Titan Pharmaceuticals, Inc. Innovations in Medicine(cid:2) 2001 Annual Report Company Profile Titan Pharmaceuticals is a diversified biopharmaceutical company develop- ing novel products for the improved treatment of cancer and central nervous system disorders. Titan’s mission is the rapid development of innovative products designed to extend patient survival and improve quality of life. Visit our web site at: www.titanpharm.com C N S P r o d u c t s i n D e v e l o p m e n t In dic a ti on(s) Pr ecli ni cal Phas e 1 P has e 2 Phas e 3 Ilope r idon e Schizophrenia, Psychosis S ph era mine ® Parkinson's Disease Pr o bup hine™ Opiate Addiction Pr oma f en™ Alcoholism O n c o l o g y P r o d u c t s i n D e v e l o p m e n t Indication(s) Pr ecl inical Phas e 1 Phas e 2 Ph ase 3 Cea Vac ® Colorectal Cancer TriAb ® Breast Cancer Ce aVa c ®/Tr iAb ® Non-Small Cell Lung Cancer, Colorectal Cancer Tr iAb ®/Tr iGe m™* Small Cell Lung Cancer Piva nex ® Non-Small Cell Lung Cancer Ga llium Ma lt olate Myeloma, Prostate Cancer, Lymphoma, Bladder Cancer RB94 Head and Neck Cancer, Pancreatic Cancer *P ha se II to b e i ni t ia ted 2H 200 2 Table of Contents Pipeline.......................................... 1 President’s Letter....................... 2 Science & Technology............. 4 Financial Information..............12 One To Our Shareholders: In 2001, Titan continued to expand its product development programs, and now has ten therapeutic products in development based on innovative scientific advancements. These novel therapies in development, combined with our strong operational resources and efficient business strategy, continue to provide multiple, growing opportunities for improved treatments of serious and life-threatening diseases. This past year, new data demonstrating the potential of Titan’s products was presented by Titan and our scientific and medical collaborators at numerous scientific meetings, including new study results with Spheramine(cid:3), iloperidone, Pivanex(cid:3), Probuphine(cid:2), CCM(cid:2) technology, and RB94. These results further support the strong scientific basis and therapeutic potential for these programs. In a one-year Phase I/II clinical study of Spheramine, patients with advanced Parkinson’s disease expe- rienced an average improvement in motor function of nearly 50 percent, as well as improvements in quality of life. Safety of Spheramine in this pilot study was also excellent. Titan received a $2 million milestone payment from Schering AG, our corporate partner for the development of Spheramine, for the successful completion of this pilot study. The randomized, placebo-controlled Phase III study of CeaVac(cid:3) in 631 patients with Dukes’ D colorectal cancer has continued to move ahead toward a final analysis of study results at year end 2002. This past year, we also initiated a Phase II study of treatment with CeaVac and TriAb(cid:3) in resected Dukes’ D colorectal cancer. This study is being conducted by the Cancer and Leukemia Group B, with funding from the National Cancer Institute. This same combination of CeaVac and TriAb is also being studied in a Phase II trial in patients with non-small cell lung cancer by the Radiation Therapy Oncology Group, also funded by the NCI. A one-year Phase III study showed that iloperidone improved the symptoms of chronic schizophrenia with fewer treatment-related motor function side effects than haloperidol, a currently available treatment. Novartis Pharma AG, our corporate partner for iloperidone, also initiated additional safety testing to more fully profile the product. Results of a completed Phase II study of Pivanex in refractory non-small cell lung cancer demonstrated clinical benefit, with overall disease stabilization of 12 weeks or more in 30 percent of patients. In addition, encouraging one-year survival of 47 percent and median survival of 11 months was demonstrated in patients whose cancer had progressed after one or two prior chemotherapy regimens. The study also showed that Pivanex was very well tolerated without some of the severe side effects seen with many current cancer treatments. In addition, preclinical studies of Pivanex in both non-small cell lung cancer and bladder cancer in combination with chemotherapy agents demonstrated further enhanced anti-tumor activity, suggesting the potential of combining Pivanex with current chemotherapeutics. Two Probuphine, Titan’s product in development for opiate addiction, demonstrated in a preclinical study that targeted therapeutic blood levels of buprenorphine were achieved and maintained for eight months, with no adverse effects. Probuphine uses Titan’s ProNeura drug delivery system to provide long-term delivery of buprenorphine, a treatment for opiate addiction. Titan’s CCM technology was shown to significantly increase survival in two separate animal models of treatment for glioma. Results showed that attachment to microcarriers enhanced the therapeutic benefit of two different cell types, and increased overall survival in these preclinical studies. Additional preclinical studies also demonstrated the potent anti-tumor effects of RB94 gene therapy in pancreatic cancer, and head and neck cancer. In the coming year, we plan to progress our numerous programs with additional clinical studies of Spheramine in Parkinson’s disease, Probuphine in opiate addiction, CeaVac in colorectal cancer, TriAb and TriGem(cid:2) in small cell lung cancer, Pivanex in non-small cell lung cancer, and gallium maltolate in multiple myeloma and prostate cancer, in addition to other potential studies with iloperidone and other products. The breadth of these development initiatives helps to illustrate Titan’s ability to turn innovative science into practical product development programs, and efficiently target numerous important clinical settings. We are confident that our progress this past year has built further support to establish Titan as an important contributor to new, innovative and improved medical therapies. We would like to thank you, our shareholders, for your support, and we look forward to further progress. Sincerely, Louis R. Bucalo, M.D. Chairman, President and Chief Executive Officer Three Science & Technology Spheramine(cid:3) A Novel Potential Treatment for Parkinson’s Disease Spheramine(cid:3), Titan’s novel cell therapy for Parkinson’s disease, uses Titan’s innovative CCM(cid:2) tech- nology that can potentially overcome the limitations of other cell-based approaches. Spheramine consists of human retinal pigment epithelial (RPE) cells attached to microcarriers. RPE cells, normally found in the eye, act to provide enhanced levels of dopamine, the neurotransmitter deficient in Parkinson’s disease. Microcarriers enhance the ability of the cells to survive in the brain and may also protect cells from rejection. Titan recently completed a pilot clinical study of Spheramine in patients with late-stage Parkinson’s disease, in which Spheramine demonstrated an average of nearly 50 percent improvement in motor function twelve months after treatment. Spheramine is being developed by Titan in collaboration with Schering AG. RPE cells Microcarriers Average Improvement in Phase I/II Study in Late–Stage Parkinson’s Disease Spheramine Spheramine is injected into the regions of the brain in need of dopamine ) n o i t a c i d e M S R D P U n i t n e m e v o r p m I % ( ” f f O “ e r o c S r o t o M 50 40 30 20 10 0 1 3 6 9 12 (Months Post Treatment) Indication(s) Prec linica l P hase 1 Ph ase 2 Phase 3 S p h e r a m i n e ® Parkinson's Disease Four Indicatio n(s) Pr ec li n ic al Ph ase 1 Ph ase 2 P has e 3 I l o p e r i d o n e Schizophrenia, Psychosis Iloperidone Treating Schizophrenia Neurotransmitters Dopamine receptor Iloperidone Serotonin receptor Iloperidone selectively binds to targeted receptors Seven Phase III studies completed to date support the potential therapeutic profile of iloperidone for the treatment of schizophrenia, without some of the major side effects associated with other antipsychotics such as weight gain and movement disorders. Iloperidone’s activity profile can be attributed to its unique structure, which selectively binds to the serotonin and dopamine receptors important for controlling schizophrenic symptoms, without major activity at receptors associated with some troubling side effects. Novartis Pharma AG, Titan’s corporate partner for the development of iloperidone, is completing additional safety testing to more fully profile iloperidone. If the results of these studies are favorable, additional pivotal testing will be performed. Five Monoclonal Antibodies Antibodies that Generate More Antibodies Titan monoclonal antibody Immune system produces antibodies directed against tumor cell Antigen Antigen-expressing tumor cells are attacked by antibodies Titan’s monoclonal antibody products stimulate the human immune system to produce high levels of antibodies against specific cancer antigens, which may help fight cancer and control cancer growth. Enlisting the body’s immune system to attack cancer cells results in an active approach that is targeted, relatively nontoxic and provides sustained levels of antibodies for long-term treatment. Six Targeting Multiple Cancer Antigens The majority of solid tumor cancers are known to express