1



SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



FORM 10-K



(Mark One)

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1996

OR

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from        to



Commission file number: 0-28150

NEUROCRINE BIOSCIENCES, INC.

(Exact name of registrant as specified in its charter)



DELAWARE                                      33-0525145

(State or other jurisdiction                           (I.R.S. Employer

of incorporation or organization)                       Identification Number)



3050 SCIENCE PARK ROAD, SAN DIEGO, CA                       92121

(Address of principal executive office)                     (Zip Code)



Registrant's telephone number, including area code: (619) 658-7600

Securities registered pursuant to Section 12(b) of the Act:  NONE

Securities registered pursuant to Section 12(g) of the Act:  COMMON STOCK,

$0.001 PAR VALUE



Indicate by check mark whether the registrant: (1) has filed all

reports required to be filed by Section 13 or 15(d) of the Securities Exchange

Act of 1934 during the preceding 12 months (or for such shorter period that the

registrant was required to file such reports), and (2) has been subject to such

filing requirements for the past 90 days.

Yes  X   No ____



Indicate by check mark if disclosure of delinquent filers pursuant to

Item 405 of Regulation S-K is not contained herein, and will not be contained,

to the best of the registrant's knowledge, in definitive proxy or information

statements incorporated by reference in Part III of this Form 10-K or any

amendment to this Form 10-K.  X



The aggregate market value of the voting stock of the issuer held by

non-affiliates of the issuer on February 28, 1997 was approximately

$141,041,532, based upon the closing price of such stock on February 28, 1997.

As of February 28, 1997, 16,846,331 shares of Common Stock of the registrant

were outstanding.



DOCUMENTS INCORPORATED BY REFERENCE



Certain information required by Parts I and III of Form 10-K is

incorporated by reference from the Registrant's Proxy Statement for the Annual

Meeting of Shareholders to be held on May 27, 1997 (the "Proxy Statement"),

which will be filed with the Securities and Exchange Commission within 120 days

after the close of the Registrant's fiscal year ended December 31, 1996.

2

PART I



ITEM 1.  BUSINESS



INTRODUCTION



Neurocrine Biosciences, Inc. is a leading neuroimmunology company

focused on the discovery and development of novel therapeutics to treat diseases

and disorders of the central nervous and immune systems. The Company's

neuroscience and immunology disciplines provide a biological understanding of

the molecular interactions between the central nervous, immune and endocrine

systems leading to therapeutic opportunities for diseases and disorders such as

anxiety, depression, Alzheimer's disease, obesity and multiple sclerosis.



Neurocrine is leveraging its resources through strategic alliances and

other financing mechanisms to build its internal product development and

commercialization capabilities. To date, Neurocrine has entered into strategic

alliances with Janssen Pharmaceutica, N.V. ("Janssen"), a subsidiary of Johnson

& Johnson, focused on the treatment of anxiety, depression and substance abuse;

Ciba-Geigy Limited ("Ciba-Geigy") for the treatment of multiple sclerosis; and

Eli Lilly and Co. ("Lilly") for the treatment of central nervous system

disorders including obesity and dementias such as Alzheimer's disease. In

conjunction with a number of institutional investors, the Company has also

established a research and development subsidiary in Canada, Neuroscience Pharma

(NPI) Inc. ("NPI"), to develop additional compounds for the treatment of

Alzheimer's disease and other neurodegenerative diseases and disorders.



The following Business section contains forward-looking statements

concerning the continuation of the Company's strategic alliances and the receipt

of payments thereunder, the anticipated dates of selection of lead compounds for

clinical development, the commencement and successful conclusion of clinical

trials, the receipt of regulatory approvals, and the development of potential

future products. Such forward-looking statements necessarily involve risks and

uncertainties. The Company's actual results could differ materially from those

anticipated in these forward-looking statements as a result of certain factors,

including but not limited to uncertainties regarding the successful continuation

of the Company's collaborative arrangements, the successful completion of

clinical trials, the difficulty of obtaining the required regulatory approvals,

and the failure to achieve product development and commercialization goals.



RISKS INHERENT IN THE COMPANY'S BUSINESS



Neurocrine was founded in 1992 and all of its product candidates are in

research or early stages of development. The Company has not requested nor

received regulatory approval for any product from the FDA or any other

regulatory body. Any products resulting from the Company's research and

development programs are not expected to be commercially available for the

foreseeable future, if at all.



The development of new pharmaceutical products is highly uncertain and

subject to a number of significant risks. Potential products that appear to be

promising at early stages of development may not reach the market for a number

of reasons. Such reasons include the possibilities that the potential products

will be found ineffective or cause harmful side effects during preclinical

testing or clinical trials, fail to receive necessary regulatory approvals, be

difficult to manufacture on a large scale, be uneconomical, fail to achieve

market acceptance or be precluded from commercialization by proprietary rights

of third parties.



The Company's product candidates require significant additional

research and development efforts. No assurance can be given that any of the

Company's development programs will be successfully completed, that any

investigational new drug application ("IND") will be accepted by the FDA, that

clinical trials will commence as planned, that required regulatory approvals

will be obtained on a timely basis, if at all, or that any products for which

approval is obtained will be commercially successful. If any of the Company's

development programs are not successfully completed, required regulatory

approvals are not obtained, or products for which approvals are obtained are not

commercially successful, the Company's business, financial condition and results

of operations would be materially adversely affected.











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BACKGROUND



Corticotropin Releasing Factor ("CRF")



Corticotropin releasing factor, the central regulator of the body's overall

response to stress, affects multiple systems by functioning both as an endocrine

factor and a neurotransmitter. CRF acts as a hormone at the pituitary gland

causing the secretion of the steroid cortisol from the adrenal glands resulting

in a number of metabolic effects, including suppression of the immune system.

CRF also functions as a neurotransmitter in the brain and plays a critical role

in coordinating psychological and behavioral responses to stress such as

increased heart rate, anxiety, arousal and reduced appetite. In addition to

neuroendocrine and neurotransmitter roles, accumulating evidence suggests that

CRF may also integrate actions between the immune and central nervous systems in

response to physiological and psychological stressors.



The body has several mechanisms to regulate the effects of CRF. The

Company's recent cloning of human CRF receptors suggests that the diverse

functions of CRF are mediated through distinct receptor subtypes which are

differentially distributed in specific brain areas and in tissues outside of the

central nervous system. These receptors may offer a mechanism to modulate

specific actions of CRF without affecting the broad range of its activities.

There are several diseases and disorders such as anxiety, depression and

substance abuse in which CRF levels are increased. The deleterious effects of

high levels of CRF may be countered by the administration of selective CRF

receptor antagonists. A protein in the brain that binds to CRF and holds it in

an inactive state, CRF-binding protein ("CRF-BP"), tightly regulates levels of

CRF in certain brain regions. CRF-BP may provide a novel target to selectively

increase levels of CRF in diseases that are associated with decreased levels of

CRF, such as Alzheimer's disease and obesity.



Altered Peptide Ligands



The immune system employs highly specific T-cells that recognize and attack

foreign antigens that invade the body. Occasionally, certain T-cells arise that

inappropriately recognize the body's own tissues as foreign and attack healthy

cells, resulting in autoimmune diseases such as multiple sclerosis and Type I

diabetes. Recently, it has been found that the peptide recognition site on

healthy tissue can be altered, creating molecular decoys that can be developed

as potential drug candidates. The Company believes that these molecules, known

as altered peptide ligands, are capable of binding to and deactivating T-cells

implicated in certain autoimmune diseases.



Multiple sclerosis is a chronic disease caused by the immune system's

attack on myelin, the insulating material that surrounds and protects nerve

fibers in the central nervous system ("CNS"). This autoimmune reaction is led by

T-cells which come in contact with myelin by utilizing T-cell receptors specific

for myelin proteins. This interaction leads to a destructive inflammatory

response mediated by molecules of the immune system known as cytokines.

Cytokines such as gamma interferon, tumor necrosis factor-alpha and

interleukin-6 are found at the site of inflammation and demyelination and play a

role in further advancing nerve cell destruction. The use of altered peptide

ligands of dominant antigens in autoimmune diseases may inactivate certain

T-cells and decrease the production of destructive cytokines.



Neurosteroids



Neurosteroids are a class of steroidal compounds produced in the central

nervous system that show a wide range of effects on neurons.

Dehydroepiandrosterone ("DHEA") is the most abundant adrenal steroid in humans.

Blood levels of this hormone peak by age 20 and then decrease throughout life,

reaching their lowest levels by age 65. DHEA levels have been found to be

decreased in Alzheimer's patients while DHEA has been shown to have

memory-enhancing effects in animal studies. For example, studies have been

performed in aged mice which perform more poorly than young mice in certain

memory tasks. Administration of DHEA in the older animals has been shown to

improve memory to the high levels seen in the younger animals. DHEA has also

been shown to significantly reverse pharmacologically-induced amnesia and memory

impairment in these animals.



In addition to the memory-enhancing effects of DHEA, preliminary data

suggest that this steroid also increases neuronal survival. DHEA may also induce

neuroprotection through inhibition of inflammatory cytokines in the brain which

have recently











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been implicated in neurodegeneration. In view of its cognitive enhancing and

neuroprotective potential, DHEA replacement therapy may be beneficial for the

treatment of neurodegenerative disorders such as Alzheimer's disease.



Neurogenomics



The brain and spinal cord are comprised of two major cell types--glial

cells and neurons. Glial cells are the most prevalent cell type in the central

nervous system, comprising over 75% of all brain cells. The gene products from

these cells are crucial for the survival and development of neurons. Neurons are

CNS cells which transmit and receive complex electrical and chemical messages

from other neurons to control all cognitive processes. In certain pathological

states, excessive glial activity results in the activation of cytosine and

related genes. The proteins encoded by these genes may be implicated in the

degenerative cascade leading to neurological disorders such as Alzheimer's

disease, stroke, multiple sclerosis, Parkinson's disease, epilepsy and AIDS

dementia. For example, in AIDS, the HIV virus does not attack neurons but does

infect glial cells which in turn release inflammatory cytokines and other

factors which are toxic to neurons. Similarly, in Alzheimer's disease,

accumulating evidence suggests complex interactions between neurons, glia and a

protein fragment known as beta amyloid leading to formation of senile plaques

and neurodegeneration. Currently, it is estimated that only a small fraction of

genes involved in neurodegeneration or regeneration have been identified. The

identification of novel CNS genes involved in the neurodegenerative process may

yield new therapeutic and diagnostic opportunities.



BUSINESS STRATEGY



The Company's strategy is to utilize its understanding of the biology of

the central nervous, immune and endocrine systems to identify and develop novel

therapeutics. There are five key elements to the Company's business strategy:



Target Multiple Product Platforms. Neurocrine is focusing on research and

development programs which utilize its distinct biological and technological

competencies. The Company believes certain central nervous system drug targets,

such as CRF, CRF-BP and neurosteroids, represent significant market

opportunities in psychiatric, neurologic and metabolic disorders. Immunological

targets, such as altered peptide ligands, offer product opportunities related to

autoimmune diseases. Neurogenomics allows the Company to combine its

neuroscience and immunology expertise with new drug discovery technologies to

identify novel gene-related product or gene therapy opportunities.



Identify Novel Neuroscience and Immunology Drug Targets for the Development

of Therapeutics Which Address Large Unmet Market Opportunities. Neurocrine

employs molecular biology as an enabling discipline to identify novel drug

targets such as receptors, genes and gene-related products. The Company uses

advanced technologies, including combinatorial chemistry, high-throughput

screening, gene sequencing and bioinformatics, to discover and develop novel

small molecule therapeutics for diseases and disorders of the central nervous

and immune systems including anxiety, depression, Alzheimer's disease, obesity

and multiple sclerosis.



Leverage Strategic Alliances to Enhance Development and Commercialization

Capabilities. Neurocrine intends to leverage the development, regulatory and

commercialization expertise of its corporate partners to accelerate the

development of its potential products, while retaining full or co-promotion

rights in North America. The Company intends to further leverage its resources

by continuing to enter into strategic alliances and novel financing mechanisms

to enhance its internal development and commercialization capabilities. To date,

Neurocrine has entered into a strategic alliance with Janssen focusing on CRF

receptor antagonists to treat anxiety, depression, and substance abuse; with

Ciba-Geigy to develop altered peptide ligands for the treatment of MS; and with

Lilly to collaborate in the discovery, development and commercialization of CRF

binding protein ligand inhibitors for the treatment of central nervous system

disorders including obesity and dementias such as Alzheimer's disease. The

Company has also formed NPI, a research and development subsidiary, to finance

its Neurosteroid and Neurogenomics programs.



Outsource Capital Intensive and Non-Strategic Activities. Neurocrine

intends to focus its resources on research and development activities by

outsourcing its requirements for manufacturing, preclinical testing, and

clinical monitoring activities. The Company utilizes contract current Good

Manufacturing Processes ("cGMP") manufacturing for both its Neurosteroid and

Altered Peptide Ligand programs. Neurocrine believes that the ease of

manufacturing of small molecule therapeutics will allow the Company to focus on

its core discovery and development programs to generate additional product

opportunities.











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Acquire Complementary Products in Clinical Development. Neurocrine plans to

acquire rights to products in various stages of clinical development in the

fields of neurology and immunology to take advantage of the development and

future commercialization capabilities it is developing in cooperation with its

strategic partners. For example, Neurocrine has licensed rights to DHEA for the

treatment of Alzheimer's disease which is currently being evaluated in a

physician investigational new drug application ("physician-IND") Phase II

clinical trial and in a Company-sponsored Phase II/III clinical trial in Canada

under the regulatory authority of the Canadian Health Protection Board ("HPB").



TECHNOLOGY



Neurocrine utilizes advanced technologies to enhance its drug discovery

capabilities and to accelerate the drug development process. These technologies

include:



High-Throughput Screening. Neurocrine has assembled a chemical library of

diverse, low molecular weight organic molecules for lead compound

identification. The Company has implemented robotic screening capabilities

linked to its library of compounds that facilitate the rapid identification of

new drug candidates for multiple drug targets. The Company believes that the

utilization of high-throughput screening and medicinal and peptide chemistry

will enable the rapid identification and optimization of lead molecules.



Combinatorial Chemistry. Neurocrine has developed an automated

combinatorial chemistry technology (Rapid Microscale Synthesis or "RMS") which

is capable of rapidly producing large quantities of highly purified small

organic molecules for evaluation as drug candidates. Unlike other combinatorial

chemistry technologies, RMS enables individual chemists to optimize candidate

compounds quickly and efficiently by producing hundreds of variations of

existing lead molecules. In collaboration with Hewlett-Packard Company ("HP"),

Neurocrine has automated this technology by adapting HP instrumentation with

robotics leading to a flexible, bench top instrument.



Molecular Biology. Neurocrine scientists have utilized novel techniques for

examination of gene expression in a variety of cellular systems. The Company has

developed a sophisticated technique to evaluate the type and quantity of genes

in various cellular systems prior to the isolation of genes. Neurocrine has also

developed unique expression vectors and cell lines that allow for the highly

efficient protein expression of specific genes.



Gene Sequencing. Neurocrine applies integrated automated DNA sequencing and

gene identification technology in its Neurogenomics program. The systems

utilized by Neurocrine allow for extended gene analysis in a rapid,

high-throughput format with independent linkage into a sequence identification

database. Neurocrine has optimized gene sequencing instrumentation for

"differential display," a technique that may facilitate the rapid identification

of novel genes.



Bioinformatics. Neurocrine's Neurogenomics program creates a significant

amount of genetic sequence information. Applied genomics relies on information

management systems to collect, store and rapidly analyze thousands of gene

sequences. Neurocrine has developed a bioinformatics system which the Company

believes will allow it to identify novel genes which are involved in

neurodegeneration. Data are collected by automated instruments and stored and

analyzed by Neurocrine using customized computational tools. To date,

Neurocrine's molecular biologists have identified over 4,500 novel genes.



PRODUCTS UNDER DEVELOPMENT



The following table summarizes Neurocrine's most advanced products in

development. This table is qualified in its entirety by reference to the more

detailed descriptions appearing elsewhere in this Form 10-K.











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<TABLE>

<CAPTION>

PROGRAM                      INDICATION              STATUS (1)               COMMERCIAL RIGHTS

-------                      ----------              ----------               -----------------

<S>                                 <C>                <C>                     <C>

Corticotropin Releasing Factor



Receptor Antagonists                Anxiety                  Preclinical            Janssen/Neurocrine

Depression               Preclinical            Janssen/Neurocrine

Stroke                   Development            Neurocrine

Substance Abuse          Research               Janssen/Neurocrine





Binding Protein Antagonists         Alzheimer's Disease      Development            Lilly/Neurocrine

Obesity                  Development            Lilly/Neurocrine



Altered Peptide Ligands             Multiple Sclerosis       Phase II               Ciba-Geigy/Neurocrine

Type I Diabetes          Research               Neurocrine





Neurosteroids                       Alzheimer's Disease      Physician-IND          Neurocrine/NPI

Phase II;

Phase II/III



Neurogenomics                       Neurodegenerative

Diseases                 Research               Neurocrine/NPI

</TABLE>

- ----------

(1) "Research" indicates identification and evaluation of compounds in in vitro

and animal models.

"Development" indicates that lead compounds have been discovered that meet

certain in vitro and in vivo criteria. These compounds may undergo structural

modification and more extensive evaluation prior to selection for preclinical

development.

"Preclinical" indicates that Neurocrine is conducting pharmacology testing,

toxicology testing, formulation, process development and/or manufacturing, and

is in the process of preparing an IND for regulatory submission.

"Physician-IND Phase II" indicates that an independent physician has received

FDA approval to evaluate one of the Company's products in humans to determine

safety and efficacy in an expanded patient population. This clinical trial is

not under full control of the Company.

