10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2004

Commission file number: 0-27406

CONNETICS CORPORATION

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)	94-3173928 (IRS Employer Identification Number)
3290 West Bayshore Road Palo Alto, California (Address of principal executive offices)	94303 (Zip Code)

Registrant’s telephone number, including area code: (650) 843-2800

     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 o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No o

     As of July 30, 2004, 35,503,541 shares of the Registrant’s common stock at $0.001 par value, were outstanding.

CONNETICS CORPORATION

TABLE OF CONTENTS

		Page
	PART I FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets at June 30, 2004 and December 31, 2003	3
	Condensed Consolidated Statements of Operations for the Three and Six Months ended	4
	June 30, 2004 and 2003
	Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30,	5
	2004 and 2003
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	18
Item 4.	Controls and Procedures	18
	PART II OTHER INFORMATION
Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities	20
Item 4.	Submission of Matters to a Vote of Security Holders	20
Item 6.	Exhibits and Reports on Form 8-K	20
	(a) Exhibits
	(b) Reports on Form 8-K
Signatures		22
Exhibits		23
EXHIBIT 10.1
EXHIBIT 10.2
EXHIBIT 10.3
EXHIBIT 10.4
EXHIBIT 10.5
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CONNETICS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)

	June 30,			December 31,
	2004			2003
ASSETS
Current assets:
Cash and cash equivalents	$	32,938		$	17,946
Marketable securities		33,054			96,716
Restricted cash — current		1,000			304
Accounts receivable, net of allowances		2,027			2,594
Inventory		4,204			1,035
Prepaid and other current assets		7,420			3,779
Total current assets		80,643			122,374
Property and equipment, net		6,276			5,628
Restricted cash — long term		2,000			—
Debt issuance costs, deposits and other assets		4,581			5,418
Goodwill		6,271			6,271
Other intangible assets, net		129,187			6,206
Total assets	$	228,958		$	145,897
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	11,791		$	3,884
Assumed liabilities related to acquisition of product rights		4,123			—
Accrued payroll and related expenses		3,539			3,792
Notes payable		1,663			—
Accrued clinical trial costs		150			857
Other accrued liabilities		3,454			1,594
Total current liabilities		24,720			10,127
Convertible senior notes		90,000			90,000
Other non-current liabilities		15			16
Commitments and contingencies
Stockholders’ equity:
Preferred stock		—			—
Common stock		35			32
Additional paid-in capital		233,999			174,080
Deferred stock compensation		(22	)		(31	)
Accumulated deficit		(120,857	)		(130,188	)
Accumulated other comprehensive income		1,068			1,861
Total stockholders’ equity		114,223			45,754
Total liabilities and stockholders’ equity	$	228,958		$	145,897

See accompanying notes to condensed consolidated financial statements.

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CONNETICS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2004			2003			2004			2003
Revenues:
Product	$	37,999		$	15,528		$	61,565		$	29,839
Royalty and contract		254			4,442			1,670			5,442
Total revenues		38,253			19,970			63,235			35,281
Operating costs and expenses:
Cost of product revenues		3,578			1,185			5,146			2,257
Amortization of intangible assets		3,400			202			4,672			403
Research and development		5,096			8,619			9,537			17,236
Selling, general and administrative		17,467			10,590			32,760			21,493
Total operating costs and expenses		29,541			20,596			52,115			41,389
Income (loss) from operations		8,712			(626	)		11,120			(6,108	)
Interest income		152			169			500			294
Interest expense		(690	)		(230	)		(1,381	)		(231	)
Other income (expense), net		(70	)		33			(19	)		87
Income (loss) before income taxes		8,104			(654	)		10,220			(5,958	)
Income tax expense		(647	)		(1,202	)		(890	)		(1,279	)
Net income (loss)	$	7,457		$	(1,856	)	$	9,330		$	(7,237	)
Net income (loss) per share:
Basic	$	0.21		$	(0.06	)	$	0.27		$	(0.23	)
Diluted	$	0.19		$	(0.06	)	$	0.25		$	(0.23	)
Shares used to calculate net income (loss) per share:
Basic		35,242			31,519			34,439			31,403
Diluted		41,627			31,519			36,722			31,403

See accompanying notes to condensed consolidated financial statements.

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CONNETICS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

	Six Months Ended
	June 30,
	2004			2003
Cash flows from operating activities:
Net income (loss)	$	9,330		$	(7,237	)
Adjustments to reconcile net income (loss) to net cash from operating activities:
Depreciation		744			649
Amortization of intangible assets		4,672			403
Amortization of convertible debt offering costs		368			56
Allowance for rebates, returns and chargebacks		7,105			2,150
Stock compensation expense		9			9
Changes in assets and liabilities:
Accounts receivable		(6,589	)		1,909
Other assets		(1,628	)		(2,421	)
Inventory		(3,147	)		(19	)
Accounts payable		7,944			(2,997	)
Accrued and other current liabilities		920			(421	)
Net cash from operating activities		19,728			(7,919	)
Cash flows from investing activities:
Purchases of marketable securities		(22,578	)		(59,974	)
Sales and maturities of marketable securities		85,809			17,903
Purchases of property and equipment		(1,492	)		(423	)
Acquisition of patent and product rights		(123,529	)		(200	)
Net cash from investing activities		(61,790	)		(42,694	)
Cash flows from financing activities:
Restricted cash		(2,696	)		312
Proceeds from issuance of common stock, net of issuance costs		56,901			86,503
Proceeds from exercise of stock options and employee stock purchase plan, net of repurchases of unvested shares		3,021			2,638
Net cash from financing activities		57,226			89,453
Effect of foreign currency exchange rate changes on cash and cash equivalents		(172	)		98
Net change in cash and cash equivalents		14,992			38,938
Cash and cash equivalents at beginning of period		17,946			8,624
Cash and cash equivalents at end of period	$	32,938		$	47,562

See accompanying notes to condensed consolidated financial statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Basis of Presentation and Policies

     We have prepared the accompanying unaudited condensed consolidated financial statements of Connetics Corporation (“Connetics”) in accordance with accounting principles generally accepted in the United States for interim financial information and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. We believe that we have included all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation. We reclassify as necessary certain prior year balances to conform to the current year presentation.