antigens targeted by Titan’s products. Since many tumors express more than one antigen, Titan’s monoclonal antibodies can also be given in combination against certain cancers. CeaVac(cid:3) Attacking the carcinoembryonic antigen CeaVac targets the carcinoembryonic antigen (CEA), which is present on a number of cancers, including colorectal, non-small cell lung, pan- creatic and gastric cancer. CeaVac, which has demonstrated strong immune responses in clinical studies in colorectal cancer patients, is currently under investigation in a controlled Phase III trial in advanced colorectal cancer. M o n o c l o n a l A n t i b o d y P r o d u c t s CEA Antigen-expressing tumor cell Indication(s) P re cl in ic al Phase 1 Phas e 2 Pha se 3 Sp onso r Survival Correlates with Immune Response in Phase I/II Study in Dukes’ D Colorectal Cancer ) s h t n o M , l a v i v r u S n a i d e M ( 20 15 10 5 0 <20 20-50 >50 (Patient Antibody Response, % Inhibition) CeaVac ® Dukes' D Colorectal Cancer Dukes' C Colorectal Cancer* TriA b ® Breast Cancer CeaVa c ®/TriAb ® Non-Small Cell Lung Cancer Colorectal Cancer TriA b ®/TriGem ™* Small Cell Lung Cancer *To be i nitiate d 2H 20 02 TriGem(cid:2) Titan ACOSOG Titan RTOG CALGB SWOG Attacking the human milk fat globule antigen TriAb targets the human milk fat globule (HMFG) antigen, which is present on a number of tumor types including breast, colorectal, non-small cell lung, ovarian, and pancreatic cancer. TriAb is being tested in breast cancer and also in combination with CeaVac for col- orectal and non-small cell lung cancers. GD2 ganglioside TriAb(cid:3) HMFG Antigen-expressing tumor cell Attacking the GD2 ganglioside antigen TriGem targets the GD2 ganglioside, a carbohydrate antigen that is present on a number of tumor types including melanoma, small cell lung cancer, neuroblastoma and sarcoma. TriGem is planned to be tested in combination with TriAb for small cell lung cancer. Antigen-expressing tumor cell Seven Indicatio n(s) P re cl in ic al Phase 1 Phase 2 P h ase 3 P i v a n e x ® Non-Small Cell Lung Cancer Pivanex(cid:3) Targeting a Key Enzyme in Cancer Growth Histone deacetylases (HDAC) play a role in cancer cell growth by condensing the DNA and regulating gene expression critical to cell proliferation. Pivanex(cid:3) acts to inhibit HDACs in cancer cells, activating gene expression to stop cancer cell growth and induce cell differentiation, leading to cancer cell death. Condensed, inactive DNA HDAC enzyme Pivanex Open, active DNA leads to gene expression Pivanex binds to and inhibits HDACs Tumor cell death Titan recently completed a Phase II study of Pivanex in non-small cell lung cancer with encouraging results. In this study, Pivanex showed preliminary therapeutic activity and was very well tolerated, without the severe side effects seen with many current cancer treatments. Eight Gallium Maltolate A Dual Mechanism for Fighting Cancer Titan’s gallium maltolate is the first gallium containing agent with high oral bioavailability. The product has two distinct potential actions: directly targeting and killing cancer cells, and protecting bone from the effects of tumor metastasis. Iron Iron binds to ribonucleotide reductase permitting DNA synthesis Gallium Gallium Maltolate Gallium inhibits ribonucleotide reductase and DNA synthesis causing tumor cell death Tumor cell death A key enzyme essential for DNA replication in cancer cells is ribonucleotide reductase, which is active when bound to ferric iron. Gallium concentrates in tumor tissues and by substituting for ferric iron inhibits the activity of ribonucleotide reductase. This action inhibits DNA synthesis and cancer cell growth. Gallium Osteoclast Osteoblasts Gallium Maltolate Diseased bone Repaired bone Gallium inhibits osteoclasts, and stimulates osteoblasts In bone diseases and cancer metastatic to bone, bone resorption (osteoclasts) outpaces bone deposition (osteoblasts), resulting in weakened and damaged bone. Gallium protects bone from such damage by inhibiting bone resorption and stimulating bone deposition. Gallium maltolate has already been shown to safely provide sustained blood levels of biologically active gallium for the potential treatment of cancer and other diseases. Titan is currently evaluating gallium maltolate in Phase I/II clinical studies in multiple myeloma, metastatic prostate cancer, metastatic bladder cancer and refractory lymphoma. Titan also plans to commence additional studies in bone related disease and other settings. G a l l i u m M a l t o l a t e Indication(s) Prec linica l P hase 1 Ph ase 2 Phase 3 Myeloma, Prostate Cancer, Lymphoma, Bladder Cancer Nine Indication (s) P re cl in ica l Pha se 1 P h ase 2 Ph ase 3 P r o b u p h i n e ™ Opiate Addiction Probuphine(cid:2) Long-Term Delivery of Therapeutics for Drug Addiction Probuphine rods Magnified cross-section of EVA copolymer/buprenorphine matrix Probuphine(cid:2), a long-term treatment for opiate addiction, combines Titan’s proprietary ProNeura drug delivery technology with buprenorphine, a drug with established efficacy in the treatment of opiate addiction. Probuphine is a small rod composed of ethylene vinyl acetate (EVA) and buprenorphine. The EVA copolymer technology forms a matrix in combination with buprenorphine that provides sustained drug release. Preclinical studies by Titan of Probuphine demonstrated targeted concentrations of buprenorphine were achieved and sustained for eight months, with no local toxicity or safety issues. This novel product provides a potential solution to treatment challenges associated with oral or injectable drug delivery, including variable drug levels and poor compliance. Titan is planning to begin clinical testing of Probuphine in 2002. Ten Innovations in Medicine The mechanisms and technologies highlighted in the pages of this report underscore the innovative scientific basis for Titan’s diversified portfolio of therapeutic products in development. Titan’s products represent novel approaches to providing new and better solutions to treating serious diseases. In addition to the product development programs described herein, Titan is conducting research in a number of other areas to explore potential new applications for its technologies. Titan’s strong development pipeline coupled with its strategic partnerships with multinational pharmaceutical companies and alliances with government-sponsored clinical groups enable Titan to potentially offer significant advances in CNS and cancer therapeutics. Eleven 2001 Financial Statements Twelve Selected Financial Data The selected financial data presented below summarizes certain financial data which has been derived from and should be read in conjunction with our consolidated financial statements and footnotes thereto included elsewhere herein. See also Management’s Discussion and Analysis of Financial Condition and Results of Operations. Statement of Operations Data: Total revenue(1) Operating expenses: Research and development Acquired in-process research and development(2) General and administrative Other income, net(3) Net (loss) income Basic net (loss) income per share Diluted net (loss) income per share Shares used in computing: Basic net (loss) income per share Diluted net (loss) income per share Year Ended December 31, 2001 2000 1999 1998 1997 (in thousands, except per share data) $ 4,572 $ 1,880 $ 337 $ — $17,500 23,339 — 5,383 6,686 16,744 4,969 4,070 5,115 9,429 136 2,794 726 7,813 — 3,708 907 9,310 9,500 6,514 8,415 $ (17,464) $ (18,788) $(11,296) $(10,614) $ 592 $ $ (0.63) $ (0.63) $ (0.73) (0.73) $ (0.70) $ (0.70) $ (0.81) $ (0.81) $ 0.05 $ 0.04 27,595 27,595 25,591 25,591 16,112 16,112 13,109 13,109 13,002 13,477 (1) Revenues for 1997 include $17.4 million from fees related to the sublicense of iloperidone to Novartis. Revenues for 2001 include $2.5 million license fee payment from Novartis for the development and commercialization of iloperidone in Japan. (2) Acquired in-process research and development reflects the acquisition of GeoMed in 2000, the acquisition of a minority interest in Theracell in 1999, and the acquisition of an exclusive worldwide (except for Japan) license for iloperidone in 1997. (3) Other income for 1997 includes a gain of $8.4 million from the sale of a research technology. Balance Sheet Data: Cash, cash equivalents, and marketable securities Working capital Total assets Total stockholders’ equity As of December 31, 2001 2000 1999 1998 1997 (in thousands) $105,051 100,193 107,132 100,127 $117,523 115,386 118,442 114,738 $ 46,454 45,128 47,362 44,302 $ 11,655 10,215 12,228 9,406 $24,387 23,642 25,594 17,178 Thirteen Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes. The following discussion contains certain forward-looking statements, within the meaning of the “safe harbor” provi- sions of the Private Securities Reform Act of 1995, the attain- ment of which involves various risks and uncertainties. Forward-looking statements may be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “believe,” “estimate,” “plan,” “anticipate,” “continue,” or similar terms, variations of those terms or the negative of those terms. Our actual results may differ materially from those described in these forward-looking statements due to, among other factors, the results of ongoing research