proceeds
"	Dividend Policy
19	Capitalization
20	Dilution
22	Selected Financial Data
23	Management's Discussion and Analysis of Financial Condition and Results of Operations
24	Total revenues
25	Deferred stock compensation
"	Equity in net loss of affiliated company
28	Business
40	Pharmacia & Upjohn AB
41	Bristol-Myers Squibb
45	Management
49	Director Compensation
50	Executive Compensation
52	Employee Benefit Plans
54	2000 Non-Employee Directors' Stock Option Plan
57	Limitations of Liability and Indemnification Matters
58	Change in Control Arrangements and Employment Agreements
59	Certain Transactions
61	Principal Stockholders
64	Description of Capital Stock
"	Preferred Stock
67	Shares Eligible for Future Sale
69	Underwriting
71	Validity of the Common Stock
"	Experts
"	Where You Can Find More Information
72	Index to Financial Statements
73	Report of Independent Accountants
74	Balance Sheets
"	Pro forma
"	Assets
75	Statements of Operations
76	Statements of Stockholders' Deficit
77	Statements of Cash Flows
78	Notes to Financial Statements
81	Bayer
83	Pharmacia & Upjohn
90	Net loss
97	Statements of Members' Equity (Deficit)
107	Unaudited Pro Forma Combined Financial Statement
108	Unaudited Pro Forma Combined Statement of Operations
109	Notes to Unaudited Pro Forma Combined Financial Statement

424B4 1st Page of 110 TOC ↑Top Previous Next ↓Bottom Just 1st
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-96335

9,100,000 Shares

[LOGO OF EXELIXIS]

Common Stock

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

This is an initial public offering of shares of common stock of Exelixis,
Inc. All of the 9,100,000 shares of common stock are being sold by Exelixis.

Prior to this offering, there has been no public market for our common
stock. Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol "EXEL".

See "Risk Factors" beginning on page 6 to read about factors you should
consider before buying shares of our common stock.

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

Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.

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

[Download Table]

Per Share Total
--------- ------------

Initial public offering price........................... $13.00 $118,300,000
Underwriting discount................................... $ 0.91 $ 8,281,000
Proceeds, before expenses, to Exelixis.................. $12.09 $110,019,000

To the extent that the underwriters sell more than 9,100,000 shares of
common stock, the underwriters have the option to purchase up to an additional
1,365,000 shares from Exelixis at the initial public offering price less the
underwriting discount.

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

The underwriters expect to deliver the shares against payment in New York,
New York on April 14, 2000.

Goldman, Sachs & Co.

Credit Suisse First Boston

SG Cowen

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

Prospectus dated April 10, 2000.

424B4 2nd Page of 110 TOC 1st Previous Next ↓Bottom Just 2nd
[Description of inside front cover graphics:
Pictures of Model Systems
and
an example of tumor
cell target identification]

424B4 3rd Page of 110 TOC 1st Previous Next ↓Bottom Just 3rd
TABLE OF CONTENTS

[Download Table]

Page
----

Business................................................................... 25
Management................................................................. 42
Certain Transactions....................................................... 56
Principal Stockholders..................................................... 58
Description of Capital Stock............................................... 61
Shares Eligible for Future Sale............................................ 64
Underwriting............................................................... 66
Validity of the Common Stock............................................... 68
Experts.................................................................... 68
Where You Can Find More Information........................................ 68
Index to Financial Statements.............................................. F-1

424B4 4th Page of 110 TOC 1st Previous Next ↓Bottom Just 4th
PROSPECTUS SUMMARY

You should read the following summary together with the more detailed
information regarding us, the sale of our common stock in this offering, our
financial statements and notes to those financial statements that appear
elsewhere in this prospectus.

Our Business

Overview

We believe that we are a leader in the fields of model system genetics and
comparative genomics. These fields involve the systematic study of simple
organisms, such as fruit flies, nematodes, mice, zebrafish and simple plants,
to rapidly and efficiently determine gene function and establish its commercial
utility in humans and other commercially important biological systems. Recent
advances in the genomics field have resulted in significant opportunities to
develop novel products for the life sciences industries, which include
companies in the pharmaceutical, agrochemical, agricultural, consumer products
and healthcare businesses. Now that the sequencing of the human genome and the
genomes of many other species is substantially complete, the challenge facing
these industries is no longer the identification of genes, but understanding
their function and determining the consequences of regulating or modulating
those genes.

Our proprietary technologies provide a rapid, efficient and cost-effective
way to move beyond DNA sequence data to understand the function of genes and
the proteins that they encode. These technologies take advantage of the
similarity of genes or a series of genes that perform a particular function in
a variety of species. We exploit this similarity to perform genetic analyses
quickly and systematically in a variety of simple model organisms. Through
these analyses, we can identify genes and related proteins which, when changed
or regulated, will lead to a desired outcome. We then utilize our expertise in
comparative genomics to identify the corresponding genes of commercial value in
humans, plants or livestock. Our proprietary technologies consist of our
expertise in genetics, genomics, computer analysis of DNA sequences, or
bioinformatics, biology, assay development and chemistry as well as tools,
reagents, databases, software and libraries of model organisms we have
developed, such as a comprehensive library of fruit flies in which each fly has
been bred to identify whether a particular gene in that organism is affected
when another gene is manipulated or mated into that fly. We believe that our
proprietary technologies will have commercial value for all industries whose
products can be enhanced by an understanding of DNA or proteins, including the
pharmaceutical, agrochemical, agricultural, diagnostic and biotechnology
industries. We are conducting research in more than 12 different programs for
these industries.

We have established collaborations with Bayer, Pharmacia & Upjohn and
Bristol-Myers Squibb, as well as with U.S. government agencies and academic
centers worldwide. Committed funding from our commercial collaborations totals
over $180 million. We intend to continue to establish strategic collaborations
with leading companies in the life sciences industries. In addition, we invest
our own funds in our own programs, and we have retained significant rights to
the results of our research and to future applications of our technologies.

Our Technologies

We conduct our work primarily utilizing model system genetics, and we
interpret and apply the data through our expertise in comparative genomics.
Model system genetics is a process that takes advantage of the short life cycle
times, well-characterized biology, and ease of genetic manipulation in species
like the fruit fly, D. melanogaster, and nematode worm, C. elegans. These
attributes make it possible to scan the entire genome of these organisms for
genes capable of leading to a desired outcome. For example,

424B4 5th Page of 110 TOC 1st Previous Next ↓Bottom Just 5th
we can identify each gene in the model system that is capable of blocking the
unregulated cell growth characteristic of cancer cells when targeted by a
pharmaceutical, or each gene that will lead to the death of insect pests when
targeted by an agrochemical. Comparative genomics involves the use of
functional information from one biological system, such as a fruit fly or worm,
across other biological systems, such as humans. We are a pioneer in the use of
comparative genomics and use this approach to move from the genes of interest
in our model systems directly to genes performing the same role or function in
species for which products are to be developed, such as humans, plant pests, or
plants. Together these technologies allow us to rapidly identify high quality
product targets for our collaborative partners and for our internal programs
focusing on areas such as cancer and animal health.

We believe that we have assembled an outstanding team of leading researchers
in the fields of comparative genomics and model system genetics. The
application of our technology and expertise has resulted in a substantial
increase in the speed, quality and scope of our analyses. Experiments that take
a year or more to complete in complex systems can be carried out in one to two
weeks in our simple model systems. Our processes are scalable, meaning we can
produce superior results in a cost-effective manner because we do not have to
repeat many or all of the original experiments. We have developed multiple
fungal, nematode, insect, plant and vertebrate genetic systems. In addition, we
have established technologies for the development of our own compounds by
acquiring the assets of MetaXen, LLC, a privately-held biotechnology company
that focused on molecular genetics, by licensing unique chemistry technology
from Bristol-Myers Squibb and by expanding our biological expertise internally.

To establish and protect our technologies as well as the output of our
research programs, we rely on a combination of patents, copyrights and trade
secrets. We have two issued U.S. patents relating to our model genetic systems
and comparative genomics technologies and have submitted 49 U.S. and foreign
patent applications. We have developed proprietary technologies for use in
characterizing a network of pathways within a cell, and for identifying the
optimal points in the network for therapeutic intervention. We have also
identified many proprietary product targets.

Our Commercial Collaborations

We have established collaborations with Bayer, Pharmacia & Upjohn and
Bristol-Myers Squibb. Our relationship with Bayer is focused on the discovery
and development of novel insecticides and nematicides for crop protection. The
initial collaboration was signed in May 1998. In January 2000, this
relationship was substantially expanded and the term was extended for eight
additional years.

Our five-year collaboration with Pharmacia & Upjohn was signed in February
1999. We are working exclusively with Pharmacia & Upjohn in the fields of
Alzheimer's disease, Type II diabetes and associated complications of diabetes,
obesity and other metabolism disorders. In October 1999, this collaboration was
expanded to include mechanism of action, or physiological activity, research
designed to identify the previously unidentified molecular targets of
biologically-active compounds provided by Pharmacia & Upjohn.

In September 1999, we entered into a three-year collaboration with Bristol-
Myers Squibb to identify the mechanism of action of compounds delivered to us
by Bristol-Myers Squibb. We also entered into a non-exclusive cross-license of
research technology.

We have received performance-based milestone payments from both our Bayer
and Pharmacia & Upjohn collaborations, and we anticipate that we will receive
substantial additional milestone

424B4 6th Page of 110 TOC 1st Previous Next ↓Bottom Just 6th
payments in the future. We will receive royalty income from all of our
collaborations should our research lead to marketed products.

Our Strategy

Our strategy has four major components:

. We will continue to develop our technological expertise to enhance our
leadership in comparative genomics and model system genetics by
investing significantly in research and development programs, entering
into partnerships and acquiring new technology.

. We will maximize our product opportunities by applying technologies we
have developed for one market to address several multi-billion dollar
markets within the life sciences industries, comprised of companies
within the pharmaceutical, agrochemical, agricultural, diagnostics and
biotechnology industries. We will continue to establish collaborations
with leading companies in each of these industries.

. We have retained and plan to continue to retain significant rights to
develop our own products and use targets, assays and other technologies
developed in each of our collaborations in our own proprietary programs.

. We will continue to invest our funds in discovering and developing our
own proprietary products. These potential products will be available for
licensing to our collaborative partners or retained by us for further
development and commercialization.

Company Information

Exelixis was incorporated in Delaware in 1994 as Exelixis Pharmaceuticals,
Inc., and we changed our name to Exelixis, Inc. in February 2000. Our executive
offices and laboratories are located at 260 Littlefield Avenue, South San
Francisco, California 94080. Our telephone number is (650) 825-2200 and our
internet address is www.exelixis.com.

Exelixis and the Exelixis logo are two of our trademarks and service marks.
Other trademarks, trade names and service marks referred to in this prospectus
are the property of their respective owners.

424B4 7th Page of 110 TOC 1st Previous Next ↓Bottom Just 7th
The Offering

[Download Table]

Shares offered by Exelixis in this offering........ 9,100,000 shares
Shares outstanding after the offering.............. 42,765,662 shares
Nasdaq National Market symbol...................... EXEL
Use of proceeds.................................... For research and development
activities, capital
expenditures, financing
possible acquisitions and
investments in technology,
working capital and other
general corporate purposes.
See "Use of Proceeds."

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

The above information is based on the number of shares outstanding as of
March 31, 2000 and excludes:

. 1,094,151 shares of common stock issuable upon the exercise of
outstanding options at a weighted average exercise price of $3.20 per
share;

. 633,212 shares of common stock issuable upon exercise of outstanding
warrants at a weighted average exercise price of $1.71 per share;

. 480,769 shares of common stock issuable upon conversion of an
outstanding promissory note;

. 4,288,221 shares of common stock available for issuance or future grant
under our stock option plans; and

. 300,000 shares of common stock available for issuance under our employee
stock purchase plan.

Except as otherwise noted, we have presented the information in this
prospectus based on the following assumptions:

. the underwriters do not exercise their over-allotment option;

. the outstanding shares of preferred stock convert into 22,877,656 post-
split shares of common stock upon the closing of this offering;

. the filing of our amended and restated certificate of incorporation
immediately following the closing of this offering; and

. a 4-for-3 reverse common stock split which became effective in April
2000.

424B4 8th Page of 110 TOC 1st Previous Next ↓Bottom Just 8th
Summary Financial Data

The following tables summarize our financial data. The pro forma as adjusted
column of the balance sheet data reflects the conversion of our preferred stock
into common stock and the sale of 9,100,000 shares of our common stock in this
offering at an initial public offering price of $13.00 per share, after
deducting the estimated underwriting discounts and offering expenses payable by
us.

[Download Table]

Year Ended December 31,
----------------------------------------------
1995 1996 1997 1998 1999
------- ------- -------- -------- --------
(in thousands, except per share data)

Statement of Operations Data:
License revenues............... $ -- $ -- $ -- $ 139 $ 1,046
Contract revenues.............. -- -- -- 2,133 9,464
------- ------- -------- -------- --------
Total revenues............... -- -- -- 2,272 10,510
------- ------- -------- -------- --------
Operating expenses:
Research and development...... 1,890 4,120 8,223 12,096 21,653
General and administrative.... 1,096 1,475 3,743 5,472 7,624
------- ------- -------- -------- --------
Total operating expenses..... 2,986 5,595 11,966 17,568 29,277
------- ------- -------- -------- --------
Loss from operations........... (2,986) (5,595) (11,966) (15,296) (18,767)
Interest income (expense), net. 33 284 470 (50) 46
------- ------- -------- -------- --------
Loss before equity in net loss
of affiliated company......... (2,953) (5,311) (11,496) (15,346) (18,721)
Equity in net loss of
affiliated company............ -- -- -- (320) --
------- ------- -------- -------- --------
Net loss....................... $(2,953) $(5,311) $(11,496) $(15,666) $(18,721)
======= ======= ======== ======== ========
Basic and diluted net loss per
share......................... $ (2.60) $ (4.50) $ (8.76) $ (3.83) $ (3.47)
Shares used in computing basic
and diluted net loss per
share......................... 1,137 1,180 1,312 4,088 5,389
Pro forma basic and diluted net
loss per share................ $ (0.67)
Shares used in computing pro
forma basic and diluted net
loss per share................ 27,996

[Download Table]

December 31, 1999
---------------------
Pro Forma
Actual As Adjusted
-------- -----------
(in thousands)

Balance Sheet Data:
Cash, cash equivalents and short-term investments......... $ 6,904 $115,523
Working capital........................................... (672) 107,947
Total assets.............................................. 18,901 127,520
Long-term obligations, less current portion............... 11,132 11,132
Mandatorily redeemable convertible preferred stock........ 46,780 --
Deferred stock compensation............................... (14,167) (14,167)
Accumulated deficit....................................... (54,727) (54,727)
Total stockholders' (deficit) equity...................... (49,605) 105,794

424B4 9th Page of 110 TOC 1st Previous Next ↓Bottom Just 9th
RISK FACTORS

An investment in our common stock is risky. You should carefully consider
the risks described below, together with all of the other information included
in this prospectus, before deciding whether to invest in our common stock. The
occurrence of any of the following risks could harm our business, financial
condition or results of operations. In such case, the trading price of our
common stock could decline, and you may lose all or part of your investment.
The risks and uncertainties described below are not exhaustive. Additional
risks and uncertainties not presently known to us, or that we currently
consider immaterial, may also harm our business.

We have a history of net losses. We expect to continue to incur net losses,
and we may not achieve or maintain profitability.

We have incurred net losses each year since our inception, including a net
loss of approximately $18.7 million for the year ended December 31, 1999. As
of that date, we had an accumulated deficit of approximately $54.7 million. We
expect these losses to continue and anticipate negative cash flow for the
foreseeable future. The size of these net losses will depend, in part, on the
rate of growth, if any, in our license and contract revenues and on the level
of our expenses. Our research and development expenditures and general and
administrative costs have exceeded our revenues to date, and we expect to
spend significant additional amounts to fund research and development in order
to enhance our core technologies and undertake product development. As a
result, we expect that our operating expenses will increase significantly in
the near term and, consequently, we will need to generate significant
additional revenues to achieve profitability. Even if we do increase our
revenues and achieve profitability, we may not be able to sustain or increase
profitability.

We will need additional capital in the future, which may not be available to
us.

Our future capital requirements will be substantial, and will depend on
many factors including:

. payments received under collaborative agreements;

. the progress and scope of our collaborative and independent research and
development projects;

. our need to develop manufacturing and marketing capabilities to
commercialize products; and

. the filing, prosecution and enforcement of patent claims.

We anticipate that the net proceeds of this offering and interest earned
thereon will enable us to maintain our currently planned operations for at
least the next two years. Changes to our current
operating plan may require us to consume available capital resources
significantly sooner than we expect. We may be unable to raise sufficient
additional capital when we need it, on favorable terms, or at all. If our
capital resources are insufficient to meet future capital requirements, we
will have to raise additional funds. The sale of equity or convertible debt
securities in the future may be dilutive to our stockholders, and debt
financing arrangements may require us to pledge certain assets and enter into
covenants that would restrict our ability to incur further indebtedness. If we
are unable to obtain adequate funds on reasonable terms, we may be required to
curtail operations significantly or to obtain funds by entering into
financing, supply or collaboration agreements on unattractive terms.

Difficulties we may encounter managing our growth may divert resources and
limit our ability to successfully expand our operations.

We have experienced a period of rapid and substantial growth that has
placed, and our anticipated growth in the future will continue to place, a
strain on our administrative and operational infrastructure. The number of our
employees increased from 102 at December 31, 1998 to 168 at

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December 31, 1999. Our revenues increased from $2.3 million in 1998 to $10.5
million in 1999. As our operations expand, we expect that we will need to
manage additional relationships with various collaborative partners, suppliers
and other third parties. Our ability to manage our operations and growth
effectively requires us to continue to improve our operational, financial and
management controls, reporting systems and procedures. We may not be able to
successfully implement improvements to our management information and control
systems in an efficient or timely manner and may discover deficiencies in
existing systems and controls.

We are dependent on our collaborations with major companies. If we are unable
to achieve milestones or develop products or are unable to renew or enter into
new collaborations, our revenues may decrease and our activities may fail to
lead to commercialized products.

Substantially all of our revenues to date have been derived from
collaborative research and development agreements. Revenues from research and
development collaborations depend upon continuation of the collaborations, the
achievement of milestones and royalties derived from future products developed
from our research. If we are unable to successfully achieve milestones or our
collaborators fail to develop successful products, we will not earn the
revenues contemplated under such collaborative agreements. In addition, some of
our collaborations are exclusive and preclude us from entering into additional
collaborative arrangements with other parties in the area or field of
exclusivity.

We currently have collaborative research agreements with Bayer, Pharmacia &
Upjohn and Bristol-Myers Squibb. Our current collaborative agreement with Bayer
is scheduled to expire in 2008, after which it will automatically be extended
for one-year terms unless terminated by either party upon 12-month written
notice. Our agreement permits Bayer to terminate our collaborative activities
prior to 2008 upon the occurrence of specified conditions, such as the failure
to agree on key strategic issues after a period of years or the acquisition of
Exelixis by certain specified third parties. Similarly, our collaborative
agreement with Pharmacia & Upjohn allows either party to terminate our research
collaboration at the conclusion of its third year in 2002, at the conclusion of
its fifth year in 2004, or any subsequent year. The Pharmacia & Upjohn
agreement may also be terminated in the event of a conflict over material
third-party intellectual property rights. Our collaborative agreement with
Bristol-Myers Squibb expires in September 2002, unless terminated earlier by
Bristol-Myers Squibb in the event that we fail to deliver specified gene
targets prior to the first anniversary of our agreement. In addition, both our
agreements with Bayer and Pharmacia & Upjohn are subject to termination at an
earlier date if certain specified individuals are no longer employed by us and
we are unable to find replacements acceptable to Bayer or Pharmacia & Upjohn,
as the case may be. In the case of Pharmacia & Upjohn, the right is triggered
if either of two specified individuals directly involved in the research
program cease to be employed by us. In the case of Bayer, the right is
triggered if two or more of our Chief Executive Officer, Chief Scientific
Officer, Agricultural Biotechnology Program Leader and Chief Information
Officer cease to have a relationship with us within six months of each other.

If these existing agreements are not renewed or if we are unable to enter
into new collaborative agreements on commercially acceptable terms, our
revenues and product development efforts may be adversely affected.

Conflicts with our collaborators could jeopardize the outcome of our
collaborative agreements and our ability to commercialize products.

We intend to conduct proprietary research programs in specific disease and
agricultural product areas that are not covered by our collaborative
agreements. Our pursuit of opportunities in agricultural and pharmaceutical
markets could, however, result in conflicts with our collaborators in the event
that any of our collaborators takes the position that our internal activities
overlap with those

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areas that are exclusive to our collaborative agreements, and we should be
precluded from such internal activities. Moreover, disagreements with our
collaborators could develop over rights to our intellectual property. In
addition, our collaborative agreements may have provisions that give rise to
disputes regarding the rights and obligations of the parties. Any conflict with
our collaborators could lead to the termination of our collaborative
agreements, delay collaborative activities, reduce our ability to renew
agreements or obtain future collaboration agreements or result in litigation or
arbitration and would negatively impact our relationship with existing
collaborators.

We have limited or no control over the resources that our collaborators may
choose to devote to our joint efforts. Our collaborators may breach or
terminate their agreements with us or fail to perform their obligations
thereunder. Further, our collaborators may elect not to develop products
arising out of our collaborative arrangements or may fail to devote sufficient
resources to the development, manufacture, market or sale of such products.
Certain of our collaborators could also become our competitors in the future.
If our collaborators develop competing products, preclude us from entering into
collaborations with their competitors, fail to obtain necessary regulatory
approvals, terminate their agreements with us prematurely or fail to devote
sufficient resources to the development and commercialization of our products,
our product development efforts could be delayed and may fail to lead to
commercialized products.

We are deploying unproven technologies, and we may not be able to develop
commercially successful products.

You must evaluate us in light of the uncertainties and complexities
affecting a biotechnology company. Our technologies are still in the early
stages of development. Our research and operations thus far have allowed us to
identify a number of product targets for use by our collaborators and our own
internal development programs. We are not certain, however, of the commercial
value of any of our current or future targets, and we may not be successful in
expanding the scope of our research into new fields of pharmaceutical or
pesticide research, or other agricultural applications such as enhancing plant
traits to produce superior crop yields, disease resistance or increased
nutritional content. Significant research and development, financial resources
and personnel will be required to capitalize on our technology, develop
commercially viable products and obtain regulatory approval for such products.

We have no experience in developing, manufacturing and marketing products and
may be unable to commercialize proprietary products.

Initially, we will rely on our collaborators to develop and commercialize
products based on our research and development efforts. We have no experience
in using the targets that we identify to develop our own proprietary products.
In order for us to commercialize products, we would need to significantly
enhance our capabilities with respect to product development, and establish
manufacturing and marketing capabilities, either directly or through
outsourcing or licensing arrangements. We may not be able to enter into such
outsourcing or licensing agreements on commercially reasonable terms, or at
all.

Since our technologies have many potential applications and we have limited
resources, our focus on a particular area may result in our failure to
capitalize on more profitable areas.

We have limited financial and managerial resources. This requires us to
focus on product candidates in specific industries and forego opportunities
with regard to other products and industries. For example, depending on our
ability to allocate resources, a decision to concentrate on a particular
agricultural program may mean that we will not have resources available to
apply the same technology to a pharmaceutical project. While our technologies
may permit us to work in both areas, resource commitments may require trade-
offs resulting in delays in the development of certain

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programs or research areas, which may place us at a competitive disadvantage.
Our decisions impacting resource allocation may not lead to the development of
viable commercial products and may divert resources from more profitable market
opportunities.

Our competitors may develop products and technologies that make ours obsolete.

The biotechnology industry is highly fragmented and is characterized by
rapid technological change. In particular, the area of gene research is a
rapidly evolving field. We face, and will continue to face, intense competition
from large biotechnology and pharmaceutical companies, as well as academic
research institutions, clinical reference laboratories and government agencies
that are pursuing research activities similar to ours. Some of our competitors
have entered into collaborations with leading companies within our target
markets, including some of our existing collaborators. Our future success will
depend on our ability to maintain a competitive position with respect to
technological advances.

Any products that are developed through our technologies will compete in
highly competitive markets. Further, our competitors may be more effective at
using their technologies to develop commercial products. Many of the
organizations competing with us have greater capital resources, larger research
and development staffs and facilities, more experience in obtaining regulatory
approvals, and more extensive product manufacturing and marketing capabilities.
As a result, our competitors may be able to more easily develop technologies
and products that would render our technologies and products, and those of our
collaborators, obsolete and noncompetitive.

If we are unable to adequately protect our intellectual property, third parties
may be able to use our technology, which could adversely affect our ability to
compete in the market.

Our success will depend in part on our ability to obtain patents and
maintain adequate protection of the intellectual property related to our
technologies and products. The patent positions of biotechnology companies,
including our patent position, are generally uncertain and involve complex
legal and factual questions. We will be able to protect our intellectual
property rights from unauthorized use by third parties only to the extent that
our technologies are covered by valid and enforceable patents or are
effectively maintained as trade secrets. The laws of some foreign countries do
not protect intellectual property rights to the same extent as the laws of the
U.S., and many companies have encountered significant problems in protecting
and defending such rights in foreign jurisdictions. We will apply for patents
covering our technologies and products as and when we deem appropriate.
However, these applications may be challenged or may fail to result in issued
patents. Our existing patents and any future patents we obtain may not be
sufficiently broad to prevent others from practicing our technologies or from
developing competing products. Furthermore, others may independently develop
similar or alternative technologies or design around our patents. In addition,
our patents may be challenged, invalidated or fail to provide us with any
competitive advantages.

We rely on trade secret protection for our confidential and proprietary
information. We have taken security measures to protect our proprietary
information and trade secrets, but these measures may not provide adequate
protection. While we seek to protect our proprietary information by entering
into confidentiality agreements with employees, collaborators and consultants,
we cannot assure you that our proprietary information will not be disclosed, or
that we can meaningfully protect our trade secrets. In addition, our
competitors may independently develop substantially equivalent proprietary
information or may otherwise gain access to our trade secrets.

424B4 13th Page of 110 TOC 1st Previous Next ↓Bottom Just 13th
Litigation or third party claims of intellectual property infringement could
require us to spend substantial time and money and adversely affect our ability
to develop and commercialize products.

Our commercial success depends in part on our ability to avoid infringing
patents and proprietary rights of third parties, and not breaching any licenses
that we have entered into with regard to our technologies. Other parties have
filed, and in the future are likely to file, patent applications covering genes
and gene fragments, techniques and methodologies relating to model systems, and
products and technologies that we have developed or intend to develop. If
patents covering technologies required by our operations are issued to others,
we may have to rely on licenses from third parties, which may not be available
on commercially reasonable terms, or at all.

Third parties may accuse us of employing their proprietary technology
without authorization. In addition, third parties may obtain patents that
relate to our technologies and claim that use of such technologies infringes
these patents. Regardless of their merit, such claims could require us to incur
substantial costs, including the diversion of management and technical
personnel, in defending ourselves against any such claims or enforcing our
patents. In the event that a successful claim of infringement is brought
against us, we may be required to pay damages and obtain one or more licenses
from third parties. We may not be able to obtain these licenses at a reasonable
cost, or at all. Defense of any lawsuit or failure to obtain any of these
licenses could adversely affect our ability to develop and commercialize
products.

The loss of key personnel or the inability to attract and retain additional
personnel could impair our ability to expand our operations.

We are highly dependent on the principal members of our management and
scientific staff, the loss of whose services might adversely impact the
achievement of our objectives and the continuation of existing collaborations.
In addition, recruiting and retaining qualified scientific personnel to perform
future research and development work will be critical to our success. We do not
currently have sufficient executive management and technical personnel to fully
execute our business plan. There is currently a shortage of skilled executives
and employees with technical expertise, and this shortage is likely to
continue. As a result, competition for skilled personnel is intense and
turnover rates are high. Although we believe we will be successful in
attracting and retaining qualified personnel, competition for experienced
scientists from numerous companies, academic and other research institutions
may limit our ability to do so.

Our business operations will require additional expertise in specific
industries and areas applicable to products identified and developed through
our technologies. These activities will require the addition of new personnel,
including management and technical personnel and the development of additional
expertise by existing employees. The inability to attract such personnel or to
develop this expertise could prevent us from expanding our operations in a
timely manner or at all.

Our collaborations with outside scientists may be subject to restriction and
change.

We work with scientific advisors and collaborators at academic and other
institutions who assist us in our research and development efforts. These
scientists are not our employees and may have other commitments that would
limit their availability to us. Although our scientific advisors and
collaborators generally agree not to do competing work, if a conflict of
interest between their work for us and their work for another entity arises, we
may lose their services. In addition, although our scientific advisors and
collaborators sign agreements not to disclose our confidential information, it
is possible that valuable proprietary knowledge may become publicly known
through them.

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Our potential therapeutic products are subject to a lengthy and uncertain
regulatory process that may not result in the necessary regulatory approvals,
which could adversely affect our ability to commercialize products.

The Food and Drug Administration, or FDA, must approve any drug or biologic
product before it can be marketed in the U.S. Any products resulting from our
research and development efforts must also be approved by the regulatory
agencies of foreign governments before the product can be sold outside the U.S.
Before a new drug application or biologics license application can be filed
with the FDA, the product candidate must undergo extensive clinical trials,
which can take many years and may require substantial expenditures. The
regulatory process also requires preclinical testing. Data obtained from
preclinical and clinical activities are susceptible to varying interpretations,
which could delay, limit or prevent regulatory approval. In addition, delays or
rejections may be encountered based upon changes in regulatory policy for
product approval during the period of product development and regulatory agency
review. The clinical development and regulatory approval process is expensive
and time consuming. Any failure to obtain regulatory approval could delay or
prevent us from commercializing products.

Our efforts to date have been primarily limited to identifying targets.
Significant research and development efforts will be necessary before any
products resulting from such targets can be commercialized. If regulatory
approval is granted to any of our products, this approval may impose
limitations on the uses for which a product may be marketed. Further, once
regulatory approval is obtained, a marketed product and its manufacturer are
subject to continual review, and discovery of previously unknown problems with
a product or manufacturer may result in restrictions and sanctions with respect
to the product, manufacturer and relevant manufacturing facility, including
withdrawal of the product from the market.

Social issues may limit the public acceptance of genetically engineered
products, which could reduce demand for our products.

Although our technology is not dependent on genetic engineering, genetic
engineering plays a prominent role in our approach to product development. For
example, research efforts focusing on plant traits may involve either selective
breeding or modification of existing genes in the plant under study. Public
attitudes may be influenced by claims that genetically engineered products are
unsafe for consumption or pose a danger to the environment. Such claims may
prevent our genetically engineered products from gaining public acceptance. The
commercial success of our future products will depend, in part, on public
acceptance of the use of genetically engineered products including drugs and
plant and animal products.

The subject of genetically modified organisms has received negative
publicity, which has aroused public debate. For example, certain countries in
Europe are considering regulations that may ban products or require express
labeling of products that contain genetic modifications or are "genetically
modified." Adverse publicity has resulted in greater regulation internationally
and trade restrictions on imports of genetically altered products. If similar
action is taken in the U.S., genetic research and genetically engineered
products could be subject to greater domestic regulation, including stricter
labeling requirements. To date, our business has not been hampered by these
activities. However, such publicity in the future may prevent any products
resulting from our research from gaining market acceptance and reduce demand
for our products.

Laws and regulations may reduce our ability to sell genetically engineered
products that we or our collaborators develop in the future.

We or our collaborators may develop genetically engineered agricultural and
animal products. The field testing, production and marketing of genetically
engineered products are subject to

424B4 15th Page of 110 TOC 1st Previous Next ↓Bottom Just 15th
regulation by federal, state, local and foreign governments. Regulatory
agencies administering existing or future regulations or legislation may
prevent us from producing and marketing genetically engineered products in a
timely manner or under technically or commercially feasible conditions. In
addition, regulatory action or private litigation could result in expenses,
delays or other impediments to our product development programs and the
commercialization of products.

