Titan Pharmaceuticals Inc. Annual Report 2003

Plain-text annual report

T I TA N P H A R M A C E U T I C A L S , I N C . Innovations in Medicine A N N U A L R E P O RT 2 0 0 3 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 corporate information Executive Officers Louis R. Bucalo, M.D. Chairman, President and Chief Executive Officer Sunil Bhonsle Executive Vice President, Chief Operating Officer, Secretary and Director Robert E. Farrell Executive Vice President, Chief Financial Officer Richard C. Allen, Ph.D. Executive Vice President, Cell Therapy 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 Board of Directors 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. Sunil Bhonsle Executive Vice President, Chief Operating Officer and Secretary Eurelio M. Cavalier Executive Committee Compensation Committee Former Group Vice President of U.S. Pharmaceutical Business Unit, Eli Lilly & Company Hubert E. Huckel, M.D. Executive Committee Compensation Committee Audit Committee Former Chairman of the Board of Hoechst-Roussel Pharmaceuticals, Inc. M. David MacFarlane, Ph.D. Audit Committee 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 T I TA N P H A R M A C E U T I C A L S , I N C . is a biopharmaceutical company focused on the development and commercialization of novel treatments for central nervous system disorders, cancer and cardiovascular disease. Titan’s numerous products in development utilize novel technologies that have the potential to significantly improve the treatment of these diseases. Titan also establishes partnerships with multinational pharmaceutical companies and government institutions for the development of its products. Titan is focused on identifying new drugs to improve the treatment of serious diseases, developing these drug candidates with leading experts in clinical research, and accelerating the development process including using carefully selected strategies, partnering with other leading companies. In 2003, Titan advanced corporate growth through the achievement of significant product development milestones, as well as through the acquisition of an important new product candidate, DITPA, a novel compound in clinical testing for the treatment of congestive heart failure. Titan is pursuing several product development programs in clinical testing: iloperidone, Spheramine®, Probuphine®, DITPA, Pivanex®, and gallium maltolate. to our shareholders During 2003, Titan expanded the number of its core development programs, and made important progress in several areas. Titan’s core product development programs address the following important therapeutic areas: central nervous system disorders, cancer and cardiovascular disease. All of Titan’s products in development are now in clinical testing. Iloperidone, Titan’s novel agent for the treatment of schizophrenia, is continuing in Phase III development. Four products, Spheramine, Probuphine, DITPA and Pivanex are in Phase II clinical testing, and gallium maltolate is in Phase I clinical testing. In June 2004, Titan announced that Vanda Pharmaceuticals, Inc. acquired from Novartis Pharma, AG the worldwide rights to develop and commercialize iloperidone, Titan’s proprietary product in development for the treatment of schizophrenia and related psychotic disorders. Under its agreement with Novartis, Vanda will pursue completion of the iloperidone Phase III development program. All of Titan’s rights and economic interests in iloperidone, including royalties on sales of iloperidone, remain unchanged under the agreement. With the implementation of this agreement, Titan re-established an important Phase III clinical program. Spheramine, our novel cell therapy product, is in development for the treatment of Parkinson’s disease. During 2003, Titan presented additional positive long-term data from a completed pilot study of Spheramine for the treatment of Parkinson’s disease. Two-year results from this pilot study were presented at the Meeting of the American Academy of Neurology in 2003, demonstrating an average 41% improvement in patient motor function two years post treatment with no significant adverse events. A randomized, controlled, blinded Phase IIb clinical study of Spheramine in advanced Parkinson’s disease is currently in process. Titan’s corporate partner for the development of Spheramine, Schering AG, Germany, is funding this study. Probuphine, our novel treatment in development for opiate addiction, is the first product in clinical testing to utilize Titan’s proprietary ProNeura drug delivery system. In 2003, Titan initiated a Phase I/II clinical study of Probuphine for the treatment of opiate addiction. In June 2004, we announced positive results from this study. The data demonstrated that all 12 patients treated with Probuphine at both dose levels tested were safely switched to Probuphine from daily sublingual buprenorphine therapy, with maintenance of therapeutic benefit for six months after a single treatment, and no significant adverse events. In October 2003, Titan acquired 3,5-diiodothyroproprionic acid (DITPA), a novel product in clinical testing for the treatment of congestive heart failure. DITPA is an orally active analogue of thyroid hormone that has demonstrated in preclinical and preliminary clinical studies to date the ability to improve cardiac function. Titan is developing DITPA initially as a potential treatment for congestive heart failure (CHF) associated with low serum thyroid hormone (T3) levels, and plans to initiate a randomized, controlled Phase II clinical study of DITPA in Class III and IV patients with low serum T3 levels in the second half of 2004. In addition, a randomized, controlled Phase II study in patients with Class II–IV CHF was initiated by the Veterans Administration Cooperative Studies Program in 2004. This multi- center study is funded by a $3.8 million government grant from the Veterans Administration system. Pivanex is an anti-cancer agent that inhibits histone deacetylases (HDAC), a class of enzymes important for cell growth. Pivanex is being evaluated in a Phase IIa clinical study as a single agent in the treatment of refractory chronic lymphocytic leukemia. In a Phase IIb clinical study with Pivanex in combination with docetaxel in the treatment of non-small cell lung cancer, Titan discontinued treatment with Pivanex due to significant safety concerns with the combination regimen. Further safety data review and analysis is in progress to determine next steps for Pivanex. Titan’s gallium maltolate is a novel oral agent in development for the treatment of cancer and bone disease. Gallium maltolate demonstrated favorable results in a pilot study presented in September 2003 at the Annual Meeting of the American Society for Bone and Mineral Research, showing that gallium maltolate can achieve targeted, potentially therapeutic serum levels of gallium in patients with advanced Paget’s disease. A Phase I study of gallium maltolate in various cancers is currently ongoing. We would like to thank our shareholders for their support and our employees for their continued dedicated efforts toward further progress in the coming year. Sincerely, Louis R. Bucalo, M.D. Chairman, President and Chief Executive Officer identifying Identifying, evaluating and acquir- ing promising drug candidates are some of Titan’s important core competencies. Titan identifies and acquires compounds and technologies based on important scientific principles that potentially address significant unmet medical needs. “Data from preliminary clinical testing suggest that DITPA may be an important thyroid hormone (T3) replacement therapy for congestive heart failure, due to its potential ability to improve cardiac function without increasing heart rate.” Milton Packer, M.D. Professor of Internal Medicine, Director for the Center of Biostatistics and Clinical Science, Holder of the Gayle and Paul Stoffle Distinguished Chair in Cardiology, University of Texas Southwestern Medical Center at Dallas. DITPA In 2003, Titan acquired DITPA, a novel product in development for the treatment of congestive heart failure (CHF). In a preliminary double-blind, placebo controlled Phase II clinical study in patients with CHF, DITPA was shown to increase cardiac index and lower systemic vascular resistance without increasing heart rate. 4 e g a p market DITPA is in development for the treatment of congestive heart failure (CHF): • More than 15 million patients worldwide with CHF, 4.7 million in the United States. • Approximately 1 million CHF patients collectively in the U.S. and Europe have decreased