"Phase II" indicates that the Company has received FDA approval to evaluate one

of the Company's products in humans to determine safety and efficacy in an

expanded patient population.

"Phase II/III" indicates that the Company has received regulatory approval from

the Canadian HPB to evaluate in Canada a multi-center Phase II/III clinical

trial of DHEA.





Corticotropin Releasing Factor -- Receptor Antagonist Program



Anxiety



Anxiety is among the most commonly observed group of CNS disorders, which

includes phobias or irrational fears, panic attacks, obsessive-compulsive

disorders and other fear and tension syndromes. Estimates by the National

Institute of Mental Health suggest that the most commonly diagnosed forms of

anxiety disorders may affect 10% of the United States population. Of the

pharmaceutical agents that are currently marketed for the treatment of anxiety

disorders, a class of compounds known as the benzodiazepines, such as Valium, is

the most frequently prescribed. In spite of their therapeutic efficacy, several

side effects limit the utility of these anti-anxiety drugs. Most problematic

among these are drowsiness, ataxia (the inability to stand up), amnesia, drug

dependency and withdrawal reactions following the cessation of therapy.



Neurocrine is developing a new class of therapeutics that target

stress-induced anxiety. In view of the evidence implicating CRF in

anxiety-related disorders, Neurocrine is developing small molecule CRF receptor

antagonists as anti-anxiety agents which











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block the effects of overproduction of CRF. The Company believes that these

compounds represent a class of molecules based on a novel mechanism of action

which may offer the advantage of being more selective, thereby providing

increased efficacy with reduced side effects. In animal studies used to evaluate

anti-anxiety drugs, Neurocrine scientists have demonstrated the efficacy of its

lead candidates following oral administration without evidence of apparent side

effects. Neurocrine's corporate partner, Janssen, selected a drug candidate in

1996 and is currently undertaking preclinical testing on the drug candidate.

Results obtained in animals are not necessarily predictive of results obtained

in man, and no assurance can be given that the Company's partner will

successfully complete preclinical testing or progress to clinical trials in a

timely manner, or at all.



Depression



Depression is one of a group of neuropsychiatric disorders that is

characterized by extremes of elation and despair, loss of body weight, decrease

in aggressiveness and sexual behavior, and loss of sleep. This condition is

believed to result from a combination of environmental factors, including

stress, as well as an individual's biochemical vulnerability, which is

genetically predetermined. The biochemical basis of depression is thought to

involve elevated secretion of CRF and abnormally low levels of other

neurotransmitters in the brain such as serotonin. Clinical depression was

reported to affect 6% of the population, or approximately 25 million individuals

in the United States in 1994. Current antidepressant therapies, including

Prozac, increase the levels of several chemicals in the brain, such as

serotonin. Because these drugs affect a wide range of neurotransmitters, they

have been associated with a number of side effects. While newer, more selective

drugs offer some safety improvement, their side effect profiles are still

inadequate due to their unwanted effects on gastrointestinal and sexual

function, and on appetite. Furthermore, most existing antidepressant therapies

are limited by their slow onset of action.



Neurocrine is developing small molecule therapeutics to block the effects

of overproduction of CRF for the treatment of depression. The Company has

developed several CRF receptor antagonists and its corporate partner, Janssen,

selected a drug candidate in 1996 for preclinical development. However, no

assurance can be given that the Company's partner will successfully complete

preclinical testing or progress to clinical trials in a timely manner, or at

all.



Stroke



Stroke is an acute neurologic event caused by blockage or rupture of

vessels which supply blood to the brain. Neuronal damage progresses over a

period of four to six hours. According to the National Institutes of Health

("NIH") estimates, approximately 500,000 patients experience a stroke in the

United States each year, with an approximately equal incidence in the rest of

the world. Stroke results in an estimated 150,000 fatalities each year, making

it the leading cause of death behind heart disease and cancer, and an estimated

additional 150,000 stroke victims suffer permanent neurological damage.

Survivors of stroke are at significantly increased risk of suffering another

episode. Current treatments for stroke consist of surgery, steroid therapy and

anti-platelet therapy. These treatments may help increase blood flow but do not

affect the secondary mechanisms which cause nerve cell death.



Neurocrine believes its CRF receptor antagonist program may have utility in

the treatment of stroke. Preliminary experiments in animal models of stroke show

substantial enhancement of neuronal survival following treatment with a CRF

receptor antagonist. The survival benefit is independent of increased blood flow

and may be acting on secondary mechanisms. The Company is currently optimizing

several series of small molecules. The Company selected a preclinical candidate

in late 1996 and is currently involved in preclinical testing. However, no

assurance can be given that the Company will successfully complete preclinical

testing in a timely manner, or at all.



Substance Abuse



Substance abuse, including the use of cocaine and overuse of alcohol, was

estimated to affect nearly 15 million individuals in the United States in 1994.

Stress has been reported to enhance the reinforcement and withdrawal properties

of abused substances such as cocaine, amphetamines and alcohol. Currently there

are no pharmaceuticals marketed for most forms of drug abuse.



In view of the primary role of CRF in modulating stress responses,

Neurocrine is developing orally active, small molecule drugs which block the CRF

receptor. A small molecule CRF receptor antagonist may be effective not only for

acute cocaine











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detoxification, but also for long-term prophylaxis in the context of a drug

prevention or treatment program. The same compounds developed for anxiety and

depression may be used for the treatment of substance abuse. In collaboration

with Janssen, Neurocrine intends to develop CRF receptor antagonists for this

indication. However, no assurance can be given that the Company will

successfully identify suitable candidate compounds for development in a timely

manner, or at all.



Corticotropin Releasing Factor -- Binding Protein Antagonist Program



Alzheimer's Disease



Alzheimer's disease is a neurodegenerative brain disorder which leads to

progressive memory loss and dementia. Alzheimer's disease generally follows a

predictable course of deterioration over eight years or more, with the earliest

symptom being impairment of short-term memory. Gradually, memory loss increases,

reasoning abilities deteriorate, and individuals become depressed, agitated,

irritable and restless. In the final stages of the disease, patients become

unable to care for themselves. According to the National Alzheimer's

Association, in 1994 over four million individuals in the United States suffered

from Alzheimer's disease. Alzheimer's disease is the fourth leading cause of

death for adults, responsible for over 100,000 deaths in 1994. Marketed

therapies currently available for the treatment of Alzheimer's disease are

severely limited. Tacrine, a therapy which has been recently approved, shows

limited memory improvement in Alzheimer's patients; however, concerns regarding

drug-induced elevations in liver enzymes have limited the widespread use of this

product.



Neurocrine scientists have found that there are significant decreases in

CRF levels in the brain areas that are affected in Alzheimer's disease. In spite

of reduced CRF concentrations, CRF-BP levels are not decreased in areas of the

brain affected by Alzheimer's disease, thereby providing the Company with a

novel target for drug intervention. Consequently, Neurocrine is developing

CRF-BP antagonists to displace CRF from the binding protein and effectively

increase the amount of "free CRF" available to interact with the CRF receptors.

This strategy is expected to selectively raise the concentration of CRF in brain

areas involved in learning and memory processes. Because the therapeutic is

designed to restore normal levels of CRF only in these areas, the Company

believes that the drug will not induce the side effects associated with

administering CRF directly, such as anxiety. The Company has identified a number

of lead compounds which show efficacy following oral administration in animal

models of learning and memory. Efforts are underway to further optimize these

molecules, and the Company and its corporate partner, Lilly, expect to select

lead compounds for development in 1997. However, no assurance can be given that

the Company and its corporate partner will successfully identify suitable

candidate compounds for development in a timely manner, or at all.



Obesity



Obesity is the most common nutritional disorder in Western societies. As

many as three in 10 adult Americans weigh at least 20% in excess of their ideal

body weight, with 35 million people in the United States characterized as

clinically obese. Increased body weight is a significant public health problem

because it is associated with a number of serious diseases, including type II

diabetes, hypertension, hyperlipidemia and several cancers. Although obesity has

been commonly considered to be a behavioral problem, there is now evidence that

body weight is physiologically regulated. The regulation of body weight is

complex and appears to consist of both centrally and peripherally acting

mechanisms. Recently, d-fenfluramine has received FDA approval for the treatment

of obesity and is being marketed by American Home Products. This drug displayed

statistically significant weight reducing effects in a large multi center

clinical trial. The Company believes that d-fenfluramine's actions on weight

reduction may in part be due to modulation of CRF. The use of a CRF-BP

antagonist may directly increase CRF levels without the inadvertent activation

of other neurotransmitter systems.



Preliminary data indicate that CRF may act as a central regulator of both

appetite and metabolism. Neurocrine has evaluated CRF-BP antagonists in a

genetically mutant strain of obese animals as well as in animal models which

were pharmacologically induced to overeat. Treatment with CRF-BP antagonists

consistently normalized feeding behavior and weight in both types of models and

did so without inducing excess CRF-related side effects such as anxiety.

Neurocrine has developed several active series of lead molecules. Medicinal

chemistry efforts have resulted in the generation of high-affinity molecules

that show efficacy in elevating brain CRF levels. Neurocrine and its corporate

partner, Lilly, anticipate selecting lead compounds in 1997 for further

development. However, no assurance can be given that the Company and its

corporate partner will successfully identify suitable candidate compounds for

development in a timely manner, or at all.











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Altered Peptide Ligand Program



Multiple Sclerosis ("MS")



Multiple sclerosis is a chronic immune mediated disease characterized by

recurrent attacks of neurologic dysfunction due to damage in the CNS. The

classic clinical features of MS include impaired vision and weakness or

paralysis of one or more limbs. Patients develop a slow, steady deterioration of

neurologic function over an average duration of approximately 30 years. The

cause of MS is unknown but immunologic or infectious factors have been

implicated. According to the National Multiple Sclerosis Society, there are an

estimated 350,000 cases of multiple sclerosis in the United States and an equal

number of patients in Europe with approximately 20,000 new cases diagnosed in

the world each year. Currently available treatments for MS offer only limited

efficacy. Steroids have been used to reduce the severity of acute flare-ups and

speed recovery. Experimental therapy with other immunosuppressive agents has

been tried, but with limited success. Betaseron (a form of beta-interferon) has

been shown to delay the onset of flare-ups of the symptoms in approximately 30%

of patients and has been approved for marketing by the FDA. In addition, Avonex,

a similar form of beta-interferon, has received FDA advisory panel

recommendation for approval. Clinical trial results show these therapies slowed,

but did not prevent, the growth of lesions in the CNS which cause the disease.

Patients treated with beta-interferon experience a variety of side effects,

including "flu-like" symptoms.



One of the Company's co-founders, Dr. Lawrence Steinman, identified the

dominant invading T-cell in the brains of patients who had died of MS. Dr.

Steinman further identified the dominant target or recognition site on the

myelin sheath to which invading T-cells bind. Neurocrine has exclusively

licensed this technology and has designed altered peptide ligands which resemble

native disease-causing molecules of the myelin sheath. These molecules have been

altered to attract and bind to disease-causing T-cells and inhibit their

destructive capabilities. Neurocrine's altered peptide ligand for the treatment

of MS has been shown to reverse disease in animal models of MS and decrease the

production of cytokines such as gamma interferon and tumor necrosis factor-alpha

which contribute to the disease. These same molecules demonstrate the ability to

turn off pathogenic T-cells from MS patients in vitro. Quantities of the

Company's drug candidate were produced under cGMP conditions in preparation for

a Phase I clinical trial. Together with Ciba-Geigy, the Company's collaborative

partner for this program, Neurocrine filed an IND and received approval in 1996

to commence clinical trials. The Company and its corporate partner have

completed Phase I clinical trials and are planning to enter multiple Phase II

clinical trials in mid-1997. However, results obtained in animals or in earlier

phases of clinical trials are not necessarily predictive of results obtained in

humans, and no assurance can be given that the Company will successfully

complete clinical trials in a timely manner, if at all.



Type I Diabetes



Type I diabetes, or juvenile-onset diabetes, is an autoimmune disease

resulting from the destruction of insulin producing cells, causing impaired

glucose metabolism resulting from a deficiency in the action of the hormone

insulin. It is one of the most prevalent chronic conditions in the United

States, afflicting approximately 500,000 patients in all age groups in 1994.

Diabetics suffer from a number of complications of the disease including heart

disease, circulatory problems, kidney failure, neurologic disorders and

blindness. Current therapy for type I diabetes consists of daily insulin

injections to regulate blood glucose levels.



Neurocrine is developing altered peptide ligands which target dominant

antigens on insulin producing cells to treat type I diabetes. Pre- diabetic

patients can now be identified using immune markers of the disease several years

before they become insulin dependent. The Company believes that an altered

peptide ligand specific for autoimmune T-cells involved in diabetes may stop the

destruction of the insulin secreting cells in these pre-diabetic patients, thus

allowing them to delay or avoid chronic insulin therapy. The Company believes

that this program can leverage the technological expertise the Company has

developed in its MS program to discover and design altered peptide ligand

therapy useful in treating diabetics and pre-diabetics. Neurocrine has begun

collaborations with a leading diabetes center, the Barbara Davis Center for

Childhood Diabetes at the University of Colorado, to study the effects of

altered peptide ligands on human T-cells from diabetic patients. However, no

assurance can be given that the Company will successfully identify suitable

candidate compounds for development in a timely manner, or at all.











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Neurosteroid Program



Alzheimer's Disease



Alzheimer's disease is a neurodegenerative brain disorder which leads to

progressive memory loss and dementia. The Company believes that DHEA, a

naturally occurring hormone, may be useful in treatment of this disease based on

a variety of mechanisms. DHEA may protect neurons from death by increasing

growth factor levels in the brain, such as insulin-like growth factor-1. DHEA

also appears to modulate several cytokines involved in inflammation, which are

believed to be involved in the pathology of Alzheimer's disease. In addition,

DHEA improves memory and learning processes in both animal models and humans and

may prove beneficial in slowing the memory loss seen in Alzheimer's disease.

Because DHEA is naturally occurring, it is expected to have few toxicity

problems, which differentiates this drug from other compounds that are currently

being tested as therapeutics for Alzheimer's disease.



A double-blind, placebo-controlled, physician-IND Phase II clinical trial

of DHEA, is being conducted with investigators from the Alzheimer's Clinic at

the University of California, San Francisco. This trial has been designed to

determine efficacy as measured by improving memory in mild to moderate

Alzheimer's patients. It is anticipated that approximately 60 patients will be

treated for six months with either active drug or a placebo. These patients will

be evaluated throughout the study to assess the progress of disease and

retention of memory. The Company anticipates that this trial will be completed

by the end of 1997. If results of this study are positive, the Company intends

to initiate company-sponsored clinical trials. However, no assurance can be

given that the Company will conclude the trial in a timely manner, or that the

Company will begin its own clinical trials in a timely manner, or at all.



The Company has obtained regulatory approval and initiated a multi-center

Phase II/III clinical trial of DHEA in Canada. This trial has been designed to

determine efficacy as measured by improving memory in mild to moderate

Alzheimer's patients. The Company anticipates that this trial will be completed

by the end of 1998. However, results obtained in earlier clinical trials are not

necessarily predictive of results obtained in later trials, and no assurance can

be given that the Company will successfully complete clinical trials in a timely

manner, if at all. Even if regulatory approval is granted in Canada, the Company

may be required to undertake additional clinical testing to obtain regulatory

approval from the FDA for sales in the United States.



Neurogenomics Program



Neurodegenerative Diseases and Disorders



Neurodegenerative diseases and disorders involve damage to the cellular

structure of the brain either acutely, as in stroke or trauma, or chronically,

as in epilepsy and Alzheimer's disease. To date, only a limited number of

effective therapeutics exist to treat neurological disorders, resulting in

significant economic and social costs. In 1994, over 26 million people in the

United States were affected by neurological disorders.



Activation of glial cells is a common feature of many neurodegenerative

diseases. The primary goal of Neurocrine's Neurogenomics program is to identify

and characterize novel genes that are induced in glial cells under conditions

that lead to neurodegeneration or regeneration. The Company is focusing on

stroke, multiple sclerosis, AIDS dementia, epilepsy, Parkinson's disease and

Alzheimer's disease. The unique conditions leading to neurodegeneration in each

of the disorders have been established in both animal and cellular models of the

disease. Neurocrine is actively isolating and analyzing genes associated with

neuronal cell death utilizing state of the art molecular biology, gene

sequencing and bioinformatics. In addition, activated genes which are

neuroprotective or allow for the regeneration of neurons may also be identified.



Novel neurodegenerative genes that are discovered may include proteins,

enzymes or receptors. Protein signaling molecules or the genes encoding such

molecules may be utilized as therapeutics, while enzymes and receptors may serve

as new targets for drug discovery. Neurocrine currently intends to place the

receptors and enzymes encoded by these genes in high-throughput screens in an

attempt to discover small molecule therapeutics to treat neurodegenerative

disorders. To date, the Company has identified more than 4,500 novel genes of

which a number are undergoing biological evaluation in in vitro and animal

models. The Company currently intends to identify candidate genes as drugs or

drug targets for one or more neurological diseases.











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However, there can be no assurance that the Company will successfully identify

suitable gene candidates for development in a timely manner, or at all.



STRATEGIC ALLIANCES



The Company's business strategy is to utilize strategic alliances and novel

financing mechanisms to enhance its development and commercialization

capabilities. To date, Neurocrine has completed the following alliances:



Janssen Pharmaceutica, N.V.



