S-1 1 f67303ors-1.txt FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 20, 2000 REGISTRATION NO. 333- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ DIADEXUS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 8731 77-0464949 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION NUMBER) IDENTIFICATION NO.)

3303 OCTAVIUS DRIVE SANTA CLARA, CALIFORNIA 95054 (408) 496-6600 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ PATRICK PLEWMAN CHIEF EXECUTIVE OFFICER, PRESIDENT AND CHIEF OPERATING OFFICER DIADEXUS, INC. 3303 OCTAVIUS DRIVE SANTA CLARA, CALIFORNIA 95054 (408) 496-6600 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPIES TO: MICHAEL W. HALL, ESQ. JOSEPH E. MULLANEY III, ESQ. ROBERT A. KOENIG, ESQ. MINTZ, LEVIN, COHN, FERRIS, LATHAM & WATKINS GLOVSKY AND POPEO, P.C. 135 COMMONWEALTH DRIVE ONE FINANCIAL CENTER MENLO PARK, CALIFORNIA 94025-1105 BOSTON, MASSACHUSETTS 02111 (650) 328-4600 (617) 542-6000

------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. ------------------------ If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the "Securities Act") check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of earlier effective registration statement for the same offering. [ ] --------------- If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] --------------- If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] --------------- If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE CHART

(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933. ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 2 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED NOVEMBER 20, 2000 PROSPECTUS Shares [DIADEXUS, INC. LOGO] COMMON STOCK -------------------------------------------------------------------------------- This is our initial public offering of shares of common stock. We are offering shares. No public market currently exists for our common stock. We plan to apply to have our common stock approved for quotation on the Nasdaq National Market under the symbol "DDXS." We expect the public offering price to be between $ and $ per share. INVESTING IN THE SHARES INVOLVES RISKS. "RISK FACTORS" BEGIN ON PAGE 5.

We have granted the underwriters a 30-day option to purchase up to an additional shares of common stock solely to cover over-allotments. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Lehman Brothers, on behalf of the underwriters, expects to deliver the shares on or about , 2001. -------------------------------------------------------------------------------- LEHMAN BROTHERS CIBC WORLD MARKETS PRUDENTIAL VECTOR HEALTHCARE A UNIT OF PRUDENTIAL SECURITIES FIDELITY CAPITAL MARKETS , 2001 3 [Description of inside cover page: Graphical information regarding diaDexus, Inc. consisting of: - sources of molecular targets; - pictures of microarrays; and - bioinformatics computer results.] 4 TABLE OF CONTENTS

------------------------ ABOUT THIS PROSPECTUS You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information that is different from that contained in this prospectus. This prospectus may only be used where it is legal to sell these securities. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of common stock. Until , 2001 (25 days after commencement of this offering), all dealers selling shares of our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. i 5 PROSPECTUS SUMMARY The following summary contains basic information about our business and this offering. It may not contain all of the information that you should consider before investing in our common stock. You should read this prospectus, including "Risk Factors" and our financial statements and the related notes, before making an investment decision. Except as otherwise indicated, all information in this prospectus assumes the conversion of all outstanding shares of preferred stock into shares of common stock immediately prior to the completion of this offering, adoption of our restated certificate of incorporation and no exercise of the underwriters' over-allotment option. DIADEXUS, INC. We are a post-genomics company focused on translating raw genomics data into novel diagnostic and therapeutic products. Our relationships with our co-founders, SmithKline Beecham and Incyte Genomics, recognized leaders in genomics and bioinformatics, place our company at the forefront of the commercial utilization of genomic information. Upon our formation in 1997, our initial strategy was to discover molecular targets and develop novel diagnostic products for the improved detection, classification and prognosis of diseases. We recently expanded our strategy to include therapeutic discovery and development. Where possible, we will seek to develop diagnostic and therapeutic products that are directed at the same molecular target, enabling a diagnostic/therapeutic tandem approach to detect and treat disease. Our initial focus has been on the discovery of novel molecular targets in cancer. We expect to extend our discovery platform beyond cancer into other diseases. To date, we have identified thousands of disease-associated molecular targets, evaluated over 200 potential molecular targets using bioMVP, our target validation process, and advanced over 40 product candidates into development, including two diagnostic product candidates in late-stage preclinical development. We are aggressively seeking patent protection on our discoveries. We use three approaches to source novel molecular targets: - we perform large scale, high-throughput searches of Incyte's LifeSeq Gold, the leading genomic database. Upon our formation, Incyte granted us a fully paid subscription to LifeSeq Gold until September 2003. In addition, we also have a fully paid subscription to PathoSeq, Incyte's microbial database, until September 2003; - we integrate various cutting-edge genomic and proteomic technologies, including subtractive hybridization and gene and protein microarrays, to supplement our data mining efforts; and - we receive, through our relationship with SmithKline Beecham, diagnostic molecular targets that SmithKline Beecham identifies through September 2001 as having potential diagnostic utility, including diagnostic molecular targets identified through its relationship with Human Genome Sciences through June 2001. MOLECULAR DIAGNOSTICS We believe that genomics and proteomics fundamentally alter the underlying economics of diagnostic discovery which, when combined with intellectual property protection, have the potential to convert the diagnostic industry from its current status as a generally low margin sector to a higher margin sector based on patent-protected tests that can command high premiums. We were one of the first companies to recognize the potential of genomics for diagnostics, and we believe this first mover advantage is reflected in our product development pipeline. Our goal is to discover and commercialize highly differentiated, value-added diagnostic products. We believe these products will: - expand the universe of detectable diseases; - enable the early detection of disease when treatment is often most effective; 1 6 - improve medical treatment by providing a more rigorous classification of a patient's disease, enabling individual tailoring of therapy; and - monitor the effectiveness of treatment for both approved drugs and drugs under development. Some diseases can be linked to a single gene and may be accurately detected using single gene or single protein diagnostic tests. Other diseases, however, are multi-factorial, involving the abnormal expression of multiple genes. Although these multi-factorial diseases may be profiled using single analyte tests, we believe that multi-analyte tests will render a more accurate diagnosis of disease. As a result, we plan to develop multi-analyte tests that can identify novel patterns of multiple gene and protein expression to detect and monitor disease. Following SmithKline Beecham's collaboration with Human Genome Sciences in 1993, SmithKline Beecham has been at the forefront of discovering novel molecular targets. Recognizing that such targets could potentially have diagnostic as well as therapeutic utility, SmithKline Beecham established a Molecular Diagnostics Group to mine the HGS database. Our company was formed from this Molecular Diagnostics Group to exclusively develop diagnostic products based on SmithKline Beecham's discoveries. Upon our formation, SmithKline Beecham assigned us a portfolio of diagnostic product candidates discovered through their early research efforts. We have continued the development of eight of these diagnostic product candidates, including Lp-PLA(2), a novel risk factor for coronary heart disease, and Cathepsin-K, a diagnostic marker for osteoporosis. We have completed initial clinical utility studies on Lp-PLA(2) and have commenced initial clinical utility studies on Cathepsin-K. The New England Journal of Medicine recently published one of these studies, identifying Lp-PLA(2) as a novel risk factor for coronary heart disease that is independent of, and potentially superior to, other known risk factors. SmithKline Beecham has active therapeutic programs targeting Lp-PLA(2) and Cathepsin-K. We have an option agreement with Quest Diagnostics, the world's largest clinical reference laboratory, to license our products for use in so-called "homebrew" tests. Homebrew tests are a category of diagnostic tests that are conducted at a physician's request by a clinical reference laboratory and do not currently require Food and Drug Administration approval. We believe the ability to sell our products to these laboratories prior to our seeking FDA approval will allow us to assess demand in the market, increase awareness of our future products and generate early revenues. Where appropriate, we will seek FDA approval for our diagnostic products. Eventually, we may license products to large diagnostic companies to run on their high-throughput testing platforms once significant demand for these products is established. EXTENSION INTO THERAPEUTICS Recognizing that our discovery platform can yield molecular targets with both diagnostic and therapeutic utility, we recently expanded our strategy to include therapeutics. Our therapeutic product discovery and development efforts will focus initially on therapeutic monoclonal antibodies, which are drugs that specifically target disease-associated proteins found on the surface of cells. We plan to enter into one or more therapeutic antibody collaborations. Additionally, we plan to discover and develop therapeutic vaccines. A significant portion of the proceeds of this offering will be used to establish discovery, validation and product development efforts for therapeutic product candidates. ------------------------ We were founded in 1997 as a limited liability company and were incorporated in Delaware in 2000. Our principal executive offices are located at 3303 Octavius Drive, Santa Clara, California 95054, and our telephone number is (408) 496-6600. Our website address is www.diadexus.com. Information contained in our website is not incorporated by reference into this prospectus, and you should not consider information contained in our website as part of this prospectus. "diaDexus" is our registered trademark. This prospectus also contains additional trade names, trademarks and service marks of other companies. 2 7 THE OFFERING Common stock offered by diaDexus........ shares Common stock to be outstanding after this offering................... shares Use of proceeds......................... To expand our discovery, validation and product development capabilities for diagnostic and therapeutic product candidates and for general corporate purposes, including working capital and the funding of operating losses. We may also use a portion of the net proceeds to acquire complementary businesses, products and technologies. See "Use of Proceeds." Proposed Nasdaq National Market symbol.................................. DDXS The number of shares of common stock to be outstanding after this offering is based on 22,233,049 common and preferred shares outstanding as of September 30, 2000. The number of shares of common stock to be outstanding after this offering excludes, as of September 30, 2000: - 2,287,250 shares of common stock issuable upon exercise of options outstanding under our 2000 Equity Incentive Plan at a weighted average exercise price of $1.05 per share; - shares of common stock issuable upon exercise of options available for issuance under our 2001 Equity Incentive Plan; - 129,032 shares of common stock issuable upon exercise of a warrant outstanding at $7.75 per share; and - shares of common stock available for purchase under our 2001 Employee Stock Purchase Plan. 3 8 SUMMARY FINANCIAL DATA The following table sets forth summary financial data for our company. You should read this information in conjunction with the information under "Selected Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and the related notes included elsewhere in this prospectus. Pro forma amounts give effect to the automatic conversion of all outstanding shares of preferred stock into shares of common stock immediately prior to the completion of this offering. Pro forma as adjusted amounts also give effect to the sale of shares of common stock in this offering at an assumed initial public offering price of $ per share, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us.