thyroid hormone (T3) levels— DIPTA’s initial target population. results DITPA INCREASES CARDIAC INDEX A preliminary double-blind, placebo con- trolled Phase II clinical study evaluated the effect of DITPA on cardiac function and systemic vascular resistance in patients with Class II or III CHF. In this study DITPA was seen to increase cardiac index, while lowering systemic vascular resistance. Cardiac Index * 2 m / n i m / L 3 2 1 0 Phase II Clinical Study Systemic Vascular Resistance Index * 2 - m x 5 - m c x c e s x s e n y D 4000 3000 2000 1000 0 Baseline DITPA After 4 Weeks Treatment * Placebo p<0.05 Baseline After 4 Weeks Treatment status • Titan plans to initiate a randomized, controlled Phase II clinical study with DITPA in the second half of 2004 in Class III and IV CHF patients with low serum T3 levels. • The U.S. Department of Veterans Affairs (VA) has initiated a 150 patient, randomized, double blind Phase II clinical study with DITPA in CHF. This multi-center study is funded by a $3.8 million grant from the VA. • An expert advisory group has been established to help guide further development of DITPA. DITPA (3,5-diiodothyropropionic acid) is an orally active analogue of thyroid hormone. Thyroid hormone itself plays a central role in maintaining cardiovascular function, and many patients with advanced (NYHA Class III and IV) CHF have decreased thyroid hormone (T3) levels. Low T3 levels are an independent predictor of poor survival in advanced CHF patients, and this patient group is estimated to comprise approximately 500,000 patients in the U.S., and a similar num- ber in Europe. However, currently available thyroid hormone preparations are not well suited for chronic administration in this setting in advanced CHF. In preliminary studies to date, DITPA has been shown to increase cardiac function with- out increasing heart rate, and represents a potential new approach to the improved treatment of many patients with CHF. 5 e g a p developing During the past year, Titan advanced the development of Probuphine through the initiation and completion of a Phase I/II clinical study evaluating the safety, pharmacokinetics and preliminary efficacy of Probuphine in the treatment of opiate addiction. “Treatment with Probuphine may potentially overcome the challenges of poor compliance, misdirection of drug and variable serum levels associated with daily oral therapy, and provide patients with a more effective treatment option.” John B. Saunders, M.D., FRACP, FAFPHM, FAChAM Professor of Alcohol and Drug Studies, University of Queensland, Director, Alcohol and Drug Service, Royal Brisbane and Women’s Hospital PROBUPHINE Probuphine is Titan’s first product in clinical testing to utilize its pro- prietary ProNeura long-term drug delivery technology. Probuphine is designed to deliver buprenorphine continuously for up to six months following a single visit to the doctor’s office. Continuous long-term delivery of buprenorphine may help eliminate many challenges asso- ciated with daily oral therapy, including poor compliance, variable blood levels, risk of misuse, morning withdrawal symptoms before each dose, and overall reduced therapeutic value. 6 e g a p market • United States: 1.3 million heroin users; 150,000-200,000 receiving pharmacological treatment • European Union: 1.5 million heroin users; 450,000-500,000 receiving pharmacological treatment • France: More than 50% of heroin-addicted patients receiving pharmacological treatment use buprenophrine results Preliminary clinical results demonstrate that Probuphine’s continuous, long-term delivery controls withdrawal symptoms and opiate craving, and may provide a new and important approach to buprenorphine therapy for patients with opiate addiction. ) 0 0 1 . x a M ( e l a c S e u g o l a n A - l a u s i V 100% Assessment of Heroin Cravings 80% 60% 40% 20% 0% -1 0 1 2 3 4 5 6 Dose Level 1 Dose Level 2 Months status • In 2004, Titan completed a Phase I/II clinical study of Probuphine in the treatment of opiate addiction. The study results demonstrated that all 12 patients at two dose levels treated with Probuphine were safely switched from daily oral sublingual buprenorphine therapy to Probuphine, with maintenance of therapeutic benefit for six months after a single treatment, and no significant adverse events. These positive study results were presented at the annual meeting of the International Society of Addiction Medicine in Helsinki in June 2004. Titan’s ProNeura drug delivery system consists of a small, solid rod made from a mixture of ethylene-vinyl acetate (EVA) and drug substance. The resulting product is a solid matrix that releases the drug substance slowly, at continuous levels, through the process of diffusion. The product is placed subcutaneously, normally in the upper arm in a simple 15-minute office procedure, and is removed in a similar manner at the end of the treatment period. ProNeura technology was developed to address the need for a simple, practical method to achieve continuous long-term drug delivery. In addition to Probuphine, Titan has also demonstrated preliminary proof of principle of ProNeura technology with a number of other drugs in preclinical testing, including drugs for the treatment of Parkinson’s disease, psychiatric disorders and alcohol addiction. 7 e g a p developing Titan is conducting a dose ranging clinical study of gallium maltolate in patients with multiple myeloma, metastatic prostate cancer, metastatic bladder cancer and refractory lymphoma. Titan is also conducting preclinical studies to evaluate gallium maltolate in the treatment of liver cancer, bone metastases, metabolic bone disease and rheumatoid arthritis. “Given the scientific evidence from prior clinical studies demonstrating the anti-cancer activity of intravenous gal- lium nitrate in several different tumor types, it is hoped that oral gallium maltolate may prove to be an important, and more easily administered, potential therapy for the treatment of cancer.” Dr. Donald W. Northfelt F.A.C.P., Assistant Clinical Professor of Medicine at the University of California, San Diego, and Medical Oncologist at Eisenhower Medical Center in Rancho Mirage, California. GALLIUM MALTOLATE Gallium maltolate is a novel oral agent for the potential treatment of cancer and bone disease. Gallium, a semi-metallic element, inhibits ribonucleotide reductase, a key enzyme essential for DNA replication in cancer cells. Prior independent clinical studies using intravenously administered gallium nitrate have demonstrated preliminary evidence of clinical activity of gallium in several cancers including multiple myeloma, lymphoma, bladder cancer and prostate cancer. 8 e g a p market Gallium maltolate is being evaluated as a potential treatment for multiple myeloma, metastatic prostate cancer, metastatic bladder cancer and refractory lymphoma: results EFFECT OF GALLIUM MALTOLATE IN AN ANIMAL MODEL OF RHEUMATOID ARTHRITIS In a preclinical animal model for arthritis, oral dosing of gallium maltolate reduced the severity of the disease in a dose-dependent manner. Further development of gallium maltolate therapy in this disease setting is under review. status • Bladder cancer is the sixth most commonly- diagnosed cancer in the U.S., with approxi- mately 54,000 new cases diagnosed each year. • Prostate cancer is the most common male cancer in the U.S. with an incidence of approximately 221,000 new cases each year. • Multiple myeloma is the second most common hematological malignancy, with approximately 14,000 new cases annually in the U.S. • The incidence of lymphoma in the U.S. is approximately 55,000 new cases each year. Histopathologic Scores, 0-5 0 = normal 5 = severe 2.3 2.0 1.9 1.8 100% 2.6 e r o c S n o i t a m r o F s u n n a P 80 60 40 20 0 Histopathologic Scores, 0-5 0 = normal 5 = severe 2.0 1.8 1.4 100% 2.25 2.29 e r o c S n o i t p r o s e R e n o B 80 60 40 20 0 l o r t n o C e s a e s i D A n i r o p s o l c y C g k / g m 0 0 1 e t a l o t l a M m u i l l a G g k / g m 0 0 2 e t a l o t l a M m u i l l a G g k / g m 0 0 3 e t a l o t l a M m u i l l a G 1.3 l o r t n o C l a m r o N l o r t n o C e s a e s i D A n i r o p s o l c y C g k / g m 0 0 1 e t a l o t l a M m u i l l a G g k / g m 0 0 2 e t a l o t l a M m u i l l a G g k / g m 0 0 3 e t a l o t l a M m u i l l a G 0.6 l o r t n o C l a m r o N • Titan is continuing to advance a Phase I/II clinical study with gallium maltolate in advanced cancer patients. • In September 2003, Titan presented favorable results from a dose finding study of oral gallium maltolate in the treatment of advanced Paget’s disease demonstrating achievement of significant serum levels of gallium. Titan is conducting a dose ranging clinical study of gallium maltolate in patients with multiple myeloma, lymphoma, bladder cancer and prostate cancer. The maximum tolerated dose level has not yet been reached. Accordingly, additional patient cohorts are being enrolled at higher doses. In addition to its anti-cancer activity, gallium has been shown in laboratory studies to increase bone deposition and reduce bone turnover. Based on these results, Titan is also conducting preclinical studies evaluating gallium maltolate in other disease settings, including metabolic bone disease and rheumatoid arthritis. 