On January 1, 1995, Neurocrine entered into a research and development

agreement (the "Janssen Agreement") with Janssen to collaborate in the

discovery, development and commercialization of CRF receptor antagonists

focusing on the treatment of anxiety, depression and substance abuse. The

collaboration utilizes Neurocrine's expertise in cloning and characterizing CRF

receptor subtypes, CRF pharmacology and medicinal chemistry. Pursuant to the

Janssen Agreement, the Company has received $2.0 million in license payments, of

which $1 million was received in 1996. Janssen is obligated to provide

Neurocrine with $3.0 million in sponsored research payments per year during the

term of the research program. The term of the research program is three years,

subject to extension by mutual agreement of the parties. Janssen has the right

to terminate the Janssen Agreement without cause at any time. However, in the

event of such termination, Janssen remains obligated to continue all sponsored

research payments for the term of the research program and all product and

technology rights become the exclusive property of Neurocrine. In connection

with the Janssen Agreement, Johnson & Johnson Development Corporation ("JJDC")

purchased $5 million of the Company's Common Stock.



Neurocrine is entitled to receive up to $10.0 million in milestone payments

for the indications of anxiety, depression, and substance abuse, and up to $9.0

million in milestone payments for other indications, if certain development

milestones are achieved, of which $750,000 was received in 1995 and $1 million

was received in 1996. The Company has granted Janssen an exclusive worldwide

license to manufacture and market products developed under the Janssen

Agreement. The Company is entitled to receive royalties on product sales

throughout the world. The Company has certain rights to co-promote such products

in North America. Janssen is responsible for funding all clinical development

and marketing activities, including reimbursement to Neurocrine for its

promotional efforts, if any. There can be no assurance that the Company's

research under the Janssen Agreement will be successful in discovering any

potential products or that Janssen will be successful in developing, receiving

regulatory approvals or commercializing any potential products that may be

discovered. As a result, there can be no assurance that any product development

milestone or royalty payments will be made.



Ciba-Geigy Limited



In January 1996, the Company entered into a binding letter agreement with

Ciba-Geigy (which has subsequently changed its name to Novartis) to develop

altered peptide ligand therapeutics for the treatment of MS based upon the

Company's drug development candidates and expertise in immunology and protein

chemistry. In December 1996, the Company and Ciba-Geigy entered into a

definitive agreement (the "Ciba-Geigy Agreement") incorporating the terms and

conditions set forth in the letter agreement and certain other terms and

conditions agreed to by the Company and Ciba-Geigy. Ciba-Geigy paid the Company

a $5 million non-refundable fee prior to executing the Ciba-Geigy Agreement. In

connection with the Ciba-Geigy Agreement, Ciba-Geigy purchased $10.0 million of

the Company's Common Stock. Pursuant to the Ciba-Geigy Agreement, Ciba-Geigy is

obligated to provide the Company with $3.5 million in research and development

funding, plus certain other program expenses, each year for five years ending on

December 31, 2000. In event that no product license application ("PLA") has been

filed as a result of the collaboration by December 31, 2000, then Ciba-Geigy may

be obligated to provide the Company with an additional $2.5 million per year

thereafter until a Product License Application is filed, except in certain

circumstances. Neurocrine is also entitled to receive milestone payments if

certain research, development and regulatory milestones are achieved. Ciba-Geigy

has the right to terminate the Ciba-Geigy Agreement on six months' notice which

may be given at any time after December 30, 1997.



The Company has granted Ciba-Geigy an exclusive license outside of the

United States and Canada to market altered peptide ligand products developed

under the Ciba-Geigy Agreement for multiple sclerosis. The Ciba-Geigy Agreement

provides that the Company and Ciba-Geigy will collaborate in the marketing of

products developed under the Ciba-Geigy Agreement in the United States and

Canada. The Company has the option to discontinue the collaborative marketing

effort in the United States











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and Canada, in which case Ciba-Geigy will have exclusive marketing rights in

such territory. Neurocrine is entitled to receive royalties on product sales.

Neurocrine is entitled to receive a share of the profits resulting from sales of

altered peptide ligand products in North America subject to the recoupment of a

portion of Ciba-Geigy's development costs. Neurocrine retains the right to

convert its profit share to the right to receive royalty payments at its sole

discretion in which case no repayment of development costs are due to

Ciba-Geigy. Neurocrine is obligated to repay a portion of the development costs

of any potential product developed pursuant to the collaboration unless the

Company elects to convert to the right to receive royalty payments. There can be

no assurance that the Company and Ciba-Geigy will be successful in developing or

commercializing any potential products. As a result, there can be no assurance

that any product development milestone, royalty, or profit sharing payments will

be made.



Eli Lilly and Co.



On October 15, 1996, Neurocrine entered into a research and license

agreement (the "Lilly Agreement") with Eli Lilly and Company to collaborate in

the discovery, development and commercialization of CRF binding protein ligand

inhibitors for the treatment of central nervous system disorders including

obesity and dementias such as Alzheimer's disease. As of December 31, 1996,

Neurocrine had received $1.3 million in research payments and received an

additional $5.0 million in research payments in January 1997. Neurocrine expects

to receive an additional $15.7 million in research payments over the first three

years of the Lilly Agreement as well as additional sponsored research payments

over the subsequent two-year period if certain milestones are met, and up to an

additional $49.0 million in milestone payments for the first two products for

dementia or obesity if certain development and regulatory milestones are

achieved. The Company has granted Lilly an exclusive worldwide license to

manufacture and market CRF binding protein ligand inhibitor products. Lilly is

obligated to fund clinical development and marketing expenses (except as set

forth below) and is responsible for clinical development, regulatory compliance,

and manufacturing of products. Neurocrine is entitled to royalties on product

sales. At its option, Neurocrine is entitled to receive a portion of the profits

resulting from sales of products for the treatment of dementia in the United

States subject to the Company's obligation to pay a portion of the development

costs for such product. Lilly has agreed to provide the Company with access to a

portion of its chemical compound library for screening against targets outside

of the field of the Lilly Agreement and other Lilly program areas, subject to

the Company's obligation to pay Lilly royalties on sales of products developed

based on compounds in such library and milestone payments based upon certain

development and regulatory milestones for such products. There can be no

assurance that the Company's research under the Lilly Agreement will be

successful in discovering any potential products or that Lilly will be

successful in developing, receiving regulatory approvals, or commercializing any

potential products that may be discovered. As a result there can be no assurance

that any product development milestone, royalty, or profit sharing payments will

be made.



Neuroscience Pharma Inc.



In March 1996, Neurocrine formed Neuroscience Pharma (NPI) Inc. ("NPI"), a

research and development company. Neurocrine licensed to NPI certain technology

and Canadian marketing rights to the Company's Neurosteroid and Neurogenomics

programs in exchange for 49% of the outstanding Common Stock of NPI. A group of

Canadian institutional investors have invested approximately $9.5 million in NPI

in exchange for Preferred Stock of NPI which may be converted into 51% of the

outstanding Common Stock of NPI. The Preferred Stock may also be converted into

the Company's Common Stock at $7.45 per share. Pursuant to a Research and

Development Agreement NPI has committed to expend an aggregate amount of $9.5

million for clinical development of the Neurosteroid program for Alzheimer's

disease and for research activities related to the Neurogenomics program.

Pursuant to such Research and Development Agreement, NPI is entitled to receive

royalties on sales of products developed in these programs as well as exclusive

Canadian marketing rights for such products in the event that the Company has

not terminated the technology license and the marketing rights or that the

investors have not converted their NPI Preferred Stock into shares of the

Company's Common Stock. In connection with their investment in NPI, such

investors received warrants exercisable for shares of the Company's Common Stock

and are eligible to receive additional warrants in the future in the event that

NPI receives certain Canadian government incentives for research activities.



Hewlett-Packard Company



The Company and Hewlett-Packard Company ("HP") have entered into a

collaboration to adapt the Company's RMS combinatorial chemistry technology to

certain HP instruments. In 1996, the parties collaborated to modify existing

instrumentation to provide customers with a flexible automated method for

generation of large numbers of chemical compounds.











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Neurocrine received research funding and equipment from HP in exchange for

technical support and consultation. The term of the collaboration has expired

and the parties are currently determining whether to renew the collaboration for

an additional term. There can be no assurance that the collaboration will be

renewed or that, if renewed, the collaboration will be successful in developing

an automated method for generating large numbers of chemical compounds.



Dependence on Strategic Alliances



The Company is dependent upon its corporate partners to provide adequate

funding for certain of its programs. Under these arrangements, the Company's

corporate partners are responsible for (i) selecting compounds for subsequent

development as drug candidates, (ii) conducting preclinical testing and clinical

trials and obtaining required regulatory approvals for such drug candidates,

and/or (iii) manufacturing and commercializing any resulting drugs. Failure of

these partners to select a compound discovered by the Company for subsequent

development into marketable products, gain the requisite regulatory approvals or

successfully commercialize products would have a material adverse effect on the

Company's business, financial condition and results of operations. The Company's

strategy for development and commercialization of certain of its products is

dependent upon entering into additional arrangements with research

collaborators, corporate partners and others, and upon the subsequent success of

these third parties in performing their obligations. There can be no assurance

that the Company will be able to enter into additional strategic alliances on

terms favorable to the Company, or at all. Failure of the Company to enter into

additional strategic alliances would have a material adverse effect on the

Company's business, financial condition and results of operations.



The Company cannot control the amount and timing of resources which its

corporate partners devote to the Company's programs or potential products. If

any of the Company's corporate partners breach or terminate their agreements

with the Company or otherwise fail to conduct their collaborative activities in

a timely manner, the preclinical testing, clinical development or

commercialization of product candidates will be delayed, and the Company will be

required to devote additional resources to product development and

commercialization, or terminate certain development programs. The Company's

strategic alliances with Janssen, Ciba-Geigy and Lilly are subject to

termination by Janssen, Ciba-Geigy, or Lilly, respectively. There can be no

assurance that Janssen, Ciba-Geigy, or Lilly will not elect to terminate its

strategic alliance with the Company prior to its scheduled expiration. In

addition, if the Company's corporate partners effect a merger with a third

party, there can be no assurance that the strategic alliances will not be

terminated or otherwise materially adversely affected. Ciba-Geigy is in the

process of completing a merger with Sandoz Ltd., another major pharmaceutical

company. The termination of any current or future strategic alliances could have

a material adverse effect on the Company's business, financial condition and

results of operations. Neurocrine's corporate partners may develop, either alone

or with others, products that compete with the development and marketing of the

Company's products. Competing products, either developed by the corporate

partners or to which the corporate partners have rights, may result in their

withdrawal of support with respect to all or a portion of the Company's

technology, which would have a material adverse effect on the Company's

business, financial condition and results of operations. There can be no

assurance that disputes will not arise in the future with respect to the

ownership of rights to any products or technology developed with corporate

partners. These and other possible disagreements between corporate partners and

the Company could lead to delays in the collaborative research, development or

commercialization of certain product candidates or could require or result in

litigation or arbitration, which would be time-consuming and expensive, and

would have a material adverse effect on the Company's business, financial

condition and results of operations.



MANUFACTURING



The Company has in the past utilized, and intends to continue to utilize,

third-party manufacturing for the production of material for use in clinical

trials and for the potential commercialization of future products. The Company

has no experience in manufacturing products for commercial purposes and does not

have any manufacturing facilities. Consequently, the Company is dependent on

contract manufacturers for the production of products for development and

commercial purposes. In the event that the Company is unable to obtain or retain

third-party manufacturing, it will not be able to commercialize its products as

planned. The manufacture of the Company's products for clinical trials and

commercial purposes is subject to cGMP regulations promulgated by the FDA. No

assurance can be given that the Company's third-party manufacturers will comply

with cGMP regulations or other regulatory requirements now or in the future. The

Company's current dependence upon third parties for the manufacture of its

products may adversely affect its profit margin, if any, on the sale of future

products and the Company's ability to develop and deliver products on a timely

and competitive basis.











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MARKETING, SALES, AND PHARMACEUTICAL PRICING ISSUES



Neurocrine has retained certain marketing or co-promotion rights in North

America to its products under development, and plans to establish its own North

American marketing and sales organization. The Company currently has no

experience in marketing or selling pharmaceutical products and does not have a

marketing and sales staff. In order to achieve commercial success for any

product candidate approved by the FDA, Neurocrine must either develop a

marketing and sales force or enter into arrangements with third parties to

market and sell its products. There can be no assurance that Neurocrine will

successfully develop such experience or that it will be able to enter into

marketing and sales agreements with others on acceptable terms, if at all. If

the Company develops its own marketing and sales capabilities, it will compete

with other companies that currently have experienced and well funded marketing

and sales operations. To the extent that the Company enters into co-promotion or

other marketing and sales arrangements with other companies, any revenues to be

received by Neurocrine will be dependent on the efforts of others, and there can

be no assurance that such efforts will be successful.



The Company's business may be materially adversely affected by the

continuing efforts of government and third-party payers to contain or reduce the

costs of health care through various means. For example, in certain foreign

markets, pricing or profitability of prescription pharmaceuticals is subject to

government control. In the United States, there have been, and the Company

expects that there will continue to be, a number of federal and state proposals

to implement similar government control in such jurisdictions. In addition, an

increasing emphasis on managed care in the United States has put, and will

continue to put, pressure on pharmaceutical pricing. Such initiatives and

proposals, if adopted, could decrease the price that the Company receives for

any products it may develop and sell in the future, and thereby have a material

adverse effect on the Company's business, financial condition and results of

operations. Further, to the extent that such proposals or initiatives have a

material adverse effect on other pharmaceutical companies that are corporate

partners or prospective corporate partners for certain of the Company's

potential products, the Company's ability to commercialize its potential

products may be materially adversely affected.



The Company's ability to commercialize pharmaceutical products may depend

in part on the extent to which reimbursement for the costs of such products and

related treatments will be available from government health administration

authorities, private health insurers and other third-party payors. Significant

uncertainty exists as to the reimbursement status of newly approved health care

products, and third-party payors are increasingly challenging the prices charged

for medical products and services. There can be no assurance that any

third-party insurance coverage will be available to patients for any products

developed by the Company. Government and other third-party payors are

increasingly attempting to contain health care costs by limiting both coverage

and the level of reimbursement for new therapeutic products, and by refusing, in

some cases, to provide coverage for uses of approved products for disease

indications for which the FDA has not granted marketing approval. If adequate

coverage and reimbursement levels are not provided by government and third-party

payors for the Company's products, the market acceptance of these products would

be materially adversely affected.



COMPETITION



The biotechnology and pharmaceutical industries are subject to rapid and

intense technological change. The Company faces, and will continue to face,

competition in the development and marketing of its product candidates from

academic institutions, government agencies, research institutions and

biotechnology and pharmaceutical companies. Competition may arise from other

drug development technologies, methods of preventing or reducing the incidence

of disease, including vaccines, and new small molecule or other classes of

therapeutic agents. There can be no assurance that developments by others will

not render the Company's product candidates or technologies obsolete or

noncompetitive.



Betaseron, a form of beta-interferon marketed by Berlex BioSciences, has

been approved for the treatment of relapsing remitting multiple sclerosis.

Avonex, a similar form of beta-interferon produced by Biogen, Inc., and Capoxen,

produced by Teva, have recently been approved by the FDA for marketing in the

United States. Tacrine, marketed by Warner-Lambert Co., and Aricept, marketed by

Pfizer Inc, have recently been approved for the treatment of Alzheimer's

dementia. Sales of these drugs may reduce the available market for any product

developed by the Company for these indications. The Company is developing

products for the treatment of anxiety disorders, which will compete with well-

established products in the benzodiazepene class, including Valium, marketed by

Hoffman-La Roche, Inc., and depression, which will compete with well-established

products in the anti-depressant class, including Prozac, marketed by Eli Lilly &

Co. Certain technologies under development by other pharmaceutical companies

could result in treatments for these and other diseases and disorders being

pursued by the Company.











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For example, a number of companies are conducting research on molecules to block

CRF to treat anxiety and depression. Other biotechnology and pharmaceutical

companies are developing compounds to treat obesity, and one such drug,

d-fenfluramine, is being marketed by American Home Products Corporation. In the

event that one or more of these products and/or programs are successful, the

market for the Company's products may be reduced or eliminated.



In addition, if Neurocrine receives regulatory approvals for its products,

manufacturing efficiency and marketing capabilities are likely to be significant

competitive factors. At the present time, Neurocrine has no commercial

manufacturing capability, sales force or marketing experience. In addition, many

of the Company's competitors and potential competitors have substantially

greater capital resources, research and development resources, manufacturing and

marketing experience and production facilities than does Neurocrine. Many of

these competitors also have significantly greater experience than does

Neurocrine in undertaking preclinical testing and clinical trials of new

pharmaceutical products and obtaining FDA and other regulatory approvals.



PATENTS AND PROPRIETARY RIGHTS



The Company files patent applications both in the United States and in

foreign countries, as it deems appropriate, for protection of its proprietary

technology and products. As of December 31, 1996, only one patent has been

issued to the Company; however the Company otherwise owns or has received

exclusive licenses to four issued patents. The Company owns 64 patent

applications pursuant to license agreements with academic and research

institutions including the Beckman Research Institute of the City of Hope, the

Salk Institute for Biological Studies, and Leland Stanford Junior University.

The Company intends to file additional United States and foreign applications in

the future as appropriate.



The Company's success will depend on its ability to obtain patent

protection for its products, preserve its trade secrets, prevent third parties

from infringing upon its proprietary rights, and operate without infringing upon

the proprietary rights of others, both in the United States and internationally.



