Titan Pharmaceuticals Inc. Annual Report 2002

FY2002 Annual Report · Titan Pharmaceuticals Inc.

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I N N O VAT I O N S I N M E D I C I N E T M

N O V E L A P P R O A C H E S to

IMPROVED T R E AT M E N T S

t i t a n p h a r m a c e u t i c a l s Annual Report 2002

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

..........T I TA N

P H A R M A C E U T I C A L S is advancing potential

B R E A K T H R O U G H T R E AT M E N T S

through the

D R U G D E V E L O P M E N T
P R O C E S S.......................................................

titan pharmaceuticals, inc. is a diversified biopharmaceutical company focused on the development and
commercialization of novel treatments for central nervous system disorders, cancer and other serious and life-threatening
diseases. The company’s numerous products in development utilize innovative technologies that have the potential to
significantly improve the treatment of these diseases. Titan also establishes important partnerships with multinational
pharmaceutical companies and government institutions for the development of its products.

Products in Devlopment

spheramine ® ...........................Parkinson’s Disease ...................................................PHASE: II
Spheramine, a novel treatment designed to provide improved, restorative dopamine replacement therapy, is being
evaluated in a multicenter, randomized, controlled Phase IIb clinical study in advanced Parkinson’s disease.

pivanex ® ..................................Lung Cancer ..........................................................PHASE: II
Pivanex, a histone deacetylase inhibitor with broad-spectrum anti-cancer activity, is being tested in a multicenter,

randomized, controlled Phase IIb clinical study in non-small cell lung cancer.

gallium maltolate ................Cancer and Bone Disease.............................................PHASE: I/II
Gallium maltolate, an oral dosage form of gallium designed to inhibit cancer cellular processes and protect bone from
the effects of tumor metastasis, is being tested in a Phase I/II clinical study in several cancers.

probuphine TM...........................Opiate Addiction ......................................................PHASE: I

Probuphine, a novel long-term treatment for opiate addiction, is being evaluated in a pilot clinical study in patients with
opiate addiction.

iloperidone ............................Schizophrenia, Psychosis..............................................PHASE: III
Iloperidone, a novel atypical agent for the treatment of schizophrenia, has been evaluated in more than 3,700 patients in
seven Phase III clinical studies. Further development of this treatment is pending review by Novartis Pharma AG,
Titan’s corporate partner for the development of iloperidone.

C O R P O R AT E I N F O R M AT I O N

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

Robert E. 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
17 Battery Place, 8th 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.
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.
Former President of Hoechst-Roussel
Pharmaceuticals, Inc.

Eurelio M. Cavalier
Executive Committee
Compensation 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 E. 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
Audit 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

.....................with a TA R G E T E D

F O C U S on T H E R A P I E S for

C A N C E R and

C E N T R A L N E RV O U S S Y S T E M diseases.

Titan’s Drug Development Process

disease targets

Cancer and central nervous system disorders.

background

Evaluating the potential of new discoveries to improve treatment of serious
diseases that affect large numbers of patients with significant unmet needs.

approach

Innovative and proprietary technologies, each representing a novel approach
to treatment.

research team

Physicians and scientists at Titan, major research universities, hospitals and
government institutions.

partners

progress

Multinational pharmaceutical companies.

Advancing four core product development programs through clinical testing.

Dear F E L L O W

S H A R E H O L D E R S . . . . . . . .

LOUIS R. BUCALO, M.D.
Chairman, President & Chief Executice Officer

In 2002, Titan made progress in several important

areas and also faced some significant challenges,

responding to these challenges with a strategic focusing

of resources to strengthen our future opportunities.

Iloperidone demonstrated further supportive

evidence of efficacy and good tolerability in the

treatment of schizophrenia in two additional controlled

studies presented at the European Congress of

Neuropsychopharmacology in October 2002, while a

potentially acceptable EKG profile was demonstrated

in a separate safety study. However, the EKG profile

may limit the ability for dose escalation, and further

development of iloperidone will depend upon

partnering decisions under review by Novartis.

CeaVac® showed evidence of a treatment benefit for

patients receiving an appropriate induction regimen of

six or more doses compared to placebo, in a Phase III

study in advanced colorectal cancer, but did not meet

the study’s primary endpoint of overall survival

improvement. Based upon these results, further

internal development of CeaVac and other monoclonal

antibodies TriAb® and TriGem™ was deferred, until

potential additional supportive data is obtained from

an ongoing government supported cooperative group

study in resected Dukes’ D colorectal cancer.

Titan responded to the technical challenges faced in

these programs by taking decisive steps to focus on and

accelerate four additional core development programs,

while reducing operating expenditures. Titan’s focus on

these four core products, Spheramine, Pivanex, gallium

maltolate and Probuphine, has generated good progress

and further advanced these important programs in

clinical testing.

In collaboration with Schering AG, Titan’s

corporate partner for the development of Spheramine,

Titan reached an important milestone in this program

by initiating a randomized, controlled Phase IIb

study of Spheramine in the treatment of later stage

alone in tumor response, time to progression, and

Parkinson’s disease. In addition, follow-up data from

overall survival. Pivanex has previously demonstrated

Titan’s pilot clinical study of Spheramine showed

synergistic anti-cancer activity with docetaxel in

continued excellent results, with patients demonstrating

laboratory testing, and is a member of a class of

an average 41% improvement in motor function

compounds called histone deacetylase inhibitors,

two years after treatment. These data were presented

representing an important new group of potential

at the annual meeting of the American Academy of

therapeutic compounds for the treatment of cancer

Neurology. Data was also presented this past year at the

and several other diseases.