The FDA has released a policy statement stating that it will apply the same
regulatory standards to foods developed through genetic engineering as it
applies to foods developed through traditional plant breeding. Genetically
engineered food products will be subject to premarket review, however, if these
products raise safety questions or are deemed to be food additives. Our
products may be subject to lengthy FDA reviews and unfavorable FDA
determinations if they raise questions regarding safety or our products are
deemed to be food additives.

The FDA has also announced that it will not require genetically engineered
agricultural products to be labeled as such, provided that these products are
as safe and have the same nutritional characteristics as conventionally
developed products. The FDA may reconsider or change its policies, and local or
state authorities may enact labeling requirements, either of which could have a
material adverse effect on our ability or the ability of our collaborators to
develop and market products resulting from our efforts.

We use hazardous chemicals and radioactive and biological materials in our
business. Any claims relating to improper handling, storage or disposal of
these materials could be time consuming and costly.

Our research and development processes involve the controlled use of
hazardous materials, including chemicals, radioactive and biological materials.
Our operations produce hazardous waste products. We cannot eliminate the risk
of accidental contamination or discharge and any resultant injury from these
materials. Federal, state and local laws and regulations govern the use,
manufacture, storage, handling and disposal of hazardous materials. We may be
sued for any injury or contamination that results from our use or the use by
third parties of these materials, and our liability may exceed our insurance
coverage and our total assets. Compliance with environmental laws and
regulations may be expensive, and current or future environmental regulations
may impair our research, development and production efforts.

In addition, our collaborators may use hazardous materials in connection
with our collaborative efforts. To our knowledge, their work is performed in
accordance with applicable biosafety regulations. In the event of a lawsuit or
investigation, however, we could be held responsible for any injury caused to
persons or property by exposure to, or release of, these hazardous materials
use by these parties. Further, we may be required to indemnify our
collaborators against all damages and other liabilities arising out of our
development activities or products produced in connection with these
collaborations.

If product liability lawsuits are successfully brought against us, we could
face substantial liabilities that exceed our resources.

We may be held liable if any product we or our collaborators develop causes
injury or is found otherwise unsuitable during product testing, manufacturing,
marketing or sale. Although we intend to obtain general liability and product
liability insurance, this insurance may be prohibitively expensive, or may not
fully cover our potential liabilities. Inability to obtain sufficient insurance
coverage at an acceptable cost or to otherwise protect ourselves against
potential product liability claims could prevent or inhibit the
commercialization of products developed by us or our collaborators.

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Our facilities are located near known earthquake fault zones, and the
occurrence of an earthquake or other catastrophic disaster could cause damage
to our facilities and equipment, which could require us to cease or curtail
operation.

Given our location, our facilities are vulnerable to damage from
earthquakes. We are also vulnerable to damage from other types of disasters,
including fire, floods, power loss, communications failures and similar events.
If any disaster were to occur, our ability to operate our business at our
facilities would be seriously, or potentially completely, impaired. In
addition, the unique nature of our research activities could cause significant
delays in our programs and make it difficult for us to recover from a disaster.
The insurance we maintain may not be adequate to cover our losses resulting
from disasters or other business interruptions. Accordingly, an earthquake or
other disaster could materially and adversely harm our ability to conduct
business.

We expect that our quarterly results of operations will fluctuate, and this
fluctuation could cause our stock price to decline, causing investor losses.

Our quarterly operating results have fluctuated in the past and are likely
to fluctuate in the future. A number of factors, many of which we cannot
control, could subject our operating results and stock price to volatility,
including:

. recognition of upfront licensing or other fees;

. payments of non-refundable upfront or licensing fees to third parties;

. acceptance of our technologies and platforms;

. the success rate of our discovery efforts leading to milestones and
royalties;

. the introduction of new technologies or products by our competitors;

. the timing and willingness of collaborators to commercialize our
products;

. our ability to enter into new collaborative relationships;

. the termination or non-renewal of existing collaborations; and

. general and industry-specific economic conditions that may affect our
collaborators' research and development expenditures.

A large portion of our expenses, including expenses for facilities,
equipment and personnel, are relatively fixed in the short term. In addition,
we expect operating expenses to increase significantly during 2000.
Accordingly, if our revenues decline or do not grow as anticipated due to the
expiration of existing contracts, our failure to obtain new contracts, our
inability to meet milestones or other factors, we may not be able to
correspondingly reduce our operating expenses. Failure to achieve anticipated
levels of revenues could therefore significantly harm our operating results for
a particular fiscal period.

Due to the possibility of fluctuations in our revenues and expenses, we
believe that quarter-to-quarter comparisons of our operating results are not a
good indication of our future performance. As a result, in some future
quarters, our operating results may not meet the expectations of stock market
analysts and investors, which could result in a decline in the price of our
stock.

Our stock price may be extremely volatile, and you may not be able to resell
your shares at or above the initial offering price.

Prior to this offering, there has been no public market for shares of our
common stock. An active trading market may not develop or be sustained
following completion of this offering. The initial public

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offering price for the shares has been determined by negotiations between us
and representatives of the underwriters. This price may bear no relationship to
the price at which our common stock will trade upon completion of this
offering. The stock market has experienced significant price and volume
fluctuations, and the market prices of technology companies, particularly
biotechnology and genomics companies, have been highly volatile.

In the past, following periods of volatility in the market price of a
company's securities, securities class action litigation has often been
instituted. A securities class action suit against us could result in
substantial costs and divert management's attention and resources, which could
have a material and adverse effect on our business.

Future sales of our common stock may depress our stock price.

The market price of our common stock could decline as a result of sales of
substantial amounts of our common stock in the public market after the closing
of this offering, or even the perception that such sales could occur. There
will be 42,765,662 shares of common stock outstanding immediately after this
offering, or 44,130,662 shares if the representatives of the underwriters
exercise their over-allotment option in full. Of these shares, the following
will be available for sale in the public market as follows:

. 625,884 shares will be eligible for sale upon completion of this
offering;

. 7,106 shares will be eligible for sale 90 days from the completion of
this offering;

. 33,032,672 shares will be eligible for sale upon the expiration of lock-
up agreements, beginning 180 days after the date of this prospectus; and

. 1,594,481 shares will be eligible for sale upon the exercise of vested
options 180 days after the date of this prospectus.

Some of our existing stockholders can exert control over us, and may not make
decisions that are in the best interests of all stockholders.

After this offering, our officers, directors and principal stockholders
(stockholders holding more than 5% of our common stock) will together control
approximately 38% of our outstanding common stock. As a result, these
stockholders, acting together, would be able to exert significant influence
over all matters requiring stockholder approval, including the election of
directors and approval of significant corporate transactions. In addition, this
concentration of ownership may delay or prevent a change in control of our
company, even when a change may be in the best interests of our stockholders.
In addition, the interests of these stockholders may not always coincide with
our interests as a company or the interests of other stockholders. Accordingly,
these stockholders could cause us to enter into transactions or agreements that
you would not approve.

As a new investor, you will experience immediate and substantial dilution.

Investors purchasing shares of our common stock in this offering will pay
more for their shares than the amount paid by existing stockholders who
acquired shares prior to this offering. Accordingly, if you purchase common
stock in this offering, you will incur immediate dilution in pro forma net
tangible book value of approximately $10.23 per share. If the holders of
outstanding options or warrants exercise those options or warrants, you will
incur further dilution. See "Dilution."

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USE OF PROCEEDS

We will receive net proceeds from the sale of the 9,100,000 shares of common
stock in the public offering of approximately $108,619,000 ($125,121,850 if the
underwriters' over-allotment option is exercised in full), at an initial public
offering price of $13.00 per share and after deducting the estimated
underwriting discounts and our estimated offering expenses.

We intend to use the net proceeds of this offering for research and
development activities, working capital and other general corporate purposes
and capital expenditures. The amounts and timing of our actual expenditures
will depend upon numerous factors, including the status of our product
development and commercialization efforts, the amount of proceeds actually
raised in this offering, the amount of cash generated by our operations,
competition, and sales and marketing activities. We may also use a portion of
the proceeds for the acquisition of, or investment in, companies, technologies
or assets that complement our business. However, we have no present
understandings, commitments or agreements to enter into any potential
acquisitions or investments. The balance of the proceeds, as well as existing
cash, will be used for general corporate purposes. Until the funds are used as
described above, we intend to invest the net proceeds of this offering in
short-term, interest-bearing securities.

The principal purposes of this offering are to increase our capitalization
and financial flexibility, to provide a public market for our common stock and
to facilitate access to public equity markets. As of the date of this
prospectus, we cannot specify with certainty all of the particular uses for the
net proceeds we will have upon completion of this offering. Accordingly, our
management will have broad discretion to allocate the net proceeds from this
offering.

DIVIDEND POLICY

We have never declared or paid cash dividends on our capital stock. We
currently intend to retain earnings, if any, to support the development of our
business and do not anticipate paying cash dividends for the foreseeable
future.

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CAPITALIZATION

The following table sets forth our capitalization as of December 31, 1999:

. on an actual basis;

. on a pro forma basis to reflect the automatic conversion of all of our
preferred stock into an aggregate of 22,877,656 shares of common stock,
which will occur upon the closing of this offering; and

. on a pro forma as adjusted basis to reflect our receipt of the net
proceeds from the sale of 9,100,000 shares of common stock in this
offering, at an initial public offering price of $13.00 per share, after
deducting the estimated underwriting discounts and offering expenses
payable by us in this offering and assuming no exercise of the
underwriters' over-allotment option.

[Download Table]

December 31, 1999
----------------------------
Pro
Forma As
Actual Pro Forma Adjusted
-------- --------- --------
(in thousands, except share
and per share amounts)

Long-term obligations, less current portion...... $ 11,132 $11,132 $ 11,132
-------- ------- --------
Mandatorily redeemable convertible preferred
stock, $0.001 par value; 35,000,000 shares
authorized; 30,503,571 shares issued and
outstanding, actual; none issued pro forma and
pro forma as adjusted........................... 46,780 -- --
-------- ------- --------
Stockholders' (deficit) equity:
Common stock, $0.001 par value; 50,000,000
shares authorized, 6,258,805 shares issued and
outstanding, actual; 50,000,000 shares
authorized, 29,136,461 shares issued and
outstanding, pro forma; and 100,000,000 shares
authorized, 38,236,461 shares issued and
outstanding pro forma as adjusted.............. 6 29 38
Additional paid-in capital...................... 19,523 66,280 174,890
Notes receivable from stockholders.............. (240) (240) (240)
Deferred stock compensation..................... (14,167) (14,167) (14,167)
Accumulated deficit............................. (54,727) (54,727) (54,727)
-------- ------- --------
Total stockholders' (deficit) equity......... (49,605) (2,825) 105,794
-------- ------- --------
Total capitalization......................... $ 8,307 $ 8,307 $116,926
======== ======= ========

The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of December 31, 1999 and
excludes:

. 4,466,527 shares of common stock underlying options outstanding at a
weighted average exercise price of $0.29 per share;

. 654,908 shares of common stock underlying warrants outstanding at a
weighted average exercise price of $1.71 per share;

. 480,769 shares of common stock issuable upon conversion of an outstanding
promissory note; and

. 417,381 shares of common stock available for issuance or future grant
under our stock option plans.

See "Selected Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
notes thereto included in this prospectus.

424B4 20th Page of 110 TOC 1st Previous Next ↓Bottom Just 20th
DILUTION

If you invest in our common stock, your interest will be diluted to the
extent of the difference between the initial public offering price per share of
our common stock and the net tangible book value per share of our common stock
after this offering.

Our net tangible book value (deficit) at December 31, 1999 was $(49.6)
million, or $(7.93) per share of common stock. After giving effect to the sale
of the 9,100,000 shares of common stock in this offering, at an initial public
offering price of $13.00 per share, assuming that the underwriters' over-
allotment option is not exercised, and after deducting the estimated
underwriting discounts, commissions and estimated offering expenses, our net
tangible book value at December 31, 1999 would be $59.0 million, or $3.84 per
share.

Net tangible book value per share before the offering represents total
tangible assets less total liabilities, divided by the number of shares of
common stock outstanding at December 31, 1999. The offering will result in an
immediate increase in the book value of $11.77 per share to existing
stockholders and an immediate dilution in net tangible book value of $9.16 per
share to new investors, or approximately 70% of the initial public offering
price of $13.00 per share. Dilution is determined by subtracting net tangible
book value per share after the offering from the initial public offering price
of $13.00 per share. Pro forma dilution per share represents the dilution per
share to new investors after giving effect to the automatic conversion of all
outstanding shares of our preferred stock into an aggregate of 22,877,656
shares of common stock, which will occur upon the closing of this offering. The
following table illustrates this per share dilution:

[Download Table]

Initial public offering price per share.......................... $13.00
Net tangible book value (deficit) per share at December 31,
1999.......................................................... $(7.93)
Increase per share attributable to this offering............... 11.77
------
Net tangible book value per share after the public offering...... 3.84
------
Dilution per share to new investors.............................. 9.16

Incremental dilution effect of the conversion of all outstanding
shares of our preferred stock into an aggregate of 22,877,656
shares of common stock.......................................... 1.07
------
Pro forma dilution per share to new investors.................... $10.23
======

The following table summarizes the total consideration paid to us and the
average price paid per share by existing stockholders and new investors
purchasing common stock in this offering. This information is presented on a
pro forma as adjusted basis at December 31, 1999, after giving effect to the
sale of the 9,100,000 shares of common stock in this offering at an initial
public offering price of $13.00 per share, before deducting estimated
underwriting discounts, commissions and estimated offering expenses.

[Download Table]

Average
Shares Purchased Total Consideration Price
------------------ ---------------------- Per
Number Percent Amount Percent Share
---------- ------- -------------- ------- -------
(in thousands)

Existing stockholders......... 29,136,461 76.2% $ 47,440 28.6% $ 1.63
New investors................. 9,100,000 23.8 118,300 71.4 13.00
---------- ----- -------- -----
Total....................... 38,236,461 100.0% $165,740 100.0%
========== ===== ======== =====

These tables assume no exercise of the underwriters' over-allotment option,
no conversion of a convertible promissory note in favor of Pharmacia & Upjohn
and no exercise of stock options and warrants outstanding at December 31, 1999.
Pharmacia & Upjohn made us an interest-free loan of

424B4 21st Page of 110 TOC 1st Previous Next ↓Bottom Just 21st
$7.5 million that is evidenced by a promissory note. This promissory note must
be converted into shares of our common stock during the two-year period
following this offering at a price per share equal to 120% of the initial
public offering price, the time of such conversion to be determined by
Pharmacia & Upjohn. At March 31, 2000, there were 1,094,151 shares of common
stock issuable upon exercise of outstanding stock options at a weighted average
exercise price of $3.20 per share and 633,212 shares of common stock issuable
upon exercise of outstanding warrants at a weighted average exercise price of
$1.71 per share. If any of these options or warrants are exercised, there will
be further dilution to new public investors.

424B4 22nd Page of 110 TOC 1st Previous Next ↓Bottom Just 22nd
SELECTED FINANCIAL DATA

This section presents our historical financial data. You should read
carefully the financial statements and the notes thereto included in this
prospectus and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

The statement of operations data for the years ended December 31, 1997, 1998
and 1999 and the balance sheet data as of December 31, 1998 and 1999 have been
derived from our audited financial statements included elsewhere in this
prospectus. The statement of operations data for the years ended December 31,
1995 and 1996 and the balance sheet data as of December 31, 1995, 1996 and 1997
have been derived from our audited financial statements that are not included
in this prospectus. Historical results are not necessarily indicative of future
results. See the Notes to Financial Statements for an explanation of the method
used to determine the number of shares used in computing basic and diluted and
pro forma basic and diluted net loss per share.

[Download Table]

Year Ended December 31,
----------------------------------------------
1995 1996 1997 1998 1999
------- ------- -------- -------- --------
(in thousands, except per share data)

Statement of Operations Data:
License revenues.............. $ -- $ -- $ -- $ 139 $ 1,046
Contract revenues............. -- -- -- 2,133 9,464
------- ------- -------- -------- --------
Total revenues............... -- -- -- 2,272 10,510
------- ------- -------- -------- --------
Operating expenses:
Research and development..... 1,890 4,120 8,223 12,096 21,653
General and administrative... 1,096 1,475 3,743 5,472 7,624
------- ------- -------- -------- --------
Total operating expenses..... 2,986 5,595 11,966 17,568 29,277
------- ------- -------- -------- --------
Loss from operations.......... (2,986) (5,595) (11,966) (15,296) (18,767)
Interest income (expense),
net.......................... 33 284 470 (50) 46
------- ------- -------- -------- --------
Loss before equity in net loss
of affiliated company........ (2,953) (5,311) (11,496) (15,346) (18,721)
Equity in net loss of
affiliated company........... -- -- -- (320) --
------- ------- -------- -------- --------
Net loss...................... $(2,953) $(5,311) $(11,496) $(15,666) $(18,721)
======= ======= ======== ======== ========
Basic and diluted net loss per
share........................ $ (2.60) $ (4.50) $ (8.76) $ (3.83) $ (3.47)
Shares used in computing basic
and diluted net loss per
share........................ 1,137 1,180 1,312 4,088 5,389
Pro forma basic and diluted
net loss per share........... $ (0.67)
Shares used in computing pro
forma basic and diluted net
loss per share............... 27,996

December 31,
----------------------------------------------
1995 1996 1997 1998 1999
------- ------- -------- -------- --------
(in thousands)

Balance Sheet Data:
Cash, cash equivalents and
short-term investments....... $ 345 $ 8,086 $ 9,715 $ 2,058 $ 6,904
Working capital............... (57) 6,686 7,619 182 (672)
Total assets.................. 1,224 9,747 15,349 8,981 18,901
Long-term obligations, less
current portion.............. 592 1,104 1,759 2,556 11,132
Mandatorily redeemable
convertible preferred stock.. 3,730 16,030 31,780 38,138 46,780
Deferred stock compensation... (47) (59) (102) (1,803) (14,167)
Accumulated deficit........... (2,953) (8,844) (20,340) (36,006) (54,727)
Total stockholders' (deficit)
equity....................... 166 (8,853) (20,364) (35,065) (49,605)

424B4 23rd Page of 110 TOC 1st Previous Next ↓Bottom Just 23rd
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis contains forward-looking statements
that are based upon current expectations. Forward-looking statements involve
risks and uncertainties. Our actual results and the timing of events could
differ materially from those anticipated in our forward-looking statements as a
result of many factors, including those set forth under "Risk Factors" and
elsewhere in this prospectus. You should read the following discussion and
analysis in conjunction with the "Selected Financial Data" and the financial
statements and notes thereto included in this prospectus.

Overview

Exelixis was founded in November 1994 and began operations in January 1995.
Since that time, we have made significant investments in developing our
capabilities in comparative genomics and model system genetics. Our proprietary
technologies provide a rapid, efficient and cost-effective way to move beyond
DNA sequence data to understand the function of genes and the proteins that
they encode. We believe that our technologies are commercially applicable to
all industries whose products can be enhanced by an understanding of DNA or
proteins. To date, we have recognized revenues from research collaborations
with large pharmaceutical and agrochemical companies. Our current
collaborations are with Bayer, Pharmacia & Upjohn and Bristol-Myers Squibb.
These agreements provide for committed funding of over $180 million through
January 2008, of which $7.5 million in equity, $7.5 million in the form of a
convertible promissary note and approximately $12.6 million in revenues have
been recorded as of December 31, 1999. Additional revenues from these
collaborations are anticipated from the attainment of research milestones and
royalties from sales of our future products.

We have invested heavily in building our two core technologies, model system
genetics and comparative genomics. These core technologies have enabled us to
establish collaborations that contributed to revenue growth from zero in 1997
to $10.5 million in 1999. Our total headcount increased from 78 employees at
December 31, 1997 to 168 employees at December 31, 1999, of which 77% were
engaged in research and development activities.

Since inception we have funded our operations primarily through private
placements of preferred stock, revenues received from collaborative
arrangements, equipment lease financings and other loan facilities.

Our sources of potential revenue for the next several years are likely to
include upfront license and other fees, funded research payments under existing
and possible future collaborative arrangements, milestone payments and
royalties from our collaborators based on revenues received from any products
commercialized under those agreements.

We have incurred operating losses in each of the last three years with net
losses of approximately $11.5 million in 1997, $15.7 million in 1998 and $18.7
million in 1999. As of December 31, 1999, we had an accumulated deficit of
approximately $54.7 million. Our losses have resulted principally from costs
associated with research and development activities, investment in core
technologies and general and administrative functions. As a result of planned
expenditures for future research and development activities, we expect to incur
additional operating losses for the forseeable future.

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Artemis Pharmaceuticals

In June 1998, we purchased a minority interest in Artemis Pharmaceuticals
GmbH, a genetics company located in Cologne, Germany. We also entered into
certain non-exclusive license agreements providing Artemis with access to our
technologies. In September 1998, we entered into a five-year cooperation
agreement with Artemis under which we agreed to share technology and business
opportunities as they arise. While either party may terminate this agreement at
any time, we believe that it provides us a significant opportunity to access
complementary genetic research. We have no financial obligation or current
intention to fund Artemis. We account for our investment in Artemis under the
equity method of accounting.

MetaXen Asset Acquisition

In July 1999, we acquired substantially all the assets of MetaXen, LLC, a
biotechnology company focused on molecular genetics. In addition to paying cash
consideration of $0.9 million, we assumed a note payable relating to certain
acquired assets with a principal balance of $1.1 million. We also assumed
responsibility for a facility sub-lease relating to the office and laboratory
space occupied by MetaXen. See Note 5 of Notes to Financial Statements.

At the time of the acquisition, MetaXen had an existing research
collaboration with Eli Lilly & Company. This agreement provided for sponsored
research payments to be made to MetaXen. The scope of work under the agreement
was completed by us in October 1999. Accordingly, we received and recognized
revenues of approximately $0.2 million in fulfillment of that arrangement.

Revenue Recognition

License, research commitment and other non-refundable payments received in
connection with research collaboration agreements are deferred and recognized
on a straight-line basis over the relevant periods specified in the agreements,
generally the research term. We recognize contract research revenues as
services are performed in accordance with the terms of the agreements. Any
amounts received in advance of performance are recorded as deferred revenue.

Results of Operations

Comparison of Fiscal Years Ended December 31, 1997, 1998 and 1999

Total Revenues

Total revenues were $2.3 million for the year ended December 31, 1998,
compared to $10.5 million in 1999. License and contract revenues earned in 1998
were related to our collaboration with Bayer. During 1999, revenues of $5.6
million and $4.3 million were earned under our collaborations with Pharmacia &
Upjohn and Bayer, respectively.

Research and Development Expenses

Research and development expenses consist primarily of salaries and other
personnel-related expenses, facility costs, supplies and depreciation of
facilities and laboratory equipment. Research and development expenses were
$8.2 million for the year ended December 31, 1997, compared to $12.1 million in
1998 and $21.7 million in 1999. The increases were due primarily to increased
staffing and other personnel-related costs, including non-cash stock
compensation expense, incurred to support new collaborative arrangements and
our internal self-funded research efforts, including the acquisition of
MetaXen. We expect to continue to devote substantial resources to research and
development, and we expect that research and development expenses will continue
to increase in absolute dollar amounts in the future.

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General and Administrative Expenses

General and administrative expenses consist primarily of personnel costs to
support our activities, facility costs and professional expenses, such as legal
fees. General and administrative expenses were $3.7 million for the year ended
December 31, 1997, compared to $5.5 million in 1998 and $7.6 million in 1999.
The increase in general and administrative expenses in 1999 compared to 1998
related primarily to increased legal expenses, non-cash stock compensation
expense and rent for facilities and lease expenses for equipment. The increase
in general and administrative expense in 1998 compared to 1997 related
primarily to California sales tax, salaries and legal expenses. We expect that
our general and administrative expenses will increase in absolute dollar
amounts in the future as we expand our business development, legal and
accounting staff, add infrastructure and incur additional costs related to
being a public company, including directors' and officers' insurance, investor
relations programs and increased professional fees.

Deferred Stock Compensation

Deferred stock compensation for options granted to employees is the
difference between the deemed value for financial reporting purposes of our
common stock on the date such options were granted and their exercise price.
Deferred stock compensation for options granted to consultants has been
determined in accordance with Statement of Financial Accounting Standards No.
123 as the fair value of the equity instruments issued. Deferred stock
compensation for options granted to consultants is periodically remeasured as
the underlying options vest in accordance with Emerging Issues Task Force No.
96-18.

In connection with the grant of stock options to employees and consultants,
we recorded deferred stock compensation of approximately $0.1 million in the
year ended December 31, 1997, compared to $2.4 million in 1998 and $15.9
million in 1999. These amounts were recorded as a component of stockholders'
(deficit) equity and are being amortized as charges to operations over the
vesting periods of the options. We recorded amortization of deferred stock
compensation of approximately $25,000 for the year ended December 31, 1997,
compared to $0.7 million in 1998 and $3.5 million in 1999. For options granted
through December 31, 1999, we expect to record additional amortization expense
for deferred compensation as follows: $7.6 million in 2000, $3.9 million in
2001, $2.0 million in 2002 and $0.6 million in 2003. We will also record an
additional $6.3 million of deferred stock compensation related to options for
829,311 shares of common stock granted during January 2000. See Note 9 of Notes
to Financial Statements.

Interest Income (Expense), Net

Interest income represents income earned on our cash, cash equivalents and
short-term investments. Net interest income was $0.5 million in 1997 and
$46,000 in 1999, and consisted of amounts earned on cash, cash equivalents and
short-term investments, substantially offset by interest expense incurred on
notes payable and capital lease obligations. Net interest expense of $50,000 in
1998 resulted primarily from reduced interest income incurred on investments.

Equity in Net Loss of Affiliated Company

During the year ended December 31, 1998, we recorded a loss of $0.3 million
representing our share of the loss recorded by Artemis using the equity method
of accounting. As this loss reduced our investment in and receivables from
Artemis to zero, no subsequent loss amounts have been recorded in the
statements of operations.

Income Taxes

We have incurred net operating losses since inception and, consequently,
have not recorded any federal or state income taxes.

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As of December 31, 1999, we had federal net operating loss carryforwards of
approximately $33.9 million. We also had federal research and development
credit carryforwards of approximately $2.1 million. If not utilized, the net
operating loss and credit carryforwards expire at various dates beginning in
2005. Under the Internal Revenue Code of 1986, as amended, and similar state
provisions, certain substantial changes in our ownership could result in an
annual limitation on the amount of net operating loss and credit carryforwards
that can be utilized in future years to offset future taxable income. Annual
limitations may result in the expiration of net operating loss and credit carry
forwards before they are used. See Note 10 of Notes to Financial Statements.

Liquidity and Capital Resources

Since inception, we have financed our operations primarily through private
placements of preferred stock totaling $46.8 million, loans, equipment lease
financings and other loan facilities of $10.9 million and revenues from
collaborators of $12.8 million. As of December 31, 1999, we had $6.9 million in
cash, cash equivalents and short-term investments and $0.1 million available
for future borrowings under an equipment financing line of credit.

Our operating activities used cash of $10.8 million for the year ended
December 31, 1997, compared to $12.7 million in 1998 and $7.3 million in 1999.
Cash used in operating activities related primarily to funding net operating
losses, partially offset by an increase in deferred revenue from collaborators
and non-cash charges related to depreciation and amortization of deferred stock
compensation.

Investing activities used cash of $6.0 million for the year ended December
31, 1997, compared to $0.5 million in 1998 and $6.5 million in 1999. Investing
activities consist primarily of purchases of property, equipment and short-term
investments. We expect to continue to make significant investments in research
and development and our administrative infrastructure, including the purchase
of property and equipment to support our expanding operations.

Financing activities provided cash of $16.4 million for the year ended
December 31, 1997, compared to $7.6 million in 1998 and $17.1 million in 1999.
These amounts consist primarily of proceeds from sales of preferred stock, net
of issuance costs, and amounts received under various financing arrangements.

We believe that the net proceeds from this offering, together with our
current cash and cash equivalents, short-term investments and funding to be
received from collaborators will be sufficient to satisfy our anticipated cash
needs for at least the next two years. However, it is possible that we will
seek additional financing within this timeframe. We may raise additional funds
through public or private financing, collaborative relationships or other
arrangements. We cannot assure you that additional funding, if sought, will be
available or, even if available, on terms favorable to us. Further, any
additional equity financing may be dilutive to stockholders, and debt
financing, if available, may involve restrictive covenants. Our failure to
raise capital when needed may harm our business and operating results.

Disclosure About Market Risk

Market risk represents the risk of loss that may impact our financial
position, operating results or cash flows due to changes in U.S. interest
rates. This exposure is directly related to our normal operating activities.
Our cash, cash equivalents and short-term investments are invested with high
quality issuers and are generally of a short-term nature. Interest rates
payable on our notes and lease obligations are generally fixed. As a result, we
do not believe that near-term changes in interest rates will have a material
effect on our future results of operations.

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Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Financial
Instruments and for Hedging Activities," which will be effective for our 2001
fiscal year. This statement establishes accounting and reporting standards
requiring that every derivative instrument, including certain derivative
instruments embedded in other contracts, be recorded in the balance sheet as
either an asset or liability measured at its fair value. The statement also
requires that changes in the derivative's fair value be recognized in earnings
unless specific hedge accounting criteria are met. SFAS 133 is not anticipated
to have a significant impact on our operating results or financial condition
when adopted, since we currently do not engage in hedging activities.

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BUSINESS

Overview

Our proprietary technologies take advantage of the evolutionary similarity
in genes and gene function among diverse species. We believe that our
proprietary technologies will be valuable to all industries whose products can
be enhanced by an understanding of DNA or proteins, including the
pharmaceutical, agrochemical, agricultural, diagnostic and biotechnology
industries. We are conducting research in more than 12 different programs for
these industries.

Background

The Genetic Cascade: DNA->RNA->Protein->Signal Transduction

The physical characteristics of all living things, or organisms, are
determined by genetic information inherited from the preceding generation. This
genetic information resides in the deoxyribonucleic acid, or DNA, found in the
cells of all organisms. DNA is composed of four different chemical subunits
called nucleotide bases that are strung together in a precise sequence. Encoded
within this DNA sequence are distinct sets of instructions, or genes, that
collectively serve as a blueprint for the functions of an organism. The DNA in
a cell is divided into several segments called chromosomes. The complete set of
chromosomes of an organism contains all of its genetic information, and is
commonly referred to as the "genome" of that organism. The human genome is
comprised of 23 pairs of chromosomes and over three billion nucleotide bases
encoding in excess of 100,000 genes. Variations in DNA sequences between
individuals contribute to the observable variation in physical traits, such as
height, weight and eye color, predisposition towards disease and response to
therapy.

The genetic cascade is the mechanism by which instructions encoded in each
gene are carried out in the cell. In this process, the genetic information
encoded in the DNA is copied into an intermediate molecular form referred to as
messenger ribonucleic acid or mRNA. The information in mRNA is then translated
by specialized cellular machinery into a specific protein. Proteins are made of
20 different building blocks called amino acids. Individual proteins vary in
composition and order of their amino acids. The number and order of these amino
acids are determined by the DNA sequence of the corresponding gene. It is
estimated that while there are more than 100,000 human genes, an individual
cell expresses no more than 10,000 different proteins at any one time. Thus,
cells may be differentiated from one another by the identity and relative
abundance of proteins found within the cells.

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Basic cellular function is largely mediated by the action of proteins. This
process generally involves interactions between proteins as well as other
molecules within a cell. This is a dynamic process that responds to changes in
both the internal and external cellular environments. Proteins have various
roles in the cell such as structural building blocks, enzymes that catalyze
reactions or receptors that sense the environment. Subsets of approximately 50
to 100 of these proteins act as functionally interconnected networks for the
transmission of signals in and between cells. This process is known as signal
transduction.

Alterations in signal transduction underlie many human diseases. Therefore,
understanding these processes and the best points for intervention is key to
the development of novel therapeutics. The ability to intervene in signal
transduction is also important for agricultural purposes such as the
development of novel pesticides or the enhancement of desirable traits in
plants or animals. The challenge facing biological researchers is to understand
the role of specific genes in signal transduction and to identify those genes
whose change or regulation will result in a desired outcome.