     Operating results for the three and six months ended June 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. For a better understanding of Connetics and its financial statements, we recommend reading these unaudited condensed consolidated financial statements and notes in conjunction with the audited consolidated financial statements and notes to those financial statements for the year ended December 31, 2003, which are included in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission.

Principles of Consolidation

     The accompanying condensed consolidated financial statements include the accounts of Connetics Corporation, Connetics Holdings Pty Ltd., and Connetics Australia Pty Ltd. (formerly Soltec Research Pty Ltd.). We have eliminated all intercompany accounts and transactions in consolidation.

Use of Estimates

     To prepare financial statements in conformity with accounting principles generally accepted in the United States, management must make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates based upon future events.

     We evaluate our estimates on an on-going basis. In particular, we regularly evaluate estimates related to recoverability of accounts receivable and inventory, revenue reserves, assumed liabilities related to acquired product rights and accrued liabilities for clinical trial activities. We base our estimates on historical experience and on various other specific assumptions that we believe to be reasonable under the circumstances. Those estimates and assumptions form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.

Revenue Recognition

     Product Revenues. We recognize revenue from product sales when there is persuasive evidence that an arrangement exists, when title has passed, the price is fixed or determinable, and we are reasonably assured of collecting the resulting receivable. We recognize product revenues net of estimated allowances for discounts, returns, rebates, and chargebacks. We are obligated to accept from customers the return of pharmaceuticals that have reached their expiration date. We authorize returns for damaged products and exchanges for expired products in accordance with our return goods policy and procedures, and we establish reserves for such amounts at the time of sale. To date we have not experienced significant returns of damaged or expired product. We include product shipping and handling costs in the cost of product revenues.

     During the first half of 2004, we made a decision to bring in house the function of Contract Administration responsibility for the calculation and related reporting of all allowances and discounts for which Managed care plans and Medicaid programs are eligible. Previously we utilized third parties to perform the allowance calculation and related reporting. In connection with this change we performed a comprehensive review of our calculation for Medicaid product pricing allowances, which resulted in an adjustment to reserves recorded in prior periods. As a result, we recorded a one-time reduction of product revenues in the amount of $564,000 in the second quarter of 2004. We have determined that the effect of this change in estimate would not have had a material impact on our financial statements

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in any prior quarterly or annual period.

     Royalty Revenue. We collect royalties from our third-party licensees based on their sales. We recognize royalties either in the quarter in which we receive the royalty payment from the licensee or in which we can reasonably estimate the royalty, which is typically one quarter following the related sale by the licensee.

     Contract Revenue. We record contract revenue for research and development, or R&D, as it is earned based on the performance requirements of the contract. We recognize non-refundable contract fees for which no further performance obligations exist, and for which Connetics has no continuing involvement, on the date we receive the payments or the date when collection is assured, whichever is earlier.

     If, at the time an agreement is executed, there remains significant risk due to the incomplete state of the product’s development, we recognize revenue from non-refundable upfront license fees ratably over the period in which we have continuing development obligations. We recognize revenue associated with substantial “at risk” performance milestones, as defined in the respective agreements, based upon the achievement of the milestones. We recognize revenue under R&D cost reimbursement contracts as the related costs are incurred. When we receive advance payments in excess of amounts earned, we classify them as deferred revenue until they are earned.

Cash Equivalents and Marketable Securities

     Cash and cash equivalents consist of cash on deposit with banks, money market and other debt instruments with original maturities of 90 days or less at the date of purchase. Investments with maturities beyond three months at the date of acquisition are included in marketable securities. Marketable securities are classified as available for sale at the time of purchase and are carried at fair value, and we report unrealized gains and losses thereon as a component of other comprehensive income (loss) in stockholders’ equity. We determine the cost of securities sold using the specific identification method.

     Cash, cash equivalents and marketable securities are financial instruments that potentially subject us to concentration of risk to the extent recorded on the balance sheet. We believe we have established guidelines for investing our excess cash relative to diversification and maturities that maintain safety and liquidity. We invest our excess cash in debt instruments of the U.S. Government and its agencies, and high-quality corporate issuers, and, by policy, restrict our exposure to any single corporate issuer by imposing concentration limits. To minimize the exposure due to adverse shifts in interest rates, we maintain investments at an average maturity of generally less than one year.

Foreign Currency

     Connetics Australia’s functional currency is the Australian dollar. We translate Connetics Australia’s local currency balance sheet into U.S. dollars using the exchange rates in effect at the balance sheet date. For revenue and expense accounts, we use a weighted average exchange rate during the period. We record foreign currency translation adjustments in other comprehensive income (loss). Net gains and losses resulting from foreign exchange transactions are included in the condensed consolidated statements of operations and were immaterial for all periods presented.

Income Taxes

     We account for income taxes using the asset and liability method. Under this method, we recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between (1) the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and (2) operating loss and tax credit carryforwards. We measure deferred tax assets and liabilities using enacted tax rates that are expected to apply to taxable income in the years in which we anticipate those temporary differences will be recovered or settled. We establish a valuation allowance for the net deferred tax assets when realization is uncertain. Historically our income tax provision related primarily to the operations of our Australian subsidiary. In 2004, however, the income tax provision is primarily related to the domestic corporation due to our expected profitability in 2004.