International Congress on Neural Transplantation and

Also this past year, gallium maltolate demonstrated

Repair in June 2002, demonstrating in preclinical

excellent safety and tolerability in an ongoing Phase I

studies an increased dopaminergic signal in brain

study in patients with advanced cancer. Titan’s

regions treated with Spheramine, supporting the

proprietary gallium maltolate product, the first oral

mechanism of action of Spheramine through the

form of gallium in clinical development for cancer

validated approach of enhancing local dopamine

treatment, seeks to take advantage of the documented

production in the central nervous system.

activity of gallium in previous human testing as an

Probuphine, Titan’s novel treatment in

anticancer agent and bone protective agent. Reliable,

development for opiate addiction, began initial clinical

sustained levels of gallium have been achieved with

testing with launch of our pilot clinical study in 18

Titan’s gallium maltolate product in these studies to

patients suffering from opiate addiction. Patients in this

date, and we look forward to further advancing this

study will be switched from oral therapy to Probuphine,

program.

and evaluated for maintenance of therapeutic benefit,

Titan will continue to move forward aggressively in

safety and tolerability. Probuphine, designed to provide

the coming year to advance our programs, combining

six months of treatment after a single administration

the excellent efforts of our dedicated employees and

under the skin, offers the potential for improved

promising development opportunities to achieve our

compliance and reliability of administration, which are

long-term goals of important contributions and

essential components of success in treatment of this

innovations in medical therapeutics.

disorder, affecting an estimated two million people in

We recognize the commitment of our shareholders,

the U.S. and Europe.

thank you for your support, and look forward with

Titan’s Pivanex program also made important

enthusiasm and excitement to our work toward

progress through successful completion of a Phase I

additional progress and a successful future.

study, demonstrating the safety of administering Pivanex

in combination with docetaxel in patients with advanced

lung cancer. Based on this success, a further important

milestone was achieved with launch of a randomized,

controlled, Phase IIb study of Pivanex in 225 patients

with advanced non-small cell lung cancer. This study

will compare Pivanex plus docetaxel versus docetaxel

LOUIS R. BUCALO, M.D.

..........We C O L L A B O R AT E with MULTINATIONAL

pharmaceutical C O M PA N I E S ,

R E S E A R C H I N S T I T U T E S

and PAT I E N T G R O U P S to

M A X I M I Z E T H E P O T E N T I A L

of our novel treatments in development........................

..............S P H E R A M I N E, in development

for PA R K I N S O N ’ S D I S E A S E, integrates our collaborations with
S C H E R I N G A G , G E R M A N Y and the

N AT I O N A L I N S T I T U T E S O F H E A LT H

to advance this clinical program..............................

candidate

Spheramine

disease target

Parkinson’s disease

background

There are more than one million Parkinson's disease patients in the U.S. and as
many as four million worldwide, many of whom are in advanced stages of the
disease and no longer respond significantly to standard therapies.

approach

A novel application of Titan’s proprietary cell-coated microsphere (CCM™)
technology, Spheramine consists of human retinal pigment epithelial cells
attached to microspheres and is designed to provide improved dopamine
replacement therapy.

research team

Preclinical development was supported by an NIH grant, as was a pilot clinical
study conducted by researchers at Emory University. The current randomized
Phase IIb clinical study involves collaborators at leading academic centers in the
United States and Europe, as well as an international study monitoring committee.

partners

progress

Schering AG, Germany is funding development activities and, in collaboration
with Titan, managing Phase II–III clinical studies.

In a pilot clinical study, patients experienced an average 48% improvement in
motor function one year after treatment. Based upon promising results in both
preclinical and clinical testing, a multicenter, randomized, controlled Phase IIb
clinical study has been initiated.

“Cell therapy is an important area of research that offers hope for patients suffering from Parkinson’s disease,
and the mounting preclinical and clinical evidence supporting the therapeutic potential of Spheramine is
quite promising.”

— Dr. Warren Olanow, Chairman, Department of Neurology, Mount Sinai School of Medicine

.................................Our T E A M works with
R E S E A R C H E R S
from L E A D I N G H O S P I TA L S and A C A D E M I C
I N S T I T U T I O N S to design and implement

clinical studies to evaluate each

of Titan’s novel agents.................................

..................P I VA N E X is being tested for the T R E AT M E N T of advanced

L U N G C A N C E R in collaboration

with a M U LT I N AT I O N A L G R O U P

of more than 50 L E A D I N G O N C O L O G I S T S

in seven countries....................................................

candidate

Pivanex

disease target

Non-small cell lung cancer

background

approach

The American Cancer Society estimates 171,900 new cases of lung cancer and
157,200 deaths from lung cancer in the U.S. in 2003. Non-small cell lung cancer
is the most common form of the disease, representing 80% of all cases.

Inhibits a class of enzymes called histone deacetylases, which are important for
cancer cell growth. This enzyme inhibition effects multiple pathways altering
gene expression, increased cell differentiation and anti-cancer activity.

research team

Titan is working with leading oncologists in a multinational clinical program to
evaluate Pivanex.

progress

In preclinical testing, Pivanex was shown to be synergistic with current
chemotherapy against lung cancer cells. Initial Phase II clinical testing of Pivanex
in non-small cell lung cancer has demonstrated anti-cancer activity and excellent
tolerability. Based on this progress, a randomized Phase IIb clinical study of
Pivanex in combination with docetaxel in non-small cell lung cancer is currently
in progress.

“Histone deacetylase inhibition represents an exciting new approach in cancer therapy. While the target is a
single enzyme, its inhibition by agents such as Pivanex activates a cascade of pathways, resulting in potent
anti-tumor activity. Further, a favorable toxicity profile allows us to easily combine these agents with current
chemotherapy, providing a powerful treatment combination for many cancer settings. Given the anti-cancer
activity observed to date with Pivanex, I am encouraged that this therapy holds significant promise as a
meaningful new treatment for lung cancer.”

—Dr. John Nemunaitis, Baylor University Medical Center; Medical Director, Research Program, US Oncology

............Titan’s P R O D U C T S in development are based on

VA L I D AT E D A N D E S TA B L I S H E D
S C I E N T I F I C P R I N C I P L E S

offering broad potential utility..........................................................