4 9 RISK FACTORS Investing in our common stock involves a high degree of risk. You should carefully consider the following risks, as well as other information contained in this prospectus, before deciding to invest in shares of our common stock. If any of the following risks actually occurs, our business, financial condition and results of operations would suffer. In that case, the price of our common stock could decline, and you might lose all or part of your investment. RISKS RELATED TO OUR BUSINESS OUR BUSINESS PROSPECTS ARE DIFFICULT TO EVALUATE BECAUSE WE HAVE A LIMITED OPERATING HISTORY. Our company was founded in 1997, and we are still at an early stage of development. We have not yet completed the development of any products for commercial sale, and whether we will discover molecular targets with clinical utility, and whether we can develop commercially successful products from any such discoveries, is uncertain. Furthermore, we have had no material revenues to date. Accordingly, we have a limited operating history from which you can evaluate our present business and future prospects. As a relatively new entrant into the field of molecular target discovery and development, we face risks and uncertainties relating to our ability to implement our business plan successfully. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of development, particularly companies in new and rapidly evolving markets such as molecular medicine. If we are unsuccessful in addressing these risks and uncertainties, we may never become profitable and our financial condition would suffer. WE HAVE A HISTORY OF LOSSES AND NEGATIVE CASH FLOWS AND ANTICIPATE CONTINUED LOSSES FOR THE FORSEEABLE FUTURE. We have incurred losses since our inception, including net losses of $11.3 million for the year ended December 31, 1999 and $7.8 million for the nine months ended September 30, 2000. As of September 30, 2000, we had an accumulated deficit of $5.2 million since our incorporation in April 2000. We must spend significant amounts to fund research and development and to expand our validation and product development efforts for diagnostic and therapeutic product candidates. As a result, we expect to incur operating losses and negative cash flows for the foreseeable future. We do not know whether we will ever achieve profitability on a quarterly or annual basis. OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY, AND ANY FAILURE TO MEET FINANCIAL EXPECTATIONS MAY RESULT IN A SIGNIFICANT DECLINE IN OUR STOCK PRICE. Our quarterly operating results have fluctuated in the past and are likely to do so in the future. Some of the factors that could cause our operating results to fluctuate include: - the timing and willingness of collaborators to commercialize our product candidates; - the timing, release and competitiveness of our future products and those of our competitors; - our ability to develop, obtain regulatory clearance and introduce products for commercial sale on a timely basis; - changes in the cost, quality and availability of tissue samples, equipment, reagents and components required to manufacture or use our future products; - general and industry-specific economic conditions, which may affect our customers' research and development expenditures and use of our products; and - availability of commercial and government funding to researchers who test our product candidates. We believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance. It is likely that in some future quarter or quarters, our operating results will be 5 10 below the expectations of securities analysts or investors. In that case, our stock price could decline significantly and our stockholders would experience a decline in the value of their investment. WE HAVE NOT DEVELOPED ANY PRODUCTS FOR COMMERCIAL SALE, AND OUR PRODUCT CANDIDATES MAY NEVER BE FULLY DEVELOPED IN A MANNER SUITABLE FOR COMMERCIAL SUCCESS. We have not developed any products for commercial sale or proven our ability to do so. We must conduct a substantial amount of additional research and development before regulatory authorities will approve any of our existing diagnostic product candidates or before such diagnostic products will be ready for the homebrew market. Our most advanced diagnostic product candidate, Lp-PLA(2), must undergo several additional studies to confirm its clinical utility, and we do not expect regulatory approval for our own diagnostic kit for at least three years. Our research may conclude that Lp-PLA(2) or our other diagnostic product candidates are not safe and effective, in which case regulatory authorities will not approve them. One of our first product candidates, which we believed was a novel target for prostate cancer, was found to be ineffective after we had incurred significant research and development expense. Problems inherent in the development of new products and the competitive environment in which we operate may limit our ability to develop commercially successful products. Even if we develop products for commercial use and obtain all necessary regulatory approvals, our products may not be accepted by the research, diagnostic, medical and pharmaceutical marketplaces unless we are able to convince prospective customers that our products are more reliable and cost-effective than other means of detection and treatment of disease. Our development of future products is subject to the risks of failure inherent in the development of new products based on new technologies. These risks include, but are not limited to: - unplanned delays or expenditures in product development; - our failure to achieve validation of our product candidates in clinical trials; - our failure to achieve acceptance of our diagnostic tests by clinical testing laboratories; - our failure to receive regulatory approvals in a timely manner; - the emergence of superior products; - our inability to have our products manufactured on a commercial scale; - our reliance on collaborative partners to successfully complete development of our product candidates; and - the failure of any future products to achieve broad market acceptance. WE DEPEND ON SMITHKLINE BEECHAM AND INCYTE FOR KEY GENOMIC INTELLECTUAL PROPERTY AND ACCESS TO GENOMIC DATABASES, AND OUR CONTRACTUAL RELATIONSHIPS WITH THESE COMPANIES END IN THE NEAR FUTURE. Our founders SmithKline Beecham and Incyte have contributed a substantial asset base of genomic intellectual property to our company. In connection with our formation, SmithKline Beecham agreed to assign to us targets it determines from its research and development to have potential diagnostic utility through September 2001, including targets derived from its collaboration with Human Genome Sciences which ends in June 2001. To date, eight of our 43 diagnostic molecular target product candidates were assigned us by SmithKline Beecham, including our two late stage diagnostic product candidates, Lp-PLA(2) and Cathepsin-K. SmithKline Beecham's collaboration with Human Genome Sciences terminates in June 2001, and thereafter we will no longer have a right to license diagnostic molecular targets derived from Human Genome Sciences. Our rights to molecular targets with diagnostic potential derived from SmithKline Beecham's collaboration with Human Genome Sciences could terminate prior to June 2001 in the event that either party breaches the collaboration agreement or otherwise determines to terminate the collaboration prematurely. In addition, SmithKline Beecham's obligation to offer us molecular targets with diagnostic potential discovered from its research and development efforts terminates in September 2001. 6 11 As a result, we will lose a significant source of new diagnostic molecular targets in 2001. We must file research reports prior to the termination of these relationships and update these reports twice yearly in order to preserve our rights to these molecular targets. We will lose our rights to these diagnostic molecular targets if we fail to actively pursue their development or to file the required research reports on a timely basis. SmithKline Beecham may discover significant diagnostic molecular targets after September 2001 or, alternatively, we may not identify until after September 2001 the diagnostic utility of a molecular target which SmithKline Beecham offers prior to the termination of our relationship. In either case, we will have no rights to these molecular targets under our agreement with SmithKline Beecham. In January 2000, SmithKline Beecham and Glaxo Wellcome announced plans to merge. While we do not believe that this merger will adversely affect our relationship with SmithKline Beecham, we do not know whether we will encounter unexpected difficulties as a result of the merger. In connection with our founding, Incyte granted us a fully paid subscription to its LifeSeq Gold and PathoSeq databases. LifeSeq Gold is the largest database of its kind in the world. Our subscription to Incyte's databases terminates in September 2003, and we do not know whether we will be able to renew the subscription at that time. In the event that we breach our agreement with Incyte, we may lose access to Incyte's databases prior to September 2003. One of our primary methods of identifying potential molecular targets is through database mining of LifeSeq Gold. If we are unable to retain access to Incyte's databases, we do not know whether we will be able to obtain access to an acceptable alternative genomics database. Under our agreement with Incyte, we have no right to sub-license any antibody products we may develop based on our access to the LifeSeq Gold database unless the sub-licensee also subscribes to the LifeSeq Gold database. This may limit our ability to commercialize antibody products we may discover from the LifeSeq Gold database. The termination of our relationship with SmithKline Beecham in September 2001 and the termination of our subscription to Incyte's databases in September 2003, or earlier, will result in the loss to our company of two significant sources of molecular targets. We do not know whether we will be able to obtain alternative sources of molecular targets on commercially reasonable terms or at all. Our business will fail if we are unable to identify and develop novel molecular targets for the detection and treatment of disease. OUR PRODUCT CANDIDATES WILL BE SUBJECT TO A LENGTHY AND UNCERTAIN REGULATORY PROCESS AND WE DO NOT HAVE, AND MAY NEVER OBTAIN, THE REGULATORY APPROVALS NEEDED TO MARKET PRODUCTS. The Food and Drug Administration, or FDA, regulates all diagnostic kits, vaccines and therapeutic products, many of which must be approved before they can be marketed in the United States. The regulatory process is expensive, time consuming and uncertain. Before receiving approval from the FDA to market our product candidates, they must undergo extensive testing, possibly including animal and human clinical trials, which can take many years and require substantial expenditures. Data obtained from such testing are susceptible to varying interpretations which could delay, limit or prevent regulatory approval. In addition, changes in regulatory policy for product approval during the period of product development and regulatory agency review of each regulatory filing may cause delays or rejections. Because our product candidates involve the application of new technologies for the diagnosis and treatment of disease, they may be subject to substantial review by government regulatory authorities. Government regulatory authorities also may grant regulatory approvals more slowly for our products than for products that use more conventional technologies. To date, we have not submitted an application to the FDA or any other regulatory authority for any product candidate. The regulatory agencies of foreign governments may impose similar review and approval requirements before our product candidates can be sold in those other countries. Even after investing significant time and expenditures, we may not be able to obtain regulatory approval for our product candidates. If we do receive regulatory approval, this approval may entail 7 12 limitations on the indicated uses for which we can market our products. Further, once regulatory approval is obtained, a marketed product and its manufacturer are subject to continual review, and the discovery of previously unknown problems with a product or manufacturer may result in restrictions on the product, manufacturer or manufacturing facility, including withdrawal of the product from the market. WE MAY BE LESS ATTRACTIVE AS A TAKEOVER CANDIDATE BECAUSE OF TERMINATION PROVISIONS IN OUR CONTRACTS WITH SMITHKLINE BEECHAM AND INCYTE. If we merge with or are acquired by a pharmaceutical company prior to September 2001, nearly all of SmithKline Beecham's obligations to us and our rights to license diagnostic targets will immediately terminate. In addition, our fully paid subscription to the Incyte databases will terminate under most circumstances if we are acquired by a third party who is not a LifeSeq Gold subscriber. This may have the effect of discouraging third parties from seeking to acquire our company and depriving our stockholders of the opportunity to earn any premium associated with a takeover proposal. OUR RELATIONSHIP WITH QUEST DIAGNOSTICS MAY PREVENT US FROM COMMERCIALIZING HOMEBREW DIAGNOSTIC PRODUCTS THROUGH OTHER PARTIES AND MAY LIMIT OUR ABILITY TO ACHIEVE MARKET ACCEPTANCE. Quest Diagnostics has a right of first negotiation for an exclusive license to any homebrew products we develop through 2005. If Quest exercises this right, we may be required to enter into an exclusive contract on pre-negotiated terms which may not reflect the commercial value of the test. Under an exclusive arrangement, Quest may fail to meet our sales expectations, which could impair market acceptance for our novel tests. IF WE FAIL TO IDENTIFY MOLECULAR TARGETS DETECTABLE IN SERUM, OUR BUSINESS WILL BE SERIOUSLY HARMED. We believe that, in order to gain widespread market acceptance, our diagnostic screening products must be detectable in serum and compatible with the existing installed base of high-throughput testing instruments in clinical laboratories. Not all molecular targets are found in serum, however, and we may discover valid molecular targets which are detectable only in tissue. We may be unable to develop diagnostic product candidates that are detectable in serum, even if such molecular targets possess the requisite sensitivity and specificity to have clinical utility. Furthermore, we may devote substantial efforts to the development of a particular molecular target before concluding that such molecular target is not detectable in serum. If we do not identify serum-based molecular targets which we can develop into marketable diagnostic products, our business will be seriously harmed. OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO ENTER INTO COLLABORATIONS WITH OTHER COMPANIES. IF WE ARE UNABLE TO ENTER INTO SUCCESSFUL COLLABORATIONS IN THE FUTURE, WE MAY NOT BE ABLE TO DEVELOP OUR TECHNOLOGIES OR PRODUCT CANDIDATES OR SELL OUR FUTURE PRODUCTS COMMERCIALLY. We will need to enter into collaborative arrangements for the commercialization of our diagnostic products and the development and commercialization of our therapeutic products. We have limited or no control over the resources that any collaborator may devote to our product candidates. Any of our present or future collaborators may not perform their obligations as expected. These collaborators may breach or terminate their agreement with us or otherwise fail to conduct their collaborative activities successfully and in a timely manner. Further, our collaborators may elect not to develop product candidates arising out of collaborative arrangements or not to devote sufficient resources to the development, manufacture, marketing or sale of our future products. MANY EXISTING AND PROSPECTIVE COMPETITORS WHO HAVE GREATER RESOURCES AND EXPERIENCE MAY DEVELOP PRODUCTS FASTER THAN WE DO AND RENDER OUR PRODUCT CANDIDATES OBSOLETE. The pharmaceutical and medical diagnostic industries are highly competitive and are characterized by rapid technological change. The area of genomics and proteomics, in particular, is a rapidly evolving field. Our future success will depend on our ability to maintain a competitive position with respect to 8 13 technological advances. Our existing or prospective competitors may develop processes or products that are more effective than ours or be more effective at implementing their technologies to develop commercial products faster. We face, and will continue to face, intense competition from large biotechnology, pharmaceutical and other companies, as well as academic and scientific research institutions, government agencies and public and private research organizations that are pursuing the same or competing molecular targets and products derived from them. Many of our competitors have substantially greater financial, technical, research, marketing, sales, distribution, service and other resources than we do. Moreover, our competitors may offer broader product lines and have greater name recognition than us. These organizations may develop processes or products that are superior to ours. Our competitors may succeed in obtaining patent protection or receiving approval from the FDA for commercializing products before us. Developments by competitors may render our product candidates obsolete or noncompetitive. WE DEPEND ON KEY PERSONNEL AND MUST ATTRACT AND RETAIN ADDITIONAL EXPERIENCED PROFESSIONALS. We depend on the principal members of our management and scientific staff, the loss of whose services would adversely affect our company. The loss of the services of any of the principal members of our management and scientific staff could delay the development and commercial sale of our product candidates and harm our business. We do not maintain "key man" life insurance for any of our employees. Recruiting and retaining qualified scientific professionals to perform research and development work is critical to our success. Currently, we do not have sufficient senior scientific personnel to execute our business plan. There is currently a shortage of skilled executives in Northern California, where our executive offices and research and development facilities are located, which is likely to continue. As a result, competition for experienced professionals is intense, and the turnover rate can be high. Competition for experienced scientists from numerous companies and academic and other research institutions may limit our ability to attract and recruit qualified personnel on acceptable terms. Failure to attract and retain personnel would prevent us from pursuing collaborations or developing our products or core technologies. We work with scientific advisors and collaborators at academic and other institutions. These scientists are not our employees and may have other commitments that limit their availability. Although our scientific advisors generally agree not to perform competing work, if a conflict of interest between their work for our company and their work for another entity arises, we may lose their services. If we lose the services of any of these advisors, the achievement of our business objectives may be impeded. WE WILL NEED ADDITIONAL CAPITAL TO FUND OUR FUTURE OPERATIONS. IF WE ARE UNABLE TO OBTAIN ADDITIONAL CAPITAL, OUR ABILITY TO DEVELOP OUR PROCESSES AND PRODUCT CANDIDATES MAY BE HARMED. We expect that our research and development projects, together with the filing, prosecution and enforcement of patent claims, will require significant capital in the future. We do not know whether our business or operations will change in a manner that would consume available resources more rapidly than anticipated. Our future revenue may not be adequate to meet our operational needs and capital requirements for product development and commercial sale. We may need to raise additional capital as a result of: - our progress with our research and development programs; - our level of success in developing and marketing our product candidates; - our ability to establish and maintain successful collaborations; and - the costs we incur in enforcing and defending our patent claims and other intellectual property rights. If we raise additional funds through the sale of equity, convertible debt or other equity-linked securities, your percentage ownership in our company will be reduced. These transactions may dilute the 9 14 value of your common stock, and we may issue securities that have rights, preferences and privileges senior to our common stock. Additional funds may not be available when needed on terms acceptable to us or at all. If adequate funds are not available on acceptable terms, we may have to reduce substantially or eliminate expenditures for the development and commercial sale of our product candidates or obtain funds through arrangements with collaborative partners that require us to relinquish rights to product candidates. Either of these alternatives could have a material adverse effect on our business and future growth prospects. WE MAY ENCOUNTER DIFFICULTIES IN MANAGING OUR ANTICIPATED GROWTH, AND THESE DIFFICULTIES COULD INCREASE OUR LOSSES. If we are unable to manage our anticipated future growth effectively, our losses could increase. Our ability to manage our operations and growth effectively requires us to continue to expend funds to improve our operational, financial and management controls, reporting systems and procedures and to attract and retain sufficient numbers of talented employees. If we are unable to implement improvements to our management information and control systems in an efficient and timely manner, or if we encounter deficiencies in existing systems and controls, then our management may receive inadequate information to manage the day-to-day operations of our company. IF WE COMPLETE ANY ACQUISITION, WE WILL INCUR A VARIETY OF COSTS AND MAY NEVER REALIZE THE ANTICIPATED BENEFITS OF THE ACQUISITION. If appropriate opportunities become available, we may seek to acquire businesses, technologies, intellectual property, services or products that we believe are a strategic fit with our business. We currently have no commitments or agreements with respect to any material acquisitions. If we undertake any transaction of this sort, the process of integrating an acquired business, technology, service or product may result in unforeseen operating difficulties and expenditures, and may absorb significant management attention that would otherwise be available for ongoing development of our business. Moreover, we may fail to realize the anticipated benefits of any acquisition. Future acquisitions could dilute our stockholders or cause us to incur debt, expose us to future liabilities or result in amortization expenses related to goodwill and other intangible assets. In addition, recent proposed changes in the Financial Accounting Standards rules for business combination accounting may affect the cost of making acquisitions or of being acquired. For example, if we acquire another company and these proposed changes become effective, we likely would have to record goodwill or other intangible assets that would reduce our earnings. This would adversely impact our future operating results and either reduce our profitability or increase our losses. Further, accounting rule changes that reduce the availability of immediate write-offs of the value of acquired in-process research and development in connection with an acquisition could result in the capitalization and amortization of these amounts, negatively impacting our results of operations in future periods. WE HAVE NO EXPERIENCE IN MANUFACTURING OR MARKETING PRODUCTS AND MAY ENCOUNTER PROBLEMS OR DELAYS, WHICH WOULD RESULT IN LOST REVENUE. We have no experience in manufacturing and marketing, and we do not have the resources or capability to manufacture or market products on a commercial scale. In order for us to sell our future products directly, we will need to develop, or obtain through outsourcing or marketing and distribution agreements, manufacturing, marketing and sales capabilities. We may not be able to develop or otherwise obtain the requisite manufacturing, marketing and sales capabilities. Contract manufacturers may utilize their own technology, our technology or technology acquired or licensed from third parties to develop manufacturing processes. In order to engage a contract manufacturer, we may need a license or other technology transfer. Even if a license is available from a contract manufacturer on reasonable terms, we may be unable to effect successfully the transfer of the technology to the contract manufacturer. Also, any such technology transfer may require the transfer of 10 15 requisite data for regulatory purposes. If we were to rely on a contract manufacturer, our ability to change contract manufacturers may be limited. Our inability to control all of the factors that affect manufacturing processes may prevent us from achieving production in volumes needed. As a result, manufacturing and quality control problems may arise as we attempt to increase the production rate at manufacturing facilities. We may not be able to increase production rates at these facilities in a timely and cost-effective manner or at a commercially reasonable cost. PRODUCT LIABILITY LAWSUITS COULD ADVERSELY AFFECT OUR BUSINESS. We may be held liable if any of our future products, or any product that is made with our technologies, fails to accurately diagnose or detect disease, causes injury or is found otherwise unsuitable during product testing, manufacturing, marketing or sale. Although we intend to seek product liability insurance, this insurance may be prohibitively expensive and may not fully cover our potential liabilities. Our inability to obtain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liability claims could prevent or inhibit the commercial sale of our products. Furthermore, our customers may not indemnify us against these types of claims or they may not be adequately insured or in the case of smaller companies, have a net worth sufficient to satisfy product liability claims. If we are sued for any injury caused by our products, our liability could exceed our total assets. Any claims against us, regardless of their merit, could harm our business and cause our stock price to decline. WE USE HAZARDOUS CHEMICALS AND RADIOACTIVE AND BIOLOGICAL MATERIALS IN OUR BUSINESS, AND ANY CLAIMS RELATING TO IMPROPER HANDLING, STORAGE OR DISPOSAL OF THESE MATERIALS COULD BE EXPENSIVE AND TIME CONSUMING. Our research and development processes involve the controlled use of hazardous materials, including chemicals and radioactive and biological materials. Our operations also produce hazardous waste products. We cannot eliminate the risk of accidental contamination or discharge and any resultant injury from these materials. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of these materials. We could be subject to civil damages in the event of an improper or unauthorized release of, or exposure of individuals to, hazardous materials. In addition, claimants may sue us for injury or contamination that results from our use, or the use by third parties, of these materials, and our liability may exceed our total assets. Compliance with environmental laws and regulations may be expensive, and current or future environmental regulations may impair our research, development or production efforts. HEALTH CARE REFORM AND RESTRICTIONS ON REIMBURSEMENTS MAY LIMIT RETURNS ON OUR PRODUCTS. Our ability to sell future products will depend in part on the extent to which reimbursement for these products will be available from government payors, such as Medicare and Medicaid, private health insurers and managed care organizations. Significant uncertainty exists as to the reimbursement status of newly approved health care products and novel procedures, and we do not know whether adequate payment will be available for any of our product candidates to enable us to maintain price levels sufficient to realize an appropriate return on our investment in research and product development. In certain foreign countries, regulatory agencies also set or approve prices. WE MUST OBTAIN REIMBURSEMENT CODES AND A SATISFACTORY REIMBURSEMENT RATE FOR OUR PRODUCT CANDIDATES. Our strategy assumes that we will be able to sell homebrew products and FDA approved diagnostic kits at prices representing a substantial premium above the prices of existing diagnostic tests. In order to achieve these premiums, we will need to obtain specific reimbursement codes for our tests. Even if we are successful in obtaining reimbursement codes, we do not know whether the level of reimbursement will be consistent with the assumption underlying our strategy. We have not yet begun the process of applying for 11 16 these reimbursement codes, and the assignment of these codes may take several years. Moreover, we do not expect that we will obtain a reimbursement code before we launch our first product candidate, Lp-PLA(2), in the homebrew market. We may not be able to obtain these codes in a timely fashion or at all. If we fail to obtain the level of reimbursement we are seeking, we may never achieve or maintain profitability. RISKS RELATED TO INTELLECTUAL PROPERTY ANY INABILITY TO ADEQUATELY PROTECT OUR PROPRIETARY TECHNOLOGIES, PRODUCTS AND PRODUCT CANDIDATES COULD HARM OUR COMPETITIVE POSITION. Our success will depend in large part on our ability to obtain patents and maintain adequate protection of our intellectual property in the United States and other countries. If we do not adequately protect our intellectual property, our competitors may be able to make use of our molecular targets and erode our competitive advantage. In addition, the laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the United States, and many companies have encountered significant problems in protecting their proprietary rights in these foreign countries. These problems can be caused by, for example, a lack of rules and methods for defending intellectual property rights. The patent positions of biopharmaceutical and biotechnology companies, including our patent positions, are generally uncertain and involve complex legal and factual questions. Our patent applications may not protect our technologies or product candidates for any one or more of the following reasons: - some or all of our pending patent applications may not result in issued patents; - we may develop additional proprietary technologies that are not patentable; - any patents issued to us may not cover commercially viable products; - any patents issued to us may not provide us with sufficient scope so as to block others from using our or similar technology; - we may require access to patents issued to third parties in order to operate; and - any patents issued to us may be challenged, circumvented or invalidated by third parties. We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary technologies are covered by valid and enforceable patents or are effectively maintained as trade secrets. Our pending patent applications may not ever issue as patents, and we may be unable to keep our competitors from commercializing our discoveries. We plan to apply for patents covering our technologies and products as we deem appropriate. However, while the U.S. Patent and Trademark Office, or USPTO, has issued patents covering full-length genes, and some partial gene sequences, the USPTO has recently issued strict utility requirements for gene applications. Under these new strict utility requirements, we do not know whether our pending patent applications will issue as patents and, if they do, whether the scope of the claims will be sufficiently broad to prevent third parties from utilizing our technologies or from developing competing products. Any patents we have now or obtain in the future may not be sufficiently broad to prevent others from utilizing our technologies or from developing competing products. Furthermore, others may independently develop similar or alternative technologies or design around our patented technologies. In addition, others may challenge or invalidate our patents, or our patents may fail to provide us with any competitive advantage. Should third parties file patent applications, or be issued patents, claiming technology also claimed by us in pending applications, we may be required to participate in interference proceedings in the USPTO to determine priority of invention. We, or our licensors, may also need to participate in interference proceedings involving our issued patents and pending applications of another entity. An unfavorable outcome in an interference proceeding could require us to cease using the technology or license rights from 12 17 prevailing third parties. There is no guarantee that any prevailing party would offer us a license or that we could acquire any license made available to us on commercially acceptable terms. Should third parties file patent applications, or be issued patents, claiming technology also claimed by us in pending applications, we may be required to participate in interference proceedings in USPTO to determine priority of invention. We, or our licensors, may also need to participate in interference proceedings involving our patents and pending applications. An unfavorable outcome in an interference proceeding could require us to cease using the technology or license rights from prevailing third parties. There is no guarantee that any prevailing party would offer us a license or that we could acquire any license made available to us on commercially acceptable terms. We may not be able to obtain new patents for our products or methods. Even if we are able to obtain new patents, these patents may not provide us with substantial or meaningful protection or be commercially beneficial to us. The issuance of a patent is not conclusive as to its validity or its enforceability. Further, a patent does not provide the patent holder with an absolute right to practice such patented technology. Any patents issued to us or to our licensors may be challenged and subsequently invalidated or circumvented. It is quite possible that third parties may have patents of their own which could, if asserted, prevent us from practicing our patented technologies. This inability to practice our own patented technologies could adversely affect our business and revenue. We have specified rights in patents and patent applications owned by SmithKline Beecham, Human Genome Sciences and Incyte that may provide important protection on the composition of matter and utility of our products. We do not, however, control the prosecution and maintenance of these patents. SmithKline Beecham, Human Genome Sciences and Incyte may allow these patents to go abandoned or may not obtain meaningful claims for our products. Also, while the USPTO has issued patents covering full-length genes, and some partial gene sequences, we do not know whether or how courts will enforce these patents. If a court finds these types of inventions to be unpatentable, or interprets them narrowly, the benefits of our patent strategy may not materialize. If any or all of these events occur, the value of our intellectual property could be diminished. OTHER RIGHTS AND MEASURES THAT WE RELY UPON TO PROTECT OUR INTELLECTUAL PROPERTY MAY NOT BE ADEQUATE TO PROTECT OUR PRODUCTS AND COULD REDUCE OUR ABILITY TO COMPETE IN THE MARKET. In addition to patents, we rely on a combination of trade secrets, copyright and trademark laws, nondisclosure agreements and other contractual provisions and technical measures to protect our intellectual property rights. While we require employees, collaborators, consultants and other third parties to enter into confidentiality and/or non-disclosure agreements where appropriate, any of the following could still occur: - the agreements may be breached; - we may have inadequate remedies for any breach; - proprietary information could be disclosed to our competitors; and - others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets or disclose such technologies. If for any of the above reasons our intellectual property is disclosed, invalidated or misappropriated, it would harm our ability to protect our rights and our competitive position. RISKS RELATED TO THIRD PARTY RIGHTS THIRD PARTIES MAY HAVE PATENTS OF THEIR OWN WHICH COULD, IF ASSERTED, PREVENT US FROM OBTAINING OR PRACTICING PATENTS ON OUR TECHNOLOGIES. THIS INABILITY TO OBTAIN OR PRACTICE OUR OWN PATENTS COULD ADVERSELY AFFECT OUR BUSINESS AND REVENUE. 13 18 We use a database that belongs to Incyte. There are a number of other companies that have non-exclusive access to the same genes and patent rights as we do. In addition, a number of entities make gene sequences publicly available at no cost. Either of these may adversely affect our ability to obtain meaningful patent claims on our future products. Some of our patent applications involve genes that may also be claimed in patent applications filed by others. In some or all of such patent applications, a determination of priority of inventorship may need to be decided in an interference proceeding before the USPTO. Some of our patent applications claim genes useful as products that may also be dominated by claims in patent applications filed by others. For some or all of such patent applications, a license may be needed from the dominant patent holder to make, have made, use or sell our products. LITIGATION OR OTHER PROCEEDINGS OR THIRD PARTY CLAIMS OF INTELLECTUAL PROPERTY INFRINGEMENT COULD REQUIRE US TO SPEND SIGNIFICANT AMOUNTS OF TIME AND CAPITAL AND COULD SHUT DOWN SOME OR ALL OF OUR PRODUCTS AND OPERATIONS. Others have filed, and in the future are likely to file, patent applications covering genes or gene fragments which we may wish to utilize, or products that are similar to products developed with the use of our technologies. Third parties may assert that we are using their proprietary technologies without authorization. In addition, third parties may obtain patents and claim that use of our technologies and products infringes these patents. We could incur substantial costs and diversion of management and technical personnel in defending against any of these claims or enforcing our patents against others. Furthermore, parties making claims against us may be able to obtain injunctive or other equitable relief which could effectively block our ability to further develop and commercially sell our future products, and could result in the award of substantial damages against us. In the event of a successful claim of infringement against our company, we may be required to pay damages and obtain one or more licenses from third parties. We may not be able to obtain these licenses at a reasonable cost, if at all. In that event, we could encounter delays in product introductions while we attempt to develop alternative methods or products, which we may be unable to do. We are aware of patents and patent applications owned by third parties which may cover certain aspects of the development and commercialization of some of our diagnostic product candidates. We intend either to seek licenses under any patents that relate to our product candidates or to modify such product candidates so as not to infringe. We may not be able to obtain such licenses on acceptable terms or at all, and product candidate modifications may require substantial cost or delay. If neither approach is feasible, we could be subject to a claim of patent infringement which, if successful, could prevent us from commercializing these diagnostic product candidates. RISKS RELATED TO THIS OFFERING OUR MANAGEMENT WILL HAVE BROAD DISCRETION IN HOW WE USE THE NET PROCEEDS OF THIS OFFERING, AND WE MAY NOT USE THESE PROCEEDS EFFECTIVELY. Our management will have broad discretion in the application of the net proceeds of this offering, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. We currently expect to use approximately $ million to expand our discovery, validation and product development capabilities for diagnostic and therapeutic product candidates and the balance for general corporate purposes, including working capital and the funding of operating losses. We may also use a portion of the net proceeds to acquire complementary businesses, products and technologies, although we have no current agreements regarding any material transaction of this sort. We have not yet finalized the amount of net proceeds to be used specifically for each of these purposes. The net proceeds may be used for corporate purposes that do not lead to our profitability or increase our market value. 14 19 MARKET PRICES OF EMERGING BIOTECHNOLOGY COMPANIES HAVE BEEN HIGHLY VOLATILE, AND THE MARKET FOR OUR STOCK MAY EXHIBIT VOLATILITY AS WELL. The financial markets, including the Nasdaq National Market, have experienced significant price and volume fluctuations, and the market prices of technology companies, particularly biotechnology companies, have been and continue to be extremely volatile. Volatility in the price of our common stock may be caused by factors outside of our control and may be unrelated or disproportionate to our operating results. In the past, following periods of volatility in the market price of a public company's securities, securities class action litigation has often been instituted against that company. Securities class action litigation could result in substantial costs and a diversion of our management's attention and resources. SOME OF OUR EXISTING STOCKHOLDERS WILL BE ABLE TO EXERT CONTROL OVER US AFTER THIS OFFERING WHICH WILL LIMIT YOUR ABILITY TO INFLUENCE THE OUTCOME OF KEY TRANSACTIONS. After this offering, SmithKline Beecham and Incyte together will own approximately % of our outstanding common stock. These stockholders will be able to influence significantly all matters requiring stockholder approval, including the approval of significant corporate transactions. Circumstances may arise in which the interests of these stockholders could conflict with the interests of our other stockholders. These stockholders could delay or prevent a change in control of our company even if such a transaction would be beneficial to our other stockholders. THE LARGE NUMBER OF SHARES ELIGIBLE FOR PUBLIC SALE AFTER THIS OFFERING COULD CAUSE OUR STOCK PRICE TO DECLINE. The market price of our common stock could decline as a result of sales of a large number of shares after this offering or the perception that sales could occur. The large number of shares eligible for sale might make it more difficult for us to sell common stock in the future at a time and at a price that we deem appropriate. After this offering, we will have an aggregate of shares outstanding. Of the outstanding shares, the shares sold in this offering will be freely tradable, other than shares purchased by our affiliates. The remaining shares may be sold only pursuant to a registration statement under the Securities Act or an exemption from the registration requirements of the Securities Act. After the completion of this offering, holders of 22,025,807 shares of common stock will be entitled to registration rights with respect to the registration of their shares under the Securities Act. For additional information regarding these registration rights, please see "Description of Capital Stock -- Registration Rights" and "Shares Eligible for Future Sale." Each of our directors and executive officers and a substantial majority of our current stockholders has agreed not to offer, sell or agree to sell, directly or indirectly, or otherwise dispose of any equity shares without the prior written consent of Lehman Brothers Inc. for a period of 180 days from the date of this prospectus. Lehman Brothers Inc. may, in its sole discretion, at any time and without notice, release all or any portion of the shares subject to the lockup agreements. For additional information regarding possible future sales of our securities, please see "Shares Eligible for Future Sale" and "Underwriting." AS A NEW INVESTOR, YOU WILL INCUR SUBSTANTIAL DILUTION AS A RESULT OF THIS OFFERING AND FUTURE EQUITY ISSUANCES. The initial public offering price will be substantially higher than the pro forma net tangible book value per share of our outstanding common stock. As a result and based upon an assumed initial public offering price of $ per share, investors purchasing common stock in this offering will incur immediate dilution of $ per share. This dilution is due in large part to earlier investors in our company having paid substantially less than the initial public offering price when they purchased their shares. The exercise of outstanding options and warrants will result in further dilution to new investors. A THIRD PARTY'S ABILITY TO ACQUIRE US MIGHT BE MORE DIFFICULT BECAUSE OF ANTI-TAKEOVER PROVISIONS IN OUR CERTIFICATE OF INCORPORATION AND BYLAWS. 15 20 Upon completion of this offering, we will be authorized to issue five million shares of undesignated preferred stock. Our Board of Directors will have the authority to issue the preferred stock in one or more series and to fix the price, rights, preferences, privileges and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting a series or the designation of any series, without any further vote or action by our stockholders. The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of delaying, deferring or preventing a change in control of our company without further action by our stockholders and may adversely affect the market price of our common stock and the voting and other rights of our stockholders. The issuance of preferred stock with voting and conversion rights may adversely affect the voting power of the holders of our common stock, including the loss of voting control to others. We have no current plans to issue any shares of preferred stock. Provisions of our Restated Certificate of Incorporation and Restated Bylaws to be in effect upon the completion of this offering eliminate the right of stockholders to act by written consent without a meeting, eliminate the right of stockholders to call a special meeting of stockholders, specify procedures for nominating directors and submitting proposals for consideration at stockholder meetings and provide for a staggered Board of Directors, so that no more than approximately one-third of our directors could be replaced each year and it would take three successive annual meetings to replace all directors. These provisions are intended to enhance the likelihood of continuity and stability in the composition of our Board of Directors and in the policies formulated by our Board of Directors and to discourage some transactions which may involve an actual or threatened change of control of our company. These provisions are designed to reduce the vulnerability of our company to an unsolicited acquisition proposal and, accordingly, could discourage potential acquisition proposals and delay or prevent a change in control of our company. These provisions are also intended to discourage tactics that may be used in proxy fights but could, however, have the effect of discouraging others from making tender offers for our common stock and, consequently, may also inhibit fluctuations in the market price of our common stock that could result from actual or rumored takeover attempts. These provisions may also have the effect of preventing changes in the management of our company. WE DO NOT PLAN TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE. We have never declared or paid cash dividends on our capital stock. We do not anticipate paying any cash dividends on our capital stock in the foreseeable future. We currently intend to retain all available funds and any future earnings to fund the development and growth of our business. Investors seeking cash dividends should not purchase our common stock. 16 21 FORWARD-LOOKING STATEMENTS We have made statements under the captions "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" and in other sections of this prospectus that are forward-looking statements. In some cases, you can identify these statements by forward-looking words such as "intend," "may," "might," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential" or "continue," the negative of these terms and other comparable terminology. These forward-looking statements, which are subject to risks, uncertainties and assumptions about us, may include, among other things, projections of our future financial performance, our anticipated growth strategies and anticipated trends in our business. These statements are only predictions based on our current expectations and projections about future events. Because these forward-looking statements involve risks and uncertainties, there are important factors that could cause our actual results, level of activity, performance or achievements to differ from those expressed or implied by the forward-looking statements, including those factors discussed under the caption entitled "Risk Factors." You should specifically consider the numerous risks outlined under "Risk Factors." Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. 17 22 USE OF PROCEEDS Our net proceeds from the sale of shares of common stock in this offering will be approximately $ million, or $ million if the underwriters' over-allotment option is exercised in full, based on an assumed initial public offering price of $ per share, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us. We currently expect to use the net proceeds from this offering as follows: - approximately $ to expand our discovery, validation and product development capabilities for diagnostic and therapeutic product candidates; and - the balance for general corporate purposes, including working capital and the funding of operating losses. We may also use a portion of the net proceeds to acquire or invest in complementary businesses, products and technologies, although we have no current agreements regarding any material transaction of this sort. The principal purposes of this offering are to establish a public market for our common stock, to increase our visibility in the industry and to facilitate future access to public capital markets. The amounts that we actually expend for research and development and general corporate purposes will vary significantly depending on a number of factors, including the amount of cash that we generate from operations. As a result, we will retain broad discretion over the allocation of the net proceeds from this offering. Pending these uses, we will invest the net proceeds of this offering in short-term, investment grade securities. DIVIDEND POLICY We have never declared or paid cash dividends on our capital stock. We do not anticipate paying any cash dividends on our capital stock in the foreseeable future. We currently intend to retain all available funds and any future earnings to fund the development and growth of our business. 18 23 CAPITALIZATION The table below sets forth our capitalization as of September 30, 2000: - on an actual basis; - on a pro forma basis giving effect to the automatic conversion of all outstanding shares of preferred stock on a one-for-one basis into 22,025,807 shares of common stock immediately prior to the completion of this offering; and - on a pro forma as adjusted basis giving effect to the sale of shares of common stock in this offering at an assumed initial public offering price of $ per share, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us. You should read this information in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and the related notes included elsewhere in this prospectus.

The foregoing excludes, as of September 30, 2000: - 2,287,250 shares of common stock issuable upon exercise of options outstanding under our 2000 Equity Incentive Plan at a weighted average exercise price of $1.05 per share; - shares of common stock issuable upon exercise of options available for issuance under our 2001 Equity Incentive Plan; - 129,032 shares of common stock issuable upon exercise of a warrant outstanding at $7.75 per share; and - shares of common stock available for purchase under our 2001 Employee Stock Purchase Plan. 19 24 DILUTION As of September 30, 2000, our pro forma net tangible book value was approximately $95.7 million, or $4.30 per share of common stock. Pro forma net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by the pro forma number of shares of common stock outstanding. After giving effect to the sale of shares of common stock in this offering at an assumed initial public offering price of $ per share, and after deducting underwriting discounts and commissions and the estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of September 30, 2000 would have been approximately $ , or $ per share of common stock. This represents an immediate increase in pro forma as adjusted net tangible book value of $ per share to our existing stockholders and an immediate and substantial dilution in pro forma as adjusted net tangible book value of $ per share to new investors in this offering. If the initial public offering price is higher or lower, the dilution to new investors will be greater or less, respectively. The following table summarizes this per share dilution: Assumed initial public offering price per share............. $ Pro forma net tangible book value per share as of September 30, 2000..................................... $4.30 Increase per share attributable to new investors.......... ----- Pro forma as adjusted net tangible book value per share after this offering....................................... ------ Dilution in pro forma net tangible book value per share to new investors............................................. $ ======

The following table summarizes, on a pro forma basis as of September 30, 2000, the differences between the number of shares of common stock issued by us and the total consideration paid and the average price per share paid by our existing stockholders and new investors:

The foregoing discussion and tables exclude, as of September 30, 2000: - 2,287,250 shares of common stock issuable upon exercise of options outstanding under our 2000 Equity Incentive Plan at a weighted average exercise price of $1.05 per share; - shares of common stock issuable upon exercise of options available for issuance under our 2001 Equity Incentive Plan; - 129,032 shares of common stock issuable upon exercise of a warrant outstanding at $7.75 per share; and - shares of common stock available for purchase under our 2001 Employee Stock Purchase Plan. To the extent outstanding options or warrants are exercised, there will be further dilution to new investors. 20 25 SELECTED FINANCIAL DATA The following table sets forth selected financial data for our company. You should read this information in conjunction with the information under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and the related notes included elsewhere in this prospectus. In connection with the sale of the Series C Preferred Stock in April 2000, our company was converted from a limited liability company to a corporation. The statement of operations data for the period from August 29, 1997 (inception) through December 31, 1997, the years ended December 31, 1998 and 1999, the nine months ended September 30, 2000 and the cumulative period from August 29, 1997 (inception) through September 30, 2000 and the balance sheet data as of December 31, 1998 and 1999 and September 30, 2000 set forth below are derived from our audited financial statements included elsewhere in this prospectus. The statement of operations data for the nine months ended September 30, 1999 are derived from our unaudited financial statements included elsewhere in this prospectus. The balance sheet data as of December 31, 1997 are derived from our audited financial statements not included in this prospectus. Our unaudited financial statements have been prepared on the same basis as our audited financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to fairly present our results of operations for the unaudited interim period. The results of operations for the nine months ended September 30, 2000 are not necessarily indicative of our results for the year ending December 31, 2000 or any future period.