and development activities and pre-clinical testing, the results of clinical trials and the availability of additional financing through corporate partnering arrangements or otherwise. Spheramine(cid:3), CeaVac(cid:3), TriAb(cid:3), TriGem(cid:2), Pivanex(cid:3), Probuphine(cid:2) and CCM(cid:2) are trademarks of Titan Pharmaceuticals, Inc. Overview We are a biopharmaceutical company developing proprietary therapeutics for the treatment of central nervous system dis- orders, cancer, and other serious and life threatening diseases. Our product development programs focus on large pharma- ceutical markets with significant unmet medical needs and commercial potential. We currently have nine products in development, seven of which are in clinical development, with two products in expanded human trials for safety and efficacy, known as Phase III clinical trials. We have five products in trials for preliminary safety and dosing and in trials for initial safety and efficacy, known as Phase I and Phase II clinical trials, respectively. In addition to these programs, we have two products in pre- clinical development. We are independently developing our product candidates and also utilizing strategic partnerships, including collaborations with Novartis Pharma AG (Novartis) and Schering AG (Schering), as well as collaborations with several government-sponsored clinical cooperative groups. These collaborations help fund product development and enable us to retain significant eco- nomic interest in our products. The following table provides a summary status of our products in development: Product Iloperidone Spheramine CeaVac TriAb TriGem CeaVac & TriAb Pivanex Gallium Maltolate RB94 Probuphine Potential Indication(s) Phase of Development Marketing Rights Schizophrenia, psychosis Parkinson’s disease Colorectal, gastrointestinal and pancreatic cancer Breast and ovarian cancer Small cell lung cancer, melanoma Metastatic breast, non-small cell lung, and colorectal cancer Non-small cell lung cancer Myeloma, prostate and bladder cancer, lymphoma, HIV Head and neck cancer Drug addiction Phase III Phase I/II Phase III (colorectal cancer) Phase II (breast cancer) Phase II (melanoma) Phase II Phase II Phase I/II (prostate cancer and multiple myeloma) Pre-clinical Pre-clinical (IND filing: 2H 2002) Novartis Pharma AG Schering AG Titan Titan Titan Titan Titan Titan Titan Titan Our products are at various stages of development and may not be successfully developed or commercialized. We do not currently have any products being sold on the commercial market. Our proposed products will require significant further capital expenditures, development, testing, and regulatory clearances prior to commercialization. We may experience unanticipated problems relating to product development and cannot predict whether we will successfully develop and commercialize any products. An estimation of product completion dates and completion costs can vary significantly for each product and are difficult to predict. Various statutes and regulations also influence our product development progress and the success of obtaining approval is highly uncertain. Fourteen Critical Accounting Policies and the Use of Estimates Results of Operations The preparation of our financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Actual results could differ materially from those estimates. The items in our financial statements requiring significant estimates and judgments are as follows: • The consolidated financial statements include the accounts of Titan and GeoMed, Inc., our wholly owned subsid- iary, and Ingenex, Inc. and ProNeura, Inc., our majority owned subsidiaries. We do not have any unconsolidated subsidiaries. • Contract revenue for research and development is recorded as earned based on the performance requirements of the contract. Non-refundable contract fees or non-refundable upfront license fees for which no further performance obli- gations exist, and there is no continuing involvement by Titan, are recognized on the earlier of when the payments are received or when collection is assured. Revenue associated with performance milestones, con- sidered “at-risk” until the milestones are completed, is recognized based on the achievement of the milestones as defined in the respective agreements. Advance pay- ments received prior to the achievement of milestones are classified as deferred revenue until earned. Government grants, which support our research effort in specific projects, generally provide for reimbursement of approved costs as defined in the grant documents, and revenue is recognized when subsidized project costs are incurred. • Our marketable securities, consisting primarily of high- grade debt securities, are classified as available-for-sale at time of purchase and carried at fair value. Declines in mar- ket value that are deemed to be other than temporary would impact our financial position. • Our investment in equity instruments of other companies is accounted for under the cost method as we do not have the ability to exercise significant influence over their oper- ations. We monitor our investments for impairment and record reductions in carrying value when events or changes in circumstances indicate that the carrying value may not be recoverable. Comparison of Years Ended December 31, 2001 and 2000 Revenues in 2001 were $4.6 million compared to $1.9 million for 2000, an increase of $2.7 million. The increase in revenue was primarily due to a $2.5 million license fee payment from Novartis for the development and commercialization of iloperidone in Japan, and higher SBIR grant revenues from the National Institutes of Health in support of the development of Spheramine, our novel treatment for Parkinson’s disease. See Note 6 to the Consolidated Financial Statements. Research and development expenses for 2001 were $23.3 million compared to $16.7 million for 2000, an increase of $6.6 million. The planned increase in research and develop- ment is associated with our expanded clinical programs in can- cer, specifically the ongoing randomized, placebo-controlled Phase III clinical study of CeaVac in Dukes D colorectal cancer, Phase II studies with Pivanex, Phase I/II study with Spheramine and Phase I/II study with gallium maltolate. Research and development expenses are expected to continue to increase moderately in the future. The rate of increase depends on a number of factors including progress in pre-clinical programs and clinical trials. General and administrative expenses for 2001 were $5.4 mil- lion compared to $4.1 million for 2000, an increase of $1.3 million. The increase, consisting primarily of salaries and employment-related costs, was in support of our expanded clinical and pre-clinical operations and certain stock option related non-cash compensation charges. Other income, net, for 2001 was $6.7 million compared to $5.1 million for 2000, an increase of $1.6 million. The increase, primarily in interest income, was a result of our significantly larger average cash and marketable securities position. As a result of the foregoing, we had a net loss of $17.5 million in 2001 compared to a net loss of $18.8 million in 2000. None of our products have been commercialized, and we do not expect to generate any revenue from product sales or royalties in the foreseeable future. With the advancement in clinical development of our products, we anticipate research and development expenses will increase in the near future, while general and administrative costs necessary to support such research and development activities will increase at a Fifteen Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) controlled rate. We will also continue to identify new technolo- gies and/or product candidates for possible in-licensing or acquisition. Accordingly, we expect to incur operating losses for the foreseeable future. We cannot assure you that we will ever achieve profitable operations. Comparison of Years Ended December 31, 2000 and 1999 Revenues in 2000 were $1.9 million compared to $0.3 million for 1999, an increase of $1.6 million. The increase in revenue is primarily due to our corporate partnership with Schering for the development and commercialization of Spheramine for the treatment of Parkinson’s disease. Ongoing research and development expenses for 2000 were $16.7 million, compared to $9.4 million for 1999, an increase of $7.3 million. The planned increase in ongoing research and development expenditures from 1999 to 2000 was a result of the expansion of our randomized, placebo-controlled Phase III clinical study of CeaVac in Dukes D colorectal cancer, commencement of our Phase I/II clinical study of Spheramine in Parkinson’s disease, advancement of our pre-clinical devel- opment programs and increased manufacturing and devel- opment activity for all of our product candidates. Also in year 2000, we recorded a $5.0 million acquired in-process research and development expense in connection with the acquisition of gallium maltolate, a novel and proprietary agent for the potential treatment of cancer and other con- ditions, including HIV infection. The entire purchase price was charged to acquired in-process research and development on the acquisition date in accordance with generally accepted accounting