...............G A L L I U M M A LT O L AT E

builds upon the established A C T I V I T Y of
S E M I - M E TA L L I C A G E N T S in the treatment

of cancer, seeking to U N L O C K

T H E T H E R A P E U T I C P O T E N T I A L of gallium...................

candidate

Gallium Maltolate

disease target

Cancer and bone disease

background

Targets include multiple myeloma, metastatic prostate cancer, metastatic bladder
cancer and refractory lymphoma, which represent more than 346,000 newly
diagnosed cases in the U.S. in 2003, according to the American Cancer Society.

approach

An oral dosage form of gallium designed to inhibit ribonucleotide reductase activity
in cancer cells as well as protect bone from the effects of tumor metastasis.

research team

A multi-disciplinary team of oncologists specializing in solid and
hematologic cancers.

progress

Phase I clinical testing currently underway has demonstrated the ability of gallium
maltolate to safely provide potentially therapeutic levels of gallium. Initiation of a
Phase II clinical study is planned for the second half of 2003.

“Early clinical work established gallium as a new semi-metallic agent with multiple mechanisms that could
potentially make it an important therapy in a variety of clinical settings. I am enthusiastic about the prospect
of an orally available form of gallium, like gallium maltolate, that may enable us to further unlock its potential
in treating cancer and other diseases.”

—Dr. Lawrence Einhorn, Distinguished Professor of Medicine, Indiana University School of Medicine

...........Addressing I M P O RTA N T P R A C T I C A L

I S S U E S in patient care can help

doctors provide

M O R E E F F E C T I V E
T R E AT M E N T..........................................................

..................P R O B U P H I N E, a novel treatment in development

for opiate addiction, provides a

P O T E N T I A L S O L U T I O N to significant challenges

facing current treatment......................

candidate

Probuphine

disease target

Opiate addiction

background

approach

Oral dosing poses significant challenges for the treatment of opiate addiction,
including patient compliance. It is estimated that only 15-20% of the 1.3 million
patients in the U.S. currently receive drug treatment.

Implantable drug delivery system that combines a copolymer with buprenorphine,
an approved treatment for opiate addiction, to deliver this agent for an extended
period, potentially eliminating compliance and other issues.

research team

Titan researchers are working with international medical centers experienced in
the treatment of opiate addiction.

progress

Based on the ability of Probuphine to deliver sustained levels of buprenorphine
for up to eight months in preclinical testing, a pilot clinical study in patients with
opiate addiction was initiated in Q2 2003.

“Buprenorphine is effective in treating opiate addiction. However, the challenges associated with oral dosing—
compliance and variable blood levels—remain. An implantable, long-term treatment that overcomes the
limitations of oral therapy is very exciting, and we look forward to the initial clinical results of Probuphine.”

— Dr. Jason White, Professor, Department of Clinical and Experimental Pharmacology,

University of Adelaide, Australia

S E L E C T E D F I NA N C I A L DATA

The selected financial data presented below summarize certain financial data that 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.

(in thousands, except per share data)

2002

2001

2000

1999

1998

Year Ended December 31,

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

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

$ 2,892

4,572 $

1,880

337

—

29,819
—
5,076
3,821

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

$ (28,182)

$ (17,464) $ (18,788)

$ (11,296)

$ (10,614)

$
$

(1.02)
(1.02)

$
$

(0.63) $
(0.63) $

(0.73)
(0.73)

$
$

(0.70)
(0.70)

$
$

(0.81)
(0.81)

27,642
27,642

27,595
27,595

25,591
25,591

16,112
16,112

13,109
13,109

(1) 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, and the acquisition of a minority interest in Theracell

in 1999.

(in thousands)

As of December 31,

2002

2001

2000

1999

1998

Balance Sheet Data
Cash, cash equivalents, and marketable securites
Working capital
Total assets
Total stockholders’ equity

$73,450
70,702
75,926
70,740

$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

M A NAG E M E N T ’ S D I S C U S S I O N A N D A NA LYS I S O F F I NA N C I A L
C O N D I T I O N A N D R E S U LT S O F O P E R AT I O N S

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 attainment 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 state-
ments 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®, Pivanex®, Probuphine™, CeaVac®, TriAb®, TriGem™ and CCM™ are trademarks of Titan
Pharmaceuticals, Inc.

Overview

We are a biopharmaceutical company developing proprietary therapeutics for the treatment of central nervous system
disorders, cancer, and other serious and life threatening diseases. Our product development programs focus on large
pharmaceutical markets with significant unmet medical needs and commercial potential.

Our internal resources are focused primarily on clinical development of the following products:

• Spheramine: for the treatment of late stage Parkinson’s disease
• Pivanex: for the treatment of non-small cell lung cancer
• Gallium maltolate: for the treatment of several cancers and bone related disease associated with cancer
• Probuphine: for the treatment of opiate addiction

We are directly developing our product candidates and also utilizing strategic partnerships, including a collaboration
with Schering AG, Germany (Schering), as well as collaborations with Novartis Pharma AG (Novartis), and with
several government-sponsored clinical cooperative groups. These collaborations help fund product development and
enable us to retain significant economic interest in our products.

Following the announcement of clinical study results last year, we are continuing to evaluate opportunities for the
continued development of iloperidone for the treatment of schizophrenia, and the monoclonal antibodies—CeaVac,
TriAb, and TriGem—for the treatment of various cancers. These programs are focused on externally funded
collaborations for further support and development. In addition, Spheramine development is primarily funded by
our corporate partner for Spheramine, Schering.

