Titan Pharmaceuticals Inc. Annual Report 2006

FY2006 Annual Report · Titan Pharmaceuticals Inc.

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Titan Pharmaceuticals, Inc.
400 Oyster Point Boulevard, Suite 505
South San Francisco, CA 94080
Phone 650.244.4990
Fax 650.244.4956
www.titanpharm.com

T I TA N P H A R M A C E U T I C A L S , I N C . 2 0 0 6 A N N U A L R E P O R T

Innovations in Medicine™

TITAN PHARMACEUTICALS is focused on developing innovative new
treatments for diseases with signiﬁ cant unmet medical needs. The Company is
developing therapeutic products with leading experts in clinical research, and
optimizes development and commercial opportunities through partnerships
with other leading pharmaceutical development companies.

CORPORATE INFORMATION

EXECUTIVE OFFICERS

BOARD OF DIRECTORS

Louis R. Bucalo, M.D.
Chairman, President and
Chief Executive Ofﬁ cer

Sunil Bhonsle
Executive Vice President,
Chief Operating Ofﬁ cer,
Secretary and Director

Robert E. Farrell, J.D.
Executive Vice President,
Chief Financial Ofﬁ cer

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
Odenberg, Ullakko, Muranishi & Co. LLP
465 California Street, Suite 700
San Francisco, California 94104

TRANSFER AGENT AND REGISTRAR
Continental Stock Transfer & Trust Company
17 Battery Place, 8th Floor
New York, New York 10004
Tel: 212-509-4000

Louis R. Bucalo, M.D.
Chairman, President and
Chief Executive Ofﬁ cer
Executive Committee

Victor J. Bauer, Ph.D.
Former President of Hoechst-Roussel
Pharmaceuticals, Inc.

Sunil Bhonsle
Executive Vice President,
Chief Operating Ofﬁ cer and Secretary

Eurelio M. Cavalier
Executive Committee
Compensation Committee
Nominating 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.

Joachim Friedrich Kapp, M.D., Ph.D.
Former President of the Global
Business Unit on Specialized
Therapeutics of Schering AG, Germany

M. David MacFarlane, Ph.D.
Audit Committee
Nominating Committee
Former Vice President and Responsible Head
of Regulatory Affairs of Genentech, Inc.

Ley S. Smith
Executive Committee
Audit Committee
Nominating Committee
Former President and Chief Operating Ofﬁ cer 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 Ofﬁ cer and
Honorary Chairman of Bayer Corporation

TITAN PHARMACEUTICALS, INC. 2006 ANNUAL REPORT

TO OUR SHAREHOLDERS:

Titan took important steps forward and achieved signiﬁ cant accomplishments
this past year.

We launched an important Phase III clinical program, achieved positive results
in another ﬁ nal Phase III pivotal study, completed enrollment in a core Phase
IIb safety and efﬁ cacy study, raised capital efﬁ ciently and judiciously, and laid
the groundwork for additional products by advancing further Phase II testing
and achieving successful preclinical results with other product candidates. This
progress was accompanied by consolidation in other areas to conserve resources
and prepare for future growth.

Our Probuphine program took an important step forward with launch of our
Phase III clinical program. This randomized, double blind, placebo controlled
Phase III clinical study will evaluate the safety and efﬁ cacy of Probuphine in
150 patients in the treatment of opiate addiction. The Phase III program is
scheduled to include an additional Phase III safety and efﬁ cacy study and an
additional open label safety study. We also plan to evaluate Probuphine in the
treatment of chronic pain.

Completion of the iloperidone Phase III clinical program with positive results
in the ﬁ nal Phase III clinical study was another important achievement. In this
study, iloperidone demonstrated statistically signiﬁ cant improvement compared
to placebo on the Positive and Negative Symptoms Scale (PANSS), the study’s
primary endpoint. Iloperidone also achieved signiﬁ cant efﬁ cacy on the positive
and negative symptom subscales of the PANSS. In addition, iloperidone
demonstrated a potentially favorable side effect proﬁ le, with low potential for
weight gain and induction of diabetes, low extrapyramidal symptoms including
akathisia, and low incidence of sleepiness and effects on cognition.

Vanda, Titan’s corporate partner for iloperidone, plans to ﬁ le an NDA for
iloperidone by the fourth quarter of 2007. Vanda plans to differentiate
iloperidone from other currently marketed antipsychotic drugs based upon the
product’s potentially favorable side effects proﬁ le, as well as genetic tests that
may help identify patients that may achieve enhanced safety and efﬁ cacy with
iloperidone. Vanda is also developing a four-week injectable depot formulation
of iloperidone.

Titan achieved another important goal this year with the completion of patient
enrollment in the randomized, double-blind, controlled Phase IIb clinical study
of Spheramine in the treatment of Parkinson’s disease. Results from this study
are expected to be available in the second half of 2008.

Spheramine is an innovative
cell-therapy based product
for the treatment of advanced
Parkinson’s disease designed
to enhance levels of dopamine
in the brain. Spheramine has
been granted both Fast Track
and Orphan Drug designations
by the FDA. The Spheramine
development program is
jointly managed by Titan
and its corporate partner for
worldwide development and
commercialization, Bayer
Schering Pharma AG.

DITPA, Titan’s analogue of
thyroid hormone (T3), is
currently being evaluated as a
potential treatment for elevated
cholesterol. DITPA is currently
being studied in a randomized,
double blind Phase II study
at the Johns Hopkins Medical
Institution in Baltimore. This
Phase II study is evaluating
DITPA in patients receiving
standard lipid lowering therapy,
whose LDL cholesterol levels
are above National Cholesterol Education Program (NCEP) guidelines. Titan
is also planning a second investigator sponsored study at Johns Hopkins to
evaluate DITPA in weight reduction and treatment of elevated triglycerides in
overweight patients.

Louis R. Bucalo, M.D. Chairman, President and Chief Executive Ofﬁ cer

Also this past year, Titan presented data on gallium maltolate, another product
in development, that demonstrated in preclinical testing effectiveness in
altering bacterial morphology and bioﬁ lm architecture. Further studies with
gallium maltolate are planned.

Titan also advanced ProNeura product candidates in preclinical testing,
demonstrating proof of principle with our ProNeura technology to deliver the

TITAN PHARMACEUTICALS, INC. 2006 ANNUAL REPORT

drug lisuride, an agent approved in Europe for the treatment of Parkinson’s
disease. In preclinical testing, a ProNeura formulation of lisuride was shown in
an animal model to deliver lisuride continuously for an extended period after
a single subcutaneous dose. This may provide a means to achieve around the
clock, continuous dopaminergic therapy for Parkinson’s patients. This is an
important goal for therapy, particularly in earlier stage patients, and is thought
to be important in slowing or preventing the onset of complications of current
therapy, including motor ﬂ uctuations and other debilitating conditions. These
early results suggest that application of ProNeura technology to the treatment
of Parkinson’s patients with dopaminergic agents may provide an approach to
achieve this important goal.

Titan also advanced its ﬁ nancing and operating goals by consolidating and
reducing non-core development expenses, reducing facilities expenses, and
reducing other costs. We enhanced our ﬁ nancial resources through a successful
$10 million ﬁ nancing, as well as establishment of an additional $25 million
equity facility, that may be accessed at the company’s option. These steps
helped provide access to additional capital for advancement of the Company’s
development programs.

These combined steps and achievements have provided a further basis for
future growth and success. These achievements were possible because of our
shareholders’ continued support, and the dedicated efforts of our employees
and partners. We look forward to further progress together in our goal of
developing new innovative treatments.

Sincerely,

Louis R. Bucalo, M.D.
Chairman, President and Chief Executive Ofﬁ cer

TITAN PHARMACEUTICALS CURRENTLY HAS
THREE PRODUCTS IN LATE STAGE CLINICAL
DEVELOPMENT: ILOPERIDONE, PROBUPHINE
AND SPHERAMINE.

ILOPERIDONE

ILOPERIDONE — FOR THE TREATMENT OF SCHIZOPHRENIA Iloperidone is
Titan’s novel agent in development for the treatment of schizophrenia and
other psychotic disorders. Phase III clinical testing of iloperidone has been
completed by Titan’s partner, Vanda Pharmaceuticals, Inc. Vanda plans to ﬁ le
an NDA for iloperidone by the fourth quarter of 2007, and is targeting potential
product launch in the U.S. in 2009. Upon potential commercialization, Titan
will receive a royalty of 8-10% on worldwide sales of iloperidone.

SCHIZOPHRENIA Schizophrenia is a chronic, severe, and disabling mental
disorder that affects approximately 2.2 million individuals in the U.S. The
disease is characterized by positive symptoms such as delusions, hallucinations,
disorganized and incoherent speech, and negative symptoms such as severe
emotional abnormalities, and withdrawal.

The worldwide market for the treatment of schizophrenia and related psychotic
disorders now exceeds $16 billion in annual sales. A number of medications are
currently available for the treatment of schizophrenia. However, dissatisfaction
with side effects caused by many current antipsychotic agents often results in
switching medications to avoid these side effects.

LIMITATIONS OF CURRENT TREATMENTS There are a number of medications
currently on the market for the treatment of schizophrenia. However, most
of these products are known to induce substantial side effects, such as
weight gain, diabetes, extrapyramidal symptoms, hyperlactinemia, increased
somnolence and cognition difﬁ culties. Patient dissatisfaction with side effects
caused by current antipsychotic agents results in many patients discontinuing
therapy within a year of initiating treatment.