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Property and Equipment

     We state property and equipment at cost less accumulated depreciation. We calculate depreciation using the straight-line method over the estimated useful lives of the assets, generally three to five years. We are depreciating equipment we have purchased on behalf of our contract manufacturer using the units of production method based on contractual minimum quantities to be produced over the term of the agreement. We amortize leasehold improvements over the shorter of the estimated useful lives of the assets or the lease term.

Inventory

     Inventory consists primarily of finished goods. We state inventory at the lower of cost (determined on a first-in first-out method) and market.

     Effective January 1, 2004, we began including certain manufacturing support and quality assurance costs in the cost of finished goods inventory and samples inventory (included in prepaid and other current assets) on the accompanying condensed consolidated balance sheets. We do not directly manufacture any of our products, and prior to January 1, 2004, we classified as R&D expense all our internal manufacturing support and quality assurance activities such as overseeing third party manufacturing, process development, quality assurance and quality control activities. Also, prior to January 1, 2004, inventory and cost of goods sold only captured third party product manufacturing costs, depreciation based on a units-of-production methodology on Connetics-owned equipment at our third-party manufacturers, product freight and distribution costs from the third party that handles all of our product distribution activities, and royalties. The amounts attributable to capitalizing these costs in inventory and samples inventory in the three and six months ended June 30, 2004, are $800,000 and $1.6 million, of net income (net of tax effect), or approximately $0.02 and $0.04 per diluted share, respectively. We have determined that the effect of this change in accounting would not have had a material impact on our financial statements in any prior quarterly or annual period.

     For the three months ended June 30, 2004, we allocated $1.1 million of costs which in previous periods had been included in R&D expense as follows: (1) we charged $87,000 to cost of goods sold, (2) we charged $168,000 to sales expense, (3) we added $687,000 to the value of commercial inventory, and (4) we added $113,000 to the value of samples inventory.

     For the six months ended June 30, 2004, we allocated $2.1 million of costs which in previous periods had been included in R&D expense as follows: (1) we charged $124,000 to cost of goods sold, (2) we charged $371,000 to sales expense, (3) we added $1.1 million to the value of commercial inventory, and (4) we added $478,000 to the value of samples inventory.

Goodwill, Other Purchased Intangibles and Impairment of Long Lived Assets

     We record goodwill in a business combination when the purchase price of the net tangible and intangible assets we acquire exceeds their fair value. Under Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets,” effective January 1, 2002, we are not required to amortize goodwill and intangible assets with indefinite lives, but are required to periodically review these assets for impairment. Intangible assets determined to have definite lives are amortized over their useful lives, generally ten years.

     SFAS 142 requires that we test goodwill for impairment on an annual basis or more frequently if indicators of potential impairment exist. We performed the annual test as of October 1, 2003, which did not result in an impairment charge. We will perform this test on October 1 of each year or more frequently if indicators of potential impairment exist.

     We periodically perform reviews to determine if the carrying value of long-term assets, other than goodwill (purchased intangibles, property and equipment), are impaired. The reviews look for the existence of facts or circumstances, either internal or external, which indicate that the carrying value of the asset cannot be recovered. Our reviews have indicated no such impairment to date. If in the future we determine that impairment indicators exist, we would use undiscounted cash flows to initially determine whether we should recognize any impairment. If necessary, we would perform a subsequent calculation to measure the amount of impairment loss based on the excess of the carrying value over the fair value of the impaired assets. If quoted market prices for the assets are not available, we would calculate the fair value using the present value of estimated expected future cash flows or other

8

appropriate valuation methodologies. The cash flow calculation would be based on management’s best estimates, using appropriate assumption and projections at the time.

Stock-Based Compensation

     We use the intrinsic-value method of accounting for stock-based awards granted to employees, as allowed under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25) and related interpretations. Accordingly, we do not recognize any compensation in our financial statements in connection with stock options granted to employees when those options have exercise prices equal to or greater than fair market value of our common stock. We also do not record any compensation expense in connection with our Employee Stock Purchase Plan as long as the purchase price is not less than 85% of the fair market value at the beginning or end of each offering period, whichever is lower.

     For options granted to non-employees, we have determined compensation expense in accordance with SFAS No. 123 “Accounting for Stock-Based Compensation,” as amended, and Emerging Issues Task Force No. 96-18 (“EITF 96-18”), “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or Services.” By those criteria, we quantify compensation expense as the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measured. We periodically re-measure the compensation expense for options granted to non-employees as they vest.

     Although SFAS 123 allows us to continue to follow the APB 25 guidelines, we are required to disclose pro forma net income (loss) and basic and diluted income (loss) per share as if we had applied the fair value based method to all awards.

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(in thousands except per share amounts):	2004			2003			2004			2003
Net income (loss), as reported	$	7,457		$	(1,856	)	$	9,330		$	(7,237	)
Add: Stock-based employee compensation expense, included in reported net income (loss), net of related tax effect		4			5			8			9
Deduct: Total stock-based employee compensation expense determined under the fair value method for all awards, net of related tax effect		(2,617	)		(2,017	)		(5,301	)		(3,766	)
Pro forma net income (loss)	$	4,844		$	(3,868	)	$	4,037		$	(10,994	)
Net income (loss) per share:
Basic income (loss) — as reported	$	0.21		$	(0.06	)	$	0.27		$	(0.23	)
Diluted income (loss) — as reported	$	0.19		$	(0.06	)	$	0.25		$	(0.23	)
Basic income (loss) — pro forma	$	0.14		$	(0.12	)	$	0.12		$	(0.35	)
Diluted income (loss) — pro forma	$	0.13		$	(0.12	)	$	0.11		$	(0.35	)