M A NAG E M E N T ’ S D I S C U S S I O N A N D A NA LYS I S O F F I NA N C I A L
C O N D I T I O N A N D R E S U LT S O F O P E R AT I O N S ( C O N T I N U E D )

The following table provides summary status of our products in development:

Product

Potential Indication(s)

Phase of Development

Marketing Rights

Spheramine

Parkinson’s Disease

Pivanex

Non-small cell lung cancer

Gallium Maltolate Myeloma, prostate and bladder
cancer, lymphoma, bone disease
associated with cancer

Probuphine

Iloperidone

CeaVac

CeaVac & TriAb

Opiate addiction

Schizophrenia, psychosis

Colorectal, gastrointestinal
and pancreatic cancer

Limited stage non-small
cell lung cancer

Resected Dukes’ D
colorectal cancer

*Further development under review
**Further development pending results of co-operative group study

Phase IIb

Phase I/II

Phase I

Phase III*

Schering AG, Germany

Titan

Novartis Pharma AG

Phase III (colorectal cancer)**

Titan

Phase II (co-operative group study)** 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.

Critical Accounting Policies and the Use of Estimates

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. We believe
the following accounting policies and estimates for the year ended December 31, 2002, to be critical:

Revenue associated with performance milestones, considered “at risk” until the milestones are completed, is recog-
nized 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. We recognized a $2.0
million milestone payment from Schering following Schering’s decision in the first quarter 2002 to initiate larger,
randomized clinical testing of Spheramine for the treatment of patients with late-stage Parkinson’s disease upon the
successful completion of Titan’s Phase I/II clinical study of Spheramine. We had no further obligations to perform
under the agreement relating to this milestone and therefore recognized the milestone as revenue.

We have elected to continue to follow Accounting Principles Board Opinion No. 25 (or APB 25), “Accounting for
Stock Issued to Employees,” rather than the alternative fair value method of accounting prescribed by Statement of
Financial Accounting Standards No. 123 (or SFAS 123), “Accounting for Stock-Based Compensation.” Under APB 25, no
compensation expense is recognized when the exercise price of our employee stock options equals the market price of
the underlying stock on the date of grant. Had we elected to follow the alternative method of accounting prescribed by

SFAS 123, we would have recorded an additional $8.2 million in net loss, or an additional $0.30 of net loss per share
for the year ended December 31, 2002.

Results of Operations

Comparison of Years Ended December 31, 2002 and 2001

Revenues in 2002 were $2.9 million compared to $4.6 million for 2001, a decrease of $1.7 million. The 2002 revenue
included a one-time $2 million milestone payment from Schering following successful completion of the Phase I/II
study and Schering’s decision to initiate randomized clinical testing of Spheramine for the treatment of patients with
late-stage Parkinson’s disease (See Note 7 to the Consolidated Financial Statements). The 2001 revenue included a
one-time license fee payment of $2.5 million received from Novartis for the development and commercialization of
iloperidone in Japan, and an SBIR grant received from the National Institutes of Health in support of the development
of Spheramine.

Research and development expenses for 2002 were $29.8 million compared to $23.3 million for 2001, an increase of
$6.5 million. The increase in research and development was primarily associated with the completion of the random-
ized, placebo-controlled Phase III clinical study of CeaVac in Dukes’ D colorectal cancer and our other expanded
clinical programs in cancer, specifically the Phase II studies with Pivanex and the Phase I/II study with gallium mal-
tolate. Research and development expenses are expected to decrease approximately 25% in 2003 due to the fact that a
larger portion of the clinical studies conducted by the Company will be funded by third parties, including Schering,
the Company’s corporate partner for the development of Spheramine, and the National Cancer Institute, which is
funding various clinical studies of CeaVac and TriAb in cancer.

General and administrative expenses for 2002 were $5.1 million compared to $5.4 million for 2001, a decrease of
$300,000. The decrease was primarily due to lower stock option related non-cash compensation expenses. We expect
G&A costs to remain approximately the same in the future.

Other income, net, for 2002 was $3.8 million compared to $6.7 million for 2001, a decrease of $2.9 million. The
decrease, primarily in interest income, was a result of declining interest rates and our smaller average cash and
marketable securities position.

As a result of the foregoing, we had a net loss of $28.2 million in 2002 compared to a net loss of $17.5 million in 2001.

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. We will also continue to identify new technologies 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, 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 commercial-
ization 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 development was associated with our expanded clinical programs
in cancer, specifically the randomized, placebo-controlled Phase III clinical study of CeaVac in Dukes’ D
colorectal cancer, Phase II studies with Pivanex, the Phase I/II study with Spheramine and the Phase I/II study with
gallium maltolate.

M A NAG E M E N T ’ S D I S C U S S I O N A N D A NA LYS I S O F F I NA N C I A L
C O N D I T I O N A N D R E S U LT S O F O P E R AT I O N S ( C O N T I N U E D )

General and administrative expenses for 2001 were $5.4 million 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.

Liquidity and Capital Resources

(in thousands)

2002

2001

2000

As of December 31:
Cash, cash equivalents and marketable securities
Working capital
Current ratio
Year Ended December 31:
Cash used in operating activities
Cash provided by (used in) investing activities
Cash provided by (used in) financing activities

$ 73,450
70,702
19:1

(29,291)
30,678
(4)

$ 105,051
100,193
18:1

(13,739)
(1,710)
921

$ 117,523
115,386
48:1

(13,163)
(96,906)
83,915

We have funded our operations since inception primarily through sales of our securities, as well as proceeds from
warrant and option exercises, corporate licensing and collaborative 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 commissions 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 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 institutions, universities, and other entities for the perform-
ance 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.

The following table sets forth the aggregate contractual cash obligations as of December 31, 2002 (in thousands):

Payments Due by Period

Contractual obligations

Total

< 1 year

2–3 years

4–5 years

5 years+

Operating leases
Sponsored research & license agreements

$3,498
$2,146

$ 812
$ 601

$ 1,593
$ 618

$ 1,093
$ 618

Total contractual cash obligations

$5,644

$1,413

$ 2,211

$ 1,711

—
$ 309

$ 309

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.

Off-Balance Sheet Arrangements

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.