principles. See Note 8 to the Consolidated Finan- cial Statements. General and administrative expenses for 2000 were $4.1 mil- lion compared to $2.8 million for 1999, an increase of $1.3 million. The increase was in support of our expanded clinical operations, infrastructure development and non-cash com- pensation charges related to stock options. Other income, net, for 2000 was $5.1 million compared to $0.7 million for 1999, an increase of $4.4 million. Other income, net, for 2000 and 1999 primarily consisted of interest income. The increase in interest income resulted from a significantly larger cash and marketable securities position in 2000. As a result of the foregoing, we had a net loss of $18.8 million in 2000 compared to a net loss of $11.3 million in 1999. Liquidity and Capital Resources 2001 2000 1999 (in thousands) $105,051 100,193 18:1 $117,523 115,386 48:1 $46,454 45,128 26:1 As of December 31: Cash, cash equivalents and marketable securities Working capital Current ratio Year Ended December 31: Cash used in operating activities (13,739) (13,163) (10,855) Cash used in investing activities Cash provided by financing activities (1,710) (96,906) (185) 921 83,915 45,839 We have funded our operations since inception primarily through sales of our securities, as well as proceeds from war- rant and option exercises, corporate licensing and collabora- tive agreements, and government-sponsored research grants. In November 2000, we completed a private placement of 1.2 million shares of our common stock for net proceeds of approximately $40.9 million, after deducting fees and commis- sions and other expenses of the offering. In March 2000, we completed a private placement of 1.2 million shares of our common stock for net proceeds of approximately $38.8 million, after deducting fees and com- missions and other expenses of the offering. In October 1999, we called for the redemption of our then out- standing Class A Warrants. Rather than surrendering the war- rants for redemption, warrant holders exercised the option to purchase our common stock and resulted in 7.1 million Class A Warrants, or 99.4%, being exercised with net proceeds to Titan of $39.4 million, after deducting advisory fees and other related expenses. In January 1999, we completed a private placement of 2.3 million shares of our common stock for net proceeds of $5.8 million, after deducting fees and commissions and other expenses of the offering. Uses of cash in operating activities were primarily to fund product development programs and administrative expenses. We have entered into various agreements with research insti- tutions, universities, and other entities for the performance of research and development activities and for the acquisition of licenses related to those activities. Certain of the licenses require us to pay royalties on future product sales, if any. In addition, in order to maintain license and other rights while products are under development, we must comply with customary licensee obligations, including the payment of patent-related costs and meeting project-funding milestones. Sixteen The following table sets forth the aggregate contractual cash obligations as of December 31, 2001 (in thousands): Contractual obligations Operating leases Sponsored research and license agreements Total contractual cash obligations Payments Due by Period Total <1 year 2-3 years 4-5 years 5 years+ $3,246 $3,243 $6,489 $ 669 $1,596 $2,265 $1,433 $ 659 $2,092 $1,144 $ 659 $1,803 — $329 $329 Titan has never entered into any off-balance sheet financing arrangements and has never established any special purpose entities. We have not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets. The only transactions between Titan and related parties during 2001 were a loan made to an officer and an agreement with certain of our officers and directors to rescind stock options that were previously granted and exercised. We expect to continue to incur substantial additional operating losses from costs related to continuation and expansion of product and technology development, clinical trials, and administrative activities. We believe that we currently have sufficient working capital to sustain our planned operations through 2005. Quantitative and Qualitative Disclosures About Market Risk Our portfolio of marketable securities creates an exposure to interest rate risk. We adhere to an investment policy that requires us to limit amounts invested in securities based on maturity, type of instrument, investment grade and issuer. We satisfy liquidity requirements by investing excess cash in securities with different maturities to match projected cash needs and limit concentration of credit risk by diversifying our investments among a variety of high credit-quality issuers. We do not use derivative financial instruments in our investment portfolio. The following table summarizes principal amounts and related weighted-average interest rates by year of maturity on our interest-bearing investment portfolio at December 31, 2001 (in thousands, except interest rate): Cash equivalents and marketable securities Variable rate securities Average interest rate Fixed rate securities Average interest rate 2002 2003 2004 2005 2006 Total Face Value $ 5,478 2.640% $41,468 6.610% — — $53,341 5.601% — — — — — — — — — — — — $ 5,478 2.640% $94,809 6.043% Estimated Fair Value $ 5,478 $99,279 Seventeen Consolidated Balance Sheets Assets Current assets: Cash and cash equivalents Marketable securities Related parties receivables Prepaid expenses and other current assets Total current assets Property and equipment, net Investment in other companies Liabilities and Stockholders’ Equity Current liabilities: Accounts payable Accrued clinical trials expenses Other accrued liabilities Deferred contract revenue Total current liabilities Commitments: Minority interest—Series B preferred stock of Ingenex, Inc. Stockholders’ equity: December 31, 2001 2000 (in thousands of dollars) $ 5,772 99,279 465 441 105,957 575 600 $ 20,300 97,223 104 222 117,849 593 — $ 107,132 $118,442 $ 894 2,156 714 2,000 5,764 $ 1,304 432 727 — 2,463 1,241 1,241 Preferred stock, $0.001 par value per share; 5,000,000 shares authorized, issuable in series: Convertible Series C, 222,400 shares designated, 222,400 shares issued and outstanding, with an aggregate liquidation value of $2,000 at December 31, 2001 and 2000 — — Common stock, at amounts paid in, $0.001 par value per share; 50,000,000 shares authorized, 27,641,770 and 27,233,754 shares issued and outstanding at December 31, 2001 and 2000, respectively Additional paid-in capital Deferred compensation Accumulated deficit Accumulated other comprehensive income Total stockholders’ equity See accompanying notes. 191,684 9,017 (795) (101,670) 1,891 190,763 8,744 (1,254) (84,206) 691 100,127 114,738 $ 107,132 $118,442 Eighteen Consolidated Statements of Operations Revenue: Contract revenue License revenue Grant revenue Total revenue Operating expenses: Research and development Acquired in-process research and development General and administrative Total operating expenses Loss from operations Other income (expense): Interest income Other expense Other income, net Net loss Basic and diluted net loss per share Weighted-average shares used in computing basic and diluted net loss per share See accompanying notes. Year Ended December 31, 2001 2000 1999 (in thousands, except per share amount) $ 1,224 2,600 748 $ 1,194 415 271 $ 4,572 1,880 23,339 — 5,383 28,722 16,744 4,969 4,070 25,783 30 50 257 337 9,429 136 2,794 12,359 (24,150) (23,903) (12,022) 6,763 (77) 6,686 5,156 (41) 5,115 756 (30) 726 $(17,464) $(18,788) $(11,296) $ (0.63) $ (0.73) $ (0.70) 27,595 25,591 16,112 Nineteen Consolidated Statement of Stockholders’ Equity Preferred Stock Common Stock Shares Amount Shares Amount Additional Paid-In Capital Deferred Compensation (in thousands) Accumulated Other Accumulated Comprehensive Stockholders’ Income Deficit Equity Total 828 $ 5,000 13,124 $ 52,291 $ 6,524 $ (287) $ (54,122) $ — $ 9,406 Balances at December 31, 1998 Issuance of common stock in a private placement, net of issuance costs of $403 Issuance of common stock to minority stockholders pursuant to the Theracell Merger Issuance of common stock upon exercise of options and warrants Issuance of common stock upon exercise of Class A Warrants, net of issuance costs of $3,254 Deferred compensation related to stock options Amortization of deferred compensation Net loss Balances at December 31, 1999 Comprehensive loss: Net loss Unrealized gain on marketable securities Comprehensive loss Issuance of common stock in a private placement in March 2000, net of issuance costs of $2,591 Issuance of common stock upon exercise of options and warrants Conversion of Series D preferred stock to common stock Issuance of common stock to acquire a technology, net Issuance of common stock in a private placement in November 2000, net of issuance costs of $2,886 Compensation related to stock options Amortization of deferred compensation Balances at December 31, 2000 Comprehensive loss: Net loss Unrealized gain on marketable securities Comprehensive loss Issuance of common stock upon exercise of options and warrants Rescission of stock option exercises Compensation related to stock options