TITAN PHARMACEUTICALS, INC. 2006 ANNUAL REPORT

PHASE III CLINICAL TESTING OF ILOPERIDONE COMPLETE, POTENTIALLY
FAVORABLE TOLERABILITY PROFILE DEMONSTRATED Results from the
ﬁ nal planned Phase III clinical study of iloperidone were positive, and
demonstrated that iloperidone is potentially safe and effective in the treatment
of schizophrenia. Speciﬁ cally, the results demonstrated statistically signiﬁ cant
improvement compared to placebo on the Positive and Negative Symptom
Scale (PANSS), the trial’s primary endpoint. Iloperidone also achieved
signiﬁ cant efﬁ cacy on the positive and negative symptom subscales of the
PANSS. Importantly, iloperidone also demonstrated a potentially favorable
side effect proﬁ le, with low potential for weight gain and induction of
diabetes, low extrapyramidal symptoms including akathisia, and low
incidence of sleepiness and effects on cognition.

The tolerability proﬁ le of iloperidone provides an important potential source
of additional value to doctors and patients.

Vanda is seeking to further differentiate iloperidone through the development
of one time genetic tests that may be used to identify patients that are more
likely to achieve better treatment results when using iloperidone. Vanda’s
market research studies indicate that physicians treating schizophrenia patients
would welcome such information in making prescribing decisions. This
potential ability to prospectively identify patients for whom iloperidone may be
a preferable drug for the treatment of schizophrenia could provide an additional
important advantage for this drug. Vanda is also developing a four-week
injectable depot formulation of iloperidone. The four-week depot formulation
for iloperidone may provide additional advantages.

Target: SCHIZOPHRENIA
PHASE III CLINICAL TESTING
COMPLETE, NDA TO BE FILED
BY FOURTH QUARTER 2007

PROBUPHINE

PROBUPHINE — FOR THE TREATMENT OF OPIATE ADDICTION Probuphine
is a novel formulation of buprenorphine under development by Titan for the
treatment of opiate addiction. Buprenorphine in a sublingual tablet formulation
is approved in the U.S., Europe and Asia for the treatment of opiate addiction.
Probuphine is designed to deliver buprenorphine for up to six months following
a single treatment.

Continuous longer term delivery of buprenorphine may potentially address
many challenges associated with daily oral therapy, including poor compliance,
variable blood levels, risk of misuse and reduced therapeutic potential.
Probuphine is currently being evaluated in a 150 patient Phase III clinical
study with results expected in the second half of 2008. The Company also
plans to subsequently initiate an additional controlled Phase III study and an
open label safety study in the U.S. and Europe.

PROBUPHINE UTILIZES TITAN’S PROPRIETARY PRONEURA LONG-TERM DRUG
DELIVERY TECHNOLOGY Probuphine is Titan’s ﬁ rst product in clinical testing
to utilize our proprietary ProNeura long-term drug delivery system. Titan’s
ProNeura drug delivery system consists of a small, solid rod made from a
combination of ethylene vinyl acetate (EVA) and the selected drug substance,
in this case, buprenorphine. The resulting product is a solid matrix that releases
the drug slowly, through the process of diffusion, and maintains a continuous
drug level for long-term treatment.

OPIATE ADDICTION Opiate dependence is a chronic medical condition that
requires long-term treatment. An estimated 2.8 million individuals in the U.S.
and Europe are addicted to illegal opioids such as heroin, and more than 1.5
million individuals in the U.S. alone are addicted to prescription opioid drugs
such as hydrocodone, oxycodone and morphine. Treatment of opiate addiction
for several decades had consisted largely of methadone maintenance treatment.
Buprenorphine, which was approved in the U.S. in 2003 for the treatment
of opiate addiction, is quickly becoming a preferred treatment, offering
several advantages over methadone. We estimate that worldwide sales of
buprenorphine for the treatment of opiate addiction were approximately $400
million in 2006.

POTENTIAL ADVANTAGES OF PROBUPHINE IN THE TREATMENT OF OPIATE
ADDICTION Buprenorphine is currently administered to opioid addicted
patients in a daily tablet formulation, which presents a number of challenges
and limitations, including potential poor compliance, variable blood levels, risk
of misuse, and overall reduced therapeutic value. Probuphine, which provides
continuous long-term delivery of buprenorphine, may help reduce or eliminate
many of these limitations.

TITAN PHARMACEUTICALS, INC. 2006 ANNUAL REPORT

CLINICAL EVALUATION OF PROBUPHINE IN THE TREATMENT OF OPIATE
ADDICTION In a completed Phase I/II clinical study, 12 opiate-dependent
patients were successfully switched from their daily tablet doses of
buprenorphine to Probuphine, with maintenance of therapeutic beneﬁ t, and
no signiﬁ cant signs of opioid withdrawal or craving. Pharmacokinetic data for
all patients demonstrated steady state serum buprenorphine concentrations for
the duration of the six month treatment period. Based on these encouraging
results, Titan this year initiated a randomized, double-blind, placebo-controlled,
multi-center Phase III clinical study of Probuphine in the treatment of opiate
dependence. This 150 patient study will evaluate the safety and effectiveness
of treatment with Probuphine versus placebo in reducing opiate dependence.
Enrollment is this study is expected to be completed by the end of 2007, with
results available in the second half of 2008. This study is part of a registration
directed program intended to obtain marketing approval of Probuphine for the
treatment of opiate addiction in Europe and the U.S. The Phase III program
includes additional clinical studies scheduled to begin later this year and
in 2008.

POTENTIAL FOR THE DEVELOPMENT OF PROBUPHINE FOR THE TREATMENT OF
CHRONIC PAIN Buprenorphine, the active drug component of Probuphine, is
an effective analgesic and is also approved for the treatment of pain in the U.S.
and Europe. Titan is also planning to evaluate the potential use of Probuphine
for the treatment of chronic pain.

Target: OPIATE ADDICTION
PHASE III CLINICAL
TESTING ONGOING

SPHERAMINE

SPHERAMINE — FOR THE TREATMENT OF ADVANCED PARKINSON’S DISEASE
Spheramine is Titan’s novel cell therapy product in development for the
treatment of Parkinson’s disease, a neurodegenerative disorder that affects over
four million individuals world wide. Spheramine consists of normal human
retinal pigment epithelial (RPE) cells placed on microscopic carrier beads.
The product is delivered by stereotactic injection into speciﬁ c brain regions.
Treatment with Spheramine is intended to provide a localized continuous
source of dopamine, an essential neurotransmitter that is deﬁ cient in speciﬁ c
brain regions in patients with Parkinson’s disease. Phase I/II clinical testing
has demonstrated initial favorable results, and enrollment in a Phase IIb
clinical study is complete, with results expected in the second half of 2008.
Spheramine is partnered with Bayer Schering Pharma AG for worldwide
development and commercialization.

PARKINSON’S DISEASE Dopamine is a neurotransmitter that sends information
to regions of the brain that control movement and coordination. Parkinson’s
disease results from progressive loss of neuronal cells in the substantia nigra,
leading to reduced levels of dopamine production and associated neuronal
activity in other speciﬁ c brain regions. Some of the most common symptoms
of Parkinson’s disease are tremors, stiffness of the limbs and trunk, slowness of
movement, and postural instability.

LIMITATIONS OF CURRENT TREATMENTS Current treatments for Parkinson’s
disease include daily administration of oral agents containing dopamine
precursors or dopamine agonists which increase the levels of dopamine activity
in the brain. However, most patients eventually develop a “wearing-off effect”
in which each dose alleviates symptoms for a shorter period of time. Typically,
within several years, most patients become refractory to treatment with
worsening symptoms. Because these therapies are orally delivered, they also
result in elevated systemic levels of dopamine, causing potential side effects,
especially as progressively higher doses are required.

PROOF-OF-PRINCIPLE ESTABLISHED IN PRECLINICAL AND INITIAL
CLINICAL STUDIES Spheramine was initially evaluated in controlled studies
in a validated primate model of Parkinson’s disease and showed favorable
results, demonstrating that after a single treatment, Spheramine was able to
substantially reverse Parkinsonian symptoms and improve movement, with
sustained efﬁ cacy throughout the 12 month duration of the study. Based on
these encouraging data, an initial clinical study in humans was conducted.

TITAN PHARMACEUTICALS, INC. 2006 ANNUAL REPORT

In this open-label Phase I/II clinical study, six advanced Parkinson’s patients
were treated and all patients showed substantial and sustained improvement
in motor function following treatment with Spheramine. The patients were
assessed before and after treatment with Spheramine using the UPDRS rating
scale, a standard measurement of Parkinson’s disease severity. At 12 months
post-treatment, patients had average improvement in motor function of 48%
over their baseline UPDRS motor scores, the study’s primary endpoint. This
beneﬁ t was substantially sustained, with patients demonstrating average
improvement in motor function of approximately 43% over baseline, four years
after treatment with Spheramine. Patients also had improvements in quality
of life and activities of daily living, and half of the patients had a reduction in
preexisting dyskinesias (involuntary movements). Spheramine was also well
tolerated, and use of Spheramine required no immunosuppression.