9 e g a p accelerating Spheramine is being developed by Titan and Schering AG, Germany, Titan’s corporate partner for the development of this novel cell therapy for the potential treatment of Parkinson’s disease. A randomized, controlled, blinded, multi-center Phase IIb clinical study of Spheramine in advanced Parkinson’s disease is currently in progress. “Spheramine is an innovative and unique potential therapy for Parkinson’s disease, and preliminary clinical results seen to date are encouraging.” SPHERAMINE Titan enhances resources for product development by establishing Ray L. Watts, M.D. partnerships with other pharmaceutical development companies and Professor and Chairman, Department of Neurology, University of Alabama, Birmingham. 0 1 e g a p government institutions. Spheramine, Titan’s novel cell therapy in development for the treatment of Parkinson’s disease, is being devel- oped through a corporate partnership with Schering AG, Germany. Schering is funding the clinical development program for Spheramine. In 2002, Titan received a $2 million milestone payment from Schering following the successful completion of Titan’s pilot clinical study with Spheramine, and the decision by Schering to market Spheramine is in development for the treatment of later-stage Parkinson’s disease (PD) patients • United States: 400,000 (out of estimated 800,000 total PD population) • European Union: 500,000 (out of estimated 1 million total PD population) UPDRS Score: Group Percent Improvement Motor “OFF” UPDRS results A pilot clinical study of Spheramine in six patients with later-stage Parkinson’s disease demonstrated substantial improvement (48%) in motor function at one-year post treatment with no significant adverse events. t n e m e v o r p m I % 60 50 40 30 20 10 0 ) 6 = n ( h t n o m 1 ) 6 = n ( s h t n o m 3 ) 6 = n ( s h t n o m 6 ) 6 = n ( s h t n o m 9 ) 6 = n ( s h t n o m 2 1 status • At the American Academy of Neurology meeting in 2003, two-year results from the Spheramine pilot study were presented that demonstrated an average 41% improvement in patients’ motor function two years post treatment with no significant adverse events. • A randomized, controlled, blinded Phase IIb clinical study of Spheramine in advanced Parkinson’s disease, initiated in December 2002, is currently in progress, and is proceeding on schedule. Titan’s corporate partner for the development of Spheramine is Schering AG, Germany. initiate randomized clinical testing for the treatment of advanced Parkinson’s disease. In addition to clinical and manu- facturing development funding and milestone payments, Schering will also pay Titan a royalty on future product sales of Spheramine. Spheramine utilizes Titan’s novel, proprietary cell-coated microcarrier (CCM) technology, which enables the development of cell-based therapies for minimally-invasive, site specific delivery of therapeutic factors to the central nervous system. Titan’s CCM technology involves adhering cells to microscopic carriers that can then be implanted into the central nervous system. This confers greatly improved survival to the cells and avoids the need for immunosuppression (suppression of the immune system to prevent rejection). Spheramine is the first Titan product to utilize this technology. 1 1 e g a p ILOPERIDONE Titan’s proprietary product in development for schizophrenia and related psychotic disorders, iloperidone, is now partnered with Vanda Pharmaceuticals, which acquired worldwide rights to iloperidone from Novartis Pharma, AG. Vanda will now move forward to advance iloperidone in Phase III clinical testing. status Iloperidone has been evaluated to date in a Phase III clinical program comprising over 3,500 patients at more than 200 sites in 24 countries. This Phase III program, which was conducted by Novartis Pharma, AG, demonstrated preliminary evidence of the clinical efficacy, safety and tolerability of iloperidone in the treatment of schizophrenia. Additionally, a study was completed in elderly patients with good results. Iloperidone was considered safe in these studies, but also showed a dose dependent increase in the QTc interval that may affect the opportunity for iloperidone as a first line therapy for schizophrenia. Vanda Pharmaceuticals will now pursue advancement of the iloperi- done Phase III development program. Vanda was founded by its Chairman, Dr. Argeris N. Karabelas, formerly CEO of Novartis Pharmaceuticals, and its CEO, Dr. Mihael Polymeropoulos, former Vice President of Pharmacogenetics at Novartis Pharmaceuticals. products in development ILOPERIDONE is an antipsychotic agent in development for the treatment of schizophrenia Schizophrenia SPHERAMINE is a novel cell therapy in development for the treatment of advanced Parkinson’s disease. Advanced Parkinson’s disease PROBUPHINE is a novel treatment in development for opiate addiction that utilizes the Company’s proprietary ProNeura long-term drug delivery system. Probuphine delivers buprenorphine, an approved agent for treatment of opiate addiction, for six months. Opiate addiction disease target DITPA (3,5-diiodothyroproprionic acid), is an orally active analogue of thyroid hormone in development for the treatment of congestive heart failure associated with low thyroid hormone levels. Congestive heart failure 2 1 e g a p PIVANEX is an anti-cancer agent that inhibits histone deacetylases (HDAC), a class of enzymes important for cell growth. Chronic lymphocytic leukemia GALLIUM MALTOLATE is a novel oral agent in development for the treatment of cancer and bone disease. Bladder cancer, lymphoma phase III II II II II I 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. (in thousands, except per share data) 2003 Year Ended December 31, 2001 2002 2000 1999 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 Basic and diluted net loss per share Shares used in computing: Basic and diluted net loss per share $ 89 $ 2,892 $ 4,572 $ 1,880 $ 337 22,258 3,896 5,109 1,285 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 $ (29,889) $ (28,182) $ (17,464) $ (18,788) $ (11,296) $ (1.07) $ (1.02) $ (0.63) $ (0.73) $ (0.70) 27,907 27,642 27,595 25,591 16,112 (1) Revenues for 2001 include $2.5 million license fee payment from Novartis for the development and commercialization of iloperidone in Japan. Revenues for 2002 include a $2.0 million milestone payment from Schering. (2) Acquired research and development reﬂects the acquisition of DTI in 2003 and 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) Balance Sheet Data 2003 As of December 31, 2001 2002 2000 1999 Cash, cash equivalents, and marketable securities Working capital Total assets Total stockholders’ equity $ 46,555 44,578 49,008 44,426 $ 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 3 1 e g a p 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” provisions of the Private Securities Reform Act of 1995, the attainment of which involves various risks and uncertainties. Forward-looking state- ments 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®, 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 CNS disorders, cancer, and cardio- vascular disease. Our product development programs focus on large pharmaceutical markets with signiﬁcant unmet medical needs and commercial potential. We have six products in clinical development: • Ioperidone: for the treatment of schizophrenia and related psychotic disorders (partnered with Vanda Pharmaceuticals, Inc.) • Spheramine: for the treatment of late stage Parkinson’s disease • Probuphine: for the treatment of opiate addiction • DITPA: for the treatment of congestive heart failure • 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 We are directly developing our product candidates and also utilizing strategic partnerships. These collaborations help fund prod- uct development and enable us to retain signiﬁcant economic interest