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     For purposes of this analysis, we estimate the fair value of each option grant on the date of grant using the Black-Scholes option-pricing model. The weighted average assumptions used in the model were as follows:

	Stock Option Plans						Stock Option Plans
	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2004			2003			2004			2003
Expected stock volatility		55.8	%		61.6	%		56.6	%		63.5	%
Risk-free interest rate		3.3	%		4.4	%		2.8	%		5.9	%
Expected life (in years)		3.4			3.2			3.4			4.0
Expected dividend yield		0.0	%		0.0	%		0.0	%		0.0	%

	Stock Purchase Plan						Stock Purchase Plan
	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2004			2003			2004			2003
Expected stock volatility		51.6	%		61.7	%		51.6	%		61.7	%
Risk-free interest rate		3.8	%		4.7	%		3.8	%		4.7	%
Expected life (in years)		1.6			1.4			1.6			1.4
Expected dividend yield		0.0	%		0.0	%		0.0	%		0.0	%

     The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. This model also requires us to make highly subjective assumptions, including the expected volatility of our stock. Because our stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, we do not believe that the existing models necessarily provide a reliable single measure of the fair value of our options.

     The effects on pro forma disclosures of applying SFAS 123 are not likely to be representative of the effects on reported results of future periods.

Note 2. Net Income (Loss) Per Share

     We compute basic net income (loss) per share by dividing net income (loss) by the weighted average number of common shares outstanding during the period. We compute diluted net income (loss) per share using the weighted average of all potential shares of common stock outstanding during the period. For the three months ended June 30, 2004, we included all dilutive stock options, warrants, and convertible debt in the calculation of diluted net income per share. As part of the dilutive calculation we excluded interest expense related to the convertible debt, net of tax effect from net income, to arrive at net income for the three months ended June 30, 2004. For the six months ended June 30, 2004 the effect of the convertible debt was not included in the calculation of diluted net income per share as it was anti-dilutive.

     The following table shows a reconciliation of the numerator and denominator used in diluted net income (loss) per share computations (in thousands except share amounts):

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2004		2003			2004		2003
Numerator:
Net income (loss)	$	7,457	$	(1,856	)	$	9,330	$	(7,237	)
Interest expense, net of tax effect		649		—			—		—
		8,106		(1,856	)		9,330		(7,237	)
Denominator:
Weighted-average shares outstanding used for basic net income (loss) per share		35,242		31,519			34,439		31,403
Effect of dilutive securities:
Stock options		2,150		—			2,247		—
Warrants		32		—			36		—
Convertible debt		4,203		—			—		—
Weighted-average shares used for diluted net income (loss) per share		41,627		31,519			36,722		31,403

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Note 3. Comprehensive Income (Loss)

     The components of comprehensive income (loss) are as follows (in thousands):

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2004			2003			2004			2003
Net income (loss)	$	7,457		$	(1,856	)	$	9,330		$	(7,237	)
Foreign currency translation adjustment		(233	)		31			(362	)		69
Change in unrealized gain (loss) on securities, net of reclassification adjustments for realized gain (loss)		(315	)		(308	)		(431	)		(532	)
Comprehensive income (loss)	$	6,909		$	(2,133	)	$	8,537		$	(7,700	)

     Accumulated other comprehensive loss included $429,000 of net unrealized gains on investments and $639,000 of foreign currency translation adjustments as of June 30, 2004, and $861,000 of unrealized gains on investments and $1.0 million of foreign currency translation adjustments as of December 31, 2003.

Note 4. Goodwill and Purchased Intangible Assets

     There were no changes in the carrying amount of goodwill during the six months ended June 30, 2004. The components of our other intangible assets at June 30, 2004, are as follows (in thousands):

	Gross Carrying		Accumulated
	Amount		Amortization			Net
Acquired product rights	$	127,652	$	(4,255	)	$	123,397
Existing technology		6,810		(2,185	)		4,625
Patents		1,590		(425	)		1,165
Total	$	136,052	$	(6,865	)	$	129,187

     Amortization expense for our other intangible assets was $3.4 million for the three months ended June 30, 2004 and $4.7 million for the six months ended June 30, 2004. For the same reporting periods in 2003, amortization expense was $202,000 and $403,000, respectively.

     The expected future amortization expense of our other purchased intangible assets is as follows (in thousands):

	Amortization Expense
Remaining six months in 2004	$	6,799
For the year ending December 31, 2005		13,598
For the year ending December 31, 2006		13,598
For the year ending December 31, 2007		13,598
For the year ending December 31, 2008		13,598
For the year ending December 31, 2009		13,598
Thereafter		54,398
	$	129,187

Note 5. Guaranties and Indemnifications

     In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others” (FIN No. 45). FIN No. 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligations it assumes under that guarantee.

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     We enter into indemnification provisions under our agreements with other companies in the ordinary course of our business, typically with business partners, contractors, clinical sites, insurers, and customers. Under these provisions we generally indemnify and hold harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of our activities. These indemnification provisions generally survive termination of the underlying agreement. In some cases, the maximum potential amount of future payments Connetics could be required to make under these indemnification provisions is unlimited. The estimated fair value of the indemnity obligations of these agreements is minimal. Accordingly, we have no liabilities recorded for these agreements as of June 30, 2004. We have not incurred any costs to defend lawsuits or settle claims related to these indemnification arrangements.

Note 6. Equity Issuance

     On February 13, 2004, we completed a private placement of 3.0 million shares of our common stock to accredited institutional investors at a price of $20.25 per share, for net proceeds of approximately $56.9 million. We used a portion of the net proceeds to pay for the acquisition of the exclusive U.S. rights to Soriatane®, and intend to use the balance for general corporate purposes, including working capital.