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22 27 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion of our financial condition and results of operations in conjunction with our financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth in the section entitled "Risk Factors" as well as factors described elsewhere in this prospectus. OVERVIEW We are a post-genomics company focused on translating raw genomics data into novel diagnostic and therapeutic products. We were founded as a limited liability company in 1997 by SmithKline Beecham and Incyte. Since our inception, we have concentrated primarily on the research and development of diagnostic tests for cancer. Upon our formation, Incyte granted us a fully-paid subscription to its human and microbial genomics databases, LifeSeq Gold and PathoSeq, until September 2003. In addition, SmithKline Beecham assigned us its existing portfolio of diagnostic product candidates as well as the rights to any additional targets with diagnostic potential discovered in the course of its pharmaceutical research activities through September 2001, including targets derived from SmithKline Beecham's collaboration with Human Genome Sciences through June 2001. These non-cash assets, which represent capital contributions made in 1997, were recorded at zero value which was equal to the carrying value of such assets by SmithKline Beecham and Incyte. During the second half of 1999 we refocused our research efforts and discontinued our work on several projects including a diagnostic product candidate for prostate cancer. We also reduced our total employee workforce by 20 individuals. In April 2000, we were incorporated in the State of Delaware as a result of our conversion from a limited liability company. During 2000 we also expanded our strategy to include the research and development of therapeutics to treat cancer. We plan to focus our therapeutic development efforts on monoclonal antibodies and therapeutic vaccines using the molecular targets we discover. We have not achieved profitability on an annual or quarterly basis, and since our inception have incurred losses totalling $27.6 million. As of September 30, 2000, we had an accumulated deficit of $5.2 million since our incorporation in April 2000. We expect to incur additional operating losses as we continue to develop diagnostic and therapeutic product candidates. REVENUE RECOGNITION To date, we have derived revenue only from a license fee from SmithKline Beecham Clinical Laboratories. The amount received in 1999 under a non-refundable license arrangement was recognized when earned as no remaining performance obligation existed. Any amounts received in advance of completing the earnings process are recorded as deferred revenue. STOCK-BASED COMPENSATION As of September 30, 2000, we had recorded deferred stock compensation aggregating $8.2 million for the difference at the date of grant between the exercise price and the estimated fair value of the common stock underlying stock options granted in the nine months ended September 30, 2000. Of this amount, we recognized stock compensation expense of $2.9 million in the nine months ended September 30, 2000. In addition, we expect to recognize $1.1 million in the remainder of 2000, $2.5 million in 2001 and $1.7 million in later years. We also presently expect to recognize additional stock compensation expense related to option grants made subsequent to September 30, 2000 of approximately $8.3 million to be generally recognized over the vesting periods. 23 28 INCOME TAXES From our inception through April 4, 2000, no provision or benefit for federal and state income taxes was recorded in our financial statements as we were a limited liability company and, therefore, taxed as a partnership. Rather, the federal and state income tax effects of our results of operations were recorded by our members in their respective income tax returns. On April 4, 2000, in connection with completing the Series C preferred stock financing, we became subject to the C corporation provisions of the Internal Revenue Code. Accordingly, any earnings after that date will be taxed at federal and state corporate income tax rates. RESULTS OF OPERATIONS Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30, 1999 License revenue. License revenue of $100,000 in 1999 consists of revenue derived from a license agreement we entered into in February 1999 with SmithKline Beecham Clinical Laboratories, Inc. We recognized no license revenue for the nine months ended September 30, 2000. Research and development expense. Research and development expense consists primarily of salaries, laboratory supplies, depreciation of laboratory equipment and stock compensation expense. Our research and development expense was approximately $7.2 million for the nine months ended September 30, 2000, compared with approximately $7.7 million for the nine months ended September 30, 1999, a decrease of $0.5 million, or 7%. The decrease in research and development expense for the nine months ended September 30, 2000 resulted primarily from a reduction in expenses related to license fees of $477,000. We anticipate that our research and development expense will increase substantially in the future as we discover and develop diagnostic and therapeutic product candidates. Research and development expense for the nine months ended September 30, 2000 includes $0.8 million of stock compensation expense. General and administrative expense. General and administrative expense consists primarily of salaries, consultants fees, recruiting and travel expenses and stock compensation expense. Our general and administrative expense was approximately $3.9 million for the nine months ended September 30, 2000, compared with approximately $1.9 million for the nine months ended September 30, 1999, an increase of approximately $2.0 million, or 105%. The increase in general and administrative expense resulted primarily from stock compensation expense of $2.2 million for the nine months ended September 30, 2000. We anticipate that our general and administrative expense will increase as we expand our corporate development and regulatory staff, add infrastructure and incur additional costs related to being a public company. Interest and other income. Interest and other income consists primarily of interest received from our short and long-term investments, and to a lesser extent, payments from the sublease of a portion of our facilities. Our interest and other income was approximately $3.3 million for the nine months ended September 30, 2000, compared with approximately $0.6 million for the nine months ended September 30, 1999, an increase of approximately $2.7 million, or 415%. The increase in interest and other income resulted primarily from an increase in cash equivalents and investments on hand resulting from the private placement completed in April 2000. Interest expense. Interest expense consists primarily of interest due on short-term notes payable to SmithKline Beecham and Incyte. Our interest expense was approximately $73,000 for the nine months ended September 30, 2000, compared with approximately $49,000 for the nine months ended September 30, 1999, an increase of approximately $24,000, or 49%. The increase in interest expense resulted primarily from amounts outstanding under the notes payable to SmithKline Beecham and Incyte for a longer period of time during the nine months ended September 30, 2000. Income taxes. For the period from April 2000 through September 30, 2000, we recorded a net operating loss of $5.2 million. 24 29 At September 30, 2000, we had state and federal net operating loss carryforwards of $1.9 million which expire in 2005 and 2020, respectively, and federal and state research tax credit carryforwards of $269,000 which expire in 2020. We have provided a full valuation allowance for our deferred tax assets at September 30, 2000 due to the uncertainty surrounding the future realization of such assets. Utilization of federal and state net operating loss and tax credit carryforwards may be subject to an annual limitation due to the "change in ownership" provisions of the Internal Revenue Code. Year Ended December 31, 1999 Compared to Year Ended December 31, 1998 License revenue. We recognized license revenue of $100,000 for 1999. We recognized no license revenue for 1998. Research and development expense. Our research and development expense was approximately $9.4 million for 1999, compared with approximately $6.8 million for 1998, an increase of approximately $2.6 million, or 38%. The increase in research and development expense resulted primarily from a $2.0 million increase in the cost of sequencing and microarray services purchased from Incyte and, to a lesser extent, increases in personnel costs as the Company expanded its operations. General and administrative expense. Our general and administrative expense was approximately $2.3 million for 1999, compared with approximately $1.9 million for 1998, an increase of approximately $0.4 million or 21%. The increase in general and administrative expense resulted primarily from higher salary expense of $0.5 million due to an increase in headcount. Interest and other income. Our interest and other income was approximately $0.5 million for 1999, compared with approximately $0.7 million for 1998, a decrease of approximately $0.2 million, or 29%. The decrease in interest and other income resulted primarily from a reduction in interest bearing cash equivalents during 1999. Interest expense. Our interest expense was approximately $120,000 for 1999 as a result of the notes payable issued in 1999. We had no interest expense in 1998. Income taxes. For 1999 and 1998, we were a limited liability company and therefore taxed as a partnership. As a result, the federal and state income tax effects of our results of operations for 1998 and 1999 were recorded by SmithKline Beecham and Incyte. Period From August 29, 1997 (Inception) to December 31, 1997 During the period from August 29, 1997 (inception) through December 31, 1997, we devoted substantially all of our efforts to recruiting personnel, financial planning, establishing our facilities and defining our research and product development strategies. As such, a comparison of the operating results of that period with the operating results for 1998 would not be meaningful. Operating expenses of $0.7 million consisted primarily of personnel and facility costs. LIQUIDITY AND CAPITAL RESOURCES Since inception, we have financed our operations primarily through the private placement of equity securities, resulting in net cash proceeds of approximately $126.5 million. In July 1999, we issued notes payable which were convertible to Series C Preferred Stock in the amount of $2.5 million each to SmithKline Beecham and Incyte. The notes were due in April 2000, accruing interest at 5.6% per annum. Upon closing the Series C financing, the note to SmithKline Beecham was converted to 322,580 shares of Series C Preferred Stock. Additionally, we paid interest of $97,000 on the note to SmithKline Beecham and paid Incyte principal of $2.5 million and accrued interest of $97,000. As of September 30, 2000, we had cash and cash equivalents and investments of $93.7 million. Net cash used in operating activities was approximately $4.1 million, $12.9 million and $5.9 million for the nine months ended September 30, 2000 and for the years ended December 31, 1999 and 1998, respectively. Net cash used in operating activities for the nine months ended September 30, 2000 consisted 25 30 primarily of our net loss of $7.8 million, partially reduced by non-cash stock compensation expense of $3.0 million and depreciation and amortization expense of $0.8 million. Net cash used in operating activities in 1999 consisted of our net loss of $11.3 million and changes in working capital of approximately $2.5 million. Cash used in operating activities in 1998 consisted primarily of our net loss of $7.9 million, partially reduced by non-cash depreciation and amortization expense of $1.7 million. Net cash used in investing activities was approximately $63.1 million, $0.2 million and $1.2 million for the nine months ended September 30, 2000, and for the years ended December 31, 1999 and 1998, respectively. For the nine months ended September 30, 2000, our investing activities consisted primarily of purchases of short-term and long-term securities of $62.5 million. In 1999 and 1998, our investing activities consisted of purchases of property and equipment. Net cash provided by financing activities was approximately $90.1 million, $5.0 million and $17.0 million for the nine months ended September 30, 2000, and for the years ended December 31, 1999 and 1998, respectively. For the nine months ended September 30, 2000, our financing activities consisted of the sale of Series C Preferred Stock to private investors, generating net cash proceeds of approximately $92.7 million. During the same period, we repaid the principal and interest on a $2.5 million note payable to Incyte. We converted the principal on a $2.5 million note payable to SmithKline Beecham to Series C Preferred Stock, while repaying the interest on the note. In 1999, we received cash of $2.5 million each from SmithKline Beecham and Incyte under these notes payable. In 1998 we received $11.0 million in cash from SmithKline Beecham and $6.0 million in cash from Incyte, respectively. In September 1997, we entered into a $5.0 million agreement with Incyte for microarray services and products and future sequencing services. As of September 30, 2000, we are committed under the agreement to pay Incyte approximately $402,000 for future sequencing and microarray services and products through February 2001. As part of our business strategy, we intend to invest significant amounts of capital over the next 12 to 24 months on the research and development of diagnostic product candidates for cancer and on developing monoclonal antibodies and therapeutic vaccines to treat cancer using the molecular targets we discover. This investment could be in the form of direct investment or through the formation of joint ventures, strategic partnerships or similar collaborative arrangements. Our future capital requirements will depend on many factors, including the following: - our ability to enter into collaborative agreements; - competing market developments; - cost of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights; - the purchase of additional capital equipment; - our ability to progress our molecular targets and products into the diagnostic and therapeutic markets in a timely manner; - our ability to obtain FDA approval on our anticipated timeline; - the cost of clinical studies. We believe that our cash and cash equivalents, short and long-term investment balances, together with the proceeds of this offering, will be sufficient to satisfy our cash requirements for at least the next two years. We intend to invest our excess cash in high quality, interest-bearing securities. For the next several years, we do not expect our operations to generate the amounts of cash required for our future cash needs. In order to satisfy our cash requirements, we expect to finance future cash needs through the sale of equity securities, strategic collaborations and perhaps debt financing. We cannot assure you that additional financing or collaboration and licensing arrangements will be available when needed or that, if available, will be on terms favorable to us or our stockholders. Insufficient funds may require us to 26 31 delay, scale back or eliminate some or all of our research or development programs, to lose rights under existing licenses or to relinquish greater or all rights to product candidates at an earlier stage of development or on less favorable terms than we would otherwise choose or may adversely affect our ability to operate as a going concern. If additional funds are obtained by issuing equity securities, substantial dilution to existing stockholders may result. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK Our investments are subject to interest rate risk and our interest income may fluctuate due to changes in U.S. interest rates. By policy, we limit our investments to money market instruments, debt securities of U.S. government agencies, and debt obligations of U.S. corporations. We manage market risk by our diversification requirements, which limit the amount of our portfolio that can be invested in a single issuer. We manage credit risk by limiting our purchases to high quality issuers. All highly liquid investments with a maturity of three months or less from the date of purchase are considered cash equivalents; investments with a maturity of three to twelve months from the date of purchase are considered to be short-term investments; investments with a maturity of more than twelve months from the date of purchase are considered long-term investments. RECENT ACCOUNTING PRONOUNCEMENT In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," or SFAS No. 133. SFAS No. 133 establishes new standards of accounting and reporting for derivative instruments and hedging activities. SFAS No. 133 requires that all derivatives be recognized at fair value in the statement of financial position, and that the corresponding gains or losses be reported either in the statement of operations or as a component of comprehensive income, depending on the type of hedge transaction. To date, we have not engaged in derivative or hedging activities. We will adopt SFAS No. 133, as required, in 2001. 27 32 BUSINESS OVERVIEW We are a post-genomics company focused on translating raw genomics data into novel diagnostic and therapeutic products. We were co-founded in 1997 by SmithKline Beecham and Incyte Genomics, recognized leaders in genomics and bioinformatics, to discover molecular targets and develop novel diagnostic products for the improved detection, classification and prognosis of diseases. We recently expanded our strategy to include therapeutic discovery and development. Our initial focus has been on the discovery of novel molecular targets in cancer. We expect to extend our discovery platform beyond cancer into other diseases. To date, we have identified thousands of disease-associated molecular targets, evaluated over 200 potential molecular targets using bioMVP, our target validation process, and advanced over 40 product candidates into development, including two diagnostic product candidates in late-stage preclinical development. We are aggressively seeking patent protection on our discoveries. Upon our formation, SmithKline Beecham assigned us a portfolio of diagnostic product candidates discovered through their early research efforts. We have continued the development of eight of these diagnostic product candidates, including Lp-PLA(2), a novel risk factor for coronary heart disease, and Cathepsin-K, a diagnostic marker for osteoporosis. We have completed initial clinical utility studies on Lp-PLA(2) and have commenced initial clinical utility studies on Cathepsin-K. We have an option agreement with Quest Diagnostics, the world's largest clinical reference laboratory, to license our future products for use in homebrew tests. We believe the ability to sell our products to clinical reference laboratories prior to our seeking FDA approval will allow us to assess demand in the market, increase awareness of our future products and generate early revenues. Where appropriate, we will seek FDA approval for our diagnostic products. Eventually, we may license products to large diagnostic companies to run on their high-throughput testing platforms once significant demand for these products is established. INDUSTRY BACKGROUND The study of genes and their protein products provides a basis for understanding disease at the molecular level, powering discoveries that will potentially lead to novel diagnostic and therapeutic products. In the early 1990s, governments and foundations recognized the potential impact of providing researchers with the sequence of the human genome and sponsored an intensive program, which became known as the Human Genome Project, to map and sequence the human genome. In parallel with the public sector effort, a large private sector effort emerged in the mid-1990s. In July 2000, public and private researchers announced that they had completed a rough draft of the complete sequence of the human genome. The total portfolio of approved drugs and diagnostics is currently directed at approximately 500 protein targets. Genomics is providing an unprecedented number of new potential targets for diagnostic and therapeutic development. Scientists now face the challenge of determining which genes and proteins are implicated in specific diseases. We believe that genomics and proteomics fundamentally alter the underlying economics of diagnostic discovery and, when combined with intellectual property protection, have the potential to convert the diagnostic industry from its current status as a generally low margin sector to a higher margin sector based on patent-protected tests that can command high premiums. We were one of the first companies to recognize the potential of genomics for diagnostics, and we believe this first mover advantage is reflected in our product development pipeline. We expect that the distinction between diagnostics and therapeutics will blur with the emergence of products based on the same molecular target. For instance, a diagnostic product detecting levels of HER2/neu gene expression is used in tandem with the drug Herceptin, a monoclonal antibody targeting HER2/neu gene expression, for the treatment of metastatic breast cancer. We believe this companion diagnostic/therapeutic approach marks the arrival of a new era of individualized molecular medicine. 28 33 DNA, GENES AND PROTEINS Deoxyribonucleic acid, or DNA, is present in all living cells. DNA contains sequences of four distinct types of nucleotide building blocks. A small portion of DNA contains sequences that are genes. The sequence of nucleotides in genes comprise the instructions for making proteins. The entire DNA content of an organism is called its genome. The human genome is generally estimated to comprise three billion pairs of nucleotides that contain the instructions for an estimated 100,000 distinct genes, though estimates of the total number of human genes range from 40,000 to 100,000. All cells contain a full copy of DNA, but each cell type "expresses" only those genes necessary for their specific functions. Genes program a cell by expression of its sequence into messenger ribonucleic acid, or mRNA, which is used as a template to direct the synthesis of a protein. Proteins carry out all cellular activities, such as relaying signals within and between cells and controlling cellular division. DIFFERENTIAL GENE EXPRESSION AND DISEASE The activation of a gene is referred to as gene expression. The selective activation of genes within specific cells is referred to as differential gene expression. All functions of cells, tissues and organs are controlled by differential gene expression. Differential gene expression results in the carefully controlled, or regulated, production of proteins. Many diseases arise from the abnormal expression of genes, resulting in the overproduction or underproduction of proteins or the expression of proteins of altered chemical composition caused by mutations or other changes in the nucleotide code for the altered gene. Scientists can compare the expression levels of genes and proteins in tissue or serum samples of patients with disease to those of healthy individuals to determine which genes or proteins are altered in disease. These differences in gene expression or composition of genes or proteins provide valuable information for the discovery of novel diagnostic and therapeutic products. DIAGNOSTIC TESTING Diagnostic tests play a variety of roles in the medical assessment and therapeutic decision-making process, including alerting the physician to the presence of a disease and providing critical information necessary to select the optimum treatment. Diagnostic tests may be performed on blood, urine or tissue samples. The effectiveness of a diagnostic test is defined by its "specificity" and "sensitivity." Specificity measures a test's ability to correctly identify individuals who are disease-free. A failure of specificity, known as a "false positive," is the failure of the test to correctly identify an individual who is disease-free, and results in a healthy person undergoing unnecessary additional diagnostic procedures. Sensitivity measures a test's ability to detect the presence of disease when the patient has disease. A test result that incorrectly indicates that an affected patient does not have the disease is called a "false negative," and results in an individual with a disease not being diagnosed or treated. There are several distinct kinds of diagnostic tests: - Screening tests are performed on large populations of apparently healthy people to help identify disease before symptoms appear. Examples of screening tests include the prostate specific antigen, or PSA, test for the early identification of prostate cancer, mammograms for breast cancer detection and pap smears for cervical cancer detection. To be useful for screening large numbers of asymptomatic people, tests must be non-invasive and easy to administer. As a result, screening tests are typically simple blood-based tests. In addition, screening tests must be highly specific to avoid costly follow-up procedures associated with false positive diagnoses. - Confirmatory tests, such as tissue biopsies, are performed upon individuals who already have other test results or symptoms suggesting the presence of disease and are used to help confirm the 29 34 existence of, or rule out, the disease in question. Unlike screening tests, confirmatory tests are administered to a relatively small population and may require invasive procedures. - Monitoring tests, such as the CA-125 blood test for monitoring ovarian cancer, are used to measure the recurrence or progression of a disease. Monitoring tests are often used repeatedly during treatment, with the results of the most recent test being compared to the results of prior tests to assess the effectiveness of treatment. For example, rising levels of CA-125 may indicate a patient's ovarian cancer is progressing. - Pharmacogenomic and pharmacogenetic tests. Pharmacogenomic tests, such as the HER2/neu test administered to breast cancer patients, indicate whether patients have a specific sub-type of a particular disease and thus aid the physician in prescribing the most appropriate treatment. For example, only a certain sub-set of patients with metatstatic breast cancer express the HER2 gene. Since Herceptin, a drug used for the treatment of metastatic breast cancer, is only approved for patients who test positive for HER2/neu expression, the HER2/neu test determines which patients are likely to respond to treatment with Herceptin. Similarly, pharmacogenetic tests indicate how patients are likely to respond to a particular course of therapy because of their individual genetic makeup and thus, like pharmacogenomic tests, aid physicians in prescribing the most appropriate treatment to optimize drug efficacy and minimize the risk of adverse events. - Predisposition tests, such as the BRCA-1 test to determine an individual's predisposition to breast cancer, classify patients into subgroups based on their DNA sequence, rather than their gene expression or protein levels. The members of the subgroups have various statistical probability of developing a particular disease. In contrast to other forms of tests, predisposition tests indicate the possibility of developing a disease, rather than the actual presence of the disease. New technology will also generate new test formats. The translation of genomic information into novel diagnostic products will take place at both the gene and the protein level. Currently, diagnostic products are primarily single analyte tests involving the detection of a single gene or protein. We expect new technologies, such as arrays of genes and/or proteins, will shift the focus away from the detection of single analytes to the large-scale, parallel testing of altered expression patterns involving tens, hundreds or perhaps ultimately thousands of genes and/or proteins in the same multi-analyte test. THERAPEUTIC PRODUCTS There are four principal categories of drugs: small molecules, secreted proteins, therapeutic monoclonal antibodies and therapeutic vaccines. - Small molecule therapeutics are often orally available, low molecular weight organic molecules that interact with a protein in the body to either block or enhance its action. - Secreted protein therapeutics are naturally occurring proteins or near relatives of natural proteins modified in the laboratory that are typically administered by intravenous or intramuscular injection. - Therapeutic monoclonal antibodies are similar to secreted protein drugs in that they are also protein molecules. These antibodies are made to specifically bind to target proteins. There are currently eight therapeutic antibody products on the market in the United States. These products are marketed for a wide range of diseases, including cancer, cardiovascular disease, transplant rejection and infectious diseases. We believe that antibodies have several potential clinical and commercial advantages over traditional therapies. These advantages include the following: -- faster product development; -- fewer unwanted side effects as a result of high specificity for the disease target; -- greater patient compliance and higher efficacy as a result of favorable pharmacokinetics; and -- targeted delivery of various payloads, including drugs, radiation and toxins, to specific disease sites. 30 35 - Therapeutic Vaccines. Historically, vaccines were developed and used to induce an immune response in order to prevent diseases. In contrast, therapeutic vaccines are administered when the patient already has the disease. For a therapeutic vaccine to be effective in fighting disease, such as cancer, it is necessary to first identify specific molecular targets on the tumor cells, called tumor antigens. The more selective the target is to the tumor, the greater the likelihood that the stimulated immune response will be directed at attacking only the cancer cells. The identification of highly specific tumor-associated antigens has been one of the limiting factors in the development of useful cancer vaccines. OUR STRATEGY We aim to be a leader in the emerging field of molecular medicine through the discovery and development of proprietary molecular targets for diagnostic and therapeutic applications. To achieve this goal, we intend to: - Assemble an integrated, comprehensive platform for molecular target discovery and validation. By aggressively using cutting-edge genomic and proteomic technologies, including access to Incyte's LifeSeq Gold database, we have put in place a discovery and development program that has already yielded a pipeline of over 40 disease-associated molecular targets. We will continue to bolster our discovery efforts by continuously adding to our arsenal of target discovery and validation technologies. - Develop and validate an initial portfolio of proprietary diagnostic products that can achieve rapid and broad market penetration utilizing existing instrument platforms. We are focused on the discovery and development of novel molecular targets that we believe will fundamentally transform the detection of disease by providing high value-added information that improves clinical decision making. In particular, we are focusing on developing single analyte, serum-based diagnostic tests that can measure the presence and levels of disease-associated target proteins. We intend to perform preclinical studies to confirm utility in everyday medical practice. Further, we plan to leverage these discoveries through initial diagnostic products that run on the existing installed base of testing instruments in clinical reference laboratories, thereby increasing the potential for rapid and broad market penetration. - Develop a next generation of diagnostic tests compatible with emerging multi-analyte testing platforms. We believe our discovery program will yield multi-analyte tests, or tests that analyze multiple gene and/or protein expression, that will more accurately detect and profile a patient's disease. Accordingly, we are pioneering a program focused on developing multi-analyte tests for use in detecting various types of cancer. - Focus initially on cancer where there is a large unmet need for better diagnostics and therapeutics. The early detection of cancer can greatly increase rates of survival, yet there are few reliable diagnostic tests for many of the major cancers. We have focused our initial research efforts on the discovery of novel molecular targets in cancer. The Incyte LifeSeq Gold database is an excellent resource for cancer target discovery since it contains information on a large number of cancer tissues. - Leverage potential diagnostic molecular targets from collaborative relationships. Through our relationships with Incyte through 2003 and SmithKline Beecham through September 2001, including SmithKline Beecham's relationship with Human Genome Sciences through June 2001, we have access to the world's largest genomic databases. We have an exclusive license to specified diagnostic intellectual property arising from research and development efforts conducted by SmithKline Beecham, including diagnostic rights arising from SmithKline Beecham's collaboration with Human Genome Sciences. We intend to pursue additional collaborative relationships with biotech, pharmaceutical and genomics companies that expand our access to potential diagnostic molecular targets. 31 36 - Partner with key clinical opinion leaders and major diagnostic players to accelerate market acceptance of diagnostic products. We believe that our agreement with Quest Diagnostics, the world's largest clinical testing laboratory, will speed the sale of our future products into the homebrew market thereby generating rapid product awareness and early revenues. We plan to work closely with key opinion leaders to perform clinical studies that can be published in major peer-review journals. Following the successful introduction of our diagnostic products in the homebrew market, we can either seek FDA approval to market diagnostic products to clinical laboratories and physicians, or license our molecular targets to established diagnostic companies who will develop tests utilizing their proprietary instrument platforms for FDA approval. - Extend molecular target discovery into the development of immunotherapeutic products. In collaboration with leading therapeutic monoclonal antibody companies, we intend to develop monoclonal antibodies that exploit our novel molecular targets. In the future, we plan to collaborate with leading therapeutic vaccine companies to develop therapeutic vaccines. - Continue to build a strong intellectual property portfolio. We have developed a strong intellectual property portfolio and are aggressively seeking patent protection on the utility of molecular targets that we determine to be clinically useful. We believe that patents are the catalyst for changing the profitability of the diagnostics industry and will enable us to capture margins similar to those enjoyed by patented therapeutic products. MOLECULAR TARGET DISCOVERY AND VALIDATION PLATFORM We use three approaches to source novel molecular targets. Each of these methods seeks to find genes and proteins that are differentially expressed in diseased and healthy tissue or serum. The first is our large-scale, high-throughput Cancer Lead Automated Search Program, or CLASP, our proprietary bioinformatics software to search Incyte's LifeSeq Gold database. The second is our internal discovery program involving the large-scale screening of diseased and healthy tissues. The third is our alliance with SmithKline Beecham, which entitles us to diagnostic molecular targets that SmithKline Beecham identifies as having potential diagnostic value through September 2001, including diagnostic molecular targets identified through its relationship with Human Genome Sciences through June 2001. [DIAGRAM DISPLAYING THREE SOURCES OF MOLECULAR TARGETS, BIOMVP, PRECLINICAL DEVELOPMENT AND FUNCTIONAL VALIDATION] Once we have identified a potential molecular target, we confirm that it is differentially expressed in diseased tissue compared to normal tissue through a rigorous validation and prioritization process that we call bioMVP. Following bioMVP, only those molecular targets that meet our criteria for specificity and sensitivity are advanced to the preclinical development stage. For potential therapeutic targets, we can then perform functional validation studies to verify the utility of the molecular target as a candidate for therapeutic product development. MOLECULAR TARGET DISCOVERY Database Mining. We have developed proprietary bioinformatics software to mine public and private genomic databases to detect differences in gene expression patterns between healthy and diseased states. The first data mining tool that we developed was CLASP in 1998, which we use to identify and prioritize several thousand tissue-specific and cancer-associated molecular targets. CLASP comprises a set of algorithms that interrogate Incyte's LifeSeq Gold database to identify genes that are both specific to particular tissue types as well as differentially expressed in tissues from patients with cancer. LifeSeq Gold is a catalog of more than six million different expressed sequence tags, or ESTs, derived from approximately 1,300 normal and diseased tissue samples from individuals. ESTs are fragments of genetic material derived from mRNA and provide a good representation of gene expression. Incyte's LifeSeq Gold database is the leading EST database in the world, and the multiplicity of samples increases the probability of finding molecular targets that are representative of the population at large. Equally important 32 37 is that it also contains information about which of these genes are expressed in various tissues in the body and about the dynamics of expression at baseline, when stimulated and during disease processes. CLASP first sorts the LifeSeq Gold database into over 40 defined tissue types, such as breast, ovary and prostate. Whereas over half of the diseased samples in the LifeSeq Gold database are cancer-related, there is considerable variability in the number of patient samples across different cancers. CLASP then categorizes each tissue sample by disease state. Disease states include "healthy," "cancer," "associated with cancer," "other disease" and "other." These specified disease states allow us to filter out data that might otherwise confound our ability to identify tissue and cancer-specific molecular targets. CLASP performs a simultaneous parallel search for genes that are expressed both (1) selectively in the defined tissue type compared to other tissue types and (2) differentially in the "cancer" disease state compared to the other disease states affecting the same, or different, tissues. This sorting is accomplished by using mathematical and statistical filters that specify the minimum change in expression levels and the minimum frequency that the differential expression pattern must be observed across the tissue samples for the gene to be considered differentially expressed. The CLASP algorithm permits quantification of the relative abundance of a particular gene in each tissue type and in each disease state. With this information, the list of potential molecular targets is reduced to a manageable number that can be examined using our bioMVP target validation platform to confirm each potential molecular target's association with a tissue type or cancer. Moreover, CLASP is capable of detecting patterns of expression of multiple genes that, when examined together, greatly enhance the sensitivity and specificity of tests compared to the use of a single molecular target alone. The LifeSeq Gold database represents a catalog of gene expression in tissues but does not convey information regarding whether the protein is expressed in serum. Our data mining approach is therefore indifferent to whether the target protein may eventually be secreted and found in serum. Following data mining using CLASP to establish the merits of a molecular target, we utilize a group of proprietary and public algorithms that analyze gene sequence information to predict whether the target protein is likely to be secreted or found on the cell surface. This enables us to carefully select and prioritize those targets that have greater potential as serum diagnostic tests. The cell surface markers may be potential therapeutic targets. CLASP analysis is conducted on each new release of the LifeSeq Gold database to interrogate additional ESTs identified in new and existing tissue samples and new "quality controlled" public sequence data. By repeating CLASP analyses regularly, we are able to continually increase the probability of discovering clinically relevant molecular targets. Internal Discovery. A second method for molecular target discovery involves the direct examination of gene and protein expression in diseased and healthy tissues. This approach supplements our data mining program and enables us to: - analyze more tissues in several cancers of interest; - segregate cancers by the stage of disease allowing us to identify genes that are differentially expressed at various stages of disease progression; - focus on tissues of a specific disease or organ that may be under-represented in the LifeSeq Gold database; - focus specifically on molecular targets found in serum to facilitate development of non-invasive diagnostic tests; and - identify genes with minimal gene expression that are less likely to appear in the LifeSeq Gold database. We use three standard methodologies to examine tissue and serum. The first method is subtractive hybridization in which genes that are expressed similarly in both diseased and healthy tissue are removed, thereby isolating the remaining genes from the diseased tissue for identification and analysis. Through subtractive hybridization, we have generated several proprietary tissue libraries from which we have 33 38 identified thousands of disease-associated genes, many of which we believe we were the first to identify. We are aggressively pursuing intellectual property filings covering these genes. The second method is through the use of microarrays which are glass or silicon wafers with a large number of known gene fragments attached to their surface. We probe the microarray with diseased and healthy samples in order to identify genes that are differentially expressed in diseased tissues. We have performed hundreds of experiments using Incyte's gene expression microarrays in various disease states. We recently entered into an agreement with Agilent Technologies to print custom microarrays in each of our five major cancers of interest: breast, colon, lung, ovary and prostate cancer. We believe this will substantially increase our capacity to identify molecular targets. The third method involves the use of proteomic technologies to identify differentially expressed proteins in tissues or serum using either two-dimensional gel profiling or protein chip technology. These analyses are conducted using commercially available tissue samples. To supplement these public resources, we recently entered into an agreement with the University of Pittsburgh Medical Center. Under this agreement, mRNA will be prepared from finely dissected tissues of various types, including colon, lung and prostate, paired with their detailed patient history. We plan to establish similar collaborations with additional sources of tissue samples in the future. SmithKline Beecham. Our third source of diagnostic molecular targets is SmithKline Beecham. As one of our founders, SmithKline Beecham agreed to assign exclusive diagnostic rights to targets identified through September 2001, including targets derived from its collaboration with Human Genome Sciences which ends in June 2001. Upon our formation, we received rights to nine diagnostic molecular targets from SmithKline Beecham, including Lp-PLA(2), our most advanced diagnostic product candidate. SmithKline Beecham provides regular updates on molecular targets with potential diagnostic utility. To date, eight of our 43 diagnostic molecular target product candidates have come from SmithKline Beecham. In the past 12 months, SmithKline Beecham has sent us more than 100 additional targets under this arrangement, and we have progressed two of these into bioMVP. BIOMVP FOR MOLECULAR TARGET VALIDATION Once we identify a potential molecular target, we subject it to a rigorous laboratory validation and prioritization process called bioMVP. We use quantitative and semi-quantitative polymerase chain reaction, or PCR, to quantify levels of gene expression in a panel of over 120 tissue types. These techniques confirm whether potential molecular targets are specific to the tissue type suggested by the original expression pattern detected at the discovery stage and have the requisite robust correlation with disease and/or specific stages in disease progression. If the molecular target meets specificity and sensitivity criteria, we will progress the molecular target into reagent development. To date, we have conducted quantitative and semi-quantitative PCR experiments on more than 200 molecular targets, 43 of which we have advanced into reagent development. We expect to increase our throughput in molecular target validation by using custom microarrays. These microarrays will allow us to measure expression levels of 2,500 molecular targets of interest in several healthy and diseased tissues. Quantitative and Semi-quantitative PCR. PCR is an amplification technology for making copies of genetic material. PCR is required because the quantity of the molecular target in actual tissue samples is too small to measure. By using PCR, sufficient copies of a molecular target can be made in order to assess their abundance. Quantitative PCR enables the estimation of the level of gene expression in a sample by counting the number of copies made over a specified period of time. Semi-quantitative PCR is similar to quantitative PCR, except that the number of copies of a molecular target in a sample is assessed by visual inspection, rather than by counting. As a result, semi-quantitative PCR can be performed more rapidly than quantitative PCR and is useful for initial confirmation of differential expression. Semi-quantitative PCR provides a useful discriminatory filter to reduce the number of targets to be evaluated by quantitative PCR. 34 39 The following graph shows the bioMVP analysis for C106, a potential molecular target for colorectal cancer, in more than 120 tissue samples: [graph of bioMVP analysis for C106] C106 was identified in the LifeSeq Gold database using CLASP. We believe that C106 is a novel molecular marker for cancer, and we have applied for a patent for diagnostic and therapeutic utility for C106. C106 is expressed almost exclusively in colon tissue and is over-expressed in a significant number of the colorectal cancer samples tested (red bars) compared to the normal adjacent tissue (blue bars) of the same patient. The only sample that shows a small amount of expression other than colorectal is a liver cancer sample, which upon further examination was revealed to be a sample from a patient with primary colorectal cancer that had metastasized to the liver. Microarrays. In our collaboration with Agilent, we have designed custom microarrays with sequences of 2,500 molecular targets affixed to the surface of each chip in order to increase the throughput of our molecular target validation effort. Instead of testing each molecular target separately against each of the 120 healthy and diseased tissue samples, we expect to be able to simultaneously test 2,500 molecular targets against several tissue types to establish tissue/organ selective expression of the molecular target and differential expression of interest in the disease. The output of a microarray experiment highlights the relative levels of expression of disease in diseased and healthy tissue in various tissue types. If the molecular target is suitably sensitive and specific, we perform quantitative PCR to determine the degree of differential expression and further validate its relevance as a potential diagnostic and/or therapeutic molecular target. REAGENT DEVELOPMENT Once a target protein has been selected, we raise polyclonal and monoclonal antibodies that bind specifically to the protein. Where only a partial sequence of a target gene is available, we clone the full length gene and express the protein. The expressed protein is then purified and used to generate antibodies. The characteristics of the antibodies may be modified in vitro to optimize their affinity to bind to the protein of interest. The purified protein and antibodies are then used as key reagents for subsequent assay development for both diagnostics and therapeutics. DIAGNOSTIC PRODUCT DEVELOPMENT Assay Development. Once a molecular target is selected for full product development, we may develop assays measuring both genes and proteins in serum and tissue samples. To detect the expression of nucleic acids, such as mRNA, we produce nucleic acid probes that bind specifically to the molecular target of interest. We develop immunoassays for the detection of the protein target in serum and immunohistochemical assays to measure the protein in tissue samples. In a typical immunoassay, the "capture" antibody binds to the protein and the "detection" antibody binds to a different portion of the same protein, releasing a signal. The intensity of the signal quantifies the level of expression of the protein. Once an assay is configured, it is used to determine if the molecular target is coding for a protein that is detectable in the serum. If the assay can successfully detect the protein in the serum, the molecular target is advanced to preclinical validation studies to determine the clinical utility of the test. Diagnostic Preclinical Studies. A large number of human patient serum samples are tested for the presence or overabundance of the protein in diseased and healthy sera. Once sufficient data is available to validate a robust correlation with disease or stage of disease, we publish our research findings in peer review journals to enhance awareness within the medical community. Diagnostic Clinical Validation and Commercialization. Once the clinical utility of a diagnostic molecular target is validated in preclinical studies, the next step is to make it available through the homebrew market. We believe that our agreement with Quest Diagnostics will speed the penetration of our future products into the homebrew market. Provided that we sell our products only to laboratories qualified under the Clinical Laboratory Improvements Act, or CLIA, review and approval by the FDA is 35 40 not required. In addition, these diagnostic tests can be sold for use in academic and biopharmaceutical laboratories as research diagnostic kits. We believe that the use of our targets in these markets will help us further define clinical utility, generate publications in peer review journals and create market awareness. Once a product has been successfully introduced into the homebrew market, we can pursue FDA approval for these products, either under our own auspices or in concert with future strategic partners. By making these targets available through the homebrew market while FDA approval is pending, we believe that we can accelerate our market penetration once approval is obtained. For those targets that do not demonstrate clear clinical utility, we will continue to make them available to the homebrew market as long there is demand. THERAPEUTIC PRODUCT DEVELOPMENT Our diagnostic discovery process identifies novel molecular targets that are highly specific to a tissue type and disease state. Some of these molecular targets are cell-surface or secreted proteins and have the potential to become targets for both diagnostic and therapeutic products. Other molecular targets are found within cells and have more limited diagnostic potential. To date, we have sought patent protection on many molecular targets we have discovered, but have pursued diagnostic product development only on cell-surface or secreted proteins due to the higher likelihood that such proteins will be found in serum and can be developed into diagnostic tests. More recently, we have expanded our focus to pursue the therapeutic potential of the cell-surface and secreted proteins we have identified. In the future, we may seek to develop therapeutic product candidates as therapeutic vaccines based on molecular targets found within cells. Therapeutic preclinical validation. For molecular targets that are cell-surface or secreted proteins, we will collaborate with therapeutic monoclonal anitibody companies to raise therapeutic monoclonal antibodies. If appropriate, functional validation studies, confirming the localization and distribution of the protein in various tissue samples, will be followed by studies to assess the safety and efficacy of these product candidates in animals and humans. For molecular targets found within cells, we intend to collaborate with therapeutic vaccine technology companies to develop therapeutic vaccines. If appropriate, functional validation studies will be followed by studies to assess the safety and efficacy of these product candidates in animals and humans. OUR PRODUCT CANDIDATES To date, we have identified several thousand novel, disease-associated molecular targets using CLASP and are aggressively seeking patent protection for our discoveries. Of the over 200 molecular targets that have completed bioMVP, we have advanced 43 targets into reagent development. Our most advanced diagnostic product candidates are: LP-PLA(2) -- A NOVEL RISK FACTOR FOR CORONARY HEART DISEASE Our most advanced diagnostic product candidate, Lp-PLA(2), is a novel risk factor for coronary heart disease discovered by SmithKline Beecham. SmithKline Beecham assigned exclusive rights to us to develop Lp-PLA(2) as a diagnostic test. There is a significant need for additional cardiovascular risk factors, since approximately half of the individuals with coronary artery disease do not exhibit traditional risk factors, such as high blood pressure or LDL cholesterol, commonly referred to as "bad" cholesterol. In October 2000, The New England Journal of Medicine published the results of a study on Lp-PLA(2). The study, which used our assay, concluded that the level of circulating Lp-PLA(2) exhibited a strong correlation with risk of coronary heart disease, independent of other known risk factors, such as LDL cholesterol. The study used blood samples collected during the West of Scotland Coronary Prevention Study, a landmark investigation that led to the approval of pravastatin for the reduction of LDL cholesterol levels. 36 41 The Lp-PLA(2) study examined the cases of 580 men who had suffered adverse coronary events, such as heart attacks, coronary-artery-bypass surgery or angioplasty. These individuals were compared with 1,160 case-controlled men who had not suffered a cardiac event. The comparison was controlled for age and smoking status. All of the participants were middle-aged, caucasian men with above-normal LDL cholesterol levels. Examining five ranges of Lp-PLA(2) levels, the study found a strong correlation between Lp-PLA(2) and coronary events, with a p-value of less than 0.001. The risk of an adverse coronary event was approximately two times greater for individuals with the highest levels of Lp-PLA(2) compared to individuals with the lowest levels of Lp-PLA(2). Lp-PLA(2) was shown to be a strong risk factor independent of LDL cholesterol and other recently well-publicized markers of vascular inflammation, such as C-reactive protein. We plan to conduct several additional studies to confirm the clinical utility of Lp-PLA(2) and to seek FDA approval as a diagnostic product. Future studies will be designed to accomplish the following objectives: - establish and confirm the specificity and sensitivity of the Lp-PLA(2) assay; - verify the results of the West of Scotland Coronary Prevention Study in a broader population; - investigate the relationship between Lp-PLA(2) levels and treatment with HMG-CoA reductase inhibitors; and - investigate the potential correlation between Lp-PLA(2) and surrogate endpoints, such as coronary artery calcification and restenosis following angioplasty and/or stent insertion. We believe that a Lp-PLA(2) diagnostic test will enable physicians to better identify and confirm individuals at risk for coronary heart disease. These individuals can be currently treated with diet and exercise regimens, as well as with drugs, particularly HMG-CoA reductase inhibitors. SmithKline Beecham has a preclinical program with Lp-PLA(2) as a therapeutic target. Currently, SmithKline Beecham is progressing drug candidates towards initial safety trials in human subjects. If SmithKline Beecham successfully develops and sells this therapeutic to treat patients with high levels of Lp-PLA(2), we believe this will create significant parallel demand for an Lp-PLA(2) diagnostic test. CATHEPSIN-K -- A DIAGNOSTIC MARKER FOR OSTEOPOROSIS Our other advanced diagnostic product candidate, Cathepsin-K, is a molecular target that shows specific expression in osteoclasts, which are bone resorbing cells. Cathepsin-K was discovered by SmithKline Beecham researchers while mining data from a cDNA library made from human osteoclasts, and it is expressed exclusively in osteoclasts. We have developed an immunoassay that is currently in preclinical studies to evaluate its utility as a molecular target for disease states associated with excessive bone resorption, such as osteoporosis and metastatic prostate cancer. Cathepsin-K may also be used to monitor patients who are being treated for osteoporosis. SmithKline Beecham has a preclinical drug research program targeting Cathepsin-K. ONCOLOGY Our primary research and development focus has been in oncology, where there is significant unmet clinical need and wide acknowledgement that early detection dramatically impacts survival. Currently, we have over 40 product candidates in development for various types of solid tumors and hematopoietic neoplasms. We plan to develop serum-based or other minimally invasive diagnostic tests that have sufficient sensitivity and specificity to screen asymptomatic individuals as part of routine physical examination. In addition, we plan to develop tests for the histological examination of tissue that will more accurately characterize the disease in terms of stage, grade and aggressiveness of tumor than traditional methods, thereby facilitating more appropriate treatment. We also believe that our molecular targets could be useful 37 42 to detect metastasis and micrometastasis, and we are currently assessing techniques for using our molecular targets for that purpose. The following table shows the number of product candidates at various stages of our research with respect to various forms of cancer:

COMPETITION We face competition from other companies in the field of novel molecular target discovery. Millennium Pharmaceuticals, Inc. through its Predictive Medicine division, is one of the few companies currently focused on molecular target discovery for disease detection. Large companies, such as Abbott Laboratories, Bayer and Roche, have limited in-house programs that focus on the discovery of molecular targets. However, current investment for research and development at these companies is geared primarily for instrument development rather than molecular target discovery, with these companies opting to in- license molecular targets once preliminary clinical validation has been demonstrated. We also may face competition from cancer diagnostics companies and single nucleotide polymorphism, or SNP, discovery companies. Cancer diagnostics companies, such as Fujirebio Diagnostics, formerly Centocor Diagnostics, Matritech and Exact Corp., are also developing diagnostic tests but have not subscribed to the leading private genomics databases which cost several millions of dollars per year in subscription fees. SNP discovery companies, such as DNA Sciences and Myriad Genetics are focused on the analysis of DNA, determining the association of a SNP with the predisposition to disease. We focus on the analysis of gene and protein expression to develop tests that will detect the early presence of disease, rather than the predisposition of an individual to disease. Diagnostics platform technology companies, such as Ciphergen Biosystems are using their specific technologies to identify proteins that are involved in disease. Frequently, these companies are focused on the development of their platform technology rather than the discovery of novel molecular targets. We may, in the future, supply the content that will be measured using these emerging platforms, and therefore view these companies as potential partners. GOVERNMENT REGULATION The FDA and comparable regulatory agencies in foreign countries impose substantial requirements on the clinical development, manufacture and marketing of pharmaceutical products and in vitro diagnostic devices. These agencies regulate research and development activities and the testing, manufacture, quality control, safety, effectiveness, labeling, storage, record keeping, advertising and promotion of these products and services. Different centers within FDA are responsible for regulating these products, depending on whether the product is considered a pharmaceutical, biologic or medical device. DIAGNOSTICS The products under development that we intend to sell to reference laboratories such as Quest Diagnostics are analyte specific reagents, or ASRs, and are treated as restricted devices under the Federal 38 43 Food Drug and Cosmetic Act. Most are exempt from premarket notification requirements, and their sale is limited to certain customers such as clinical laboratories regulated under CLIA as qualified to perform high complexity testing, in vitro diagnostics manufacturers and nonclinical laboratories that do not use the reagents to provide diagnostic information to patients. Manufacturers and suppliers of ASRs are required to register with FDA, to conform to FDA's current good manufacturing practices requirements and to comply with certain reporting and other record keeping requirements. Because we do not provide any clinical testing services, we are not registered under CLIA, although we will have to register with the FDA as an ASR manufacturer or supplier and comply with other applicable requirements before we start selling ASRs. However, the clinical reference laboratories to which we intend to sell reagents for their home brew tests must be CLIA-certified. CLIA is intended to ensure the quality and reliability of clinical laboratories in the U.S. by mandating specific standards in the areas of personnel qualification, administration, participation in proficiency testing, patient test management, quality control, quality assurance and inspections. The regulation promulgated under CLIA establishes three levels of diagnostic tests: (1) waived, (2) moderately complex, and (3) highly complex, and the standards applicable to a clinical laboratory depend on the level of the tests it performs. We cannot assure you that the CLIA regulations and future administrative interpretations of CLIA will not have a materially adverse impact on us by limiting the potential market for our testing services. When we decide to provide in vitro diagnostic tests for broader use, our products will be subject to additional regulation by the FDA under FDA's authority to regulate medical devices. In the U.S., medical devices are classified into one of three classes on the basis of the controls deemed by the FDA to be necessary to reasonably ensure their safety and effectiveness. Class I devices are generally subject to general controls, including labeling, premarket notification and adherence to quality systems regulations, or QSRs, which are device-specific good manufacturing practices. Class II devices are subject to general controls and special controls, including performance standards and postmarket surveillance. Class III devices are subject to most of the previously identified requirements as well as to premarket approval. Most in vitro diagnostic devices are regulated as Class I or Class II devices, although certain diagnostic tests may be classified as Class III devices. Before a new device can be introduced in the market, its manufacturer generally must obtain marketing clearance through either a premarket notification under Section 510(k) of the Federal Food, Drug and Cosmetic Act or approval of a premarket approval application, or PMA. A 510(k) premarket notice demonstrates that the device in question is substantially equivalent to another legally marketed device that does not require premarket approval. FDA is supposed to complete its review of a 510(k) notice within 90 days of submission, but it may request additional data, including clinical information, thus increasing the time that will be necessary to review the notice. Most Class I devices and many Class II devices are exempt from the 510(k) requirement. If the FDA rejects the 510(k), if the device is not equivalent to a marketed device or if the use of a 510(k) notice is not otherwise appropriate, the manufacturer must file a PMA. The PMA process is more complex, costly and time consuming than the 510(k) clearance procedure. A PMA must be supported by more detailed scientific evidence than a 510(k), including clinical data to demonstrate the safety and efficacy of the device. If the device presents a "significant risk," the sponsor of the trial will have to file an investigational device exemption, or IDE, prior to commencing clinical trials. If the FDA approves the IDE application and the institutional review boards, or IRBs, at the institutions at which the clinical trials will be performed approve the clinical protocol and related materials, clinical trials may begin at a specific number of investigational sites with a specific number of patients, as approved by the FDA. Upon completion of the clinical trials, and assuming that the sponsor believes that the results indicate that the product is safe and effective for its intended purpose, the sponsor will file a PMA. The FDA is required to review a PMA in 180 days, but it typically requests additional information and may refer the PMA to an FDA advisory committee for review. A PMA application can take from one to several years to complete, and there can be no assurance that any submitted PMA application will ultimately be approved. Moreover, even when approved, the FDA may limit the indications for which the 39 44 product may be marketed or to whom it may be sold. Additionally, there can be no assurance that the FDA will not request additional information or request the performance of additional clinical studies after the PMA is approved. We believe that most, if not all, of our diagnostic test kits will require a PMA. THERAPEUTICS Although we currently do not intend to market our own therapeutic products, we may develop products through Phase II before out licensing. Therapeutic product development is subject to extensive regulation. The process required by the FDA before a pharmaceutical product or biologic may be marketed in the US generally involves the following: - completion of preclinical laboratory and animal testing; - submission of an investigational new drug application, or IND, which must become effective before clinical trials in humans may begin; - performance of adequate and well controlled human clinical trials to establish the safety and efficacy of the proposed drug for its intended use; and - approval by the FDA of a new drug application, or NDA, if the product is a pharmaceutical, or a biologics license application, or BLA, if the product is a biologic. The testing and approval process requires substantial time, effort, and financial resources, and we cannot be certain that any approvals for our or any collaborator's product candidate will be granted in a timely manner, if at all. Prior to commencing a clinical trial, a sponsor must submit an IND to the FDA. The IND will become effective 30 days after receipt by the FDA unless the FDA within the 30-day period raises concerns or questions about the conduct of the trial. In that case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial may begin. The submission of an IND may not result in FDA authorization to commence a clinical trial. In addition, an independent institutional review board, or IRB, at each institution at which a clinical trial is being performed, must review and approve the clinical protocol before is may begin. Human clinical trials are typically conducted in three sequential phases that may overlap. The FDA, an IRB or the sponsor may suspend a clinical trial at any time for various reasons, including a belief that the subjects are being exposed to an unacceptable health risk. These phases generally include the following: Phase I during which the drug is introduced into healthy human subjects or occasionally into patients and tested for safety, dose tolerance and metabolism; Phase II during which the drug is introduced into a limited patient population to determine the efficacy of the product of specific targeted diseases, to determine dosage tolerance and optimal dosage and to identify possible adverse effects and safety risks; and Phase III during which the clinical trial is expanded to a more diverse patient group in geographically dispersed clinical trial sites to further evaluate clinical efficacy, optimal dosage and safety. The results of product development, preclinical animal studies and human clinical studies are submitted to the FDA as part of an NDA or BLA. The FDA may disapprove the NDA or BLA if the applicable regulatory criteria are not satisfied or it may require additional clinical data. Once approved, the FDA may withdraw product approval if compliance with regulatory standards is not maintained or if problems occur after the product reaches the marketplace. In addition, the FDA may require post-marketing studies to monitor the effect of approved products, and may limit further marketing of the product based on the results of these post-marketing studies. Further, if the sponsor wants to make changes in a product after FDA approval, a new or supplemental application might be required. Satisfaction of FDA requirements or similar requirements of foreign regulatory agencies typically takes several years and the actual time required may vary substantially based upon the type, complexity and novelty of the product or disease. Government regulation may delay or prevent marketing of potential products for a considerable period of time and impose costly procedures upon our activities. Success in early stage clinical trials does not assure success in later stage clinical trials. Data obtained from clinical 40 45 activities is not always conclusive and may be susceptible to varying interpretations that could delay, limit or prevent regulatory approval. Even if a product receives regulatory approval, later discovery of previously unknown problems with a product may result in restrictions on the product or even complete withdrawal of the product from the market. We are also subject to various laws and regulations relating to safe working conditions, laboratory and manufacturing practices, the experimental use of animals, and the use and disposal of hazardous or potentially hazardous substances, including radioactive compounds and infectious disease agents used in connection with our research. Compliance with laws and regulations relating to the protection of the environment has not had a material effect our capital expenditures or competitive position. However, the extent of governmental regulation, which might result from any legislative or administrative action, cannot be accurately predicted. The FDA has broad regulatory and enforcement powers, including the ability to levy fines and civil penalties, suspend or delay issuance of approvals, seize or recall products, and withdraw approvals, any one or more of which could have material adverse effect upon us. THIRD PARTY REIMBURSEMENT Our products under development will initially be sold directly or indirectly as testing services to medical institutions, laboratories and physicians. Medical institutions and physicians will be required to seek reimbursement for the use of these products and services from third-party payors, including Medicare, Medicaid and private health insurers and managed care organizations. As a result, market acceptance of our proposed products may depend in large part on the extent to which third party payors provide coverage for the diagnostic tests, drugs or therapeutic vaccines that are developed from our product candidates and how much they will pay for the tests and therapeutic products after they are approved. Coverage and the level of payment provided by U.S. and foreign third party payors varies according to a number of factors, including the type of medical provider, the payor, the location and cost. In the U.S., many private health care insurance carriers follow the recommendations of the Health Care Financing Administration, or HCFA, which establishes guidelines for the coverage of procedures, services and medical equipment and the payment of health care providers treating Medicare patients. In recent years, it has taken an increasing amount of time to obtain coverage from HCFA for new medical technology and to obtain appropriate codes for filing claims, even after that technology is approved by FDA. While HCFA has recently begun to respond to pressure to make faster and more reasoned decisions regarding coverage and to publicize the criteria that it uses to make those decisions, it is too early to say whether these efforts will have a beneficial effect on reimbursement for our and our collaborators' product candidates. Internationally, healthcare reimbursement systems vary significantly. In many countries, the government sets the prices that will be paid. MANUFACTURING To date, we have not manufactured any products for clinical or commercial purposes and do not have any manufacturing facilities, technical capabilities or the resources to do so. We have no present plans to establish a manufacturing facility. We intend to utilize contract third-party manufacturers or our corporate collaborators for the production of material for use in clinical trials and for the potential commercialization of our future products. EMPLOYEES As of September 30, 2000, we employed 36 full-time employees, including nine in finance and administration and 27 in research and development. None of our employees is represented by collective bargaining agreements, and our management considers its relations with our employees to be good. 41 46 FACILITIES We currently lease 30,600 square feet of office and research and development facilities in Santa Clara, California. Our lease expires in September 2002. We are currently exploring alternatives which would provide us with additional space to accommodate our anticipated growth. LEGAL PROCEEDINGS We are not a party to any legal proceedings. 42 47 MANAGEMENT EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES Our executive officers, directors and key employees as of November 15, 2000 are as follows:

Patrick Plewman has served as our Chief Executive Officer since June 2000, as a Director since April 2000, as our President since January 2000 and as our Chief Operating Officer since July 1999. From our inception in August 1997 through June 1999, Mr. Plewman served as our Vice President of Corporate Development. From 1989 to 1997, Mr. Plewman served in various capacities at SmithKline Beecham, including most recently as Director, Business Development -- Molecular Diagnostics. Mr. Plewman holds a B.A. in Chemistry and Political Science from the University of North Carolina at Chapel Hill and an M.B.A. from Harvard Business School. Sharon E. Tetlow has served as our Vice President, Finance and Chief Financial Officer since February 1999. From January 1998 to March 1999, Ms. Tetlow was Chief Financial Officer of Reprogen, Inc., a biotechnology company. From March 1997 to December 1997, Ms. Tetlow worked as a consultant to C.V. Therapeutics, Inc., a biotechnology company. From January 1996 to February 1997, Ms. Tetlow served as the Chief Financial Officer of Terrapin Technologies, Inc., a biotechnology company. Ms. Tetlow holds a B.A. in Psychology from the University of Delaware and an M.B.A. from Stanford University. Mohan S. Iyer has served as our Vice President, Business Development since December 1999 and as Vice President, Research & Development Operations and Business Development from December 1999 to November 2000. From September 1998 to December 1999, Mr. Iyer served as our Director of Business Development. From September 1995 to September 1998, Mr. Iyer was Senior Consultant/Engagement Manager for The Wilkerson Group, a healthcare consulting company. Mr. Iyer holds a B.S. in Chemical Engineering from the University of Tennessee, an M.S. in Biomedical Engineering from Duke University and an M.B.A. from Yale University School of Management. Ronald M. Lindsay, Ph.D. has served as our Vice President, Research and Development and Chief Science Officer since November 2000. From January 1998, Dr. Lindsay has served in various roles with Millenium Pharmaceuticals, Inc., including Senior Vice President, Biotherapeutics and Vice President, Preclinical Research and Development, Millenium BioTherapeutics. From February 1989 to December 1997, Dr. Lindsay served in various roles with Regeneron Pharmaceuticals Inc., including most recently as Vice President, Neurobiology. Dr. Lindsay holds a B.S. in Chemistry from the University of Glasgow in Scotland and a Ph.D. in Biochemistry from the University of Calgary. Robert L. Wolfert, Ph.D. has served as our Vice President, Diagnostics since November 2000. From May 1999 to October 2000, Dr. Wolfert was Vice President, Research and Development of Atairgin Technologies, Inc., a biotechnology company. From April 1984 to April 1999, Dr. Wolfert served in various capacities at Hybritech Incorporated, a diagnostics company, including most recently as Director of 43 48 Immunodiagnostics Research. Dr. Wolfert holds a B.A. in Chemistry and Biology from Cornell University and a Ph.D. in Biochemistry and Immunology from Tufts University School of Medicine. George Poste, DVM, Ph.D. has served as our Chairman of the Board of Directors since September 1997. Since January 2000, Dr. Poste has served as the Chief Executive Officer of Health Technology Networks, a healthcare consulting company. From September 1997 to December 1999, he was the Chief Science and Technology Officer of SmithKline Beecham. From March 1992 to August 1997, Dr. Poste was the President, Research and Development, of SmithKline Beecham and he also served as Director from March 1992 to December 1999. In addition, Dr. Poste currently serves on the Board of Directors of Maxygen, Illumina, Orchid Biosciences and Structural GenomiX, where he serves as the Chairman of the Board of Directors. Dr. Poste holds a Doctorate in Veterinary Medicine and a Ph.D. in Virology from the University of Bristol in England. Louis C. Bock has served as a Director since April 2000. Mr. Bock also serves as a Managing Director of BA Venture Partners VI, LLC, which is the general partner of BAVP, L.P. Mr. Bock joined BA Venture Partners in September 1997. Prior to that time, he was employed by Gilead Sciences, a biopharmaceutical company, where he held positions in research, project management, business development and sales from November 1992 to September 1997. He currently serves on the Board of Directors of Dynavax Technologies, Prolinx, Synthon, Seattle Genetics, Structural GenomiX and Neuron Therapeutics. He holds a B.S. in Biology from California State University, Chico and an M.B.A. from California State University, San Francisco. Randy W. Scott, Ph.D. has served as a Director since our inception in September 1997. Dr. Scott is a co-founder of Incyte Genomics, Inc. where he has served as Chairman since September 2000 and as Director since 1991. From January 1997 to September 2000, he served as President and Chief Scientific Officer of Incyte. From April 1991 to December 1996, he served as Incyte's Vice President of Research and Development. He also currently serves on the Board of Directors of Incyte, Genomic Health, Vocent, iTrenders and Highway Communications. Dr. Scott holds a B.S. from Emporia State University and a Ph.D. in Biochemistry from the University of Kansas. Tadataka Yamada, M.D. has served as a Director since our inception in September 1997. Since February 1999, Dr. Yamada has served as Chairman of Research and Development at SmithKline Beecham Pharmaceuticals. He has also served as President of SmithKline Beecham Healthcare Services from February 1996 to February 1999. He has served as a member of Board of Directors of SmithKline Beecham since 1994. Dr. Yamada joined the University of Michigan School of Medicine as Professor of Internal Medicine in 1983 and served as Chairman of the Department from 1990 to 1996. Dr. Yamada holds a B.A. in History from Stanford University and an M.D. from the New York University School of Medicine. BOARD COMPOSITION Our board of directors currently consists of five members. All directors are elected to hold office until their successors have been elected and qualified or until their earlier death, resignation, disqualification or removal. Our certificate of incorporation and bylaws that become effective immediately prior to the completion of this offering provide that our board will be divided into three classes, Class I, Class II and Class III, with each class serving staggered three-year terms. The Class I directors will stand for re-election at the 2001 annual meeting of stockholders. The Class II directors will stand for re-election at the 2002 annual meeting of stockholders. The Class III director will stand for re-election at the 2003 annual meeting of stockholders. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors. This staggered classification of the board of directors may have the effect of delaying or preventing changes in control or management. There are no familial relationships among any of our directors or executive officers. 44 49 BOARD COMMITTEES Our board of directors has an audit committee and a compensation committee. Audit committee. The audit committee of our board of directors recommends the appointment of our independent auditors, reviews our internal accounting procedures and financial statements and consults with and reviews the services provided by our independent auditors, including the results and scope of their audit. The audit committee currently consists of . Compensation committee. The compensation committee of our board of directors reviews and recommends to the board the compensation and benefits of all of our executive officers, administers our stock option plans and establishes and reviews general policies relating to compensation and benefits of our employees. The compensation committee currently consists of . COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION None of the members of our compensation committee has at any time been one of our officers or employees. None of our executive officers currently serves, or in the past year has served, as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our board of directors or compensation committee. Prior to the creation of our compensation committee, all compensation decisions were made by our full board of directors. DIRECTOR COMPENSATION Our directors do not receive any cash compensation for their services as directors or members of committees of the board of directors but are reimbursed for their reasonable expenses incurred in attending meetings of the board of directors. Our directors are eligible to participate in our 2001 Equity Incentive Plan and 2001 Equity Incentive Plan and employee-directors will be able to participate in our 2001 Employee Stock Purchase Plan. Our 2001 Plan provides for formula grants to our non-employee directors of non-qualified stock options to purchase 10,000 shares of common stock on the date of each annual meeting of our stockholders. Formula grants to non-employee directors become vested at a rate of 1/12 per month, commencing with the month in which they are granted. On January 3, 2000, we entered into a consulting agreement with Dr. George Poste, Chairman of our Board of Directors, to act as consultant to our company for a quarterly fee of $20,000, plus travel expenses. The agreement remains in effect until terminated by either party upon written notice. As of September 30, 2000, we had paid an aggregate of $80,000 to Dr. Poste pursuant to this consulting agreement. 45 50 EXECUTIVE COMPENSATION The following table presents information regarding compensation paid in 1999 to our Chief Executive Officer and our other highest-paid executive officers whose total annual salary and bonus exceeded $100,000 for the fiscal year ended December 31, 1999. These executive officers are referred to as our "named executive officers" elsewhere in this prospectus. There were no long-term compensation awards or other compensation awarded to our named executive officers during fiscal 1999. SUMMARY COMPENSATION TABLE

--------------- (a) Mr. Plewman has served as our Chief Operating Officer since July 1999 and was appointed as our President in December 1999 and Chief Executive Officer in June 2000. (b) Dr. Poste served as our acting Chief Executive Officer from July 1999 to June 2000. (c) Ms. Tetlow joined us in February 1999. (d) Dr. Gerber resigned in July 1999. He received $331,250 in separation payments. (e) Dr. Cooper resigned in May 2000. He received a housing and travel allowance of $37,895. (f) Drs. Lindsay and Wolfert joined us in November 2000. 46 51 OPTION GRANTS DURING THE FISCAL YEAR ENDED DECEMBER 31, 1999 The following table provides information relating to stock options awarded to each of our named executive officers during the year ended December 31, 1999. All such options were awarded under our 2000 Equity Incentive Plan. In accordance with the rules of the SEC, the following table sets forth the potential realizable value over the term of the options based on assumed rates of stock appreciation of 5% and 10% compounded annually. The term of the options are the period from the grant date to the expiration date, or 10 years. These amounts do not represent our estimate of future stock price performance. Actual realizable values, if any, of stock options will depend on the future performance of the common stock. INDIVIDUAL GRANTS

--------------- (a) 25% of all options vest after the first year, and the remaining options vest at a rate of 1/48 per month. (b) The exercise price per share of each option was equal to the fair market value of our common stock on the date of grant as determined by our Board of Directors. (c) Potential realizable values are computed by (1) multiplying the number of shares of common stock subject to a given option by the assumed initial public offering price of $ per share, (2) assuming that the aggregate stock value derived from that calculation compounds at the annual 5% or 10% rate shown in the table for the entire ten-year term of the option, and (3) subtracting from that result the aggregate option exercise price. The 5% and 10% assumed annual rates of stock price appreciation are mandated by the rules of the SEC and do not represent our estimate or projection of future common stock prices. (d) Dr. Gerber resigned in July 1999. Upon his resignation, he was permitted to exercise options covering 113,889 shares of our common stock. (e) Dr. Cooper resigned in May 2000. Upon his resignation, he was permitted to exercise options covering 5,000 shares of our common stock. (f) Drs. Lindsay and Wolfert joined us in November 2000. 47 52 OPTIONS EXERCISED DURING THE FISCAL YEAR ENDED DECEMBER 31, 1999 AND OPTION VALUES AS OF DECEMBER 31, 1999 The following table sets forth information for each of our named executive officers concerning option exercises for the fiscal year ended December 31, 1999 and vested and unvested options held at December 31, 1999. The value realized upon exercise and the value of unexercised in-the-money options shown have been calculated on the basis of the assumed initial public offering price of $ per share, less the applicable exercise price per share, multiplied by the number of shares underlying these options.