in our products. Spheramine development is primarily funded by our corporate partner for Spheramine, Schering. In June 2004, we announced that Vanda Pharmaceuticals, Inc. had acquired from Novartis Pharma AG the worldwide rights to develop and commercialize iloperidone, Titan’s proprietary antipsy- chotic agent in Phase III clinical development for the treatment of schizophrenia and related psychotic disorders. Under it’s agreement with Novartis, Vanda will pursue advancement of the iloperidone Phase III development program. All of Titan’s rights and economic interests in iloperidone, including royalties on sales of iloperidone, remain essentially unchanged under the agree- ment. Titan is no longer directly pursuing development of the monoclonal antibodies—CeaVac, TriAb, and TriGem—for the treatment of various cancers, and remaining clinical studies are externally funded collaborations with co-operative groups. The following table provides summary status of our products in development: Product Potential Indication(s) Phase of Development Marketing Rights Iloperidone Spheramine Probuphine DITPA Pivanex Schizophrenia, psychosis Parkinson’s disease Opiate addiction Congestive heart failure Chronic lymphocytic leukemia Gallium maltolate Bladder cancer, lymphoma Phase III Phase IIb Phase II Phase II Phase II Phase I VAnda Phar0maceutical Vanda Pharmaceutical Inc. Schering AG Titan Titan Titan Titan * Further development under review. 4 1 e g a p For additional information on our product development programs, see Item 1(c) “Narrative Description of Business” section. 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 expendi- tures, 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. For a full discussion of risks and uncertainties in our product development, see “Risk Factors—Our products are at various stages of development and may not be successfully developed or commercialized.” 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, 2003, to be critical: We have elected to continue to follow Accounting Principles Board Opinion No. 25 (or APB 25), “Accounting for Stock Issued to Employees,” to account for employee stock options because the alternative fair value method of accounting prescribed by Statement of Financial Accounting Standards No. 123 (or SFAS 123), “Accounting for Stock-Based Compensation,” requires the use of option valuation 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 employee stock options equals the market price of the underlying stock on the date of grant. Had we elected to follow SFAS 123 and to apply the fair value method to stock-based employee compensation, we would have recorded an additional $2.0 million in net loss, or an additional $0.07 of net loss per share for the year ended December 31, 2003. RESULTS OF OPERATIONS Comparison of Years Ended December 31, 2003 and 2002 Revenues in 2003 were $0.1 million compared to $2.9 million for 2002, a decrease of $2.8 million. Our 2002 revenue included a one-time $2 million milestone payment from Schering AG following successful completion of our Phase I/II clinical study of Spheramine in the treatment of Parkinson’s disease 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 beginning on page F-1 in this report). In addition, our 2002 revenue also included SBIR grant revenues from the National Institutes of Health in support of the development of Spheramine. We had no comparable milestone or grant revenue in 2003. Research and development expenses for 2003 were $22.3 million compared to $29.8 million for 2002, a decrease of $7.5 million. The decrease in research and development was primarily associated with the completion of a randomized, placebo-controlled Phase III clinical study in 2002. Of our 2003 research and development expenses, approximately 52%, or $11.7 million, were attributable to external R&D expenses. External R&D expenses include direct expenses such as clinical research organization charges, investigator and review board fees, patient expense reimbursements, pre-clinical activities and contract manufacturing expenses. In 2003, approximately $5.2 million of external R&D expenses were related to Pivanex, $1.2 million to Probuphine, $1.3 million to gallium maltolate, $0.6 million to Spheramine, and the remainder to other projects. Remaining R&D expenses were attributable to internal operating costs, which include clinical research and development personnel salaries and employment related expenses, clinical trials related travel expenses, and allocation of facility and corporate costs. In 2003, we recorded a $3.9 million acquired research and development expense in connection with the acquisition of DITPA, a novel product for the potential treatment of congestive heart failure. The entire purchase price was charged to acquired research and development on the acquisi- tion date in accordance with generally accepted accounting principles. See Note 8 to the Consolidated Financial Statements beginning on page F-1 in this report. As a result of the risks and uncertainties inherently associated with pharmaceutical research and development activities described elsewhere in this report, we are unable to estimate the speciﬁc timing and future costs of our clinical development programs or the timing of material cash inﬂows, if any, from our product candidates. 5 1 e g a p management’s discussion and analysis of ﬁnancial condition and results of operations (continued) General and administrative expenses for 2003 were $5.1 million compared to $5.1 million for 2002. We expect G&A costs to remain approximately the same in 2004. Other income, net, for 2003 was $1.3 million compared to $3.8 million for 2002, a decrease of $2.5 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 $29.9 million in 2003 compared to a net loss of $28.2 million in 2002. None of our products has 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, 2002 and 2001 Revenues in 2002 were $2.9 million compared to $4.6 million for 2001, a decrease of $1.7 million. Our 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 randomized, 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 maltolate. 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. 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. LIQUIDITY AND CAPITAL RESOURCES (in thousands) 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 2003 2002 2001 $ 46,555 $ 44,578 14:1 $ 73,450 $ 70,702 19:1 $105,051 $100,193 18:1 $ (26,438) $ 26,002 113 $ $ (29,291) $ 30,678 (4) $ $ (13,739) $ (1,710) 921 $ 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 October 2003, we acquired DITPA through the acquisition of Developmental Therapeutics, Inc. in a stock transaction for 1,187,500 shares of Titan common stock valued at approximately $3.6 million using the average market price of our common stock over the ﬁve-day trading period, including and prior to the date of the merger. In addition, up to a total of 750,000 shares of common stock will be issued only upon the achievement of positive pivotal study results or certain other substantial milestones within ﬁve years. 6 1 e g a p 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 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, annual minimum license fees, and meeting project-funding milestones. The following table sets forth the aggregate contractual cash obligations as of December 31, 2003 (in thousands): Payments Due by Period Total < 1 year 1–3 years 3–5 years 5 years+ Contractual obligations Operating leases Sponsored research & license agreements $ 3,121 $ 1,974 $ $ 924 319 $ 1,852 653 $ $ $ 345 668 Total contractual cash obligations $ 5,095 $ 1,243 $ 2,505 $ 1,013 — 334 334 $ $ 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 the ﬁrst half of 2005. In addition, in February 2004 we ﬁled a shelf registration statement with the Securities and Exchange Commission to sell up to $50 million of common or preferred stock. Under this registration statement, shares may be sold periodically to provide additional funds for our operations. For a full discussion of risks and uncertainties regarding our need for additional ﬁnancing, see “Risk Factors—We may need additional ﬁnancing.” 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. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our portfolio of marketable securities exposes us 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 require- ments 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 $330,000 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, 2003 (in thousands, except interest rate): Face Value 2004 2005 Total Estimated Fair Value Cash equivalents and marketable securities Variable rate securities Average interest rate Fixed rate securities Average interest rate $ 5,082 0.88% $ 24,810 — $ 5,082 — $ 15,885 $ 40,695 0.88% $ 5,082 $ 41,220 7 1 e g a p 3.15% 1.42% 2.48% consolidated balance sheets (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 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, 2003 and 2002 Common stock, at amounts paid in, $0.001 par value per share; 50,000,000 shares authorized, 28,903,043 and 27,642,085 shares issued and outstanding at December 31, 2003 and 2002, respectively Additional paid-in capital Deferred compensation Accumulated deﬁcit Accumulated other comprehensive income Total stockholders’ equity See accompanying notes. 8 1 e g a p December 31, 2002 2003 $ 6,832 39,723 123 1,241 47,919 789 300 $ 7,155 66,295 316 881 74,647 979 300 $ 49,008 $ 75,926 $ 1,505 634 1,202 3,341 $ 1,901 1,203 841 3,945 1,241 1,241 — — 195,331 9,047 (211) (159,741) — 191,680 9,161 (621) (129,852) 372 44,426 70,740 $ 49,008 $ 75,926 consolidated statements of operations (in thousands, except per share amount) Revenue: Contract revenue License revenue Grant revenue Total revenue Operating expenses: Research and development Acquired research and development General and administrative Total operating expenses Loss from operations Other income (expense): Interest income Other income (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, 2002 2001 2003 $ $ 28 61 — 89 22,258 3,896 5,109 2,696 — 196 2,892 29,819 — 5,076 $ 1,224 2,600 748 4,572 23,339 — 5,383 31,263 34,895 28,722 (31,174) (32,003) (24,150) 1,278 7 1,285 4,221 (400) 3,821 6,763 (77) 6,686 $ (29,889) $ (28,182) $ (17,464) $ (1.07) $ (1.02) $ (0.63) 27,907 27,642 27,595 9 1 e g a p consolidated statement of stockholders’ equity (in thousands) 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 Comprehensive loss: Net loss Unrealized loss on marketable securities Comprehensive loss Issuance of common stock to acquire technologies, net of issuance costs of $22 Issuance of common stock upon exercise of options Compensation related to stock options Amortization of deferred compensation Balances at December 31, 2003 See accompanying notes. 0 2 e g a p Preferred Stock Shares Amount 222 $ — 222 — 222 $ — 222 $ — Common Stock Shares 27,234 Amount $190,763 Additional Paid-In Capital Deferred Compensation Accumulated Deﬁcit Accumulated Other Comprehensive Income Total Stockholders Equity $ 8,744 $ (1,254) $ (84,206) $ 691 $114,738 461 (53) 1,028 (107) 149 124 27,642 191,684 9,017 (83) 542 (795) — (4) 144 (141) 315 (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 1,188 73 3,538 113 (114) 114 296 (29,889) (372) (29,889) (372) (30,261) 3,538 113 — 296 28,903 $195,331 $ 9,047 $ (211) $(159,741) $ — $ 44,426 1 2 e g a p consolidated statements of cash ﬂows (in thousands of dollars) Cash ﬂows from operating activities: Net loss Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization (Gain) loss on investment activities Acquired 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 Years ended December 31, 2002 2003 2001 $ (29,889) $ (28,182) $ (17,464) 439 (51) 3,873 296 (166) (675) (265) — 374 309 — 318 (291) 1,007 (826) (2,000) 272 — — 732 (580) (410) 1,711 2,000 Net cash used in operating activities (26,438) (29,291) (13,739) 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 (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 (248) 91 (47,660) 64,819 9,000 (778) — (25,114) 43,718 12,852 (254) (600) (72,733) 55,750 16,127 26,002 30,678 (1,710) 113 113 (323) 7,155 6,832 39,723 (4) (4) 1,383 5,772 7,155 66,295 921 921 (14,528) 20,300 5,772 99,279 Cash, cash equivalents and marketable securities at end of year $ 46,555 $ 73,450 $105,051 Schedule of non-cash transaction: Issuance of common stock to acquire technologies, net $ 3,538 $ — $ — See accompanying notes. 2 2 e g a p 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 (CNS) disorders, cancer, and cardiovascular disease. Our product development programs focus on large pharmaceutical markets with signiﬁcant unmet medical needs and commercial potential. We are directly developing our product candidates and also utilizing strategic partnerships, including a collaboration with Schering AG, Germany (Schering). These collaborations help fund product development and enable us to retain signiﬁcant economic interest in our products. Some of our preclinical product development work is conducted through our two consolidated subsidiaries: Ingenex, Inc., and ProNeura, Inc. At December 31, 2003, we owned 81% of Ingenex, assuming the conversion of all preferred stock to common stock, and 79% of ProNeura. In the fourth quarter of 2003, we acquired 3,5-diiodothyropropionic acid (DITPA), a novel product in clinical testing, for the treatment of congestive heart failure (CHF) through the acquisition of Developmental Therapeutics, Inc. (DTI), a private company established to develop DITPA. 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 sub- sidiaries. All signiﬁcant intercompany balances and transactions are eliminated. Reclassiﬁcations Certain prior year balances have been reclassiﬁed to conform to the current year presentation. These reclassiﬁcations have no impact on the results of operations. 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 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 estimate and recognize compensation expense for our stock-based employee compensation. Year Ended December 31, 2002 2001 2003 Net loss, as reported Add: Stock-based employee compensation expense included in reported net loss Deduct: Stock-based employee compensation expense $ (29,889) $ (28,182) $ (17,464) 296 318 1,088 determined under fair value method for all stock option grants (2,319) (8,489) (10,225) Pro forma net loss Basic and diluted net loss per share, as reported Pro forma basic and diluted net loss per share $ (31,912) $ (36,353) $ (26,601) $ $ (1.07) (1.14) $ $ (1.02) (1.32) $ $ (0.63) (0.96) 3 2 e g a p notes to consolidated ﬁnancial statements (continued) 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 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. 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 and corporate notes and bonds, and commercial paper, are classiﬁed as available-for-sale at time of purchase and carried 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-temporary declines in fair value of our marketable securities are charged against interest income. We recognized expenses of approximately $40,000 in 2003, $9,000 in 2002, and none in 2001 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 realized gains and losses are included in interest income. Unrealized gains and losses are included as accumulated other comprehensive income, a separate component of stockholders’ equity. The cost of securities sold is based on use of the 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 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, and at December 31, 2003, these shares represent 6.6% of total equity in the company. In June 2002, we recorded a $300,000 reduction in the carrying value of our investment in Altagen, and in July 2003, we returned the 300 shares of Series D Preferred stock to Altagen in settlement of outstanding liabilities and recorded a gain on investment of approximately $90,000. Revenue Recognition We generate revenue principally from collaborative research and development arrangements, technology licenses, and government grants. Revenue arrangements with multiple components are divided into separate units of accounting if certain criteria are met, including whether the delivered component has stand-alone value to the customer, and whether there is objective and reliable evidence of the fair value of the undelivered items. Consideration received is allocated among the separate units of accounting based on their respective fair values, and the applicable revenue recognition criteria are then applied to each of the units. 