Because of the substantial length of time and expense associated with

bringing new products through the development and regulatory approval processes

in order to reach the marketplace, the pharmaceutical industry places

considerable importance on obtaining patent and trade secret protection for new

technologies, products and processes. Accordingly, the Company intends to seek

patent protection for its proprietary technology and compounds. There can be no

assurance as to the success or timeliness in obtaining any such patents, that

the breadth of claims obtained, if any, will provide adequate protection of the

Company's proprietary technology or compounds, or that the Company will be able

to adequately enforce any such claims to protect its proprietary technology and

compounds. Since patent applications in the United States are confidential until

the patents issue, and publication of discoveries in the scientific or patent

literature tend to lag behind actual discoveries by several months, the Company

cannot be certain that it was the first creator of inventions covered by pending

patent applications or that it was the first to file patent applications for

such inventions.



The degree of patent protection afforded to pharmaceutical inventions is

uncertain and any patents which may issue with regard to the Company's potential

products will be subject to this uncertainty. There can be no assurance that

competitors will not develop competitive products outside the protection that

may be afforded by the claims of the Company's patents. For example, the Company

is aware that other parties have been issued patents and have filed patent

applications in the United States and foreign countries which claim alternative

uses of DHEA, a potential product of the Company, and cover other therapeutics

for the treatment of multiple sclerosis. DHEA is not a novel compound and is not

covered by a composition of matter patent. The issued patents licensed to the

Company covering DHEA are use patents containing claims covering therapeutic

methods and the use of specific compounds and classes of compounds for

neuroregeneration. Other potential products which the Company may develop may

not consist of novel compounds and therefore would not be covered by composition

of matter patent claims. Competitors may be able to commercialize DHEA products

for indications outside of the protection provided by the claims of any use

patents that may be issued to the Company. In this case, physicians, pharmacies

and wholesalers could then substitute a competitor's product for the Company's

product. Use patents may be unavailable or may afford a lesser degree of

protection in certain foreign countries due to the patent laws of such

countries.



The Company may be required to obtain licenses to patents or proprietary

rights of others. As the biotechnology industry expands and more patents are

issued, the risk increases that the Company's potential products may give rise

to claims that such products infringe the patent rights of others. At least one

patent containing claims covering compositions of matter consisting











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of certain altered peptide ligand therapeutics for use in modulating the immune

response has issued in Europe, and the Company believes that this patent has

been licensed to a competitor of the Company. There can be no assurance that a

patent containing corresponding claims will not issue in the United States. In

addition, there can be no assurance that the claims of the European patent or

any corresponding claims of any future United States patents or other foreign

patents which may issue will not be infringed by the manufacture, use or sale of

any potential altered peptide ligand therapeutics developed by the Company or

Ciba-Geigy. Furthermore, there can be no assurance that the Company or

Ciba-Geigy would prevail in any legal action seeking damages or injunctive

relief for infringement of any patent that might issue under such applications

or that any license required under any such patent would be made available or,

if available, would be available on acceptable terms. Failure to obtain a

required license could prevent the Company and Ciba-Geigy from commercializing

any altered peptide ligand products which they may develop.



No assurance can be given that any licenses required under any patents or

proprietary rights of third parties would be made available on terms acceptable

to the Company, or at all. If the Company does not obtain such licenses, it

could encounter delays in product introductions while it attempts to design

around such patents, or could find that the development, manufacture or sale of

products requiring such licenses could be foreclosed. Litigation may be

necessary to defend against or assert such claims of infringement, to enforce

patents issued to the Company, to protect trade secrets or know-how owned by the

Company, or to determine the scope and validity of the proprietary rights of

others. In addition, interference proceedings declared by the United States

Patent and Trademark Office may be necessary to determine the priority of

inventions with respect to patent applications of the Company or its licensors.

Litigation or interference proceedings could result in substantial costs to and

diversion of effort by, and may have a material adverse impact on, the Company.

In addition, there can be no assurance that these efforts by the Company would

be successful.



The Company also relies upon unpatented trade secrets and improvements,

unpatented know-how and continuing technological innovation to develop and

maintain its competitive position, which it seeks to protect, in part, by

confidentiality agreements with its commercial partners, collaborators,

employees and consultants. The Company also has invention or patent assignment

agreements with its employees and certain, but not all, commercial partners and

consultants. There can be no assurance that relevant inventions will not be

developed by a person not bound by an invention assignment agreement. There can

be no assurance that binding agreements will not be breached, that the Company

would have adequate remedies for any breach, or that the Company's trade secrets

will not otherwise become known or be independently discovered by competitors.



GOVERNMENT REGULATION



Regulation by government authorities in the United States and foreign

countries is a significant factor in the development, manufacture and marketing

of the Company's proposed products and in its ongoing research and product

development activities. The nature and extent to which such regulation will

apply to the Company will vary depending on the nature of any products which may

be developed by the Company. It is anticipated that all of the Company's

products will require regulatory approval by government agencies prior to

commercialization. In particular, human therapeutic products are subject to

rigorous preclinical testing and clinical trials and other approval procedures

of the FDA and similar regulatory authorities in foreign countries. Various

federal and state statutes and regulations also govern or influence testing,

manufacturing, safety, labeling, storage and record-keeping related to such

products and their marketing. The process of obtaining these approvals and the

subsequent compliance with appropriate federal and state statutes and

regulations require the expenditure of substantial time and financial resources.

Any failure by the Company or its collaborators or licensees to obtain, or any

delay in obtaining, regulatory approval could adversely affect the marketing of

any products developed by the Company, its ability to receive product or royalty

revenues and its liquidity and capital resources.



Preclinical testing is generally conducted in laboratory animals to

evaluate the potential safety and the efficacy of a product. The results of

these studies are submitted to the FDA as a part of an IND, which must be

approved before clinical trials in humans can begin. Typically, clinical

evaluation involves a time consuming and costly three-phase process. In Phase I,

clinical trials are conducted with a small number of subjects to determine the

early safety profile, the pattern of drug distribution and metabolism. In Phase

II, clinical trials are conducted with groups of patients afflicted with a

specific disease in order to determine preliminary efficacy, optimal dosages and

expanded evidence of safety. In Phase III, large-scale, multi-center,

comparative trials are conducted with patients afflicted with a target disease

in order to provide enough data to demonstrate the efficacy and safety required

by the FDA. The FDA closely monitors the progress of each of the three phases of

clinical trials and may, at its discretion, re-evaluate,











-16-

17

alter, suspend or terminate the testing based upon the data which have been

accumulated to that point and its assessment of the risk/benefit ratio to the

patient.



A physician-IND is an IND that allows a physician to conduct a clinical

trial under less rigorous regulatory review standards. A physician-IND clinical

trial does not replace the need for Company-sponsored clinical trials, but can

provide a preliminary indication as to whether further clinical trials are

warranted and may sometimes facilitate the more formal regulatory review

process.



The results of preclinical testing and clinical trials are submitted to the

FDA in the form of an NDA or PLA for approval to commence commercial sales. In

responding to an NDA or PLA, the FDA may grant marketing approval, request

additional information or deny the application if the FDA determines that the

application does not satisfy its regulatory approval criteria. There can be no

assurance that approvals will be granted on a timely basis, or at all. Similar

regulatory procedures must also be complied with in countries outside the United

States.



To date the Company has submitted two IND applications in the United States

and Canada with regard to its product candidates and has commenced clinical

trials with regard to one potential product. A physician-IND Phase II clinical

trial was initiated in March 1996 with regard to the use of DHEA for the

treatment of Alzheimer's disease. However, such clinical trials are not under

the full control of the Company. In addition, a physician-IND clinical trial

does not replace the need for Company-sponsored clinical trials. A multi-center

Phase II/III clinical trial was initiated in Canada in early 1997 with respect

to the same potential product under the regulatory authority of the Canadian

HPB. Even if Canadian regulatory approval is obtained, the Company may be

required to undertake additional clinical testing to obtain FDA regulatory

approval in the United States. No assurance can be given that the Company will

be able to obtain FDA or other governmental regulatory approval for any

products.



The results from preclinical testing and early clinical trials may not be

predictive of results obtained in later clinical trials, and there can be no

assurance that clinical trials conducted by the Company or its corporate

partners will demonstrate sufficient safety and efficacy to obtain the requisite

regulatory approvals or will result in marketable products. In addition,

clinical trials are often conducted with patients having the most advanced

stages of disease. During the course of treatment, these patients can die or

suffer other adverse medical effects for reasons that may not be related to the

pharmaceutical agent being tested but which can nevertheless adversely affect

clinical trial results. A number of companies in the biotechnology and

pharmaceutical industries have suffered significant setbacks in advanced

clinical trials, even after promising results in earlier trials. If the

Company's drug candidates are not shown to be safe and effective in clinical

trials, the resulting delays in developing other compounds and conducting

related preclinical testing and clinical trials, as well as the potential need

for additional financing, would have a material adverse effect on the Company's

business, financial condition and results of operations.



The rate of completion of clinical trials conducted by the Company or its

corporate partners may be delayed by many factors, including slower than

expected patient recruitment or unforeseen safety issues. Any delays in, or

termination of, the Company's clinical trials would have a material adverse

effect on the Company's business, financial condition and results of operations.

There can be no assurance that Neurocrine will be permitted by regulatory

authorities to undertake clinical trials for its products or, if such trials are

conducted, that any of the Company's product candidates will prove to be safe

and efficacious or will receive regulatory approvals.



The Company is required to conduct its research activities in compliance

with NIH Guidelines for Research Involving Recombinant DNA Molecules and

Animals. The Company is also subject to various Federal, state and local laws,

regulations and recommendations relating to safe working conditions, laboratory

manufacturing practices, and the use and disposal of hazardous or potentially

hazardous substances, including radioactive compounds and infectious disease

agents, used in connection with the Company's research. The extent of government

regulation which might result from future legislation or administrative action

cannot be predicted accurately.



SCIENTIFIC ADVISORY BOARD



Neurocrine has assembled a Scientific Advisory Board that currently

consists of 16 individuals. Members of the Scientific Advisory Board are leaders

in the fields of neurobiology, immunology, endocrinology, psychiatry and

medicinal chemistry. Scientific Advisory Board members meet as a group at least

yearly to advise the Company in the selection, implementation and











-17-

18

prioritization of its research programs. Certain members meet more frequently to

advise the Company with regard to its specific programs.



The Scientific Advisory Board presently consists of the following

individuals:



Floyd E. Bloom, M.D., is Chairman of the Department of Neuropharmacology

at The Scripps Research Institute. Dr. Bloom is an internationally recognized

expert in the fields of neuropharmacology and neurobiology. He is the current

editor of the journal, Science.



Michael Brownstein, M.D., Ph.D., is Chief of the Laboratory of Cell Biology

at the National Institute of Mental Health. He is a recognized expert in

molecular pharmacology as it applies to the field of neuroendocrinology, where

he has defined many of the pharmaceutically important neurotransmitter receptors

and transporter systems.



Iain Campbell, Ph.D., is an Associate Member of the Department of

Neuropharmacology at The Scripps Research Institute. Dr. Campbell is an expert

in cytosine activation in autoimmune diseases and neuronal degeneration.



Burton G. Christensen, Ph.D., is currently retired from his position as

Senior Vice President of Chemistry at Merck Research Laboratories. In his

capacity as Senior Vice President, Dr. Christensen directed over 400 scientists

and groups, who, under his direction, were responsible for the synthesis of

finasteride (Proscar), a 5-alpha-reductase inhibitor for the treatment of benign

prostatic hypertrophy.



George P. Chrousos, M.D., Sc.D., is Chief of the Pediatric Endocrinology

Section at the National Institute of Child Health and Human Development. He has

investigated the role of stress hormones in pathological conditions such as

Cushing's disease, anxiety-related disorders and rheumatoid arthritis.



Caleb E. Finch, Ph.D., is the Arco and William F. Kieschnick Professor of

Neurobiology of Aging at the University of Southern California. He is an

internationally recognized expert in the field of molecular gerontology and the

genomic control of mammalian development and aging. His recent work has focused

on the role of cytokines in neuronal protection and aging.



Stephen M. Hedrick, Ph.D., is Professor and Chairman of Cell Biology at

the University of California, San Diego. Dr. Hedrick is an expert in T-cell

immunology and codiscovered the first T-cell receptor genes and identified the

regions responsible for antigen binding. He is an editor for the Journal of

Immunology.



Florian Holsboer, M.D., Ph.D., is Director at the Max Planck Institute fur

Psychiatrie. Dr. Holsboer is an international expert on the role of

glucocorticoids and neuropeptides, particularly CRF, in neuropsychiatric

disorders. He coordinates the efforts of several hundred scientists and

clinicians at the Max Planck Institute, a major European neuropsychiatric

institute.



George F. Koob, Ph.D., is a Member of the Department of Neuropharmacology

at The Scripps Research Institute and an Adjunct Professor in the Departments of

Psychology and Psychiatry at the University of California, San Diego. Dr. Koob

is an internationally recognized behavioral pharmacology expert on the role of

peptides in the central nervous system, the neurochemical basis of addiction and

in the development of preclinical behavioral procedures for the screening of

anxiolytic and antidepressant drugs and memory enhancers.



Phillip J. Lowry, Ph.D., is Professor and Head of the Department of

Biochemistry and Physiology at the University of Reading in Great Britain. Dr.

Lowry is an internationally recognized biochemical endocrinologist whose work

has focused on the purification and characterization of some of the key

hormonal mediators of the endocrine response to stress. Dr. Lowry is a member

of the European Neuroscience Steering Committee, the European Neuroendocrine

Association and the Committee of British Endocrinology.



Joseph B. Martin, M.D., Ph.D., is Chancellor and Professor of Neurology at

the University of California, San Francisco. Dr. Martin is an internationally

recognized expert in clinical and basic research in neurology and

neuroendocrinology and the etiology of hypothalamic diseases, and was one of the

first neurologists to embrace the role of the central nervous system on immune

function.











-18-

19

Bruce S. McEwen, Ph.D., is Professor and Head of the Harold and Margaret

Milliken Hatch Laboratory of Neuroendocrinology at The Rockefeller University.

Dr. McEwen has identified and studied the function of intracellular receptors

for neuroactive steroid hormones in the brain and immune system, in relation to

stress and sex differences. Dr. McEwen is also President of the Society for

Neuroscience.



Charles B. Nemeroff, M.D., Ph.D., is Chairman and Professor of the

Department of Psychiatry and Behavioral Sciences at Emory University School of

Medicine. Dr. Nemeroff is an internationally recognized expert on the effects of

neuropeptides on behavior and their relevance in clinically important conditions

such as depression, anxiety and schizophrenia, and has published over 400

articles on this subject.



Lawrence J. Steinman, M.D., is Chief Scientist, Neuroimmunology of the

Company and a member of Neurocrine's Founding Board of Scientific and Medical

Advisors and its Executive Committee. See "Item 10 -- Executive Officers and

Directors of the Registrant."



Wylie W. Vale, Ph.D., is Chief Scientist, Neuroendocrinology of the

Company and a member of Neurocrine's Founding Board of Scientific and Medical

Advisors and its Executive Committee. See "Item 10 -- Executive Officers and

Directors of the Registrant."



Stanley J. Watson, Jr., M.D., Ph.D., is Professor and Associate Chair for

Research in the Department of Psychiatry and Co-Director of the Mental Health

Research Institute at the University of Michigan. Dr. Watson is a recognized

expert in neuropeptides and their receptors and their role in psychiatric

diseases and behavior. Dr. Watson is also a member of the Institute of Medicine

of the National Academy of Sciences.



Each of the members of the Scientific Advisory Board have signed consulting

agreements that contain confidentiality provisions and restrict the members of

the Scientific Advisory Board from competing with the Company for the term of

the agreement. Each member of the Scientific Advisory Board receives either a

per diem consulting fee or a retainer fee and is anticipated to provide at least

five days of consulting per year. Each member also has received stock or stock

options in the Company, which vest over time. All but one member of the

Scientific Advisory Board is a full-time employee of a university or research

institute that has regulations and policies which limit the ability of such

personnel to act as part-time consultants or in other capacities for any

commercial enterprise, including the Company. A change in these regulations or

policies could adversely affect the relationship of the Scientific Advisory

Board member with the Company.



INSURANCE



The Company maintains product liability insurance for clinical trials in

the amount of $5.0 million per occurrence and $5.0 million in the aggregate. The

Company intends to expand its insurance coverage to include the sale of

commercial products if marketing approval is obtained for products in

development. However, insurance coverage is becoming increasingly expensive, and

no assurance can be given that the Company will be able to maintain insurance

coverage at a reasonable cost or in sufficient amounts to protect the Company

against losses due to liability. There can also be no assurance that the Company

will be able to obtain commercially reasonable product liability insurance for

any products approved for marketing. A successful product liability claim or

series of claims brought against the Company could have a material adverse

effect on its business, financial condition and results of operations.



EMPLOYEES



As of December 31, 1996, the Company had 103 employees, consisting of 90

full-time and 13 part-time employees. Of the full-time employees, 35 hold Ph.D.,

M.D., or equivalent degrees. None of the Company's employees are represented by

a collective bargaining arrangement, and the Company believes its relationship

with its employees is good. The Company is highly dependent on the principal

members of its management and scientific staff. The loss of services of any of

these personnel could impede the achievement of the Company's development

objectives. Furthermore, recruiting and retaining qualified scientific personnel

to perform research and development work in the future will also be critical to

the Company's success. There can be no assurance that the Company will be able

to attract and retain personnel on acceptable terms given the competition among

biotechnology, pharmaceutical and health care companies, universities and

non-profit research institutions for experienced











-19-

20

scientists. In addition, the Company relies on members of its Scientific

Advisory Board and a significant number of consultants to assist the Company in

formulating its research and development strategy.



ITEM 2.  PROPERTIES



The Company leases approximately 48,000 square feet of laboratory facilities at

3050 Science Park Road, San Diego, California. The lease extends through 2006.

The Company has sublet 19,000 square feet of this facility to a third party for

up to four years. The Company has also leased an additional 2,000 square-foot

animal facility for a term of two years. The Company believes that its

facilities will be adequate to meet its research and development needs through

1998.