--------------- (a) Dr. Gerber resigned in July 1999. Upon his resignation, he was permitted to exercise options covering 113,889 shares of our common stock, all of which he exercised in July 2000. (b) Dr. Cooper resigned in May 2000. Upon his resignation, he was permitted to exercise options covering 5,000 shares of our common stock. (c) Drs. Lindsay and Wolfert joined us in November 2000. EMPLOYMENT CONTRACTS, CHANGE OF CONTROL ARRANGEMENTS AND SEVERANCE AGREEMENTS We routinely deliver written offer letters containing provisions on salary, bonuses, relocation payments, benefits and stock option grants to prospective members of management and other employees. We have entered into an employment agreement with each of our executive officers. Under these employment agreements, we agree to pay an annual base salary to each of our executive officers and to make each of them eligible for an incentive bonus. The base salaries for Mr. Plewman, Ms. Tetlow, Mr. Iyer and Dr. Lindsay are $245,000, $184,000, $164,000 and $250,000, respectively. The employment agreements provide that each of our executive officers is employed "at-will" and the employment relationship may be terminated for any reason at any time. If the executive officer terminates his or her employment with us because of a reduction in his or her base salary or title, because we relocate the executive or because we have materially breached the employment agreement, or if we terminate the executive without cause, we must pay the executive a severance payment of one year's base salary. In addition, all of Mr. Plewman's stock options would immediately vest and become exercisable upon any of such events. Our executive officers other than Mr. Plewman will become immediately vested in their stock options only if any of such events occur within 12 months following a change of control of our company. George Poste, DVM, Ph.D. Dr. Poste began serving as our acting Chief Executive Officer in July 1999, and in December 1999, Dr. Poste entered into a consulting agreement to serve as our acting Chief Executive Officer and consultant for a quarterly fee of $20,000 plus travel expenses. Although Dr. Poste no longer serves as acting Chief Executive Officer, he continues to provide consulting services to us, and on January 18, 2000, we entered into a special consulting agreement with Dr. Poste to act as a consultant to our company in connection with our Series C Preferred Stock financing for a daily fee of $5,000, plus travel expenses. As of September 30, 2000, we had paid an aggregate of $15,000 to Dr. Poste 48 53 pursuant to this special consulting agreement. This agreement remains in effect until terminated by either party upon written notice. William G. Gerber, M.D. In September 1999, Dr. Gerber entered into a separation agreement with us in conjunction with the termination of his employment relationship. Pursuant to the terms of the agreement, we paid Dr. Gerber a lump sum payment of $331,250 and allowed him to exercise options to purchase 113,889 shares of our common stock. STOCK PLANS 2000 Equity Incentive Plan. Our 2000 Equity Incentive Plan provides for the grant of incentive stock options to employees, including officers and employee directors, and for the grant of non-qualified stock options and stock purchase rights to employees, directors and consultants. Our 2000 Plan was adopted by our Board of Directors in April 2000. Under the 2000 Plan, a total of 4,700,000 shares of common stock has been reserved for issuance, of which options to acquire 2,287,250 shares have been issued and were outstanding as of September 30, 2000, and a total of 207,042 shares have been issued and were outstanding as of September 30, 2000 pursuant to the exercise of options granted under our 2000 Plan. No further grants will be made under the 2000 Plan after , 2001, provided that the shares that remain reserved for issuance as of , 2001, or that become available for issuance as a result of stock options expiring or becoming unexercisable after , 2001, under our 2000 Plan may be issued under our 2001 Equity Participation Plan. Prior to this offering, the 2000 Plan may be administered by our Board of Directors, or a committee thereof. Following this offering, a committee of our Board of Directors shall administer the 2000 Plan, provided that the committee consist solely of two or more members of our Board of Directors, each of whom is an "outside director" within the meaning of Section 162(m) of the Code and a "non-employee director" within the meaning of Rule 16b-3 of the Securities Exchange Act of 1934, as amended. The administrator of our 2000 Plan has the power to determine, among other things: - the fair market value of our common stock; - the selection of the officers, consultants and employees to whom the options and stock purchase rights may from time to time be granted; - the number of shares to be covered by each option and stock purchase right granted under the 2000 Plan; - the form of agreement for use under the 2000 Plan; - the terms and conditions of any option or stock purchase right granted under the 2000 Plan, including but not limited to, the exercise price and any accelerated vesting provisions; - whether to buy out previously granted options; - the rules and regulations relating to the 2000 Plan; - whether to permit 2000 Plan participants to have us withhold from shares issuable upon exercise of options or stock purchase rights shares having a value equal to the statutory minimum withholding amount; - to amend any option or stock purchase right; and - to construe and interpret the terms of the 2000 Plan and awards granted under the 2000 Plan. Our Board of Directors may amend, alter, suspend or discontinue the 2000 Plan at any time. However, this action will not affect the rights of previously granted options or stock purchase rights unless there is a written agreement to that effect signed by the option holder or stock purchase right holder and our company. 49 54 Our 2000 Plan provides that upon any changes in our capitalization, the number of shares subject to each option and stock purchase right and the shares reserved under our 2000 Plan, as well as the per share exercise price of outstanding options will be adjusted appropriately by the 2000 Plan administrator. In the event any dividend or other distribution (whether in the form of cash, our common stock, other securities, or other property), recapitalization, reclassification, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, liquidation, dissolution, or sale, transfer, exchange or other disposition of all or substantially all of our assets, or exchange of our common stock or other securities, issuance of warrants or other rights to purchase our common stock or other securities, or other similar corporate transaction or event, the 2000 Plan administrator may provide for the purchase of any option or restricted stock; may provide that outstanding options become fully vested; may provide that options and restricted stock be assumed by the successor or survivor corporation, or a parent or subsidiary thereof, or be substituted for by similar options, rights or awards covering the stock of the successor or survivor corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares and prices; or may adjust the number and type of shares subject to outstanding options, and the terms, conditions of and criteria included in, outstanding options or restricted stock; and may provide that upon the consummation of such event, outstanding options shall become fully vested and then terminate. In the case of restricted stock purchased upon exercise of an unvested option or a stock purchase right, unless the administrator determines otherwise, the restricted stock purchase agreement will grant us a repurchase option exercisable upon the termination of the purchaser's employment or consulting relationship with our company for any reason, including death or disability. The purchase price for shares repurchased pursuant to a restricted stock purchase agreement may be the original price paid by the purchaser. The repurchase option will lapse at a rate determined by the administrator. Options and stock purchase rights granted under our 2000 Plan are generally not transferable by the optionee, and each option and stock purchase right is exercisable during the lifetime of the optionee only by the optionee. Options granted under our 2000 Plan must generally be exercised within three months after the end of the optionee's status as an employee, director or consultant, or within one year after the optionee's termination by disability or death, respectively, but in no event later than the expiration of the option's term. 2001 Equity Incentive Plan. Our 2001 Equity Incentive Plan was adopted by our Board of Directors in and was approved by our stockholders in as a successor equity plan to our 2000 Equity Incentive Plan. Under the 2001 Plan, a total of shares of common stock have been reserved for issuance, including shares that remained reserved for issuance under our 2000 Plan as of , 2001. In addition, shares that become available for issuance as a result of stock options expiring or becoming exercisable under our 2000 Plan after , 2001 may be issued under our 2001 Plan. Our 2001 Plan provides for the grant of incentive stock options to employees, including officers and employee directors, and for the grant of non-qualified stock options and stock purchase rights to employees, directors and consultants. Our 2001 Plan provides that we cannot issue options or stock purchase rights after the tenth anniversary of the date on which the 2001 Plan was adopted by our Board of Directors. Our 2001 Plan may be administered by our Board of Directors or a committee thereof. Following this offering, a committee of our Board of Directors shall administer our 2001 Plan, provided that the committee consist solely of two or more members of our Board of Directors, each of whom is an "outside director" within the meaning of Section 162(m) of the Code and a "non-employee director" within the meaning of Rule 16b-3 of the Securities Exchange Act of 1934, as amended. The administrator of our 2001 Plan has the power to determine, among other things: - the fair market value of our common stock; - the selection of the officers, consultants and employees to whom the options and stock purchase rights may from time to time be granted; 50 55 - the number of shares to be covered by each option and stock purchase right granted under the 2001 Plan; - the form of agreement for use under the 2001 Plan; - the terms and conditions of any option or stock purchase right granted under the 2001 Plan, including but not limited to the exercise price and any accelerated vesting provisions; - whether to buy out previously granted options; - the rules and regulations relating to the 2001 Plan; - whether to permit 2001 Plan participants to have us withhold from shares issuable upon exercise of options or stock purchase rights shares having a value equal to the statutory minimum withholding amount; - to amend any option or stock purchase right; and - to construe and interpret the terms of the 2001 Plan and awards granted under the 2001 Plan. Our 2001 Plan provides for formula grants to our non-employee directors of non-qualified stock options to purchase 10,000 shares of common stock on the date of each annual meeting of our stockholders. Formula grants to non-employee directors become vested at a rate of 1/12 per month, commencing with the month in which they are granted. In the case of restricted stock purchased upon exercise of an unvested option or a stock purchase right, unless the administrator determines otherwise, the restricted stock purchase agreement will grant us a repurchase option exercisable upon the termination of the purchaser's employment or consulting relationship with our company for any reason, including death or disability. The purchase price for shares repurchased pursuant to a restricted stock purchase agreement may be the original price paid by the purchaser. The repurchase option will lapse at a rate determined by the administrator. Options and stock purchase rights granted under the 2001 Plan are generally not transferable by the optionee, and each option and stock purchase right is exercisable during the lifetime of the optionee only by the optionee. Options granted under the 2001 Plan must generally be exercised within three months after the end of the optionee's status as an employee, director or consultant, or within one year after the optionee's termination by disability or death, respectively, but in no event later than the expiration of the option's term. The 2001 Plan provides that upon any changes in our capitalization the number of shares subject to each option and stock purchase right and the shares reserved under the 2001 Plan, as well as the per share exercise price of outstanding options will be adjusted appropriately by the 2001 Plan administrator. In the event any dividend or other distribution (whether in the form of cash, our common stock, other securities, or other property), recapitalization, reclassification, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, liquidation, dissolution, or sale, transfer, exchange or other disposition of all or substantially all of our assets, or exchange of our common stock or other securities, issuance of warrants or other rights to purchase our common stock or other securities, or other similar corporate transaction or event, the 2001 Plan administrator may provide for the purchase of any option or restricted stock; may provide that outstanding options become fully vested; may provide that options and restricted stock be assumed by the successor or survivor corporation, or a parent or subsidiary thereof, or be substituted for by similar options, rights or awards covering the stock of the successor or survivor corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares and prices; or may adjust the number and type of shares subject to outstanding options, and the terms, conditions of and criteria included in, outstanding options or restricted stock; and may provide that upon the consummation of such event, outstanding options will become fully vested and then terminate. The 2001 Plan also provides that without regard to the discretionary actions described above, in the event of a change of control of our company, including our merger with or into another entity, if outstanding options, stock purchase rights and shares of restricted stock are not assumed or substituted for 51 56 by the successor entity, the option, stock purchase right and restricted stock shall automatically become fully vested prior to the change of control, and will then terminate. Employee Stock Purchase Plan. Our 2001 Employee Stock Purchase Plan was adopted by our Board of Directors in and was approved by our stockholders in . A total of shares of common stock may be sold under the Purchase Plan, plus an annual increase to be added on each anniversary of the Purchase Plan's adoption during the term of the Purchase Plan equal to the lesser of shares or % of the outstanding shares on such date or a lesser amount determined by our Board of Directors. As of the date of this prospectus, no shares have been issued under the Purchase Plan. The Purchase Plan, which is intended to qualify under Section 423 of the Internal Revenue Code, contains consecutive offer periods that are generally 24 months in duration. The offer periods start on and ends on the last day of of each year, except for the first offer period, which will commence on the date immediately preceding the first date on which a share of common stock is traded on an exchange or quoted on Nasdaq or a successor quotation system and end on . Each offer period is comprised of four consecutive six-month purchase periods. Employees are eligible to participate if they are customarily employed by us or any participating subsidiary for at least twenty hours per week. However, no employee may be granted a right to purchase stock under the Purchase Plan (1) to the extent that, immediately after the grant of the right to purchase stock, the employee would own, or be treated as owning, stock possessing 5% or more of the total combined voting power or value of all classes of our capital stock or (2) to the extent that his or her rights to purchase stock under all of our employee stock purchase plans accrues at a rate which exceed $25,000 worth of stock for each calendar year. The Purchase Plan permits participants to purchase common stock through payroll deductions of up to 20% of the participant's base compensation. Base compensation is defined as the participant's total compensation which he or she receives on each payday as compensation for services to our company. The maximum number of shares a participant may purchase with respect to a single purchase period is shares. Amounts deducted and accumulated by the participant are used to purchase shares of common stock at the end of each purchase period. The price of stock purchased under the purchase plan is 85% of the lesser of the fair market value of the common stock (1) the first day of the purchase period or (2) the last day of the purchase period. Participants may end their participation at any time and they will be paid their payroll deductions without interest to date. Participation ends automatically upon termination of employment with our company. Rights to purchase stock granted under the Purchase Plan are not transferable by a participant other than by will, the laws of descent and distribution, or as otherwise provided under the Purchase Plan. The Purchase Plan provides that, in the event of a merger of our company with or into another corporation or a sale of substantially all of our assets, each outstanding right to purchase stock may be assumed or substituted for by the successor corporation. Our Board of Directors has the authority to amend or terminate the Purchase Plan. However, no action by our Board may adversely affect any outstanding rights to purchase stock under the Purchase Plan, except that our Board may terminate an offer period on any exercise date if our Board determines that the termination of the Purchase Plan is in the best interests of diaDexus and our stockholders. Unless sooner terminated by our Board of Directors, the Purchase Plan will terminate on the tenth anniversary of its adoption. 401(k) PLAN In January 1998, we adopted a retirement savings and investment plan, or 401(k) plan, covering our eligible full-time employees located in the United States. The 401(k) plan is intended to qualify under Section 401(k) of the Internal Revenue Code of 1986, as amended, so that contributions to the 401(k) plan by employees are not taxable to employees until withdrawn from the 401(k) plan. Pursuant to the 401(k) plan, participating employees may elect to reduce their current compensation by up to the lesser of 15% of their annual compensation or the statutorily prescribed annual limit ($10,500 in 2000), and to have the amount of the reduction contributed to the 401(k) plan. The 401(k) plan permits discretionary 52 57 company matching and profit sharing contributions by our company. To date, we have not made any contributions to the 401(k) plan on behalf of any of our employees. LIMITATION OF LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS Following the completion of this offering, provisions in our restated certificate of incorporation and restated bylaws will limit or eliminate the personal liability of our directors for a breach of their fiduciary duty of care as a director. The duty of care generally requires that, when acting on behalf of the corporation, directors exercise an informed business judgment based on all material information reasonably available to them. Consequently, a director will not be personally liable to us or our stockholders for monetary damages or breach of fiduciary duty as a director, except for liability for: - any breach of the director's duty of loyalty to us or our stockholders; - any act or omission not in good faith or that involve intentional misconduct or a knowing violation of law; - any act related to unlawful stock repurchases, redemptions or other distributions or payment of dividends; or - any transaction from which the director derived an improper personal benefit. These limitations of liability do not affect the availability of equitable remedies such as injunctive relief or rescission. Our certificate of incorporation also authorizes us to indemnify our officers, directors and other agents to the full extent permitted under Delaware law. Following the completion of this offering, our restated bylaws will provide that: - we are required to indemnify our directors and officers to the fullest extent permitted by the Delaware General Corporation Law, subject to limited exceptions; - we may indemnify our other employees to the same; - we are required to advance expenses, as incurred, to our directors and officers in connection with a legal proceeding to the fullest extent permitted by the Delaware General Corporation Law, subject to limited exceptions; and - the rights provided in our bylaws are not exclusive. We have entered, and intend to continue to enter, into separate indemnification agreements with each of our directors and officers which in certain respects are broader than the specific indemnification provisions contained in the Delaware General Corporation Law. These indemnification agreements require us, among other things, to indemnify our officers and directors against liabilities that may arise by reason of their status or service as directors or officers. These indemnification agreements also require us to advance any expenses incurred by the directors or officers as a result of any proceeding against them as to which they could be indemnified and to obtain directors' and officers' insurance if available on reasonable terms. At present, there is no pending litigation or proceeding involving any of our directors, officers, employees or agents in which indemnification by us is sought, nor are we aware of any threatened litigation or proceeding that may result in a claim for indemnification. We intend to purchase a policy of directors' and officers' liability insurance that insures our directors and officers against the cost of defense, settlement or payment of a judgment in some circumstances. 53 58 CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS Since our inception, there has not been, nor is there currently planned, any transaction or series of similar transactions to which we were or are a party in which the amount involved exceeds $60,000 and in which any director, executive officer or holder of more than 5% of our capital stock or any member of their respective immediate families had or will have a direct or indirect material interest other than agreements which are described under the caption "Management" and the transactions described below. CERTAIN TRANSACTIONS On September 2, 1997, we entered into a Master Strategic Relationship Agreement with Incyte and SmithKline Beecham. Under this agreement, SmithKline Beecham Corporation and Incyte contributed cash in the amounts of $15.0 million and $10.0 million, respectively, and other property to form diaDexus, LLC, our predecessor limited liability company. Under this agreement, we issued 4,400,000 units of diaDexus LLC, the predecessor to our company, to each of SmithKline Beecham and Incyte at a price per unit of $3.41 and $2.27, respectively. Each of SmithKline Beecham's units was converted to one share of Series A Preferred Stock and each of Incyte's units was converted to one share of Series B Preferred Stock upon our conversion from a limited liability company to a Delaware corporation immediately prior to the closing of our Series C Preferred Stock offering in April 2000. We entered into a Collaboration and License Agreement with SmithKline Beecham Corporation, SmithKline Beecham plc and Incyte on September 2, 1997 and amendments to the agreement on February 17, 2000 and March 30, 2000. Pursuant to the Collaboration and License Agreement, among other things, each of SmithKline Beecham Corporation and SmithKline Beecham plc granted to us an exclusive sublicenseable license under certain of its patents and know-how with respect to genes and gene products for use as diagnostics through September 2, 2001. We pay no milestones, royalties or other payments under the Collaboration and License Agreement but we are obligated to pay pass-through royalties to Human Genome Sciences, Inc. on sales of products derived from the use of genes discovered by Human Genome Sciences. In this agreement we committed to expend $5.0 million for gene sequencing and microarray services from Incyte (including services obtained under the GEM Services Agreement described below). To date, we have spent approximately $4.6 million. On July 28, 1999, we entered into an amendment to the Collaboration and License Agreement with SmithKline Beecham Corporation, SmithKline Beecham plc, Incyte and Quest Diagnostics Incorporated. This amendment transferred to Quest certain of our rights that we had previously granted to SmithKline Beecham Clinical Laboratories, which was formerly owned by SmithKline Beecham and is now owned by Quest. Pursuant to this amendment, we granted to Quest a first right to license our clinical diagnostic tests before FDA approval is obtained. These rights continue in effect until September 2, 2005. On December 11, 1997 SmithKline Beecham Corporation assigned to us its rights and obligations under the lease agreement for our company offices in Santa Clara County. On September 28, 1998, we entered into a Service Agreement with SmithKline Beecham. Under this agreement, SmithKline Beecham provided us personnel support to identify diagnostic leads and research for a period of one year. In exchange, we paid SmithKline Beecham a total of $200,000. We entered into a GEM Services Agreement with Incyte on November 1, 1998, and an Amendment to the GEM Services Agreement on September 1, 1999, pursuant to which we obtain gene preparation and expression services for generating gene expression information and data from Incyte. The GEM Services Agreement expired on November 1, 2000. On February 10, 1999, we entered into a License Agreement with SmithKline Beecham Clinical Laboratories, Inc. Pursuant to the License Agreement, we granted to SmithKline Beecham Clinical Laboratories an exclusive right and license to make, use and sell as a homebrew a prostate cancer test. In exchange, we received a license fee of $100,000, and we have the right to receive fixed royalties on future sales of homebrews. On July 28, 1999, this agreement was assigned to Quest Diagnostics. This agreement 54 59 is effective until February 10, 2004 unless terminated earlier in accordance with the terms of the agreement, and Quest may extend this agreement for three additional periods of one year each. On March 31, 1999, we repaid to SmithKline Beecham $2.2 million for certain leasehold improvements originally paid by them upon our formation. On July 28, 1999, we entered into a bridge loan with each of SmithKline Beecham and Incyte. Each bridge loan required us to repay an aggregate principal amount of $2.5 million (or $5.0 million total), together with interest on the unpaid balance from July 28, 1999 until April 28, 2000 unless earlier converted into shares of Series C Preferred Stock. On April 6, 2000, SmithKline Beecham converted the bridge loan into 322,580 shares of Series C Preferred Stock and we paid accrued interest of approximately $97,000. We concurrently repaid Incyte's bridge loan in full. In December 1999, we entered into a LifeArray Software License Agreement with Incyte. Under this agreement, we use computer software from Incyte for the processing and analysis of microarray expression data for a period of 12 months, which we can extend for an additional 12 month term. The licensing fee for the use of the software is $75,000 per year. On February 17, 2000, we entered into a Collaborative Agreement with Incyte to retroactively replace and expand our rights that existed in two prior, now expired, collaborative agreements that were both entered into on September 2, 1997. Pursuant to this Collaborative Agreement, we have access to Incyte's human database, LifeSeq Gold and microbial database, PathoSeq, at no subscription cost until September 2, 2003. As with other database subscribers, this Collaborative Agreement grants us non-exclusive access to database products and database patents for research, the diagnostic field of use, and the pharmaceutical field of use. We have an option to exclusively license certain Incyte patents in the pharmaceutical field of use. We pay Incyte milestones and royalties on the sale of diagnostic and therapeutic products. On April 6, 2000, we sold 13,225,807 shares of our Series C Preferred Stock for $7.75 per share to 77 accredited investors who were not affiliated with our company. Such investors, as well as our founders SmithKline Beecham and Incyte, were granted registration rights with respect to their shares of preferred stock. See "Description of Capital Stock -- Registration Rights." Entities affiliated with American Express, BA Venture Partners, Moore Capital, Brookside Capital Partners and Rho Management respectively acquired 2,387,096, 1,548,387, 1,419,354, 967,741 and 903,225 Series C shares, each of which positions constituted more than five percent of the total Series C shares issued. We have entered into indemnification agreements with certain of our officers and directors containing provisions which may require us to, among other things, indemnify our officers and directors against certain liabilities that may arise by reason of their status or service as officers or directors and to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified. For a description of limitations of liability and certain indemnification arrangements with respect to our directors and officers, see "Management -- Limitation of Liability and Indemnification of Officers and Directors." 55 60 PRINCIPAL STOCKHOLDERS The following table presents information concerning the beneficial ownership of the shares of our common stock as of September 30, 2000, by: - each person we know to be the beneficial owner of 5% of more of our outstanding shares of common stock; - each of our named executive officers; - each of our directors; and - all of our executive officers and directors as a group. Beneficial ownership is determined under the rules of the SEC and generally includes voting or investment power over securities. Except in cases where community property laws apply or as indicated in the footnotes to this table, we believe that each stockholder identified in the table possesses sole voting and investment power over all shares of common stock shown as beneficially owned by the stockholder. Percentage of beneficial ownership is based on 22,233,049 shares of common stock outstanding as of September 30, 2000, and shares of common stock outstanding after the completion of this offering. The information set forth in the table gives effect to the automatic conversion of all outstanding shares of preferred stock into shares of common stock immediately prior to the completion of this offering. Shares of common stock subject to options that are currently exercisable or exercisable within 60 days of September 30, 2000, are considered outstanding and beneficially owned by the person holding the options for the purpose of computing the percentage ownership of that person but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. Unless indicated below, the address of each individual listed below is c/o diaDexus, Inc., 3303 Octavius Drive, Santa Clara, California 95054.