Amortization of deferred compensation 5,797 136 650 39,392 — 217 (11,296) 44,302 (18,788) 691 (18,097) 38,809 4,252 — 3,522 40,914 465 571 2,255 5,797 33 396 136 650 7,084 39,392 431 (431) 217 828 5,000 22,892 98,266 6,955 (501) (11,296) (65,418) (18,788) — — 691 1,200 38,809 1,181 4,252 (606) (5,000) 667 5,000 94 3,522 1,200 40,914 1,789 222 — 27,234 190,763 8,744 (1,324) 571 (1,254) 461 (53) 1,028 (107) 149 124 (83) 542 (84,206) 691 114,738 (17,464) 1,200 (17,464) 1,200 (16,264) 1,028 42 41 542 Balances at December 31, 2001 222 $ — 27,642 $191,684 $9,017 $ (795) $(101,670) $1,891 $100,127 See accompanying notes. Twenty Consolidated Statements of Cash Flows Cash flows from operating activities: Net loss Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization Acquired in-process research and development Non-cash compensation related to stock options Issuance of common stock to acquire minority interest of Theracell, Inc. Other Changes in operating assets and liabilities: Prepaid expenses, receivables and other current assets Accounts payable Accrued clinical trials and other liabilities Deferred contract revenue Net cash used in operating activities Cash flows from investing activities: Purchases of property and equipment, net Investment in other companies Purchases of marketable securities Proceeds from maturities of marketable securities Proceeds from sales of marketable securities Net cash used in investing activities Cash flows from financing activities: Issuance of common stock, net Net cash provided by financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Marketable securities at end of year Years Ended December 31, 2001 2000 1999 (in thousands of dollars) $ (17,464) $ (18,788) $(11,296) 647 — 732 — — (955) (410) 1,711 2,000 343 4,969 1,036 — — 20 (931) 188 — 412 — 217 136 13 (575) 438 (200) — (13,739) (13,163) (10,855) (254) (600) (72,733) 55,750 16,127 (374) — (167,355) 51,550 19,273 (1,710) (96,906) 921 921 (14,528) 20,300 5,772 99,279 83,915 83,915 (26,154) 46,454 20,300 97,223 (185) — — — — (185) 45,839 45,839 34,799 11,655 46,454 — Cash, cash equivalents and marketable securities at end of year $105,051 $ 117,523 $ 46,454 Schedule of non-cash transaction: Issuance of common stock to acquire technology, net See accompanying notes. $ — $ 3,522 $ — Twenty-One Notes to Consolidated Financial Statements 1. Organization and Summary of Significant Accounting Policies The Company and its Subsidiaries We are a biopharmaceutical company developing proprietary therapeutics for the treatment of central nervous system disor- ders, cancer, and other serious and life threatening diseases. Our product development programs focus on large pharma- ceutical markets with significant unmet medical needs and commercial potential. We conduct a portion of our operations through our two subsidiaries: Ingenex, Inc. and ProNeura, Inc. Another majority owned subsidiary, Theracell, Inc., was merged with and into Titan in March 1999 (the Theracell Merger). Pursuant to the Theracell Merger, we issued 33,000 shares of our common stock to the minority stockholders of Theracell and recorded an in-process research and devel- opment expense of $136,000, which equals the value of the common stock issued. In the third quarter of 2000 and in con- nection with the acquisition of worldwide rights to gallium maltolate, a novel and proprietary agent for the potential treatment of cancer and other conditions, including HIV infec- tion, we acquired GeoMed, Inc., a privately held California corporation (See Note 8). We operate in one business segment, the development of pharmaceutical products. Ingenex, Inc. Ingenex is engaged in the development of gene-based thera- peutics for the treatment of cancer. In September 1994, Ingenex issued shares of its Series B convertible preferred stock to a third party for $1.2 million, net of issuance costs. At December 31, 2001, we owned 81% of Ingenex, assuming the conversion of all preferred stock to common stock. ProNeura, Inc. ProNeura is engaged in the development of cost effective, long-term treatment solutions to neurologic and psychiatric disorders through an implantable drug delivery system. At December 31, 2001, we owned 79% of ProNeura. Basis of Presentation and Consolidation The accompanying consolidated financial statements include the accounts of Titan and our wholly and majority owned subsidiaries. All significant intercompany balances and trans- actions are eliminated. The consolidated financial statements are reformatted to present dollars in thousands. Certain prior year balances have been reclassified to conform to the current year presentation. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Cash, Cash Equivalents and Marketable Securities Our cash and investment policy emphasizes liquidity and preservation of principal over other portfolio considerations. We select investments that maximize interest income to the extent possible given these two constraints. We satisfy liquidity requirements by investing excess cash in securities with different maturities to match projected cash needs and limit concentration of credit risk by diversifying our invest- ments among a variety of high credit-quality issuers and limit the amount of credit exposure to any one issuer. The estimated fair values have been determined using available market information and commonly used valuation method- ologies. We do not use derivative financial instruments in our investment portfolio. All investments with original maturities of three months or less are considered to be cash equivalents. Our marketable securities, consisting primarily of high-grade debt securities including money market funds, U.S. government corporate notes and bonds, and commercial paper, are classified as available-for-sale at time of purchase and carried at fair value. Amortization of premiums and discounts, and realized gains and losses are included as interest income. Unrealized gains and losses are included as accumulated other comprehensive income, a separate component of stockholders’ equity. Cost of securities sold is based on specific identification method. Property and Equipment Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets ranging from three to five years. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the assets. Investment in Other Companies We have invested in equity instruments of privately-held com- panies for business and strategic purposes. These investments are classified as long-term assets and are accounted for under the cost method as we do not have the ability to exercise significant influence over their operations. We monitor our investments for impairment and record reductions in carrying value when events or changes in circumstances indicate that the carrying value may not be recoverable. In July 2001, we made a $300,000 equity investment in CSS Acquisition Corporation for 300 shares of Series D Preferred stock, representing 2.5% of total equity in the company. In December 2001, we made a $300,000 equity investment Twenty-Two in Molecular Medicine LLC for 714,286 shares of Series A Preferred stock, representing 13.6% of total equity in the company. These investments are intended to strengthen our relationships with companies that provide contracted services and resources that are important to our operations. Revenue Recognition and Deferred Revenue Contract revenue for research and development is recorded as earned based on the performance requirements of the contract. Non-refundable contract fees or non-refundable upfront license fees for which no further performance obli- gations exist, and there is no continuing involvement by Titan, are recognized on the earlier of when the payments are received or when collection is assured. Revenue associated with performance milestones, considered “at-risk” until the milestones are completed, is recognized based on the achievement of the milestones as defined in the respective agreements. Advance payments received prior to the achievement of milestones are classified as deferred revenue until earned. Government grants, which support our research effort in specific projects, generally provide for reimbursement of approved costs as defined in the grant documents, and rev- enue is recognized when subsidized project costs are incurred. Sponsored Research and Development Costs Research and development expenses include internal and external costs. Internal costs include salaries and employment related expenses, facility costs, administrative expenses and allocations of corporate costs. External expenses consist of costs associated with outsourced clinical research organization activities, sponsored research studies, product registration, patent application and prosecution, and investigator spon- sored trials. All such costs are charged to expense as incurred. Net Loss Per Share We calculate basic net loss per share using the weighted- average common shares outstanding for the period. Diluted net income per share includes the impact of other dilutive equity instruments, primarily our preferred stock, options and warrants. For the years ended December 31, 2001, 2000 and 1999, outstanding preferred stock, options and war- rants totaled 4.4 million, 3.9 million and 4.3 million shares, respectively. We reported net