Genomics Phase I: Genome Sequence

Recognition of the central role of DNA in disease coupled with advances in
enabling technologies gave rise to the emergence of the field of genomics, or
the study of human and other genomes. This led to an international effort known
as the Human Genome Project, or the HGP. The first phase of the HGP has been
focused primarily on determining the complete human DNA sequence and common
variations in DNA sequences among individuals. The HGP also encompasses efforts
dedicated to exploring the genomes of other organisms, including a number of
bacterial, yeast, invertebrate and vertebrate species. This research has
generated significant amounts of data, and the first working draft of the human
genome sequence is expected later this year. The importance of the HGP effort
has also attracted substantial private investment in related research, with
several billion dollars already having been spent on these endeavors. To date,
researchers have principally used large-scale processing tools to identify the
sequences of small portions of the DNA, often without knowledge of the
relevance of what they have discovered. They have identified the pieces of the
human genetic puzzle without understanding the interrelationships between the
different pieces. The majority of the human DNA sequence is now readily
available in computerized databases, and has become an important commodity of
biological research.

Genomics Phase II: Gene Function

The vast amounts of gene sequence data now available have created a critical
mismatch between data generation and knowledge generation. As a result,
genomics has recently moved into a second phase in which the elucidation of
function has become the primary challenge for biologists. Function means the
discovery of a gene's role in a cell based upon its assignment to, or
relationship with, a particular series of genes that collectively perform a
specific function, also known as a signaling network, and the predicted
consequence of changing or regulating its activity. Gene function cannot be
directly inferred from DNA sequence, nor can it be derived from attributes such
as sequence variation, similarities to other genes of known function or
expression of encoded proteins. Rather, it requires the integration of these
observations with a detailed understanding of how proteins interact with each
other to form signaling networks. Thus, assignment of function with respect to
a disease state or condition is a complex process requiring the application of
new tools that are knowledge-based rather than process-oriented.

Rational Selection of Molecular Targets

The life sciences industries consist of pharmaceutical, agrochemical,
agricultural, diagnostic and biotechnology companies. Many of the principal
products of these industries were developed without knowledge of the specific
protein or network affected, while others were developed against specific

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proteins whose impact in signal transduction was uncertain. As a result,
product development in these industries is costly, time consuming and
inefficient and is characterized by high failure rates. Life sciences companies
have turned to genomics technologies, primarily for DNA sequence information,
to help address these problems with respect to the selection of molecular
targets. Despite significant investment in genomics, there has not been
appreciable improvement in the efficiency in selecting molecular targets. It is
now clear that the rational selection of molecular targets requires knowledge
about genes and their encoded proteins as well as their interaction with other
components of signaling networks. Since the complete human sequence as well as
the sequence of other commercially important genomes will soon be widely
available, the competitive advantage for life sciences companies will become
the capability to rapidly and accurately translate sequence information into
knowledge about function.

The Exelixis Solution

We believe that we have developed a faster and more efficient method to
understand gene function and to select superior commercial product targets for
the life sciences industries. Our technologies are scalable, cost-effective and
enable us to industrialize the process of determining gene function by
utilizing comparative genomics and model system genetics.

Comparative Genomics. We are a pioneer in the use of comparative genomics,
an approach that applies functional information from one biological system
across all other biological systems. Comparison of genomic sequence and gene
function data from a variety of organisms has affirmed the basic principles of
Charles Darwin's evolutionary theory that life has emerged from a common
ancestor. This common origin is reflected not only in the high degree of
conservation of genes between organisms but also in the role of genes in
signaling networks. In many cases, the same proteins interacting in the same
manner are involved in analogous processes in different species. The use of
comparative genomics is analogous to comparative linguistics, where a language
such as Latin can be used as a basis for understanding any of the Romance
languages. Comparative genomics enables tests to be performed quickly in
organisms with simple genomes such as the fruit fly or algae to predict and
guide the analysis of gene function in organisms with complex genomes such as
humans and crops.

Model System Genetics. We are also a leading model systems genetics company.
Model system genetics serves as the experimental engine for the application of
comparative genomics. We conduct systematic genetic experimentation of simple
and well-understood organisms, such as worms, flies, yeasts and simple plant
models, to identify the relationships among genes and signaling networks. Model
systems have key advantages that result in speed and efficiency due to a number
of characteristics. These include short life cycles that allow experiments to
be completed significantly quicker than with more complicated organisms;
genomes that can be easily manipulated to develop variants that, for example,
mimic biochemical processes underlying disease; well-characterized biology that
allows easy detection of changes through physical traits; and low cost of
maintenance.

Our systematic research capabilities allow us to rapidly define gene
function and select targets for the development of new products for the life
sciences industries. Our unique approach provides a shortcut to understanding
complex biological signaling networks. We have developed proprietary research
tools, such as libraries of modified organisms, specialized reagents, databases
and software, to facilitate this research. We believe that our systematic use
and application of these proprietary technologies and tools provides us with a
unique ability to quickly and cost-effectively address key drug and
agricultural product development questions.

Our Comparative Genomics and Model System Genetics Technologies

We conduct our work primarily utilizing model system genetics, and we
interpret and apply the data through our expertise in comparative genomics. We
also have significant expertise in human

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genetic analysis. Our primary model systems are the fruit fly, D. melanogaster,
and the nematode worm, C. elegans. Scientists have used these organisms as
discovery tools for several decades. Empirical evidence has provided us
accurate benchmarks for applying biological and biochemical discoveries to more
developed organisms, such as humans. We have adapted these systems from the
academic community and have industrialized them by developing a suite of
proprietary tools and reagents that allows us to perform systematic genetic
analyses at a larger scale and substantially faster than otherwise is currently
available. Among other proprietary tools, we have exclusively licensed the U.S.
patent covering P-elements, which are genetic elements essential for performing
modern fruit fly genetics because they allow for direct genetic manipulation.
Additionally, we have adapted and developed a number of other model systems,
including fungal, insect, plant and vertebrate species. Each of these model
systems has unique advantages that can be applied in different ways. Our
expertise allows us to leverage knowledge across species and to select the best
model systems for a particular commercial application.

Our technologies enable us to quickly analyze the consequences of gene
modulation on a desired outcome. Specifically, we can generate information that
results in a rational selection of targets for our life sciences company
partners as well as our own proprietary programs. We believe that the rapid
identification of superior targets will lead to shorter product development
times and higher success rates for our partners and ourselves.

Our genetic tools include proprietary libraries of existing and engineered
model organisms as well as technologies for the conditional expression, removal
or addition of an existing or novel gene(s) from an organism's genome. Our
complete set of genomic tools provides us with the ability to rapidly
characterize the genome of a model system. We have state-of-the-art expertise
in data storage management and representation capabilities for externally and
internally generated genomic and genetic data and analysis. We use computer-
aided approaches for analyzing DNA sequence, protein structure and function as
well as building and maintaining information management systems supporting our
high throughput research process.

We have developed a proprietary process to quickly determine the genes and
proteins with which chemical compounds such as pharmaceuticals or agrochemicals
interact to produce their effect. Understanding physiological activity, or the
mechanism of action, of a compound can be of significant value to
pharmaceutical and agrochemical companies for several reasons. For example,
many companies have a number of compounds that have commercially useful
activities, but are too complex to manufacture cost-effectively. Compounds
extracted from plants or marine organisms are examples of this class of
compounds. By identifying the gene or protein with which a compound interacts,
compounds can be designed that have the same activity, but which overcome the
manufacturing or other limitations of the original compound. In addition,
companies may have compounds that have commercially useful activities, but also
have undesirable side effects due to their interaction with more than one gene
or protein. By understanding the genes or proteins with which a compound
interacts, new compounds can be designed that have the desired activity, but do
not have the undesirable side effect.

We apply our technologies to select and validate targets that we believe
will lead to new pharmaceuticals and agrochemicals. We also use our
technologies to identify the molecular targets of existing pharmaceutical and
agrochemical compounds. These two approaches, the forward target-to-compound
approach and the reverse compound-to-target approach, address major bottlenecks
in the application of genomics to research and development processes.

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Our research involves a four-step process described below:

[Graphic Description: Illustration of four-step target indentification
process.]

Step I: Definition of the Desired Outcome

The first step in selecting a target is to identify the ideal properties of
a product for pharmaceutical or agricultural use. For example, an ideal cancer
drug would selectively kill cancer cells and spare normal cells. Most tumors
arise as a consequence of one or more common acquired changes or mutations in
their genomic DNA sequence. These mutations alter gene function and lead to a
disruption of specific signaling networks that contribute to unregulated cell
growth. An ideal therapeutic target would be one located in another part of the
signaling network regulating cell growth that, when affected by a drug, would
either restore normal cell function or selectively kill the cell. Similar
approaches can be applied to many other major human diseases and to the
development of products for agricultural use or trait development.

Step II: Selection of a Model System

We use our experience and expertise to select the model organism(s) most
appropriate for a particular commercial application. The mechanisms for many
human diseases and agricultural

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products have been characterized at least partially at the molecular level.
When at least one molecular mechanism is defined and a therapeutic rationale is
established, the appropriate model system may be selected. The most important
criteria for selection are the degree of genetic similarity between the
targeted signaling network in a model system and technical considerations for
studying that network. The fruit fly and nematode are ideal genetic model
systems for fundamental questions of signal transduction, because the complete
genomic sequences for these organisms are available, the presence or absence of
a particular pathway can be easily established by use of computer-aided
biology, and we can modify these organisms using an extensive array of
proprietary tools. In cases where underlying mechanisms have not been
established, such as those mechanisms that enhance specific physical
characteristics, or traits, such as size or nutritional content in animals or
plants, model systems are selected on the basis of physiological similarity and
ease of technical manipulation. Understanding the evolutionary relationship
between the targeted organism and the prospective model system is most
important to selecting the proper model system for a particular commercial
application. If an appropriate model system does not already exist, we can
rapidly develop a new model system.

One of our insecticide projects provides an example of how we utilize our
existing genetic systems in combination with new model systems that we develop.
We have utilized fruit flies to define many of the genes that are good targets
for compounds designed to kill moth and beetle agricultural pests. Most of the
targets identified in fruit flies have direct counterparts in the target
species and can be used directly for the development of novel pesticides.
However, to develop compounds that could specifically kill moths and not other
insects, we have taken advantage of the fact that while the gut of most
organisms, including humans, is extremely acidic, the gut of moths is extremely
basic. To specifically target the moth gut and to identify moth-specific
targets, our researchers developed a moth genetic system in which we are
performing genetic experiments directly in the moth. These experiments will
enhance the programs carried out in fruit flies by identifying genes and
proteins that are unique in the moth gut and therefore could lead to compounds
that are selectively lethal for moths.

Step III: Genetic Assays

Target-to-Compound: Target Identification. We develop proprietary genetic
assays that measure the ability of a particular gene or protein to change or
regulate the signaling network of interest, leading to the definition of the
constituents of such networks as well as candidate targets. The initial step is
to mimic at the molecular level a specific disease in the selected model
system. This step involves modifying the DNA sequence of a gene or genes in the
model system that are known to be involved in the disease. The modified DNA
sequence leads to altered proteins, which in turn result in a physiological,
behavioral or structural alteration in the organism that can be observed as a
physical trait.

Our altered organisms are systematically mated with a comprehensive
collection of organisms of the same species carrying mutations in each gene.
Analysis of the offspring of these matings is used to identify the small number
of genes among the many thousands in the genome whose change or regulation
affects the targeted signaling network. These genes and their encoded proteins
are potential targets. The populations of well-characterized genetically
modified organisms we have produced are one of our key strategic assets and the
strategy for their production is one of our core technologies. We have
libraries of these organisms that have been modified in a controlled fashion,
so that comprehensive pairwise breeding allows us to test the effect on the
disease of increasing or decreasing the output of each gene in the model
organism. The availability of this asset significantly enhances the efficiency
of research directed at candidate target identification. Our ability to rapidly
and selectively move from an alteration in a gene directly to the
identification of targets that can reverse the effects of that alteration is an
extremely powerful, rapid, direct route to new pharmaceuticals and agricultural
products.

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Compound-to-Target: Mechanism of Action. The molecular targets and mechanism
of action for many promising or marketed pharmaceutical and agrochemical
compounds are unknown. Determination of the target as well as the mechanism of
action for such compounds provides starting points for the development of new
compounds that may retain the desired biological effect without the limitations
previously identified in the original compound, such as high manufacturing
costs or undesirable side effects. Alternatively, such information may provide
a new commercial opportunity to develop a small molecule directed at a
validated signaling network. Application of our technology and tools not only
permits us to identify key targets and functions for existing compounds
provided by our partners, but also serves as the basis for us to rapidly and
more effectively develop our own unique compounds.

The first step in this process requires the identification of compounds
based on the availability of efficacy data and absence of information regarding
the target(s) of the compound. The second step is to establish whether or not
this pharmaceutical or agricultural compound induces an alteration in the
appearance or observable behavior of the appropriate model organism. If such a
biologically relevant effect is observed, a genetic assay designed to identify
genes and encoded proteins that confer sensitivity or resistance to the applied
compounds is established. This information can be readily assembled into a
signaling network, establishing the mechanism of action for the compound.

Step IV: Target Validation and Product Development

Once the set of genes that interact with a signaling network of interest has
been identified in the model system, the corresponding genes from other species
can be identified using the tools of comparative genomics. These tools include
computer-aided analysis, protein biochemistry, protein expression and gene
transfer technologies, as well as the experimental and computational tools of
structural biology, such as mass spectroscopy-based protein sequencing and x-
ray crystallography. The result of these model genetic programs is a more
focused and relevant collection of targets with a high degree of biological
data supporting their function in a signaling network. This provides a superior
basis for target selection in product development.

Our current capabilities provide a foundation for building a significant
drug discovery program that will enable us to develop our own commercially
valuable drugs and agrochemicals. Through our acquisition of the assets of
MetaXen and our licensing of Bristol-Myers Squibb's chemical synthesis
platform, we are now able to develop assays to identify compounds that modulate
target activity, design and develop compounds that perform well under assay
conditions and apply unique chemistry approaches to produce more effective
compounds.

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We use our model systems to identify genes whose change or regulation will
lead to a desired therapeutic effect. Our model organisms that carry mutations
common to human tumor cells are mated with large numbers of other organisms of
the same species carrying mutations in each gene in order to identify those
genes which are capable of specifically killing the tumor-like cells. Drugs can
then be identified that modulate the same gene or protein and therefore lead to
the desired therapeutic effect.

[DIAGRAM OF IDENTIFYING GENE IN MODEL SYSTEM]

The Exelixis Strategy

Our goal is to leverage our position as a leader in developing and applying
comparative genomics and model system genetics to discover and develop new
pharmaceutical, agrochemical, agricultural, diagnostic and biotechnology
products. There are four principal elements to our business strategy:

Enhance Our Leadership in Comparative Genomics and Model System Genetics

We will continue to develop our proprietary technologies and infrastructure
in support of our existing comparative genomics and model systems genetics
platform. In addition, we will develop additional model systems in order to
broaden the range of pharmaceutical and agricultural product opportunities that
we can address using our fundamental knowledge and capabilities. We will
continue to in-license and acquire technologies that complement our fundamental
knowledge and capabilities and protect our technologies with patents and trade
secrets. We will continue to recruit and collaborate with leaders in the field
of model system genetics.

Maximize Opportunities in Multiple Markets

We believe that our model system genetics capabilities will enable us to
develop products that address opportunities in the pharmaceutical,
agrochemical, agricultural, diagnostic and biotechnology industries. We intend
to address these opportunities through the establishment of collaborations with
leading companies in their respective fields and through the development of our
own proprietary products. We intend to enter into collaborations in order to
fund the development of our core technologies and our own products, as well as
provide us with the opportunity to receive significant future payments if our
collaborators successfully market products that result from our collaborative
work.

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Retain Significant Rights in Each Collaboration

We have retained and plan to continue to retain significant technology
rights to use targets and assays and other technologies developed in each of
our collaborations for use in our proprietary research programs. These rights
will enable us to use the genetic information that we develop within each
individual collaboration to pursue additional opportunities that are outside of
the scope of that particular collaboration.

Establish Internal Programs to Capture Greater Value From Our Core
Technologies

We have invested and plan to continue to invest our own funds in discovering
and developing our own proprietary products. These potential products will be
available for licensing to our collaborative partners or to be retained by us
for further development and commercialization.

Current Status of Our Programs

Our comparative genomics and model system genetics technologies can be
applied to address opportunities in any market whose products can be enhanced
by an understanding of DNA or proteins, including pharmaceutical, agrochemical,
diagnostic, biotechnology, animal health, pesticides, crop improvement,
livestock improvement and industrial enzymes. We have focused our initial
research efforts to address attractive pharmaceutical and agrochemical markets.
We will use our proprietary comparative genomics and model system genetics
platform to analyze signaling networks to identify genes that can be used to
develop treatments for a broad range of important diseases and to develop more
productive crops and livestock.

We currently have active research programs in the following areas:

Human Pharmaceutical Research Programs

. Alzheimer's disease. Alzheimer's disease is a progressive neurological
disease that results in the loss of cognitive functions, including
memory. In collaboration with Pharmacia & Upjohn, we are applying our
genetics technologies to understand the causes of Alzheimer's disease and
to determine how to stop or reverse the progression of the disease. As a
result of genetic screens performed to date, we have identified a target
that may reduce the formation of structural abnormalities that are
associated with Alzheimer's disease, and we have received a milestone
payment for delivering this target to Pharmacia & Upjohn. We have also
identified additional targets that are currently being evaluated for
commercial application. Under the terms of our agreement with Pharmacia &
Upjohn, we remain free to conduct research on our own behalf or in
collaboration with third parties in other areas of central nervous system
and cognitive disorders, such as Parkinson's disease, depression and
schizophrenia.

. Angiogenesis and anti-angiogenesis. Angiogenesis is the formation of
blood vessels. Products that promote angiogenesis could be used to treat
coronary heart disease and vascular complications of diabetes. The
ability to prevent the formation of new blood vessels could be used to
kill cancer cells by depriving them of nutrients.

. Cancer. Cancer is a leading cause of death in developed countries. Cancer
is caused by a number of genetic defects in cells resulting in
unregulated cell growth. We are applying our genetics technologies to
identify targets that will enable us to selectively kill cells in a broad
range of solid tumors without damaging normal cells by using the cancer's
genetic defects as a means of targeting treatment. As a result of genetic
screens performed to date, we have identified several targets that may be
used to develop new anti-cancer pharmaceutical products that have fewer
side effects than current cancer treatments.

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. Metabolic syndrome. Metabolic syndrome is a condition that underlies many
human diseases, including coronary artery disease and diabetes. This
condition results in the inability of individuals to maintain essential
elements of blood chemistry, such as cholesterol and blood sugar, within
desirable ranges. In our collaboration with Pharmacia & Upjohn, we have
identified several targets that may be useful in developing products to
optimize the levels of both cholesterol and fat in the bloodstream. We
have also identified several targets that may be useful in developing
products to control Type II diabetes. Under the terms of our agreement
with Pharmacia & Upjohn, we remain free to conduct research on our own
behalf or in collaboration with third parties in other areas of
cardiovascular disease, including hypertension and control of heart rate,
rhythm and contraction.

. Inflammation. Our inflammation program focuses on the innate immune
system. The innate immune system is involved in diseases of inflammation,
such as asthma and arthritis. We are applying our technologies to
identify targets that control inflammation.

Agricultural Research Programs

. Animal Health. Livestock producers experience significant losses due to
disease, and incur significant costs to control insects, parasites and
other pests. Companion animals also represent a significant opportunity
for products that control pests such as fleas, ticks and heartworms.
During the course of conducting research in the area of insecticides and
nematicides in our collaboration with Bayer, we have identified and will
continue to identify targets that may be used to develop animal health
products. Under the terms of our agreement with Bayer, we remain free to
pursue animal health opportunities on our own behalf or in collaboration
with third parties.

. Fungicides. Farmers experience significant crop losses due to fungal
disease, which can destroy specific parts of the plant that are necessary
for normal growth. The current market for fungicides is approximately $6
billion per year. We are developing fungal model systems, which we intend
to use to identify targets that will lead to the development of new, more
effective fungicides.

. Herbicides. Farmers experience significant reductions in crop yields due
to weeds, which compete with crops for nutrients. The current market for
herbicides is approximately $15 billion per year. We are developing plant
model systems, which we intend to use to identify targets that will lead
to the development of new, more effective herbicides.

. Insecticides. Farmers experience significant crop losses due to damage
from insects. The current market for insecticides is approximately $9
billion per year. In collaboration with Bayer, we are applying our
genetics technologies to identify targets that may be used to develop
new, more effective insecticides. As a result of genetic screens
performed to date, we have identified several targets that may be useful
in developing new insecticides, and we have received milestone payments
for delivering these targets to Bayer. We are currently developing assays
that Bayer will use to develop the active component of new insecticides.
Under the terms of our agreement with Bayer, we remain free to conduct
research on our own behalf or in collaboration with third parties in
pesticides other than insecticides or nematicides, as well as in the
development of pest-resistant crops.

. Nematicides. Farmers experience significant crop losses due to damage
from nematodes, which are small worms that infest plants. Currently,
there are no products that effectively and safely control nematicides. In
collaboration with Bayer, we are applying our genetics technologies to
identify targets that may be used to develop new, more effective
nematicides. We are in the process of taking the genetic tools we have
developed for C. elegans, and applying these tools to various nematodes.

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. Plant and Livestock Traits. Farmers and livestock producers rely on seed
companies and animal genetics companies to develop products that will
enable them to produce their crops or livestock at a competitive cost.
The U.S. market for planting seed is approximately $7 billion. The market
for meat and dairy products is in excess of $235 billion per year. We are
in the process of developing plant model systems, and we intend to use
these model systems to identify targets that may be used to develop crops
with superior yield and improved nutritional profiles. We also intend to
apply our comparative genomics and mouse model systems to develop more
rapidly growing livestock and cattle that produce milk with an improved
nutritional profile.

The following table summarizes the current status of the research projects
described above:

[DIAGRAM OF SUMMARY OF CURRENT STATUS OF RESEARCH PROJECTS]

Mechanism of Action Programs

We are performing mechanism of action studies for Bayer, Pharmacia & Upjohn
and Bristol-Myers Squibb. Each of our partners has provided us a number of
compounds that have interesting biological activity but whose molecular target
is unknown. We utilize our model systems to identify the targets for the
compounds and provide those targets to our partners. The first step in this
process is referred to as a "feasibility study." We use such studies to
establish whether or not our model systems can be used to determine the
mechanism of action for a particular compound. Our experience to date indicates
that more than 50% of compounds selected by our partners and provided to us in
a blinded fashion are suitable for further study. Once feasibility has been
established, we work towards the identification of the target for the compound
as well as other components of its associated signaling pathway. The targets
are identified through the analysis of organisms that are either resistant or
hypersensitive to the compound. Following identification, the targets are
confirmed using biochemical assays. Targets and other components of the
signaling pathways are candidates for further compound development.

Mechanism of action projects are very efficient: a small research team can
typically identify the gene targets of a number of compounds within a few
months. We intend to establish multiple mechanism of action collaborations with
pharmaceutical and agrochemical companies. Since our partners are confident
that modulating these targets leads to desirable biological activity, we
believe that our partners will actively pursue many of the targets without
further validation. Additionally, since

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many of the compounds with which we identify the targets can be used as the
basis for developing better compounds, we believe that this approach can save
two years or more in time to market as compared to more traditional approaches.
We are also capitalizing on this technology to develop our own proprietary
compounds.

The following table summarizes the current status of our mechanism of action
programs described above:

[TABLE: MECHANISM OF ACTION STATUS]

Corporate Collaborations

It is part of our strategy to establish collaborations with leading
companies in the pharmaceutical and agrochemical industries. Through these
collaborations, we obtain license fees and research funding, together with the
opportunity to receive milestone payments and royalties resulting from research
results and subsequent product development. To date we have structured our
agreements to retain significant rights in technology developed in each program
for use elsewhere in our business.

Bayer accounted for 41% of our revenues in 1999, and Pharmacia & Upjohn
accounted for 54% of our revenues in 1999. The loss of either of them as a
customer would have a material adverse effect on our business, financial
condition and results of operations. While the amount of milestone payments for
any product development pursuant to any collaboration is not expected to be
material under our existing revenue recognition policy, the aggregate of such
payments may be material depending upon our collaborators' development
decisions and the number of products achieving milestones.

Bayer Corporation

In December 1999, we established GenOptera LLC, a Delaware limited liability
company, with Bayer Corporation to develop insecticides and nematicides for
crop protection. As part of the formation of this joint venture, Bayer agreed
to pay us, through GenOptera, license fees and research commitment fees of $20
million and to provide eight years of research funding at a minimum level of
$10 million per year (for a total of $100 million of committed fees and
research support). One-half, or $10 million, of these license and research
commitment fees were received in January 2000, with the remaining amounts to be
received in January 2001. Bayer owns 60% of

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GenOptera and Exelixis owns the remaining 40%. The formation of this joint
venture is an outgrowth of, and replaces, the contractual collaboration we
first established with Bayer AG (the corporate parent of Bayer Corporation) in
May 1998. The funding committed as part of the formation of GenOptera is in
addition to the research support that has already been provided under the
original agreement. Bayer will pay GenOptera milestones and royalties on
products developed by it resulting from the GenOptera research, and we will pay
GenOptera royalties on certain uses of technology arising from such research.

GenOptera has been organized to conduct its research in close conjunction
with the other research conducted at Exelixis. Pursuant to a services
agreement, Exelixis employees will conduct the GenOptera research, and the
operations of the joint venture will be located in Exelixis research
facilities. We have agreed that during the term of GenOptera research support,
we will not conduct other research directed towards the specified field of
research except through the joint venture.

GenOptera will identify and validate molecular targets within its field of
research. GenOptera will also conduct assay development based on those targets
to the extent determined by the management committee of the joint venture.
Bayer will have the first right to screen compounds in assays developed by
GenOptera for insecticidal and nematicidal use.

The parties have agreed on a detailed allocation of rights with respect to
the use of targets identified by GenOptera, and the use of assays developed
against those targets by GenOptera. The allocation of rights takes into
consideration many different factors, but is designed generally to:

. provide Bayer exclusive rights to research in the areas of insecticides
and nematicides, which precludes Exelixis from conducting research in
these areas with other parties;

. permit Bayer to market any resulting products for most nonpharmaceutical
uses; and

. permit Exelixis to use the technology generated by Exelixis or GenOptera
in the course of the joint venture's research for other purposes,
although this work is subject to restrictions designed to protect Bayer's
interests arising from the joint venture.

We retain exclusive rights to use the technology resulting from the joint
venture's work for pharmaceutical purposes, subject to rights in favor of Bayer
to collaborate with us in such projects.

Either Bayer or Exelixis may terminate the GenOptera research efforts after
eight years. In addition, Bayer may terminate the joint venture or buy out our
interest in the joint venture under specified conditions, including, by way of
example, failure to agree on key strategic issues after a period of years, the
acquisition of Exelixis by another company or the loss of key personnel that we
are unable to replace with individuals acceptable to Bayer.

Pharmacia & Upjohn AB

In February 1999, we established a five-year collaboration with Pharmacia &
Upjohn to identify targets in the fields of Alzheimer's disease, Type II
diabetes and associated complications of metabolic syndrome, a condition which
comprises much of diabetes, obesity and portions of cardiovascular disease. In
October 1999, this collaboration was expanded to include mechanism of action
work designed to identify biological targets of agents already identified by
Pharmacia & Upjohn as having activity in these fields. Under this agreement,
Pharmacia & Upjohn paid us a $5 million license fee and provides ongoing
research funding and support. Pharmacia & Upjohn will also pay us milestones
based on target selection and royalties in the event that products result from
the targets that we identify.

Under this agreement, Pharmacia & Upjohn has the exclusive right to pursue,
within the field of Alzheimer's disease and metabolic syndrome, a specified
number of targets that we identify. Although Pharmacia & Upjohn is obligated to
use these targets only for research related to

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Alzheimer's disease and metabolic syndrome, it may develop and commercialize
any resulting products for any use. Pharmacia & Upjohn has the right to
substitute targets if newly identified ones appear more promising than those
previously designated by Pharmacia & Upjohn, but there are numerical
limitations on the total number of targets that can be reserved by Pharmacia &
Upjohn at any single time. We retain the exclusive right, subject to certain
rights of first negotiation of Pharmacia & Upjohn, to use all targets
identified in the course of the research performed for Pharmacia & Upjohn that
are not subsequently selected by Pharmacia & Upjohn. In addition, we retain
rights for specified uses of those targets that are selected by Pharmacia &
Upjohn for further research.

Either party may terminate the research at the end of the third year of the
collaboration, the fifth year or any subsequent year. Pharmacia & Upjohn may
terminate the research at any time with advance written notice in the event of
our failure to find an acceptable replacement for a particular key employee or
in the event of conflicting material third-party intellectual property rights.

In conjunction with the establishment of our research collaboration,
Pharmacia & Upjohn purchased 2,500,000 shares of our Series D preferred stock
for a purchase price of $7.5 million, and also made us an interest-free loan of
$7.5 million. The loan is evidenced by a promissory note which must be
converted into shares of our common stock during the two-year period following
this offering at a price per share equal to 120% of the initial public offering
price, the time of such conversion prior to April 2002 to be determined by
Pharmacia & Upjohn.

Bristol-Myers Squibb

In September 1999, we entered into a three-year research collaboration with
Bristol-Myers Squibb to identify the mechanism of action of compounds delivered
to us by Bristol-Myers. The identity and function of these compounds, including
their field of activity, are not known to us prior to their delivery to us.

Under this agreement, the parties agreed to a non-exclusive cross-license of
research technology. We granted Bristol-Myers the right to use our proprietary
technology covering C. elegans and D. melanogaster genetics, and in exchange
Bristol-Myers transferred to us combinatorial chemistry hardware and software,
together with related intellectual property rights, which had been developed by
Bristol-Myers. The technology received from Bristol-Myers under this agreement
will expedite the development of our compound discovery capabilities.

Under the agreement, Bristol-Myers pays us a technology access fee and
research support payments, as well as additional milestones and royalties based
on achievements in the research and commercialization of products.

Relationship with Artemis

In June 1998, we purchased a minority interest in Artemis Pharmaceuticals
GmbH, a genetics company located in Cologne, Germany, focusing on the
development of vertebrate model genetic systems such as mice and zebrafish. We
established this relationship with Artemis in order to expand our access to
other model systems technology beyond our existing systems. The individual
founders of Artemis include Professor Christianne Nusslein-Volhard, Ph.D., a
geneticist and 1995 Nobel Laureate in medicine and physiology, Professor Klaus
Rajewsky, Ph.D., professor and director of the Institute of Genetics at the
University of Cologne, and Peter Stadler, Ph.D., the former head of pharma-
biotechnology for Bayer AG's European operations. As of December 31, 1999, we
own 24% of the outstanding equity of Artemis and, pursuant to a shareholders'
agreement, we have appointed three of the five members of the Artemis
shareholders' governing board. We have agreed in principle with Artemis, and
Artemis has solicited shareholder consent, to amend the shareholders' agreement
to increase the size of the Artemis shareholders' governing board to six
members, of which we will have the right to appoint three members.

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In September 1998, we also entered into a five-year cooperation agreement
with Artemis under which we agreed to share technology and business
opportunities as they arise. While either party may terminate this agreement at
any time, we believe that it provides a significant opportunity to access
complementary genetic research. In addition to developing zebrafish and mouse
model system technology, Artemis is studying cartilage biology, angiogenesis
and cardiovascular biology. We and Artemis have developed an integrated
research approach in the field of angiogenesis and are jointly marketing this
capability.

Academic and Government Collaborations

In order to enhance our research and technology access, we have established
key relationships with government agencies and major academic centers in the
U.S. and Europe. Our government collaborators include a number of U.S.
Department of Agriculture campuses, and we maintain over ten academic
collaborations with investigators at such institutions as Stanford University,
Columbia University, University of Cologne, The Rockefeller Institute and the
University of North Carolina. The purpose of these government and academic
collaborations is to continuously improve our core technology and to facilitate
the establishment of new discovery programs.