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. A hypothetical 100 basis point decrease in interest rates would result in an approximate $712K decrease in
cash flow over the subsequent year. 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, 2002 (in thousands, except interest rate):

2003

2004

2005

2006

2007

Total

Estimated
Fair Value

Face Value

Cash equivalents and

marketable securities:

Variable rate securities
Average interest rate
Fixed rate securities
Average interest rate

$ 6,579

1.260%

$ 50,581

—
—
$14,000

5.246%

3.459%

—
—
—
—

$ 6,579

1.260%

$64,581

$66,295

4.859%

C O N S O L I DAT E D BA L A N C E S H E E T S

(in thousands of dollars)

Assets
Current assets:

Cash and cash equivalents
Marketable securities
Related party receivables
Prepaid expenses, other receivables and 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

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, 2002 and 2001

Common stock, at amounts paid in, $0.001 par value per share;

50,000,000 shares authorized, 27,642,085 and 27,641,770 shares
issued and outstanding at December 31, 2002 and 2001, respectively

Additional paid-in capital
Deferred compensation
Accumulated deficit
Accumulated other comprehensive income

Total stockholders’ equity

December 31,

2002

2001

7,155
66,295
316
881

74,647
979
300

5,772
99,279
465
441

105,957
575
600

$ 75,926

$ 107,132

1,901
1,203
841
—

3,945

1,241

894
2,156
714
2,000

5,764

1,241

—

191,680
9,161
(621)
(129,852)
372

191,684
9,017
(795)
(101,670)
1,891

70,740

100,127

$ 75,926

$ 107,132

See accompanying notes.

C O N S O L I DAT E D S TAT E M E N T S O F O P E R AT I O N S

(in thousands, except per share amount)

2002

2001

2000

Year ended December 31,

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

2,696
—
196

2,892

29,819
—
5,076

34,895

1,224
2,600
748

4,572

23,339
—
5,383

28,722

1,194
415
271

1,880

16,744
4,969
4,070

25,783

(32,003)

(24,150)

(23,903)

4,221
(400)

3,821

6,763
(77)

6,686

5,156
(41)

5,115

$ (28,182)

$ (17,464)

$ (18,788)

Basic and diluted net loss per share

(1.02)

(0.63)

(0.73)

Weighted average shares used in computing

basic and diluted net loss per share

See accompanying notes.

27,642

27,595

25,591

C O N S O L I DAT E D S TAT E M E N T S O F S T O C K H O L D E R S ’ E QU I T Y

Preferred Stock

828

Amount

$ 5,000

(606)

(5,000)

222

—

222

—

222

$ —

(in thousands)

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

Balances at December 31, 2001
Comprehensive loss:

Net loss
Unrealized loss on marketable securities

Comprehensive loss
Issuance of common stock upon exercise of options,

net of issuance costs of $6

Compensation related to stock options
Amortization of deferred compensation

Balances at December 31, 2002

See accompanying notes.

Common Stock

Amount

22,892

Additional
Paid-In
Capital

Deferred
Compensation

Accumulated
Deficit

Accumulated
Other
Comprehensive
Income

Total
Stockholders’
Equity

$ 98,266

$ 6,955

$ (501)

(65,418)

$ —

$ 44,302

1,200
1,181
667
94

38,809
4,252
5,000
3,522

1,200

40,914

1,789

27,234

190,763

8,744

461
(53)

1,028
(107)

149
124

27,642

191,684

9,017

(1,324)
571

(1,254)

(83)
542

(795)

—

(4)

144

(141)
315

(18,788)

691

(18,788)
691

(18,097)

38,809
4,252
—
3,522

40,914
465
571

(84,206)

691

114,738

(17,464)

1,200

(17,464)
1,200

(16,264)
1,028
42
41
542

(101,670)

1,891

100,127

(28,182)

(1,519)

(28,182)
(1,519)

(29,701)

(4)
3
315

27,642

$191,680

$ 9,161

$ (621)

$ (129,852)

$ 372

$ 70,740

C O N S O L I DAT E D S TAT E M E N T S O F CA S H F L OW S

(in thousands of dollars)

2002

2001

2000

Year ended December 31,

Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization
Loss on investment activities
Acquired in-process research and development
Non-cash compensation related to stock options

Changes in operating assets and liabilities:

Prepaid expenses, receivables and other current assets
Accounts payable
Accrued clinical trials and other liabilities
Deferred contract revenue

$ (28,182)

$ (17,464)

$ (18,788)

1,569
309
—
318

(1,486)
1,007
(826)
(2,000)

647
—
—
732

(955)
(410)
1,711
2,000

343
—
4,969
1,036

20
(931)
188
—

Net cash used in operating activities

(29,291)

(13,739)

(13,163)

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 provided by (used in) investing activities

Cash flows from financing activities:
Issuance of common stock, net

Net cash (used in) 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

Cash, cash equivalents and marketable securities
at end of year

Schedule of non-cash transaction:

(778)
—
(25,114)
43,718
12,852

30,678

(4)

1,383
5,772

7,155
66,295

(254)
(600)
(72,733)
55,750
16,127

(1,710)

921

(14,528)
20,300

5,772
99,279

(374)
—
(167,355)
51,550
19,273

(96,906)

83,915

(26,154)
46,454

20,300
97,223

$ 73,450

$ 105,051

$ 117,523

Issuance of common stock to acquire technology, net

—

3,522

See accompanying notes.

N OT E S T O C O N S O L I DAT E D F I NA N C I A L S TAT E M E N T S

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 sys-
tem disorders, cancer, and other serious and life threatening diseases. Our product development programs focus on
large pharmaceutical markets with significant unmet medical needs and commercial potential. We conduct a small
portion of our operations through two subsidiaries: Ingenex, Inc. and ProNeura, Inc. At December 31, 2002, we
owned 81% of Ingenex, assuming the conversion of all preferred stock to common stock, and 79% of ProNeura. In
the third quarter of 2000 and in connection with the acquisition of worldwide rights to gallium maltolate, a novel and
proprietary agent for the potential treatment of cancer and other conditions, we acquired GeoMed, Inc., a privately
held California corporation (See Note 8). We operate in one business segment, the development of pharmaceutical
products.