ENROLLMENT OF THE PHASE IIB CLINICAL STUDY IS COMPLETE Based on the
encouraging results from the Phase I/II clinical study, Titan and its corporate
partner for the worldwide development and commercialization of Spheramine,
Bayer Schering Pharma AG, are conducting a randomized, double blind,
controlled Phase IIb clinical study to further evaluate the safety and efﬁ cacy of
Spheramine. Patient enrollment in this study was completed in mid-2007, and
results from this study are expected in the second half of 2008. Bayer Schering
Pharma is fully funding the Spheramine development program.

SPHERAMINE HAS BEEN GRANTED BOTH FAST TRACK AND ORPHAN DRUG
The FDA has granted Fast Track designation for Spheramine. The FDA’s
Fast Track Program is designed to facilitate the development and expedite
the review of drug candidates that demonstrate the potential to treat serious
or life-threatening diseases and address unmet medical needs. The FDA has
also approved Orphan Drug designation for Spheramine for the treatment of
advanced Parkinson’s disease.

Target: PARKINSON’S DISEASE
ENROLLMENT IN THE RANDOMIZED,
DOUBLE-BLIND PHASE IIB CLINICAL STUDY
OF SPHERAMINE IN THE TREATMENT OF
PARKINSON’S DISEASE IS COMPLETE,
WITH RESULTS EXPECTED TO BE AVAILABLE
IN THE SECOND HALF OF 2008

OTHER PRODUCTS
IN DEVELOPMENT

DITPA

GALLIUM
MALTOLATE

PRONEURA

FOR THE POTENTIAL TREATMENT OF HYPERLIPIDEMIA DITPA (3,5-
diiodothyropropionic acid) is an analogue of thyroid hormone (T3). Thyroid
hormone (T3) is known to play a central role in normal cardiovascular function
and lipid metabolism. DITPA is currently being evaluated for the treatment of
elevated cholesterol in an investigator sponsored Phase II clinical study at the
Johns Hopkins Medical Institutions in Baltimore. This randomized, placebo-
controlled study is enrolling patients receiving standard lipid-lowering therapy,
whose LDL cholesterol levels are above National Cholesterol Education
Program (NCEP) guidelines, and will evaluate DITPA as a cholesterol lowering
agent in combination with such standard therapy.

Titan is also planning a second investigator sponsored Phase II clinical study at
Johns Hopkins to evaluate the effectiveness of DITPA in weight reduction and
the lowering of high triglycerides in obese patients.

FOR THE POTENTIAL TREATMENT OF CHRONIC BACTERIAL INFECTIONS,
BONE DISEASE AND CANCER Gallium maltolate is Titan’s novel oral agent in
development for the potential treatment of chronic bacterial infections, bone
disease and cancer. Data from recent preclinical testing demonstrating that
treatment with gallium maltolate can alter bioﬁ lm architecture and bacterial
morphology at the site of infection were presented at the American Society for
Microbiology Biodefense and Emerging Diseases Research Meeting in March
2007. Studies with gallium maltolate in other preclinical settings are ongoing.

LONG-TERM DRUG DELIVERY TECHNOLOGY Titan’s proprietary ProNeura
technology was developed to address the need for a simple, practical method
to achieve continuous long-term drug delivery. This technology is designed
to provide controlled drug release on an outpatient basis for several months.
ProNeura can also potentially improve treatment results by avoiding the varying
blood levels of drug that are usually seen throughout the day with many oral
medications. The ProNeura system consists of a small, solid rod made from a
combination of ethylene-vinyl acetate (EVA) and drug substance. The resulting
product is a solid matrix that is placed subcutaneously, usually in the upper
arm, in an ofﬁ ce procedure.

Titan’s ﬁ rst product to utilize our ProNeura drug delivery technology is
Probuphine, a long-term dosage formulation of buprenorphine in development
for the treatment of opiate addiction. Buprenorphine is also approved in
Europe for the treatment of chronic pain, and Titan is also planning to
develop Probuphine for the treatment of this condition.

SELECTED FINANCIAL DATA

The selected ﬁ nancial data presented below summarizes certain ﬁ nancial data which has been
derived from and should be read in conjunction with our consolidated ﬁ nancial statements and
notes thereto included elsewhere herein. See also Management’s Discussion and Analysis of
Financial Condition and Results of Operations.

(in thousands,
except per share data)

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

Years Ended December 31,

2006

2005

2004

2003

2002

$ 2,892

11,620

17,770

20,415

22,258

29,819

—
4,859
710

—
5,370
589

759
5,237
376

3,896
5,109
1,285

—
5,076
3,821

Net loss

$ (15,737) $ (22,462) $ (26,004) $ (29,889) $ (28,182)

Basic and diluted net
loss per share
Shares used in computing:
Basic and diluted net

loss per share

(0.42) $

(0.69) $

(0.83) $

(1.07) $

(1.02)

37,902

32,635

31,381

27,907

27,642

(1) Revenues for 2002 include a $2.0 million milestone payment from Bayer Schering Pharma AG.
(2) Acquired research and development reﬂ ects the acquisition of the minority shares of ProNeura in 2004 and the acquisition of DTI in 2003.

(in thousands)

2006

2005

As of December 31,
2004

2003

2002

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

$ 13,715
10,825
15,040
10,405

$ 17,369
15,449
19,737
15,360

$ 36,322
33,760
38,626
33,713

$ 46,555
44,578
49,008
44,426

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

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 thereto included elsewhere herein.

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 statements may be identiﬁ ed 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 ﬁ nancing through corporate
partnering arrangements or otherwise.

Probuphine®, Spheramine®, ProNeura™ and CCM™ are trademarks of Titan Pharmaceuticals,
Inc. This report also includes trade names and trademarks of companies other than Titan
Pharmaceuticals, Inc.

OVERVIEW
We are a biopharmaceutical company developing proprietary therapeutics for the treatment of
central nervous system (CNS) disorders, cardiovascular disease, bone disease and other disorders.
Our product development programs focus primarily on large pharmaceutical markets with
signiﬁ cant unmet medical needs and commercial potential. We are focused primarily on clinical
development of the following products:

■ Probuphine: for the treatment of opioid dependence

■ Iloperidone: for the treatment of schizophrenia and related psychotic disorders (partnered with

Vanda Pharmaceuticals, Inc.)

■ Spheramine: for the treatment of advanced Parkinson’s disease (partnered with Bayer Schering

Pharma AG)

■ DITPA: for the treatment of cardiovascular disease

■ Gallium maltolate: for the treatment of bone related diseases, chronic bacterial infections and cancer

We are directly developing our product candidates and also utilizing corporate partnerships,
including a collaboration with (i) Bayer Schering Pharma AG, Germany (Bayer Schering) for the
development of Spheramine to treat Parkinson’s disease, and (ii) Vanda Pharmaceuticals, Inc.
(Vanda) for the development of iloperidone for the treatment of schizophrenia and related psychotic
disorders. We also utilize grants from government agencies to fund development of our product
candidates.

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

Product

Potential
Indication(s)

Phase of
Development

Marketing
Rights

Probuphine
Iloperidone
Spheramine
DITPA
Gallium maltolate Bone related disease, chronic

Opioid dependence
Schizophrenia, psychosis
Parkinson’s disease
Hyperlipidemia

Phase III
Phase III
Phase IIb
Phase II

Titan
Vanda Pharmaceuticals, Inc.
Bayer Schering Pharma AG
Titan

bacterial infections, cancer

Phase I

Titan

Our products are at various stages of development and may not be successfully developed or
commercialized. We do not currently have any products being commercially sold. Our proposed
products will require signiﬁ cant further capital expenditures, development, testing, and regulatory
clearances prior to commercialization. We may experience unanticipated problems relating to
product development and cannot predict whether we will successfully develop and commercialize
any products. An estimation of product completion dates and completion costs can vary signiﬁ cantly
for each product and are difﬁ cult to predict. Various statutes and regulations also inﬂ uence our
product development progress and the success of obtaining approval is highly uncertain. 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 proﬁ table operations. 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,” included in our 2006 Form
10-K ﬁ led with the Securities and Exchange Commission.

CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES
The preparation of our ﬁ nancial 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 consolidated ﬁ nancial statements and accompanying notes. Actual
results could differ materially from those estimates. We believe the following accounting policy for
the year ended December 31, 2006, to be applicable:

In December 2004, the Financial Accounting Standards Board (FASB) issued their ﬁ nal standard
on accounting for share-based payments in FASB Standard No.123R (revised 2004), Share-Based
Payment (SFAS 123R). This statement replaces FASB Statement 123, Accounting for Stock-Based
Compensation (SFAS 123), and supersedes Accounting Principles Board (APB) Opinion No.25,
Accounting for Stock Issued to Employees. The statement is effective for all interim and annual periods
beginning after December 15, 2005 and requires companies to measure and recognize compensation
expense for all share-based payments at fair value in the consolidated statement of income.

Effective January 1, 2006, we adopted SFAS 123R using the modiﬁ ed-prospective-transition
method. Under this transition method, stock compensation cost recognized beginning January 1,
2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet
vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the
original provisions of SFAS 123, and (b) compensation cost for all share-based payments granted on
or subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with
the provisions of SFAS 123R. Results for prior periods have not been restated.

RESULTS OF OPERATIONS
Comparison of Years Ended December 31, 2006 and 2005
Revenues in 2006 were $32,000 compared to $89,000 for 2005, a decrease of $57,000. Our
revenues during 2006 and 2005 were derived from fees received under various licensing
agreements.