losses for all years presented and, therefore, preferred stock, options and warrants were excluded from the calculation of diluted net loss per share as they were anti-dilutive. Comprehensive Income Comprehensive income is comprised of net loss and other comprehensive income. The only component of other comprehensive income is unrealized gains and losses on our marketable securities. Comprehensive loss for the years ended December 31, 2001, 2000 and 1999 were $16.3 million, $18.1 million and $11.3 million, respectively. Comprehensive loss has been disclosed in the Statement of Stockholders’ Equity for all periods presented. Recent Accounting Pronouncements In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141, “Business Combinations” (SFAS 141). SFAS 141 addresses finan- cial accounting and reporting for business combinations, and supersedes APB Opinion No. 16, “Business Combinations” and a number of interpretations of that opinion. SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and also specifies the criteria for the recognition of intangible assets separately from goodwill. When the amounts of goodwill and intangible assets acquired are significant in relation to the purchase price paid, disclosure of the amount of goodwill by reportable segment and the amount of purchase price assigned to each major intangible asset class is required. Our adoption of SFAS 141 on January 1, 2002 is not expected to have a material impact on our financial position and results of operations. In July 2001, the FASB issued Statement of Financial Account- ing Standards No. 142, “Goodwill and Other Intangibles” (SFAS 142). Under SFAS 142, goodwill and indefinite-lived intangible assets are no longer amortized but are reviewed annually for impairment (or more frequently if impairment indicators arise). Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their estimated useful lives. We have not recorded any goodwill or indefinite-lived intangible assets prior to December 31, 2001. Our adoption of SFAS 142 on January 1, 2002 is not expected to have a material impact on our financial position and results of operations. In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144, “Accounting for the Impair- ment or Disposal of Long-Lived Assets” (SFAS 144), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes Statement 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,” and the accounting and reporting provisions of APB Opinion No. 30, “Reporting the Results of Operations for a Disposal of a Seg- ment of a Business.” Our adoption of SFAS 144 on January 1, 2002 is not expected to have a material impact on our financial position and results of operations. Twenty-Three Notes to Consolidated Financial Statements (continued) 2. Available-for-Sale Securities The following is a summary of our available-for-sale securities at December 31 (in thousands): 2001 2000 Money market funds Securities of the U.S. government and its agencies Corporate notes and bonds Commercial paper Classified as: Cash equivalents Marketable securities Amortized Cost Unrealized Gains $ 5,478 60,785 36,603 — $102,866 $ — 1,380 511 — $1,891 Amortized Cost Unrealized Gains Fair Value $ 5,478 62,165 37,114 — $ 17,835 52,280 42,289 3,957 $104,757 $116,361 $ 5,478 99,279 $104,757 $ — 393 296 2 $691 Fair Value $ 17,835 52,673 42,585 3,959 $117,052 $ 19,829 97,223 $117,052 The estimated fair value of available-for-sale securities at December 31, 2001 was $104.8 million, with $5.8 million maturing within 1 year and $98.9 million maturing between 1 to 3 years. Gross realized gains on sales of marketable securities were $149,000 for the year ended December 31, 2001. Gross realized gains or losses were immaterial for the years ended December 31, 2000 and 1999. 3. Property and Equipment Property and equipment consisted of the following at December 31 (in thousands): At December 31, 2001, the annual aggregate commitments we have under these agreements, including minimum license payments, are as follows (in thousands): Furniture and office equipment Leasehold improvements Laboratory equipment Computer equipment Less accumulated depreciation and amortization Property and equipment, net 2001 2000 $ 290 229 363 380 $ 191 213 354 250 1,262 1,008 (687) (415) $ 575 $ 593 Depreciation and amortization expense was $272,000, $196,000 and $174,000 for the years ended December 31, 2001, 2000 and 1999, respectively. 4. Sponsored Research and License Agreements We have entered into various agreements with research insti- tutions, universities, and other entities for the performance of research and development activities and for the acquisition of licenses related to those activities. Expenses under these agreements totaled $1.6 million, $1.5 million and $1.3 million in the years ended December 31, 2001, 2000 and 1999, respectively. 2002 2003 2004 2005 2006 $1,596 329 329 329 329 $2,912 After 2006, we must make annual payments aggregating $329,000 per year to maintain certain licenses. Certain licenses provide for the payment of royalties by us on future product sales, if any. In addition, in order to maintain these licenses and other rights during product development, we must comply with various conditions including the payment of patent related costs and obtaining additional equity investments. 5. Agreement with Aventis SA In 1997, we entered into an exclusive license agreement with Aventis SA (formerly Hoechst Marion Roussel, Inc.). The agreement gave us a worldwide license to the patent rights and know-how related to the antipsychotic agent iloperidone, including the ability to develop, use, sublicense, manufacture and sell products and processes claimed in the patent rights. We are required to make additional benchmark payments as specific milestones are met. Upon commercialization of the product, the license agreement provides that we will pay royalties based on net sales. Twenty-Four 6. Iloperidone Sublicense to Novartis Pharma AG We entered into an agreement with Novartis in 1997 pursuant to which we granted Novartis a sublicense for the worldwide (with the exception of Japan) development, manufacturing and marketing of iloperidone. In April 2001, we entered into an amendment to the agreement for the development and com- mercialization of iloperidone in Japan. Under the amendment, in exchange for rights to iloperidone in Japan, Titan received a $2.5 million license fee in May 2001. Novartis will make our milestone payments to Aventis during the life of the Novartis agreement, and will also pay to Aventis and Titan a royalty on future net sales of the product, providing Titan with a net royalty of 8% on the first $200 million of sales annually and 10% on all sales above $200 million on an annual basis. Novartis has assumed the responsibility for all clinical develop- ment, registration, manufacturing and marketing of iloperi- done, and we have no remaining obligations under the terms of this agreement, except for maintaining certain usual and customary requirements, such as confidentiality covenants. 7. Licensing and Collaborative Agreement with Schering AG In January 2000, we entered into a licensing and collaborative agreement with Schering, under which we will collaborate with Schering on manufacturing and clinical development of our cell therapy product, Spheramine(cid:3), for the treatment of Parkinson’s disease. Under the agreement, we will perform clinical development activities for which we will receive fund- ing. As of December 31, 2001, we recognized $2.2 million under this agreement. Schering will fully fund, and manage in collaboration with us, all future pilot and pivotal clinical studies, and manufacturing and development activities. We are entitled to certain payments upon the achievement of specific milestones. 8. Acquisition of a Novel and Proprietary Agent In July 2000, we announced the acquisition of a worldwide, royalty-bearing, exclusive license to a novel and proprietary agent, gallium maltolate, for a potential treatment of cancer and other conditions, including HIV infection. We obtained these rights through the acquisition of GeoMed, Inc., a pri- vately held California corporation. Under this license agree- ment, we are required to make an annual license payment to Dr. Lawrence Bernstein, technology inventor, of $50,000, as well as royalty payments based on net sales of products and processes incorporating the licensed technology. We com- pleted the acquisition in August 2000 by assuming $1.4 million of GeoMed’s liabilities and issuing an aggregate of 94,000 shares of Titan common stock valued at approximately $3.6 million using the fair market value of our common stock at the date of the agreement in accordance with generally accepted accounting principles. The entire purchase price of approximately $5.0 million was charged to acquired in-process research and development as the acquired technology was in an early stage of development that, as of the acquisition date, had not achieved technological feasibility and no alternative use existed. 