56 61

--------------- * Less than 1%. (1) Consists solely of options to purchase 215,625 shares of common stock at an average exercise price of $0.68 per share. (2) Consists solely of options to purchase 65,625 shares of common stock at an exercise price of $0.75 per share. (3) Consists solely of options to purchase 40,155 shares of common stock at an average exercise price of $0.62 per share. (4) Consists solely of options to purchase 20,833 shares of common stock at an average exercise price of $0.61 per share. (5) Includes 4,400,100 shares held by Incyte. Dr. Scott is a co-founder and Chairman of the Board of Directors of Incyte and as such may be deemed to share voting and investment power with respect to such shares. Dr. Scott disclaims beneficial ownership of such shares except to the extent of his pecuniary interest in such shares. (6) Consists solely of options to purchase 6,250 shares of common stock at an average exercise price of $0.51 per share. Includes 4,722,680 shares held by SmithKline Beecham Corporation. Mr. Yamada is the Chairman, Research and Development of SmithKline Beecham Pharmaceuticals and as such may be deemed to share voting and investment power with respect to such shares. Mr. Yamada disclaims beneficial ownership of such shares except to the extent of his pecuniary interest in such shares. (7) Includes 1,548,387 shares held by BAVP, L.P. Mr. Bock is a Managing Director of BAVP and as such may be deemed to share voting and investment power with respect to such shares. Mr. Bock disclaims beneficial ownership of such shares except to the extent of his pecuniary interest in such shares. (8) Consists of securities described in notes 1-7 above. (9) Consists of 4,400,000 shares of Series A Preferred Stock, 322,580 shares of Series C Preferred Stock and 100 shares of common stock. (10) Consists of 4,400,000 shares of Series B Preferred Stock and 100 shares of common stock. (11) Consists of 477,419 shares of Series C Preferred Stock held by IDS Life Series Fund, Inc., 795,698 shares of Series C Preferred Stock held by AXP Strategy Series, Inc. and 1,113,979 shares of Series C Preferred Stock held by AXP Variable Portfolio, Inc. (12) Consists of 1,548,387 shares of Series C Preferred Stock held by BAVP, L.P. (13) Consists of 877,419 shares of Series C Preferred Stock held by Moore Global Investment, LTD, 322,581 shares of Series C Preferred Stock held by Remington Investment Strategies, L.P. and 219,354 shares of Series C Preferred Stock held by Moore Global Fixed Income Fund, LTD. 57 62 DESCRIPTION OF CAPITAL STOCK The following is a summary of the rights of our common stock and preferred stock. This summary is not complete. For more detailed information, please see our restated certificate of incorporation which is filed as an exhibit to the registration statement of which this prospectus is a part. Upon the completion of this offering, our authorized capital stock will consist of shares of common stock, $0.01 par value per share, and five million shares of preferred stock, $0.01 par value per share. COMMON STOCK As of September 30, 2000, and assuming the conversion of all outstanding preferred stock into common stock immediately prior to the completion of this offering, there were 22,233,049 shares of common stock outstanding held by 77 stockholders and options outstanding to purchase 2,287,250 shares of common stock under our 2000 Equity Incentive Plan and other warrants outstanding to purchase 129,032 shares of common stock. Dividend Rights. Subject to preferences that may apply to shares of preferred stock outstanding at the time, the holders of outstanding shares of common stock are entitled to receive dividends out of assets legally available at the times and in the amounts as our board of directors may from time to time determine. Voting Rights. Each common stockholder is entitled to one vote for each share of common stock held on all matters submitted to a vote of stockholders. Cumulative voting for the election of directors is not provided for in our restated certificate of incorporation, which means that the holders of a majority of the shares voted can elect all of the directors then standing for election. No Preemptive or Similar Rights. Our common stock is not entitled to preemptive rights and is not subject to conversion or redemption. Right to Receive Liquidation Distributions. Upon our liquidation, dissolution or winding-up, the assets legally available for distribution to our stockholders are distributable ratably among the holders of our common stock and any participating preferred stock outstanding at that time after payment of liquidation preferences, if any, on any outstanding preferred stock and payment of other claims of creditors. Each outstanding share of common stock is, and all shares of common stock to be outstanding upon completion of this offering will be, fully paid and nonassessable. PREFERRED STOCK Immediately prior to the completion of this offering, each outstanding share of our preferred stock outstanding will be converted into one share of common stock. Following the offering, we will be authorized, subject to the limits imposed by the Delaware General Corporation Law, to issue five million shares of preferred stock in one or more series, to establish from time to time the number of shares to be included in each series, to fix the rights, preferences and privileges of the shares of each wholly unissued series and any of its qualifications, limitations, restrictions. Our board of directors can also increase or decrease the number of shares of any series, but not below the number of shares of that series then outstanding, without any further vote or action by our stockholders. Our board of directors may authorize the issuance of preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of our common stockholders. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of delaying, deferring or preventing our change in control and may cause the market price of our common stock to decline or impair the voting and other rights of the holders of our common stock. We have no current plans to issue any shares of preferred stock. 58 63 WARRANTS In connection with our sale of Series C Preferred Stock in April 2000, we issued a warrant to Prudential Securities Incorporated in June 2000 to purchase 129,032 shares of Series C Preferred Stock at an exercise price per share of $7.75. This warrant may be exercised at any time prior to June 1, 2005. After the offering, this warrant will automatically convert to a warrant to purchase common stock. REGISTRATION RIGHTS The holders of approximately 22,025,807 shares of preferred stock have the right to require us to register their shares with the Securities and Exchange Commission so that those shares may be publicly resold or to include their shares in any registration statement we file. Demand Registration Rights. At any time six months after the closing of this offering the holders of at least 40% of the shares having registration rights have the right to demand that we file a registration statement so long as the aggregate amount of securities to be sold under the registration statement exceeds $7.5 million. If we are eligible to file a registration statement on Form S-3, the holders of at least 500,000 shares having registration rights have the right to demand that we file a registration statement on Form S-3. Piggyback Registration Rights. If we register any securities for public sale, stockholders with registration rights will have the right to include their shares in the registration statement. The underwriters of any underwritten offering will have the right to limit the number of shares having registration rights to be included in the registration statement, but not below 30% of the total number of shares included in the registration statement, except for this offering in which the underwriters have excluded any sales by existing investors. Expenses of Registration. We will all pay expenses relating to any demand or piggyback registration. However, we will not pay for the expenses of any demand registration if the request is subsequently withdrawn by the holders of a majority of the shares having registration rights, subject to very limited exceptions. Expiration of Registration Rights. The registration rights described above will expire five years after this offering is completed. The registration rights will terminate earlier for a particular stockholder if that holder, following this offering, holds less than 1% of our common stock and such holder can resell all of its securities in a three-month period under Rule 144 of the Securities Act. ANTITAKEOVER EFFECTS OF DELAWARE LAW AND PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS Delaware Takeover Statute We are subject to Section 203 of the Delaware General Corporation Law. This statute regulating corporate takeovers prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for three years following the date that the stockholder became an "interested stockholder," unless: - prior to the date of the transaction, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder; - the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding (a) shares owned by persons who are directors and also officers, and (b) shares owned by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or 59 64 - on or subsequent to the date of the transaction, the business combination is approved by the board and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the interested stockholder. Section 203 defines a "business combination" to include: - any merger or consolidation involving the corporation and the interested stockholder; - any sale, transfer, pledge or other disposition involving the interested stockholder of 10% or more of the assets of the corporation; - subject to exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; or - the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by the entity or person. Certificate of Incorporation and Bylaw Provisions Provisions of our certificate of incorporation and bylaws which will become effective upon the closing of this offering may have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of our company. These provisions could cause the price of our common stock to decrease. Some of these provisions allow us to issue preferred stock without any vote or further action by the stockholders, eliminate the right of stockholders to act by written consent without a meeting and eliminate cumulative voting in the election of directors. These provisions may make it more difficult for stockholders to take specific corporate actions and could have the effect of delaying or preventing a change in our control. The amendment of any of these provisions would require approval by holders of at least two-thirds of the outstanding common stock. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for our common stock is 60 65 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no public market for our common stock, and there can be no assurance that a significant public market for our common stock will develop or be sustained after this offering. Future sales of substantial amounts of common stock, including shares issued upon exercise of outstanding options and warrants, in the public market following this offering could adversely affect market prices prevailing from time to time and could impair our ability to raise capital through the sale of our equity securities. Furthermore, since no shares will be available for sale shortly after this offering because of contractual and legal restrictions on resale described below, sales of substantial amounts of our common stock in the public market after the restrictions lapse could adversely affect the prevailing market price and our ability to raise equity capital in the future. Upon completion of this offering, we will have outstanding shares of common stock, assuming no exercise of the over-allotment options and no exercises of outstanding options or warrants. Of these shares, all the shares sold in this offering, plus any shares issued upon exercise of the underwriters' over-allotment option, will be freely tradable without restriction or further registration under the Securities Act, unless purchased by our "affiliates" as that term is defined in Rule 144 under the Securities Act. The remaining shares of common stock outstanding are "restricted securities" within the meaning of Rule 144 under the Securities Act. Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144, 144(k) or 701 promulgated under the Securities Act, which are summarized below. As a result of contractual restrictions described below and the provisions of Rules 144 and 701, the restricted shares will be available for sale in the public market as follows: - shares will become eligible for sale upon expiration of the lock-up agreements described below, beginning 180 days after the date of this prospectus; - shares will be eligible for sale upon exercise of vested options 180 days after the date of this prospectus; and - shares will be eligible for sale pursuant to Rule 144 beginning one year after the date of this prospectus. LOCK-UP AGREEMENTS Our directors, officers and stockholders have entered into lock-up agreements with the underwriters of this offering generally providing that they will not offer, sell, contract to sell or grant any option to purchase or otherwise dispose of our shares of common stock or any securities exercisable for or convertible into our common stock owned by them prior to this offering for a period of 180 days after the effective date of the registration statement filed pursuant to this offering without the prior written consent of Lehman Brothers Inc. RULE 144 In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person who has beneficially owned restricted shares for at least one year, including the holding period of any prior owner except an affiliate, would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: - 1% of the number of shares of common stock then outstanding, which will equal approximately shares immediately after this offering; or - the average weekly trading volume of our common stock during the four calendar weeks preceding the filing of a Form 144 with respect to such sale. Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about us. Under Rule 144(k), a person who is not 61 66 deemed to have been an affiliate of us at any time during the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, including the holding period of any prior owner except an affiliate, is entitled to sell such shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Rule 701, as currently in effect, permits resales of shares in reliance upon Rule 144 but without compliance with certain restrictions, including the holding period requirement, of Rule 144. Any of our employees, officers, directors, or consultant who purchased shares under a written compensatory plan or contract may be entitled to rely on the resale provisions of Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. Rule 701 further provides that non-affiliates may sell such shares in reliance on Rule 144 without having to comply with the holding period, public information, volume limitation or notice provisions of Rule 144. All holders of Rule 701 shares are required to wait until 90 days after the date of this prospectus before selling such shares. However, all Rule 701 shares are subject to lock-up agreements and will only become eligible for sale at the earlier of the expiration of the 180-day lock-up agreements or no sooner than 90 days after the offering upon obtaining the prior written consent of Lehman Brothers Inc. STOCK OPTIONS Within 90 days following the effectiveness of this offering, we intend to file a registration statement on Form S-8 registering approximately shares of common stock subject to outstanding options or reserved for future issuance under our 2000 Equity Incentive Plan, our 2001 Equity Incentive Plan and our 2001 Employee Stock Purchase Plan, based on shares and options outstanding as of September 30, 2000. As of September 30, 2000, options to purchase a total of 2,287,250 shares were outstanding and 2,195,708 additional shares were reserved for future issuance under our 2000 Equity Incentive Plan. Upon the filing of the registration statement on Form S-8, common stock issued upon exercise of outstanding options which are not subject to our right of repurchase or which are issued under our Purchase Plan, other than common stock issued to our affiliates, will be available for immediate resale in the open market. Also beginning six months after the date of this offering, holders of approximately 22,025,807 restricted shares will be entitled to certain registration rights. See "Description of Capital Stock -- Registration Rights" for more information regarding these rights. Registration of such shares under the Securities Act would result in such shares becoming freely tradable without restriction under the Securities Act, except for shares purchased by affiliates, immediately upon the effectiveness of such registration. 62 67 UNITED STATES TAX CONSEQUENCES TO NON-U.S. HOLDERS The following summary of the material United States federal income and estate tax consequences of the purchase, ownership and disposition of our common stock by non-U.S. holders is based upon the provisions of the Internal Revenue Code of 1986, as amended, or the "Code," the United States Treasury regulations, and rulings and judicial decisions issued with respect thereto, all of which are subject to change, possibly with retroactive effect, or possible differing interpretations. Any such change or different interpretation could affect the continuing validity of this summary. A non-U.S. holder is a holder of common stock that is not, for United States federal income tax purposes, any of the following: - a citizen or resident of the United States; - a corporation, partnership or other entity created or organized in or under the laws of the United States or any of its political subdivisions; - an estate, the income of which is subject to United States federal income taxation regardless of its source; or - a trust (a) whose administration is subject to the primary supervision of a United States court and which has one or more United States persons who have the authority to control all substantial decisions of the trust, or (b) which was in existence on August 20, 1996 and has properly elected to continue to be received as a United States person. This summary does not discuss all aspects of United States federal taxation that may be important to a particular non-U.S. holder in light of specific facts and circumstances relevant to that holder and may not apply to non-U.S. holders subject to special treatment under applicable United States federal tax law, including, without limitation, "controlled foreign corporations," "passive foreign investment companies," "foreign personal holding companies" or certain United States expatriates. In addition, this discussion does not address the treatment of any non-U.S. holders under the laws of any state, local, foreign or other taxing jurisdiction. EACH PROSPECTIVE HOLDER IS URGED TO CONSULT ITS TAX ADVISOR WITH RESPECT TO THE UNITED STATES FEDERAL INCOME AND ESTATE TAX CONSEQUENCES OF ACQUIRING, HOLDING AND DISPOSING OF OUR COMMON STOCK, AS WELL AS ANY TAX CONSEQUENCES THAT MAY ARISE UNDER THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING JURISDICTION. DIVIDENDS If you are a non-U.S. holder of our common stock, dividends paid to you will generally be subject to withholding of United States federal income tax at a 30% rate or a lower rate as may be specified by an applicable income tax treaty. Under currently effective United States Treasury regulations, for purposes of determining if dividends are subject to the 30% withholding tax, dividends paid to an address in a foreign country are presumed to be paid to a resident of that country, unless the person making the payment has knowledge to the contrary. Under current interpretations of United States Treasury regulations, this presumption also applies for purposes of determining whether a lower withholding rate applies under an income tax treaty. Under United States Treasury regulations that will generally apply to dividends paid after December 31, 2000, or the "Final Withholding Regulations," a non-U.S. holder must satisfy certification requirements in order to claim the benefit of a lower treaty rate. In addition, if the non-U.S. holder is a partner in a foreign partnership, the holder, as well as the foreign partnership, must satisfy the certification requirements, and the partnership must provide certain information, including a taxpayer identification number. A look through rule will apply in the case of tiered partnerships. A non-U.S. holder of common stock that is eligible for a reduced rate of United States withholding tax under a tax treaty may obtain a refund of any excess amounts currently withheld by filing an appropriate claim for refund with the United States Internal Revenue Service. 63 68 If the dividends are "effectively connected" with a non-U.S. holder's conduct of a trade or business within the United States, and, if an income tax treaty applies, are attributable to a United States permanent establishment of the non-U.S. holder in the United States, then dividends paid to a non-U.S. holder will generally not be subject to withholding tax, provided that the non-U.S. holder complies with applicable certification and disclosure requirements. Instead, the "effectively connected" dividends will be subject to United States federal income tax in the same manner as dividends paid to United States citizens, resident aliens and domestic United States corporations. Any effectively connected dividends received by a corporate non-U.S. holder may also, under certain circumstances, be subject to an additional "branch profits tax" at a 30% rate or a lower rate as may be specified by an applicable income tax treaty. GAIN ON DISPOSITION OF COMMON STOCK A non-U.S. holder generally will not be required to pay United States federal income tax with respect to gain recognized on a sale or other disposition of common stock unless one of the following conditions is satisfied: - the gain is effectively connected with the conduct of a trade or business in the United States, and, if an income tax treaty applies, is attributable to a permanent establishment maintained in the United States by the non-U.S. holder; - in the case of a non-U.S. holder who is an individual and holds the common stock as a capital asset, the holder is present in the United States for 183 or more days in the taxable year of the sale or other disposition and certain other conditions exist; - we are or have been a "United States real property holding corporation" for United States federal income tax purposes; or - the non-U.S. holder is required to pay tax under certain provisions of the Code applicable to United States expatriates. Individual non-U.S. holders described in the first bullet point above will be required to pay tax on the net gain derived from the sale of our common stock at the regular graduated United States federal income tax rates. Individual non-U.S. holders described in the second bullet point above will be subject to a 30% tax on the gain derived from the sale or other disposition of our common stock, which may be offset by United States source capital losses (even though the non-U.S. holder is not considered a resident of the United States). Amounts received by corporate non-U.S. holders described in the first bullet point above may also, under certain circumstances, be subject to an additional "branch profits tax" at a 30% rate or a lower rate as may be specified by an applicable income tax treaty. We believe we are not currently, and do not anticipate becoming, a "United States real property holding corporation" for United States federal income tax purposes. If we were to become a "United States real property holding corporation," gain recognized by a non-U.S. holder would not be subject to United States tax if the non-U.S. holder were eligible for a treaty exemption or if the shares were considered to be "regularly traded on an established securities market," and the non-U.S. holder did not hold, directly or indirectly, at any time during the shorter of the periods described above, more than 5% of our common stock. FEDERAL ESTATE TAX CONSEQUENCES Common stock held by an individual non-U.S. holder at the time of death will be included in the holder's gross estate for United States federal estate tax purposes, and may be subject to United States federal estate tax, unless an applicable estate tax treaty provides otherwise. INFORMATION REPORTING AND BACKUP WITHHOLDING We must report annually to the United States Internal Revenue Service and to each non-U.S. holder the amount of dividends paid to, and the tax withheld with respect to, any holder, regardless of whether 64 69 any tax was actually withheld. This information may also be made available to the tax authorities in the non-U.S. holder's country of residence. Under current law, United States information reporting requirements, other than reporting of dividend payments for purposes of the withholding tax noted above, and backup withholding tax generally will not apply to dividends paid to non-U.S. holders that are either subject to the 30% withholding discussed above or that are not subject to withholding because an applicable tax treaty reduces or eliminates the withholding. Otherwise, backup withholding of United States federal income tax at a rate of 31% may apply to dividends paid with respect to common stock to holders that are not "exempt recipients" and that fail to provide certain information including the holder's United States taxpayer identification number. Under current law, unless the payor of dividends has actual knowledge that the payee is a United States person, the payor generally may treat dividend payments to a payee with a foreign address as exempt from information reporting and backup withholding. However, under the Final Withholding Regulations, dividend payments made after December 31, 2000 generally will be subject to information reporting and backup withholding unless applicable certification requirements are satisfied. See the discussion above with respect to the rules applicable to foreign partnerships under the Final Withholding Regulations. In general, United States information reporting and backup withholding requirements also will not apply to the payment of disposition proceeds where the transaction is effected through an office outside the United States of a non-United States broker. However, United States information reporting, but not backup withholding, will apply to a payment of sales proceeds, even if made outside the United States, through an office of a broker that is (i) a United States person, (ii) a foreign person that derives 50% or more of its gross income for certain periods from the conduct of a trade or business in the United States, (iii) a "controlled foreign corporation" for United States federal income tax purposes, or, (iv) in the case of payments made after December 31, 2000, a foreign partnership with certain connections to the United States, unless the broker has documentary evidence in its records that the holder or beneficial owner is a non-U.S. person and that certain conditions are met, or the holder or beneficial owner otherwise establishes an exemption. Payment of the proceeds of the sale of common stock to or through a United States office of a broker is currently subject to both United States backup withholding and information reporting unless the holder certifies its non-U.S. holder status under penalties of perjury or otherwise establishes an exemption. Backup withholding is not an additional tax. Amounts withheld under the backup withholding rules are generally allowable as a refund or credit against a non-U-S. holder's federal income tax liability, if any, provided that the required information is furnished to the Internal Revenue Service. 65 70 UNDERWRITING Under the underwriting agreement, which is filed as an exhibit to the registration statement relating to this prospectus, the underwriters named below, for whom Lehman Brothers Inc., CIBC World Markets Corp., Prudential Securities Incorporated and Fidelity Capital Markets, a division of National Financial Services, LLC, are acting as representatives, have each agreed to purchase from us, the respective number of shares of common stock shown opposite its name below:

This is a firm commitment underwriting. This means that the underwriters have agreed to purchase all of the shares offered by this prospectus, other than those covered by the over-allotment option described below, if any are purchased. Under the underwriting agreement, if an underwriter defaults in its commitment to purchase shares, the commitments of non-defaulting underwriters may be increased or the underwriting agreement may be terminated, depending on the circumstances. We plan to apply for quotation of our common stock on the NASDAQ National Market under the symbol "DDXS." COMMISSIONS AND EXPENSES The representatives of the underwriters have advised us that the underwriters propose to offer the common stock directly to the public at the public offering price on the cover page of this prospectus, and to selected dealers, who may include the underwriters, at the public offering price less a selling concession not in excess of $ per share. The underwriters may allow, and the selected dealers may reallow, a concession not in excess of $ per share to brokers and dealers. After the completion of this offering, the underwriters may change the offering price and other selling terms. The following table summarizes the underwriting discounts and commissions we will pay to the underwriters. These amounts are shown assuming both no exercise and full exercise of the underwriters' over-allotment option to purchase additional shares. The underwriting discounts and commissions are equal to the public offer price per share, less the amount paid to us per share.

66 71 We estimate that the total expenses of the offering, including registration, filing and listing fees, printing fees and legal and accounting expenses, but excluding underwriting discounts and commissions, will be approximately $ million. OVER-ALLOTMENT OPTION We have granted to the underwriters an option to purchase up to an aggregate of shares of common stock, exercisable solely to cover over-allotments, if any, at the public offering price less the underwriting discounts and commissions shown on the cover page of this prospectus. The underwriters may exercise this option at any time until 30 days after the date of this prospectus. To the extent the underwriters exercise this option, each underwriter will be committed, so long as the conditions of the underwriting agreement are satisfied, to purchase a number of additional shares proportionate to that underwriter's initial commitment as indicated in the preceding table. LOCK-UP AGREEMENTS We, our directors, officers and other stockholders holding % of securities have agreed not, directly or indirectly, to offer for sale, sell, pledge, or otherwise dispose of any common stock or any securities which may be converted into or exchanged for any common stock for a period of 180 days from the date of this prospectus without the prior written consent of Lehman Brothers Inc. However, shares acquired in the open market or in the directed share program described below will not be subject to the lock-up agreements, nor will transfers to immediate family members who agree to be bound by the lock-up agreements. Lehman Brothers Inc., in its sole discretion, may release the shares subject to the lock-up agreements in whole or in part at any time with or without notice. However, Lehman Brothers Inc. has informed us that it has no current plan to do so. OFFERING PRICE DETERMINATION Prior to this offering, there has been no public market for our common stock. The initial public offering price will be negotiated between the representatives and us. In determining the initial public offering price of our common stock, the representatives will consider: - prevailing market conditions; - our historical performance and capital structure; - estimates of our business potential and earnings prospects; - an overall assessment of our management; and - the consideration of these factors in relation to market valuation of companies in related businesses. INDEMNIFICATION We have agreed to indemnify the underwriters against liabilities relating to this offering, including liabilities under the Securities Act and liabilities arising from breaches of the representations and warranties contained in the underwriting agreement, and to contribute to payments that the underwriters may be required to make for these liabilities. STABILIZATION, SHORT POSITIONS AND PENALTY BIDS The representatives may engage in over-allotment, stabilizing transactions, syndicate covering transactions, and penalty bids or purchases for the purpose of pegging, fixing or maintaining the price of the common stock, in accordance with Regulation M under the Securities Exchange Act. - Over-allotment involves syndicate sales in excess of the offering size, which creates a syndicate short position. 67 72 - Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specific maximum. - Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed. - Penalty bids permit the representatives to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a syndicate covering transaction to cover syndicate short positions. The underwriters may purchase and sell shares of common stock in the open market. These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering. "Covered" short sales are sales made in an amount not greater than the underwriters' option to purchase additional shares from the issuer in the offering. The underwriters may close out any covered short position by either exercising their option to purchase additional shares or purchasing shares in the open market. In determining the source of shares to close out the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through-the over-allotment option. "Naked" short sales are any sales in excess of such option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market after pricing that could adversely affect investors who purchase in the offering. Stabilizing transactions consist of various bids for or purchases of common stock made by the underwriters in the open market prior to the completion of the offering. Similar to other purchase transactions, the underwriters' purchases to cover the syndicate short sales may-have the effect of raising or maintaining the market price of the common stock or preventing or retarding a decline in the market price of the common stock. As a result, the price of the common stock may be higher than the price that might otherwise exist in the open market. Neither we nor any of the underwriters make any representation or prediction concerning the direction or magnitude of any effect that the transactions described above may have on the price of our common stock. In addition, neither we nor any of the underwriters make any representation that the representatives will engage in these transactions or that any such transaction, once commenced, will not be discontinued without notice. OTHER MATTERS Prudential Securities Incorporated, one of the representatives of the underwriters of this public offering, acted as a placement agent in connection with our sale of Series C Preferred Stock in April 2000, for which they were paid customary fees, together with the grant of a warrant to purchase 129,032 shares of Series C Preferred Stock. In addition, employees of Prudential Securities purchased 29,121 of Series C Preferred Stock. DISTRIBUTION Lehman Brothers Inc. and CIBC World Markets Corp. intend to distribute and deliver this prospectus only by hand or mail and intend to use only printed prospectuses. Fidelity Capital Markets, a division of National Financial Services LLC, is acting as an underwriter of this offering and will be facilitating electronic distribution through the Internet. One of the representatives, Prudential Securities Incorporated, also markets online through its PrudentialSecurities.com division. Clients of Prudential Advisor(SM) may view offering terms and a prospectus online and place orders through their financial advisors. Other than the prospectus in electronic format, the information on this website is not intended to be part of this prospectus or the registration statement of which this prospectus forms a part, has not been approved or endorsed by us or any underwriter in such capacity and should not be relied on by prospective investors. 68 73 STAMP TAXES Purchasers of the shares of our common stock offered by this prospectus may be required to pay stamp taxes and other charges under the laws and practices of the country of purchase, in addition of the offering price listed on the cover of this prospectus. OFFER AND SALES IN CANADA Any offers in Canada will be made only under an exception from the requirements to file a prospectus in each relevant province of Canada where a sale is made. DIRECTED SHARE PROGRAM At our request, Lehman Brothers Inc. has reserved up to shares, or 5% of our common stock offered by this prospectus, for sale under a directed share program to our officers, directors, employees and to our business associates. All of the persons purchasing the reserved shares must commit to purchase no later than the close of business on the day following the date of this prospectus. The number of shares available for sale to the general public will be reduced to the extent these persons purchase the reserved shares. Shares committed to be purchased by directed share participants which are not so purchased will be reallocated for sale to the general public in the offering. All sales of shares pursuant to the directed share program will be made at the initial public offering price set forth on the cover page of this prospectus. SALES TO DISCRETIONARY ACCOUNTS The underwriters have informed us that they do not intend to confirm sales to discretionary accounts that exceed 5% of the total number of shares of our common stock offered by them. 69 74 LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Latham & Watkins, Menlo Park, California. Various legal matters relating to the offering will be passed upon for the underwriters by Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., Boston, Massachusetts. Latham & Watkins and certain of its partners and employees beneficially own 50,000 shares of our common stock and 16,772 shares of our preferred stock, all of which will convert to common stock immediately prior to the completion of this offering. EXPERTS The financial statements as of December 31, 1998, 1999 and September 30, 2000 and for the period from August 29, 1997 (date of inception) to December 31, 1997 and for the two years ended December 31, 1998 and 1999 and for the nine month period ended September 30, 2000 and for the cumulative period from August 29, 1997 (date of inception) to September 30, 2000, included in this prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditings and accounting. WHERE YOU CAN FIND MORE INFORMATION We have filed with the SEC a registration statement on Form S-1 under the Securities Act that registers the shares of common stock to be sold in this offering. The registration statement, including the attached exhibits and schedules, contain additional relevant information about us and our capital stock. The rules and regulations of the SEC allow us to omit various information included in the registration statement from this document. In addition, upon completion of this offering, we will become subject to the reporting and information requirements of the Exchange Act and, as a result, will file periodic reports, proxy statements and other information with the SEC. You may read and copy this information at the public reference room of the SEC at 450 Fifth Street, N.W., Room 1024, Washington, DC 20549. You also obtain copies of this information by mail from the public reference section of the SEC, 450 Fifth St., N.W. Room 1024, Washington, DC 20549, at prescribed rates. The SEC also maintains an internet website that contains reports, proxy statements and other information about issuers, like us who file electronically with the SEC. The address of that website is www.sec.gov. We intend to furnish our stockholders with annual reports containing audited financial statements, and make available to our stockholders quarterly reports for the first three quarters of each fiscal year containing unaudited interim financial information. 70 75 DIADEXUS, INC. (A DEVELOPMENT STAGE COMPANY) INDEX TO FINANCIAL STATEMENTS

F-1 76 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of diaDexus, Inc. The two new stock benefit plans described in Note 8 to the financial statements have not been adopted as of November 20, 2000. When they are adopted by the Board of Directors, we will be in a position to furnish the following report: "In our opinion, the accompanying balance sheets and the related statements of operations, of members' and stockholders' equity and of cash flows present fairly, in all material respects, the financial position of diaDexus, Inc. (a development stage company) at December 31, 1998, 1999 and September 30, 2000, and the results of its operations and its cash flows for the period from August 29, 1997 (date of inception) to December 31, 1997 and for the two years ended December 31, 1998 and 1999, and for the nine months ended September 30, 2000 and for the cumulative period from August 29, 1997 (date of inception) to September 30, 2000, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion." /s/ PRICEWATERHOUSECOOPERS LLP San Jose, California November 20, 2000, except as to Note 8 which is as of December , 2000 F-2 77 DIADEXUS, INC. (A DEVELOPMENT STAGE COMPANY) BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

The accompanying notes are an integral part of these financial statements. F-3 78 DIADEXUS, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)

The accompanying notes are an integral part of these financial statements. F-4 79 DIADEXUS, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF MEMBERS' AND STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)

The accompanying notes are an integral part of these financial statements. F-5 80 DIADEXUS, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CASH FLOWS (IN THOUSANDS)

The accompanying notes are an integral part of these financial statements. F-6 81 DIADEXUS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS NOTE 1 -- THE COMPANY: diaDexus, Inc., (the "Company"), was founded as a Delaware limited liability company in August 1997 by SmithKline Beecham Corporation ("SmithKline Beecham") and Incyte Genomics, Inc.("Incyte") (together, the "Members"). On April 4, 2000, the Company was converted to a Delaware corporation (see Note 2). The Company focuses on translating raw genomics data into novel diagnostic and therapeutic products. Since its formation in 1997, the initial strategy of the Company has been to discover molecular targets and develop novel diagnostic products for the improved detection, classification and prognosis of diseases. The Company recently expanded its strategy to include therapeutic discovery and development. Where possible, the Company seeks to develop diagnostic and therapeutic products that are directed at the same molecular target, enabling a diagnostic/therapeutic tandem approach to detect and treat disease. The Company expects to extend its discovery platform beyond the initial focus on cancer into other diagnostic and therapeutic areas. NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: UNAUDITED INTERIM RESULTS The accompanying statements of operations and cash flows for the nine months ended September 30, 1999 are unaudited. The unaudited interim financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company's results of operations and cash flows for the nine months ended September 30, 1999. The financial data and other information disclosed in these notes to the financial statements related to this period are unaudited. The results of operations for any interim period are not necessarily indicative of the results of operations for the full year. INITIAL PUBLIC OFFERING In November 2000, the Board of Directors authorized management of the Company to file a registration statement with the Securities and Exchange Commission permitting the Company to sell shares of its common stock to the public. UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY If the Company's initial public offering is completed under the terms presently anticipated, all of the convertible preferred stock outstanding will automatically convert into common stock. Unaudited pro forma stockholders' equity at September 30, 2000, as adjusted for the assumed conversion of preferred stock, is set forth on the accompanying balance sheets. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of income and expenses during the reporting period. Actual results could differ from those estimates. F-7 82 DIADEXUS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) CONCENTRATION OF CREDIT RISK AND OTHER RISKS AND UNCERTAINTIES The Company's financial instruments that are subject to concentration of credit risk consist primarily of cash and cash equivalents and marketable securities. The Company's policy is to place its cash and cash equivalents and marketable securities with high credit quality financial institutions in order to limit the amount of credit exposure. The Company has not experienced any losses to date. The Company's future products may require approval from the U.S. Food and Drug Administration ("FDA") and may require approval from certain international regulatory agencies prior to commencing commercial sales. There can be no assurance that the Company's products will receive any of these required approvals. If the Company was denied such approvals or such approvals were delayed, it would have a material adverse impact on the Company's results of operations. The Company is subject to risks common to companies in the biotechnology industry including, but not limited to, new technological innovations, dependence on key personnel, protection of proprietary technology, compliance with government regulations, uncertainty of market acceptance of products, product liability and the need to obtain additional financing. SmithKline Beecham accounted for 100% of revenues during the year ended December 31, 1999. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with original maturities of less than 90 days to be cash equivalents. Investments with maturities of less than one year from the balance sheet date and with original maturities greater than 90 days are considered short-term investments. Investments consist primarily of money market accounts, commercial paper, certificates of deposit and other short-term instruments. These investments typically bear minimal risk. This minimization of risk is consistent with the Company's policy to maintain high liquidity and ensure safety of principal. INVESTMENTS The Company's short-term and long-term investments are classified as available-for-sale. Available-for-sale securities are carried at fair value based on quoted market prices, with the unrealized gains and losses included in accumulated other comprehensive income within stockholders' equity. The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest and other income. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are also included in interest and other income. Interest and dividends on securities classified as available-for-sale are included in interest and other income. The cost of securities sold is based on the specific identification method. The amortized cost and fair value of securities, with gross unrealized gains and losses, were as follows (in thousands):

F-8 83 DIADEXUS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) The fair value of available-for-sale debt securities by contractual maturity at September 30, 2000 was as follows (in thousands): Within 1 year............................................... $39,134 Greater than 1 year less than 5 years....................... 23,320 ------- $62,454 =======