We will continue to establish strategic collaborations with government
agencies and academic centers. We will seek to retain significant rights to
develop and market products arising from our strategic alliances. In addition,
we will continue to invest our own funds in certain specific areas and product
opportunities with the aim of maintaining, enhancing and extending our core
technology, as well as increasing our opportunities to generate greater revenue
from such activities.

Competition

We are aware of other companies, including Paradigm Genetics, Inc.,
DeltaGen, Inc., Devgen N.V. and Lexicon Genetics Incorporated, that have or are
developing capabilities in the use of model systems to define gene function. In
addition, many genomics companies are expanding their capabilities, using a
variety of techniques, to determine gene function. The pharmaceutical industry
more broadly has invested heavily in obtaining access to genomics data and
identifying biological targets.

We are aware that companies focused specifically on other model systems such
as mice and yeast have alternative methods for identifying product targets. In
addition, pharmaceutical, biotechnology and genomics companies and academic
institutions are conducting work in this field. In the future, we expect the
field to become more competitive with companies and academic institutions
seeking to develop competing technologies.

Any products that we may develop or discover through application of our
technologies will compete in highly competitive markets. Many of our potential
competitors in these markets have substantially greater financial, technical
and personnel resources than we do, and we cannot assure you that they will not
succeed in developing technologies and products that may render our
technologies and products and those of our collaborators obsolete or
noncompetitive. In addition, many of our competitors have significantly greater
experience than we do in their respective fields.

Proprietary Rights

To establish and protect our proprietary technologies and targets, we rely
on a combination of patent, copyright, trademark and trade secret laws, as well
as confidentiality provisions in our contracts. We believe that we have
developed proprietary technology for use in target identification, biochemical
pathway identification and assay design and that we have identified proprietary
targets. Our patent strategy is designed to provide us with freedom to operate
and facilitate commercialization

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of our current and future products. Our patent portfolio includes two issued
U.S. patents relating to our proprietary model genetic systems and comparative
genomics technologies exclusively licensed from the Carnegie Institution of
Washington and Yale University. We have an additional 49 pending U.S. and
foreign patent applications related to our technologies and specialized
screens, and the application of these technologies to diverse industries
including agriculture, pharmaceuticals, diagnostics, chemicals and small
molecule therapeutics. The patent licensed from the Carnegie Institution of
Washington will expire on June 2, 2004, and the patent licensed from Yale
University will expire on March 27, 2015. Patents that might issue from the
pending patent applications we exclusively own would begin to expire in March
2018.

We also rely in part on trade secret protection of our intellectual
property. We attempt to protect our trade secrets by entering into
confidentiality agreements with third parties, employees and consultants. Our
employees and consultants also sign agreements requiring that they assign to us
their interests in patents and other intellectual property arising from their
work for us. All employees sign an agreement not to engage in any conflicting
employment or activity during their employment with us, and not to disclose or
misuse our confidential information. However, it is possible that these
agreements may be breached or invalidated and if so, there may not be an
adequate corrective remedy available. Accordingly, we cannot assure you that
employees, consultants or third parties will not breach the confidentiality
provisions in our contracts or infringe or misappropriate our patents, trade
secrets and other proprietary rights, and the measures we are taking to protect
our proprietary rights may not be adequate.

In the future, third parties may file claims asserting that our technologies
or products infringe on their intellectual property. We cannot predict whether
third parties will assert such claims against us or against the licensors of
technology licensed to us, or whether those claims will harm our business. If
we are forced to defend ourself against such claims, whether they are with or
without merit and whether they are resolved in favor of or against us or our
licensors, we may face costly litigation and diversion of management's
attention and resources. As a result of such disputes, we may have to develop
costly non-infringing technology, or enter into licensing agreements. These
agreements, if necessary, may be unavailable on terms acceptable to us, or at
all, which could seriously harm our business or financial condition.

Legal Proceedings

We are not a party to any material legal proceedings.

Employees

As of December 31, 1999, we had 168 full-time employees, 76 of whom hold
Ph.D. and/or M.D. degrees and 130 of whom were engaged in full-time research
activities. We plan to expand our corporate development programs and hire
additional staff as corporate collaborations are established and we expand our
internal development programs. Our success will depend upon our ability to
attract and retain employees. We face competition in this regard from other
companies in both the biotechnology and high technology industries as well as
research and academic institutions. None of our employees are represented by a
labor union, and we consider our employee relations to be good.

Facilities

We currently lease an aggregate of 70,000 square feet of office and
laboratory facilities in South San Francisco, California in two buildings. The
first building lease, for 33,000 square feet, expires on July 31, 2005. The
second building lease, for 37,000 square feet, expires concurrent with our move
to new facilities described below.

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We are party to a lease arrangement for two new office and laboratory
facilities totaling a maximum of 120,000 square feet. The first building lease,
for 70,000 square feet, expires 17 years from the rent commencement date. Under
this lease, we have two five-year options to extend the term prior to
expiration. We exercised an option to obtain an additional 50,000 square feet
in a building to be constructed across the street. Construction is required to
begin following an agreement on the terms of a lease for this second building.
We will move into the first building beginning in the second half of 2000 and
believe that the new facilities, including the space in the building to be
constructed, will be sufficient for a minimum of three years. Depending on our
growth, we believe we may require additional space thereafter and will seek
additional facilities.

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MANAGEMENT

Executive Officers and Directors

The following table sets forth information as of February 28, 2000 regarding
our current executive officers and directors.

[Download Table]

Name Age Position
---- --- --------

George A. Scangos, Ph.D............ 51 President, Chief Executive Officer and
Director
Geoffrey Duyk, M.D., Ph.D.......... 40 Chief Scientific Officer and Director
Lloyd M. Kunimoto.................. 46 Senior Vice President of Business
Development
Michael Morrissey.................. 39 Vice President, Discovery Research
Michael Rusnak..................... 43 Vice President, Pharmaceutical
Business Development
Glen Y. Sato....................... 40 Chief Financial Officer, Vice
President of Legal Affairs and
Secretary
Stelios Papadopoulos, Ph.D. (1)(2). 51 Chairman of the Board of Directors
Charles Cohen, Ph.D. (1)........... 49 Director
Jurgen Drews, M.D.................. 67 Director
Jason S. Fisherman, M.D. (2)....... 43 Director
Jean-Francois Formela, M.D. (2).... 43 Director
Edmund Olivier de Vezin (1)........ 62 Director
Peter Stadler, Ph.D................ 54 Director
Lance Willsey, M.D................. 38 Director

--------
(1) Member of the compensation committee.
(2) Member of the audit committee.

George A. Scangos, Ph.D., has served as our President and Chief Executive
Officer since October 1996 and as a Director since October 1996. From September
1993 to October 1996, Dr. Scangos served as President of Biotechnology at Bayer
Corporation, a pharmaceutical company, and was responsible for research,
business and process development, manufacturing, engineering and quality
assurance. Dr. Scangos holds a B.A. in Biology from Cornell University and a
Ph.D. in Microbiology from the University of Massachusetts. He was a Post-
Doctoral Fellow at Yale University and a faculty member at the Johns Hopkins
University. He currently holds an appointment as Adjunct Professor of Biology
at Johns Hopkins University.

Geoffrey Duyk, M.D., Ph.D., has served as our Chief Scientific Officer since
April 1997 and as a Director since April 1998. From 1994 to 1997, Dr. Duyk
served at Millennium Pharmaceuticals, Inc., a genomics company, mostly recently
as Vice President of Genomics. From 1992 to 1994, Dr. Duyk was an Assistant
Professor in the Department of Genetics at Harvard Medical School and an
Assistant Investigator of the Howard Hughes Medical Institute. While at Harvard
Medical School, Dr. Duyk was a co-principal investigator in the NIH-funded
Cooperative Human Linkage Center. Dr. Duyk holds a Ph.D. and M.D. from Case
Western Reserve University and completed his residency and post-doctoral
training at University of California, San Francisco.

Lloyd M. Kunimoto has served as our Senior Vice President of Business
Development since August 1999. From 1997 to 1999, Mr. Kunimoto served as Vice
President of Commercial Development for the Nutrition and Consumer Products
sector of Monsanto Company, a life sciences company. While at Monsanto, Mr.
Kunimoto was responsible for directing Monsanto's genetic

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engineering program in the area of food ingredients. From 1996 to 1997, Mr.
Kunimoto served as President and Chief Executive Officer of Calgene, Inc., an
agricultural biotechnology company. Mr. Kunimoto holds a B.S. in Mathematics
from Stanford University.

Michael M. Morrissey, Ph.D. has served as our Vice President of Discovery
Research since February 2000. Previously with Berlex Biosciences since 1991,
Dr. Morrissey held positions of increasing responsibility, including Vice
President of Discovery Research, Director of Pharmaceutical Discovery and Unit
Head of Medicinal Chemistry. Dr. Morrissey received his Ph.D. in Chemistry from
Harvard University and his B.S. Honors in Chemistry from the University of
Wisconsin.

Michael Rusnak, has served as our Vice President of Pharma Business
Development since February 2000. Mr. Rusnak was Vice President of Business
Development for CombiChem, Inc. from March 1999 until the company was acquired
by DuPont Pharmaceuticals in November of 1999. From January 1996 to November
1999, Mr. Rusnak was employed by Lexicon Genetics Incorporated in The
Woodlands, Texas as Vice President of Marketing and Business Development.
Previous to Lexicon, he served as Director of Marketing for Aprogenex, Inc. He
received his B.S. in Microbiology from St. Bonaventure University and his M.S.
in Clinical Science from San Francisco State University.

Glen Y. Sato has served as our Chief Financial Officer, Vice President of
Legal Affairs and Secretary since November 1999. From April 1999 to November
1999, Mr. Sato served as Vice President, Legal and General Counsel for Protein
Design Labs, Inc., a biotechnology company, where he previously served as the
Associate General Counsel and Director of Corporate Planning from July 1993 to
April 1999. Mr. Sato holds a B.A. from Wesleyan University and a J.D. and
M.B.A. from the University of California, Los Angeles.

Stelios Papadopoulos, Ph.D., has been a Director since December 1994 and
Chairman of the Board since January 1998. Dr. Papadopoulos has been an
investment banker at SG Cowen since February 2000. Prior to this, Dr.
Papadopoulos was an investment banker at PaineWebber from April 1987 to
February 2000, and Chairman of PaineWebber Development Corp., a PaineWebber
subsidiary, from June 1998 to February 2000. Dr. Papadopoulos is a member of
the Board of Directors of Diacrin, Inc. and several private companies. Dr.
Papadopoulos holds a Ph.D. in Biophysics and an M.B.A. in Finance, both from
New York University.

Charles Cohen, Ph.D., has been a Director since November 1995. Dr. Cohen co-
founded Creative BioMolecules, Inc., a biotechnology company, in 1982 and is
its Chief Scientific Officer. Dr. Cohen serves on the board of directors of
Creative BioMolecules, Inc. and several private companies. Dr. Cohen holds a
B.A. from State University of New York at Buffalo and a Ph.D. in Basic Medical
Sciences from New York University School of Medicine.

Jurgen Drews, M.D., has been a Director since July 1998. Dr. Drews has been
Chairman of the Board of International Biomedicine Management Partners, Inc.
since October 1997. From 1996 to 1997, Dr. Drews served as President of Global
Research for Hoffmann-La Roche Inc. and also served as a member of the
Corporate Executive Committee of the Roche Group. From 1991 to 1995, Dr. Drews
served as President of International Research and Development and as a member
of the Corporate Executive Committee for Roche. Dr. Drews is also a director of
Protein Design Labs, Inc., Human Genome Sciences, Inc. and MorphoSys GmbH. Dr.
Drews holds an M.D. in Internal Medicine and Molecular Biology from the
University of Heidelberg.

Jason S. Fisherman, M.D., has been a Director since March 1996. Dr.
Fisherman has been a partner of Advent International Corporation since 1994.
From 1991 to 1994, Dr. Fisherman served as Senior Director of Medical Research
at Enzon, where he managed clinical programs in oncology, genetic diseases and
blood substitutes. Dr. Fisherman is a director of Mediconsult.com, Inc., ILEX

424B4 47th Page of 110 TOC 1st Previous Next ↓Bottom Just 47th
Oncology, Inc. and several private companies. Dr. Fisherman holds a B.A. in
Molecular Biophysics and Biochemistry from Yale University, an M.D. from the
University of Pennsylvania and an M.B.A. from the Wharton Graduate School of
Business.

Jean-Francois Formela, M.D., has been a Director since September 1995. Dr.
Formela was a partner of Atlas Venture from 1993 to 1995, and has been a
general partner of Atlas since 1995. From 1989 to 1993, Dr. Formela served at
Schering-Plough, most recently as Senior Director, Medical Marketing and
Scientific Affairs, where he had biotechnology licensing and marketing
responsibilities. Dr. Formela serves on the board of directors of BioChem
Pharma, Inc. and several private companies. Dr. Formela holds an M.D. from
Paris University School of Medicine and an M.B.A. from Columbia Business
School.

Edmund Olivier de Vezin has been a Director since July 1997. Mr. Olivier has
been a General Partner of Oxford BioScience Partners and general partner of
Fairfield/Steuben Venture Partners since 1993. From 1983 to 1993, Mr. Olivier
served as Vice President of Technology and Planning at Diamond Shamrock. Mr.
Olivier is a Life Fellow and a Member of the National Council of the Salk
Institute and a former Chairman of the Biotechnology Venture Investors Group.
Mr. Olivier holds a B.S. in Chemical Engineering from Rice University and an
M.B.A. from Harvard University Graduate School of Business.

Peter Stadler, Ph.D., has been a Director since April 1998. Dr. Stadler has
been President and Chief Executive Officer of Artemis Pharmaceuticals, GmbH
since June 1998. From 1987 to 1997, Dr. Stadler was head of pharma-
biotechnology at Bayer AG. From 1986 to 1987, Dr. Stadler served as a visiting
scientist at the University of Munster, Germany and the Massachusetts Institute
of Technology in the area of biotechnology. Dr. Stadler holds a Ph.D. in
Organic Chemistry and Biochemistry from the University of Hamburg.

Lance Willsey, M.D., has been a Director since April 1997. Dr. Willsey has
been a Founding Partner of DCF Capital, a hedge fund focused on investing in
the life sciences, since July 1998. From July 1997 to July 1998, Dr. Willsey
served on the Staff Department of Urologic Oncology at the Dana Farber Cancer
Institute at Harvard University School of Medicine. From July 1996 to July
1997, Dr. Willsey served on the Staff Department of Urology at Massachusetts
General Hospital at Harvard University School of Medicine, where he was a
urology resident from July 1992 to July 1996. Dr. Willsey holds a B.S. in
Physiology from Michigan State University and an M.S. in Biology and an M.D.
from Wayne State University.

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Scientific Advisory Board

The following individuals are members of our Scientific Advisory Board:

[Enlarge/Download Table]

Name Current Position
---- ----------------

Spyridon Artavanis-Tsakonas, Ph.D... Director of Developmental Biology and Cancer at the
Massachusetts General Hospital Cancer Center
Richard ffrench-Constant, Ph.D...... Chair of Insect Molecular Biology, Department of
Biology and Biochemistry at the University of Bath
Corey S. Goodman, Ph.D.............. Evan Rauch Professor of Neuroscience and Director of
the Wills Neuroscience Institute at the University
of California, Berkeley
Ronald Plasterk, Ph.D............... Director of the Hubrecht Laboratory for
Developmental Biology (Utrecht, the Netherlands)
Marc Tessier-Lavigne, Ph.D.......... Professor of Anatomy and of Biochemistry and
Biophysics, and Director of the Center for Brain
Development, University of California, San
Francisco, and Investigator of the Howard Hughes
Medical Institute
James H. Thomas, Ph.D............... Associate Professor in the Department of Genetics
and member of the Programs in Molecular and Cellular
Biology and in Neuroscience and Behavior, University
of Washington, Seattle
Director of the Max-Planck Institute (Tubingen,
Christianne Nusslein-Volhard, Ph.D.. Germany)
Klaus Rajewsky, Ph.D................ Professor and Director of the Institute of Genetics
at the University of Kohn

Board Composition

We currently have ten directors. Subject to approval, in accordance with the
terms of our certificate of incorporation and bylaws, upon the closing of this
offering we will have ten directors and the terms of office of the board of
directors will be divided into three classes. As a result, a portion of our
board of directors will be elected each year. The division of the three classes
and their respective election dates are as follows:

. the class I directors will be Drs. Cohen, Drews and Duyk, and their term
will expire at the annual meeting of stockholders to be held in 2000;

. the class II directors will be Drs. Fisherman and Formela and Mr.
Olivier, and their term will expire at the annual meeting of
stockholders to be held in 2001; and

. the class III directors will be Drs. Papadopoulos, Scangos, Stadler and
Willsey, and their term will expire at the annual meeting of
stockholders to be held in 2002.

At each annual meeting of stockholders after the initial classification, the
successors to directors whose terms will then expire will be elected to serve
from the time of election and qualification until the third annual meeting
following election. In addition, our certificate of incorporation provides that
the authorized number of directors may be changed only by resolution of the
board of directors. Any additional directorships resulting from an increase in
the number of directors will be distributed among the three classes so that, as
nearly as possible, each class will consist of one-third of the directors. This
classification of the board of directors may have the effect of delaying or
preventing changes in control or management of Exelixis.

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The holders of our preferred stock currently have rights to appoint
directors pursuant to the Fourth Amended and Restated Securityholders'
Agreement that we entered into in February 1999 with our Series A, Series B,
Series C and Series D preferred stockholders. In accordance with these
appointment rights:

. Dr. Formela was appointed by Atlas Venture Fund II, L.P. and Atlas
Venture Europe Fund B.V.;
. Dr. Fisherman was appointed by our Series A and Series B preferred
stockholders;
. Drs. Papadopoulos, Drews and Willsey and Mr. Olivier were appointed by
our Series A, Series B, Series C and Series D preferred stockholders
voting together as a single class; and
. Dr. Scangos serves as a director by virtue of his position as our Chief
Executive Officer.

Upon the closing of this offering, our preferred stock will be converted to
common stock and these appointment rights will cease to exist.

Board Committees

Audit Committee. Our audit committee reviews our internal accounting
procedures and consults with, and reviews the services provided by, our
independent accountants. Current members of our audit committee are Drs.
Fisherman, Formela and Papadopoulos.

Compensation Committee. Our compensation committee reviews and recommends to
the board of directors the compensation and benefits of all our officers and
establishes and reviews general policies relating to compensation and benefits
of our employees. The compensation committee also administers the issuance of
stock options and other awards under our stock plans. Current members of the
compensation committee are Mr. Olivier and Drs. Cohen and Papadopoulos.

Compensation Committee Interlocks and Insider Participation

None of the members of our compensation committee has at any time been an
officer or employee of Exelixis. No interlocking relationship exists between
our board of directors or compensation committee and the board of directors or
compensation committee of any other company, nor has any interlocking
relationship existed in the past.

Drs. Formela, Papadopoulus and Scangos serve as members of the Shareholders'
Committee of Artemis, the governing board of Artemis responsible for
compensation decisions. Dr. Stadler, a member of our board, is Chief Executive
Officer of Artemis.

Director Compensation

Directors currently receive no cash compensation from us for their services
as members of the board or for attendance at committee meetings.

In January 2000, we adopted the 2000 Non-Employee Directors' Stock Option
Plan to provide for the automatic grant of options to purchase shares of common
stock to our directors who are not employees of Exelixis or of any affiliate of
Exelixis. Any non-employee director elected after the closing of this offering
will receive an initial option to purchase 25,000 shares of common stock.
Starting at the annual stockholder meeting in 2000, all non-employee directors
will receive an annual option to purchase 5,000 shares of common stock. See "--
Employee Benefit Plans--2000 Non-Employee Directors' Stock Option Plan" for a
more detailed explanation of the terms of these stock options.

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Executive Compensation

The following table sets forth information concerning the compensation that
we paid during 1999 to our Chief Executive Officer and each of the four other
most highly compensated executive officers who earned more than $100,000 during
1999. These individuals are referred to as the "named executive officers."

Summary Compensation Table

[Download Table]

Long-Term
Annual Compensation
Compensation Awards
----------------- ------------
Securities
Underlying
Name and Principal Position Salary Bonus Options
--------------------------- -------- -------- ------------

George A. Scangos, Ph.D.................... $400,000 $250,000(1) 600,000
President and Chief Executive Officer
Geoffrey Duyk, M.D., Ph.D.................. 290,000 162,000(2) 375,000
Chief Scientific Officer
Lloyd M. Kunimoto (3)...................... 87,500 71,875 262,500
Senior Vice President of Business
Development
Glen Y. Sato (4)........................... 30,962 -- 243,750
Chief Financial Officer, Vice
President of Legal Affairs and Secretary
Lynne Zydowsky, Ph.D.(5)................... 162,500 48,000(6) 90,000

--------
(1) Includes a 1998 bonus of $50,000 that was paid in 1999.
(2) Includes a 1998 bonus of $87,000 that was paid in 1999.
(3) Mr. Kunimoto joined Exelixis in August 1999. Mr. Kunimoto's annual salary
is $210,000.
(4) Mr. Sato joined Exelixis in November 1999. Mr. Sato's annual salary is
$210,000.
(5) Dr. Zydowsky left her position as our Vice President, Pharmaceutical
Business Development in January 2000.
(6) Includes a 1998 bonus of $20,000 that was paid in 1999.

Option Grants in Fiscal Year 1999

The following table sets forth each grant of stock options during the fiscal
year ended December 31, 1999, to each of the named executive officers.

The exercise price of each option is equal to the estimated fair market
value of our common stock as determined by the board of directors on the date
of grant. In determining the estimated fair market value of our common stock on
the date of grant our board of directors considered many factors, including:

. the fact that our options involved illiquid securities in a nonpublic
company;

. prices of preferred stock issued by Exelixis to outside investors in
arm's-length transactions;

. the rights, preferences and privileges of our preferred stock over our
common stock;

. our stage of development and business strategy; and

. the likelihood that our common stock would become liquid through an
initial public offering, a sale of Exelixis or another event.

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The exercise price may be paid in cash, promissory notes, shares of our
common stock valued at fair market value on the exercise date or through a
cashless exercise procedure involving a same-day sale of the purchased shares.

The potential realizable value of our options is calculated based on the
ten-year term of the option at the time of grant. Stock price appreciation of
5% and 10% is assumed pursuant to rules promulgated by the Securities and
Exchange Commission and does not represent our prediction of our stock price
performance. The potential realizable values at 5% and 10% appreciation are
calculated by:

. multiplying the number of shares of common stock subject to a given
option by the initial public offering price of $13.00 per share;

. assuming that the aggregate stock value derived from that calculation
compounds at the annual 5% or 10% rate shown in the table until the
expiration of the options; and

. subtracting from that result the aggregate option exercise price.

Percentages shown under "Percent of Total Options Granted to Employees in
1999" are based on an aggregate of 2,892,202 (post-split) options granted to
our employees, consultants and directors under our stock option plans during
1999.

[Enlarge/Download Table]

Potential Realizable
Individual Grants Value at Assumed
------------------------------------------------- Annual Rates of
Number of Stock Price
Securities Percent of Total Appreciation
Underlying Options Granted Exercise for Option Term
Options to Employees in Price per Expiration --------------------
Name Granted (#) 1999 (%) Share ($) Date 5% 10%
---- ----------- ---------------- --------- ---------- --------- ----------

George A. Scangos, Ph.D. 375,000 12.97 0.27 08/04/09 7,461,475 11,393,745
225,000 7.78 1.33 12/16/09 4,238,385 6,597,747
Geoffrey Duyk, M.D.,
Ph.D................... 225,000 7.78 0.27 08/04/09 4,476,885 6,836,247
150,000 5.19 1.33 12/16/09 2,825,590 4,398,498
Lloyd M. Kunimoto....... 225,000 7.78 0.27 08/01/09 4,476,885 6,836,247
37,500 1.33 1.33 12/16/09 706,398 1,099,624
Glen Y. Sato............ 243,750 8.43 0.40 11/07/09 4,818,074 7,373,944
Lynne Zydowsky, Ph.D.... 60,000 2.07 0.27 06/03/09 1,193,836 1,822,999
30,000 1.04 0.40 10/31/09 593,018 907,600

Option Values at December 31, 1999

The following table sets forth the number and value of securities underlying
unexercised options that are held by each of the named executive officers as of
December 31, 1999.

Amounts shown under the column "Value of Unexercised In-the-Money Options at
December 31, 1999" are based on the initial public offering price of $13.00,
without taking into account any taxes that may be payable in connection with
the transaction, multiplied by the number of shares underlying the option, less
the exercise price payable for these shares.

[Enlarge/Download Table]

Number of
Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
December 31, 1999(1) December 31, 1999(1)
------------------------- -------------------------
Shares
Acquired Value
on Exercise Realized Exercisable/ Exercisable/ Exercisable/ Exercisable/
Name (#) ($) Vested Unvested Vested Unvested
---- ----------- -------- ------------ ------------ ------------ ------------

George A. Scangos, Ph.D. -- -- 196,094 666,406 2,496,277 8,244,848
Geoffrey Duyk, M.D.,
Ph.D................... -- -- 123,047 420,703 1,566,388 5,196,549
Lloyd M. Kunimoto....... -- -- -- 262,500 -- 3,301,875
Glen Y. Sato............ 62,500 58,125 -- 181,250 -- 2,283,750
Lynne Zydowsky, Ph.D.... 42,263 30,743 -- 96,487 -- 1,224,744

--------
(1) All options are exercisable upon grant but are subject to a right of
repurchase by Exelixis until vested.

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Employee Benefit Plans

2000 Equity Incentive Plan

We adopted our 2000 Equity Incentive Plan in January 2000 to replace the
1997 Equity Incentive Plan.

Administration. The plan is administered by our board of directors, or a
committee appointed by the board, which determines recipients and types of
stock awards to be issued, including number of shares under the stock award and
the exercisability of the stock award, and also has the power to construe,
interpret and amend the incentive plan.

Share Reserve. We have reserved a total of 3,000,000 shares of our common
stock for issuance under the incentive plan. On the last day of each of our
fiscal years for ten years, starting in 2000, the share reserve will
automatically be increased by a number of shares equal to the greater of:

. 5% of our outstanding shares on a fully-diluted basis; or

. that number of shares subject to stock awards granted under the
incentive plan during the prior 12-month period.

The automatic increase is subject to reduction by the board, and share reserve
increases for incentive stock options may not exceed an aggregate of 30,000,000
shares over the term of the plan. If the recipient of a stock award does not
purchase the shares subject to his or her stock award before the stock award
expires or otherwise terminates, the shares that are not purchased will again
become available for issuance under the incentive plan. Likewise, if the
recipient of a stock award terminates his or her service to us, any unvested
shares that we repurchase will again become available for issuance under the
incentive plan for all awards other than incentive stock options.

Eligibility. The board may grant incentive stock options that qualify under
Section 422 of the Internal Revenue Code to our employees and to the employees
of our affiliates. The board also may grant nonstatutory stock options, stock
bonuses and restricted stock purchase awards to our employees, directors and
consultants as well as to the employees, directors and consultants of our
affiliates.

Under certain conditions the board may grant an incentive stock option to a
person who owns or is deemed to own stock possessing more than 10% of our total
combined voting power or the total combined voting power of an affiliate of
ours. In such a case, the exercise price of any such options must be at least
110% of the fair market value of the stock on the grant date, and the option
term must be five years or less.

Option Terms. The board may grant incentive stock options with an exercise
price of 100% or more of the fair market value of a share of our common stock
on the grant date, but it has the discretion to set a lower exercise price for
nonstatutory stock options. If the value of our shares declines thereafter, the
board may offer optionholders the opportunity to replace their outstanding
higher-priced options with new lower-priced options.

The maximum option term is ten years. Subject to this limitation, the board
may provide for exercise periods of any length with respect to individual
option grants. An option generally terminates three months after the
optionholder's service to us or one of our affiliates terminates. If this
termination is due to the optionholder's disability, the exercise period
generally is extended to 12 months. If termination is due to the optionholder's
death or if the optionholder dies within three months of the date on which his
or her service terminates, the exercise period generally is extended to 18
months following the optionholder's death.

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The board may provide for the transferability of nonstatutory stock options
but not incentive stock options. However, the optionholder may designate a
beneficiary to exercise either type of option in the event of the
optionholder's death. If the optionholder does not designate a beneficiary, the
optionholder's option rights will pass by his or her will or by the laws of
descent and distribution.

Terms of Other Stock Awards. The board determines the purchase price of
other stock awards. The board may award stock bonuses in consideration of past
services without a purchase payment. Shares that we sell or award under our
incentive plan may, but need not, be restricted and subject to a repurchase
option in our favor in accordance with a vesting schedule that the board
determines. The board, however, may accelerate the vesting of the restricted
stock.

Other Provisions. Transactions that do not involve our receipt of
consideration, including a merger, consolidation, reorganization, stock
dividend and stock split, may trigger a change in the class and number of
shares subject to the incentive plan and to outstanding awards. In that event,
the board will appropriately adjust the incentive plan as to the class and the
maximum number of shares subject to the incentive plan and the cap on the
number of shares available for incentive stock options. It will also adjust
outstanding awards as to the class, number and price of shares subject to such
awards.

Effect of a Merger on Stock Awards. If we dissolve or liquidate, then our
outstanding stock awards will terminate immediately prior to such event.
However, we treat outstanding stock awards differently in the following change
in control situations:

. a sale, lease or other disposition of all or substantially all of our
assets;

. a merger or consolidation in which we are not the surviving corporation;

. a reverse merger in which we are the surviving corporation but the
shares of our common stock outstanding immediately preceding the merger
are converted by virtue of the merger into other property; and

. an acquisition of the beneficial ownership of our securities
representing at least 50% of the combined voting power entitled to vote
in the election of our directors.

In these situations, any surviving entity may either assume or replace all
outstanding awards under the incentive plan. Otherwise, the vesting and
exercisability of outstanding awards will accelerate.

If a participant's service is either involuntarily terminated without cause
or voluntarily terminated for good reason within the period of time beginning
one month before and ending 13 months after a change in control, then the
vesting of an award (and, if applicable, the exercisability of the award) will
accelerate by one year.

Stock Awards Granted. As of the date of this prospectus, we have issued no
options under the incentive plan, and all 3,000,000 shares remained available
for future grants. As of the date of this prospectus, the board had not granted
any stock bonuses or restricted stock under the incentive plan.

Plan Termination. The incentive plan will terminate in 2010 unless the board
terminates it sooner.

1997 Equity Incentive Plan and 1994 Employee, Director and Consultant Stock
Plan

Our 1997 Equity Incentive Plan was adopted in September 1997 and terminated
for purposes of new option grants in January 2000. Our 1994 Employee, Director
and Consultant Stock Plan was adopted in January 1995 and terminated for
purposes of new option grants in September 1997. Each of the plans remains in
effect as to outstanding stock options granted under that plan.

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Each of the 1997 plan and the 1994 plan provided for the grant of incentive
stock options to employees and nonstatutory stock options to employees,
directors and consultants of Exelixis and its affiliates. The plans also
provided for the outright sale of stock to employees, directors and
consultants. Each of these plans is administered by the board of directors, or
a committee appointed by the board, which determined recipients and types of
stock awards to be issued, including the number of shares under the stock award
and the exercisability of the stock award, and also has the power to construe,
interpret and amend the plan.

Prior Option Grants. As of December 31, 1999, under the 1997 Equity
Incentive Plan and 1994 Employee, Director and Consultant Stock Plan, options
to purchase 4,504,027 shares of common stock were outstanding under these
plans, 375,000 of which were granted subject to stockholder approval of an
increase in the available share reserve, and options to purchase 2,353,889
shares of common stock had been exercised.

Effect of a Merger on Options. If we dissolve or liquidate or have a change
of control transaction, options outstanding under the 1997 plan and the 1994
plan will be treated in the same manner as options outstanding under the 2000
Equity Incentive Plan.