4 2 e g a p Revenue is recognized when the four basic criteria of revenue recognition are met: (1) a contractual agreement exists; (2) transfer of technology has been completed or services have been rendered; (3) the fee is ﬁxed or determinable; and (4) collectibility is reasonably assured. For each source of revenue, we comply with the above revenue recognition criteria in the following manner: • Collaborative arrangements typically consist of non-refundable and/or exclusive technology access fees, cost reimbursements for speciﬁc research and development spending, and various milestone and future product royalty payments. If the delivered technology does not have stand-alone value or if we do not have objective or reliable evidence of the fair value of the undeliv- ered component, the amount of revenue allocable to the delivered technology is deferred. Non-refundable upfront fees with stand-alone value that are not dependent on future performance under these agreements are recognized as revenue when received, and are deferred if Titan has continuing performance obligations and has no evidence of fair value of those obliga- tions. Cost reimbursements for research and development spending are recognized when the related costs are incurred and when reimbursements are received. Payments received related to substantive, performance-based “at-risk” milestones are recognized as revenue upon achievement of the clinical success or regulatory event speciﬁed in the underlying contracts, which represent the culmination of the earnings process. Amounts received in advance are recorded as deferred revenue until the technology is transferred, costs are incurred, or milestone is reached. • Technology license agreements typically consist of non-refundable upfront license fees and annual minimum access fees or royalty payments. Non-refundable upfront license fees and annual minimum payments received with separable stand-alone values are recognized when the technology is transferred or accessed, provided that the technology transferred or accessed is not dependent on the outcome of our continuing research and development efforts. • Government grants, which support our research efforts in speciﬁc projects, generally provide for reimbursement of approved costs as deﬁned in the notices of grants. Grant revenue is recognized when associated project costs are incurred. 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 sponsored trials. In accordance with SFAS No. 2, “Accounting for Research and Development Costs,” 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, 2003, 2002, and 2001, outstanding preferred stock, options and warrants totaled 6.1 million, 6.4 million, and 4.4 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, 2003, 2002, and 2001 was $30.3 million, $29.7 million, and $16.3 million, respectively. Comprehensive loss has been disclosed in the Statement of Stockholders’ Equity for all periods presented. 5 2 e g a p notes to consolidated ﬁnancial statements (continued) Recent Accounting Pronouncements In November 2003, the EITF discussed several of the recommendations on the proposed models for evaluating impairment of equity and debt securities discussed on Issue No. 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” Although the Task Force requested further revisions to the underlying impairment models at the November meeting, it reached a consensus that certain quantitative and qualitative disclosures are required for debt and marketable equity securities classiﬁed as available-for-sale or held-to-maturity under SFAS No. 115 and SFAS No.124 that are impaired at the balance sheet date but for which an other-than-temporary impairment has not been recognized. For those investments with unrealized losses that have not been recognized as other-than-temporary impairments, additional disclosure is required. The disclosure requirement is effective for ﬁscal years ending after December 15, 2003 (see Note 2). In January 2003, the FASB issued Interpretation No. 46 (or FIN 46), “Consolidation of Variable Interest Entities.” FIN 46 addresses consolidation of variable interest entities (“VIEs”) that do not have sufﬁcient equity investment at risk to permit the entity to ﬁnance its activities without additional subordinated ﬁnancial support, or in which the equity investors lack an essential character- istic of a controlling ﬁnancial interest. In December 2003, the FASB completed deliberations of proposed modiﬁcations to FIN 46 (“Revised Interpretation”) resulting in multiple effective dates based on the nature as well as the creation date of the VIE. VIEs created after January 31, 2003, but prior to January 1, 2004, may be accounted for either based on the original interpretation of the Revised Interpretation. VIEs created after January 1, 2004 must be accounted fro under the Revised Interpretation. Special purpose entities (“SPEs”) created prior to February 1, 2003 may be accounted for under the original or revised interpretation’s provisions no later than our ﬁrst quarter of ﬁscal 2004. Non-SPEs created prior to February 1, 2003, should be accounted for under the revised interpretation’s provisions no later than our ﬁrst quarter of 2004. We do not currently have any arrangements with variable interest entities that will require consolidation of there ﬁnancial information in our ﬁnancial statements. In November 2002, the EITF reached a consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple prod- ucts, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 apply to revenue arrangements entered into in ﬁscal periods beginning after June 15, 2003. The adoption of EITF Issue No. 00-21 did not have a material impact on our ﬁnancial position and results of operations. Also 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 require- ments for most guarantees, including certain indemniﬁcation agreements. It also clariﬁes that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value of the obligation it assumes under that guarantee and must disclose that information in its interim and annual ﬁnancial statements. The initial recognition and measurement provisions apply on a prospective basis to guarantees issued or modiﬁed after December 31, 2002. The disclosure requirements are effective for ﬁnancial statements of interim or annual periods ending after December 15, 2002. The adoption of FIN 45 did not have a material impact on our results of operations and ﬁnancial position. See Note 10, “Guarantees and Indemniﬁcations,” below for a discussion related to these agreements. 6 2 e g a p 2. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES The following is a summary of our cash, cash equivalents and marketable securities at December 31 (in thousands): 2003 2002 Gross Amortized Unrealized Unrealized Gain (Loss) Gross Cost Fair Value Gross Amortized Unrealized Unrealized Gain (Loss) Gross Cost Fair Value Classiﬁed as: Cash Cash equivalents: Money market funds Commercial paper Total cash equivalents Marketable securities: Securities of the U.S. government and its agencies Corporate notes and bonds Commercial paper Total marketable securities Total cash, cash equivalents and $ 253 $ — $ — $ 253 $ 576 $ — $ — $ 576 5,082 1,497 6,579 33,178 4,246 2,299 39,723 — — — 47 9 — 56 — — — 5,082 1,497 6,579 — 6,579 6,579 (17) (38) (1) 33,208 4,217 2,298 40,064 18,571 7,288 (56) 39,723 65,923 — — — 258 161 8 427 — — — 6,579 — 6,579 (17) (38) — 40,305 18,694 7,296 (55) 66,295 marketable securities $46,555 $ 56 $ (56) $46,555 $73,078 $ 427 $ (55) $73,450 Securities available-for-sale: Maturing within 1 year Maturing between 1 to 2 years $30,353 $15,949 $30,353 $58,275 $15,949 $14,227 $58,505 $14,369 Gross realized losses on sales of marketable securities were $17,000 for the year ended December 31, 2003. There were no gross realized gains in 2003. For the year ended December 31, 2002, there were $119,000 of gross realized gains and $3,000 of gross real- ized losses. For the year ended December 31, 2001, there were $149,000 of gross realized gains and no gross realized losses. The aggregate amount of unrealized losses and the related fair value of investments with unrealized losses at December 31, 2003 were approximately $56,000 and $3.8 million, respectively. The unrealized losses were caused by ﬂuctuation in market interest rates and are not considered other-than-temporary until a continuous decline has occurred. 7 2 e g a p notes to consolidated ﬁnancial statements (continued) 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 $ 2003 530 368 428 810 2,136 (1,347) 2002 $ 525 318 365 728 1,936 (957) $ 789 $ 979 Depreciation and amortization expense was $436,000, $374,000, and $272,000 for the years ended December 31, 2003, 2002, and 2001, respectively. 4. RESEARCH AND LICENSE AGREEMENTS We have entered into various agreements with research institutions, universities, clinical research organizations 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 $2.6 million, $1.3 million, and $1.6 million in the years ended December 31, 2003, 2002, and 2001, respectively. At December 31, 2003, the annual aggregate commitments we have under these agreements, including minimum license pay- ments, are as follows (in thousands): 2004 2005 2006 2007 2008 $ 319 324 329 334 334 $ 1,640 After 2008, we must make annual payments aggregating $334,000 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 obtain- ing 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. 