ITEM 3.  LEGAL PROCEEDINGS



Not applicable.



ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



Not applicable.











-20-

21

PART II



ITEM 5.

MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS



The Company's Common Stock has been traded on the Nasdaq National Market

System under the symbol NBIX since the Company's initial public offering on May

23, 1996. Prior to that time there was no established public trading market for

the Company's Common Stock. The following table sets forth for the periods

indicated the high and low sale price for the Common Stock.



<TABLE>

<CAPTION>

High            Low

------------   ------------

<S>                                      <C>            <C>

FISCAL YEAR 1996

4th Quarter . . . . . . . . . . . .  $         13     $    9-1/4

3rd Quarter . . . . . . . . . . . .        12-3/8          6-1/2

2nd Quarter  (from May 23, 1996)  .        13-1/4          8-1/8

</TABLE>



As of February 28, 1997, there were approximately 482 holders of record of

Common Stock.



DIVIDEND POLICY



The Company has not paid any cash dividends on its Common Stock since its

inception and does not anticipate paying cash dividends on its Common Stock in

the foreseeable future.



ITEM 6.  SELECTED FINANCIAL DATA



The following selected financial data have been derived from the Financial

Statements of the Company, which have been audited by Ernst & Young LLP, whose

reports appear elsewhere herein. The information presented below should be read

in conjunction with the Company's Financial Statements and Notes thereto

included elsewhere in this Form 10-K. See "Management's Discussion and Analysis

of Financial Condition and Results of Operations."











-21-

22



SELECTED FINANCIAL DATA



(In thousands, except net income (loss) per share)



<TABLE>

<CAPTION>

YEAR ENDED DECEMBER 31,

-------------------------------------------------------------------

1996          1995          1994          1993           1992

-------------------------------------------------------------------

<S>                                        <C>            <C>            <C>            <C>           <C>

STATEMENT OF OPERATIONS DATA:

Revenues:

Sponsored research                      $  7,344       $  3,000       $   --         $   --        $   --

License fees                               5,000          2,000           --             --            --

Milestones                                 4,000            750           --             --            --

Other revenues                             2,872            356          162             --            --

--------       --------       --------       --------      --------

Total revenues                      19,216          6,106          162             --            --



Operating expenses:

Research and development                  12,569          7,740          6,231          2,804           406

General and administrative                 3,697          2,728          2,223          1,550           216

--------       --------       --------       --------      --------

Total operating expenses            16,266         10,468          8,454          4,354            622

--------       --------       --------       --------      --------

Income (loss) from operations                2,950        (4,362)          (8,292)        (4,354)         (622)

Interest income, net                         2,598            839             627            118            15

Other income (expense)                         574            177           (41)          --                --

--------       --------       --------       --------      --------

Net income (loss) before income taxes         6,122        (3,346)        (7,706)        (4,236)          (607)

--------       --------       --------       --------      --------

Income taxes                                   248            --             --             --            --



Net income (loss)                             5,874        (3,346)         (7,706)        (4,236)         (607)

========       =======        ========       ========      ========



Net income (loss) per share                    0.35         (0.27)          (0.67)         (0.64)        (0.49)

========       =======        ========       ========      ========

Shares used in computing net income

(loss) per share                          16,589         12,184         11,433          6,635         1,247

========       =======        ========       ========      ========

</TABLE>

<TABLE>

<CAPTION>

DECEMBER 31,

-------------------------------------------------------------------

1996          1995           1994           1993           1992

-------------------------------------------------------------------

BALANCE SHEET DATA:

<S>                                        <C>           <C>            <C>            <C>           <C>

Cash, cash equivalents and short-term      $  69,920     $  18,696     $  18,228       $  21,639     $   2,010

investments

Total assets                                  77,957        24,012        22,344          24,436         2,475

Accumulated deficit                          (10,022)      (15,895)      (12,549)         (4,843)         (607)

Total stockholders' equity                    72,767        19,225        18,743          22,137         2,445

</TABLE>





ITEM 7.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS



The following Management's Discussion and Analysis of Financial Condition

and Results of Operations of Neurocrine Biosciences, Inc. ("Neurocrine" or the

"Company") contains forward-looking statements which involve risks and

uncertainties, pertaining generally to the expected continuation of the

Company's collaborative agreements, the receipt of research payments thereunder,

the future achievement of various milestones in product development and the

receipt of payments related thereto, the potential receipt of royalty payments,

financial results and operations. Actual results could differ materially from

those anticipated in such forward-looking statements as a result of various

factors, including those set forth below, and those outlined in "Item 1 --

Business" above.











-22-

23

OVERVIEW



Since the founding of the Company in January 1992, Neurocrine has been

engaged in the discovery and development of novel pharmaceutical products for

diseases and disorders of the central nervous and immune systems. To date,

Neurocrine has not generated any revenues from the sale of products, and does

not expect to generate any product revenues for the foreseeable future. The

Company's revenues are expected to come from its strategic alliances. Neurocrine

has incurred a cumulative deficit of approximately $10.0 million as of December

31, 1996 and expects to incur additional operating losses in the future which

are potentially greater than losses in prior years.



RESULTS OF OPERATIONS



Revenues increased to $19.2 million in 1996 compared with $6.1 million in

1995 and $162,000 in 1994. These increases were primarily due to increased

sponsored research, license fees, and milestone revenues recognized under the

Janssen, Ciba-Geigy, and Eli Lilly collaborations.



Research and development expenses increased to $12.6 million in 1996

compared with $7.7 million in 1995 and $6.2 million in 1994. These increases

reflect continued additions to scientific personnel and related support

expenditures as the Company increased its research, development, and clinical

activities primarily in the CRF and Altered Peptide Ligand programs.



General and administrative expenses increased to $3.7 million in 1996

compared with $2.7 million in 1995 and $2.2 million in 1994. These increases

reflect the additional administrative staff required to support increased

research, development and clinical activities, increased facility expenses and

expanded business development activities.



Interest income increased to $2.9 million in 1996 compared with $1.1

million in 1995 and $786,000 in 1994. These increases were due to increased

investment income attributable to increased cash and short term investments

purchased with proceeds from the Company's initial public offering in May 1996

and from payments received under its corporate collaborations.



Net income increased to $5.9 million or $0.35 per share for 1996 compared

with a net loss of $3.3 million or $0.27 per share in 1995 and $7.7 million or

$0.67 per share in 1994. The increase in net income over 1995 and 1994 was

primarily attributable to the increased revenues earned under the Janssen,

Ciba-Geigy and Eli Lilly corporate collaborations. The increase in net income

per share for 1996 was partially offset by the inclusion of dilutive common

stock equivalents in the calculation of weighed average shares used in computing

net income per share.



LIQUIDITY AND CAPITAL RESOURCES



At December 31, 1996 the Company's cash, cash equivalents, and short-term

investments totaled $69.9 million. This excludes approximately $9.1 million held

by NPI which is available to fund certain of the Company's research and

development activities.



Net cash provided by operating activities in 1996 increased to $6.7 million

compared with a net use of cash in operating activities of $2.4 million in 1995

and $7.1 million in 1994. The 1996 increase in cash provided by operating

activities and the 1995 decline in cash used in operating activities was

primarily the result of the timing of cash receipts under the Janssen,

Ciba-Geigy and Eli-Lilly collaborations.











-23-

24

Cash used in investing activities in 1996 was $48.6 million compared with

$933,000 provided by investing activities in 1995 and $13.8 million used in

investing activities in 1994. The 1996 increase in cash used in investing

activities was the result of the purchase of additional short-term investments

with proceeds from the Company's initial public offering and the sale of Common

Stock to corporate collaborators in May 1996. The 1995 increase in cash provided

by investing activities over the 1994 use of cash in investing activities was

the result of timing differences of various investment purchases and

sales/maturities and fluctuations in the Company's portfolio mix between cash

and cash equivalent and short-term investment holdings.



Cash provided by financing activities in 1996 was $46.8 million compared

with $3.2 million in 1995 and $3.9 million in 1994. This 1996 increase was the

result of proceeds received from the Company's initial public offering and the

sale of Common Stock to corporate collaborators in May 1996. The 1995 decrease

was the result of the decline in number of securities sold to corporate

collaborators and other private investors.



Neurocrine has primarily financed its operations through proceeds from the

sale of Common Stock and corporate collaborations. In February 1994, the Company

completed the final closing of a private placement offering which resulted in

net proceeds of approximately $27.6 million. In May 1996, the Company sold 3.5

million shares of Common Stock in an initial public offering resulting in net

proceeds to the Company of approximately $34.2 million. Concurrent with this

offering the Company sold 714,286 shares of Common Stock to corporate

collaborators, resulting in aggregate net proceeds to the Company of

approximately $7.2 million. In June 1996 the Company sold an additional 180,000

shares of Common Stock to the underwriters of the initial public offering to

cover over-allotments. This transaction resulted in net proceeds to the Company

of approximately $1.8 million.



In February 1995, the Company entered into a three to five year

collaborative research and development agreement with Janssen for the

development of CRF receptor antagonists for the treatment of anxiety, depression

and substance abuse. In 1996 Janssen paid the Company $3.0 million in sponsored

research payments and $1.0 million in milestone payments.



In January 1996, the Company entered into an agreement with Ciba-Geigy to

develop altered peptide ligands for the treatment of multiple sclerosis. In 1996

Ciba-Geigy paid the Company $8.5 million in license fees and research funding

and $3.0 million in milestone payments.



In March 1996, the Company completed the formation of a research and

development subsidiary, Neuroscience Pharma (NPI), Inc., with a group of

Canadian investors.



In October 1996, the Company entered into a Collaborative Research

Agreement with Eli Lilly and Company to discover and develop corticotropin

releasing factor (CRF) - binding protein ligand inhibitors for the treatment of

central-nervous system disorders, including obesity and dementia, such as that

associated with Alzheimer's disease. Lilly paid the Company $1.3 million in

research payments in 1996 and an additional $5.0 million in research payments in

January 1997.



See "Business - Strategic Alliances," and Note 4 of "Notes to Financial

Statements."



The Company believes that its existing capital resources, together with

interest income and future payments due under the strategic alliances, will be

sufficient to satisfy its current and projected funding requirements at least

through 2000. However, no assurance can be given that such capital resources and

payments will be sufficient to conduct its











-24-

25

research and development programs as planned. The amount and timing of

expenditures will vary depending upon a number of factors, including progress of

the Company's research and development programs.



The foregoing Management's Discussion and Analysis of Financial Condition

and Results of Operations of Neurocrine Biosciences, Inc. ("Neurocrine" or the

"Company") as well as other sections of this Form 10-K contain forward-looking

statements which involve risks and uncertainties, pertaining generally to the

expected continuation of the Company's collaborative agreements, the receipt of

research payments thereunder, the future achievement of various milestones in

product development and the receipt of payments related thereto, the potential

receipt of royalty and profit-sharing payments, the anticipated dates of

commencement of selection of development candidates and the commencement of

clinical trials the successful continuation of the Company's research and

development programs and the development of future products, the period of time

the Company's existing capital resources will meet its funding requirements, and

the Company's financial results and operations. Actual results could differ

materially from those anticipated in such forward-looking statements as a result

of various factors, including those set forth below, and those outlined in "Item

1 -- Business" above.



The Company's business is subject to significant risks, including but not

limited to, the risks inherent in its research and development activities,

including the successful continuation of the Company's strategic collaborations,

the successful completion of clinical trials, the lengthy, expensive and

uncertain process of seeking regulatory approvals, uncertainties associated both

with obtaining and enforcing its patents and with patent rights of others,

uncertainties regarding government reforms and of product pricing and

reimbursement levels, technological change and competition, manufacturing

uncertainties and dependence on third parties. Even if the Company's product

candidates appear promising at an early stage of development, they may not reach

the market for numerous reasons. Such reasons include the possibilities that the

product will be ineffective or unsafe during clinical trials, will fail to

receive necessary regulatory approvals, will be difficult to manufacture on

large scale, will be uneconomical to market or will be precluded from

commercialization by proprietary rights of third parties.



Neurocrine will require substantial additional funding for the continuation

of its research and product development programs, for progress with preclinical

testing and clinical trials, for operating expenses, for the pursuit of

regulatory approvals for its product candidates, for the costs involved in

filing and prosecuting patent applications and enforcing patent claims, if any,

the cost of product in-licensing and any possible acquisitions, and may require

additional funding for establishing manufacturing and marketing capabilities in

the future. The Company may seek to access the public or private equity markets

whenever conditions are favorable. The Company may also seek additional funding

through strategic alliances and other financing mechanisms, potentially

including off-balance sheet financing. There can be no assurance that adequate

funding will be available on terms acceptable to the Company, if at all. If

adequate funds are not available, the Company may be required to curtail

significantly one or more of its research or development programs or obtain

funds through arrangements with collaborative partners or others. This may

require the Company to relinquish rights to certain of its technologies or

product candidates.



Neurocrine expects to incur substantial additional operating expenses over

the next several years as its research, development, preclinical testing and

clinical trial activities increase. To the extent that the Company is unable to

obtain third-party funding for such expenses, the Company expects that increased

expenses will result in increased losses from operations. There can be no

assurance that the Company's products under development will be successfully

developed or that its products, if successfully developed, will generate

revenues sufficient to enable the Company to earn a profit.











-25-

26



ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA



See the list of the Company's Financial Statements filed with this Form

10-K under Item 14 below.



ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND

FINANCIAL DISCLOSURE



Not Applicable.











-26-

27

PART III



ITEM 10.  EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT



(a) Information about the Company's directors required by this item will be

contained in the Company's Notice of 1997 Annual Meeting of Stockholders and

Proxy Statement, pursuant to Regulation 14A, to be filed with the Securities and

Exchange Commission within 120 days after December 31, 1996. Such information is

incorporated herein by reference.



(b) The information required by this Item concerning compliance with

Section 16(a) of the Exchange Act is incorporated by reference from the section

captioned "Compliance with Section 16(a) of the Exchange Act" contained in the

Company's Notice of 1997 Annual Meeting of Stockholders and Proxy Statement,

pursuant to Regulation 14A, to be filed with the Securities and Exchange

Commission within 120 days after December 31, 1996.



(c)  The executive officers and key employees of the Company are as

follows:



<TABLE>

<CAPTION>

NAME                                     AGE                       POSITION

----                                     ---                       --------

<S>                                               <C>        <C>

Harry F. Hixson, Jr., Ph.D. (1) . . . . . . . . .   58        Chairman of the Board

Gary A. Lyons . . . . . . . . . . . . . . . . . .   45        President, Chief Executive Officer and Director

Wylie W. Vale, Ph.D. (1)(2) . . . . . . . . . . .   55        Chief Scientist, Neuroendocrinology and Director

Lawrence J. Steinman, M.D. (2)  . . . . . . . . .   49        Chief Scientist, Neuroimmunology

Errol B. De Souza, Ph.D.  . . . . . . . . . . . .   43        Executive Vice President, Research and Development

Paul W. Hawran  . . . . . . . . . . . . . . . . .   45        Senior Vice President and Chief Financial Officer

Stephen G. Marcus, M.D. . . . . . . . . . . . . .   43        Senior Vice President, Medical and Regulatory Affairs

and Chief Medical Officer

</TABLE>

- -----------

(1) Member of Audit Committee.



(2) Part-time commitment pursuant to a consulting agreement.



Harry F. Hixson, Jr., Ph.D., has served as a Director and Chairman of the

Board of the Company since September 1992. Dr. Hixson worked with Amgen, Inc.

("Amgen") from July 1985 through February 1991, most recently as President,

Chief Operating Officer and director. While at Amgen, he was responsible for

pharmaceutical development, manufacturing and United States and international

marketing and sales. Dr. Hixson is a director of Biocircuits, Inc. and Somatix

Therapy Corporation. Dr. Hixson holds a Ph.D. in Physical Biochemistry from

Purdue University and an M.B.A. from the University of Chicago.



Gary A. Lyons has served as President, Chief Executive Officer and a

Director of the Company since February 1993. Prior to joining the Company in

February 1993, Mr. Lyons was Vice President of Business Development at

Genentech, Inc. ("Genentech") since 1989. At Genentech, he was responsible for

international licensing, acquisitions and partnering which resulted in over 20

corporate relationships. He was also responsible for Genentech's Corporate

Venture Program which participated in early financing and/or formation of a

number of biotechnology start-up companies such as Xenova Ltd., Tularik, Inc.,

Nexagen, Inc., CytoTherapeutics, Inc., Khepri, Incyte Pharmaceuticals, Inc.,

Genomyx, Inc. and GenVec. Mr. Lyons serves as Chairman of the Board of Genomyx,

Inc. a privately held bio-instrumentation company. In addition, Mr.  Lyons had

operating responsibility for Genentech's two subsidiaries, Genentech Canada,

Inc. and Genentech Limited (Japan). Previously, he served as Vice President of

Sales and was responsible for building the marketing and sales organization for

the commercial introduction of Genentech's first two pharmaceutical products,

Protropin (human growth hormone) and Activase (TPA). Mr. Lyons holds a B.S. in

Marine Biology from the University of New Hampshire and an M.B.A. from

Northwestern University's J.L. Kellogg Graduate School of Management.