Research and development expenses for 2006 were $11.6 million compared to $17.8 million
for 2005, a decrease of $6.2 million. The decrease in research and development was primarily
associated with the conclusion of certain clinical study related activities and cost reduction
strategies initiated in the third quarter of 2005 resulting in lower internal expenditures in 2006. Of
our 2006 research and development expenses, approximately 46%, or $5.3 million, were attributable
to external R&D expenses. External R&D expenses include direct expenses such as clinical

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

research organization charges, investigator and review board fees, patient expense reimbursements,
pre-clinical activities and contract manufacturing expenses. In 2006, approximately $2.2 million
of external R&D expenses were related to Probuphine, $2.6 million to DITPA, $0.4 million to
gallium maltolate, 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 October 2006, we determined to focus our resources on the Phase III
development of Probuphine, and have discontinued further enrollment in our Phase II study of
DITPA in congestive heart failure (CHF). We will subsequently analyze data collected to date.
In addition, the Department of Veteran’s Affairs indicated that it will discontinue its Cooperative
Studies Program Phase II study of DITPA in CHF patients.

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 speciﬁ c
timing and future costs of our clinical development programs or the timing of material cash inﬂ ows,
if any, from our product candidates.

General and administrative expenses for 2006 were $4.9 million compared to $5.4 million for 2005,
a decrease of $0.5 million.

Other income, net, for 2006 was $710,000 compared to $589,000 for 2005, an increase of
$121,000.

As a result of the foregoing, we had a net loss of $15.8 million in 2006 compared to a net loss of
$22.5 million in 2005.

Comparison of Years Ended December 31, 2005 and 2004
Revenues in 2005 were $89,000 compared to $31,000 for 2004, an increase of $58,000. Our
revenues during 2005 and 2004 were derived from fees received under various licensing agreements.

Research and development expenses for 2005 were $17.8 million compared to $20.4 million
for 2004, a decrease of $2.6 million. The decrease in research and development was primarily
associated with the conclusion of certain clinical studies in 2004 and cost reduction strategies
initiated in 2005 resulting in lower internal expenditures in 2005. Of our 2005 research and
development expenses, approximately 38%, or $6.8 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 2005, approximately $2.4 million of external R&D
expenses were related to Probuphine, $2.7 million to DITPA, $0.7 million to gallium maltolate, 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
2004, we recorded a $759,000 acquired research and development expense in connection with
the acquisition of minority shares of ProNeura, Inc. The entire purchase price of the shares was
charged to acquired research and development on the acquisition date in accordance with generally
accepted accounting principles.

General and administrative expenses for 2005 were $5.4 million compared to $5.2 million for 2004.

Other income, net, for 2005 was $589,000 compared to $376,000 for 2004, an increase of
$213,000.

As a result of the foregoing, we had a net loss of $22.5 million in 2005 compared to a net loss of
$26.0 million in 2004.

LIQUIDITY AND CAPITAL RESOURCES

(in thousands)

2006

2005

2004

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

$ 13,715
$ 10,825
4.2:1

$ 17,369
$ 15,449
5.9:1

$ 36,322
$ 33,760
10:1

$ (13,500)
$ 4,081
$ 9,890

$ (22,921)
$ 22,533
$ 4,067

$ (23,912)
$ 7,977
$ 14,566

At December 31, 2006, we had $13.7 million of cash, cash equivalents, and marketable securities
compared to $17.4 million at December 31, 2005.

Our operating activities used $13.5 million during 2006. This consisted primarily of the net loss
for the period of $15.8 million reduced by $1.0 million related to changes in prepaid expenses,
receivables, other assets, accounts payable and other accrued liabilities. This was offset in part
by non-cash charges of $0.4 million related to depreciation and amortization expenses and
$0.9 million related to stock based compensation expenses. 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, meeting project-funding milestones and diligent efforts in product
development. The aggregate commitments we have under these agreements, including minimum
license payments, for the next 12 months is approximately $0.2 million.

Net cash provided by investing activities of $4.1 million during 2006 consisted primarily of
maturities of marketable securities of $19.7 million, partially offset by purchases of marketable
securities of $15.6 million and capital expenditures of approximately $0.1 million.

Net cash provided by ﬁ nancing activities during 2006 was $9.9 million, which consisted primarily
of $9.3 million of net proceeds from the sale of common stock under an existing shelf registration
statement and net proceeds from the exercise of stock options.

On September 28, 2005, we entered into a Standby Equity Distribution Agreement with Cornell
Capital Partners. Under the agreement, we can require Cornell to purchase up to $35.0 million of
our common stock over a two year period following the effective date of a registration statement
covering the shares of the common stock to be sold to Cornell Capital Partners. We can make draw-
downs under the agreement in $2.0 million increments. At the closing of each draw-down (which
will take place six days after our notiﬁ cation to Cornell Capital Partners) we will issue to Cornell
Capital Partners a number of shares of our common stock equal to the amount of the draw-down
divided by the lowest daily volume weighted average price of our common stock during the ﬁ ve
trading days following the draw-down notice to Cornell Capital Partners. At each closing, we will
pay 5% of the amount of the draw-down to Cornell Capital Partners and $500 to Yorkville Associates
Management, the investment advisor to Cornell Capital Partners. We are not obligated to make any
draw-downs under the agreement, and will not pay any additional fees to Cornell Capital Partners
if we do not do so. As of December 31, 2006, we completed a total of ﬁ ve draw-downs under the

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Standby Equity Distribution Agreement pursuant to which we issued an aggregate of 3,131,228
shares and received net proceeds of approximately $3.8 million. We can issue 3,344,059 additional
shares under the agreement without receipt of the required shareholder approval. We did not make
any draw-downs under this facility in 2006.

In February 2004, we ﬁ led 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. In March
2004, we completed a sale of 3,075,000 shares of our common stock offered under the registration
statement at a price of $5.00 per share, for gross proceeds of approximately $15.4 million. Net
proceeds were approximately $14.4 million. In March 2006, we completed a sale of 3,076,924
shares of our common stock offered under the registration statement at a price of $3.25 per share,
for gross proceeds of approximately $10 million. Net proceeds were approximately $9.3 million.
This shelf registration statement expired in February 2007.

In February 2007, we ﬁ led 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.

We expect to continue to incur substantial additional operating losses from costs related to
continuation of product and technology development, clinical trials, and administrative activities. We
believe that with our current cash balances and the Standby Equity Distribution agreement we will
have access to sufﬁ cient working capital to sustain our planned operations through the end of 2007.

Although the Standby Equity Distribution agreement provides us with up to an additional $31.0
million of ﬁ nancing, subject to the receipt of required shareholder approval, we will need to seek
additional ﬁ nancing sources to fund our product development activities, and will be required to
obtain substantial funding to commercialize any products other than iloperidone or Spheramine that
we may successfully develop. If we are unable to complete a debt or equity offering, or otherwise
obtain sufﬁ cient ﬁ nancing when and if needed, we may be required to reduce, defer or discontinue
one or more of our product development programs.

The following table sets forth the aggregate contractual cash obligations as of December 31, 2006
(in thousands):

Total

< 1 year

1-3 years

3-5 years

5 years+

Payments Due by Period

Contractual obligations
Operating leases
Sponsored research &
license agreements

$ 2,103

$ 636

$ 1,171

$ 296

Total contractual cash obligations

$ 2,882

$ 779

$ 133

$ 769

$ 238

$ 1,409

$ 272

$ 568

—

$ 136

For a full discussion of risks and uncertainties regarding our need for additional ﬁ nancing, see
“Risk Factors—We will need additional ﬁ nancing,” included in our 2006 Form 10-K ﬁ led with the
Securities and Exchange Commission.

OFF-BALANCE SHEET ARRANGEMENTS
We have never entered into any off-balance sheet ﬁ nancing arrangements and we have never
established any special purpose entities. We have not guaranteed any debt or commitments of other
entities or entered into any options on non-ﬁ nancial assets.

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 requirements by investing excess cash in securities
with different maturities to match projected cash needs and limit concentration of credit risk by
diversifying our investments among a variety of high credit-quality issuers. A hypothetical 100 basis
point decrease in interest rates would result in an approximate $100,000 decrease in cash ﬂ ow over
the subsequent year. We do not use derivative ﬁ nancial 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, 2006 (in thousands,
except interest rate):

Face Value

2007

2008

Total

Cash equivalents and marketable securities:
Variable rate securities
Average interest rate
Fixed rate securities
Average interest rate

$ 7,560

5.06%

$ 3,400

4.09%

—
—
$ 702

3.79%

$ 7,560

5.06%

$ 4,102

4.04%

Estimated
Fair value

$ 7,560

$ 4,102

CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures: Our principal executive and ﬁ nancial ofﬁ cers
reviewed and evaluated our disclosure controls and procedures (as deﬁ ned in Exchange Act Rule
13a-15(e)) as of the end of the period covered by this Form 10-K. Based on that evaluation, our
principal executive and ﬁ nancial ofﬁ cers concluded that our disclosure controls and procedures are
effective in timely providing them with material information relating to the Company, as required to
be disclosed in the reports we ﬁ le under the Exchange Act.

(b) Management’s Annual Report on Internal Control Over Financial Reporting: Our management
is responsible for establishing and maintaining adequate internal control over our ﬁ nancial
reporting. Management assessed the effectiveness of our internal control over ﬁ nancial reporting
as of December 31, 2006. In making this assessment, management used the criteria set forth by
the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—
Integrated Framework. Based on the assessment using those criteria, management concluded that,
as of December 31, 2006, our internal control over ﬁ nancial reporting was effective.