2000 Non-Employee Directors' Stock Option Plan

We adopted the 2000 Non-Employee Directors' Stock Option Plan in January
2000. The directors' plan provides for the automatic grant of options to
purchase shares of our common stock to our non-employee directors.

Administration. The board of directors administers the directors' plan
unless it delegates administration to a committee. The board has the authority
to construe, interpret and amend the directors' plan but the directors' plan
specifies the essential terms of the options, including recipients, grant
dates, the number of shares in each option and price per share.

Share Reserve. We have reserved a total of 500,000 shares of our common
stock for issuance under the directors' plan. On the last day of each of our
fiscal years for ten years, starting in 2000, the share reserve will
automatically be increased by a number of shares equal to the greater of:

. 0.75% of our outstanding shares on a fully-diluted basis; or

. that number of shares subject to options granted under the directors'
plan during the prior 12-month period.

The automatic increase is subject to reduction by the board. If an optionholder
does not purchase the shares subject to his or her option before the option
expires or otherwise terminates, the shares that are not purchased will again
become available for issuance under the directors' plan. Likewise, if an
optionholder terminates his or her service to us, any unvested shares that we
repurchase will again become available for issuance under the directors' plan

Eligibility. We will automatically issue options to our non-employee
directors under the directors' plan as follows:

. Each person who is an non-employee director on the effective date of the
closing of this offering or who is first elected or appointed thereafter
as a non-employee director will automatically receive an initial grant
for 25,000 shares. The initial grant is exercisable immediately but will
vest at the rate of 25% of the shares on the first anniversary of the
grant date and monthly thereafter over the next three years.

. In addition, on the day after each of our annual meetings of the
stockholders each non-employee director will automatically receive an
annual grant for 5,000 shares. This annual

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grant is exercisable immediately but will vest monthly over the following
year. If the non-employee director is appointed to the board after the
annual meeting, the annual grant will be pro rated.

As long as the optionholder continues to serve with us or with an affiliate
of ours, whether in the capacity of a director, an employee or a consultant,
the option will continue to vest and be exercisable during its term. When the
optionholder's service terminates, we will have the right to repurchase any
unvested shares at the original exercise price, without interest.

Option Terms. Options have an exercise price equal to 100% of the fair
market value of our common stock on the grant date. The option term is ten
years but terminates three months after the optionholder's service terminates.
If this termination is due to the optionholder's disability, the post-
termination exercise period is extended to 12 months. If termination is due to
the optionholder's death or if the optionholder dies within three months of the
date on which his or her service terminates, the post-termination exercise
period is extended to 18 months following death.

The optionholder may transfer the option by gift to immediate family members
or for estate-planning purposes. The optionholder may also designate a
beneficiary to exercise the option in the event of the optionholder's death. If
the optionholder does not designate a beneficiary, the option exercise rights
will pass by the optionholder's will or by the laws of descent and
distribution.

Other Provisions. Transactions that do not involve our receipt of
consideration, including a merger, consolidation, reorganization, stock
dividend and stock split, may trigger a change in the class and number of
shares subject to the directors' plan and to outstanding options. In that
event, the board will appropriately adjust the directors' plan as to the class
and the maximum number of shares subject to the directors' plan and the
automatic option grants. It will also adjust outstanding options as to the
class, number and price of shares subject to such options.

Effect of a Merger on Options. If we dissolve or liquidate, outstanding
options will terminate immediately prior to such event. However, we treat
outstanding options differently in the following situations:

. a sale, lease or other disposition of all or substantially all of our
assets;

. a merger or consolidation in which we are not the surviving corporation;

. an acquisition of the beneficial ownership of our securities
representing at least 50% of the combined voting power entitled to vote
in the election of our directors.

In these situations, any surviving entity will either assume or replace all
outstanding options under the directors' plan. Otherwise, the vesting of the
options will accelerate.

Options Issued. The directors' plan will not be effective until the
effective date of the closing of this offering. Therefore, we have not issued
any options under the directors' plan.

Plan Termination. The directors' plan will terminate in 2010 unless the
board terminates it sooner.

2000 Employee Stock Purchase Plan

Our board adopted the 2000 Employee Stock Purchase Plan in January 2000.

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Administration. The board administers the purchase plan unless it delegates
administration to a committee. The board has the authority to construe,
interpret and amend the purchase plan as well as to determine the terms of
rights granted under the purchase plan.

Share Reserve. We authorized the issuance of 300,000 shares of our common
stock pursuant to purchase rights granted to eligible employees under the
purchase plan. On the last day of each of our fiscal years for ten years,
starting in 2000, the share reserve will automatically be increased by a number
of shares equal to the greater of:

. 0.75% of our outstanding shares on a fully-diluted basis; or

. that number of shares subject to stock awards granted under the
incentive plan during the prior 12-month period.

The automatic increase is subject to reduction by the board, and the share
reserve may not increase by more than an aggregate of 1.5 million shares over
the ten-year period.

Eligibility. The purchase plan is intended to qualify as an employee stock
purchase plan within the meaning of Section 423 of the Internal Revenue Code.
The purchase plan provides a means by which eligible employees may purchase our
common stock through payroll deductions. We implement the purchase plan by
offering purchase rights to eligible employees. Generally, all of our full-time
employees who have been employed for at least ten days may participate in
offerings under the purchase plan. However, no employee may participate in the
purchase plan if immediately after we grant the employee a purchase right, such
employee would have voting power over 5% or more of our outstanding capital
stock.

Offerings. The board has the authority to set the terms of an offering. It
may specify offerings of up to 27 months where common stock is purchased for
accounts of participating employees at a price per share equal to the lower of:

. 85% of the fair market value of a share on the first day of the
offering; or

. 85% of the fair market value of a share on the purchase date.

The first offering will begin on the effective date of the closing of this
offering. The fair market value of the shares will be the initial public
offering price. Thereafter, the fair market value will be the closing sales
price (rounded up where necessary to the nearest whole cent) for our shares (or
the closing bid, if no sales were reported) as quoted on the Nasdaq National
Market on the last trading day prior to the relevant determination date, as
reported in The Wall Street Journal.

The board may provide that employees who become eligible to participate
after an offering period begins may nevertheless enroll in the offering. These
employees will purchase our stock at the lower of:

. 85% of the fair market value of a share on the day they began
participating in the purchase plan; or

. 85% of the fair market value of a share on the purchase date.

The board has determined that participating employees may authorize payroll
deductions of up to 15% of their compensation for the purchase of stock under
the purchase plan. These employees may end their participation in the offering
at any time up to ten days before a purchase date. Their participation ends
automatically on termination of their employment.

Other Provisions. A participant's right to purchase our stock under our
purchase plan, plus any other purchase plans established by us or by our
affiliates, is limited. An employee may not accrue

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the right to purchase stock at a rate of more than $25,000 of the fair market
value of our stock for each calendar year in which the purchase right is
outstanding. We determine the fair market value of our stock, for the purpose
of this limitation, as of the first day of the offering.

Upon a change in control, the board may provide that the successor
corporation will either assume or replace outstanding purchase rights.
Alternatively, the board may shorten the ongoing offering period and provide
that our stock will be purchased for the participants immediately before the
change in control.

Shares Issued. As of the date of this prospectus, no shares of common stock
had been issued under the purchase plan.

Plan Termination. The purchase plan will terminated in 2010. Prior to that
time, the board may terminate the purchase plan at any time after the end of an
offering.

401(k) Plan

All of our employees generally are eligible to participate in our 401(k)
Retirement Plan. Pursuant to the 401(k) Plan, employees may elect to reduce
their current compensation by up to the lesser of 20% of their annual
compensation or the statutorily prescribed annual limit allowable under
Internal Revenue Service Regulations and to have the amount of such reduction
contributed to the 401(k) Plan. The 401(k) Plan permits us, but does not
require us, to make additional matching contributions on behalf of all
participants in the 401(k) Plan. We have not made any contributions to the
401(k) Plan. The 401(k) Plan is intended to qualify under Section 401(k) of the
Code so that contributions to the 401(k) Plan by employees or by Exelixis, and
the investment earnings thereon, will not be taxable to employees until
withdrawn from the 401(k) Plan, and our contributions, if any, will be
deductible by us when made.

Limitations of Liability and Indemnification Matters

In connection with the consummation of this offering, we will adopt and file
an amended and restated certificate of incorporation and restated bylaws. As
permitted by Delaware law, our amended and restated certificate of
incorporation provides that no director will be personally liable to us or our
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability for:

. any breach of duty of loyalty to us or our stockholders;

. acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;

. unlawful payment of dividends or unlawful stock repurchases or
redemptions; or

. any transaction from which the director derived an improper personal
benefit.

Our amended and restated bylaws provide that we shall indemnify our
directors and executive officers and may indemnify our other officers and
employees and other agents to the fullest extent permitted by law. We believe
that indemnification under our amended and restated bylaws covers at least
negligence and gross negligence on the part of indemnified parties. Our amended
and restated bylaws also permit us to secure insurance on behalf of any
officer, director, employee or other agent for any liability arising out of his
or her actions in such capacity, regardless of whether the amended and restated
bylaws would permit indemnification.

We have entered into agreements to indemnify our directors and executive
officers, in addition to the indemnification provided for in our amended and
restated bylaws. These agreements, among other things, indemnify our directors
and executive officers for certain expenses, including attorneys'

424B4 58th Page of 110 TOC 1st Previous Next ↓Bottom Just 58th
fees, judgments, fines and settlement amounts incurred by any such person in
any action or proceeding, including any action by us, arising out of such
person's services as a director or executive officer with respect to Exelixis,
any of our subsidiaries or any other company or enterprise to which the person
provides services at our request. We believe that these provisions and
agreements are necessary to attract and retain qualified persons as directors
and executive officers.

Change in Control Arrangements and Employment Agreements

At the time of commencement of employment, our employees generally sign
offer letters specifying basic terms and conditions of employment. In general,
our employees are not subject to written employment agreements. Each officer
and employee has entered into a standard form agreement with respect to
confidential information and invention assignment that provides that the
employee will not disclose any confidential information of Exelixis received
during the course of employment and that, with some exceptions, the employee
will assign to Exelixis any and all inventions conceived or developed during
the course of employment.

In September 1996, we entered into an agreement with George Scangos in
connection with his appointment as President and Chief Executive Officer of
Exelixis. The agreement provides that Dr. Scangos' term of employment will be
renewed automatically each year unless either party provides written notice of
its intention not to renew. In the event that Dr. Scangos' employment is
terminated without cause, he may receive up to six months base salary and
bonus, together with all benefits. The agreement also provides that in the
event of a merger or sale of more than 50% of Exelixis' assets, Dr. Scangos'
unvested stock options shall automatically accelerate and vest in full.

In April 1997, we entered into an agreement with Geoffrey Duyk in connection
with his appointment as Chief Scientific Officer and Senior Vice President of
Research and Development. The agreement provides that Dr. Duyk's term of
employment will be renewed automatically each year unless either party provides
written notice of its intention not to renew. In the event that Dr. Duyk's
employment is terminated without cause, he may receive up to six months base
salary and any declared but unpaid bonus as of the date of termination,
together with all benefits. The agreement also provides that in the event of a
change of control, Dr. Duyk's unvested stock options shall automatically
accelerate and vest in full.

In October 1999, we entered into an agreement with Glen Sato in connection
with his appointment as Chief Financial Officer and Vice President of Legal
Affairs. The agreement provides that in the event that Mr. Sato's employment is
terminated without cause, he will receive six months base salary and benefits.

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CERTAIN TRANSACTIONS

Stock option grants to our executive officers and directors are described in
this prospectus under the headings "Management--Director Compensation," and
"Management--Executive Compensation."

The following executive officers, directors and holders of more than five
percent of our voting securities purchased securities in the amounts as of the
dates shown below since January 1, 1997.

[Download Table]

Shares of Preferred
Stock (1)
Common -------------------
Stock Series C Series D
--------- --------- ---------

Executive Officers and Directors
George A. Scangos................................. 1,977,750 -- --
Geoffrey Duyk..................................... 1,049,999 -- --
Lloyd Kunimoto.................................... 262,500 -- --
Michael Morrissey................................. 82,500 -- --
Michael Rusnak.................................... 56,250 -- --
Glen Y. Sato...................................... 243,749 -- --
Stelios Papadopoulos.............................. 128,571 37,500 --
Charles Cohen..................................... 90,000 -- --
Peter Stadler..................................... 37,500 -- --
Lance Willsey..................................... -- 37,500 --

5% Stockholders
Atlas Venture Fund II, L.P. (2)................... -- 200,022 101,064
Atlas Venture Europe Fund B.V. (2)................ -- 99,978 50,532
Pharmacia & Upjohn AB............................. -- -- 1,875,000
Oxford Bioscience Partners, L.P. (3).............. -- 126,225 63,602
Oxford Bioscience Partners (Bermuda) L.P.(3)...... -- 35,025 17,648
Advent Partners L.P.(4)........................... -- 5,048 2,884
Advent Performance Materials, L.P.(4)............. -- 22,651 12,944
Adwest L.P.(4).................................... -- 12,944 7,396
Rovent II L.P.(4)................................. -- 90,606 51,774
Hambrecht & Quist Healthcare Investors............ -- 112,500
Hambrecht & Quist Life Science Investors.......... -- 75,000
Price per share................................... $0.001 to $ 2.67 $ 4.00
$ 1.33
Date(s) of purchase............................... 4/97 to 4/97 8/98 to
3/00 2/99

--------
(1) The Series A, Series B, Series C and Series D preferred stock will all
convert into shares of common stock on a 1-for-0.75 basis upon the closing
of this offering.
(2) Jean-Francois Formela, one of our directors, is a general partner of Atlas
Venture.
(3) Edmund Olivier, one of our directors, is a partner of Oxford Bioscience
Partners.
(4) Jason S. Fisherman, one of our directors, is a partner of Advent
International Corporation.

Fourth Amended and Restated Securityholders' Agreement. In February 1999,
Exelixis and the Series A, Series B, Series C and Series D preferred
stockholders entered into the fourth amended and restated securityholders'
agreement. The agreement provides that in the event of an underwritten public
offering such as this offering, Exelixis will use its best efforts to cause the
underwriters to reserve up to 10% of the shares included in the public offering
for purchase by individuals who hold Series C preferred stock and do not hold
shares of any other class of our capital stock. If these Series C stockholders
are able to participate in such public offering, they may purchase shares of
our common stock in the public offering pro rata to their holdings of Series C
preferred stock. This provision derives from agreements entered into in April
1997 in connection with the issuance of the Series C preferred stock.

424B4 60th Page of 110 TOC 1st Previous Next ↓Bottom Just 60th
Executive Employment Agreements. We have entered into employment agreements
with George Scangos, President and Chief Executive Officer, Geoffrey Duyk,
Chief Scientific Officer and Senior Vice President of Research and Development,
and Glen Sato, Chief Financial Officer and Vice President of Legal Affairs. See
"Management--Change in Control Arrangements and Employment Agreements."

Indemnification Agreements. We intend to enter into indemnification
agreements with our directors and certain officers for the indemnification of
and advancement of expenses to these persons to the fullest extent permitted by
law. We also intend to execute these agreements with our future directors and
officers. See "Management--Limitations of Liability and Indemnification
Matters."

Indebtedness of Management. In January 1998, we entered into a loan
agreement with George Scangos, President, Chief Executive Officer and a
director, in the amount of $150,000. The loan has an interest rate of 6.13% and
matures on January 19, 2003. Pursuant to the terms of the loan agreement, the
loan may be forgiven under certain circumstances.

In January 1998, we entered into a loan agreement with Geoffrey Duyk, Chief
Scientific Officer, Senior Vice President of Research and Development, and a
director, in the amount of $90,000. The loan has an interest rate of 6.13% and
matures on January 16, 2003. Pursuant to the terms of the loan agreement, the
loan may be forgiven under certain circumstances.

In March 1999, we entered into a loan agreement with Lynne Zydowsky, former
Vice President, Pharmaceutical Business Development, in the amount of $150,000.
The loan has an interest rate of 5.5% and matures on the earlier of 181 days
after the closing of our initial public offering or upon the financing of a new
business venture by Dr. Zydowsky.

Artemis. In 1998, we purchased a minority interest in Artemis
Pharmaceuticals GmbH, a genetics company located in Cologne, Germany, focusing
on the study of vertebrate model genetic systems such as mice and zebrafish. As
of December 31, 1999, we own 24% of the outstanding equity of Artemis, and,
pursuant to a shareholders' agreement, we have appointed three of the five
members of the Artemis shareholders' governing board. We have agreed in
principle with Artemis, and Artemis has solicited shareholder consent, to amend
the shareholders' agreement to increase the size of the Artemis shareholders'
governing board to six members, of which we will have the right to appoint
three members.

In September 1998, we entered into a five-year cooperation agreement with
Artemis under which we agreed to share technology and business opportunities as
they arise. While either party may terminate this agreement at any time, we
believe that it provides a significant opportunity to access complementary
genetic research. In addition to developing zebrafish and mouse model system
technology, Artemis is studying cartilage biology, angiogenesis and
cardiovascular biology. We and Artemis have developed an integrated research
approach in the field of angiogenesis and are jointly marketing this
capability.

We believe that all of the transactions set forth above were made on terms
no less favorable to us than could have been obtained from unaffiliated third
parties. All future transactions, including loans, between us and our officers,
directors, principal stockholders and their affiliates will be approved by a
majority of the board of directors, including a majority of the independent and
disinterested directors, and will continue to be on terms no less favorable to
us than could be obtained from unaffiliated third parties.

424B4 61st Page of 110 TOC 1st Previous Next ↓Bottom Just 61st
PRINCIPAL STOCKHOLDERS

The following table sets forth summary information regarding the beneficial
ownership of our outstanding common stock as of March 31, 2000 (assuming the
reverse stock split and conversion of all outstanding shares of preferred stock
into common stock upon the closing of this offering and as adjusted to reflect
the sale of the shares offered by this prospectus) by:

. each of the named executive officers;

. each of our directors;

. each person or group who is known by us to beneficially own more than 5%
of our common stock; and

. all of our current directors and executive officers as a group.

Beneficial ownership of shares is determined under the rules of the
Securities and Exchange Commission and generally includes any shares over which
a person exercises sole or shared voting or investment power. Except as
indicated by footnote, and subject to applicable community property laws, each
person identified in the table possesses sole voting and investment power with
respect to all shares of common stock held by them. Shares of common stock
subject to options currently exercisable or exercisable within 60 days of March
31, 2000 as of that date are deemed outstanding for calculating the percentage
of outstanding shares of the person holding these options, but are not deemed
outstanding for calculating the percentage of any other person. Applicable
percentage ownership in the following table is based on 33,665,662 shares of
common stock outstanding as of March 31, 2000, after giving effect to the
conversion of all outstanding shares of preferred stock into common stock upon
the closing of this offering, and 42,765,662 shares of common stock outstanding
immediately following the completion of this offering. Unless otherwise
indicated, the address of each individual listed in the table is in care of
Exelixis, Inc., 260 Littlefield Avenue, South San Francisco, California 94080.

[Download Table]

Percentage
Beneficially Owned
----------------------
Name and Address of Number of Shares Before After
Beneficially Owned Beneficially Owned Offering Offering
------------------- ------------------ --------- ---------

Executive Officers and Directors
George A. Scangos, Ph.D(1)........ 1,977,750 5.9% 4.6
Geoffrey Duyk, M.D., Ph.D(2)...... 1,218,749 3.6 2.8
Lloyd M. Kunimoto(3).............. 262,500 * *
Glen Y. Sato(4)................... 243,749 * *
Lynne Zydowsky, Ph.D. ............ 109,762 * *
Stelios Papadopoulos, Ph.D........ 348,213 1.0 *
Charles Cohen, Ph.D.(5)........... 355,713 1.1 *
Jurgen Drews, M.D.(6)............. 1,250,000 3.7 3.0
Jason S. Fisherman, M.D.(7)....... 1,730,997 5.1 4.1
Jean-Francois Formela, M.D.(8).... 4,023,736 12.0 9.4
Edmund Olivier de Vezin(9)........ 2,153,924 6.4 5.0
Lance Willsey, M.D................ 37,500 * *
Peter Stadler, Ph.D.(10).......... 225,000 * *
5% Stockholders
Atlas Venture(8).................. 4,023,736 12.0 9.4
Oxford Bioscience Partners(9)..... 2,153,924 6.4 5.0
Pharmacia & Upjohn AB(11)......... 1,875,000 5.6 4.4
Advent International Group(7) .... 1,730,997 5.1 4.1
Hambrecht & Quist Capital
Management, Inc.(12)............. 1,687,500 5.0 4.0
All directors and executive
officers as a group
(15 persons)(13)................. 14,076,343 41.3% 32.6%

-------
* Represents beneficial ownership of less than 1 percent.
(1) Includes 121,212 shares held by George A. Scangos, Trustee of The Leslie
S. Wilson Grantor Annuity Trust, 4,875 shares held by Clare Springs,
Trustee of The Jennifer Scangos Trust and 4,875 shares held by Clare
Springs, Trustee of The Katherine Scangos Trust. Includes 732,812 shares
that Exelixis has the right to repurchase within 60 days of March 31,
2000.

424B4 62nd Page of 110 TOC 1st Previous Next ↓Bottom Just 62nd
(2) Includes 17,137 shares held by Geoffrey M. Duyk and Ulrike Barbara Wolter,
Trustees of The Duyk 2000 Irrevocable Trust dated 2/21/00, 4,275 shares
held by Geoffrey M. Duyk and Ulrike Barbara Wolter, Trustees of The
Charles Duyk Trust dated 2/21/00, 22,500 shares held by Ulrike Barbara
Wolter, Trustee of The Geoffrey M. Duyk Irrevocable Trust dated 2/21/00
and 75,000 shares held by Geoffrey M. Duyk, Trustee of The Geoffrey M.
Duyk Annuity Trust dated 2/21/00. Also includes 168,750 shares Dr. Duyk
has the right to acquire pursuant to an option exercisable within 60 days
of March 31, 2000 of which Exelixis has the right to repurchase 543,750
shares within 60 days of March 31, 2000.
(3) Consists of 262,500 shares that Exelixis has the right to repurchase
within 60 days of March 31, 2000. Mr. Kunimoto has indicated an interest
to purchase 1,000 shares of common stock in this offering as part of a
directed shares program for certain directors, employees and friends of
Exelixis.
(4) Consists of 243,749 shares that Exelixis has the right to repurchase
within 60 days of March 31, 2000. Mr. Sato has indicated an interest to
purchase 2,500 shares of common stock in this offering as part of a
directed shares program for certain directors, employees and friends of
Exelixis.
(5) Includes 107,142 shares held by Creative BioMolecules, Inc. and 53,571
shares issuable upon exercise of a warrant held by Creative BioMolecules,
Inc. within 60 days of March 31, 2000. Dr. Cohen is a director of Creative
BioMolecules, Inc. and disclaims beneficial ownership of these shares.
Creative BioMolecules, Inc. is located at 101 Huntington Avenue, Suite
2400, Boston, MA 02199. Dr. Cohen has indicated an interest to purchase
5,000 shares of common stock in this offering as part of a directed shares
program for certain directors, employees and friends of Exelixis.
(6) Consists of 1,250,000 shares held by FEI Biomedicine Private Equity
Holding Inc., an investment company managed by International Biomedicine
Management Partners Inc. ("IBMP"). Dr. Drews is the Chairman of the Board
of IBMP and disclaims beneficial ownership of these shares except to the
extent of his pecuniary interest in these shares. IBMP is located at House
of Commerce, Aeschenplatz 7, Basel, Switzerland. Dr. Drews has indicated
an interest to purchase 1,000 shares of common stock in this offering as
part of a directed shares program for certain directors, employees and
friends of Exelixis.
(7) Includes 1,192,380 shares held by Rovent II L.P., 298,095 shares held by
Advent Performance Materials, L.P., 170,341 shares held by Adwest L.P.,
66,432 shares held by Advent Partners L.P. and 3,750 shares held by Advent
International Investors II, L.P. Advent International Corporation, the
venture capital firm that is the manager of the funds affiliated with
Advent International Group, exercises sole voting and investment power
with respect to all shares held by these funds. Dr. Fisherman is a partner
of Advent International Corporation and disclaims beneficial ownership of
these shares except for 17,053 shares that are indirectly beneficially
owned by Dr. Fisherman. Advent International Corporation is located at 75
State Street, Boston, MA 02109. Dr. Fisherman has indicated an interest to
purchase 1,000 shares of common stock in this offering as part of a
directed shares program for certain directors, employees and friends of
Exelixis.
(8) Consists of 2,682,763 shares held by Atlas Venture Fund II, L.P. and
1,340,973 shares held by Atlas Venture Europe Fund B.V. Atlas Venture Fund
II, L.P. and Atlas Venture Europe Fund B.V are part of the Atlas Venture,
a group of funds under common control. Dr. Formela is a general partner of
Atlas Venture. No general partner of Altas Venture is deemed to have
voting and investment power with respect to such shares and Dr. Formela
disclaims beneficial ownership of these shares. Atlas Venture is located
at 222 Berkeley Street, Suite 1950, Boston, MA 02116. Dr. Formela has
indicated an interest to purchase 5,000 shares of common stock in this
offering as part of a directed shares program for certain directors,
employees and friends of Exelixis.
(9) Consists of 1,473,102 shares held by Oxford Bioscience Partners, L.P.,
408,678 shares held by Oxford Bioscience Partners (Bermuda) L.P., 182,144
shares held by Oxford Bioscience Partners (Adjunct) L.P. and 90,000 shares
held by Oxford Bioscience Management Partners. Mr. Olivier is

424B4 63rd Page of 110 TOC 1st Previous Next ↓Bottom Just 63rd
a general partner of Oxford Bioscience Partners and disclaims beneficial
ownership of these shares except to the extent of his proportionate
partnership interest in these shares. Oxford Bioscience Partners is located
at 650 Town Center Drive, Suite 810, Costa Mesa, CA 92626.
(10) Includes 187,500 shares Dr. Stadler has the right to acquire pursuant to
an option exercisable within 60 days of March 31, 2000 of which Exelixis
has the right to repurchase 89,062 shares within 60 days of March 31,
2000.
(11) Pharmacia & Upjohn is entitled to additional shares of common stock by
virtue of an interest free loan of $7.5 million made to Exelixis in 1999
that is evidenced by a convertible promissory note. The promissory note
must be converted into shares of our common stock during the two-year
period following this offering at a price per share equal to 120% of the
initial public offering price, the time of such conversion prior to March
2002 to be determined by Pharmacia & Upjohn.
(12) Consists of 937,500 shares held by Hambrecht & Quist Healthcare Investors
and 750,000 held by Hambrecht & Quist Life Science Investors, closed-end
registered investment companies for which Hambrecht & Quist Capital
Management, Inc. ("HQCM") is the investment adviser. HQCM is wholly owned
by Chase H&Q Group, which is owned by the Chase Manhattan Bank. HQCM is
located at 50 Rowes Wharf, Boston, MA 02110.
(13) Total number of shares includes 9,265,799 shares of common stock held by
entities affiliated with directors and executive officers, 409,821 shares
issuable upon the exercise of options and warrants within 60 days of March
31, 2000 and 2,010,623 shares that Exelixis has the right to repurchase
within 60 days of March 31, 2000. See footnotes 1 through 10 above.

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DESCRIPTION OF CAPITAL STOCK

Upon completion of this offering and the filing of our amended and restated
certificate of incorporation, our authorized capital stock will consist of
100,000,000 million shares of common stock, $0.001 par value, and 10,000,000
million shares of preferred stock, $0.001 par value.

Common Stock

As of March 31, 2000, there were 33,665,662 shares of common stock
outstanding that were held of record by approximately 365 stockholders after
giving effect to the reverse stock split and the conversion of our preferred
stock into common stock at a 1-to-0.75 ratio. There will be 42,765,662 shares
of common stock outstanding (assuming no exercise of the underwriters' over-
allotment option and no exercise of outstanding options) after giving effect to
the sale of the shares of common stock offered by this prospectus.

The holders of common stock are entitled to one vote per share on all
matters submitted to a vote of our stockholders and do not have cumulative
voting rights. Accordingly, holders of a majority of the shares of common stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Subject to preferences that may be applicable to any
preferred stock outstanding at the time, the holders of outstanding shares of
common stock are entitled to receive ratably any dividends out of assets
legally available therefor as our board of directors may from time to time
determine. Upon liquidation, dissolution or winding up of Exelixis, holders of
our common stock are entitled to share ratably in all assets remaining after
payment of liabilities and the liquidation preference of any then outstanding
shares of preferred stock. Holders of common stock have no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the common stock. All outstanding shares
of common stock are fully paid and nonassessable.

Preferred Stock

According to our amended and restated certificate of incorporation, our
board of directors will have the authority, without further action by the
stockholders, to issue up to 10,000,000 shares of preferred stock, in one or
more series. Our board shall determine the rights, preferences, privileges and
restrictions of the preferred stock, including dividend rights, conversion
rights, voting rights, terms of redemption, liquidation preferences, sinking
fund terms and the number of shares constituting any series or the designation
of any series. The issuance of preferred stock could diminish voting power of
holders of common stock, and the likelihood that holders of preferred stock
will receive dividend payments and payments upon liquidation may have the
effect of delaying, deferring or preventing a change in control of Exelixis,
which could depress the market price of our common stock. We have no present
plan to issue any shares of preferred stock.

Warrants

As of March 31, 2000, warrants to purchase 188,214 shares of Series A
preferred stock were outstanding at an exercise price of $0.70 per share. These
warrants were immediately exercisable upon issuance and expire upon the later
of July 20, 2005 or five years after completion of this offering. The warrants
contain provisions for the adjustment of the exercise price and the aggregate
number of shares that may be issued upon the exercise of the warrant if a stock
dividend, stock split, reorganization, reclassification or consolidation
occurs. Upon the closing of this offering, the warrants to purchase Series A
preferred stock will become exercisable for common stock at the rate of 0.75 of
a share of common stock for each share of preferred stock underlying the
warrants.

As of March 31, 2000, warrants to purchase 357,143 shares of Series B
preferred stock were outstanding at an exercise price of $0.85 per share. The
warrants expire upon the later of

424B4 65th Page of 110 TOC 1st Previous Next ↓Bottom Just 65th
January 24, 2006 or five years after completion of this offering. The warrants
contain provisions for the adjustment of the exercise price and the aggregate
number of shares that may be issued upon the exercise of the warrants if a
stock dividend, stock split, reorganization, reclassification or consolidation
occurs. Upon the closing of this offering, the warrants to purchase Series B
preferred stock will become exercisable for common stock at the rate of 0.75 of
a share of common stock for each share of preferred stock underlying the
warrants.

As of March 31, 2000, warrants to purchase a total of 224,196 shares of
common stock (post-reverse stock split) were outstanding. During 1995, we
issued warrants to purchase 69,642 shares of our common stock (post-reverse
stock split) at an exercise price of $0.93 per share to two stockholders.
During January 2000, one warrant to purchase 16,071 shares (post-reverse stock
split) was exercised. These warrants expire in January 2005. In September 1997,
we issued warrants to purchase 63,750 shares of our common stock (post-reverse
stock split) at an exercise price of $2.67 per share as part of an equipment
lease financing arrangement. These warrants expire upon the earlier of
September 25, 2007 or five years after completion of this offering. In May
1999, we issued warrants to purchase 112,500 shares of our common stock (post-
reverse stock split) at an exercise price of $4.00 per share in connection with
a building lease. During February 2000, two warrants to purchase 5,625 shares
of our common stock were exercised. These warrants expire five years after
completion of this offering. Each warrant contains provisions for the
adjustment of the exercise price and the aggregate number of shares that may be
issued upon the exercise of the warrants if a stock dividend, stock split,
reorganization, reclassification or consolidation occurs.