Wylie W. Vale, Ph.D., is a Founder and Chief Scientist, Neuroendocrinology

and Chairman of the Company's Founding Board of Scientific and Medical Advisors

and its Executive Committee. Dr. Vale was elected a Director of the Company in

September 1992. He is a Professor at The Salk Institute for Biological Studies

("The Salk Institute") and is the Senior Investigator and Head of The Clayton

Foundation Laboratories for Peptide Biology at The Salk Institute, where he has

been employed for 25 years. Dr. Vale is the current Chairman of the Faculty and

a current Member of the Board of Trustees of The Salk Institute.  Dr. Vale is











-27-

28

recognized for his work on the identification of neuroendocrine factors such as

somatostatin, growth hormone releasing factor, corticotropin releasing factor,

CRF-BP, gonadotropin releasing hormone, activin and the activin receptor, the

CRF1 receptor and urocortin, the native ligand for the CRF2 receptor. These

scientific advances have distinguished him as one of the 10 most cited

scientific authors in the world in the past decade. Dr. Vale received a B.A. in

Biology from Rice University, and a Ph.D. in Physiology and Biochemistry from

the Baylor College of Medicine.



Lawrence J. Steinman, M.D., became Chief Scientist, Neuroimmunology and a

member of Neurocrine's Founding Board of Scientific and Medical Advisors and

its Executive Committee in September 1992. Dr. Steinman is a Professor in the

Department of Neurology and Neurological Sciences, Pediatrics and Genetics at

Stanford University School of Medicine where he has been employed for more than

the last five years, and is Professor of Immunology at the Weizmann Institute.

Dr. Steinman has substantial expertise in the basic and clinical biology of

immunological diseases of the central nervous system. Dr. Steinman has been

honored with the Weir Mitchell Award of the American Academy of Neurology and

the Senator Jacob Javits Neuroscience Investigators Award from the United

States Congress. Dr. Steinman is a member of the Board of Directors of

Centocor, Inc.



Errol B. De Souza, Ph.D., is a Founder and Executive Vice President,

Research and Development for the Company.  Dr. De Souza has served as

President, Chief Executive Officer, and a Director of Neuroscience Pharma

(NPI), Inc. since April 1996.  Prior to joining the Company in October 1992,

Dr. De Souza was Director of Central Nervous System Diseases Research for The

Du Pont Merck Pharmaceutical Company ("Du Pont Merck"), where he directed the

discovery efforts of over 100 scientists in the fields of neurobiology,

molecular biology, pharmacology and chemistry commencing in May 1990. Prior to

joining Du Pont Merck, Dr. De Souza was Chief of the Laboratory of Neurobiology

at the National Institute on Drug Abuse, and he was an Associate Professor in

the Department of Pathology at The Johns Hopkins University School of Medicine.

Dr. De Souza received a B.A. in Physiology and a Ph.D. in Endocrinology from

the University of Toronto and pursued post-doctoral training at The Johns

Hopkins University School of Medicine and the University of Kentucky.



Paul W. Hawran became Senior Vice President and Chief Financial Officer of

the Company in February 1996. In March 1996, Mr. Hawran became Vice President

and Chief Financial Officer of Neuroscience Pharma, Inc., a subsidiary of the

Company. Prior to joining the Company in May 1993 as Vice President, Mr. Hawran

was employed by SmithKline Beecham Corporation ("SmithKline") from July 1984 to

May 1993, most recently as Vice President and Treasurer. Prior to joining

SmithKline in 1984, Mr. Hawran held various financial positions at Warner

Communications (now Time Warner) where he was involved in corporate finance,

financial planning and domestic and international budgeting and forecasting. Mr.

Hawran received a B.S. in Finance from St. John's University and an M.S. in

Taxation from Seton Hall University. He is a Certified Public Accountant and a

member of the American Institute of Certified Public Accountants, California and

Pennsylvania Institute of Certified Public Accountants and the Financial

Executives Institute.



Stephen G. Marcus, M.D. has served as Senior Vice President, Medical

and Regulatory Affairs and Chief Medical Officer since February 1997. Prior to

joining the Company, Dr. Marcus served as Vice President, Clinical and

Regulatory Affairs for Genetic Therapy, Inc., since 1993. Dr. Marcus was

responsible for all clinical and regulatory activities at Genetic Therapy,

Inc., where he filed numerous INDs, led clinical and regulatory activities

leading to human gene therapy trials, and developed a gene therapy product for

malignant brain tumors from Phase I clinical trials to Phase III trials in the

U.S., Canada and Europe. From 1992 to 1993, Dr. Marcus was Vice President,

Medical and Regulatory Affairs for Systemix, Inc., and from 1990 to 1992 was

Director, Oncology Research Worldwide for Schering-Plough Corporation. Dr.

Marcus received a B.S. from Brooklyn College in 1973 and an M.D. from New York

Medical College in 1976. He is certified by the American Board of Internal

Medicine and the American Board of Medical Examiners.



ADDITIONAL INFORMATION



Officers of the Company serve at the discretion of the Board of Directors.

There are no family relationships among any of the directors, executive officers

or key employees. No executive officer, key employee, promoter, or control

person of the Company has, in the last five years, been subject to bankruptcy

proceedings, criminal proceedings, or legal proceedings related to the violation

of state or federal commodities or securities laws.











-28-

29

ITEM 11.  EXECUTIVE COMPENSATION



Information required by this item will be contained in the Company's Notice

of 1997 Annual Meeting of Stockholders and Proxy Statement, pursuant to

Regulation 14A, to be filed with the Securities and Exchange Commission within

120 days after December 31, 1996 and is incorporated herein by reference.



ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT



Information required by this item will be contained in the Company's Notice

of 1997 Annual Meeting of Stockholders and Proxy Statement, pursuant to

Regulation 14A, to be filed with the Securities and Exchange Commission within

120 days after December 31, 1996 and is incorporated herein by reference.



ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



Information required by this item will be contained in the Company's Notice

of 1997 Annual Meeting of Stockholders and Proxy Statement, pursuant to

Regulation 14A, to be filed with the Securities and Exchange Commission within

120 days after December 31, 1996 and is incorporated herein by this reference.











-29-

30

PART IV



ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K



(a)      Documents filed as part of this report.



1.      List of Financial Statements.  The following financial

statements of Neurocrine Biosciences, Inc. and Report of Ernst

& Young LLP, Independent Accountants are included in this

report:



Balance Sheet as of December 31, 1996, 1995, and 1994



Statement of Operations for the years ended December 31, 1996,

1995, 1994, 1993, and 1992



Statement of Stockholders' Equity for the years ended

December 31, 1996, 1995, and 1994



Statement of Cash Flows for the years ended December 31, 1996,

1995, and 1994 Notes to Financial Statements



Report of Ernst & Young LLP, Independent Accountants



2.      List of all Financial Statement schedules:



(i)      All schedules are omitted because they are not

applicable or the required information is shown in the

Financial Statements or notes thereto.



3.      List of Exhibits Required by Item 601 of Regulation S-K.  See

part (c) below.



(b)      Reports on Form 8-K.  No reports on Form 8-K were filed during the

quarter ended December 31, 1996.



(c)      Exhibits.  The following exhibits are filed as part of, or

incorporated by reference into, this report:



<TABLE>

<CAPTION>

Exhibit

Number                   Description

-------   --------------------------------------------------------

<S>      <C>



3.1*      Articles of Incorporation of Neurocrine Biosciences,

Inc., a Delaware corporation, as amended.



3.2*      Bylaws of the Registrant.



4.1*      Form of Lock-Up Agreement.



4.2*      Form of Common Stock Certificate.



4.3*      Form of warrant issued to existing warrant holders.



4.4*      Form of Series A Warrant issued in connection with the

execution by the Registrant of the Unit Purchase

Agreement (see Exhibit 10.20).



4.5*      New Registration Rights Agreement dated March 29, 1996

among the Registrant and the investors signatory

thereto.



10.1*     Information and Registrations Rights Agreement dated

September 15, 1992, as amended to date.





10.2*     1992 Incentive Stock Plan, as amended, and form of

incentive stock option agreement and nonstatutory stock

option agreement

</TABLE>













-30-

31



<TABLE>

<CAPTION>

Exhibit

Number                       Description

-------   --------------------------------------------------------

<S>       <C>

10.3*     1996 Employee Stock Purchase Plan.



10.4*     1996 Director Stock Option Plan and form of stock option

agreement.



10.5*     Form of Director and Officer Indemnification Agreement.



10.6*     Employment Agreement dated March 1, 1993, between the

Registrant and Gary A. Lyons, as amended.



10.7*     Employment Agreement dated July 1, 1993, between the

Registrant and Errol B. De Souza, Ph.D.



10.8*     Employment Agreement dated May 8, 1993, between the

Registrant and Paul W. Hawran.



10.9*     Consulting Agreement dated September 25, 1992, between

the Registrant and Wylie A. Vale, Ph.D.



10.10*    Consulting Agreement effective as of January 1, 1992,

between the Registrant and Lawrence J. Steinman, M.D.



10.11*    Lease Agreement dated June 1, 1993, between the

Registrant and Hartford Accident and Indemnity Company,

as amended.



10.12*    Exclusive License Agreement dated as of July 1, 1993, by

and between the Beckman Research Institute of the City

of Hope and the Registrant covering the treatment of

nervous system degeneration and Alzheimer's disease.



10.13*    Exclusive License Agreement dated as of July 1, 1993, by

and between the Beckman Research Institute of the City

of Hope and the Registrant covering the use of

Pregnenolone for the enhancement of memory.



10.14*    License Agreement dated May 20, 1992, by and between The

Salk Institute for Biological Studies and the

Registrant.



10.15*    License Agreement dated July 17, 1992, by and between

The Salk Institute for Biological Studies and the

Registrant.



10.16*    License Agreement dated November 16, 1993, by and

between The Salk Institute for Biological Studies and

the Registrant.



10.17*    License Agreement dated October 19, 1992, by and between

The Board of Trustees of the Leland Stanford Junior

University and the Registrant.



10.18*    Agreement dated January 1, 1995, by and between the

Registrant and Janssen Pharmaceutica, N.V.



10.19*    Letter Agreement dated January 19, 1996, by and between

the Registrant and Ciba-Geigy Limited.



10.20*#   Unit Purchase Agreement dated March 29, 1996, by and

between Neuroscience Pharma (NPI) Inc., the Registrant

and the investors signatory thereto.



10.21*#   Exchange Agreement dated March 29, 1996, by and between

Neurocrine Biosciences (Canada) Inc., the Registrant and

the investors signatory thereto.



10.22*#   Research and Development Agreement dated March 29, 1996,

by and between Neurocrine Biosciences (Canada) Inc. and

Neuroscience Pharma (NPI) Inc.



10.23*#   Intellectual Property and License Grants Agreement dated

March 29, 1996, by and between the Registrant and

Neurocrine Biosciences (Canada) Inc.



</TABLE>









-31-

32

<TABLE>

<CAPTION>

Exhibit

Number                   Description

-------   -------------------------------------------------------

<S>        <C>

10.24**    Development and Commercialization Agreement dated

December 20, 1996, by and between Ciba-Geigy Ltd. and

the Registrant.



10.25**    Letter and Purchase Order dated June 7, 1996, by and

between Ciba-Geigy and the Registrant.



10.26**    Third Lease Amendment dated June 6, 1996, by and between

Talcott Realty I Limited Partnership and the Registrant.





10.27**    Research and License Agreement dated October 15, 1996,

between the Registrant and Eli Lilly and Company.



11.1       Computation of Net Earnings per Share.



21.1*      List of subsidiaries of the Registrant.



23.1       Consent of Ernst & Young LLP, independent auditors.



24.1       Power of Attorney (reference is made to the following

page of this Form 10-K).



27.1       Financial data schedule.

</TABLE>



*        Incorporated herein by reference to the same-numbered exhibit

previously filed with the Company's Registration Statement on Form S-1

(Registration No. 333-03172).



**       Confidential treatment has been requested with respect to certain

portions of the exhibit.



#        Confidential treatment has been granted with respect to certain

portions of the exhibit.



(d)      Financial Statement Schedules



See Item 14(a)(2) above.











-32-

33

SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) of the Securities

Exchange Act of 1934, the Registrant has duly caused this report to be signed on

its behalf by the undersigned, thereunto duly authorized.



NEUROCRINE BIOSCIENCES, INC.

a Delaware Corporation





By: /s/ Gary A. Lyons

------------------------------

Gary A. Lyons

President and Chief Executive Officer



Date: March 27, 1997





POWER OF ATTORNEY



KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature

appears below constitutes and appoints Gary A. Lyons and Paul Hawran, jointly

and severally his attorneys-in-fact, each with the power of substitution, for

him in any and all capacities, to sign any amendment to this Report on Form

10-K, and to file the same, with exhibits thereto and other documents in

connection therewith, with the Securities and Exchange Commission, hereby

ratifying and confirming all that each of said attorneys-in-fact, or his

substitute or substitutes, may or cause to be done by virtue hereof.



Pursuant to the requirements of the Securities Exchange Act of 1934, this

report has been signed by the following persons on behalf of the Registrant and

in the capacities and on the dates indicated.



<TABLE>

<CAPTION>

Signature                                    Title                                       Date

<S>                                    <C>                                                        <C>

/s/ Gary A. Lyons                     President, Chief Executive Officer and                      March 27, 1997

------------------------------------   Director (Principal Executive Officer)

Gary A. Lyons



/s/ Paul Hawran                       Chief Financial Officer (Principal Financial                March 27, 1997

------------------------------------   and Accounting Officer)

Paul Hawran



/s/ Harry F. Hixson, Jr.               Chairman of the Board of Directors                         March 27, 1997

------------------------------------

Harry F. Hixson, Jr.



/s/ Howard C. Birndorf                 Director                                                   March 27, 1997

------------------------------------

Howard C. Birndorf



Director                                                   March   , 1997

------------------------------------

David E. Robinson



/s/ David Schnell                      Director                                                   March 27, 1997

------------------------------------

David Schnell



/s/ Wylie W. Vale                      Director                                                   March 27, 1997

------------------------------------

Wylie W. Vale

</TABLE>

34

NEUROCRINE BIOSCIENCES, INC.

INDEX TO FINANCIAL STATEMENTS





<TABLE>

<CAPTION>

PAGE

----

<S>                                                              <C>

Report of Independent Auditors  . . . . . . . . . . . . . . . .   F-1



Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . .   F-2



Statement of Operations . . . . . . . . . . . . . . . . . . . .   F-3



Statement of Stockholders' Equity . . . . . . . . . . . . . . .   F-4



Statement of Cash Flows . . . . . . . . . . . . . . . . . . . .   F-5



Notes to Financial Statements . . . . . . . . . . . . . . . . .   F-6

</TABLE>

35



REPORT OF INDEPENDENT AUDITORS





The Board of Directors and Stockholders

Neurocrine Biosciences, Inc.



We have audited the accompanying balance sheets of Neurocrine Biosciences, Inc.

as of December 31, 1996 and 1995, and the related statements of operations,

stockholders' equity, and cash flows for each of the three years in the period

ended December 31, 1996. These financial statements are the responsibility of

the Company's management. Our responsibility is to express an opinion on these

financial statements based on our audits.



We conducted our audits in accordance with generally accepted auditing

standards. Those standards require that we plan and perform the audit to obtain

reasonable assurance about whether the financial statements are free of

material misstatement. An audit includes examining, on a test basis, evidence

supporting the amounts and disclosures in the financial statements. An audit

also includes assessing the accounting principles used and significant

estimates made by management, as well as evaluating the overall financial

statement presentation. We believe that our audits provide a reasonable basis

for our opinion.



In our opinion, the financial statements referred to above present fairly, in

all material respects, the financial position of Neurocrine Biosciences, Inc.

at December 31, 1996 and 1995, and the results of its operations and its cash

flows for each of the three years in the period ended December 31, 1996, in

conformity with generally accepted accounting principles.





/s/ ERNST & YOUNG LLP

----------------------------

Ernst & Young LLP



San Diego, California

February 14, 1997











F-1

36

BALANCE SHEET



<TABLE>

<CAPTION>

DECEMBER 31,

------------------------------

1996           1995

--------------   -------------

<S>                                                           <C>                      <C>

ASSETS

Current assets

Cash and cash equivalents                                $  11,325,361    $ 6,392,749

Short-term investments, available-for-sale (Note 2)         58,594,853     12,303,460

Receivable under collaborative agreements (Note 6)           1,329,513      1,000,000

Other current assets                                           840,962        234,334

-------------    -----------

Total current assets                                     72,090,689     19,930,543

Furniture, equipment and leasehold improvements, net         3,546,420      2,772,844

(Note 3)

Licensed technology and patent application costs, net        1,443,403        919,049

(Notes 3 and 5)

Other assets                                                   876,070        389,296

--------------   -----------

Total assets                                          $  77,956,582    $24,011,732

==============   ===========



LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities

Accounts payable                                         $     800,157    $   820,883



Accrued liabilities (Note 3)                                 1,564,889        879,287

Deferred revenue                                               918,750        500,000

Current portion of obligations under capital leases            783,718        741,294

(Note 5)                                              -------------    -----------

Total current liabilities                                       4,067,514      2,941,464

Obligations under capital leases, less current portion            846,744      1,631,404

(Note 5)

Deferred rent                                                     275,356        213,925

Commitments (Note 5)

Stockholders' equity (Notes 2 and 4):

Preferred Stock, $0.001 par value, 5,000,000 shares

authorized, no shares issued and outstanding

Common stock, no par value:

Authorized shares-100,000,000

Issued and outstanding shares - 16,776,614 in 1996,

and 11,723,101 in 1995                                   83,251,404     35,597,941

Deferred compensation                                         (377,057)      (342,679)

Notes receivable from stockholders                            (127,704)      (138,177)

Unrealized gains on short-term investments                      41,870          3,319



Accumulated deficit                                        (10,021,545)   (15,895,465)

--------------   -----------

Total stockholders' equity                                     72,766,968     19,224,939

--------------   -----------

Total liabilities and stockholders' equity                  $   77,956,582   $24,011,732

==============   ===========



</TABLE>



See accompanying notes.