9. Lease Commitments We lease facilities under operating leases that expire at var- ious dates through June 2006. Rent expense was $584,000, $411,000, and $331,000, for years ended December 31, 2001, 2000, and 1999, respectively. The following is a schedule of future minimum lease payments at December 31, 2001 (in thousands): 2002 2003 2004 2005 2006 $ 665 719 704 755 389 $3,232 10. Stockholders’ Equity Preferred Stock In connection with the merger of our Trilex Pharmaceu- ticals, Inc. subsidiary (Trilex) in 1997, we issued 222,400 shares of Series C convertible preferred stock (the Series C Preferred) to certain members of the Trilex management team and to certain consultants of Trilex. The Series C Preferred automati- cally converts to common stock, on a one-to-one basis, only if certain development milestones are achieved within certain timeframes. Upon achievement of the milestones, we would be required to value the technology using the then fair market value of our common stock issuable upon conversion. Holders of Series C Preferred are not entitled to vote but entitled to receive dividends, when, as and if declared by the board of directors ratably with any declaration or payment of any divi- dend on our common stock or other junior securities. The Series C Preferred has a liquidation preference equal to $0.01 per share. No value was assigned to the Series C Preferred in the accompanying financial statements. Common Stock In March 2000, we completed a private placement of 1.2 mil- lion shares of our common stock for net proceeds of $38.8 million, after deducting fees and commissions and other expenses of the offering. Twenty-Five Notes to Consolidated Financial Statements (continued) In November 2000, we completed a private placement of 1.2 million shares of our common stock for net proceeds of $40.9 million, after deducting fees and commissions and other expenses of the offering. In October 1999, we called for the redemption of our then outstanding Class A Warrants. Rather than surrendering the warrants for redemption, warrant holders exercised the option to purchase our common stock which resulted in 7.1 million Class A Warrants, or 99.4%, being exercised with net proceeds to Titan of $39.4 million, after deducting advisory fees and other related expenses. In January 1999, we completed a private placement of 2.3 mil- lion shares of our common stock for net proceeds of $5.8 million, after deducting fees and commissions and other expenses of the offering. Shares Reserved for Future Issuance As of December 31, 2001, shares of common stock reserved by us for future issuance consisted of the following (shares in thousands): Stock options and warrants Preferred stock 11. Stock Option Plans 5,427 222 5,649 Under our amended 1998 Stock Option Plan and predecessor option plans, a total of 3.6 million shares of our common stock were reserved and authorized for issuance. The option plans provide for the grant of incentive stock options to employees, and non-qualified stock options to employees, directors and consultants. Options granted under the option plans generally expire no later than ten years from the date of grant, except when the grantee is a 10% shareholder, in which case the maximum term is five years from the date of grant. Options generally vest at the rate of one fourth after one year from the date of grant and the remainder ratably over the subsequent three years, although options with different vesting terms are granted from time to time. The exercise price of incentive stock options, non-qualified stock options and options granted to 10% stockholders, shall be at least 100%, 85% and 110%, respectively, of the fair market value of the stock on the date of grant. Our 1998 Option Plan provides for the automatic grant of non-qualified stock options to our directors who are not 10% stockholders (Eligible Directors). Each Eligible Director will be granted an option to purchase 10,000 shares of common stock on the date that such person is first elected or appointed a director. Commencing on the day immediately following the later of (i) the 2000 annual stockholders meeting, or (ii) the first annual meeting of stockholders after their election to the Board, each Eligible Director will receive an automatic bi- annual (i.e., every two years) grant of an option to purchase 15,000 shares of common stock on the day immediately following the date of each annual stockholders meeting, as long as such director is a member of the Board of Directors. In addition, each Eligible Director will receive an automatic annual grant of an option to purchase 5,000 shares of common stock on the day immediately following the date of each annual stockholders meeting for each committee of the Board on which they serve. In November 1999 and in connection with the warrant call, we granted 813,000 non-qualified stock options outside of our stock option plans to our executive officers, at an exercise price of $12.69, vesting equally over 36 months from the date of grant. In August 2001, we adopted the 2001 Employee Non-Qualified Stock Option Plan (2001 NQ Plan) pursuant to which 1.0 mil- lion shares of common stock were reserved and authorized for issuance for option grants to employees and consultants who are not officers or directors of Titan. Options granted under the option plans generally expire no later than ten years from the date of grant. Option vesting schedule and exercise price are determined at time of grant by the Board of Directors. In December 2001, Titan entered into agreements with certain officers and directors of the company to rescind stock options that were previously granted and exercised. These agreements resulted in the rescission of 88,000 stock options that were exercised and, as a result, a total compensation charge of $149,000 was recorded in general and administrative expense and the reinstated options were subsequently cancelled. A total of 53,000 shares of common stock were returned and retired from shares outstanding as of December 31, 2001, and $107,000 was refunded to the individuals. Twenty-Six Activity under our stock option plans, as well as non-plan activity are summarized below (shares in thousands): Balance at December 31, 1998 Increase in shares reserved Options granted Options exercised Options cancelled Balance at December 31, 1999 Increase in shares reserved Options granted Options exercised Options cancelled Balance at December 31, 2000 Increase in shares reserved Options granted Options exercised Options cancelled Balance at December 31, 2001 Shares Available for Grant Number of Options Outstanding Weighted- Average Exercise Price 868 226 (784) — 67 377 1,500 (748) — 28 1,157 1,000 (1,300) — 434 1,291 1,924 — 1,597 (147) (70) 3,304 — 748 (353) (33) 3,666 — 1,300 (404) (434) 4,128 $ 5.45 — $ 8.12 $ 3.32 $ 4.84 $ 6.82 — $ 36.20 $ 4.31 $ 19.17 $ 12.95 — $ 15.21 $ 3.26 $ 26.35 $13.20 Our option plans allow for stock options issued as the result of a merger or consolidation of another entity, including the acquisition of minority interest of our subsidiaries, to be added to the maximum number of shares provided for in the plan (Substitute Options). Consequently, Substitute Options are not returned to the shares reserved under the plan when cancelled. During 2001, 2000 and 1999, the number of Substitute Options cancelled were immaterial. Options for 2.4 million and 2.1 million shares were exercisable at December 31, 2000 and 1999, respectively. The options outstand- ing at December 31, 2001 have been segregated into three ranges for additional disclosure as follows (option shares in thousands): Range of Exercise Prices $ 0.08–$ 7.50 $ 8.39–$12.69 $12.75–$46.50 Options Outstanding Weighted-Average Remaining Life (Years) Options Exercisable Weighted-Average Exercise Price Number Exercisable Weighted-Average Exercise Price 5.99 8.73 8.77 7.66 $ 5.30 $12.01 $30.31 $13.20 1,587 626 375 2,588 $ 5.29 $12.48 $30.87 $10.73 Number Outstanding 1,620 1,646 862 4,128 In addition, Ingenex has a stock option plan under which options to purchase common stock of Ingenex have been and may be granted. No options had been granted under such plan since 1997. We have elected to follow APB 25 in accounting for our stock options because the alternative fair value method of account- ing prescribed by SFAS 123 requires the use of option valua- tion models that were not developed for use in valuing employee stock options. Under APB 25, no compensation expense is recognized when the exercise price of our stock options equals the market price of the underlying stock on the date of grant. For the years ended December 31, 2001, 2000 and 1999, compensation costs for options granted to employees and consultants were $1.1 million, $1.0 million and $0.2 million, respectively. Pro forma net loss and net loss per share information required by SFAS 123 has been determined as if we had accounted for our employee stock options under the fair value method of SFAS 123. The fair value for these options was estimated at the date of grant using a Black-Scholes option-pricing model with the following assumptions for 2001, 2000 and 1999: weighted-average volatility factor of 0.86, 0.90 and 0.80, respectively; no expected dividend payments; weighted- average risk-free interest rates in effect of 3.9%, 5.0% and 6.0%, respectively; and a weighted-average expected life of 2.99, 3.69 and 2.52, respectively. Twenty-Seven Notes to Consolidated Financial Statements (continued) The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because our employee stock options have characteristics sig- nificantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of our employee stock options. Based upon the above methodology, the weighted-average fair value of options granted during the years ended December 31, 2001, 2000 and 1999 was $8.44, $23.56 and $4.83, respectively. For purposes of SFAS 123 disclosures, the estimated fair value of the options is amortized to expense over the options’ vest- ing period. Our pro forma information is as follows (in thou- sands, except per share amount): Net loss as reported Basic and diluted net loss per share as reported Pro forma net loss Pro forma basic and diluted December 31, 2001 2000 1999 $(17,464) $(18,788) $(11,296) $ (0.63) $(27,690) $ (0.73) $(27,569) $ (0.70) $(13,487) net loss per share $ (1.00) $ (1.08) $ (0.84) The consolidated pro forma net loss calculated above also includes the estimated fair value of the options granted by our subsidiaries in 2001, 2000 and 1999, calculated on sub- stantially equivalent assumptions. 