Registration Rights of Stockholders

Upon completion of this offering, holders of an aggregate of 22,877,656
shares of common stock and holders of warrants to purchase an aggregate of
409,017 shares of common stock will be entitled to rights to register these
shares under the Securities Act. These rights are provided under the Fourth
Amended and Restated Securityholders' Agreement, dated January 28, 1999, under
the Fourth Amended and Restated Registration Rights Agreement, dated February
26, 1999, and under agreements with similar registration rights. If we propose
to register any of our securities under the Securities Act, either for our own
account or for the account of others, the holders of these shares are entitled
to notice of the registration and are entitled to include, at our expense,
their shares of common stock in the registration and any related underwriting,
provided, among other conditions, that the underwriters may limit the number of
shares to be included in the registration and in some cases, including this
offering, exclude these shares entirely. In addition, the holders of these
shares may require us, at our expense and on not more than two occasions at any
time beginning six months from the date of the closing of the offerings, to
file a registration statement under the Securities Act with respect to their
shares of common stock, and we will be required to use our best efforts to
effect the registration. Further, the holders may require us at our expense to
register their shares on Form S-3 when this form becomes available.

Anti-Takeover Provisions of Delaware Law and Charter Provisions

In general, Section 203 of the Delaware General Corporation Law prohibits a
publicly-held Delaware corporation from engaging in any business combination
with any interested stockholder for a period of three years following the date
that the stockholder became an interested stockholder unless:

. prior to that date, our board of directors approved either the business
combination or the transaction that resulted in the stockholder becoming
an interested stockholder;

. upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding those shares owned by persons who
are directors and also officers, and by employee stock plans in which
shares held subject to the plan will be tendered in a tender or exchange
offer; or

424B4 66th Page of 110 TOC 1st Previous Next ↓Bottom Just 66th
. on or subsequent to that date, the business combination is approved by
our board of directors and is authorized at an annual or special meeting
of stockholders, and not by written consent, by the affirmative vote of
at least two-thirds of the outstanding voting stock not owned by the
interested stockholder.

Section 203 defines "business combination" to include:

. any merger or consolidation involving the corporation and the interested
stockholder;

. any sale, transfer, pledge or other disposition involving the interested
stockholder of 10% or more of the assets of the corporation;

. subject to exceptions, any transaction that results in the issuance or
transfer by the corporation of any stock of the corporation to the
interested stockholder; and

. the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.

In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by the entity or person.

Our amended and restated certificate of incorporation requires that upon
completion of the public offerings, any action required or permitted to be
taken by our stockholders must be effected at a duly called annual or special
meeting of stockholders and may not be effected by a consent in writing.
Additionally, our certificate of incorporation:

. substantially limits the use of cumulative voting in the election of
directors;

. provides that the authorized number of directors may be changed only by
resolution of our board of directors; and

. authorizes our board of directors to issue blank check preferred stock to
increase the amount of outstanding shares.

Our amended and restated bylaws provide that candidates for director may be
nominated only by our board of directors or by a stockholder who gives written
notice to us no later than 60 days prior nor earlier than 90 days prior to the
first anniversary of the last annual meeting of stockholders. Our board of
directors currently consists of ten members, who will be divided into three
classes. As a result, a portion of our board of directors will be elected each
year. Our board of directors may appoint new directors to fill vacancies or
newly created directorships. Our bylaws also limit who may call a special
meeting of stockholders.

Delaware law and these charter provisions may have the effect of deterring
hostile takeovers or delaying changes in control of our management, which
could depress the market price of our common stock.

Transfer Agent and Registrar

The transfer agent and registrar for the common stock is ChaseMellon
Shareholder Services.

National Market Listing

Our common stock has been approved for listing on the Nasdaq National
Market under the symbol "EXEL".

424B4 67th Page of 110 TOC 1st Previous Next ↓Bottom Just 67th
SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no public market for our common
stock. Future sales of substantial amounts of our common stock in the public
market could reduce prevailing market prices. As described below, no shares
currently outstanding will be available for sale immediately after this
offering because of contractual restrictions on resale. Sales of substantial
amounts of our common stock in the public market after the restrictions lapse
could adversely affect the prevailing market price and impair our ability to
raise equity capital in the future.

Upon completion of this offering, we will have outstanding 42,765,662 shares
of common stock. Of these shares, all of the shares sold in this offering will
be freely tradeable without restriction or further registration under the
Securities Act, unless these shares are purchased by our "affiliates," as that
term is defined in Rule 144 under the Securities Act. In general, affiliates
include officers, directors or 10% stockholders. The remaining 33,665,662
shares outstanding are "restricted securities" within the meaning of Rule 144.
These restricted securities may be sold in the public market only if registered
or if they qualify for an exemption from registration under Rules 144, 144(k)
or 701 promulgated under the Securities Act, which are summarized below. Sales
of the restricted securities in the public market, or the availability of these
shares for sale, could adversely affect the market price of our common stock.

All of our directors and officers and some of our stockholders and option
holders have entered into lock-up agreements in connection with this offering
generally providing that they will not offer, sell, contract to sell or grant
any option to purchase or otherwise dispose of our common stock or any
securities exercisable for or convertible into our common stock owned by them
for a period of 180 days after the date of this prospectus without the prior
written consent of Goldman, Sachs & Co.

Taking into account these lock-up agreements, and assuming Goldman, Sachs &
Co. does not release stockholders from their agreements, the following shares
will be eligible for sale in the public market at the following times:

. 625,884 shares will be eligible for sale upon completion of this
offering;

. 7,106 shares will be eligible for sale 90 days from completion of this
offering;

. 33,032,672 shares will be eligible for sale upon the expiration of lock-
up agreements, beginning 180 days after the date of this prospectus; and

. 1,594,481 shares will be eligible for sale upon the exercise of vested
options 180 days after the date of this prospectus.

In general, under Rule 144 as currently in effect, after expiration of the
lock-up agreements, a person who has beneficially owned restricted securities
for at least one year would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of:

. one percent of the number of shares of common stock then outstanding,
which will equal approximately 427,700 shares immediately after this
offering; or

. the average weekly trading volume of the common stock during the four
calendar weeks preceding the sale.

Sales under Rule 144 must comply with the requirements with respect to
manner of sale, notice and the availability of current public information about
us. Under Rule 144(k), a person who is not deemed to have been our affiliate at
any time during the three months preceding a sale, and who has beneficially
owned the shares proposed to be sold for at least two years, is entitled to
sell these shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.

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Rule 701, as currently in effect, permits our employees, officers and
directors or consultants who purchased shares under a written compensatory plan
or contract to resell these shares in reliance upon Rule 144 but without
compliance with specific restrictions. Commencing 90 days after the date of
this offering, Rule 701 permits affiliates to sell their Rule 701 shares under
Rule 144 without complying with the holding period requirement and permits non-
affiliates to sell these shares in reliance on Rule 144 without complying with
the holding period, public information, volume limitation or notice provisions
of Rule 144.

Registration Rights. Upon completion of this offering, the holders of
22,877,656 shares of our common stock and holders of warrants to purchase an
aggregate of 409,017 shares of our common stock, or their transferees, will be
entitled to rights with respect to the registration of their shares under the
Securities Act. Registration of their shares under the Securities Act would
result in these shares becoming freely tradable without restriction under the
Securities Act, except for shares purchased by affiliates, immediately upon the
effectiveness of this registration.

In addition, we intend to file, immediately after the effectiveness of this
offering, a registration statement on Form S-8 under the Securities Act
covering all shares of common stock reserved for issuance under our stock
option plans. Shares registered under this registration statement would be
available for sale in the open market in the future, providing there is
compliance with Rule 144 restrictions, in the case of affiliates, and the
contractual restrictions described above.

424B4 69th Page of 110 TOC 1st Previous Next ↓Bottom Just 69th
UNDERWRITING

Exelixis and the underwriters named below have entered into an underwriting
agreement with respect to the shares being offered. Subject to certain
conditions, each underwriter has severally agreed to purchase the number of
shares indicated in the following table. Goldman, Sachs & Co., Credit Suisse
First Boston Corporation and SG Cowen Securities Corporation are the
representatives of the underwriters:

[Download Table]

Number of
Underwriters Shares
------------ ---------

Goldman, Sachs & Co................................................ 3,640,000
Credit Suisse First Boston Corporation............................. 2,547,000
SG Cowen Securities Corporation.................................... 1,365,000
Bear, Stearns & Co. Inc............................................ 225,000
A.G. Edwards & Sons, Inc........................................... 225,000
ING Barings LLC.................................................... 225,000
Salomon Smith Barney Inc........................................... 225,000
The Chapman Company................................................ 81,000
Commerzbank Capital Markets Corporation............................ 81,000
Dain Rauscher Incorporated......................................... 81,000
First Union Securities, Inc........................................ 81,000
Janney Montgomery Scott LLC........................................ 81,000
Pacific Growth Equities, Inc....................................... 81,000
Stephens Inc....................................................... 81,000
Tucker Anthony Incorporated........................................ 81,000
---------
Total............................................................ 9,100,000
=========

If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional
1,365,000 shares from Exelixis to cover such sales. They may exercise that
option for 30 days. If any shares are purchased under this option, the
underwriters will severally purchase shares in approximately the same
proportion as set forth in the table above.

The following table shows the per share and total underwriting discounts and
commissions to be paid to the underwriters by Exelixis. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares.

The following table summarizes the compensation and expenses we will pay.

[Download Table]

No Full
Paid by Exelixis Exercise Exercise
---------------- ---------- ----------

Per share.............................................. $ 0.91 $ 0.91
Total.................................................. $8,281,000 $9,523,150

Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus.
Any shares sold by the underwriters to securities dealers may be sold at a
discount of up to $0.55 per share from the initial public offering price. Any
of these securities dealers may resell any shares purchased from the
underwriters to other brokers or dealers at a discount of up to $0.10 per share
from the initial public offering price. If all the shares are not sold at the
initial public offering price, the representatives may change the offering
price and the other selling terms.

Exelixis has agreed with the underwriters not to dispose of or hedge any of
their common stock or securities convertible into or exchangeable for shares of
common stock during the period from the date of this prospectus continuing
through the date 180 days after the date of this prospectus, except with the
prior written consent of the representatives. This restriction does not apply
to any existing employee benefit plans or securities issued in connection with
acquisition transactions, provided that

424B4 70th Page of 110 TOC 1st Previous Next ↓Bottom Just 70th
the recipients of such securities agree not to dispose of or hedge any of such
securities for the same 180 day period. See "Shares Eligible for Future Sale"
for a discussion of transfer restrictions.

At the request of Exelixis, the underwriters have reserved up to 637,000
shares of common stock for certain directors, employees and friends of
Exelixis. In addition, at the request of Exelixis and in accordance with
contractual rights granted in April 1997 to the holders of Exelixis Series C
preferred stock who do not hold shares of any other class of capital stock, the
underwriters have reserved for sale, at the initial public offering price, 10%
of the shares included in this offering for those individuals. There can be no
assurance that any of the reserved shares will be so purchased. The number of
shares available for sale to the general public in the offering will be reduced
to the extent these persons purchase any reserved shares. Any reserved shares
not so purchased will be offered to the general public on the same basis as the
other shares offered hereby.

Prior to this offering, there has been no public market for the common
stock. The initial public offering price for the common stock was negotiated
among Exelixis and the representatives of the underwriters. Among the factors
considered in determining the initial public offering price of the shares, in
addition to prevailing market conditions, were Exelixis' historical
performance, estimates of Exelixis' business potential and earnings prospects,
an assessment of Exelixis' management and the consideration of the above
factors in relation to market valuation of companies in related businesses.

Exelixis' common stock has been approved for quotation on the Nasdaq
National Market under the symbol "EXEL".

In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering.
Stabilizing transactions consist of bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the common stock while
the offering is in progress.

The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares
sold by or for the account of such underwriter in stabilizing or short covering
transactions.

These activities by the underwriters may stabilize, maintain or affect the
market price of the common stock. As a result, the price of the common stock
may be higher than the price that otherwise might exist in the open market. If
these activities are commenced, they may be discontinued by the underwriters at
any time. These transactions may be effected on The Nasdaq National Market, in
the over-the-counter market or otherwise.

A prospectus in electronic format may be made available on the web sites
maintained by one or more underwriters or securities dealers. The underwriters
may agree to allocate a number of shares to underwriters for sale to their
online brokerage account holders. Internet distributions will be allocated by
the lead managers to underwriters that may make Internet distributions on the
same basis as other allocations. In addition, shares may be sold by the
underwriters to securities dealers who resell shares to online brokerage
account holders.

The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.

Exelixis estimates that its share of the total expenses of the offering,
excluding underwriting discounts and commissions, will be approximately
$1,400,000.

Exelixis has agreed to indemnify the several underwriters against
liabilities, including liabilities under the Securities Act of 1933.

424B4 71st Page of 110 TOC 1st Previous Next ↓Bottom Just 71st
VALIDITY OF THE COMMON STOCK

The validity of the common stock offered hereby will be passed upon by our
counsel, Cooley Godward LLP, Palo Alto, California and for the underwriters by
Sullivan & Cromwell, Los Angeles, California.

EXPERTS

The consolidated financial statements of Exelixis, Inc. as of December 31,
1998 and 1999 and for each of the three years in the period ended December 31,
1999 included in this prospectus have been so included in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.

The financial statements of MetaXen, LLC as of December 31, 1997 and 1998
and for each of the two years in the period ended December 31, 1998 included in
this prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the common stock
offered in this offering. This prospectus does not contain all of the
information set forth in the registration statement. For further information
with respect to Exelixis, Inc. and the common stock offered in this offering,
we refer you to the registration statement and to the attached exhibits and
schedules. Statements made in this prospectus concerning the content of any
document referred to in this prospectus are not necessarily complete. With
respect to each such document filed as an exhibit to the registration
statement, we refer you to the exhibit for a more complete description of the
matter involved.

You may inspect our registration statement and the attached exhibits and
schedules without charge at the public reference facilities maintained by the
Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C.
20549 and at the regional offices of the Commission located at Seven World
Trade Center, 13th Floor, New York, New York 10048 and the Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. You may obtain copies
of all or any part of our registration statement from the Securities and
Exchange Commission upon payment of prescribed fees. You may also inspect
reports, proxy and information statements and other information regarding
registrants that file electronically with the Securities and Exchange
Commission without charge at the website maintained by the Securities and
Exchange Commission at www.sec.gov. Information contained on our website does
not constitute part of this prospectus.

Upon completion of the offering, we will be subject to the information
reporting requirements of the Securities Exchange Act of 1934, as amended, and
we will file reports, proxy statements and other information with the SEC.

We intend to furnish our stockholders with annual reports containing
financial statements audited by our independent public accountants and
quarterly reports for the first three fiscal quarters of each fiscal year
containing unaudited interim financial information. Our telephone number is
(650) 825-2200.

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EXELIXIS, INC.

INDEX TO FINANCIAL STATEMENTS

[Download Table]

Page
----
EXELIXIS, INC.

Report of Independent Accountants.......................................... F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Stockholders' Deficit........................................ F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7

METAXEN, LLC

Report of Independent Accountants.......................................... F-23
Balance Sheets............................................................. F-24
Statements of Operations................................................... F-25
Statements of Members' Equity (Deficit).................................... F-26
Statements of Cash Flows................................................... F-27
Notes to Financial Statements.............................................. F-28

EXELIXIS, INC.

Unaudited Pro Forma Combined Financial Statement........................... F-36
Unaudited Pro Forma Combined Statement of Operations....................... F-37
Notes to Unaudited Pro Forma Combined Financial Statement.................. F-38

F-1

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REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
Exelixis, Inc.

In our opinion, the accompanying balance sheets and the related statements
of operations, of stockholders' deficit and of cash flows present fairly, in
all material respects, the financial position of Exelixis, Inc. at December 31,
1998 and 1999, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.

/s/ PricewaterhouseCoopers LLP

San Jose, California
January 31, 2000, except as to the
fifth paragraph of Note 1 which
is as of April 7, 2000

F-2

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EXELIXIS, INC.

BALANCE SHEETS
(in thousands, except share and per share data)

[Download Table]

Pro Forma
Stockholders'
December 31, Equity
------------------ December 31,
1998 1999 1999
-------- -------- -------------
(unaudited)

ASSETS
Current assets:
Cash and cash equivalents.................. $ 2,058 $ 5,400
Short-term investments..................... -- 1,504
Other receivables.......................... 150 185
Other current assets....................... 423 943
-------- --------
Total current assets..................... 2,631 8,032
Property and equipment, net.................. 5,744 9,498
Related party receivables.................... 458 619
Other assets................................. 148 752
-------- --------
Total assets............................. $ 8,981 $ 18,901
======== ========
LIABILITIES, MANDATORILY REDEEMABLE
CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses...... $ 584 $ 3,648
Current portion of capital lease
obligations............................... 924 735
Current portion of notes payable........... 504 1,554
Deferred revenue........................... 437 2,767
-------- --------
Total current liabilities................ 2,449 8,704
Capital lease obligations.................... 973 229
Notes payable................................ 1,583 3,299
Convertible promissory note.................. -- 7,500
Other long-term liability.................... -- 104
Deferred revenue............................. 903 1,890
-------- --------
Total liabilities........................ 5,908 21,726
-------- --------
Commitments (Note 11)

Mandatorily redeemable convertible preferred
stock,
$0.001 par value; 35,000,000 shares
authorized; issued and outstanding:
27,623,110 shares in 1998, 30,503,571
shares in 1999 and none pro forma
(aggregate liquidation preference $46,780)
........................................... 38,138 46,780 $ --
-------- -------- --------
Stockholders' deficit:
Common stock, $0.001 par value; 50,000,000
shares authorized; issued and outstanding:
4,001,505 shares in 1998, 6,258,805 shares
in 1999 and 29,136,461 pro forma.......... 4 6 29
Class B common stock, $0.001 par value;
526,819 shares authorized; shares issued
and outstanding: 526,819 shares in 1998,
none in 1999 and pro forma................ 1 -- --
Additional paid-in-capital................. 2,979 19,523 66,280
Notes receivable from stockholders......... (240) (240) (240)
Deferred stock compensation................ (1,803) (14,167) (14,167)
Accumulated deficit........................ (36,006) (54,727) (54,727)
-------- -------- --------
Total stockholders' deficit.............. (35,065) (49,605) $ (2,825)
-------- -------- ========
Total liabilities, mandatorily redeemable
convertible preferred stock and
stockholders' deficit................... $ 8,981 $ 18,901
======== ========

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

F-3

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EXELIXIS, INC.

STATEMENTS OF OPERATIONS
(in thousands, except per share data)

[Download Table]

Year Ended December 31,
----------------------------
1997 1998 1999
-------- -------- --------

Revenues:
License........................................ $ -- $ 139 $ 1,046
Contract....................................... -- 2,133 9,464
-------- -------- --------
Total revenues............................... -- 2,272 10,510
-------- -------- --------

Operating expenses:
Research and development (including stock
compensation expense of $25, $557 and $2,241
in 1997, 1998 and 1999, respectively) ........ 8,223 12,096 21,653
General and administrative (including stock
compensation expense of $0, $168 and $1,281 in
1997, 1998 and 1999, respectively) ........... 3,743 5,472 7,624
-------- -------- --------
Total operating expenses..................... 11,966 17,568 29,277
-------- -------- --------
Loss from operations............................. (11,966) (15,296) (18,767)
Interest income.................................. 689 266 571
Interest expense................................. (219) (316) (525)
-------- -------- --------
Loss before equity in net loss of affiliated
company......................................... (11,496) (15,346) (18,721)
Equity in net loss of affiliated company......... -- (320) --
-------- -------- --------
Net loss......................................... $(11,496) $(15,666) $(18,721)
======== ======== ========
Net loss per share, basic and diluted............ $ (8.76) $ (3.83) $ (3.47)
Shares used in computing net loss per share,
basic and diluted............................... 1,312 4,088 5,389
Pro forma net loss per share, basic and diluted.. -- -- $ (0.67)
Shares used in computing pro forma net loss per
share........................................... -- -- 27,996

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

F-4

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EXELIXIS, INC.

STATEMENTS OF STOCKHOLDERS' DEFICIT
(in thousands, except share data)

[Enlarge/Download Table]

Class B Common Notes
Common Stock Stock Additional Receivable Deferred Total
---------------- ---------------- Paid-in from Stock Accumulated Stockholders'
Shares Amount Shares Amount Capital Stockholders Compensation Deficit Deficit
--------- ------ -------- ------ ---------- ------------ ------------ ----------- -------------

Balance at January 1,
1997.................. 1,239,912 $ 1 526,819 $ 1 $ 147 $ -- $ (59) $ (8,844) $ (8,754)
Exercise of stock
options............... 246,695 -- -- -- 7 -- -- -- 7
Deferred stock
compensation.......... -- -- -- -- 68 -- (68) -- --
Amortization of
deferred stock
compensation.......... -- -- -- -- -- -- 25 -- 25
Net loss.............. -- -- -- -- -- -- -- (11,496) (11,496)
--------- ----- -------- ----- -------- ------ --------- --------- ---------
Balance at
December 31, 1997..... 1,486,607 1 526,819 1 222 -- (102) (20,340) (20,218)
Exercise of stock
options............... 2,514,898 3 -- -- 331 -- -- -- 334
Issuance of notes to
stockholders for the
exercise of stock
options............... -- -- -- -- -- (240) -- -- (240)
Deferred stock
compensation.......... -- -- -- -- 2,426 -- (2,426) -- --
Amortization of
deferred stock
compensation.......... -- -- -- -- -- -- 725 -- 725
Net loss.............. -- -- -- -- -- -- -- (15,666) (15,666)
--------- ----- -------- ----- -------- ------ --------- --------- ---------
Balance at
December 31, 1998..... 4,001,505 4 526,819 1 2,979 (240) (1,803) (36,006) (35,065)
Exercise of stock
options............... 1,057,300 1 -- -- 267 -- -- -- 268
Issuance of stock
purchase warrants..... -- -- -- -- 391 -- -- -- 391
Deferred stock
compensation.......... -- -- -- -- 15,886 -- (15,886) -- --
Amortization of
deferred stock
compensation.......... -- -- -- -- -- -- 3,522 -- 3,522
Conversion of Class B
common stock into
common stock.......... 1,200,000 1 (526,819) (1) -- -- -- -- --
Net loss.............. -- -- -- -- -- -- -- (18,721) (18,721)
--------- ----- -------- ----- -------- ------ --------- --------- ---------
Balance at December
31, 1999.............. 6,258,805 $ 6 -- $ -- $ 19,523 $ (240) $ (14,167) $ (54,727) $ (49,605)
========= ===== ======== ===== ======== ====== ========= ========= =========

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

F-5

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EXELIXIS, INC.

STATEMENTS OF CASH FLOWS
(in thousands)

[Download Table]

Year Ended December 31,
----------------------------
1997 1998 1999
-------- -------- --------

Cash flows from operating activities:
Net loss....................................... $(11,496) $(15,666) $(18,721)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................ 731 1,529 2,166
Loss on disposal of property and equipment... 19 -- --
Amortization of deferred stock compensation.. 25 725 3,522
Changes in assets and liabilities:
Other receivables............................ (52) (98) (35)
Other current assets......................... 40 (397) (497)
Other assets................................. (103) (6) (81)
Related party receivables.................... (635) 177 (161)
Accounts payable and accrued expenses........ 706 (334) 3,064
Deferred revenue............................. -- 1,340 3,317
Other long-term liabilities.................. -- -- 104
-------- -------- --------
Net cash used in operating activities...... (10,765) (12,730) (7,322)
-------- -------- --------
Cash flows used in investing activities:
Acquisition, net............................... -- -- (870)
Purchases of property and equipment............ (3,973) (2,494) (4,100)
Proceeds from short-term investments........... -- 1,997 --
Purchase of short-term investments............. (1,997) -- (1,504)
-------- -------- --------
Net cash used in investing activities...... (5,970) (497) (6,474)
-------- -------- --------
Cash flows from financing activities:
Proceeds from sale of mandatorily redeemable
convertible preferred stock................... 15,703 6,333 8,642
Proceeds from exercise of stock options........ 7 94 268
Proceeds from capital lease financing.......... 1,838 179 --
Principal payments on capital lease
obligations................................... (461) (899) (933)
Proceeds from issuance of notes payable........ -- 2,315 10,066
Principal payments on note payable............. (720) (455) (905)
-------- -------- --------
Net cash provided by financing activities.. 16,367 7,567 17,138
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents..................................... (368) (5,660) 3,342
Cash and cash equivalents, at beginning of year.. 8,086 7,718 2,058
-------- -------- --------
Cash and cash equivalents, at end of year........ $ 7,718 $ 2,058 $ 5,400
======== ======== ========
Supplemental cash flow disclosure:
Property and equipment acquired under capital
leases........................................ $ 1,169 $ -- $ --
Cash paid for interest......................... 219 316 525

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

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EXELIXIS, INC.

NOTES TO FINANCIAL STATEMENTS

Note 1 The Company and a Summary of Significant Accounting Policies

The Company

Exelixis, Inc. ("Exelixis" or the "Company"), formerly Exelixis
Pharmaceuticals, Inc., is a model system genetics and comparative genomics
company that uses model systems to identify critical genes in disease pathways
and to determine functional relationships of genes and functionality of
potential targets for the pharmaceutical and agriculture industries. The
Company operates in one business segment in the U.S. and exited the development
stage during the year ended December 31, 1998.

Equity in Affiliated Companies

The Company reports its minority ownership interests in GenOptera LLC and
Artemis Pharmaceuticals, GmbH using the equity method of accounting.

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
disclosures 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.

Initial Public Offering

In January 2000, the Board of Directors authorized management of the Company
to file a registration statement with the Securities and Exchange Commission to
sell shares of its common stock to the public. If the initial public offering
is completed under the terms presently anticipated, all outstanding shares of
mandatorily redeemable convertible preferred stock will automatically convert
into 22,877,656 shares of common stock. Unaudited pro forma stockholders'
equity adjusted for the assumed conversion of the preferred stock is set forth
on the balance sheets.

In February 2000, the Company's Board of Directors authorized a 4-for-3
reverse split of its common stock. The reverse stock split became effective on
April 7, 2000. The accompanying financial statements have been adjusted
retroactively to reflect the stock split.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of cash equivalents and short-term
investments. The Company's cash equivalents and short-term investments are held
by three financial institutions. Deposits held with financial institutions may
exceed the amount of insurance provided on such deposits. The Company has not
experienced any losses on its deposits of cash and cash equivalents. See Note 3
for a discussion of notes and other receivables.

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EXELIXIS, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The Company
invests its excess cash in high grade short-term commercial paper and money
market funds which invest in U.S. Treasury securities that are subject to
minimal credit and market risk. The Company had $1.8 million and $1.0 million
of high grade short-term commercial paper which was included in cash and cash
equivalents at December 31, 1998 and 1999, respectively. These investments are
carried at cost, which approximates fair market value.

Short-term Investments

The Company classifies all short-term investments as available-for-sale in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." The
Company's short-term investments consist of high grade corporate securities
maturing one year or less from the date of purchase. Available-for-sale
securities are carried at fair value with unrealized gains or losses reported
in stockholders' deficit and included in other comprehensive loss. The cost of
securities sold is based on the specific identification method.

Property and Equipment

Property and equipment are recorded at cost and depreciated using the
straight-line method over their estimated useful lives, generally four to ten
years. Leasehold improvements are amortized over the shorter of the estimated
useful life or the remaining term of the lease. Equipment held under capital
leases is stated at the lower of the fair market value of the related asset or
the present value of the minimum lease payments and is amortized on a straight-
line basis over the shorter of the estimated useful life of the related asset
or the term of the lease. Repair and maintenance costs are charged to expense
as incurred.

Long-lived Assets

The Company accounts for its long-lived assets under SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of" ("SFAS 121"). Consistent with SFAS 121, the Company
identifies and records impairment losses on long-lived assets used in
operations when events and circumstances indicate that the assets might be
impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amounts of those assets. None of these events
have occurred with respect to the Company's long-lived assets, which consist
primarily of machinery and equipment and leasehold improvements.

Income Taxes

The Company accounts for income taxes under the liability method. Under this
method, deferred tax assets and liabilities are determined on the basis of the
difference between the income tax bases of assets and liabilities and their
respective financial reporting amounts at enacted tax rates in effect for the
periods in which the differences are expected to reverse. A valuation allowance
is established when necessary to reduce deferred tax assets to the amounts
expected to be realized.

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EXELIXIS, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

Fair Value of Financial Instruments

Carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents, accounts receivable and accounts payable,
approximate fair value due to their short maturities. Based on borrowing rates
currently available to the Company for loans with similar terms, the carrying
value of its debt obligations approximates fair value.

Revenue Recognition

License, research commitment and other non-refundable payments received in
connection with research collaboration agreements are deferred and recognized
on a straight-line basis over the relevant periods specified in the agreements,
generally the research term. The Company recognizes contract research revenues
as services are performed, pursuant to the terms of the agreements. Any amounts
received in advance of performance are recorded as deferred revenue.

Research and Development Expenses

Research and development costs are expensed as incurred and include costs
associated with research performed pursuant to collaborative agreements.
Research and development costs consist of direct and indirect internal costs
related to specific projects as well as fees paid to other entities which
conduct certain research activities on behalf of the Company. Research and
development expenses incurred in connection with collaborative agreements
approximated contract revenues for the years ended December 31, 1998 and 1999,
respectively.

Net Loss per Share

The Company computes net loss per share in accordance with SFAS No. 128,
"Earnings per Share" and SEC Staff Accounting Bulletin No. 98. Basic and
diluted net loss per share are computed by dividing the net loss for the period
by the weighted average number of shares of common stock outstanding during the
period. The calculation of diluted net loss per share excludes potential common
stock if their effect is antidilutive. Potential common stock consists of
common stock subject to repurchase, incremental common shares issuable upon the
exercise of stock options and warrants and shares issuable upon conversion of
the preferred stock and note payable.

The following table sets forth potential shares of common stock that are not
included in the diluted net loss per share because to do so would be anti-
dilutive for the periods indicated:

[Download Table]

Year Ended December 31,
--------------------------------
1997 1998 1999
---------- ---------- ----------

Preferred stock............................. 17,405,007 19,723,780 22,607,614
Options to purchase common stock............ 2,867,709 2,834,619 3,649,611
Common stock subject to repurchase.......... 326,392 1,653,066 994,657
Conversion of note payable.................. -- -- 1,718,750
Warrants.................................... 497,255 542,411 612,724
---------- ---------- ----------
21,096,363 24,753,876 29,583,356
========== ========== ==========

Pro Forma Net Loss per Share (Unaudited)

Pro forma net loss per share for the year ended December 31, 1999 was
computed using the weighted average number of shares of common stock
outstanding, including the pro forma effect of

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EXELIXIS, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

the automatic conversion of all of the Company's preferred stock into shares of
the Company's common stock effective upon the closing of the Company's initial
public offering as if such conversion occurred on January 1, 1999, or at the
date of original issuance, if later. The resulting pro forma adjustment
includes an increase in the weighted average shares used to compute pro forma
basic net loss per share for the year ended December 31, 1999. The calculation
of pro forma diluted net loss per share excludes potential common stock as
their effect would be anti-dilutive.

Stock-based Compensation

The Company has adopted the pro forma disclosure requirements of SFAS No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"). As permitted, the
Company continues to recognize employee stock-based compensation under the
intrinsic value method of accounting as prescribed by Accounting Principles
Board Opinion No. 25. The pro forma effects of applying SFAS 123 are shown in
Note 9 to the financial statements. The Company accounts for stock options
issued to non-employees in accordance with the provisions of SFAS 123 and EITF
96-18, "Accounting for Equity Instruments that are Issued to Other Than
Employees for Acquiring, or in Conjunction with, Selling Goods or Services."

Comprehensive Income

The Company adopted the provisions of SFAS No. 130, "Reporting Comprehensive
Income." This statement requires companies to classify items of other
comprehensive income by their nature in the financial statements and display
the accumulated balance of other comprehensive income separately from
accumulated deficit and additional paid-in capital in the equity section of the
balance sheet. For all periods presented, there were no material differences
between comprehensive loss and net loss.

Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivatives and Hedging Activities" ("SFAS No. 133").
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. In July 1999, the FASB issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of
the Effective Date of FASB Statement No. 133." SFAS No. 137 deferred the
effective date of SFAS No. 133 until fiscal years beginning after June 15,
2000. To date, the Company has not engaged in derivative or hedging activities.