F-2

37

STATEMENT OF OPERATIONS



<TABLE>

<CAPTION>

YEAR ENDED DECEMBER 31,

---------------------------------------------------

1996               1995               1994

-------------        -----------        -----------

<S>                                                    <C>                  <C>                 <C>

Revenues:

Sponsored research                                  $ 7,343,750         $3,000,000        $       -

License fees                                          5,000,000          2,000,000                -

Milestones                                            4,000,000            750,000                -

Other revenues                                        2,871,912            355,750            161,533

-------------        -----------        -----------

Total revenues                                    19,215,662          6,105,750            161,533





Operating expenses:

Research and development                             12,569,114          7,740,128          6,230,483

General and administrative                            3,696,515          2,728,342          2,222,967

-------------        -----------        -----------

Total operating expenses                          16,265,629         10,468,470          8,453,450





Income (loss) from operations                            2,950,033         (4,362,720)        (8,291,917)

Interest income                                          2,870,407          1,137,004            785,640

Interest expense                                          (272,464)          (297,675)          (157,960)

Other income (expense)                                     573,627            177,001            (41,398)

-------------        -----------        -----------

Income (loss) before income taxes                        6,121,603         (3,346,390)        (7,705,635)

Income taxes                                               247,683                -                  -

-------------        -----------        -----------

Net income (loss)                                      $ 5,873,920        $(3,346,390)       $(7,705,635)

=============        ===========        ===========

Net income (loss) per share                            $      0.35        $     (0.27)       $     (0.67)

=============        ===========        ===========

Shares used in computing net income

(loss) per share

16,589,415         12,183,582         11,433,482

=============        ===========        ===========

</TABLE>

See accompanying notes.







F-3

38

STATEMENT OF STOCKHOLDERS' EQUITY





<TABLE>

<CAPTION>



UNREALIZED

NOTES             GAINS

RECEIVABLE       (LOSSES) ON                        TOTAL

DEFERRED        FROM           SHORT-TERM        ACCUMULATED  STOCKHOLDERS'

SHARES      AMOUNT    COMPENSATION   STOCKHOLDERS      INVESTMENTS        DEFICIT        EQUITY

------      ------    ------------   ------------      -----------        -------        ------

<S>                          <C>          <C>         <C>           <C>             <C>                <C>             <C>

Balance at December 31, 1993  10,205,954  $27,141,773    $      --  $(160,924)              --          $ (4,843,440)   $22,137,409

Issuance of Common Stock for

cash, net . . . . . . . . .    879,592    4,087,884           --         --               --                  --        4,087,884

Repurchase of shares  . . . .    (26,120)      (1,359)          --         --               --                  --           (1,359)

Payment on notes receivable .         --           --           --     12,661               --                  --           12,661

Compensation related to grant

of stock options  . . . . .         --      235,368           --         --               --                  --          235,368

Unrealized losses on short-

term investments  . . . . .         --           --           --         --            (23,535)               --          (23,535)

Net loss  . . . . . . . . . .         --           --           --         --               --            (7,705,635)    (7,705,635)

----------   ----------     --------  ---------   ----------------        ------------    -----------

Balance at December 31, 1994  11,059,426   31,463,666           --   (148,263)           (23,535)        (12,549,075)    18,742,793

Issuance of Common Stock for

cash . . . . . . . . . . .    659,635    3,730,000           --         --               --                  --        3,730,000

Issuance of Common Stock for

services . . . . . . . . .      4,040       20,200           --         --               --                  --           20,200

Payment on notes receivable .         --           --           --     10,086               --                  --           10,086



Deferred compensation related

to grant of stock options .         --      384,075     (384,075)        --               --                  --              --

Amortization of deferred

compensation  . . . . . .         --           --       41,396         --               --                  --           41,396

Unrealized gains on short-term

investments  . . . . . . .         --           --           --         --             26,854                --           26,854

Net loss  . . . . . . . . . .         --           --           --         --               --            (3,346,390)    (3,346,390)

----------   ----------     --------  ---------   ----------------        ------------    -----------

Balance at December 31, 1995  11,723,101   35,597,941     (342,679)  (138,177)             3,319         (15,895,465)    19,224,939

Issuance of Common Stock for

cash  . . . . . . . . . . .  5,053,513   47,539,591           --         --               --                   --      47,539,591

Payments on notes receivable          --           --           --     10,473               --                   --          10,473

Deferred compensation related

to grant of stock options .         --      113,872     (113,872)        --               --                   --              --

Amortization of deferred

compensation  . . . . . . .         --           --       79,494         --               --                   --          79,494

Unrealized gains on short-term

investments  . . . . . . .         --           --           --         --             38,551                 --          38,551

Net income  . . . . . . . . .         --           --           --         --               --             5,873,920      5,873,920

----------  -----------    ---------  ---------   ----------------        ------------   ------------

Balance at December 31, 1996  16,776,614  $83,251,404    $(377,057) $(127,704)          $ 41,870        $(10,021,545)  $ 72,766,968

==========  ===========    =========  =========   ================        ============   ============



</TABLE>





See accompanying notes.



F-4

39

STATEMENT OF CASH FLOWS



<TABLE>

<CAPTION>

YEAR ENDED DECEMBER 31,

--------------------------------------------

1996            1995            1994

--------------------------------------------

<S>                                                     <C>                               <C>

CASH FLOW FROM OPERATING ACTIVITIES:

Net income (loss)                                             $ 5,873,920       $(3,346,390)   $(7,705,635)



Adjustments to reconcile net income (loss) to net cash

provided by (used in) operating activities:

Depreciation and amortization                               980,833          715,398          515,294

Deferred revenue                                            418,750          500,000              -

Compensation expense recognized for stock options            79,494           41,396          235,368

Deferred rent                                                61,431          213,925              -

Loss on sale of assets                                       25,370              -                -

Common Stock issued for technology                              -             20,200              -

Write-off of licensed technology and patent

application costs                                               -                -            190,720

Change in operating assets and liabilities:

Accounts payable and accrued liabilities               664,876          356,429             (786)

Receivable under collaborative agreements             (329,513)      (1,000,000)             -

Other assets                                          (486,774)           9,516          (88,448)

Other current assets                                  (606,628)          67,797         (223,953)

----------        ----------      ----------

Net cash flows provided by (used in) operating                 6,681,759        (2,421,729)     (7,077,440)

activities



CASH FLOW FROM INVESTING ACTIVITIES:

Purchases of short-term investments                           (85,171,207)     (17,854,139)     (43,394,769)

Sales/maturities of short-term investments                     38,918,365       19,098,351       29,859,531

Purchase of licensed technology and expenditures for

patent application costs                                         (663,796)        (263,261)        (235,541)

Purchases of furniture, equipment and leasehold

improvements                                                   (1,640,337)         (47,657)             -

-----------       ----------      ----------

Net cash flows provided by (used in) investing                (48,556,975)         933,294      (13,770,779)

activities



CASH FLOW FROM FINANCING ACTIVITIES:

Issuance of Common Stock, net                                 47,539,591        3,730,000        4,087,884

Principal payments on obligations under capital leases          (742,236)        (574,954)        (222,875)

Payments received on notes receivable from shareholders           10,473           10,086           12,661

Advance received on capital lease                                    -                -             49,399

Repurchase of Common Stock                                           -                -             (1,359)

----------        ----------      ----------

Net cash flows provided by financing activities               46,807,828        3,165,132        3,925,710

==========        ==========      ==========

Net increase (decrease) in cash and cash equivalents           4,932,612        1,676,697      (16,922,509)

Cash and cash equivalents at beginning of year                 6,392,749        4,716,052       21,638,561

----------        ----------      ----------

Cash and cash equivalents at end of year                     $11,325,361       $6,392,749      $ 4,716,052

==========        ==========      ==========





SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

Interest paid                                                 $  272,464        $ 298,332      $   157,960

==========        ==========      ==========

Taxes paid                                                    $   40,000        $     -        $      -

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND                ==========        ==========      ==========

FINANCING ACTIVITIES



Furniture and equipment financed with obligations under      $       -         $  689,791      $  1,477,457

capital leases                                                ==========        ===========     ===========

</TABLE>



See accompanying notes.







F-5

40

NEUROCRINE BIOSCIENCES, INC.



NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1996



1.   ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



Organization and Business Activity:  Neurocrine Biosciences, Inc. (the

"Company") was incorporated in California on January 17, 1992 and was

reincorporated in Delaware in March 1996.  The Company is engaged in the

discovery and development of therapeutics for the treatment of diseases and

disorders of the central nervous and immune systems which includes anxiety,

depression, Alzheimer's disease, obesity, stroke and multiple sclerosis.



Cash Equivalents:  The Company considers as cash equivalents all

highly liquid investments with a maturity of three months or less when

purchased.



Short-Term Investments Available-for-Sale:  In accordance with

Statement of Financial Accounting Standards No. 115, "Accounting for Certain

Debt and Equity Securities," short-term investments are classified as

available-for-sale. Available-for-sale securities are carried at fair value,

with the unrealized gains and losses reported in a separate component of

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 investment income. Realized gains and losses

and declines in value judged to be other-than-temporary, if any, on

available-for-sale securities are included in investment income. The cost of

securities sold is based on the specific identification method. Interest and

dividends on securities classified as available-for-sale are included in

interest income.



The Company invests its excess cash in high-grade commercial paper,

investment grade debt instruments, and marketable debt securities of U.S.

government agencies. Management has established guidelines relative to

diversification and maturities that maintain safety and liquidity.



Furniture, Equipment and Leasehold Improvements:  Furniture, equipment

and leasehold improvements are carried at cost. Depreciation and amortization

are provided over the estimated useful lives of the assets, ranging from five

to seven years, using the straight-line method.



Licensed Technology and Patent Application Costs:  Licensed technology

consists of exclusive, worldwide, perpetual licenses to patents related to the

Company's platform technology, which are capitalized at cost and amortized over

periods of 10 to 17 years.



Asset Impairment:  The Company adopted Statement of Financial

Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of

Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," effective

January 1, 1996.  There was no effect on the financial statements from the

adoption of SFAS No. 121.



Research and Development Revenue and Expenses:  Revenue under

strategic alliances is recognized over the term of the agreement. Advance

payments received in excess of amounts earned are classified as deferred

revenue. Research and development costs are expensed as incurred.



Net Income (Loss) Per Share:  Net income (loss) per share is computed

using the weighted average number of shares of common stock outstanding during

each period.  Common stock equivalent shares from stock options, warrants, and

convertible preferred shares are excluded from the computation when their

effect is antidilutive, except that, pursuant to the Securities and Exchange

Commission Staff Accounting Bulletins, common and common equivalent shares

issued at prices substantially below the public price during the 12-month

period prior to the filing of the initial public offering have been included in

the calculation as if they were outstanding for all periods through that date

(using the treasury stock method).  Income per share on a fully diluted basis

was unchanged.



Reliance on 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 amounts of revenues and expenses

during the reporting period. Actual results could differ from those estimates.



F-6

41

NEUROCRINE BIOSCIENCES, INC.



NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996





Reclassifications:  Certain amounts in the financial statements as of

and for the years ended December 31, 1995 and 1994 have been reclassified to

conform with current classifications.



2.   SHORT-TERM INVESTMENTS



The following is a summary of short-term investments:





<TABLE>

<CAPTION>

AVAILABLE-FOR-SALE SECURITIES

-----------------------------

DECEMBER 31, 1996                               DECEMBER 31, 1995

-----------------                               -----------------

GROSS        GROSS     ESTIMATED                   GROSS        GROSS     ESTIMATED

UNREALIZED   UNREALIZED     FAIR                    UNREALIZED   UNREALIZED     FAIR

COST        GAINS       LOSSES       VALUE          COST       GAINS        LOSSES      VALUE

----------  ---------   ----------  ----------    -----------  ----------   ---------   ----------

<S>                   <C>          <C>         <C>         <C>           <C>           <C>          <C>         <C>

U.S. Government

agency securities       $7,973,645  $  24,706   $ (26,388)  $ 7,971,963    $ 6,982,363        --     $  (6,213)  $6,976,150

Certificates of

deposit . . . . . . .      484,022         --          --       484,022        222,310        --           --       222,310

Commercial paper  . .    3,972,292         --          --     3,972,292           --          --           --           --

Corporate debt

securities . . . .   46,123,024     80,288     (36,736)   46,166,576      5,095,468       9,532         --     5,105,000

-----------  ---------   ----------  -----------    -----------   ---------   ---------   ----------

Total debt securities  $58,552,983   $104,994    $(63,124)  $58,594,853    $12,300,141   $   9,532   $  (6,213) $12,303,460

===========  =========   ==========  ===========    ===========   =========   =========   ==========

</TABLE>





Gross realized gains and losses were not material for any of the

reported periods.  The amortized cost and estimated fair value of debt

securities, by contractual maturity, are shown below.





<TABLE>

<CAPTION>

ESTIMATED

DECEMBER 31, 1996                                     COST        FAIR VALUE

------------   ------------

<S>                                                <C>            <C>

Due in one year or less . . . . . . . . . . . .    $14,793,352    $14,790,710

Due after one year through five years . . . . .     43,759,631     43,804,143

------------   ------------

$58,552,983    $58,594,853

============    ===========

</TABLE>



3.   BALANCE SHEET DETAILS



Furniture, equipment and leasehold improvements consist of the following:



<TABLE>

<CAPTION>

DECEMBER 31,

------------

1996           1995

------------    ------------

<S>                                                             <C>            <C>

Equipment . . . . . . . . . . . . . . . . . . . . . . . . . .      $3,738,213     $2,705,757

Furniture and fixtures  . . . . . . . . . . . . . . . . . . .       1,123,956        788,958

Leasehold improvements  . . . . . . . . . . . . . . . . . . .         646,939        418,155

------------    ------------

5,509,108      3,912,870

Less accumulated depreciation and amortization  . . . . . . .      (1,962,688)    (1,140,026)

------------    ------------

Net furniture, equipment and leasehold improvements . . . .  .     $3,546,420     $2,772,844

------------    ------------

</TABLE>



Licensed technology and patent application costs consisted of

$1,744,240 and $1,081,590 at December 31, 1996 and 1995, respectively, and

accumulated amortization was $300,837 and $162,541 at December 31, 1996 and

1995, respectively.



F-7

42

NEUROCRINE BIOSCIENCES, INC.



NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996



Accrued liabilities consist of the following:



<TABLE>

<CAPTION>

DECEMBER 31,

-----------------------

1996           1995

--------       --------

<S>                                       <C>            <C>

Accrued employee benefits . . . . .  $   414,971    $   259,394

Accrued clinical trial costs  . . .      256,141            --

Accrued income taxes  . . . . . . .      206,883            --

Accrued professional fees . . . . .      143,407        335,000

Other accrued liabilities . . . . .      543,487        284,893

==========     ==========

$1,564,889     $  879,287

==========     ==========

</TABLE>



4.   STOCKHOLDERS' EQUITY



Common Stock Issuances:  The Company sold approximately 5,880,000

shares of Common Stock at $5.00 per share in various private financings from

September 1993 through February 1994, resulting in net proceeds to the Company

of approximately $27.6 million.



Concurrent with collaborative research and development agreements

entered into in 1995 and 1996, the Company sold 434,783 shares to Johnson &

Johnson Development Corporation ("JJDC"), an affiliate of Janssen

Pharmaceutica, N.V. ("Janssen"), for $2.5 million, and 645,161 shares to

Ciba-Geigy Limited ("Ciba-Geigy") at $7.75 per share.



In 1996, the Company sold 3,680,000 shares in an initial public

offering resulting in net proceeds of approximately $36.0 million.  Concurrent

with the offering, JJDC and Ciba-Geigy purchased an aggregate of 714,286 shares

for $7.5 million.



Options:  The Company has reserved 3,300,000 shares of Common Stock

for issuance upon exercise of options or stock purchase rights granted under

the 1992 Incentive Stock Option Plan ("The Plan").  The Plan provides for the

grant of stock options and stock purchase rights to officers, directors, and

employees of, and consultants and advisors to, the Company.  Options under the

Plan have a term of up to 10 years from the date of grant and may be designated

as incentive stock options or nonstatutory stock options.



The Company has elected to follow Accounting Principles Board Opinion

No. 25, "Accounting for Stock Issued to Employees" (APB 25), and related

Interpretations, in accounting for its employee stock options because, as

discussed below, the alternative fair value accounting provided for under FASB

Statement No. 123, "Accounting for Stock-Based Compensation," requires use of

option valuation models that were not developed for use in valuing employee

stock options.  As a result, deferred compensation is recorded only in the

event that the fair market value of the stock on the date of the option grant

exceeds the exercise price of the options.  Such deferred compensation is

amortized over the vesting period of the options.  Compensation expense

recognized during the years ended December 31, 1996 and 1995 was $79,494 and

$41,396, respectively.



Pro forma information regarding net income (loss) and income (loss)

per share is required by Statement 123, and has been determined as if the

Company had accounted for its employee stock options under the fair value

method of that Statement.  The fair value for these options was estimated at

the date of grant using a Black-Scholes option pricing model using the

following weighted-average assumptions for both 1995 and 1996: a risk-free

interest rate of 6.1%, dividend yield of 0.0%, a volatility factor of the

expected market price of the Company's common stock of .41; and a weighted

average expected life of the option of 5 years.



For purposes of pro forma disclosures, the estimated fair value of the

options granted is amortized to expense over the options' vesting period.  The

Company's pro forma information for the years ended December 31, 1996 and 1995

follows:



F-8

43

NEUROCRINE BIOSCIENCES, INC.



NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996





<TABLE>

<CAPTION>

1996         1995

------       -------

<S>                                                       <C>         <C>

Pro forma net income (loss) (in thousands)                 $5,375      ($3,474)

Pro forma income (loss) per share                          $ 0.33      ($ 0.29)

</TABLE>





The pro forma effect on net income for 1996 and net loss for 1995 is

not likely to be representative of the effects on reported net income or loss

in future years because these amounts reflect only two years or one year of

vesting, respectively.



A summary of the Company's stock option activity and related

information for the years ended December 31 follows:



<TABLE>

<CAPTION>

1996                            1995                             1994

----------------------------    ----------------------------     ----------------------------

OPTIONS                         OPTIONS                          OPTIONS

(IN      WEIGHTED-AVERAGE       (IN      WEIGHTED-AVERAGE        (IN      WEIGHTED-AVERAGE

THOUSANDS)    EXERCISE PRICE    THOUSANDS)    EXERCISE PRICE     THOUSANDS)    EXERCISE PRICE

----------    --------------    ----------    --------------     ----------    --------------

<S>                          <C>               <C>           <C>               <C>              <C>             <C>

Outstanding-beginning

of year                      1,415             $3.61           906             $3.22            540             $2.51

Granted (below market)         255             $6.90           638             $4.28            380             $4.28

Granted (at market)            123             $9.30             -                 -              -                 -

Exercised                       11             $3.60             -                 -              -                 -

Forfeited                       43             $4.41           129             $4.18             14             $4.59

----------                      ----------                       ----------

Outstanding-end of year      1,739             $4.48         1,415             $3.61            906             $3.22

==========                      ==========                       ==========

</TABLE>





The weighted-average fair value of options granted was $3.76 and $2.54

in 1996 and 1995, respectively.



A summary of options outstanding and exercisable as of December 31,

1996 follows:



<TABLE>

<CAPTION>

OPTIONS                  EXERCISE PRICE              WEIGHTED-AVERAGE            WEIGHTED-AVERAGE

(IN THOUSANDS)                    RANGE                   EXERCISE PRICE             CONTRACTUAL LIFE

--------------                    -----                   --------------             ----------------

<S>                      <C>                        <C>                        <C>

539                         $2.50                       $2.50                      6.8 years

926                    $4.25 to $5.95                   $4.41                      8.3 years

274                    $7.01 to $10.13                  $8.58                      9.7 years







OPTIONS EXERCISABLE               EXERCISE                 WEIGHTED-AVERAGE

(IN THOUSANDS)                PRICE RANGE                EXERCISE PRICE

-------------------              -----------               ----------------

<S>                      <C>                          <C>

500                         $2.50                       $2.50

424                    $4.25 to $5.95                   $4.38

14                    $7.01 to $10.13                  $8.38

</TABLE>



Warrants:  The Company has outstanding warrants to purchase 898,944

shares of Common Stock at  exercise prices  of $5.00 to $10.50 per share.  The

warrants generally expire between 1998 and 2007.  At December 31, 1996, 168,005

warrants were exercisable, and the remainder will become exercisable in 1997.



Employee Stock Purchase Plan:  In March 1996, the Board of Directors

adopted the 1996 Employee Stock Purchase Plan (the "Purchase Plan"). A total of

125,000 shares of Common Stock is reserved for issuance under the Purchase

Plan.  The Purchase Plan permits eligible employees to purchase Common Stock

through payroll deductions at a purchase price equal to 85% of the lesser of

the fair market value per share of Common Stock on the start date of an

offering period or on the date on which the shares are purchased.  Through

December 31, 1996 no shares had been issued pursuant to the Purchase Plan.







F-9

44

NEUROCRINE BIOSCIENCES, INC.



NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996





Director Option Plan:  In March 1996 the Board of Directors adopted

the 1996 Director Option Plan (the "Director Plan") which generally provides

for the grant of ten-year options to purchase 10,000 shares of Common Stock to

each non-employee director of the Company at each annual meeting of the

stockholders commencing in 1997.  Such options become exercisable over a

three-year period following the date of grant.  Through December 31, 1996 no

shares had been issued pursuant to the Director Plan.



The following shares of Common Stock are reserved for future issuance

at December 31, 1996:



<TABLE>

<S>                                                        <C>

Stock Options                                               1,945,458

Warrants                                                      898,944

Employee stock purchase plan                                  125,000

Director option plan                                          100,000

----------

Total                                           3,069,402

==========

</TABLE>



Of the shares available for future issuance under the stock option

plan, 1,738,840 are outstanding grants and 206,618 remain available for future

grant.



5.   COMMITMENTS



Leases:  The Company leases its corporate and laboratory facilities

under an operating lease which expires in June 2006. Rent expense was

approximately $1,298,000, $798,000 and $667,000 for the years ended December

31, 1996, 1995 and 1994, respectively, and sublease rental revenue totaled

approximately $598,000, $177,000 and $133,000 for the years ended December 31,

1996, 1995 and 1994, respectively.



Furniture and equipment under capital leases were approximately

$3,368,000 at December 31, 1996 and 1995. Accumulated depreciation of furniture

and equipment under capital leases totaled $1,679,000 and $1,043,000 at

December 31, 1996 and 1995, respectively.



Future minimum payments at December 31, 1996 are as follows:



<TABLE>

<CAPTION>

OBLIGATIONS

UNDER

CAPITAL          OPERATING

LEASES           LEASES

---------       -----------

<S>                                              <C>               <C>

1997  . . . . . . . . . . . . . . . . . . .      $   919,179       $ 1,336,496

1998  . . . . . . . . . . . . . . . . . . .          758,411         1,316,327

1999  . . . . . . . . . . . . . . . . . . .          129,190         1,355,816

2000  . . . . . . . . . . . . . . . . . . .              --          1,396,491

2001  . . . . . . . . . . . . . . . . . . .              --          1,438,386

Thereafter  . . . . . . . . . . . . . . . .              --          7,031,941

---------       -----------

Total minimum payments  . . . . . . . . . .        1,806,780       $13,875,457

===========

Amount representing interest  . . . . . . .          176,318

---------

Present value of net minimum payments . . .        1,630,462

Less current portion  . . . . . . . . . . .          783,718

---------

Long-term obligations under capital leases       $   846,744

=========

</TABLE>



Future minimum rental income to be received under noncancellable

subleases at December 31, 1996 will be $570,237, $512,257, $527,625, $543,453

and $559,757 for the five years ending December 31, 1997 through 2001,

respectively.



F-10

45

NEUROCRINE BIOSCIENCES, INC.



NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996



Licensing and Research Agreements:  The Company has entered into

licensing agreements with various universities and research organizations.

Under the terms of these agreements, the Company has received licenses to

technology, or technology claimed, in certain patents or patent applications.

The Company is required to pay royalties on future sales of products employing

the technology or falling under claims of a patent, and, certain agreements

require minimum royalty payments.  Certain agreements also require the Company

to make payments of up to an aggregate of approximately $4.9 million upon the

achievement of specified milestones.



6.   COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS



Janssen:  In January 1995, the Company entered into a research and

development agreement with Janssen (the "Janssen Agreement"), under which

Janssen paid the Company $2.0 million in up-front license fees and is obligated

to provide the Company with $3.0 million in sponsored research payments per year

during the three-year term of the research program, with Janssen having the

right to extend such term for up to two additional years.



The Company is entitled to receive up to $9.0 million in milestone

payments if certain development milestones are achieved, of which $1,750,000

has been received through December 31, 1996. The Company has granted Janssen an

exclusive worldwide license to manufacture and market products developed under

the Janssen Agreement. The Company is entitled to receive royalties on product

sales throughout the world. The Company has certain rights to co-promote such

products in North America. Janssen is responsible for funding all clinical

development and marketing activities, including reimbursement to Neurocrine for

its promotional efforts, if any.



Janssen has the right to terminate the Agreement upon six months

notice. However, in the event of termination, other than termination by Janssen

for cause or as a result of the acquisition of Neurocrine, Janssen remains

obligated to continue all sponsored research payments for the term of the

research program and all product and technology rights become the exclusive

property of Neurocrine.



Ciba-Geigy:  In January 1996, the Company entered into an agreement

with Ciba-Geigy under which Ciba-Geigy paid the Company $5.0 million in up-front

license fees and is obligated to provide Neurocrine with $7.0 million in

research and development funding during the first two years of the agreement and

up to $15.5 million in further research and development funding thereafter. In

addition, the Company is also entitled to receive milestone payments if certain

development and regulatory milestones are achieved, of which $3.0 million has

been received through December 31, 1996.  In return, Ciba-Geigy received

manufacturing and marketing rights outside of North America and will receive a

percentage of profits on sales in North America.  The Company will receive

royalties for all sales outside North America and a percentage of profits on

sales in North America, which the Company may at its option convert to a right

to receive royalties on product sales.  Neurocrine is obligated to repay a

portion of the development costs for potential products developed in such

collaboration unless the Company elects to convert to the right to receive

royalty payments.



Eli Lilly:  In October 1996, the Company entered into an agreement

with Eli Lilly and Company ("Eli Lilly") under which the Company expects to

receive up to $22.0 million in research payments.  The Company is also entitled

to milestone payments if certain development and regulatory accomplishments are

achieved. In January 1997 Eli Lilly paid the Company a $5.0 million research

payment. The Company will have the option to receive copromotion rights and

share profits from commercial sales of select products which result from the

collaboration in the U.S. or receive royalties on U.S. product sales.  The

Company will receive royalties on product sales for the rest of the world.



7.   INCOME TAXES



At December 31, 1996, the Company had federal income tax net operating

loss carryforwards of approximately $8.7 million and federal and California

research tax credit carryforwards of approximately $740,000 and $116,000,

respectively, which will begin to expire in 2007 unless previously utilized.

The Company also has federal Alternative Minimum Tax credit carryforwards of

approximately $130,000 which will carryforward indefinitely.





F-11

46

NEUROCRINE BIOSCIENCES, INC.



NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996



Pursuant to Internal Revenue Code Sections 382 and 383, annual use of

the Company's net operating loss and credit carryforwards may be limited

because of cumulative changes in ownership of more than 50% which occurred

during 1992 and 1993. However, the Company does not believe such changes will

have a material impact upon the utilization of these carryforwards.



The provision for income taxes in 1996 consists of federal alternative

minimum taxes. Significant components of the Company's deferred tax assets as of

December 31, 1995 and 1996 are shown below. A valuation allowance, which was

decreased by $2.3 million in 1996, has been recognized to fully offset the

deferred tax assets as of December 31, 1996 and 1995 as realization of such

assets is uncertain.



<TABLE>

<CAPTION>

December 31,

-----------------------------------------

1996                         1995

-----------                   -----------

<S>                                                               <C>                           <C>

Deferred tax assets:

Net operating loss carryforwards  . . . . . . . .             $ 3,038,000                   $ 5,279,000

Tax credits . . . . . . . . . . . . . . . . . . .                 946,000                       884,000

Capitalized research and development  . . . . . .                 594,000                       656,000

Other, net  . . . . . . . . . . . . . . . . . . .                  69,000                       157,000

-----------                   -----------

Total deferred tax assets . . . . . . . . . . . . . .               4,647,000                     6,976,000

Valuation allowance for deferred tax assets . . .              (4,647,000)                   (6,976,000)

-----------                   -----------

Net deferred tax assets . . . . . . . . . . . . . . .             $                             $

===========                   ===========

</TABLE>





8.   NEUROSCIENCE PHARMA (NPI) INC.



In March 1996, the Company established Neuroscience Pharma (NPI) Inc.

("NPI"), a subsidiary of the Company in Canada. The Company licensed to NPI

certain technology and Canadian marketing rights.



A group of Canadian institutional investors (the "Canadian Investors")

invested approximately $9.5 million in NPI in exchange for Preferred Stock of

NPI which may be converted into a majority ownership interest in NPI or into

1,279,584 shares of the Company's Common Stock at the option of the investors.

NPI has committed to use these funds for research and clinical development of

certain of the Company's programs in exchange for royalties on sales of

products developed in these programs as well as exclusive Canadian marketing

rights for such products in certain situations. The Company has the right to

terminate the agreement upon the purchase of  the shares of NPI Preferred Stock

held by the Canadian Investors in exchange for Common Stock at a predetermined

price.  In connection with their investment in NPI, the Canadian Investors

received warrants exercisable for 383,875 shares of the Company's Common Stock

at an exercise price of $10.50 per share and are also eligible to receive

additional warrants in the future upon attainment of certain additional

funding.



Since the Company does not have a majority interest in NPI, NPI is not

consolidated. The Company will recognize its pro rata share of the cumulative

profits of NPI as they are earned. All cumulative losses of NPI will be

allocated to the majority owners as the Company has not contributed any assets

with an accounting basis to NPI.



As of December 31, 1996 NPI had total assets consisting primarily of

cash and cash equivalents of $9.4 million stated in U.S. dollars.



F-12

47

EXHIBIT INDEX



<TABLE>

<CAPTION>

Exhibit

Number                   Description

-------   --------------------------------------------------------

<S>      <C>



3.1*      Articles of Incorporation of Neurocrine Biosciences,

Inc., a Delaware corporation, as amended.



3.2*      Bylaws of the Registrant.



4.1*      Form of Lock-Up Agreement.



4.2*      Form of Common Stock Certificate.



4.3*      Form of warrant issued to existing warrant holders.



4.4*      Form of Series A Warrant issued in connection with the

execution by the Registrant of the Unit Purchase

Agreement (see Exhibit 10.20).



4.5*      New Registration Rights Agreement dated March 29, 1996

among the Registrant and the investors signatory

thereto.



10.1*     Information and Registrations Rights Agreement dated

September 15, 1992, as amended to date.





10.2*     1992 Incentive Stock Plan, as amended, and form of

incentive stock option agreement and nonstatutory stock

option agreement

</TABLE>

48



<TABLE>

<CAPTION>

Exhibit

Number                       Description

-------   --------------------------------------------------------

<S>       <C>

10.3*     1996 Employee Stock Purchase Plan.



10.4*     1996 Director Stock Option Plan and form of stock option

agreement.



10.5*     Form of Director and Officer Indemnification Agreement.



10.6*     Employment Agreement dated March 1, 1993, between the

Registrant and Gary A. Lyons, as amended.



10.7*     Employment Agreement dated July 1, 1993, between the

Registrant and Errol B. De Souza, Ph.D.



10.8*     Employment Agreement dated May 8, 1993, between the

Registrant and Paul W. Hawran.



10.9*     Consulting Agreement dated September 25, 1992, between

the Registrant and Wylie A. Vale, Ph.D.



10.10*    Consulting Agreement effective as of January 1, 1992,

between the Registrant and Lawrence J. Steinman, M.D.



10.11*    Lease Agreement dated June 1, 1993, between the

Registrant and Hartford Accident and Indemnity Company,

as amended.



10.12*    Exclusive License Agreement dated as of July 1, 1993, by

and between the Beckman Research Institute of the City

of Hope and the Registrant covering the treatment of

nervous system degeneration and Alzheimer's disease.



10.13*    Exclusive License Agreement dated as of July 1, 1993, by

and between the Beckman Research Institute of the City

of Hope and the Registrant covering the use of

Pregnenolone for the enhancement of memory.



10.14*    License Agreement dated May 20, 1992, by and between The

Salk Institute for Biological Studies and the

Registrant.



10.15*    License Agreement dated July 17, 1992, by and between

The Salk Institute for Biological Studies and the

Registrant.



10.16*    License Agreement dated November 16, 1993, by and

between The Salk Institute for Biological Studies and

the Registrant.



10.17*    License Agreement dated October 19, 1992, by and between

The Board of Trustees of the Leland Stanford Junior

University and the Registrant.



10.18*    Agreement dated January 1, 1995, by and between the

Registrant and Janssen Pharmaceutica, N.V.



10.19*    Letter Agreement dated January 19, 1996, by and between

the Registrant and Ciba-Geigy Limited.



10.20*#   Unit Purchase Agreement dated March 29, 1996, by and

between Neuroscience Pharma (NPI) Inc., the Registrant

and the investors signatory thereto.



10.21*#   Exchange Agreement dated March 29, 1996, by and between

Neurocrine Biosciences (Canada) Inc., the Registrant and

the investors signatory thereto.



10.22*#   Research and Development Agreement dated March 29, 1996,

by and between Neurocrine Biosciences (Canada) Inc. and

Neuroscience Pharma (NPI) Inc.



10.23*#   Intellectual Property and License Grants Agreement dated

March 29, 1996, by and between the Registrant and

Neurocrine Biosciences (Canada) Inc.



</TABLE>

49

<TABLE>

<CAPTION>

Exhibit

Number                   Description

-------   -------------------------------------------------------

<S>        <C>

10.24**    Development and Commercialization Agreement dated

December 20, 1996, by and between Ciba-Geigy Ltd. and

the Registrant.



10.25**    Letter and Purchase Order dated June 7, 1996, by and

between Ciba-Geigy and the Registrant.



10.26**    Third Lease Amendment dated June 6, 1996, by and between

Talcott Realty I Limited Partnership and the Registrant.





10.27**    Research and License Agreement dated October 15, 1996,

between the Registrant and Eli Lilly and Company.



11.1       Computation of Net Earnings per Share.



21.1*      List of subsidiaries of the Registrant.



23.1       Consent of Ernst & Young LLP, independent auditors.



24.1       Power of Attorney (reference is made to page 33 of this

form 10-K).



27.1       Financial data schedule

</TABLE>



*        Incorporated herein by reference to the same-numbered exhibit

previously filed with the Company's Registration Statement on Form S-1

(Registration No. 333-03172).



**       Confidential treatment has been requested with respect to certain

portions of the exhibit.



#        Confidential treatment has been granted with respect to certain

portions of the exhibit.