8 2 e g a p 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 prod- uct, 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 market- ing 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. 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®, 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, 2003, we recognized $2.8 million under this agreement to date. In February 2002, we announced that we received a $2.0 mil- lion milestone payment from Schering. The milestone payment followed 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 rev- enue 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 receive up to an aggregate of $8 million over the life of the Schering agreement upon the achievement of speciﬁc milestones. 8. DITPA ACQUISITION On October 16, 2003, we announced the acquisition of a novel product in clinical testing for the treatment of congestive heart failure (CHF). The product in development, 3,5-diiodothyropropionic acid (DITPA), is an orally active analogue of thyroid hormone that has demonstrated in preclinical and clinical studies to date the ability to improve cardiac function, with no signiﬁcant adverse effects. Titan acquired DITPA through the acquisition of Developmental Therapeutics, Inc. (DTI), a private company established to develop DITPA, and the exclusive licensee of recently issued U.S. patent and pending U.S. and international patent applications covering DITPA. Titan acquired DTI in a stock transaction for 1,187,500 shares of Titan common stock valued at approximately $3.6 million using the average market price of our common stock over the ﬁve-day trading period, including and prior to the date of the merger in accordance with generally accepted accounting principles. We also made a cash payment of $171,250 to the licen- sor of the technology. In the fourth quarter of 2003, the total acquisition cost of $3.9 million was reported as acquired research and development in the statement of operations. An additional payment of 712,500 shares of Titan common stock will be made only upon the achievement of positive pivotal study results or certain other substantial milestones within ﬁve years. In addition, a cash payment of $102,750 or, alternatively, an additional payment of 37,500 shares of Titan common stock, will be made to the licensor of the technology upon achievement of such study results or such other substantial milestones within ﬁve years. 9. COMMITMENTS AND CONTINGENCIES Lease Commitments We lease facilities under operating leases that expire at various dates through June 2007. We also lease certain ofﬁce equipment under operating and capital leases that expire at various dates through February 2007. Rental expense was $825,000, $765,000, and $584,000 for years ended December 31, 2003, 2002, and 2001, respectively. 9 2 e g a p notes to consolidated ﬁnancial statements (continued) The following is a schedule of future minimum lease payments at December 31, 2003 (in thousands): 2004 2005 2006 2007 924 959 893 345 $ 3,121 Legal Proceedings On November 4, 2003, a purported class action suit entitled Patrick Magee v. Titan Pharmaceuticals, Inc., et al was ﬁled in the United States District Court for the Northern District of California on behalf of purchasers of Titan’s common stock during the period between December 1, 1999 and July 22, 2002. Subsequently, several similar actions were ﬁled in the same court. The com- plaints alleged that Titan and certain of its executive ofﬁcers violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by issuing false and misleading statements that failed to disclose certain key information regarding iloperidone. The complaints sought unspeciﬁed damages. On November 6, 2003, a stockholder purporting to act on our behalf ﬁled a derivative action in the California Superior Court for the County of San Mateo against Titan’s executive ofﬁcers and directors and certain former directors seeking unspeciﬁed damages, injunctive relief and restitution. Titan was also named as a nominal defendant. The derivative action is based on the same factual allegations as the purported class actions and alleges state law claims for breach of ﬁduciary duty, abuse of control, gross misman- agement, waste of corporate assets and unjust enrichment. On February 2, 2004, we announced that all of the class action and derivative lawsuits ﬁled against the Company had been dis- missed without prejudice. In every case, the plaintiffs agreed to voluntarily dismiss the lawsuits after discussion of the facts with Titan’s counsel, without any further legal action necessary by Titan. Titan, its afﬁliates, and insurers, made no payment in connec- tion with dismissal of the lawsuits, and have no obligation to make any payments whatsoever to any plaintiffs or their counsel in connection with the dismissals. Furthermore, Titan has no other obligations in connection with the dismissals. 10. GUARANTEES AND INDEMNIFICATIONS As permitted under Delaware law and in accordance with our Bylaws, we indemnify our ofﬁcers and directors for certain events or occurrences while the ofﬁcer or director is or was serving at the Company’s request in such capacity. The term of the indemniﬁ- cation period is for the ofﬁcer’s or director’s lifetime. The maximum amount of potential future indemniﬁcation is unlimited; however, we have a director and ofﬁcer insurance policy that limits our exposure and may enable us to recover a portion of any future amounts paid. We believe the fair value of these indemniﬁcation agreements is minimal. Accordingly, we have not recorded any liabilities for these agreements as of December 31, 2003. In the normal course of business, we have commitments to make certain milestone payments to various clinical research organiza- tions in connection with our clinical trial activities. Payments are contingent upon the achievement of speciﬁc milestones or events as deﬁned in the agreements, and we have made appropriate accruals in our consolidated ﬁnancial statements for those milestones that were achieved as of December 31, 2003. We also provide indemniﬁcations of varying scope to our clinical research organizations and investigators against claims made by third parties arising from the use of our products and processes in clinical trials. Historically, costs related to these indemniﬁcation provisions were immaterial. We also maintain various liability insurance policies that limit our exposure. We are unable to estimate the maximum potential impact of these indemniﬁcation provisions on our future results of operations. 0 3 e g a p 11. 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 develop- ment milestones are achieved within certain timeframe. 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 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 October 2003, we acquired DITPA through the acquisition of Developmental Therapeutics, Inc. (DTI) in a stock transaction for 1,187,500 shares of Titan common stock valued at approximately $3.6 million using the average market price of our common stock over the ﬁve-day trading period, including and prior to the date of the merger. In addition, up to a total of 750,000 shares of common stock will be issued only upon the achievement of positive pivotal study results or certain other substantial milestones within ﬁve years. Shares Reserved for Future Issuance As of December 31, 2003, shares of common stock reserved by us for future issuance consisted of the following (shares in thousands): Stock options Preferred stock DTI merger contingent shares 12. STOCK OPTION PLANS 8,090 222 750 9,062 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 predecessor 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 incentive stock options within the meaning of Section 422 of the Internal Revenue Code and/or options that do not qualify 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. 1 3 e g a p notes to consolidated ﬁnancial statements (continued) In July 2002, our Board of Directors elected to continue the option grant practice under our amended 1998 Option Plan, which provided for the automatic grant of non-qualiﬁed stock options (Directors’ 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 biennial (i.e. every two years) grant of an option to purchase 15,000 shares of common stock 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 for each committee of the Board on which they serve. The exercise price of the Director’s Options shall be equal to the fair market value of our common stock on the date of grant. 