Note 2 Research and Collaboration Agreements

Bayer

In May 1998, the Company entered into a six-year research collaboration
agreement with Bayer AG (including its affiliates, "Bayer") to identify novel
screening targets for the development of new pesticides for use in crop
protection. The Company will provide research services directed towards
identifying and investigating molecular targets in insects and nematodes that
may be useful in developing and commercializing pesticide products. The Company
received a $1.2 million license fee upon execution of the agreement which has
been deferred and will be recognized as revenue over the term of the agreement.
The Company will also receive annual research funding of approximately

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EXELIXIS, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

$2.8 million. The Company can earn additional payments under the agreement upon
the achievement of certain milestones. The Company can also earn royalties on
the future sale by Bayer of pesticide products incorporating compounds
developed under the agreement. The agreement also provides Bayer an exclusive
royalty free option to use certain technology developed under the agreement in
the development of fungicides and herbicides.

In December 1999, the Company significantly expanded its relationship with
Bayer by forming a joint venture in the form of a new limited liability
company, GenOptera LLC ("GenOptera"). Under the terms of the GenOptera
operating agreement, Bayer will provide 100% of the capital necessary to fund
the operations of GenOptera and will control the entity with a 60% ownership
interest. The Company will own the other 40% interest in GenOptera without
making any capital contribution and will report its investment in GenOptera
using the equity method of accounting. Bayer's initial capital contribution to
GenOptera will be $10 million in January 2000 and another $10 million on
January 1, 2001. Bayer will also contribute cash to GenOptera in amounts
necessary to fund its ongoing operating expenses.

On January 1, 2000, the Company, Bayer and GenOptera entered into an
exclusive eight-year research collaboration agreement which superceded the 1998
agreement discussed above. The Company will provide GenOptera with
significantly expanded research services focused on developing insecticides and
nematicides for crop protection. Under the terms of the collaboration
agreement, GenOptera will pay the Company a $10 million license fee and a $10
million research commitment fee. One-half of these fees was received in January
2000, with the remaining amounts to be received in January 2001. Additionally,
GenOptera will also pay the Company approximately $10 million in annual
research funding. The Company can earn additional payments under the
collaboration agreement upon the achievement of certain milestones. The Company
can also earn royalties on the future sale by Bayer of pesticide products
incorporating compounds developed under the agreement. The agreement also
provides Bayer an exclusive royalty-free option to use certain technology
developed under the agreement in the development of fungicides and herbicides.
To the extent permitted under the collaboration agreement, if the Company were
to develop and sell certain human health or agrochemical products which
incorporate compounds developed under the agreement, it would be obligated to
pay royalties to GenOptera. No such activities are expected for the foreseeable
future.

Revenues recognized under these agreements approximated $2.3 million and
$4.3 million during the years ended December 31, 1998 and 1999, respectively.

During 2000 and beyond, the Company will recognize license, contract
research and milestone payments received from GenOptera as revenues over the
term of the agreement and also record research and development expenses under
this collaboration, all as described in Note 1.

Artemis Pharmaceuticals

In June 1998, the Company purchased a minority interest in Artemis
Pharmaceuticals GmbH, a genetics company located in Cologne, Germany. The
Company also entered into certain non-exclusive license agreements providing
Artemis with access to the Company's technologies. In September 1998, the
Company entered into a five-year cooperation agreement with Artemis under which
the Company agreed to share technology and business opportunities as they
arise. While either party may terminate this agreement at any time, the Company
believes that it provides a

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EXELIXIS, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

significant opportunity to access complementary genetic research. The Company
has no financial obligation or current intention to fund Artemis. As of
December 31, 1999, the Company owns 24% of the outstanding equity of Artemis.
As a result of recording our portion of the 1998 Artemis loss, the carrying
value of this investment was zero at December 31, 1998 and 1999.

Pharmacia & Upjohn

In February 1999, the Company entered into a five-year research
collaboration agreement with Pharmacia & Upjohn AB ("Pharmacia & Upjohn")
focused on the identification of novel targets that may be useful in the
development of pharmaceutical products in the areas of Alzheimer's disease and
metabolic syndrome. Pharmacia & Upjohn agreed to pay the Company a $5 million
non-refundable license fee which is being recognized as revenue over the term
of the agreement. Under the terms of the agreement, as expanded and amended in
October 1999, the Company will also receive future research funding during the
first three years of the agreement. The Company can also earn additional
amounts under the agreement upon the achievement of certain milestones. The
Company can also earn royalties on the future sales by Pharmacia & Upjohn of
human therapeutic products incorporating compounds developed under the
agreement. Revenues recognized under this agreement approximated $5.6 million
during the year ended December 31, 1999.

In connection with entering into this agreement, Pharmacia & Upjohn also
purchased 2,500,000 shares of Series D Preferred Stock at $3.00 per share,
resulting in net cash proceeds to the Company of $7.5 million. Further,
Pharmacia & Upjohn loaned the Company $7.5 million in exchange for a non-
interest bearing convertible promissory note (see Note 6).

Bristol-Myers Squibb

In September 1999, the Company entered into a three-year research and
technology transfer agreement with Bristol-Myers Squibb Company ("Bristol-Myers
Squibb") to identify the mechanisms of action of compounds delivered to the
Company by Bristol-Myers Squibb. Bristol-Myers Squibb agreed to pay the Company
a $250,000 technology access fee which is being recognized as revenue over the
term of the agreement. Under the terms of the agreement, the Company will
receive research funding ranging from $1.3 million in the first year to as much
as $2.5 million in later years. The Company can also earn additional amounts
under the agreement upon the achievement of certain milestones. The Company can
also earn royalties on the future sale by Bristol-Myers Squibb of human
products incorporating compounds developed under the agreement. The agreement
also includes technology transfer and licensing terms which call for Bristol-
Myers Squibb and the Company to license and share certain core technologies in
genomics and lead optimization. Revenues recognized under this agreement
approximated $372,000 during the year ended December 31, 1999.

Note 3 Related Party Receivables

The Company had outstanding loans aggregating $458,000 and $619,000 to
certain officers and employees of the Company at December 31, 1998 and 1999,
respectively. The notes are collateralized and bear interest at rates ranging
from 3.77% to 6.13% and have maturities through March 2003. The principal plus
accrued interest will be forgiven annually over three to four years from the
employees' date of employment with the Company. If an employee leaves the
Company, all unpaid and unforgiven principal and interest will be due and
payable within 60 days.

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EXELIXIS, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

Note 4 Property and Equipment

Property and equipment consists of the following (in thousands):

[Download Table]

December 31,
----------------
1998 1999
------- -------

Laboratory equipment....................................... $ 1,588 $ 4,301
Computer equipment and software............................ 1,667 2,837
Furniture and fixtures..................................... 525 1,018
Leasehold improvements..................................... 1,820 2,537
Equipment under capital leases............................. 2,773 2,773
Construction in-progress................................... -- 827
------- -------
8,373 14,293
Less accumulated depreciation and amortization............. (2,629) (4,795)
------- -------
$ 5,744 $ 9,498
======= =======

Depreciation and amortization expense for the years ended December 31,
1997, 1998 and 1999 included $460,000, $704,000 and $652,000, respectively,
related to equipment under capital leases. Accumulated depreciation and
amortization for equipment under capital leases was $1.5 million and $2.2
million at December 31, 1998 and 1999, respectively. The equipment under
capital leases collateralizes the related lease obligations.

Note 5 Notes Payable

In July 1998, the Company entered into a $5.0 million equipment and tenant
improvements lending agreement. As of December 31, 1999, there was
approximately $3.9 million outstanding under the lending agreement. The
Company's ability to borrow additional amounts expired in January 2000.
Borrowings under the lending agreement bear interest at 7.0% per annum and are
collateralized by the financed equipment. Principal and interest are payable
monthly over 42 months, and the Company is required to make a final balloon
payment equal to 10% of the original principal amount of each drawdown.

In connection with the acquisition of MetaXen (see Note 12), the Company
assumed a loan agreement which provided for the financing of equipment
purchases. Borrowings under the agreement are collateralized by the assets
financed and are subject to repayment over thirty-six to forty-eight months,
depending on the type of asset financed. Borrowings under the agreement bear
interest at the U.S. Treasury note rate plus a number of basis points
determined by the type of asset financed (6.80% to 7.44% at December 31,
1999). As of December 31, 1999, there was approximately $937,000 outstanding
under this loan agreement.

Future principal payments of notes payable at December 31, 1999 are as
follows (in thousands):

[Download Table]

Year ending December 31,
------------------------

2000.............................................................. $ 1,554
2001.............................................................. 1,664
2002.............................................................. 1,209
2003.............................................................. 426
-------
4,853
Less current portion.............................................. (1,554)
-------
$ 3,299
=======

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EXELIXIS, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

Note 6 Convertible Promissory Note

In February 1999, the Company issued a $7.5 million convertible promissory
note to Pharmacia & Upjohn in connection with a collaboration agreement (see
Note 2). The non-interest bearing note automatically converts in March 2002,
unless converted earlier at the option of Pharmacia & Upjohn. The note must be
converted into shares of the Company's common stock during the two-year period
following the Company's initial public offering at a price per share equal to
120% of the price of common stock sold in the initial public offering, the time
of such conversion to be determined by Pharmacia & Upjohn. If the Company has
not completed an initial public offering by March 2002, the note will be
converted into a number of shares of convertible preferred stock equal to $7.5
million divided by the most recent price per share of such convertible
preferred stock. The note contains certain covenants including restrictions on
mergers and disposition of assets.

Note 7 Mandatorily Redeemable Convertible Preferred Stock

The Company has authorized 35,000,000 shares of preferred stock, designated
in series. A summary of mandatorily redeemable convertible preferred stock
("preferred stock") is as follows:

[Download Table]

December 31,
-----------------------
1998 1999
----------- -----------
Liquidation
Shares Preference Issued and Issued and
Designated Per Share Outstanding Outstanding
---------- ----------- ----------- -----------

Series A......................... 5,817,464 $ 0.70 5,328,571 5,328,571
Series B......................... 13,000,000 1.00 12,300,000 12,300,000
Series C......................... 7,875,000 2.00 7,875,000 7,875,000
Series D......................... 7,500,000 3.00 2,119,539 5,000,000
---------- ---------- ----------
34,192,464 27,623,110 30,503,571
========== ========== ==========

The preferred stock has the following characteristics:

Conversion

Each share of Series A, B, C and D preferred stock is convertible at any
time at the option of the holder into shares of common stock based upon a one
to 0.75 conversion ratio. All Series A, B, C and D preferred stock will
automatically convert to common stock upon the earlier of (1) the closing of an
initial public offering of the Company's common stock resulting in net proceeds
of at least $15 million and a per share price of not less than $5.00, or (2)
the consent of the holders of at least 66 2/3% in voting power of the then
outstanding shares of Series A, B, C and D preferred stock.

Dividends

Holders of the Series D preferred stock are entitled to receive dividends
when and if declared by the Board of Directors.

Holders of the Series B and C preferred stock are entitled to receive
dividends when and if declared by the Board of Directors, provided however,
that no dividend shall be declared on the Series B or C preferred stock unless
the holders of the Series D preferred stock shall have first received, or the
Company shall simultaneously declare and pay, an equal dividend on each
outstanding share of Series D preferred stock.

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NOTES TO FINANCIAL STATEMENTS--(Continued)

Holders of the Series A preferred stock are entitled to receive dividends
when and if declared by the Board of Directors, provided however that with the
exception of the declaration and payment of the Special Series A Dividend (as
defined below), no dividend shall be declared or paid on the Series A preferred
stock unless the Company shall simultaneously declare and pay an equal dividend
on each outstanding share of Series B, C and D preferred stock. Through
December 31, 1999, no dividends have been declared or paid by the Company.

Holders of Series A preferred stock are entitled to receive a dividend of
one twentieth ( 1/20th) of one share of common stock (the "Special Series A
Dividend") under certain circumstances. If the consummation of either (1) the
consolidation, merger, liquidation or sale of all or substantially all of the
assets of the Company, or (2) the closing of an initial public offering of the
Company's common stock at a price at or above the Per Share Threshold Amount
($3.00 at December 31, 1999), as defined, occurs on or before March 31, 2000,
then the Special Series A Dividend shall be payable to holders of Series A
preferred stock immediately prior to such event.

Mandatory Redemption

On March 31, 2002, 2003 and 2004, each holder of Series A, B and C preferred
stock and on March 13, 2002, 2003 and 2004 each holder of Series D preferred
stock shall have the right to require the Company to redeem up to the number of
shares of such preferred stock held by each shareholder multiplied by a
percentage (33-1/3%, 50% and 100% at each respective redemption date) at a per
share price of $3.00 for Series D preferred stock, $2.00 for Series C preferred
stock, $1.00 for Series B preferred stock and $0.70 for Series A preferred
stock, plus all declared but unpaid dividends.

Liquidation Preference

In the event of any liquidation, dissolution, or winding up of the affairs
of the Company, the holders of Series D preferred stock will be entitled to
receive in preference to the holders of the Series C, B and A preferred stock
and all classes of common stock an amount equal to $3.00 per share, subject to
certain adjustments, plus any accrued but unpaid dividends. The holders of
Series C preferred stock shall receive in preference to the holders of the
Series B and A preferred stock and all classes of common stock an amount equal
to $2.00 per share, subject to certain adjustments, plus any accrued and unpaid
dividends. The holders of Series B preferred stock shall receive, in preference
to the holders of the Series A preferred stock and all classes of common stock
an amount equal to $1.00 per share, subject to certain adjustments, plus any
accrued but unpaid dividends. The holders of Series A preferred stock shall
receive, prior and in preference to any other series of preferred stock (other
than the Series D, C and B preferred stock) and all classes of common stock, an
amount equal to $0.70 per share, subject to certain adjustments, plus any
accrued but unpaid dividends.

Voting Rights

Each holder of Series A, B, C and D preferred stock is entitled to the
number of votes equal to the number of shares of common stock into which such
holder's shares are convertible.

Amended and Restated Securityholders' Agreement

In January 1999, the Company and the Series A, Series B, Series C and Series
D preferred stockholders entered into an amended and restated securityholders'
agreement. The agreement

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NOTES TO FINANCIAL STATEMENTS--(Continued)

provides that in the event of an underwritten public offering, the Company will
use its best efforts to cause the underwriters to reserve up to 10% of the
shares included in the public offering for purchase by individuals who hold
Series C preferred stock and do not hold shares of any other class of our
capital stock.

Note 8 Common Stock and Warrants

Stock Repurchase Agreements

In January 1995, the Company sold to certain founders and members of its
Scientific Advisory Board (the "SAB") and to a consultant 1,327,500 shares of
common stock at a price of $0.001 per share. In June 1995, 1,200,000 of these
shares held by three founders of the Company were converted into 526,819 shares
of Class B common stock. Simultaneously, these founders entered into Restated
Stock Purchase and Repurchase Agreements (the "Restated Agreements"). In April
1999, 526,819 shares of Class B common stock were converted into 1,200,000
shares of common stock pursuant to the terms of the Restated Agreements.

Under the terms of the 1997 Equity Incentive Plan (the "1997 Plan"), options
are exercisable when granted and such shares are subject to repurchase upon
termination of employment. Repurchase rights lapse over the vesting periods
which are generally three to four years. Should the employment of the holders
of common stock subject to repurchase terminate prior to full vesting of the
outstanding shares, the Company may repurchase all unvested shares at a price
per share equal to the original exercise price. At December 31, 1999, 1,629,785
shares were subject to such repurchase terms.

Warrants

During 1995, the Company issued warrants to purchase 69,642 shares of the
Company's common stock at an exercise price of $0.93 per share to two
shareholders of the Company. During January 2000, warrants to purchase 16,071
shares were exercised. The warrants expire in January 2005. The fair value of
these warrants was determined using the Black-Scholes option pricing model and
was not material, accordingly, no value was ascribed to them for financial
reporting purposes.

In 1995, the Company also issued warrants to purchase 188,214 shares of the
Company's Series A preferred stock at an exercise price of $0.70 per share in
connection with a line of credit agreement. The warrants were immediately
exercisable upon issuance and expire ten years from the date of issuance or
five years from the date of an initial public offering, whichever is longer.
The fair value of these warrants was determined using the Black-Scholes option
pricing model and was not material, accordingly, no value has been ascribed to
them for financial reporting purposes.

In January 1996, the Company issued warrants to purchase 357,143 shares of
Series B preferred stock, at an exercise price of $0.85 per share, to a lender.
The warrants expire ten years from the date of issue or five years from the
effective date of an initial public offering, whichever is longer. The fair
value of these warrants was determined using the Black-Scholes option pricing
model and was not material, accordingly, no value was ascribed to them for
financial reporting purposes.

In September 1997, the Company issued warrants to purchase 63,750 shares of
common stock at an exercise price of $2.67 per share as part of a $2 million
equipment lease financing arrangement. These warrants expire upon the earlier
of September 2007 or five years from the

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EXELIXIS, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

effective date of an initial public offering. The fair value of these warrants
was determined using the Black-Scholes option pricing model and was not
material, accordingly, no value has been ascribed to them for financial
reporting purposes.

In May 1999, the Company issued warrants to purchase 112,500 shares of
common stock at an exercise price of $4.00 per share in connection with a
building lease. The Company determined the fair value of these warrants using
the Black-Scholes option pricing model with the following assumptions: expected
life of five years; a weighted average risk-free rate of 6.1%; expected
dividend yield of zero; volatility of 70% and a deemed value of the common
stock of $5.71 per share. The fair value of the warrants of $391,000 has been
capitalized and will be amortized as rent expense over the term of the lease.

All such warrants are currently exercisable.

Reserved Shares

At December 31, 1999, the Company has reserved 30,295,798 shares of common
stock for future issuance upon the conversion of its preferred stock, and the
convertible promissory note, as well as for use in the Company's stock plans
and exercise of outstanding warrants.

Note 9 Employee Benefit Plans

In January 1995, the Company adopted the 1994 Employee, Director and
Consultant Stock Option Plan (the "1994 Plan"). The 1994 Plan provides for the
issuance of incentive stock options, non-qualified stock options and stock
purchase rights to key employees, directors, consultants and members of the
SAB. In September 1997, the Company adopted the 1997 Plan. The 1997 Plan amends
and supercedes the 1994 Plan. At December 31, 1999, the total number of shares
which may be issued under the 1997 Plan, as amended, was 9,142,000. During
January 2000, the Company approved a 2,000,000 share increase to the authorized
shares available for issuance under the 1997 Plan. The Board of Directors is
responsible for administration of the Company's stock plans and determines the
term of each option, exercise price and the vesting terms. The Company may not
grant an employee incentive stock options that are exercisable during any one
year with an estimated fair value in excess of $100,000. Incentive stock
options may be granted at an exercise price per share at least equal to the
estimated fair value per underlying common share on the date of grant (not less
than 110% of the estimated fair value in the case of holders of more than 10%
of the Company's voting stock). Options granted under the 1997 Plan are
exercisable when granted and generally expire ten years from the date of grant
(five years for incentive stock options granted to holders of more than 10% of
the Company's voting stock).

F-17

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EXELIXIS, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

A summary of all option activity is presented below:

[Download Table]

Weighted-
Average
Exercise
Shares Price
---------- ---------

Options outstanding at December 31, 1996............... 1,924,365 $ 0.06
Granted.............................................. 2,092,215 0.21
Exercised............................................ (246,695) 0.03
Cancelled............................................ (48,363) 0.03
----------
Options outstanding at December 31, 1997............... 3,721,522 0.12
Granted.............................................. 1,949,255 0.27
Exercised............................................ (2,514,898) 0.13
Cancelled............................................ (354,702) 0.26
----------
Options outstanding at December 31, 1998............... 2,801,177 0.25
Granted.............................................. 2,892,202 0.32
Exercised............................................ (1,057,300) 0.26
Cancelled............................................ (169,552) 0.27
----------
Options outstanding at December 31, 1999............... 4,466,527 0.29
==========

The following table summarizes information about stock options outstanding
at December 31, 1999:

[Download Table]

Options Outstanding and Exercisable
-----------------------------------------------------------
Weighted-
Average
Remaining Weighted-
Contractual Average
Exercise Life Exercise
Prices Number (Years) Price
-------- --------- ----------- ---------

$ 0.01 29,625 6.34 $ 0.01
0.13 107,261 7.02 0.13
0.27 3,776,256 8.81 0.27
0.40 473,150 9.81 0.40
0.80 42,735 9.94 0.80
1.33 37,500 9.96 1.33
---------
4,466,527 8.95 0.29
=========

At December 31, 1999, 1,629,785 shares of common stock purchased under the
1994 and 1997 Plans were subject to repurchase by the Company at a weighted
average price of $0.27 per share.

F-18

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EXELIXIS, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

Had compensation cost been determined based on the fair value of the options
at the grant date consistent with the provisions of SFAS No. 123, the Company's
pro forma net loss would have been as follows:

[Download Table]

Year Ended December 31,
----------------------------
1997 1998 1999
-------- -------- --------

Net loss:
As reported................................. $(11,496) $(15,666) $(18,721)
Pro forma................................... (11,505) (15,701) (18,776)
Net loss per share (basic and diluted):
As reported................................. $ (8.76) $ (3.83) $ (3.47)
Pro forma................................... (8.77) (3.84) (3.48)

Since options vest over several years and additional option grants are
expected to be made in future years, the pro forma impact on the results of
operations for the three years ended December 31, 1999 is not representative of
the pro forma effects on the results of operations for future periods.

The fair value of each option grant is estimated on the date of grant using
the minimum value method with the following assumptions for grants in 1997,
1998 and 1999: 0% dividend yield for all years; risk-free interest rates of
6.18% for 1997, 5.82% for 1998 and 5.59% for 1999 and expected lives of 5 years
for all years presented.

Deferred Stock Compensation

During the period from January 1, 1997 through December 31, 1999, the
Company recorded $18.4 million of deferred stock compensation in accordance
with APB 25, SFAS 123 and Emerging Issues Task Force 96-18, related to stock
options granted to consultants and employees. For options granted to
consultants, the Company determined the fair value of the options using the
Black-Scholes option pricing model with the following assumptions: expected
lives of four years; a weighted average risk-free rate of 5.75%; expected
dividend yield of zero percent; volatility of 70% and deemed values of common
stock between $0.40 and $8.35 per share. Stock compensation expense is being
recognized in accordance with FIN 28 over the vesting periods of the related
options, generally four years. The Company recognized stock compensation
expense of $25,000, $725,000 and $3.5 million for the years ended December 31,
1997, 1998 and 1999, respectively.

2000 Equity Incentive Plan

In January 2000, the Company adopted, subject to stockholder approval, the
2000 Equity Incentive Plan. A total of 3,000,000 shares of common stock have
been reserved for future issuance under this plan.

2000 Non-Employee Directors' Stock Option Plan

In January 2000, the Company adopted, subject to stockholder approval, the
2000 Non-Employees Directors' Stock Option Plan. This plan provides for the
automatic grant of options to purchase shares of common stock to non-employee
directors. A total of 500,000 shares of common stock were initially authorized
for issuance under this plan.

2000 Employee Stock Purchase Plan

In January 2000, the Company adopted, subject to stockholder approval, the
2000 Employee Stock Purchase Plan. A total of 300,000 shares of common stock
were initially authorized for issuance under this plan.

F-19

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EXELIXIS, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

Note 10 Income Taxes

The Company's deferred tax assets consist of the following (in thousands):

[Download Table]

December 31
------------------
1998 1999
-------- --------

Net operating loss carryforwards......................... $ 8,248 $ 12,430
Capitalized start-up and organizational costs............ 2,546 2,154
Tax credit carryforwards................................. 1,483 2,071
Capitalized research and development costs............... 2,239 1,966
Other.................................................... (842) (240)
-------- --------
Total deferred tax assets................................ (13,674) (18,381)
Valuation allowance...................................... 13,674 18,381
-------- --------
Net deferred tax assets.................................. $ -- $ --
======== ========

The valuation allowance increased by $4.7 million and $5.7 million during
the years ended December 31, 1999 and 1998, respectively.

The Company has not recorded any provision or benefit for income taxes as it
continues to record operating losses. The Company has provided a full valuation
allowance for the deferred tax assets at December 31, 1999 since the
realization of these amounts is not considered more likely than not by
management.

At December 31, 1999, the Company had federal and state net operating loss
carryforwards of approximately $33.9 million and $25.6 million, respectively,
which expire at various dates beginning in the year 2005. Under the Internal
Revenue Code, certain substantial changes in the Company's ownership could
result in an annual limitation on the amount of net operating loss
carryforwards which can be utilized in future years to offset future taxable
income.

Note 11 Commitments

Leases

The Company leases office and research space and certain equipment under
operating and capital leases that expire at various dates through the year
2017. Certain operating leases contain renewal provisions and require the
Company to pay other expenses. Future minimum lease payments under operating
and capital leases are as follows (in thousands):

[Download Table]

Operating Capital
Year ending December 31, Leases Leases
------------------------ --------- -------

2000....................................................... $ 3,061 $ 793
2001....................................................... 2,531 235
2002....................................................... 2,489 --
2003....................................................... 2,566 --
2004....................................................... 2,621 --
Thereafter................................................. 23,778 --
------- -----
37,046 1,028
Less amount representing interest.......................... -- (64)
------- -----
Present value of minimum lease payments.................... $37,046 964
======= -----
Less current portion....................................... (735)
-----
Long-term portion.......................................... $ 229
=====

F-20

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EXELIXIS, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

Rent expense under noncancellable operating leases was $882,000, $920,000
and $1.5 million for the years ended December 31, 1997, 1998 and 1999,
respectively.

The Company entered into a line of credit agreement (the "Agreement") during
1995. The term of each borrowing under the Agreement ranges from thirty-six to
forty-eight months and bears interest at rates ranging from 9.5% to 11.0%
depending on the type of equipment purchased under the Agreement. At December
31, 1999, $125,000 was outstanding under the Agreement. In connection with the
Agreement, the Company issued warrants to purchase 188,214 shares of the
Company's Series A preferred stock at an exercise price of $0.70 per share (see
Note 8).

In September 1997, the Company entered into a lease line of credit
arrangement (the "Arrangement") which allows the Company to purchase $2.0
million of equipment. The term of each borrowing under the Arrangement is 42
months and each bears interest at a minimum of 9.0%. At December 31, 1999,
$839,000 was outstanding under the Arrangement. In connection with the
Arrangement, the Company granted warrants to purchase 63,750 shares of its
common stock (see Note 8).

Licensing Agreements

The Company has entered into several licensing agreements with various
universities and institutions under which it obtained exclusive rights to
certain patent, patent applications, and other technology. Future payments
pursuant to these agreements are as follows (in thousands):

[Download Table]

Year ending December 31,
------------------------

2000................................................................ $1,573
2001................................................................ 665
2002................................................................ 657
2003................................................................ 657
2004................................................................ 441
------
$3,993
======

In addition to the payments summarized above, the Company is required to
make royalty payments based upon a percentage of net sales of any products or
services developed from certain of the licensed technologies and milestone
payments upon the occurrence of certain events as defined by the related
agreements. No such royalties or milestones have been paid through December 31,
1999.

Consulting agreements

The Company has entered into consulting agreements with certain members of
the SAB. Total consulting expense incurred under these agreements during the
years ended December 31, 1997, 1998 and 1999 was $236,000, $345,000 and
$352,000, respectively.

F-21

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EXELIXIS, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

Note 12 Acquisition

In July 1999, the Company acquired substantially all the assets of MetaXen,
LLC ("MetaXen"), a biotechnology company focusing on molecular genetics. In
addition to paying cash consideration of $870,000, the Company assumed a note
payable relating to certain acquired assets with a principal balance due of
$1.1 million (see Note 5). The Company also assumed responsibility for a
facility sub-lease relating to the office and laboratory space occupied by
MetaXen.

This transaction was recorded using the purchase method of accounting. The
fair value of the assets purchased, and debt assumed, was determined by
management to equal their respective historical net book values on the
transaction date, as follows (in thousands):

[Download Table]

Laboratory and computer equipment................................... $ 1,645
Leasehold improvements.............................................. 175
Other tangible assets............................................... 155
Note payable........................................................ (1,105)
-------
$ 870
=======

The following unaudited pro forma financial information presents the
consolidated results of the Company as if the acquisition had occurred at the
beginning of each period presented (in thousands, except per share data). This
pro forma financial information is not intended to be indicative of future
operating results.