Our independent registered public accounting ﬁ rm, Odenberg, Ullakko, Muranishi& Co. LLP,
have issued an attestation report on management’s assessment of our internal control over ﬁ nancial
reporting as well as on the effectiveness of our internal control over ﬁ nancial reporting as of
December 31, 2006. The attestation report on the internal control over ﬁ nancial reporting appears
elsewhere in this Annual Report.

(c) Changes in Internal Control Over Financial Reporting: There were no changes in our internal
control over ﬁ nancial reporting during the year that have materially affected, or are reasonably likely
to materially affect, our internal control over ﬁ nancial reporting.

CONSOLIDATED BALANCE SHEETS

(in thousands of dollars)

Assets
Current assets:
Cash and cash equivalents
Marketable securities
Prepaid expenses, receivables and other current assets

Total current assets
Property and equipment, net
Investment in other companies
Other assets

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
Accrued clinical trials expenses
Other accrued liabilities

Total current liabilities

December 31,

2006

2005

9,613 $
4,102
504

9,142
8,227
1,216

14,219
457
150
214

18,585
788
150
214

$ 15,040 $ 19,737

561 $

1,521
1,312

3,394

518
787
1,831

3,136

Commitments and contingencies
Minority interest—Series B preferred stock of Ingenex, Inc.
Stockholders’ Equity:
Preferred stock, $0.001 par value per share; 5,000,000 shares

authorized, none issued and outstanding:

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

75,000,000 shares authorized, 38,975,040 and 35,584,269 shares
issued and outstanding at December 31, 2006 and 2005, respectively

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

Total stockholders’ equity

1,241

—

224,221
10,118
—
(223,944)
10

214,331
9,264
(19)
(208,207)
(9)

10,405

15,360

$ 15,040 $ 19,737

See accompanying notes.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amount)

Revenue:
License 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.

Years ended December 31,
2005

2006

2004

11,620
—
4,859

16,479

17,770
—
5,370

23,140

20,415
759
5,237

26,411

(16,447)

(23,051)

(26,380)

717
(7)
710

570
19
589

673
(297)
376

$ (15,737)

$ (22,462)

$ (26,004)

(0.42)

(0.69)

(0.83)

37,902

32,635

31,381

CONSOLIDATED STATEMENTS OF
STOCKHOLDERS’ EQUITY

(in thousands)

Balances at December 31, 2003
Comprehensive loss:
Net loss
Unrealized loss on marketable securities

Comprehensive loss
Issuance of common stock,
net of issuance costs of $1,020
Issuance of common stock upon exercise of options
Issuance of common stock upon tender of
Proneura, Inc. shares
Compensation related to stock options
Amortization of deferred compensation

Balances at December 31, 2004
Comprehensive loss:
Net loss
Unrealized gain on marketable securities

Comprehensive loss
Issuance of common stock, net of
issuance costs of $263
Issuance of common stock upon exercise of options
Compensation related to stock options
Amortization of deferred compensation
Redemption of series C preferred stock

Balances at December 31, 2005
Comprehensive loss:
Net loss
Unrealized gain on marketable securities

Comprehensive loss
Issuance of common stock, net of issuance
costs of $730
Issuance of common stock upon
exercise of options
Compensation related to stock options
Amortization of deferred compensation

Preferred Stock

Common Stock

Amount

222

$ —

28,903

$ 195,331

3,075
180

14,355
211

150

367

222

—

32,308

210,264

3,131
145

3,887
180

(222)

—

$ —

35,584

$ 214,331

3,077

9,270

314

620

Balances at December 31, 2006

—

$ —

38,975

$ 224,221

See accompanying notes.

Additional
Paid-In
Capital

$ 9,047

Deferred
Compensation

Accumulated
Deficit

Accumulated
Other
Comprehensive
Income

Total
Stockholders’
Equity

$ (211)

$ (159,741)

$ —

$ 44,426

(26,004)

(51)

(26,004)
(51)

(26,055)

14,355
211

367
126
283

(185,745)

(51)

33,713

(22,462)

(22,462)
42

(22,420)

3,887
180
(63)
63
—

280

9,327

(154)
283

(82)

(63)

$ 9,264

$ (19)

$ (208,207)

$ (9)

$ 15,360

(15,737)

(15,737)
19

(15,718)

9,270

620
854
19

$ (223,944)

$ 10

$ 10,405

854

$ 10,118

$ —

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands of dollars)

Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization

(Gain) loss on investment activities

Loss on disposition of property and equipment
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

Years ended December 31,
2005

2006

2004

$ (15,737)

$ (22,462)

$ (26,004)

389
—
5
—
873

712
42
216

405
(8)
—
—
—

(320)
(171)
(365)

466
261
4
759
409

254
(816)
755

Net cash used in operating activities

(13,500)

(22,921)

(23,912)

Cash flows from investing activities:
Purchases of property and equipment, net
Purchases of marketable securities
Proceeds from maturities of marketable securities

Net cash provided by investing activities

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

Net cash provided by financing activities

Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year

Cash and cash equivalents at end of year
Marketable securities at end of year

Cash, cash equivalents and marketable
securities at end of year

(63)
(15,596)
19,740

(149)
(7,202)
29,884

(725)
(12,098)
20,800

4,081

22,533

7,977

9,890

471
9,142

9,613
4,102

4,067

3,679
5,463

9,142
8,227

14,566

(1,369)
6,832

5,463
30,859

$ 13,715

$ 17,369

$ 36,322

Schedule of non-cash transaction:
Issuance of common stock to acquire technologies, net

—

$ —

367

See accompanying notes.

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, cardiovascular disease, bone disease and other disorders.
Our product development programs focus primarily on large pharmaceutical markets with
signiﬁ cant unmet medical needs and commercial potential. We are directly developing our product
candidates and also utilizing strategic partnerships, including a collaboration with Bayer Schering
Pharma AG, Germany (Bayer Schering). These collaborations help fund product development and
enable us to retain signiﬁ cant economic interest in our products. At December 31, 2006, we owned
81% of Ingenex, Inc. assuming the conversion of all preferred stock to common stock. In the fourth
quarter of 2004, we completed the merger of ProNeura, Inc., our 89% owned subsidiary, into Titan.
We operate in only one business segment, the development of pharmaceutical products.

Basis of Presentation and Consolidation
The accompanying consolidated ﬁ nancial statements include the accounts of Titan and our wholly and
majority owned subsidiaries. All signiﬁ cant intercompany balances and transactions are eliminated.

Use of Estimates
The preparation of ﬁ nancial 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 consolidated ﬁ nancial statements and accompanying notes. Actual results could differ from those estimates.

Stock Option Plans
Effective January 1, 2006, we adopted SFAS 123R – “Share Based Payment” (SFAS 123R) using
the modiﬁ ed-prospective-transition method. Under this transition method, stock compensation cost
recognized beginning January 1, 2006 includes: (a) compensation cost for all share-based payments
granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value estimated
in accordance with the original provisions of SFAS 123, and (b) compensation cost for all share-based
payments granted on or subsequent to January 1, 2006, based on the grant-date fair value estimated
in accordance with the provisions of SFAS 123R. Results for prior periods have not been restated.

We use the Black-Scholes-Merton option-pricing model with the following assumptions to estimate
the share-based compensation expense for the year ended December 31, 2006: 1) weighted-average
risk-free interest rate of 4.8%; 2) no expected dividend payments; 3) expected holding period of
5.8 years based on the simpliﬁ ed method provided in Staff Accounting Bulletin No.107 for “plain
vanilla options”; 4) weighted-average volatility factor of 0.64 based on historical stock prices; and 5)
an estimated forfeiture rate of 2% of options granted to management and 31% of options granted to
non-management based on historical data.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The SFAS 123R share-based compensation expense recorded for awards under the stock option plans
was approximately $873,000, net of estimated forfeitures, during the year ended December 31, 2006.
The share-based compensation expense of $354,000 was recorded in research and development
expense and $519,000 was recorded in general and administrative expense during the twelve month
period ended December 31, 2006. No tax beneﬁ t was recognized related to share-based compensation
expense since we have incurred operating losses and we have established a full valuation allowance to
offset all the potential tax beneﬁ ts associated with our deferred tax assets. Our basic and diluted loss
per share for the year ended December 31, 2006 increased by $0.03, due to adopting SFAS 123R.

During the year ended December 31, 2006 we granted 1,157,650 options to employees, directors
and consultants to purchase common stocks. The following table summarizes option activity for the
year ended December 31, 2006:

(in thousands, except per share amounts)

Outstanding at January 1, 2006
Granted
Exercised
Cancelled

Outstanding at December 31, 2006

Options exercisable at December 31, 2006

6,499
1,158
(314)
(753)

6,590

5,282

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Contractual
Term

Aggregate
Intrinsic
Value

$ 7.56
1.69
1.98
4.68

$ 7.12

$ 8.41

5.24

4.33

$ 3,606

$ 1,752

As of December 31, 2006 there was approximately $778,000 of total unrecognized compensation
expense related to non-vested stock options. This expense is expected to be recognized over a
weighted-average period of 0.59 year.

Until December 31, 2005, we elected to follow Accounting Principles Board Opinion No.25
(APB 25), “Accounting for Stock Issued to Employees,” rather than the alternative method of
accounting prescribed by 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 we had applied the provisions of SFAS 123 to
estimate and recognize compensation expense for our share-based employee compensation during
the year ended December 31, 2005 and 2004.