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 transactions are eliminated. 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.

Stock Option Plans

We have elected to continue to follow Accounting Principles Board Opinion No. 25 (or APB 25), “Accounting for
Stock Issued to Employees,” rather than the alternative fair value method of accounting prescribed by Statement of
Financial Accounting Standards No. 123 (or SFAS 123), “Accounting for Stock-Based Compensation.” Under APB
25, no compensation expense is recognized when the exercise price of our employee stock options equals the market
price of the underlying stock on the date of grant. The following table illustrates the effect on our net loss and net
loss per share if Titan had applied the provisions of SFAS 123 to stock-based employee compensation.

Net loss, as reported
Add: Stock-based employee compensation
expense included in reported net loss
Deduct: Stock-based employee compensation expense determined
in accordance with SFAS 123 for all stock option grants

Pro forma net loss

Basic and diluted net loss per share, as reported

Pro forma basic and diluted net loss per share

Year Ended December 31,

2002

2001

2000

$ (28,182)

$ (17,464)

$ (18,788)

318

1,088

1,036

(8,489)

(10,225)

(8,781)

$ (36,353)

$ (26,601)

$ (26,533)

(1.02)

(1.32)

(0.63)

(0.96)

(0.73)

(1.04)

N OT E S T O C O N S O L I DAT E D F I NA N C I A L S TAT E M E N T S ( C O N T I N U E D )

Cash, Cash Equivalents and Marketable Securities

Our cash and investment policy emphasizes liquidity and preservation of principal over other portfolio considera-
tions. 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 investments 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 methodologies. 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 mar-
ketable securities, consisting primarily of high-grade debt securities including money market funds, U.S. government
and corporate notes and bonds, and commercial paper, are classified as available-for-sale at time of purchase and car-
ried at fair value. If the fair value of a security is below its amortized cost for six consecutive months or if its decline
is due to a significant adverse event, the impairment is considered to be other-than-temporary. Other-than-tempo-
rary declines in fair value of our marketable securities are charged against interest income. We recognized expenses
of approximately $9,000 in 2002, and none in 2001 and 2000 as a result of charges related to other-than-temporary
declines in the fair values of certain of our marketable securities. Amortization of premiums and discounts, and real-
ized 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 use-
ful 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 companies 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. Determination of impairment is based on a number of factors, including an assessment of the strength of
investee’s management, the length of time and extent to which the fair value has been less than our cost basis, the
financial condition and near-term prospects of the investee, fundamental changes to the business prospects of the
investee, share prices of subsequent offerings, and our intent and ability to hold the investment for a period of time
sufficient to allow for any anticipated recovery in our carrying value.

In July 2001, we made a $300,000 equity investment in Altagen Biosciences Inc. (formerly 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 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.
In June 2002, we recorded a $300,000 reduction in the carrying value of our investment in Altagen.

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
obligations exist, and there is no continuing involvement by Titan, are recognized on the earlier of when the pay-
ments are received or when collection is assured.

Revenue associated with performance milestones, considered “at-risk” until the milestones are completed, is recog-
nized 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 revenue 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 employ-
ment 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, prod-
uct registration, patent application and prosecution, and investigator sponsored 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 would include the impact of other dilutive equity instruments, primarily our preferred stock,
options and warrants. For the years ended December 31, 2002, 2001 and 2000, outstanding preferred stock, options
and warrants totaled 6.4 million, 4.4 million and 3.9 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, 2002, 2001 and 2000 was $29.7 million, $16.3 million, and $18.1 million, respectively.
Comprehensive loss has been disclosed in the Statement of Stockholders’ Equity for all periods presented.

Recent Accounting Pronouncements

In June 2002, the Financial Accounting Standards Board (or FASB) issued SFAS 146, “Accounting for Costs Associated
with Exit or Disposal Activities,” which addresses accounting for restructuring, discontinued operation, plant closing, or
other exit or disposal activity. SFAS 146 requires companies to recognize costs associated with exit or disposal activi-
ties when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS 146 is to be
applied prospectively to exit or disposal activities initiated after December 31, 2002. The adoption of SFAS 146 is not
expected to have a material impact on our financial position and results of operations.

In November 2002, the FASB issued Interpretation No. 45 (or FIN 45), “Guarantor’s Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 elaborates on the existing
disclosure requirements for most guarantees, including residual value guarantees issued in conjunction with operating
lease agreements. The disclosure requirements are effective for financial statements of interim or annual periods end-
ing after December 15, 2002. The adoption of FIN 45 is not expected to have a material impact on our financial
position and results of operations.

In December 2002, the FASB issued Statement No. 148 (or SFAS 148), “Accounting for Stock-Based Compensation -
Transition and Disclosure.” SFAS 148 amends SFAS 123 “Accounting for Stock-Based Compensation” to provide alternative
methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require more prominent
disclosures in both annual and interim financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The additional disclosure requirements of

N OT E S T O C O N S O L I DAT E D F I NA N C I A L S TAT E M E N T S ( C O N T I N U E D )

SFAS 148 are effective for fiscal years ending after December 15, 2002. We have elected to continue to follow the
intrinsic value method of accounting as prescribed by APB 25 to account for employee stock options. We satisfied
the disclosure requirement under SFAS 148 earlier in this Note 1 under caption “Stock Option Plans.”