12. Minority Interest The $1.2 million received by Ingenex upon the issuance of its Series B convertible preferred stock has been classified as minority interest in the consolidated balance sheet. As a result of the Series B preferred stockholders’ liquidation preference, the balance has not been reduced by any portion of the losses of Ingenex. Amounts invested by outside investors in the common stock of the consolidated subsidiaries have been apportioned between minority interest and additional paid-in capital in the consolidated balance sheets. Losses applicable to the minority interest holdings of the subsidiaries’ common stock have been reduced to zero. 13. Related Parties Transactions We make loans to our officers and employees from time to time in order to attract and retain the best available talent and to encourage the highest level of performance. In 2001 and 2000, we provided certain relocation loans to employees in connection with employment. Also in February 2001, we provided a loan to an officer. The loan, originally due in February 2002, bears an interest rate at prime and has been extended to August 2002. As of December 31, 2001, the principal amount outstanding on the loan was $373,000. 14. Income Taxes As of December 31, 2001, we had net operating loss carry- forwards for federal income tax purposes of approximately $99.0 million that expire in the years 2006 through 2021, and federal research and development tax credits of approximately $2.2 million that expire in the years 2007 through 2021. We also had net operating loss carryforwards for state income tax purposes of approximately $12.0 million that expire in the years 2002 through 2011. Utilization of our net operating loss may be subject to substan- tial annual limitation due to ownership change limitations pro- vided by the Internal Revenue Code and similar state provisions. Such an annual limitation could result in the expira- tion of the net operating loss carryforwards before utilization. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabil- ities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets are as follows (in thousands): Deferred tax assets: Net operating loss carryforwards Research credit carryforwards Capitalized research and development Other, net Total deferred tax assets Deferred tax liabilities: Unrealized gain on investments Valuation allowance Net deferred tax assets December 31, 2001 2000 $ 34,300 3,000 3,400 900 $ 28,200 2,000 2,900 2,000 41,600 35,100 (800) (40,800) (200) (34,900) $ — $ — Twenty-Eight Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. The valuation allowance increased by $9.4 million and $6.7 million during 2000 and 1999, respectively. The valuation allowance at December 31, 2001 includes $2.3 mil- lion related to deferred tax assets arising from tax benefits associated with stock option plans. This benefit, when realized, will be recorded as an increase to stockholders’ equity. 15. Quarterly Financial Data (Unaudited) 2001 Total revenue Net loss Basic and diluted net loss per share Cash, cash equivalents and marketable securities 2000 Total revenue Net loss Basic and diluted net loss per share Cash, cash equivalents and marketable securities 16. Subsequent Event (Unaudited) First Quarter Second Quarter Third Quarter Fourth Quarter (in thousands, except per share amount) $ 580 $ (4,519) $ (0.16) $114,421 $ 335 $ (3,648) $ (0.15) $ 83,865 $ 2,873 $ (1,834) $ (0.07) $113,122 $ 281 $ (2,423) $ (0.09) $ 82,515 $ 530 $ (4,787) $ (0.17) $108,913 $ 695 $ (8,711) $ (0.34) $ 79,797 $ 589 $ (6,324) $ (0.23) $105,051 $ 569 $ (4,006) $ (0.15) $117,523 In February 2002, we announced that we received a $2.0 million milestone payment from Schering, Titan’s corporate partner for worldwide development, manufacture and commercialization of Spheramine®, Titan’s novel cell therapy for the treatment of Parkinson’s disease. The milestone payment follows Schering’s recent decision to initiate larger, randomized clinical testing of Spheramine for the treatment of late-stage Parkinson’s disease upon the successful completion of Titan’s Phase I/II clinical study of Spheramine. Twenty-Nine Report of Ernst & Young LLP, Independent Auditors The Board of Directors and Stockholders Titan Pharmaceuticals, Inc. We have audited the accompanying consolidated balance sheets of Titan Pharmaceuticals, Inc. as of December 31, 2001 and 2000, and the related consolidated statements of opera- tions, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company’s manage- ment. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing stand- ards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reason- able assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consoli- dated financial position of Titan Pharmaceuticals, Inc. at December 31, 2001 and 2000, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. Palo Alto, California February 21, 2002 MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) Price Range of Securities Our common stock trades on the American Stock Exchange under the symbol TTP. The table below sets forth the high and low sales prices of our common stock as reported by the American Stock Exchange for the periods indicated. Fiscal Year Ended December 31, 2001: First Quarter Second Quarter Third Quarter Fourth Quarter Fiscal Year Ended December 31, 2000: First Quarter Second Quarter Third Quarter Fourth Quarter High Low $39.650 $38.000 $30.350 $10.490 $53.000 $45.000 $65.300 $64.750 $14.500 $18.200 $ 5.950 $ 5.250 $15.000 $18.875 $33.000 $31.400 (b) Approximate Number of Equity Security Holders The number of record holders of our common stock as of March 22, 2002 was approximately 152. Based on the last ADP search, we believe there are in excess of 8,000 beneficial holders of our common stock. (c) Dividends We have never paid a cash dividend on our common stock and anticipate that for the foreseeable future any earnings will be retained for use in our business and, accordingly, do not anticipate the payment of cash dividends. Thirty Corporate Information EXECUTIVE OFFICERS BOARD OF DIRECTORS Louis R. Bucalo, M.D. Chairman, President and Chief Executive Officer Sunil Bhonsle Executive Vice President, Chief Operating Officer and Secretary Bob Farrell Executive Vice President, Chief Financial Officer Richard C. Allen, Ph.D. Executive Vice President, Cell Therapy Frank H. Valone, M.D. Executive Vice President, Clinical Development and Regulatory Affairs CORPORATE OFFICE 400 Oyster Point Boulevard, Suite 505 South San Francisco, California 94080 Tel: 650-244-4990 Fax: 650-244-4956 GENERAL COUNSEL Loeb & Loeb LLP 345 Park Avenue New York, New York 10154-0037 SECURITIES LISTING Titan’s securities are listed on the American Stock Exchange Common Stock: TTP INDEPENDENT AUDITORS Ernst & Young LLP Palo Alto, California TRANSFER AGENT AND REGISTRAR Continental Stock Transfer & Trust Company 2 Broadway, 19th Floor New York, New York 10004 Tel: 212-509-4000 Louis R. Bucalo, M.D. Chairman, President and Chief Executive Officer Executive Committee Ernst-Günter Afting, M.D., Ph.D. Audit Committee Compensation Committee President of the GSF-National Center for Environment and Health, Germany Former President and Chief Executive Officer of Roussel Uclaf Victor J. Bauer, Ph.D. Executive Director of Corporate Development Former President of Hoechst-Roussel Pharmaceuticals, Inc. Eurelio Cavalier Executive Committee Former Group Vice President of U.S. Pharmaceutical Business Unit, Eli Lilly & Company Michael K. Hsu Audit Committee General Partner of EndPoint Merchant Group Hubert Huckel, M.D. Executive Committee Audit Committee Compensation Committee Former Chairman of the Board of Hoechst-Roussel Pharmaceuticals, Inc. M. David MacFarlane, Ph.D. Former Vice President and Responsible Head of Regulatory Affairs of Genentech, Inc. Ley S. Smith Executive Committee Former President and Chief Operating Officer of the Upjohn Company, and Former President of Pharmacia & Upjohn’s U.S. Pharma Product Center Konrad M. Weis, Ph.D. Executive Committee Compensation Committee Former President, Chief Executive Officer and Honorary Chairman of Bayer Corporation TITAN PHARMACEUTICALS, INC. 400 OYSTER POINT BLVD., STE 505 SOUTH SAN FRANCISCO, CA 94080 PHONE 650.244.4990 FAX 650.244.4956 WWW.TITANPHARM.COM