Net loss, as reported
Add: Stock-based employee compensation
expense included in reported net loss
Deduct: Stock-based employee compensation
expense determined under fair value method
for all stock option grants

Pro forma net loss

Basic and diluted net loss per share, as reported

Pro forma basic and diluted net loss per share

Years Ended December 31,

2005

2004

$ (22,462) $ (26,004)

(27)

268

(873)

(1,390)

$ (23,362) $ (27,126)

(0.69) $

(0.83)

(0.72) $

(0.86)

The fair value of options was estimated at the date of grant using a Black-Scholes-Merton option-
pricing model with the following assumptions for the year ended December 31, 2005 and 2004,
respectively: weighted-average volatility factor of 0.70 and 0.70; no expected dividend payments;
weighted-average risk-free interest rate in effect of 4.1% and 3.0%; and a weighted-average expected
life of 3.12 and 3.97 years. In the pro forma information for periods prior to 2006, we accounted for
forfeitures as they occurred.

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 ﬁ nancial 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 classiﬁ ed 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 signiﬁ cant 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 $27,000 in 2006, $45,000 in 2005, and $102,000 in 2004 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 (loss), a separate component
of stockholders’ equity. The cost of securities sold is based on use of the speciﬁ c identiﬁ cation 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 ﬁ ve 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 classiﬁ ed as long-term assets and are accounted for under the
cost method as we do not have the ability to exercise signiﬁ cant inﬂ uence 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 ﬁ nancial 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 sufﬁ cient to allow for any anticipated recovery in our carrying value.

In December 2001, we made a $300,000 equity investment in Molecular Medicine BioServices,
Inc. for 714,286 shares of Series A Preferred stock, and at December 31, 2006, these shares
represent 3.7% of total equity in the company. In September 2004, we recorded a $150,000
reduction in the carrying value of our investment in Molecular Medicine BioServices, Inc., and
included the loss in other income (expense).

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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.

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 ﬁ xed 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 speciﬁ c 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 undelivered
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 we have
continuing performance obligations and have no evidence of fair value of those obligations.
Cost reimbursements for research and development spending are recognized when the related
costs are incurred and when collections are reasonably expected. Payments received related to
substantive, performance-based “at-risk” milestones are recognized as revenue upon achievement
of the clinical success or regulatory event speciﬁ ed 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 a milestone is reached.

■ Technology license agreements typically consist of non-refundable upfront license fees, 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 speciﬁ c projects, generally provide for
reimbursement of approved costs as deﬁ ned 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, 2006, 2005,
and 2004, outstanding preferred stock, options and warrants totaled 6.6 million, 6.7 million, and

6.7 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 (Loss)
Comprehensive income (loss) 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, 2006, 2005, and 2004 was $15.7
million, $22.4 million, and $26.1 million, respectively. Comprehensive income (loss) has been
disclosed in the Consolidated Statements of Stockholders’ Equity for all periods presented.

Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (FASB) issued their ﬁ nal standard
on accounting for share-based payments in FASB Standard No.123R (revised 2004), Share-Based
Payment (SFAS 123R). This statement replaces FASB Statement 123, Accounting for Stock-Based
Compensation (SFAS 123), and supersedes Accounting Principles Board (APB) Opinion No.25,
Accounting for Stock Issued to Employees. The statement is effective for all interim and annual
periods beginning after December15, 2005 and requires companies to measure and recognize
compensation expense for all share-based payments at fair value in the consolidated statement of
income.

In June 2006, the FASB issued Interpretation No.48, “Accounting for Uncertainty in Income
Taxes—an interpretation of FASB Statement No.109” (“FIN 48”). This Interpretation clariﬁ es
the accounting for uncertainty in income taxes recognized in a company’s ﬁ nancial statements
in accordance with FASB Statement No.109, Accounting for Income Taxes. FIN 48 prescribes
a recognition threshold and measurement attribute for the ﬁ nancial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also
provides guidance on derecognition, classiﬁ cation, interest and penalties, accounting in interim
periods, disclosure, and transition. The evaluation of a tax position in accordance with FIN 48 is a
two-step process. The ﬁ rst step is recognition: The Company determines whether it is “more-likely-
than-not” that a tax position will be sustained upon examination, including resolution of any related
appeals or litigation processes, based on the technical merits of the position. In evaluating whether
a tax position has met the “more-likely-than-not” recognition threshold, the company presumes that
the position will be examined by the appropriate taxing authority that would have full knowledge
of all relevant information. The second step is measurement: A tax position that meets the “more-
likely-than-not” recognition threshold is measured to determine the amount of beneﬁ t to recognize
in the ﬁ nancial statements. The tax position is measured at the largest amount of beneﬁ t that is
greater than 50 percent likely to be realized upon ultimate settlement. FIN 48 is effective for ﬁ scal
years beginning after December 15, 2006. The Company has not yet determined what impact this
statement will have on its results of operations or ﬁ nancial position.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
The following is a summary of our cash, cash equivalents and marketable securities at December
31, 2006 and 2005 (in thousands):

2006

2005

Gross
Amortized Unrealized Unrealized
(Loss)

Gross

Gain

Cost

Fair
Value

Gross
Amortized Unrealized Unrealized
(Loss)

Gross

Gain

Cost

Fair
Value

Classified as:
Cash
Cash equivalents:
Money market funds

Total cash and
cash equivalents

Marketable securities:
Securities of the U.S.
government and
its agencies

Total cash, cash equivalents
and marketable securities

$ 2,053

$ —

$ 2,053

$ 1,444

$ —

$ 1,444

7,560

9,613

—

7,560

7,698

—

7,698

—

9,613

9,142

—

9,142

4,092

—

4,102

8,235

(17)

8,227

$ 13,705

$ 10

$ —

$ 13,715

$ 17,377

$ 9

$ (17) $ 17,369

Securities available-for-sale:
Maturing within 1 year

$ 3,392

$ 3,400

$ 7,236

Maturing between
1 to 2 years

$ 700

$ 702

999

$ 7,237

$ 990

There were no material gross realized gains or losses on sales of marketable securities for the years
ended December 31, 2006, 2005 and 2004.

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

2006

2005

$ 579
459
852
977

2,866
(2,409)

$ 565
459
964
920

2,908
(2,120)

$ 457

$ 788

Depreciation and amortization expense was $389,000, $405,000, and $466,000 for the years ended
December 31, 2006, 2005, and 2004, 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
approximately $690,000, $700,000, and $3.5 million in the years ended December 31, 2006, 2005,
and 2004, respectively.

At December 31, 2006, the annual aggregate commitments we have under these agreements,
including minimum license payments, are as follows (in thousands):

2007
2008
2009
2010
2011

$ 133
102
136
136
136

$ 643

After 2011, we must make annual payments aggregating $136,000 per year to maintain certain
licenses. Certain licenses provide for the payment of royalties by us on future product sales, if any.
In addition, in order to maintain these licenses and other rights during product development, we
must comply with various conditions including the payment of patent related costs and obtaining
additional equity investments.

5. AGREEMENT WITH SANOFI-AVENTIS SA
In 1997, we entered into an exclusive license agreement with Sanoﬁ -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 speciﬁ c milestones are met. Upon commercialization of the
product, the license agreement provides that we will pay royalties based on net sales.

6. ILOPERIDONE SUBLICENSE TO NOVARTIS PHARMA AG
We entered into an agreement with Novartis Pharma AG (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, we received a $2.5 million license fee in May 2001. Novartis will make
our milestone payments to Sanoﬁ -Aventis during the life of the Novartis agreement, and will also pay
to Sanoﬁ -Aventis and us a royalty on future net sales of the product, providing us with a net royalty
of 8% on the ﬁ rst $200 million of sales annually and 10% on all sales above $200 million on an annual
basis. Novartis has assumed the responsibility for all clinical development, registration, manufacturing and
marketing of iloperidone, and we have no remaining obligations under the terms of this agreement, except
for maintaining certain usual and customary requirements, such as conﬁ dentiality covenants.

In June 2004, we announced that Vanda Pharmaceuticals, Inc. (Vanda) had acquired from Novartis
the worldwide rights to develop and commercialize iloperidone, our proprietary antipsychotic agent
in Phase III clinical development for the treatment of schizophrenia and related psychotic disorders.
Under its agreement with Novartis, Vanda is pursuing advancement of the iloperidone Phase III
development program. All of our rights and economic interests in iloperidone, including royalties on
sales of iloperidone, remain essentially unchanged under the agreement.

7. LICENSING AND COLLABORATIVE AGREEMENT WITH BAYER SCHERING
PHARMA AG
In January 2000, we entered into a licensing and collaborative agreement with Bayer Schering
Pharma AG (Bayer Schering), under which we will collaborate with Bayer Schering on manufacturing
and clinical development of our cell therapy product, Spheramine®, for the treatment of Parkinson’s

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

disease. Under the agreement, we will perform clinical development activities for which we will
receive funding. As of December 31, 2006, we have recognized $2.8 million under this agreement.
In February 2002, we announced that we received a $2.0 million milestone payment from Bayer
Schering. The milestone payment followed Bayer Schering’s decision in the ﬁ rst quarter 2002
to initiate larger, randomized clinical testing of Spheramine for the treatment of patients with
advanced Parkinson’s disease following the successful completion of our Phase I/II clinical study
of Spheramine. As a result, we recognized $2.0 million in contract revenue in the ﬁ rst quarter of
2002. Bayer 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 Bayer Schering agreement upon the achievement of
speciﬁ c milestones. We will also receive a royalty on future net sales of the product.