2. Available-For-Sale Securities

The following is a summary of our available-for-sale securities at December 31 (in thousands):

Money market funds
Securities of the U.S. government

and its agencies

Corporate notes and bonds
Commercial paper

Classified as:

Cash equivalents
Marketable Securities

2002

2001

Amortized Unrealized
Gain/ (loss)

Cost

Amortized Unrealized

Fair Value

Cost

Gain/ (loss) Fair Value

6,579

— $

6,579

5,478

— $

5,478

40,064
18,571
7,288

241
123
8

40,305
18,694
7,296

60,785
36,603
—

1,380
511
—

62,165
37,114
—

$ 72,502

372

$ 72,874

$ 102,866

1,891

$ 104,757

6,579
66,295

$ 72,874

5,478
99,279

$ 104,757

The estimated fair value of available-for-sale securities at December 31, 2002 was $72.9 million, with $58.5 million
maturing within 1 year and $14.4 million maturing between 1 to 2 years.

Gross realized gains on sales of marketable securities were $116,000 for the year ended December 31, 2002. Gross real-
ized gains for the year ended December 2001 were $149,000, and immaterial for the year ended December 31, 2000.

3. Property and Equipment

Property and equipment consisted of the following at December 31 (in thousands):

Furniture and office equipment
Leasehold improvements
Laboratory equipment
Computer equipment

Less accumulated depreciation and amortization

Property and equipment, net

2002

$ 525
318
365
728

1,936
(957)

$ 979

2001

$ 290
229
363
380

1,262
(687)

$ 575

Depreciation and amortization expense was $374,000, $272,000, and $196,000 for the years ended December 31,
2002, 2001, and 2000, respectively.

4. Sponsored Research and License Agreements

We have entered into various agreements with research institutions, universities, and other entities for the perform-
ance of research and development activities and for the acquisition of licenses related to those activities. Expenses
under these agreements totaled $1.3 million, $1.6 million, and $1.5 million in the years ended December 31, 2002,
2001, and 2000, respectively.

At December 31, 2002, the annual aggregate commitments we have under these agreements, including minimum
license payments, are as follows (in thousands):

2003
2004
2005
2006
2007

$ 601
309
309
309
309

$1,837

After 2007, we must make annual payments aggregating $309,000 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 permitting 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.

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 commercialization 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 development, registration, manufacturing and marketing of iloperidone,
and we have no remaining obligations under the terms of this agreement, except for maintaining certain usual and
customary requirements, such as confidentiality covenants.

N OT E S T O C O N S O L I DAT E D F I NA N C I A L S TAT E M E N T S ( C O N T I N U E D )

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 collab-
orate with Schering on manufacturing and clinical development of our cell therapy product, Spheramine®, for the
treatment of Parkinson’s disease. Under the agreement, we will perform clinical development activities for which we
will receive funding. As of December 31, 2002, we recognized $2.8 million under this agreement to date. In February
2002, we announced that we received a $2.0 million milestone payment from Schering. The milestone payment fol-
lowed Schering’s decision in the first quarter 2002 to initiate larger, randomized clinical testing of Spheramine for
the treatment of patients with late-stage Parkinson’s disease following the successful completion of Titan’s Phase I/II
clinical study of Spheramine. As a result, Titan recognized $2.0 million in contract revenue in the first quarter of
2002. 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 propri-
etary agent, gallium maltolate, for a potential treatment of cancer and bone related disease. We obtained these rights
through the acquisition of GeoMed, Inc., a privately held California corporation. Under this license agreement, 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 complet-
ed 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 technol-
ogy 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 various dates through June 2006. We also lease certain office
equipment under operating and capital leases that expire at various dates through January 2006. Rental expense was
$765,000, $584,000, and $411,000 for years ended December 31, 2002, 2001, and 2000, respectively.

The following is a schedule of future minimum lease payments at December 31, 2002 (in thousands):

2003
2004
2005
2006
2007

$ 812
779
814
754
339

$3,498

10. Stockholders’ Equity

Preferred Stock

In connection with the merger of our Trilex Pharmaceuticals, 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 automatically converts to Titan’s common stock, on
a one-to-one basis, only if certain development milestones are achieved within a certain timeframe. Upon achieve-
ment of the milestones, we would be required to value the technology using the then fair market value of our com-
mon 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 dividend
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 million shares of our common stock for net proceeds of
$38.8 million, after deducting fees and commissions and other expenses of the offering.

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.

Shares Reserved for Future Issuance

As of December 31, 2002, shares of common stock reserved by us for future issuance consisted of the following
(shares in thousands):

Stock options
Preferred stock

11. Stock Option Plans

8,163
222

8,385

In July 2002, we adopted the 2002 Stock Option Plan (2002 Plan). The 2002 Plan assumed the options which remain
available for grant under our option plans previously approved by stockholders. Under the 2002 Plan and predeces-
sor plans, a total of 6.4 million shares of our common stock were authorized for issuance to employees, officers,
directors, consultants, and advisers. Options granted under the 2002 Plan and predecessor plans may either be incen-
tive stock options within the meaning of Section 422 of the Internal Revenue Code and/or options that do not quali-
fy as incentive stock options; however, only employees are eligible to receive incentive stock options. 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 any options
granted under the 2002 Plan must be at least 100% of the fair market value of our common stock on the date of
grant, except when the grantee is a 10% shareholder, in which case the exercise price shall be at least 110% of the
fair market value of our common stock on the date of grant.

Our amended 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

N OT E S T O C O N S O L I DAT E D F I NA N C I A L S TAT E M E N T S ( C O N T I N U E D )

immediately following the later of (i) the 2000 annual stockholders meeting, or (ii) the first annual meeting of stock-
holders after their election to the Board, each Eligible Director will receive an automatic biennial (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 August 2001, we adopted the 2001 Employee Non-Qualified Stock Option Plan (2001 NQ Plan) pursuant to
which 1,750,000 shares of common stock were authorized for issuance for option grants to employees and consult-
ants 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.