Note 7. Acquisition of Soriatane® Product Line

     On February 6, 2004, we entered into a binding agreement with Roche to acquire exclusive U.S. rights to Soriatane-brand (acitretin), an approved oral therapy for the treatment of severe psoriasis in adults. The transaction closed on March 4, 2004, and we have recognized revenue, net of applicable reserves, for all sales of the product from that date. Under the terms of the purchase agreement, we paid Roche a total of $123.0 million in cash at the closing to acquire Soriatane. We also assumed certain liabilities in connection with returns, rebates and chargebacks associated with prior sales of Soriatane by Roche totaling $4.1 million, and purchased Roche’s existing inventory of Soriatane at a cost of approximately $1.5 million. In addition, we incurred transaction costs, originally estimated at approximately $500,000 and finalized at $529,000 during the second quarter. Including the cash paid to acquire the rights, liabilities assumed and transactions costs, the total value of the acquired product rights for accounting purposes is $127.7 million. We are amortizing this amount over the ten year estimated useful life of the Soriatane asset.

Note 8. UCB Co-Promotion Agreement

     In the first quarter of 2004, we entered into an agreement with UCB Pharma, a subsidiary of UCB Group, pursuant to which UCB Pharma’s 400-person U.S. sales force will promote OLUX and Luxíq to a segment of U.S. primary care physicians (PCP’s). UCB’s focus will be on the approximately 10% of PCP’s who are active prescribers of dermatology products, including OLUX and Luxíq. The purpose of the co-promotion agreement is to build value for the OLUX and Luxíq brands with the additional benefit of ensuring appropriate use of OLUX and Luxíq with the current PCP users. We estimate that, historically, PCP’s have written approximately 15% of prescriptions for OLUX and Luxíq, even though we have promoted exclusively to dermatologists.

We will record 100% of the revenue from sales generated by promotional efforts of UCB and pay UCB a portion of revenue as a promotion expense. UCB will bear the marketing costs for promoting the products (including product samples, marketing materials, etc.). The agreement is structured with a two-year promotional period followed by a two-year tail of additional compensation to UCB.

Note 9. Facility Lease

     In June 2004, we signed a series of lease agreements with Incyte Corporation and The Board of Trustees of the Leland Stanford Junior University to lease approximately 96,000 square feet of space in Palo Alto, California. Our commitments, including those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2003, consist primarily of operating lease agreements for our facilities as well as minimum purchase commitments under one of our contract manufacturing agreements.

As a result of this new leasing arrangement our operating lease obligations will increase as follows (in thousands):

	Increase in operating lease obligations
For the year ending December 31, 2005	$	2,975
For the year ending December 31, 2006		1,325
For the year ending December 31, 2007		1,325
For the year ending December 31, 2008		1,325
For the year ending December 31, 2009		1,325
Thereafter		8,009
	$	16,284

Note 10. Subsequent Events

     We have entered into a multi-year consent with Roche to sell Soriatane to a U.S.-based distributor that exports branded pharmaceutical products to select international markets. Product sold to this distributor is not permitted to be resold in the U.S. Under the terms of the agreement Connetics will pay a royalty to Roche on Soriatane sales made during the term of the agreement to this distributor.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion and analysis should be read in conjunction with the MD&A included in our Annual Report on Form 10-K for the year ended December 31, 2003, and with the unaudited condensed consolidated financial statements and notes to financial statements included in this Report. Our disclosure and analysis in this Report, in other reports that we file with the Securities and Exchange Commission, in our press releases and in public statements of our officers contain forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current events. They use words such as “anticipate,” “estimate,” “expect,” “will,” “may,” “intend,” “plan,” “believe” and similar expressions in connection with discussion of future operating or financial performance. These include statements relating to future actions, prospective products or product approvals, future performance or results of current and anticipated products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, and financial results. Forward-looking statements may turn out to be wrong. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Many factors will be important in determining future results. No forward-looking statement can be guaranteed, and actual results may vary materially from those anticipated in any forward-looking statement. Some of the factors that, in our view, could cause actual results to differ are discussed in this report under the caption “Factors That May Affect Future Results, Financial Condition and the Market Price of Securities” and under the caption “Factors Affecting Our Business and Prospects” in our 2003 Annual Report on Form 10-K. Our historical operating results are not necessarily indicative of the results to be expected in any future period.

Overview

     Our commercial business is focused on the dermatology marketplace, which is characterized by a large patient population that is served by relatively small, and therefore more accessible, groups of treating physicians. We currently market three pharmaceutical products, OLUX®, Luxíq®, and Soriatane®-brand (acitretin). Our products have clinically proven therapeutic advantages and we are providing quality customer service to physicians through our experienced sales and marketing professionals.

     On March 4, 2004, we completed the acquisition of the exclusive U.S. rights to Roche’s Soriatane-brand (acitretin), an approved oral therapy for the treatment of severe psoriasis in adults. Including purchase price of $123.0 million, assumed liabilities of $4.1 million and transaction costs of $529,000, we recorded an intangible asset of approximately $127.7 million related to this acquisition, which we are amortizing over an estimated useful life of 10 years.

     In the first quarter of 2004, we entered into an agreement with UCB Pharma, a subsidiary of UCB Group, pursuant to which UCB Pharma’s 400-person U.S. sales force will promote OLUX and Luxíq to a segment of U.S. primary care physicians (PCP’s). UCB’s focus will be on the approximately 10% of PCP’s who are active prescribers of dermatology products, including OLUX and Luxíq. The purpose of the co-promotion agreement is to build value for the OLUX and Luxíq brands with the additional benefit of ensuring appropriate use of OLUX and Luxíq with the current PCP prescribers. We will book 100% of the revenue from sales generated by UCB and pay UCB a portion of revenue as a promotion expense. UCB will bear the marketing costs for selling to its customers. The agreement is structured as a two-year promotional period followed by a two-year tail of additional compensation to UCB.