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 signiﬁ cant adverse
effects. We 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. We acquired DTI in
a stock transaction for 1,187,500 shares of our common stock valued at approximately $3.6 million
using the average market price of our common stock over the ﬁ ve-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 licensor 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
consolidated statement of operations. An additional payment of 712,500 shares of our common
stock will be made only upon the achievement of positive pivotal study results or certain other
substantial milestones within ﬁ ve years. In addition, a cash payment of $102,750 or, alternatively,
an additional payment of 37,500 shares of our common stock, will be made to the licensor of the
technology upon achievement of such study results or such other substantial milestones within
ﬁ ve years. No speciﬁ c milestones have been achieved related to this acquisition as of December
31, 2006. In October 2006, we discontinued further enrollment in our Phase II study of DITPA
in CHF. We will subsequently analyze data collected to date. In addition to the discontinuation of
our Phase II clinical study in CHF, the Department of Veteran’s Affairs has indicated that it will
discontinue its Cooperative Studies Program Phase II study of DITPA in CHF patients.

9. COMMITMENTS AND CONTINGENCIES
Lease Commitments
We lease facilities under operating leases that expire at various dates through June 2010. We
also lease certain ofﬁ ce equipment under operating and capital leases that expire at various dates
through July 2009. Rental expense was $703,000, $721,000, and $832,000 for years ended
December 31, 2006, 2005, and 2004, respectively.

The following is a schedule of future minimum lease payments at December 31, 2006
(in thousands):

2007
2008
2009
2010
Thereafter

$ 636
587
584
296
—

$ 2,103

Legal Proceedings
In March 2005, Dr. Bernard Sabel initiated an appraisal proceeding in the Court of Chancery of the
State of Delaware relating to the merger of our subsidiary ProNeura, Inc. into Titan. The complaint
indicates that Mr. Sabel wants the court to appraise the value of the 108,800 shares of the common
stock of ProNeura owned by him. The complaint does not specify an amount that Mr. Sabel considers
the fair value of the shares. Discovery is proceeding in connection with this appraisal proceeding.

10. GUARANTEES AND INDEMNIFICATIONS
As permitted under Delaware law and in accordance with our Bylaws, we indemnify our ofﬁ cers and
directors for certain events or occurrences while the ofﬁ cer or director is or was serving at the Company’s
request in such capacity. The term of the indemniﬁ cation period is for the ofﬁ cer’s or director’s
lifetime. The maximum amount of potential future indemniﬁ cation is unlimited; however, we have a
director and ofﬁ cer 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 indemniﬁ cation agreements is minimal.
Accordingly, we have not recorded any liabilities for these agreements as of December 31, 2006.

In the normal course of business, we have commitments to make certain milestone payments to
various clinical research organizations in connection with our clinical trial activities. Payments are
contingent upon the achievement of speciﬁ c milestones or events as deﬁ ned in the agreements, and
we have made appropriate accruals in our consolidated ﬁ nancial statements for those milestones
that were achieved as of December 31, 2006. We also provide indemniﬁ cations 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 indemniﬁ cation 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
indemniﬁ cation provisions on our future results of operations.

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 our common stock, on a one-to-one basis, only if certain
development milestones are achieved within a 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. Certain milestones were not achieved by October 6,
2004. In February 2005, we redeemed all of the outstanding shares of Series C Preferred Stock at a
redemption price equal to the aggregate par value of the shares plus accrued and unpaid dividends,
if any. There were no accrued and unpaid dividends outstanding at the time of the redemption.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Common Stock
On September 28, 2005, we entered into a Standby Equity Distribution Agreement with Cornell
Capital Partners. Under the agreement, we can require Cornell to purchase up to $35.0 million of
our common stock over a two year period following the effective date of a registration statement
covering the shares of the common stock to be sold to Cornell Capital Partners. We can make draw-
downs under the agreement in $2.0 million increments. At the closing of each draw-down (which
will take place six days after our notiﬁ cation to Cornell Capital Partners) we will issue to Cornell
Capital Partners a number of shares of our common stock equal to the amount of the draw-down
divided by the lowest daily volume weighted average price of our common stock during the ﬁ ve
trading days following the draw-down notice to Cornell Capital Partners. At each closing, we will
pay 5% of the amount of the draw-down to Cornell Capital Partners and $500 to Yorkville Associates
Management, the investment advisor to Cornell Capital Partners. We are not obligated to make any
draw-downs under the agreement, and will not pay any additional fees to Cornell Capital Partners
if we do not do so. We paid Cornell Capital Partners a one-time commitment fee equal to $140,000
in the form of 75,407 shares of common stock, Monitor Capital, Inc., a placement agent fee equal
to $10,000 in the form of 5,386 shares of common stock and paid Yorkville Advisors Management
a structuring fee of $10,000, all of which are underwriting discounts payable or paid to Cornell
Capital Partners. As of December 31, 2006, we had completed a total of ﬁ ve draw-downs under the
Standby Equity Distribution Agreement selling a total of 3,050,435 shares of our common stock for
gross proceeds of approximately $4.0 million. Net proceeds were approximately $3.8 million.

We can issue 3,344,059 additional shares under the agreement without receipt of the required
shareholders’ approval. We did not make any draw-downs under this facility in 2006.

In October 2004, we issued 149,599 shares of our common stock in exchange for 101,700 shares of
ProNeura, Inc. (ProNeura) common stock under a share exchange agreement with two of the three
minority shareholders of ProNeura. Our common stock was valued at $367,000 using the average
market price of our common stock over a ﬁ ve day trading period, including two days prior to and
subsequent to the date of issuance.

Shares Reserved for Future Issuance
As of December 31, 2006, shares of common stock reserved by us for future issuance consisted of
the following (shares in thousands):

Stock options
DTI merger contingent shares

6,590
750

7,340

12. STOCK OPTION PLANS
In October 2005, we repriced 223,134 non-executive employee options previously granted under
the 1998 Stock Option Plan. The weighted average original exercise price of the repriced options
was $23.89. The exercise price of the new options is $5.00.

In August 2005, we adopted an amendment to the 2002 Stock Option Plan (2002 Plan) to (i)
permit the issuance of Shares of restricted stock and stock appreciation rights to participants under
the 2002 Plan, and (ii) increase the number of Shares issuable pursuant to grants under the 2002
Plan from 2,000,000 to 3,000,000.

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, ofﬁ cers, 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
ﬁ ve 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. Generally, 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.

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-qualiﬁ ed 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 ﬁ rst elected or appointed a director. Commencing on the day immediately
following the later of (i) the 2000 annual stockholders meeting, or (ii) the ﬁ rst 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. Commencing in 2005,
the biennial grant of options to non-employee directors pursuant to our stockholder-approved stock
option plans was increased from 15,000 options to 20,000 options.

In August 2001, we adopted the 2001 Employee Non-Qualiﬁ ed 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 ofﬁ cers 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 options granted under the 2001 NQ Plan were 100% of the fair market value of
our common stock on the date of grant.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

Balance at December 31, 2003
Options granted
Options exercised
Options cancelled

Balance at December 31, 2004
Increase in shares reserved

Options granted
Options exercised
Options cancelled

Balance at December 31, 2005
Options granted
Options exercised
Options cancelled

Balance at December 31, 2006

Shares Available
For Grant

Number of
Options

Weighted
Average
Outstanding Exercise Price

2,138
(1,407)
—
734

1,465
1,000
(953)
—
754

2,266
(1,158)
—
606

1,714

5,952
1,407
(180)
(734)

6,445
—
953
(145)
(754)

6,499
1,158
(314)
(753)

6,590

$ 9.39
$ 2.90
$ 1.17
$ 7.81

$ 8.39
—
$ 3.03
$ 1.24
$ 10.14

$ 7.56
$ 1.69
$ 1.98
$ 4.68

$ 7.12

Our option plans allow for stock options issued as the result of a merger or consolidation of another
entity, including the acquisition of minority interest of our subsidiaries, to be added to the maximum
number of shares provided for in the plan (Substitute Options). Consequently, Substitute Options
are not returned to the shares reserved under the plan when cancelled. During 2006, 2005 and
2004, the number of Substitute Options cancelled was immaterial.

Options for 5.3 million and 5.6 million shares were exercisable at December 31, 2006 and 2005,
respectively. The options outstanding at December 31, 2006 have been segregated into four ranges
for additional disclosure as follows (option shares in thousands):

Range of Exercise Prices

$ 0.08 – $ 2.35
$ 2.36 – $ 3.69
$ 3.77 – $ 11.63
$ 12.68 – $ 43.63

$ 0.08 – $ 43.63

Options Outstanding

Options Exercisable

Weighted
Average
Remaining
Life (Years)

7.81
6.29
3.41
3.21

5.24

Weighted
Average
Exercise
Price

$ 1.64
$ 2.98
$ 8.02
$ 19.03

Number
Exercisable

769
1,296
2,004
1,213

$ 7.12

5,282

Weighted
Average
Exercise
Price

$ 1.65
$ 3.09
$ 8.02
$ 19.03

$ 8.41

Number
Outstanding

1,705
1,668
2,005
1,212

6,590

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 have been granted under such plan
since 1997.