PROPERTY AND EQUIPMENT Property and equipment are recorded at cost and depreciated over their estimated useful lives using the straight-line method. Assets contributed by the Members during 1997 were recorded at amounts equal to the Members' net carrying value. Laboratory equipment, computers, software, and office furniture are depreciated over three years. Leasehold improvements are recorded at cost and amortized over the term of the non-cancelable lease or their useful life, whichever is shorter. Maintenance and repairs are expensed as incurred. IMPAIRMENT OF LONG-LIVED ASSETS The Company reviews long-lived assets for impairment whenever events or circumstances suggest that the carrying amount of those assets may not be fully recoverable or that the estimated useful life of those assets has changed significantly. When expected future undiscounted cash flows that are expected to be generated by an asset are less than its carrying amount, then an impairment loss is recognized, and the asset is written down to its estimated fair value. REVENUE RECOGNITION The amount received during 1999 from SmithKline Beecham under a non-refundable license arrangement was recognized when earned and no remaining performance obligation existed. Any amounts received in advance of completing the earnings process are recorded as deferred revenue. RESEARCH AND DEVELOPMENT The Company recognizes research and development expense as incurred. INCOME TAXES From the Company's inception through April 4, 2000, no provision or benefit for federal or state income taxes was recorded in the financial statements as the Company was a limited liability company and, therefore, was taxed as a partnership. Rather, the federal and state income tax effects of the Company's results of operations were recorded by the Members in their respective income tax returns. On April 4, 2000, in connection with completing the Series C preferred stock financing, the Company became subject to the C corporation provisions of the Internal Revenue Code. Accordingly, any earnings after this date will be taxed at federal and state corporate income tax rates. Current income tax expense (benefit) is the amount of income taxes expected to be payable (refundable) for the current year. A deferred income tax asset or liability is computed for the expected future impact of the differences between the financial reporting and tax bases of assets and liabilities as well as the expected future tax benefit to be derived from tax loss and tax credit carryforwards. Deferred income tax expense (benefit) is generally the net change during the year in the deferred income tax assets or liability. A valuation allowance is established when necessary to reduce deferred tax assets to the amount more likely than not to be realized in future tax returns. F-9 84 DIADEXUS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) STOCK-BASED COMPENSATION The Company accounts for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25") and Financial Accounting Standards Board Interpretation No. 28, "Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans" ("FIN No. 28") and complies with the pro forma disclosure provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). Under APB No. 25, compensation expense is based on the difference, if any, on the date of the grant, between the estimated fair value of the Company's common stock and the exercise price. SFAS No. 123 defines a "fair value" based method of accounting for employee stock options. Pro forma disclosures of the difference between compensation expense included in net loss and the related cost measured by the fair value method are presented (see Note 5). The Company accounts for stock issued to non-employees in accordance with the provisions of SFAS No. 123 and Emerging Issue Task Force No. 96-18, "Accounting for Equity Instruments that are issued Other Than Employees for Acquiring or in Conjunction with Selling, Goods and Services" ("EITF No. 96-18"). COMPREHENSIVE INCOME (LOSS) The Company accounts for comprehensive income in accordance with Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for reporting and displaying comprehensive income (loss) and its components. Comprehensive income (loss) refers to revenues, expenses, gains and losses that under generally accepted accounting principles are included in comprehensive income (loss) but excluded from net income (loss). NET LOSS PER SHARE The Company computes basic net loss per share by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted net loss per share is computed using the weighted-average number of shares of common stock outstanding and, when dilutive, potential common shares from options and warrants to purchase common stock using the treasury stock method and from convertible securities using the if-converted method. These potential common shares are antidilutive for all periods presented and, therefore, have been excluded from the calculation of diluted net loss per share. The following potentially dilutive common shares were excluded from the calculation of diluted net loss per share because their effect was antidilutive (in thousands):

F-10 85 DIADEXUS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) PRO FORMA NET LOSS PER SHARE (UNAUDITED) Pro forma basic and diluted net loss per share is calculated using the weighted average number of shares of common stock outstanding, including convertible preferred shares (using the if-converted method) that will automatically convert to shares of Common Stock immediately prior to completion of the initial public offering, as if they had been converted on January 1, 1999 or the original date of issuance if later. Potentially dilutive common shares derived from stock options and warrants were excluded from this calculation because their effect was antidilutive. The following table sets forth the calculation of basic and diluted pro forma net loss per share (in thousands, except per share data):

RECENT ACCOUNTING PRONOUNCEMENT In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes new standards of accounting and reporting for derivative instruments and hedging activities. SFAS No. 133 requires that all derivatives be recognized at fair value in the statement of financial position, and that the corresponding gains or losses be reported either in the statement of operations or as a component of comprehensive income (loss), depending on the type of hedge transaction. The Company, to date, has not engaged in derivative or hedging activities. The Company will adopt SFAS No. 133, as required, in fiscal year 2001. NOTE 3 -- BALANCE SHEET COMPONENTS Property and equipment consist of the following (in thousands):

F-11 86 DIADEXUS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) Accrued liabilities consist of the following (in thousands):

NOTE 4 -- COMMITMENTS AND CONTINGENCIES The Company has an operating lease for laboratory and office facilities in Santa Clara, California through September 30, 2002. The lease has a renewal option. Minimum future lease payments under the non-cancelable lease as of September 30, 2000 are as follows (in thousands):

Rent expense was $310,000, $825,000 and $838,000, and $606,000 for the period from August 29, 1997 (inception) through December 1997, the years ended December 31, 1998 and 1999, and for the nine months ended September 30, 2000, respectively. A security deposit of $67,000 relating to our facility lease was paid by SmithKline Beecham and is included in due to related parties in the accompanying balance sheets. The Company has subleased a portion of its leased office facilities under a non-cancelable lease agreement since 1998. Rental income for the years ended December 31, 1998 and 1999 and for the nine months ended September 30, 2000 was $117,000, $202,000 and $242,000, respectively. In September 1997, the Company entered into a $5,000,000 agreement with Incyte for microarray services and products and future sequencing services. At September 30, 2000, the Company is committed under the agreement to pay Incyte approximately $402,000 through February 2001. The Company entered into a collaboration agreement with the University of Pittsburgh Medical Center effective October 1, 2000 to analyze RNA expression in human cancer tissues. Under this agreement, the University of Pittsburgh Medical Center will perform RNA expression analysis on human cancer and corresponding non-malignant tissues to establish genotypic classifications. The Company will pay the University of Pittsburgh Medical Center approximately $1,200,000 over the three year term of this agreement. The Company entered into a one-year agreement with Agilent Technologies, Inc. in August 2000 for early access to Agilent's DNA microarray technology. Under the terms of the agreement, diaDexus will purchase a number of custom in-situ microarrays at a cost of approximately $405,000. The Company has entered into employment agreements with certain key executive officers. Such agreements provide for severance payments and, in one case, provide for accelerated vesting following a change in control of the Company. F-12 87 DIADEXUS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 5 -- MEMBERS' AND STOCKHOLDERS' EQUITY: PREFERRED UNITS AND STOCK In September 1997, the Company issued 4,400,000 Series A Preferred units, no par value, to SmithKline Beecham, at $3.41 per unit. At the time these units were issued, the Company received an initial capital contribution of $4,000,000 in cash and assets and a contractual commitment for additional cash contributions of $7,000,000 and $4,000,000 which were received on April 15, 1998 and July 15, 1998, respectively. Upon conversion of the Company from a limited liability company into a C corporation, the Series A Preferred units were converted into Series A Preferred Stock on a one-to-one basis. The Series A Preferred Stock converts automatically to Common Stock upon completion of an initial public offering by the Company that results in net proceeds of at least $20,000,000 and an offering price of at least $10.00 per share. In September 1997, the Company also issued 4,400,000 Series B Preferred units, no par value, to Incyte at $2.27 per share. At the time these units were issued, the Company received an initial capital contribution of $4,000,000 in cash and a contractual commitment for additional cash contributions of $2,000,000 and $4,000,000 which were received on April 15, 1998 and July 15, 1998, respectively. Upon conversion of the Company from a limited liability company into a C corporation, the Series B Preferred units were converted into Series B Preferred Stock on a one-to-one basis. The Series B Preferred Stock converts automatically to Common Stock upon completion of an initial public offering by the Company that results in net proceeds of at least $20,000,000 and an offering price of at least $10.00 per share. In April 2000, the Company issued 13,225,807 shares of Series C Preferred Stock, $0.01 par value, at $7.75 per share. Net proceeds were approximately $92,678,000 after cash offering expenses of $7,322,000. The Series C Preferred Stock converts automatically to Common Stock upon completion of an initial public offering by the Company that results in net proceeds of at least $20,000,000 and an offering price of at least $10.00 per share. In connection with the sale of Series C Preferred Stock, the Company issued a warrant in June 2000 to purchase 129,032 shares of Series C Preferred Stock at $7.75 per share to the placement agent. The Series C Preferred Stock warrant converts automatically to a Common Stock warrant upon completion of an initial public offering by the Company that results in net proceeds of at least $20 million and an offering price of at least $10.00 per share. The warrant becomes exercisable in 2005. The Company valued this warrant using the Black-Scholes option pricing model with the following assumptions: expected life of five years; risk free interest rate of 6.23%; expected dividend yield of zero, and volatility of 85%. The fair value of the warrant of $846,367 is included in the carrying value of the Series C Preferred Stock. At September 30, 2000, the Company has reserved 22,154,839 shares of Common Stock for future issuance upon the conversion of the Preferred Stock. DIVIDENDS In the event dividends are paid on any share of Common Stock, an additional dividend must be paid with respect to all outstanding shares of Preferred Stock in an amount per share (on an as-if-converted basis) equal to the amount paid or set aside for each share of Common Stock whenever funds are legally available. Such dividends are payable when, as and if declared by the Board of Directors. No dividends accrue unless declared by the Board of Directors. As of September 30, 2000, no dividends had been declared. F-13 88 DIADEXUS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) LIQUIDATION PREFERENCE In the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary, holders of the Series A, Series B and Series C Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets to the holders of the Common Stock, an amount per share equal to $3.41 for each outstanding share of Series A Preferred Stock, $2.27 for each outstanding share of Series B Preferred Stock and $7.75 for each outstanding share of Series C Preferred Stock plus any declared but unpaid dividends on such share of Series A, Series B or Series C Preferred Stock. If upon the occurrence of such an event, the assets and funds thus distributed among the holders of the Preferred Stock shall be insufficient to permit the payment to such holders of the full aforesaid preferential amounts, then, the entire assets and funds of the Company legally available for distribution shall be distributed ratably among the holders of the Series A, Series B and Series C Preferred Stock in proportion to the aggregate liquidation preference of such stock owned by each such holder. Upon completion of the distributions described above, all of the remaining assets of the Company available for distribution to stockholders shall be distributed among the holders of Common Stock pro rata based on the number of shares of Common Stock held by each. VOTING RIGHTS Holders of Series A, Series B and Series C Preferred Stock are entitled to one vote for each share of Common Stock into which such shares can be converted. The holders of the outstanding shares of Series A and Series B Preferred Stock, voting as separate classes, are each entitled to elect one member to the Company's Board of Directors and the holders of the outstanding shares of Series C Preferred Stock, voting as a separate class, are entitled to elect two members to the Company's Board of Directors. Any remaining board members will be elected by the holders of Common Stock and the holders of Preferred Stock voting together as a single class. REGISTRATION RIGHTS The holders of the Company's Preferred Stock have the right to require the Company to register their shares with the Securities and Exchange Commission so that those shares may be publicly resold or to include their shares in any registration statement we file. CONVERSION RIGHTS Shares of Series A, Series B and Series C Preferred Stock are convertible into shares of Common Stock at the option of the holder, or automatically upon completing a public offering of at least $20,000,000 of Common Stock at an offering price of at least $10.00 per share, upon the written consent of the holders of at least 80% of the then outstanding shares of Series A, Series B and Series C Preferred Stock voting together as a single class on an as-if-converted basis. The conversion rate is one share of Common Stock for one share of Preferred Stock (subject to certain adjustments). STOCK OPTION PLANS In January 1998, the Company's Board of Directors adopted the 1997 Incentive Plan ("1997 Plan") under which 1,200,000 shares of the Company's Common Units ("Units") were reserved for issuance to employees and consultants of the Company. During 1999, the Company increased the number of Units reserved for future issuance by 1,000,000. Options granted under the 1997 Plan are for terms not to exceed ten years. If the option is granted to an individual who, at the time of grant, owns a membership interest in the Company representing more than 10% of the voting power of all classes of membership interest of F-14 89 DIADEXUS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) the Company or any parent or subsidiary, the exercise price of the option must be at least 110% of the estimated fair value of the Units at the date of grant. Exercise prices of options granted to all other persons must be at least 85% of the estimated fair value of the Units at the date of grant. Options under the 1997 Plan generally vest over four years. The 1997 Plan expires in 2008. In April 2000, all of the Units granted under the 1997 Plan were converted into options to acquire shares of Common Stock under the 2000 Equity Incentive Plan ("2000 Plan"). The 2000 Plan provides for the issuance of options to purchase up to 2,200,000 shares of the Company's Common Stock. The Board of Directors has the authority to determine to whom options will be granted, the number of shares, the term and exercise price (which cannot be less than the estimated fair value at date of grant for incentive stock options or 85% of fair market value for nonstatutory stock options). Historically, estimated fair value has been determined by the Board of Directors. If an employee owns stock representing more than 10% of the outstanding shares, the price of each share shall be at least 110% of estimated fair value. Options generally vest ratably over four years and expire within ten years of the date of the grant. In June 2000, the Company reserved an additional 2,500,000 shares of Common Stock under the 2000 Plan. Stock option activity under the Company's plans is as follows:

F-15 90 DIADEXUS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) The following summarizes information about stock options outstanding at September 30, 2000:

The weighted average grant date fair value of options granted during the years ended December 31, 1998 and 1999, and the nine months ended September 30, 2000, was $0.07, $0.14 and $6.06, respectively. Had compensation cost for the Company's stock options been calculated based upon the fair value at the date of grant, the Company's net loss and net loss per share would have increased to the pro forma amounts shown in the table that follows:

The fair value of each option grant is estimated at the grant date using the minimum value method, assuming an expected option term of four years, no dividend yield, and risk-free interest rates of 4.43% to 5.54%, 5.11% to 5.86%and 5.86% to 6.20% for the years ended December 31, 1998 and 1999, and for the nine months ended September 30, 2000, respectively. DEFERRED STOCK COMPENSATION In the nine months ended September 30, 2000, the Company recorded $8,170,000 of deferred stock compensation in accordance with APB No. 25, SFAS No. 123 and EITF Issue No. 98-16 from the grant of stock options to employees, directors and consultants. The difference between exercise price of the option granted and the estimated fair value of common stock on the grant date is recognized as deferred stock compensation. Stock compensation expense is being recognized over the vesting period of the related options in accordance with FIN No. 28. Total stock compensation expense for the nine months ended September 30, 2000 was $2,977,000. F-16 91 DIADEXUS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) 401(K) SAVINGS PLAN In January 1998, the Company has established a qualified savings plan for employees under Section 401(k) (the "401(k) Plan") of the Internal Revenue Service Code, in which employees may defer as much as 15% of their pretax annual salary up to the statutory limits. The 401(k) Plan permits discretionary matching and profit sharing contributions to be made by the Company. As of September 30, 2000, the Company has not made any contributions to the 401(k) Plan. NOTE 6 -- INCOME TAXES: On April 5, 2000, the Company became subject to the C corporation provisions of the Internal Revenue Code. No provision or benefit for income taxes has been recognized since April 5, 2000 as the Company has incurred net operating losses. The significant components of deferred tax assets and liabilities are as follows (in thousands):

The Company has provided a full valuation allowance for its deferred tax assets at September 30, 2000 due to the uncertainty surrounding the future realization of such assets. At September 30, 2000, the Company had state and federal net operating loss carryforwards of $1,827,000 which expire in 2005 and 2020, respectively, and federal and state research tax credit carryforwards of $269,000 which expire in 2020. Utilization of federal and state net operating loss and tax credit carryforwards may be subject to an annual limitation due to the "change in ownership" provisions of the Internal Revenue Code. NOTE 7 -- RELATED PARTY TRANSACTIONS: In connection with forming the Company, SmithKline Beecham, Incyte and the Company entered into several agreements during September 1997, including an Operating Agreement (the "Operating Agreement") and a Master Strategic Relationship Agreement (the "Master Agreement"). The Operating Agreement served as the Company's by-laws while the Master Agreement documents certain specific matters regarding the operation of the Company. During September 1997, the Company issued 4,400,000 shares of Series A Preferred units to SmithKline Beecham in exchange for an initial capital contribution of $4,000,000 in cash and assets and a contractual commitment for additional cash contributions of $11,000,000, which was received in two installments on April 15 and July 15, 1998. Concurrently, the Company issued 4,400,000 shares of Series B Preferred units to Incyte in exchange for an initial capital contribution of $4,000,000 in cash and a contractual commitment for additional cash contributions of $6,000,000, which was received in two installments on April 15 and July 15, 1998. F-17 92 DIADEXUS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) In addition to the above contributions, SmithKline Beecham has granted the Company various exclusive and non-exclusive rights to develop certain diagnostic tests using genes identified by SmithKline Beecham, including genes identified by SmithKline Beecham from their collaboration with Human Genome Sciences, Inc., until June 2001. SmithKline Beecham has also granted the Company an exclusive license for a number of diagnostic tests that are in late stage clinical validation. Incyte has provided the Company with non-exclusive access to certain of its gene sequence and expression databases for various exclusive and non-exclusive rights to diagnostic and therapeutic applications until September 2003. The Company will pay royalties to Incyte and Human Genome Sciences on the sale, if any, of certain products developed using their respective proprietary databases. These non-cash assets received as capital contributions from SmithKline Beecham and Incyte were recorded at zero value of which was equal to the carrying value of such assets by SmithKline Beecham and Incyte. The Operating Agreement specified that the limited liability company would merge into a C corporation at the earliest of (i) the eighteen month anniversary of the Company's formation (March 1999); (ii) any time after January 1, 1999, if the Company's cash balance falls below $2,000,000, or (iii) the mutual agreement of SmithKline Beecham and Incyte. Pursuant to the Operating Agreement, the conversion of the Company into a C corporation was deferred until completion of the Series C Preferred Stock financing in April 2000. Pursuant to an Intercompany Services Agreement, SmithKline Beecham and Incyte provided the Company with certain legal, financial and research and development services. Charges to the Company for these services were based upon either actual costs or rates charged to other customers for similar services. Such amounts, which were charged to research and development, were $0 and $86,000 in 1999 and 1998, respectively. The Company incurred similar costs from Incyte, which were charged to research and development, of $72,000 and $1,928,000 during the years ended December 31, 1998 and 1999, respectively. In February 1999, the Company entered into a license agreement with SmithKline Beecham Clinical Laboratories, Inc. Following the terms and conditions of this agreement, the Company received a non-refundable license fee of $100,000, which was recognized as revenue in 1999. In July 1999, the Company issued two convertible notes payable in the amount of $2,500,000 each to SmithKline Beecham and Incyte. The notes were due and payable in April 2000, accruing interest at 5.6% per annum. Upon closing the Series C financing, the note to SmithKline Beecham was converted to 322,580 shares of Series C Preferred Stock. Additionally, the Company paid interest of $97,000 on the note to SmithKline Beecham and paid Incyte principal of $2,500,000 and accrued interest of $97,000. In December 1999, the Company entered into a LifeArray Software License Agreement with Incyte. Under this agreement, the Company has access to computer software from Incyte for the processing and analysis of microarray expression data for a period of 12 months, with the option to extend for an additional 12 month term. The license fee for the use of the software is $75,000 per year. NOTE 8 -- SUBSEQUENT EVENTS: EMPLOYEE STOCK PURCHASE PLAN The Company's Board of Directors adopted, subject to stockholder approval, the 2000 Employee Stock Purchase Plan (the "2000 ESPP") on December , 2000. The Board has recommended that a total of 500,000 shares should be reserved for issuance under the 2000 ESPP. F-18 93 DIADEXUS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2001 EQUITY INCENTIVE PLAN The Company's Board of Directors adopted, subject to stockholder approval, the 2001 Equity Incentive Plan (the "2001 Plan") on December , 2000 as a successor equity plan to the 2000 Plan. Under the 2001 Plan, a total of shares of common stock have been reserved for issuance, including shares that remained reserved for issuance under the 2000 Plan. STOCK OPTIONS Subsequent to September 30, 2000, the Company granted options to purchase 814,813 shares of Common Stock at $1.80 per share. These grants will result in deferred stock compensation of approximately $8,311,000 which will be recognized over the vesting periods. F-19 94 LOGO Shares [LOGO] Common Stock --------------------------- PROSPECTUS , 2001 --------------------------- LEHMAN BROTHERS CIBC WORLD MARKETS PRUDENTIAL VECTOR HEALTHCARE A UNIT OF PRUDENTIAL SECURITIES FIDELITY CAPITAL MARKETS 95 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth all costs and expenses, other than the underwriting discounts and commissions, payable by the Registrant in connection with the sale and distribution of the common stock being registered. All amounts shown are estimates except for the Securities and Exchange Commission registration fee, the NASD filing fee and the Nasdaq National Market application fee. Securities and Exchange Commission registration fee......... $26,400 NASD filing fee............................................. 10,500 Nasdaq National Market listing fee.......................... * Blue sky qualification fees and expenses.................... 12,500 Printing and engraving expenses............................. * Legal fees and expenses..................................... * Accounting fees and expenses................................ * Director and officer liability insurance.................... * Transfer agent and registrar fees........................... * Miscellaneous expenses...................................... * ------- Total............................................. $ * =======

--------------- * To be completed by amendment. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Our Certificate of Incorporation in effect as of the date hereof, and our Restated Certificate of Incorporation to be in effect upon the closing of this offering (collectively, the "Certificate") provide that, except to the extent prohibited by the Delaware General Corporation Law, as amended (the "DGCL"), the Registrant's directors shall not be personally liable to the Registrant or its stockholders for monetary damages for any breach of fiduciary duty as directors of the Registrant. Under the DGCL, the directors have a fiduciary duty to the Registrant which is not eliminated by this provision of the Certificate and, in appropriate circumstances, equitable remedies such as injunctive or other forms of nonmonetary relief will remain available. In addition, each director will continue to be subject to liability under the DGCL for breach of the director's duty of loyalty to the Registrant, for acts or omissions which are found by a court of competent jurisdiction to be not in good faith or involving intentional misconduct, for knowing violations of law, for actions leading to improper personal benefit to the director, and for payment of dividends or approval of stock repurchases or redemptions that are prohibited by the DGCL. This provision also does not affect the directors' responsibilities under any other laws, such as the federal securities laws. The Registrant may obtain liability insurance for its officers and directors. Section 145 of the DGCL empowers a corporation to indemnify its directors and officers and to purchase insurance with respect to liability arising out of their capacity or status as directors and officers, provided that this provision shall not eliminate or limit the liability of a director: (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) arising under Section 174 of the DGCL or (iv) for any transaction from which the director derived an improper personal benefit. The DGCL provides further that the indemnification permitted thereunder shall not be deemed exclusive of any other rights to which the directors and officers may be entitled under the corporation's bylaws, any agreement, a vote of stockholders or otherwise. The Certificate eliminates the personal liability of directors to the fullest extent permitted by Section 102(b)(7) of the DGCL and provides that the Registrant may fully indemnify any person who was or is a party or is threatened to be made a party to any threatened, II-1 96 pending or completed action, suit or proceeding (whether civil, criminal, administrative or investigative) by reason of the fact that such person is or was a director or officer of the Registrant, or is or was serving at the request of the Registrant as a director or officer of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses (including attorney's fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. (a) Since our inception in August 1997, we have issued and sold the following unregistered securities: (1) In September 1997, we issued 4,400,000 units of diaDexus LLC, the predecessor to our company, to each of SmithKline Beecham and Incyte at a price per unit of $3.41 and $2.27 respectively. Each of SmithKline Beecham's units was converted into one share of Series A Preferred Stock and each of Incyte's units was converted into one share of Series B Preferred Stock upon our conversion from a limited liability company to a Delaware corporation immediately prior to the closing of our Series C Preferred Stock offering in April 2000. Also in connection with our incorporation, each of SmithKline Beecham and Incyte received 100 shares of our common stock. (2) In April 2000, we issued and sold 13,225,807 shares of Series C Preferred Stock to 79 investors for an aggregate consideration of $102,500,004. (3) In June 2000, we issued a warrant to Prudential Securities Incorporated to purchase 129,032 shares of Series C Preferred Stock at an exercise price per share of $7.75. (4) In November 2000, we issued and sold 50,000 shares of restricted common stock to our firm of outside counsel for an aggregate consideration of $60,000. These shares vest over a two-year period. (5) Since our inception and as of September 30, 2000, we have granted options to purchase 3,176,583 shares of common stock to employees, directors and consultants under our 2000 Equity Incentive Plan at exercise prices ranging from $0.35 to $1.30 per share. Of the options granted, 2,287,250 remain outstanding, 207,042 shares of common stock have been purchased pursuant to exercises of stock options and 682,291 shares have been cancelled and returned to the 2000 Equity Incentive Plan as of September 30, 2000. The issuances of securities in the transactions described above were deemed exempt from registration under the Securities Act in reliance on Section 4(2), Regulation D or Rule 701 promulgated thereunder as transactions pursuant to compensatory benefit plans and contracts relating to compensation. The recipients of securities in each such transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and other instruments issued in such transactions. All recipients either received adequate information about us or had access, through employment or other relationships, to such information. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (A) EXHIBITS.

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II-3 98

--------------- * To be filed by amendment. + Registrant has requested confidential treatment pursuant to Rule 406 for a portion of the referenced exhibit and has separately filed such exhibit with the Commission. II-4 99 (b) FINANCIAL STATEMENT SCHEDULES. Not applicable. Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. ITEM 17. UNDERTAKINGS The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification by the Registrant for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions referenced in Item 14 of this Registration Statement or otherwise, the Registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act, and is therefore unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective; and (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at the time shall be deemed to be the initial bona fide offering thereof. II-5 100 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Santa Clara, State of California, on November 20, 2000. DIADEXUS, INC. By: /s/ PATRICK PLEWMAN ------------------------------------ Name: Patrick Plewman Title: Chief Executive Officer, President and Chief Operating Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Patrick Plewman and Sharon Tetlow, and each of them acting individually, as his or her true and lawful attorneys-in-fact and agents, each with full power of substitution, for him or her in any and all capacities, to sign any and all amendments to this Registration Statement (including post-effective amendments or any abbreviated registration statement and any amendments thereto filed pursuant to Rule 462(b) increasing the number of securities for which registration is sought), and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, with full power of each to act alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully for all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:

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DIADEXUS INC S-1