     On May 17, 2004, we announced that the United States Patent and Trademark Office issued to Connetics Patent No. 6,730,288B1. The patent covers a pharmaceutical aerosol foam composition having occlusive capability. We expect to incorporate this technology into our next generation of foam products. This emollient foam delivery vehicle will serve patients with dermatoses that require a stronger moisturizing vehicle to alleviate dryness and scaling.

     In June 2004, we signed a series of lease agreements with Incyte Corporation and The Board of Trustees of the Leland Stanford Junior University to lease approximately 96,000 square feet of space in Palo Alto, California. We anticipate that we will move from our current facilities in late 2004 or early 2005.

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Critical Accounting Policies

     There have been no material changes to our critical accounting policies, which are included in our Annual Report on Form 10-K for the year ended December 31, 2003.

Results of Operations

Revenues

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	(In thousands)				(In thousands)
	2004		2003		2004		2003
Product revenues:
OLUX	$	15,223	$	11,004	$	29,593	$	20,879
Luxíq		5,614		4,491		11,085		8,879
Soriatane		17,154		—		20,794		—
Other		8		33		93		81
Total product revenues		37,999		15,528		61,565		29,839
Royalty and contract revenues:
Royalty		172		4,384		1,525		5,320
Contract		82		58		145		122
Total royalty and contract revenues		254		4,442		1,670		5,442
Total revenues	$	38,253	$	19,970	$	63,235	$	35,281

     Our product revenues were $38.0 million for the three months ended June 30, 2004, and $61.6 million for the six months ended June 30, 2004, compared to $15.5 million and $29.8 million, respectively, for the three and six months ended June 30, 2003. Total product revenues increased by 145% in the three months ended June 30, 2004, and by 106% in the six months ended June 30, 2004, as compared to the same periods in the prior year. The increase in product revenues in the three months ended June 30, 2004 represents 111% attributable to the introduction of Soriatane to our product portfolio, 17% attributable to increases in sales volumes, and 17% attributable to higher sales prices for our OLUX and Luxíq product lines. The increase in product revenues in the six months ended June 30, 2004 represents 70% attributable to the introduction of Soriatane to our product portfolio, 17% attributable to increases in sales volumes, and 19% attributable to higher sales prices for our OLUX and Luxíq product lines.

     During the first half of 2004, we made a decision to bring in house the function of Contract Administration responsibility for the calculation and related reporting of all allowances and discounts for which Managed care plans and Medicaid programs are eligible. Previously we utilized third parties to perform the allowance calculation and related reporting. In connection with this change we performed a comprehensive review of our calculation for Medicaid product pricing allowances, which resulted in an adjustment to reserves recorded in prior periods. As a result, we recorded a one-time reduction of product revenues in the amount of $564,000 in the second quarter of 2004. We have determined that the effect of this adjustment would not have had a material impact on our financial statements in any prior quarterly or annual period.

     Royalty and contract revenues were $254,000 for the three months ended June 30, 2004, and $1.7 million for the six months ended June 30, 2004, compared to $4.4 million and $5.4 million, respectively, for the three and six months ended June 30, 2003. Royalty and contract revenues decreased primarily because in the second quarter of 2003 we recognized $4.2 million of royalties from S.C. Johnson related to their concentrated aerosol spray which was marketed in the U.S. and internationally. As the royalty agreement with S.C. Johnson was terminated in the first quarter of 2004, no royalties were received or recognized in the second quarter of 2004.

Cost of Product Revenues

     Currently, DPT Laboratories, Ltd. and AccraPac Group, Inc. manufacture commercial supplies of OLUX and Luxíq, and Roche manufactures commercial supplies of Soriatane. Cardinal Health Specialty Pharmaceutical Services (formerly CORD Logistics, Inc.) handles all of our product distribution activities. Our cost of product revenues includes the third party costs of manufacturing OLUX and Luxíq, the cost of Soriatane inventory acquired from Roche, depreciation costs associated with Connetics-owned equipment located at the DPT facility in Texas,

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allocation of overhead, royalty payments based on a percentage of our product revenues, and product freight and distribution costs from Cardinal Health SPS. We recorded costs of product revenues of $3.6 million for the three months ended June 30, 2004, and $5.1 million for the six months ended June 30, 2004, compared to $1.2 million and $2.3 million for the comparable periods in 2003. The increase in the cost of product revenues in 2004 is primarily attributable to the introduction of Soriatane to our product portfolio in 2004 as well as an increase in sales volume of our OLUX and Luxíq products.

     Effective January 1, 2004, we began including in the cost of finished goods inventory and prepaid sample cost, certain manufacturing support and quality assurance costs which had previously been classified as research and development expense. While we do not directly manufacture any of our products, our internal activities include overseeing third party manufacturing, process development, quality assurance and quality control activities. Previously only third party product manufacturing costs, depreciation based on a units of production methodology on Connetics-owned equipment at our third-party manufacturers, product freight and distribution costs from the third party that handles all of our product distribution activities, and royalties were being captured in inventory and cost of goods sold. We have determined that the effect of this change in accounting would not have had a material impact on our financial statements in any prior quarterly or annual period.

     For the three months ended June 30, 2004, $1.1 million of costs which in previous periods had been included in research and development expense were allocated as follows: (1) $87,000 was charged to cost of goods sold, (2) $168,000 was charged to sales expense, (3) $687,000 was added to the value of commercial inventory, and (4) $113,000 was added to the value of samples inventory.