The Black-Scholes option valuation model was developed for use in estimating the fair value of
traded options that have no vesting restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions including the expected stock
price volatility. Because our employee stock options have characteristics signiﬁ cantly 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, 2006, 2005, and 2004 was $1.06, $1.00, and $1.65, respectively. A
tabular presentation of pro forma net loss and net loss per share information for all reporting periods
is presented in Note 1.

13. MINORITY INTEREST
The $1.2 million received by Ingenex upon the issuance of its Series B convertible preferred stock
has been classiﬁ ed as minority interest in the consolidated balance sheets. 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. INCOME TAXES
As of December 31, 2006, we had net operating loss carryforwards for federal income tax purposes
of approximately $222.2 million that expire at various dates through 2026, and federal research and
development tax credits of approximately $6.5 million that expire at various dates through 2026.
We also had net operating loss carryforwards for state income tax purposes of approximately $87.6
million that expire at various dates through 2016, and state research and development tax credits of
approximately $5.4 million which do not expire.

Current federal and California tax laws include substantial restrictions on the utilization of net
operating losses and tax credits in the event of an ownership change of a corporation. Accordingly,
the Company’s ability to utilize net operating loss and tax credit carryforwards may be limited as a
result of such ownership changes. Such a limitation could result in the expiration of carryforwards
before they are utilized.

Deferred income taxes reﬂ ect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for ﬁ nancial reporting purposes and the amounts used for income
tax purposes. Signiﬁ cant 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
Valuation allowance

Net deferred tax assets

December 31,

2006

2005

$ 75,769
10,048
5,902

$ 73,974
9,112
5,975

91,719
(91,719)

89,061
(89,061)

—

$ —

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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 $2.7 million, $11.9 million, and $7.6 million
during 2006, 2005, and 2004, respectively.

Under SFAS 123R, the deferred tax asset for Net Operating Losses as of December 31, 2006
excludes deductions for excess tax beneﬁ ts related to stock based compensation. The deferred tax
asset pertaining to Net Operating Losses decreased approximately $4.2 million.

In November 2005, the FASB issued Financial Statement Position (“FSP”) on SFAS No. 123(R)-
3, Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards.
Effective upon issuance, FSP No. 123(R)-3 provides for an alternative transition method for
calculating the tax effects of stock-based compensation expense pursuant to SFAS No. 123(R). The
alternative transition method provides simpliﬁ ed approaches to establish the beginning balance of
a tax beneﬁ t pool comprised of the additional paid-in capital (“APIC”) related to the tax effects of
employee stock-based compensation expense, and to determine the subsequent impact on the APIC
tax beneﬁ t pool and the statement of cash ﬂ ows of stock-based awards that were outstanding upon
the adoption of SFAS No. 123(R). The Company has made the election to calculate the tax effects
of stock-based compensation expense using the alternative transition method pursuant to FSP
No. 123(R)-3 and computed the beginning balance of the APIC tax beneﬁ t pool by applying the
simpliﬁ ed method. Based on the Company’s historical losses, the Company did not have cumulative
excess tax beneﬁ ts from stock-based compensation available in APIC that could be used to offset
an equal amount of future tax shortfalls (i.e., when the amount of the tax deductible stock-based
compensation is less than the related stock-based compensation cost).

The provision for income taxes consists of state minimum taxes due. The effective tax rate of the
Company’s provision (beneﬁ t) for income taxes differs from the federal statutory rate as follows (in
thousands):

Computed at 34%
State Taxes
Book losses not currently benefited
Other

Total

Year Ending December 31,

2006

2005

$ (5,348)
(909)
6,219
47

$ (7,637)
(1,301)
8,926
18

15. QUARTERLY FINANCIAL DATA (UNAUDITED)

(in thousands, except per share amount)

2006
Total revenue
Net loss
Basic and diluted net loss per share
2005
Total revenue
Net loss
Basic and diluted net loss per share

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

$
1
$ (4,705)
$ (0.13)

1
$ (3,426)
$ (0.09)

1
$ (4,340)
$ (0.11)

$
14
$ (6,296)
$ (0.19)

13
$ (5,742)
$ (0.18)

1
$ (6,378)
$ (0.20)

$
29
$ (3,266)
$ (0.09)

$
61
$ (4,046)
$ (0.12)

REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Titan Pharmaceuticals, Inc.

We have audited management’s assessment, included in the Management’s Annual Report on
Internal Control Over Financial Reporting included in Item 9A, that Titan Pharmaceuticals, Inc.
and its subsidiaries (the “company”) maintained effective internal control over ﬁ nancial reporting
as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO
criteria). The company’s management is responsible for maintaining effective internal control over
ﬁ nancial reporting and for its assessment of the effectiveness of internal control over ﬁ nancial
reporting. Our responsibility is to express an opinion on management’s assessment and an opinion
on the effectiveness of the company’s internal control over ﬁ nancial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over ﬁ nancial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over ﬁ nancial reporting,
evaluating management’s assessment, testing and evaluating the design and operating effectiveness of
internal control, and performing such other procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over ﬁ nancial reporting is a process designed to provide reasonable
assurance regarding the reliability of ﬁ nancial reporting and the preparation of ﬁ nancial statements
for external purposes in accordance with generally accepted accounting principles. A company’s
internal control over ﬁ nancial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly reﬂ ect the transactions
and dispositions of the assets of the company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of ﬁ nancial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the ﬁ nancial statements.

Because of the inherent limitations, internal control over ﬁ nancial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of the effectiveness to future periods are
subject to the risk that the controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that the company maintained effective internal control
over ﬁ nancial reporting as of December 31, 2006, is fairly stated, in all material respects, based on
the COSO criteria. Also in our opinion, the company maintained, in all material respects, effective
internal control over ﬁ nancial reporting as of December 31, 2006, based on the COSO criteria.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Titan Pharmaceuticals, Inc. and its subsidiaries
as of December 31, 2006 and 2005 and the related consolidated statements of operations, stockholders’
equity, and cash ﬂ ows for each of the three years in the period ended December 31, 2006, and our report
dated February 27, 2007 expressed an unqualiﬁ ed opinion thereon.

/s/ Odenberg, Ullakko, Muranishi& Co. LLP

San Francisco, California
February 27, 2007

REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Titan Pharmaceuticals, Inc.

We have audited the accompanying consolidated balance sheets of Titan Pharmaceuticals, Inc.
and its subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements
of operations, stockholders’ equity, and cash ﬂ ows for each of the three years in the period
ended December 31, 2006. These consolidated ﬁ nancial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these consolidated ﬁ nancial
statements based on our audits.

We conducted our audits in accordance with standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the ﬁ nancial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the ﬁ nancial statements. An audit also includes assessing the accounting principles
used and signiﬁ cant estimates made by management, as well as evaluating the overall ﬁ nancial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated ﬁ nancial statements audited by us present fairly, in all material
respects, the consolidated ﬁ nancial position of Titan Pharmaceuticals, Inc. and its subsidiaries
at December 31, 2006 and 2005, and the consolidated results of their operations and their cash
ﬂ ows for each of the three years in the period ended December 31, 2006 in conformity with U.S.
generally accepted accounting principles.

As discussed in Note 1 to the consolidated ﬁ nancial statements, the Company changed its method
of accounting for share-based compensation in 2006 when it adopted SFAS No.123R, “Share Based
Payment” starting January 1, 2006.

We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Titan Pharmaceuticals, Inc.’s internal
control over ﬁ nancial reporting as of December 31, 2006, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated February 27, 2007 expressed an unqualiﬁ ed opinion
thereon.

/s/ Odenberg, Ullakko, Muranishi& Co. LLP

San Francisco, California
February 27, 2007

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, 2006:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year Ended December 31, 2005:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter

High

Low

$ 4.99
$ 3.39
$ 2.52
$ 4.10

$ 3.24
$ 2.47
$ 2.31
$ 1.89

$ 1.35
$ 1.69
$ 1.65
$ 1.92

$ 2.20
$ 1.80
$ 1.73
$ 1.19

(b) Approximate Number of Equity Security Holders
The number of record holders of our common stock as of March 1, 2007 was approximately 136.
Based on the last ADP search, we believe there are in excess of 10,000 beneﬁ cial holders of our
common stock.

(c) Dividends
We have never paid a cash dividend on our common stock and anticipate that for the foreseeable
future any earnings will be retained for use in our business and, accordingly, do not anticipate the
payment of cash dividends.

STOCK PRICE PERFORMANCE PRESENTATION

The following chart compares the cumulative total stockholder return on the Company’s Shares
with the cumulative total stockholder return of (i) the Amex Market Index and (ii) a peer group
index consisting of companies reporting under the Standard Industrial Classiﬁ cation Code 2834
(Pharmaceutical Preparations):

Compare Cumulative Total Return Among Titan Pharmaceuticals, Inc., Amex Market Index
and SIC Code Index

$300

$250

$200

$150

$100

$50

2001

2002

2003

2004

2005

2006

Titan Pharmaceuticals, Inc.

Amex Market Index

SIC Code Index

Assumes $100 invested on December 31, 2001 and assumes dividends reinvested. Measurement
points are at the last trading day of the ﬁ scal years ended December 31, 2002, 2003, 2004, 2005
and 2006. The material in this chart is not soliciting material, is not deemed ﬁ led with the SEC
and is not incorporated by reference in any ﬁ ling of the Company under the Securities Act or the
Exchange Act, whether made before or after the date of this annual report and irrespective of any
general incorporation language in such ﬁ ling.