[Download Table]

Year Ended
December 31,
------------------
1998 1999
-------- --------
(unaudited)

Total revenues............................................. $ 7,022 $ 12,807
Net loss................................................... (19,129) (20,328)
Net loss per share, basic and diluted...................... (4.68) (3.77)

F-22

424B4 94th Page of 110 TOC 1st Previous Next ↓Bottom Just 94th
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Members of
MetaXen, LLC

In our opinion, the accompanying balance sheets and the related statements
of operations, of members' equity (deficit) and of cash flows present fairly,
in all material respects, the financial position of MetaXen, LLC (a majority
owned subsidiary of Xenova UK Limited) at December 31, 1997 and 1998, and the
results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles. 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 audit of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred net losses since inception which
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

/s/ PricewaterhouseCoopers LLP

San Jose, California
February 10, 1999

F-23

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METAXEN, LLC
(A MAJORITY OWNED SUBSIDIARY OF XENOVA UK LIMITED)

BALANCE SHEETS

[Download Table]

December 31, June 30,
---------------------- -----------
1997 1998 1999
---------- ----------- -----------
(unaudited)
ASSETS

Current assets:
Cash and cash equivalents............... $ 124,000 $ 216,000 $ 30,000
Other current assets.................... 130,000 121,000 135,000
---------- ----------- -----------
Total current assets...................... 254,000 337,000 165,000
Property and equipment, net............... 1,487,000 3,132,000 2,837,000
Other assets.............................. 160,000 320,000 320,000
---------- ----------- -----------
$1,901,000 $ 3,789,000 $ 3,322,000
========== =========== ===========

LIABILITIES AND MEMBERS' EQUITY (DEFICIT)

Current liabilities:
Accounts payable........................ $ 306,000 $ 369,000 $ 263,000
Accrued expenses........................ 244,000 1,415,000 1,227,000
Deferred revenue........................ -- 502,000 379,000
Intercompany payable.................... 3,000 227,000 1,965,000
Intercompany loan....................... -- 3,035,000 3,084,000
Current portion of long-term
liabilities............................ 250,000 380,000 417,000
---------- ----------- -----------
Total current liabilities................. 803,000 5,928,000 7,335,000
Long-term liabilities..................... 707,000 788,000 548,000
---------- ----------- -----------
Total liabilities......................... 1,510,000 6,716,000 7,883,000
---------- ----------- -----------
Commitments (Note 9)
Members' equity (deficit):
Preferred stock--Class A; 1,766,000
shares issued and outstanding at
December 31, 1997 and 1998............. 391,000 (3,068,000) (4,675,000)
Preferred stock--Class B; 120,000 shares
issued and outstanding at December 31,
1997 and 1998.......................... -- -- --
Preferred stock--Class C; 300,000 and
345,000 shares issued and outstanding
at December 31, 1997 and 1998,
respectively........................... -- 141,000 114,000
---------- ----------- -----------
Total members' equity (deficit)........... 391,000 (2,927,000) (4,561,000)
---------- ----------- -----------
$1,901,000 $ 3,789,000 $ 3,322,000
========== =========== ===========

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

F-24

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METAXEN, LLC
(A MAJORITY OWNED SUBSIDIARY OF XENOVA UK LIMITED)

STATEMENTS OF OPERATIONS

[Download Table]

Six Months Ended June
Year Ended December 31, 30,
------------------------ ------------------------
1997 1998 1998 1999
----------- ----------- ----------- -----------
(unaudited)

Contract revenues.......... $ -- $ 4,750,000 $ 2,364,000 $ 2,297,000
----------- ----------- ----------- -----------
Operating expenses:
General and
administrative.......... 1,268,000 1,348,000 583,000 513,000
Research and
development............. 2,937,000 6,626,000 2,774,000 3,328,000
----------- ----------- ----------- -----------
Total operating expenses... 4,205,000 7,974,000 3,357,000 3,841,000
----------- ----------- ----------- -----------
Loss from operations....... (4,205,000) (3,224,000) (993,000) (1,544,000)
Interest income............ 46,000 35,000 16,000 9,000
Interest expense........... (30,000) (274,000) (70,000) (72,000)
----------- ----------- ----------- -----------
Net loss................... $(4,189,000) $(3,463,000) $(1,047,000) $(1,607,000)
=========== =========== =========== ===========

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

F-25

424B4 97th Page of 110 TOC 1st Previous Next ↓Bottom Just 97th
METAXEN, LLC
(A MAJORITY OWNED SUBSIDIARY OF XENOVA UK LIMITED)

STATEMENTS OF MEMBERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM INCEPTION (AUGUST 1996) THROUGH DECEMBER 31, 1998

[Enlarge/Download Table]

Series A Series B Series C
Preferred Stock Preferred Stock Preferred Stock
--------------------- ---------------- -----------------
Shares Amount Shares Amount Shares Amount Total
--------- ----------- ------- -------- ------- -------- -----------

Balance at December 31,
1996................... 280,000 $ 364,000 120,000 $216,000 320,000 $ 2,000 $ 582,000
Issuance of Class A
Preferred Stock at
$2.50 per share........ 1,200,000 3,000,000 -- -- -- -- 3,000,000
Issuance of Class A
Preferred Stock at
$3.50 per share........ 286,000 1,000,000 -- -- -- -- 1,000,000
Repurchase of Class C
Preferred Stock at
$0.10 per share........ -- -- -- -- (20,000) (2,000) (2,000)
Net loss................ -- (3,973,000) -- (216,000) -- -- (4,189,000)
--------- ----------- ------- -------- ------- -------- -----------
Balance at December 31,
1997................... 1,766,000 391,000 120,000 -- 300,000 -- 391,000
Issuance of Class C
Preferred Stock at
$0.005 per share....... -- -- -- -- 20,000 -- --
Issuance of Class C
Preferred Stock at
$0.10 per share........ -- -- -- -- 45,000 5,000 5,000
Stock compensation
expense................ -- -- -- -- -- 141,000 141,000
Repurchase of Class C
Preferred Stock at
$0.005 per share....... -- -- -- -- (10,000) -- --
Repurchase of Class C
Preferred Stock at
$0.10 per share........ -- -- -- -- (10,000) (1,000) (1,000)
Net loss................ -- (3,459,000) -- -- -- (4,000) (3,463,000)
--------- ----------- ------- -------- ------- -------- -----------
Balance at December 31,
1998................... 1,766,000 (3,068,000) 120,000 -- 345,000 141,000 (2,927,000)
Stock compensation
expense (unaudited).... -- -- -- -- -- (27,000) (27,000)
Net loss (unaudited).... -- (1,607,000) -- -- -- -- (1,607,000)
--------- ----------- ------- -------- ------- -------- -----------
Balance at June 30, 1999
(unaudited)............ 1,766,000 $(4,675,000) 120,000 $ -- 345,000 $114,000 $(4,561,000)
========= =========== ======= ======== ======= ======== ===========

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

F-26

424B4 98th Page of 110 TOC 1st Previous Next ↓Bottom Just 98th
METAXEN, LLC
(A MAJORITY OWNED SUBSIDIARY OF XENOVA UK LIMITED)

STATEMENTS OF CASH FLOWS

[Download Table]

Six Months
Year Ended December 31, Ended June 30,
------------------------ ------------------------
1997 1998 1998 1999
----------- ----------- ----------- -----------
(unaudited)

Cash flow used in
operating activities:
Net loss................ $(4,189,000) $(3,463,000) $(1,047,000) $(1,607,000)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation and
amortization......... 314,000 659,000 266,000 317,000
Loss on disposal of
property and
equipment............ -- 104,000 -- --
Stock compensation.... -- 141,000 -- (27,000)
Changes in assets and
liabilities:
Other current assets.. (95,000) 9,000 (47,000) (14,000)
Other assets.......... (160,000) (160,000) (160,000) --
Accounts payable...... 236,000 63,000 (182,000) (106,000)
Accrued expenses...... 212,000 1,171,000 -- (188,000)
Deferred revenue...... -- 502,000 366,000 (123,000)
Intercompany payable.. -- 224,000 -- 1,738,000
----------- ----------- ----------- -----------
Net cash used in
operating
activities......... (3,682,000) (750,000) (804,000) (10,000)
----------- ----------- ----------- -----------
Cash flow used in
investing activities:
Purchases of property
and equipment.......... (1,731,000) (2,408,000) (376,000) (22,000)
----------- ----------- ----------- -----------
Cash flow provided by
financing activities:
Proceeds from issuance
of Class A Preferred
Stock.................. 4,000,000 -- (1,000) --
Proceeds from issuance
of Class C Preferred
Stock.................. -- 5,000 -- --
Repurchase of Class C
Preferred Stock........ (2,000) (1,000) -- --
Proceeds from equipment
line of credit......... 1,000,000 254,000 -- --
Repayments under
equipment line of
credit................. (43,000) (43,000) (110,000) (203,000)
Increase in intercompany
loan................... -- 3,035,000 2,100,000 49,000
----------- ----------- ----------- -----------
Net cash provided by
(used in) financing
activities......... 4,955,000 3,250,000 1,989,000 (154,000)
----------- ----------- ----------- -----------
Net increase (decrease) in
cash and cash
equivalents.............. (458,000) 92,000 809,000 (186,000)
Cash and cash equivalents
at beginning of period... 582,000 124,000 124,000 216,000
----------- ----------- ----------- -----------
Cash and cash equivalents
at end of period......... $ 124,000 $ 216,000 $ 933,000 $ 30,000
=========== =========== =========== ===========

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

F-27

424B4 99th Page of 110 TOC 1st Previous Next ↓Bottom Just 99th
METAXEN, LLC
(A MAJORITY OWNED SUBSIDIARY OF XENOVA UK LIMITED)

NOTES TO FINANCIAL STATEMENTS

Note 1--The Company and Significant Accounting Policies:

Nature of business

MetaXen, LLC (the "Company") was incorporated in Delaware in August 1996 for
the purpose of performing research and development in the fields of
biotechnology and molecular genetics and to develop pharmaceutical products and
procedures on its own account and in collaboration with Xenova UK Limited, a
wholly owned subsidiary of Xenova Group plc (collectively referred to as
"Xenova" or the "Parent Company"). The Company is a majority owned subsidiary
of Xenova. The Company emerged from the development stage during 1997.

The Company was formed as a result of a merger in September 1996 between
RGH Founders, LLC, a Delaware corporation incorporated in August 1996, and
MetaXen, LLC, a Delaware corporation incorporated in September 1996 ("Merger
Corp."). At that time, Xenova exchanged its premerger interests in Merger Corp.
for 280,000 shares of Class A Preferred Stock in the Company; MJR Holdings,
Inc. exchanged its premerger interests in Merger Corp. for 100,000 shares of
Class B Preferred Stock in the Company. Also at this time, Ross Holdings, Inc.,
Giebel Holdings, Inc. and Hartmanis Holdings, Inc. exchanged their interests in
RGH Founders, LLC for 200,000, 100,000 and 20,000 shares of the Company's Class
C Preferred Stock, respectively. Upon the merger, the Company assumed the
assets and liabilities of Merger Corp. and RGH Founders, LLC. Merger Corp. and
RGH Founders, LLC were both nominally capitalized at that time and there was no
gain or loss arising from the merger. These financial statements include the
results of RGH Founders, LLC and Merger Corp. since their inception.

Need for additional financing

The Company has incurred a cumulative net loss of $8,072,000 since inception
and expects to incur additional losses in the future which raise substantial
doubt about the Company's ability to continue as a going concern. Xenova has
committed to provide sufficient funds to support the operations of MetaXen
until the earlier of 1) such time as Xenova Group plc has less then a 50%
controlling interest in MetaXen or 2) March 31, 1999. Therefore, in order to
continue operating and fully implement its business plan, the Company will need
to raise additional debt or equity financing. There can be no assurance that
such additional funds will be available to the Company, or if available, that
it will be on reasonable terms. The inability of the Company to obtain
additional financing beyond March 1999 will have a material adverse impact on
the Company's operations.

The Company funded its operations through June 1999 by amounts received
under a research and license agreement and additional amounts received from
Xenova.

Cash and cash equivalents

The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.

Property and equipment

Property and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization are computed on a straight-line
basis over the lesser of the estimated useful lives of the assets, which range
from three to seven years, or the lease terms.

F-28

424B4 100th Page of 110 TOC 1st Previous Next ↓Bottom Just 100th
METAXEN, LLC
A MAJORITY OWNED SUBSIDIARY OF XENOVA LIMITED

NOTES TO FINANCIAL STATEMENTS--(Continued)

Revenue recognition

Revenue recognized under research and development contracts is recorded as
earned pursuant to the terms of the contracts. Nonrefundable contract fees for
which no further performance obligations exist are recognized when the payments
are received or when collection is assured. In return for such payments,
contract partners may receive certain marketing and manufacturing rights,
products for clinical use and testing, and/or research and development
services.

Research and development expenses

Research and development costs are expensed as incurred.

Stock-based compensation

The Company has adopted the pro forma disclosure requirements of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). As permitted, the Company continues to recognize
employee stock-based compensation under the intrinsic value method of
accounting pursuant to Accounting Principles Board Opinion No. 25.

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 revenue and expenses during the
reporting period. Actual results could subsequently differ from those
estimates.

Note 2--Property and Equipment:

Property and equipment consists of the following:

[Download Table]

December 31,
------------------------
1997 1998
----------- -----------

Lab equipment...................................... $ 818,000 $ 1,305,000
Computer equipment................................. 449,000 676,000
Furniture and equipment............................ 184,000 357,000
Leasehold improvements............................. 353,000 1,366,000
----------- -----------
1,804,000 3,704,000
Less accumulated depreciation and amortization..... (317,000) (572,000)
----------- -----------
$ 1,487,000 $ 3,132,000
=========== ===========

Depreciation and amortization expense was $659,000 and $314,000 for the
years ended December 31, 1998 and 1997, respectively.

Note 3--Other Assets:

At December 31, 1998, other assets of $320,000 consisted of a certificate of
deposit restricted as to withdrawal to secure an irrevocable letter of credit
issued in connection with the Company's non-cancellable facility operating
lease.

F-29

424B4 101st Page of 110 TOC 1st Previous Next ↓Bottom Just 101st
METAXEN, LLC
A MAJORITY OWNED SUBSIDIARY OF XENOVA LIMITED

NOTES TO FINANCIAL STATEMENTS--(Continued)

Note 4--Income Taxes:

No provision or benefit for federal income taxes is reported in the
financial statements because, as a limited liability company, the tax effects
of the Company's results accrue to its Members.

Note 5--Debt:

In July 1997, the Company entered into a loan agreement which provides for
the financing of up to $1,500,000 of equipment purchases made through December
31, 1998. Borrowings under this agreement are secured by the assets financed
and are to be repaid over thirty-six to forty-eight months, depending on the
type of asset financed. Borrowings under this agreement bear interest at the
U.S. Treasury note rate plus a number of basis points determined by the type of
asset financed (9.22% to 11.09% at December 31, 1998).

Future payments under this loan are as follows:

[Download Table]

Year Ending December 31,
------------------------

1999............................................................ $ 500,000
2000............................................................ 500,000
2001............................................................ 367,000
2002............................................................ 148,000
---------
1,515,000
Less interest................................................... (347,000)
---------
1,168,000
Less current portion............................................ (380,000)
---------
Long-term portion............................................... $ 788,000
=========

Note 6--Members' Equity:

The rights and preferences of the preferred stock are described below.

Allocations and distributions

In the event of cash distributions, amounts will first be distributed to the
holders of Class A and Class B Preferred Stock pro rata in accordance with the
balances in their respective Member equity accounts. Any amounts in excess of
the amounts in their Member equity accounts will be distributed (i) 80% to the
holders of Class A Preferred Stock; and (ii) 20% to the holders of Class B and
Class C Preferred Stock, pro rata in accordance with the number of such shares
held by such holders. No distributions have been made from inception through
December 31, 1998.

Net losses of the Company are first allocated (i) 80% to the holders of
Class A Preferred Stock; and (ii) 20% to the holders of the Class B and C
Preferred Stock, to the extent that cumulative net profits (if any) allocated
to the holders of Class B and C Preferred Stock in prior years exceeds the
cumulative net losses allocated to such holders in prior years. Any remaining
net losses of the Company are then allocated (i) to the holders of Class B
Preferred Stock to the extent that this would not cause such holders to have a
deficit in their Member equity at the end of the year; then (ii) to the holders
of Class A Preferred Stock to the extent that this would not cause such holders
to have a

F-30

424B4 102nd Page of 110 TOC 1st Previous Next ↓Bottom Just 102nd
METAXEN, LLC
A MAJORITY OWNED SUBSIDIARY OF XENOVA LIMITED

NOTES TO FINANCIAL STATEMENTS--(Continued)

deficit in their Members equity account at the end of the year; and then (a)
80% to the holders of Class A Preferred Stock; and (b) 20% to the holders of
Class B and C Preferred Stock. However, in the event of the members having
received a distribution of the type described below in connection with a
winding up of the Company, the Member equity accounts of the holders of Class B
and C Preferred Stock and Common Stock shall be adjusted to reflect the
aggregate net loss that would have been allocated to such holders if the
holders of Common Stock had participated with the holders of Class B and C
Preferred Stock under (b) above from the date of the acquisition of such Common
Stock.

Net profits of the Company are first allocated to the holders of Class A, B
and C Preferred Stock to the extent that cumulative net losses allocated to
such holders in prior years exceed the cumulative net profits allocated to such
holders in prior years. Any remaining net profits are then allocated (i) to the
holders of Class A Preferred Stock to the extent that cumulative net losses
allocated to such holders in provision (ii) on the allocation of losses above
exceed cumulative net profits allocated under this provision; then (ii) to the
holders of Class B Preferred Stock to the extent that cumulative net losses
allocated to such holders in provision (i) on the allocation of losses above
exceed cumulative net profits allocated under this provision; and then (a) 80%
to the holders of Class A Preferred Stock; and (b) 20% to the holders of Class
B and C Preferred Stock. However, in the event of the members having received a
distribution of the type described below in connection with a winding up of the
Company, the Member equity accounts of the holders of Class B and C Preferred
Stock and Common Stock shall be adjusted to reflect the aggregate net profit
that would have been allocated to such holders if the holders of Common Stock
had participated with the holders of Class B and C Preferred Stock under (b)
above from the date of the acquisition of such Common Stock. Furthermore, in
the event of the Members receiving a distribution of the type described below
describing distributions upon the winding up of the Company, the holders of
Common Stock shall be allocated the portion of net profit associated with the
remaining distributable assets distributed to the holders of such Common Stock.

In the event of there being distributable assets upon the winding up of the
Company, these assets will be distributed (i) to the holders of Class A and B
Preferred Stock pro rata in accordance with the balances in their respective
Member equity accounts for the return of their respective contributions; (ii)
to all members of the Company pro rata in accordance with their respective
Member equity accounts after giving effect to (i) above but without allocating
any net profit resulting from the liquidation of the Company's assets and the
dissolution of the Company; (iii) to the holders of Class A Preferred Stock to
the extent of 80% of the remaining distributable assets; and (iv) to the
holders of Class B and C Preferred Stock and Common Stock pro rata in
accordance with the number of such shares then held by such holders.

Class A Preferred Stock

Holders of Class A Preferred Stock are entitled to one vote per share and
are entitled to elect two-thirds of the members of the Board of Directors.

Class B Preferred Stock

Holders of Class B Preferred Stock are entitled to one vote per share and
are entitled to elect one-third of the number of members constituting the Board
of Directors subject to certain approvals from the holders of the Class A
Preferred Stock.

F-31

424B4 103rd Page of 110 TOC 1st Previous Next ↓Bottom Just 103rd
METAXEN, LLC
A MAJORITY OWNED SUBSIDIARY OF XENOVA LIMITED

NOTES TO FINANCIAL STATEMENTS--(Continued)

At any time following September 4, 2000 and prior to the close of business
on the 30th day thereafter, the holders of Class B Preferred Stock may exchange
their shares for ordinary shares of Xenova Group plc. The applicable exchange
ratio depends upon the Company and Xenova having achieved various milestones.

At any time prior to the close of business on the 60th day following
September 4, 2000, Xenova Group plc may exchange all of the then outstanding
Class B Preferred Stock for ordinary shares of Xenova Group plc. The applicable
exchange ratio depends upon the Company and Xenova having achieved various
milestones.

At any time prior to September 4, 2000, subject to the achievement of
specified milestones, the holders (other than Xenova Group plc and its
affiliates) of not less than one-third of the then outstanding shares and
options and warrants to purchase any class of stock may exchange the portion
requested for shares and options, respectively, of Xenova Group plc at the then
applicable exchange ratio. The applicable exchange ratio depends upon the
Company and Xenova having achieved various milestones.

Class C Preferred Stock

The holders of Class C Preferred Stock do not have any voting rights but
have the same exchange rights and obligations as the holders of Class B
Preferred Stock.

In the event that a holder of Class C Preferred Stock (i) terminates his or
her employment with the Company in certain circumstances; or (ii) in the case
of any person acquiring Class C Preferred Stock prior to commencing employment
with the Company, where the person failed to execute an employment agreement
and commence employment with the Company prior to September 4, 1997, the
Company has the option to repurchase all or a portion of that person's Class C
Preferred Stock. The portion of the person's Class C Preferred Stock that the
Company may purchase depends upon the length of time that has passed since the
September 1996 merger.

During 1998, the Company recorded $141,000 of stock compensation expense for
the excess deemed fair value over the issuance price of stock sold to
employees.

Class D Preferred Stock

At December 31, 1998, the Company had not designated or issued any Class D
Preferred Stock. The holders of Class D Preferred Stock would be entitled to a
percentage, prorata and in accordance with the number of shares then held by
such holders, of all cash profit or loss distributions which is equal to the
product of 0.000015 and the number of Class D Preferred Shares outstanding at
such time.

Class E Preferred Stock

At December 31, 1998, the Company had not designated or issued any shares of
Class E Preferred Stock. The holders of Class E Preferred Stock would be
entitled to a percentage, prorata and in accordance with the number of shares
then held by such holders, of all cash profit or loss distributions which is
equal to the product of 0.0000775 and the number of Class E Preferred Shares
outstanding at such time.

F-32

424B4 104th Page of 110 TOC 1st Previous Next ↓Bottom Just 104th
METAXEN, LLC

A MAJORITY OWNED SUBSIDIARY OF XENOVA LIMITED

NOTES TO FINANCIAL STATEMENTS (Continued)

Stock Warrants

In May 1997, the Company entered into a building lease agreement (the "Lease
Agreement"). As part of the Lease Agreement, the Company granted the lessor
warrants on November 5, 1997 to purchase 100,000 shares of the Company's Class
D Preferred Stock with an exercise price of $6.38 per share, which equalled the
fair market value of the Xenova common stock plus $2.00 per share, as of the
date of the issuance of such warrants. The warrants are exercisable from the
date of issuance through October 2002.

In July 1997, the Company entered into a loan agreement which provides for
the financing of certain equipment purchases (see Note 5). As part of the
agreement, the Company granted the lender warrants on July 31, 1997 to purchase
14,516 shares of the Company's Class E Preferred Stock with an exercise price
of $7.75 per share. The exercise price of $7.75 is based on the sum of the
Common Stock price of Xenova Group plc as of June 17, 1997 plus $2.00 per
share. The warrants are exercisable from the date of issuance through June
2002.

A nominal value was ascribed to the warrants outlined above.

Common Stock

At December 31, 1998, the Company had not issued any shares of Common Stock.
The Common Stock does not have any voting rights. The shares of Common Stock
are subject to the same exchange rights and obligations as the Class B
Preferred Stock but such shares will be exchanged for Xenova Group plc shares
on a one-for-one basis.

Note 7--Stock Option Plan:

In December 1996 the Company adopted the 1996 Equity Incentive Plan (the
"1996 Plan"). The Company has reserved 300,000 shares of Common Stock for
issuance under the 1996 Plan relating to nonqualified options to be granted to
officers and employees. The exercise price, vesting requirements and maximum
term of each option issued under the 1996 Plan are determined by the Company's
Board of Directors.

Activity under the 1996 Plan is summarized as follows:

[Download Table]

Options
Available Options Exercise
for Grant Outstanding Price
--------- ----------- -----------

Balance at December 31, 1996............. 300,000 -- --
Granted................................ (216,000) 216,000 $2.88-$5.81
-------- -------
Balance at December 31, 1997............. 84,000 216,000 2.88-5.81
Granted................................ (94,000) 94,000 2.69-2.75
Cancelled.............................. 92,500 (92,500) 2.88-5.81
-------- -------
Balance at December 31, 1998............. 82,500 217,500 2.69-5.81
======== =======

F-33

424B4 105th Page of 110 TOC 1st Previous Next ↓Bottom Just 105th
METAXEN, LLC
A MAJORITY OWNED SUBSIDIARY OF XENOVA LIMITED

NOTES TO FINANCIAL STATEMENTS--(Continued)

The following table summarizes information about options outstanding under
the 1996 Plan as of December 31, 1998:

[Download Table]

Options Outstanding
----------------------------------------------------------------
Weighted
Average Weighted
Range of Remaining Average
Exercise Number Contractual Exercise
Prices Outstanding Life Price
---------- ----------- ----------- --------

$2.69-2.88 166,500 4.2 years $2.80
3.63 20,000 3.0 years 3.63
4.38 16,000 3.6 years 4.38
5.81 15,000 3.3 years 5.81
-------
217,500 3.20
=======

The Company believes that had employee stock-based compensation for options
granted under the 1996 Plan been determined based on the fair value at the
grant date using the minimum value model as prescribed by SFAS 123, there would
have been no material difference between the Company's pro forma net loss for
the years ended December 31, 1998 and 1997 and the actual net loss recorded in
the accompanying statement of operations. The fair value of each option was
estimated on the grant date using the minimum value method with the following
assumptions: annual dividend yield of 0.0%, risk-free annual interest rate of
5.82% to 6.57% and an expected option term of four years.

Note 8--Research and License Agreement:

The Company and Xenova signed a research and license agreement with Eli
Lilly and Company ("Eli Lilly") on February 16, 1998. The Company and Xenova
are providing research services to Eli Lilly in the form of screening certain
compounds for accelerated drug discovery and development. Eli Lilly will have
certain license rights to any compounds resulting from efforts completed under
the agreement. The Company and Xenova receive amounts quarterly under the
agreement which approximate cost reimbursement for amounts incurred pursuant to
the agreement. Milestone payments can also be earned by the Company and Xenova,
as defined in the agreement. For the year ended December 31, 1998, the Company
recorded total contract revenues of $4,750,000, consisting of a $1,000,000 non-
refundable license fee and $3,750,000 of research fees. Costs incurred by the
Company under the agreement in 1998 approximated $4,409,000.

F-34

424B4 106th Page of 110 TOC 1st Previous Next ↓Bottom Just 106th
METAXEN, LLC
A MAJORITY OWNED SUBSIDIARY OF XENOVA LIMITED

NOTES TO FINANCIAL STATEMENTS--(Continued)

Note 9--Commitments:

The Company leases its facility under a non-cancellable operating lease
which expires in September 2002. The Company subleases certain space in its
current facility to other tenants.

Rent expense for the years ended December 31, 1998 and 1997 was $762,000 and
$377,000, respectively. The Company recognizes rent expense on a straight line
basis over the lease period.

Future minimum lease payments under the non-cancellable operating lease and
minimum sublease rental receipts under non-cancellable operating sub-leases are
as follows:

[Download Table]

Operating Sublease
Year Ending December 31, Lease Income
------------------------ ----------- -----------

1999............................................... $ 1,966,000 $ 633,000
2000............................................... 1,997,000 429,000
2001............................................... 1,843,000 --
2002............................................... 1,814,000 --
2003............................................... 1,783,000 --
----------- -----------
$ 9,403,000 $ 1,062,000
=========== ===========

Note 10--Related Party Transactions:

On September 4, 1996, the Company entered into a research and development
collaboration agreement with Xenova. The agreement specifies the rights of both
parties to intellectual property developed under the agreement. The agreement
will continue to be in force until the earlier of (i) the date that Xenova
provides the Company with notice that it will cease to provide funding for the
operations of the Company; (ii) the dissolution of the Company; or (iii) the
date of exchange of all shares of Class B and C Preferred Stock and Common
Stock of the Company for shares of Xenova common stock.

On December 17, 1997, the Company entered into a loan agreement with Xenova.
Under this agreement, Xenova agreed to make available to the Company a loan
facility of $1.1 million or such other amounts as the parties may agree to in
writing from time to time. The loan bears interest at the UK LIBOR plus 1%,
compounded quarterly. The loan will mature one year from the date on which
Xenova advances amounts to the Company or such other date as the parties hereto
may agree to in writing from time to time. On January 2, 1998, Xenova advanced
$1.1 million to the Company under this loan agreement.

During 1998 the loan agreement was amended and the total amount available
was increased to $2.92 million, all of which was borrowed and outstanding at
December 31, 1998. Interest due on the loan as of December 31, 1998 amounted to
$115,000.

F-35

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EXELIXIS, INC.

UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENT

On July 11, 1999, the Company acquired substantially all of the assets of
MetaXen, LLC ("MetaXen"), a biotechnology company focused on molecular
genetics, in a transaction accounted for using the purchase method of
accounting. Under the purchase method of accounting, the aggregate purchase
price is allocated to the tangible and identifiable intangible assets acquired
and debt assumed on the basis of their fair values on the acquisition date. The
fair value of the assets purchased, and debt assumed, was determined by
management to equal their respective historical net book values on the
transaction date. The unaudited pro forma combined statement of operations is
based on the individual statements of operations of the Company and MetaXen for
the year ended December 31, 1999. The operations of MetaXen have been included
in the unaudited pro forma combined statement of operations as though the
acquisition had been consummated on January 1, 1999.

The pro forma information has been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission and is provided for
illustrative purposes only. The pro forma information does not purport to be
indicative of the results that actually would have occurred had the combination
been effected on the date indicated above. The unaudited pro forma financial
statement, including the notes thereto, are qualified in their entirety by
reference to, and should be read in conjunction with Management's Discussion
and Analysis of Financial Condition and Results of Operations and the financial
statements and notes thereto, which are included elsewhere herein.

F-36

424B4 108th Page of 110 TOC 1st Previous Next ↓Bottom Just 108th
EXELIXIS, INC.

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(in thousands, except per share data)

[Download Table]

Year Ended December 31,
1999
---------------------------
As Pro
Reported MetaXen Forma
-------- ------- --------

Revenues:
License......................................... $ 1,046 $ -- $ 1,046
Contract........................................ 9,464 2,297 11,761
-------- ------- --------
Total revenues................................ 10,510 2,297 12,807
-------- ------- --------
Operating expenses:
Research and development........................ 21,653 3,328 24,981
General and administrative...................... 7,624 513 8,137
-------- ------- --------
Total operating expenses...................... 29,277 3,841 33,118
-------- ------- --------
Loss from operations.............................. (18,767) (1,544) (20,311)
Interest and other income......................... 571 9 580
Interest expense.................................. (525) (72) (597)
-------- ------- --------
Net loss.......................................... $(18,721) $(1,607) $(20,328)
======== ======= ========
Basic and diluted net loss per share.............. $ (3.47) $ (3.77)
Shares used in computing basic and diluted net
loss per share................................... 5,389 5,389

F-37

424B4 109th Page of 110 TOC 1st Previous Next ↓Bottom Just 109th
EXELIXIS, INC.

NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENT
(UNAUDITED)

Note 1 Basis of Presentation:

On July 11, 1999, the Company acquired substantially all the assets of
MetaXen, LLC ("MetaXen"), a biotechnology company focused on molecular
genetics. In addition to paying cash consideration of $870,000, the Company
assumed a note payable relating to certain acquired assets with a principle
balance due of $1.1 million. The Company also assumed responsibility for a
facility sub-lease relating to the office and laboratory space occupied by
MetaXen.

This transaction was recorded using the purchase method of accounting. The
allocation of the aggregate purchase price to the tangible and identifiable
intangible assets acquired and liabilities assumed in connection with this
acquisition was based on estimated fair values as determined by management. The
purchase price allocation is summarized below (in thousands):

[Download Table]

Pro forma adjustments relating to interest income and interest expense were
not material to the unaudited pro forma combined financial statement.

Note 2 Net Loss Per Share:

Basic and diluted net loss per share and shares used in computing basic and
diluted net loss per share for the year ended December 31, 1999 are based upon
the Company's historical weighted average common shares outstanding. Common
stock issuable upon the exercise of the stock options and warrants, and shares
issuable upon the conversion of preferred stock and note payable have been
excluded from the computation of basic and diluted net loss per share as their
effect would be anti-dilutive.

F-38

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

No dealer, salesperson or other person is authorized to give any informa-
tion or to represent anything not contained in this Prospectus. You must not
rely on any unauthorized information or representations. This Prospectus is an
offer to sell only the shares offered hereby, but only under circumstances and
in jurisdictions where it is lawful to do so. The information contained in
this Prospectus is current only as of its date.

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

TABLE OF CONTENTS

[Download Table]

Page
----

Prospectus Summary........................................................ 1
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 15
Dividend Policy........................................................... 15
Capitalization............................................................ 16
Dilution.................................................................. 17
Selected Financial Data................................................... 19
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 20
Business.................................................................. 25
Management................................................................ 42
Certain Transactions...................................................... 56
Principal Stockholders.................................................... 58
Description of Capital Stock.............................................. 61
Shares Eligible for Future Sale........................................... 64
Underwriting.............................................................. 66
Validity of the Common Stock.............................................. 68
Experts................................................................... 68
Where You Can Find More Information....................................... 68
Index to Financial Statements............................................. F-1

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

Through and including May 5, 2000 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether
or not participating in this offering, may be required to deliver a
prospectus. This is in addition to a dealer's obligation to deliver a
prospectus when acting as an underwriter and with respect to an unsold
allotment or subscription.

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

9,100,000 Shares

Exelixis, Inc.

Common Stock

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

[LOGO OF EXELIXIS]

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

Goldman, Sachs & Co.

Credit Suisse First Boston

SG Cowen

Representatives of the Underwriters

-------------------------------------------------------------------------------
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Dates Referenced Herein and Documents Incorporated by Reference

		Referenced-On Page
This ‘424B4’ Filing	Date	First	Last	Other Filings

	3/27/15	43
	9/25/07	65
	1/24/06	65		4
	7/31/05	43
	7/20/05	64
	6/2/04	43		4
	3/31/04	86		10-Q, 8-K
	3/13/04	86
	3/31/03	86		10-Q, 10-Q/A
	3/13/03	86
	1/19/03	60
	1/16/03	60
	3/31/02	86		10-Q
	3/13/02	86
	1/1/01	82
	9/4/00	103
	6/15/00	81
	5/5/00	110
	4/14/00	1
Filed on:	4/11/00			POS EX
	4/10/00	1
	4/7/00	73	78	S-1/A
	3/31/00	7	86	10-Q
	2/28/00	45
	1/31/00	73
	1/1/00	82
	12/31/99	8	109
	7/11/99	107	109
	6/30/99	97
	3/31/99	99
	2/26/99	65
	2/10/99	94
	1/28/99	65
	1/1/99	81	107
	12/31/98	9	106
	2/16/98	105
	1/2/98	106
	12/31/97	22	106
	12/17/97	106
	11/5/97	104
	9/4/97	103
	7/31/97	104
	6/17/97	104
	1/1/97	59	90
	12/31/96	22	104
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Filing Submission 0001012870-00-002035 – Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)

Exelixis, Inc. – IPO: ‘424B4’ on 4/11/00

On: Tuesday, 4/11/00 · Accession #: 1012870-0-2035 · File #: 333-96335

Initial Public Offering (IPO): Prospectus — Rule 424(b)(4)Filing Table of Contents

Document Table of Contents

Dates Referenced Herein and Documents Incorporated by Reference

Initial Public Offering (IPO): Prospectus — Rule 424(b)(4)
Filing Table of Contents