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 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. Historically, the exercise prices of option granted under the 2001 NQ Plan were 100% of the fair market value of our common stock on the date of grant. 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): 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 Options granted Options exercised Options cancelled Balance at December 31, 2003 2 3 e g a p Shares Available For Grant Number of Options Outstanding Weighted Average Exercise Price 1,157 1,000 (1,300) — 434 1,291 2,750 (2,200) — 132 1,973 (699) — 864 2,138 3,666 — 1,300 (404) (434) 4,128 — 2,200 — (138) 6,190 699 (73) (864) 5,952 $ 12.95 — $ 15.21 $ 3.26 $ 26.35 $ 13.20 — $ 4.44 — $ 15.31 $ 10.05 $ 1.83 $ 1.57 $ 8.67 $ 9.39 Our option plans allow for stock options issued as the result of a merger or consolidation of another entity, including the acquisi- tion 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 2003, 2002 and 2001, the number of Substitute Options cancelled was immaterial. Options for 3.9 million and 2.6 million shares were exercisable at December 31, 2002 and 2001, respectively. The options outstand- ing at December 31, 2003 have been segregated into three ranges for additional disclosure as follows (option shares in thousands): Range of Exercise Prices $ 0.08 – $ 3.77 $ 3.79 – $ 11.63 $11.95 – $ 46.50 $ 0.08 – $ 46.50 Options Outstanding Options Exercisable Weighted Average Weighted Number Outstanding Remaining Life (Years) Average Exercise Price Number Exercisable Weighted Average Exercise Price 2,088 2,355 1,509 5,952 7.43 6.27 6.30 6.69 $ 2.14 $ 8.39 $ 20.99 $ 9.39 1,186 2,146 1,459 4,791 $ 2.28 $ 8.29 $ 20.44 $ 10.50 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. 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 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 2003, 2002, and 2001: weighted-average volatility factor of 0.70, 0.79, and 0.86, respectively; no expected dividend payments; weighted-average risk-free interest rates in effect of 2.2%, 2.4%, and 3.9%, respectively; and a weighted-average expected life of 3.01, 3.54, and 2.99 years, 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 vest- ing 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 signiﬁcantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of our employee stock options. Based upon the above methodology, the weighted-average fair value of options granted during the years ended December 31, 2003, 2002, and 2001 was $0.89, $2.32, and $8.44, respectively. A tabular presentation of pro forma net loss and net loss per share infor- mation for all reporting periods is presented in Note 1. 3 3 e g a p notes to consolidated ﬁnancial statements (continued) 13. 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. 14. 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 and 2001, we provided certain relocation loans to employees in connection with employ- ment. Also in February 2001, we provided a loan to 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. 15. INCOME TAXES As of December 31, 2003, we had net operating loss carryforwards for federal income tax purposes of approximately $157.4 million that expire at various dates through 2023, and federal research and development tax credits of approximately $4.2 million that expire at various dates through 2023. We also had net operating loss carryforwards for state income tax purposes of approxi- mately $56.5 million that expire at various dates through 2013, and state research and development tax credits of approximately $3.2 million which do not expire. Utilization of our net operating loss may be subject to substantial annual limitation due to ownership change limitations 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): Deferred tax assets: Net operating loss carryforwards Research credit carryforwards Other, net Total deferred tax assets Deferred tax liabilities: Unrealized gain on investments Valuation allowance Net deferred tax assets 4 3 e g a p December 31, 2003 2002 $ 59,000 6,400 4,200 $ 45,300 2,100 4,600 69,600 52,000 (50) (69,550) (100) (51,900) $ — $ — 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 $17.6 million, $11.1 million, and $5.9 million during 2003, 2002, and 2001, respectively. The valuation allowance at December 31, 2002 includes $3.7 million 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. 16. QUARTERLY FINANCIAL DATA (UNAUDITED) (in thousands, except per share amount) 2003 Total revenue Net loss Basic and diluted net loss per share 2002 Total revenue Net loss Basic and diluted net loss per share First Quarter Second Quarter Third Quarter Fourth Quarter $ 26 $ (6,530) $ (0.24) $ 2 $ (6,681) $ (0.24) — $ 61 $(10,509) $ (0.37) $ (6,169) $ (0.22) $ 2,347 $ (4,950) $ (0.18) 151 $ $ (7,032) $ (0.25) 158 $ $ (7,296) $ (0.26) 236 $ $ (8,904) $ (0.32) 5 3 e g a p report of independent registered public accounting ﬁrm 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, 2003 and 2002, and the related consolidated statements of operations, stockholders’ equity, and cash ﬂows for each of the three years in the period ended December 31, 2003. 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 the standards of the Public Company Accounting and Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the ﬁnancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the ﬁnancial statements. An audit also includes assessing the accounting principles used and signiﬁcant estimates made by management, as well as evaluating the overall ﬁnancial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated ﬁnancial statements referred to above present fairly, in all material respects, the consolidated ﬁnancial position of Titan Pharmaceuticals, Inc. at December 31, 2003 and 2002, and the consolidated results of its operations and its cash ﬂows for each of the three years in the period ended December 31, 2003, in conformity with U.S. generally accepted accounting principles. Palo Alto, California February 20, 2004 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, 2003: First Quarter Second Quarter Third Quarter Fourth Quarter Fiscal Year Ended December 31, 2002: First Quarter Second Quarter Third Quarter Fourth Quarter (b) Approximate Number of Equity Security Holders High Low $ $ $ $ $ $ $ $ 1.81 3.09 2.80 4.00 9.81 7.00 4.17 2.86 $ $ $ $ $ $ $ $ 1.36 1.44 1.91 2.42 5.60 3.10 1.35 1.20 The number of record holders of our common stock as of March 5, 2004 was approximately 154. Based on the last ADP search, we believe there are in excess of 11,000 beneﬁcial holders of our common stock. 6 3 e g a p (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. corporate information Executive Officers Louis R. Bucalo, M.D. Chairman, President and Chief Executive Officer Sunil Bhonsle Executive Vice President, Chief Operating Officer, Secretary and Director Robert E. Farrell Executive Vice President, Chief Financial Officer Richard C. Allen, Ph.D. Executive Vice President, Cell Therapy 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 Board of Directors 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. Sunil Bhonsle Executive Vice President, Chief Operating Officer and Secretary Eurelio M. Cavalier Executive Committee Compensation Committee Former Group Vice President of U.S. Pharmaceutical Business Unit, Eli Lilly & Company Hubert E. Huckel, M.D. Executive Committee Compensation Committee Audit Committee Former Chairman of the Board of Hoechst-Roussel Pharmaceuticals, Inc. M. David MacFarlane, Ph.D. Audit Committee 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 T I TA N P H A R M A C E U T I C A L S , I N C . is a biopharmaceutical company focused on the development and commercialization of novel treatments for central nervous system disorders, cancer and cardiovascular disease. Titan’s numerous products in development utilize novel technologies that have the potential to significantly improve the treatment of these diseases. Titan also establishes partnerships with multinational pharmaceutical companies and government institutions for the development of its products. T I TA N P H A R M A C E U T I C A L S , I N C . Innovations in Medicine A N N U A L R E P O RT 2 0 0 3 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

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