     For the six months ended June 30, 2004, $2.1 million of costs which in previous periods had been included in research and development expense were allocated as follows: (1) $124,000 was charged to cost of goods sold, (2) $371,000 was charged to sales expense, (3) $1.1 million was added to the value of commercial inventory, and (4) $478,000 was added to the value of samples inventory.

Research and Development

     Research and development expenses include costs of personnel to support our research and development activities, costs of preclinical studies, costs of conducting our clinical trials, such as clinical investigator fees, monitoring costs, data management and drug supply costs, external research programs, and an allocation of facilities costs, salaries and benefits, and overhead costs such as rent, supplies and utilities. In the three months ended June 30, 2004 we incurred costs associated with two Velac trials in various stages of completion as well as start up costs associated with trials for three other product candidates. During the first quarter of 2003, we incurred costs associated with concurrent trials in Velac, Actiza, and Extina, which were in varying stages of completion.

     Research and development expenses were $5.1 million for the three months ended June 30, 2004, compared to $8.6 million for the three months ended June 30, 2003. The decrease represents a reduction of $2.7 million of costs related to clinical trials activities underway in 2003 as well as a $1.1 million change in classification from research and development costs to cost of goods sold, inventory, and selling expense. For additional information about this change, see Note 1 of the accompanying Notes to Consolidated Financial Statements. For the six months ended June 30, 2004 and 2003, research and development expenses were $9.5 million and $17.2 million, respectively. The decrease represents a reduction of $3.3 million of costs related to clinical trials activities underway in 2003 as well as a $2.1 million change in classification from research and development costs to cost of goods sold, inventory, and selling expense. While we do not directly manufacture any of our products, our internal research and development activities include manufacturing associated costs such as overseeing third-party manufacturing, process development, and quality assurance and quality control activities.

Selling, General and Administrative Expenses

     Selling, general and administrative expenses were $17.5 million for the three months ended June 30, 2004, compared to $10.6 million for the comparable period in 2003. For the three months ended June 30, 2004 the overall increase in expenses, compared with the same period in 2003 was primarily related to a $2.3 million increase in direct and indirect sales promotion capabilities, a $994,000 increase in employee-related costs due to increased headcount in the marketing and general and administrative departments, an increase of $389,000 in travel expenses

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related to supporting business activities, and an increase of approximately $2.3 million in increased marketing and sales activities such as tradeshows, sales meetings, product samples, advertising and market research.

     Selling, general and administrative expenses were $32.8 million for the six months ended June 30, 2004, compared to $21.5 million for the comparable period in 2003. For the six months ended June 30, 2004 the overall increase in expenses, compared with the same period in 2003 was primarily related to a $3.0 million increase in direct and indirect sales promotion capabilities, a $1.5 million increase in employee-related costs due to increased headcount in the marketing and general and administrative departments, an increase of $761,000 in travel expenses related to supporting business activities, and an increase of approximately $3.6 million in increased marketing and sales activities such as trade shows, sales meetings, product samples, advertising and market research.

Interest and other income (expense), net

     Interest income was $152,000 for the three months ended June 30, 2004, and $500,000 for the six months ended June 30, 2004, compared to $169,000 and $294,000 for the three and six months ended June 30, 2003, respectively. The increase in interest income during 2004 was the result of higher average cash and investment balances in connection with the cash we received by issuing $90.0 million of convertible senior notes in May 2003, as well as the $56.9 million net receipts from a private placement of common stock in February 2004, partially offset by lower market interest rates on investments.

     Interest expense was $690,000 for the three months ended June 30, 2004, and $1.4 million for the six months ended June 30, 2004, compared to $230,000 and $231,000, respectively, for the three and six months ended June 30, 2003. The increase in interest expense during 2004 was directly related to the interest expense associated with the convertible senior notes issued in the second quarter of 2003.

Income Taxes

     We recognized income tax expense of $647,000 for the three months ended June 30, 2004, and $890,000 for the six months ended June 30, 2004. We recorded tax provisions for domestic income taxes because we had a profitable first and second quarter and anticipate that we will be profitable for the full year of 2004. Specifically, for the three months ended June 30, 2004, we recorded a domestic tax provision of $511,000, and for the six months ended June 30, 2004, we recorded a domestic tax provision of $572,000. We also recorded foreign tax provisions in the three and six months ended June 30, 2004 related to our Australian operations. By comparison, we recognized income tax expense of $1.2 million and $1.3 million, respectively, in the three and six months ended June 30, 2003 related to our Australian operations.

Liquidity and Capital Resources

     Sources and Use of Cash. We have financed our operations to date primarily through proceeds from equity and debt financings, collaborative arrangements with corporate partners, bank loans, and product revenues. At June 30, 2004, cash, cash equivalents and marketable securities totaled $66.0 million compared to $114.7 million at December 31, 2003. Our cash balances are held in a variety of interest-bearing instruments including high-grade obligations, commercial paper, obligations of the U.S. Government and state and local agencies, and money market accounts.

     Cash from operating activities. Cash provided by operations for the six months ended June 30, 2004 was $19.7 million compared to $7.9 million of cash used for the six months ended June 30, 2003. Net income of $9.3 million for the six months ended June 30, 2004 was affected by non-cash charges of $5.8 million of depreciation and amortization expense and $7.1 million of increased reserves related to product returns, chargebacks, rebates and coupon programs. Cash usage was primarily due to an increase in gross accounts receivable of approximately $6.6 million primarily attributable to receivables related to the Soriatane product line; the balance of the change in accounts receivable was related to the timing of sales on OLUX and Luxíq, and collection of outstanding amounts. The increase in 2004 was also a result of an increase in other assets of $4.8 million related to various prepaid activities including payments in connection with our UCB co-promotion agreement, insurance, samples inventory and sales and marketing activities, as well as an increase in accounts payable and other accrued and current

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liabilities of $8.8 million primarily due to the timing of payments and other business activities.