Activity under our stock option plans, as well as non-plan activity are summarized below (shares in thousands):

Shares Available
For Grant

Number of
Options
Outstanding

Weighted
Average
Exercise
Price

$ 6.82
—
$36.20
$ 4.31
$19.17

$12.95
—
$15.21
$ 3.26
$26.35

$13.20
—
$ 4.44
—
$15.31

3,304
—
748
(353)
(33)

3,666
—
1,300
(404)
(434)

4,128
—
2,200
—
(138)

6,190

$10.05

377
1,500
(748)
—
28

1,157
1,000
(1,300)
—
434

1,291
2,750
(2,200)
—
132

1,973

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
Increase in shares reserved
Options granted
Options exercised
Options cancelled

Balance at December 31, 2002

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 2002, 2001 and 2000, the number of Substitute Options cancelled were immaterial.

Options for 2.6 million and 2.4 million shares were exercisable at December 31, 2001 and 2000, respectively. The
options outstanding at December 31, 2002 have been segregated into three ranges for additional disclosure as follows
(option shares in thousands):

Options Outstanding

Weighted Average

Options Exercisable

Range of Exercise Prices

Number
Outstanding

Remaining Life Weighted Average

Number Weighted Average

(Years)

Exercise Price

Exercisable

Exercise Price

$ 0.08–$ 1.50
$ 1.51–$ 4.99
$ 5.00–$ 11.62
$ 11.63–$ 46.50

$ 0.08–$ 46.50

200
1,654
2,070
2,266

6,190

2.50
8.66
7.18
7.69

7.61

$ 0.68
$ 2.41
$ 7.48
$18.81

$10.05

198
620
1,352
1,727

3,897

$ 0.67
$ 3.15
$ 7.48
$18.58

$11.36

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 continue to follow APB 25 in accounting for our stock options, rather than the method of
accounting prescribed by SFAS 123. 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.

Pro forma net loss and net loss per share information required by SFAS 123 as amended by SFAS 148 has been
determined as if we had accounted for our employee stock options under the method prescribed by 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 2002, 2001, and 2000: weighted-average volatility factor of 0.79, 0.86, and 0.90, respec-
tively; no expected dividend payments; weighted-average risk-free interest rates in effect of 2.4%, 3.9% and 5.0%,
respectively; and a weighted-average expected life of 3.54, 2.99, and 3.69, respectively. For purposes of disclosure, the
estimated fair value of options is amortized to expense over the options’ vesting period.

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 high-
ly subjective assumptions including the expected stock price volatility. Because our employee stock options have char-
acteristics significantly different from those of traded options, and because changes in the subjective input assump-
tions 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, 2002, 2001, and 2000 was $2.32, $8.44, and $23.56, respectively. A tabular presentation of pro forma
net loss and net loss per share information for all reporting periods is presented in Note 1.

N OT E S T O C O N S O L I DAT E D F I NA N C I A L S TAT E M E N T S ( C O N T I N U E D )

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 employees from time to time in order to attract and retain the best available talent and to
encourage the highest level of performance. In 2002, 2001 and 2000, we provided certain relocation loans to employ-
ees in connection with employment. Also in February 2001, we provided a loan to an a vice president officer in the
principal amount of $373,000 bearing interest at prime rate. The loan was due and payable on August 7, 2002 and as
of December 31, 2002, the principal balance was paid in full.

14. Income Taxes

As of December 31, 2002, we had net operating loss carryforwards for federal income tax purposes of approximately
$130.0 million that expire in the years 2006 through 2022, and federal research and development tax credits of
approximately $1.4 million that expire in the years 2007 through 2022. We also had net operating loss carryforwards
for state income tax purposes of approximately $21.0 million that expire in the years 2004 through 2013.

Utilization of our net operating loss may be subject to substantial annual limitation due to ownership change limita-
tions provided by the Internal Revenue Code and similar state provisions. Such an annual limitation could result in
the expiration 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
liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of
our deferred tax assets are as follows (in thousands):

December 31,

2002

2001

$ 45,300
2,100
4,300
300

$ 34,300
3,000
3,400
900

52,000

41,600

(100)
(51,900)

(800)
(40,800)

—

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

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 $11.1 million, $5.9 million, and $9.4 million during 2002, 2001, and 2000, respectively. The
valuation allowance at December 31, 2002 includes $3.7 million related to deferred tax assets arising from tax bene-
fits associated with stock option plans. This benefit, when realized, will be recorded as an increase to stockholders’
equity.

15. Quarterly Financial Data (Unaudited)

(in thousands, except per share amount)

2002
Total revenue
Net loss
Basic and diluted net loss per share
Cash, cash equivalents and marketable securities

2001
Total revenue
Net loss
Basic and diluted net loss per share
Cash, cash equivalents and marketable securities

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

2,347
$
(4,950)
$
$
(0.18)
$ 96,013

580
$
(4,519)
$
$
(0.16)
$ 114,421

151
$
(7,032)
$
$
(0.25)
$ 89,616

2,873
$
(1,834)
$
$
(0.07)
$ 113,122

158
$
(7,296)
$
$
(0.26)
$ 81,449

530
$
(4,787)
$
$
(0.17)
$ 108,913

236
$
(8,904)
$
$
(0.32)
$ 73,450

589
$
(6,324)
$
$
(0.23)
$ 105,051

R E P O RT O F E R N S T & YO U N G L L P, I N D E P E N D E N T AU D I T O R S

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,
2002 and 2001, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each
of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those stan-
dards require that we plan and perform the audit to obtain reasonable assurance about whether the financial state-
ments 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
consolidated financial position of Titan Pharmaceuticals, Inc. at December 31, 2002 and 2001, and the consolidated
results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in con-
formity with accounting principles generally accepted in the United States.

Palo Alto, California
February 24, 2003

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, 2002:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year Ended December 31, 2001:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter

High

Low

$ 9.810
$ 7.000
$ 4.170
$ 2.860

$39.650
$38.000
$30.350
$10.490

$ 5.600
$ 3.100
$ 1.350
$ 1.200

$14.500
$18.200
$ 5.950
$ 5.250

(b) Approximate Number of Equity Security Holders
The number of record holders of our common stock as of March 24, 2003 was approximately 166. Based on the last
ADP search, we believe there are in excess of 12,000 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.