     Cash from investing activities. We used $61.8 million cash in investing activities for the six months ended June 30, 2004, compared to $42.7 million for the six months ended June 30, 2003. The increase in cash used in investing activities is primarily related to the 2004 acquisition of the Soriatane product line for $123.5 million, partially offset by $85.8 million from maturities and sales of marketable securities necessary to fund the acquisition.

     Cash from financing activities. Financing activities provided $57.2 million for the six months ended June 30, 2004 compared to $89.5 million for the six months ended June 30, 2003. The 2003 change is primarily because in May 2003 we had net cash proceeds of $86.5 million from the issuance of convertible senior notes. The 2004 change is primarily due to the net cash proceeds of $56.9 million from a private placement of our common stock in February 2004.

     Working Capital. Working capital decreased by $56.3 million to $55.9 million at June 30, 2004 from $112.2 million at December 31, 2003, primarily because we used cash to fund the acquisition of exclusive U.S. rights to Soriatane and related inventory in March 2004 and we assumed approximately $4.1 million in liabilities associated with the Soriatane acquisition. The amounts related to the acquisition were partially offset by net proceeds of $56.9 million from a private placement of our common stock in February 2004.

     Contractual Obligations and Commercial Commitments. In June 2004, we signed a series of lease agreements with Incyte Corporation and The Board of Trustees of the Leland Stanford Junior University to lease approximately 96,000 square feet of space in Palo Alto, California. We anticipate that we will move from our current facilities in late 2004 or early 2005. Our commitments, including those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2003, consist primarily of operating lease agreements for our facilities as well as minimum purchase commitments under one of our contract manufacturing agreements.

     As a result of this new leasing arrangement our operating lease obligations will increase as follows (in thousands):

	Increase in operating lease
	obligations
For the year ending December 31, 2005	$	2,975
For the year ending December 31, 2006		1,325
For the year ending December 31, 2007		1,325
For the year ending December 31, 2008		1,325
For the year ending December 31, 2009		1,325
Thereafter		8,009
	$	16,284

     Restricted Cash and Cash Equivalents. In the three and six months ended June 30, 2004, we entered into two Letter of Credit arrangements, which are secured by certificates of deposit. The first arrangement is a $1.0 million Letter of Credit required as part of our annual corporate insurance renewal. The second Letter of Credit is for $2.0 million and is required as part of the new office facility leasing arrangement that will begin in late 2004 or early 2005. Both of these certificates of deposit are classified as restricted cash, current and non-current, respectively, on the June 30, 2004 balance sheet.

     We believe our existing cash, cash equivalents and marketable securities, cash generated from product sales and collaborative arrangements with corporate partners, will be sufficient to fund our operating expenses, debt obligations and capital requirements through at least the next 12 months. Our future capital uses and requirements depend on numerous factors, including the progress of our research and development programs, the progress of clinical testing, the time and costs involved in obtaining regulatory approvals, the cost of filing, prosecuting, and enforcing patent claims and other intellectual property rights, competing technological and market developments, the level of product revenues, and the possible acquisition of new products and technologies. A key element of our strategy is to in-license or acquire additional marketed or late-stage development products. A portion of the funds needed to acquire, develop and market any new products may come from our existing cash, which will result in

17

fewer resources available to our current products and clinical programs. We continually evaluate various business development opportunities, including the possibility of acquiring or in-licensing other products. If we successfully reach agreements with third parties, these transactions may require us to use some of our available cash, or to raise additional cash by liquidating some of our investment portfolio and/or raising additional funds through equity or debt financings in connection with the transaction.

Factors that May Affect Future Results, Financial Condition and the Market Price of Securities

Please also read Item 1 in our Annual Report on Form 10-K for the year ended December 31, 2003, where we have described our business and the challenges and risks we may face in the future.

     There are many factors that affect our business and results of operations, some of which are beyond our control. In our Annual Report on Form 10-K for the year ended December 31, 2003 we list some of the important factors that may cause the actual results of our operations in future periods to differ materially from the results currently expected or desired. Due to these factors, we believe that quarter-to-quarter comparisons of our results of operations are not a good indication of our future performance. The factors discussed in our reports filed with the Securities and Exchange Commission, including our 2003 Annual Report on Form 10-K, in particular under the caption “Factors Affecting Our Business and Prospects,” should be carefully considered when evaluating our business and prospects.

Our Business Strategy May Cause Fluctuating Operating Results

     Our operating results and financial condition may fluctuate from quarter to quarter and year to year depending upon the relative timing of events or uncertainties that may arise. For example, the following events or occurrences could cause fluctuations in our financial performance from period to period:

• changes in the levels we spend to develop new product lines,

• changes in the amounts we spend to promote our products,

• changes in treatment practices of physicians that currently prescribe our products,

• changes in reimbursement policies of health plans and other similar health insurers, including changes that affect newly developed or newly acquired products,

• forward-buying patterns by wholesalers that may result in significant quarterly swings in revenue reporting,

• increases in the cost of raw materials used to manufacture our products,

• the development of new competitive products by others,

• the mix of products that we sell during any time period,

• our responses to price competition, and

• fluctuations in royalties paid by third parties.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     There have been no material changes in the reported market risks or foreign currency exchange risks from those reported under Item 7A, Quantitative and Qualitative Disclosures About Market Risk in our Annual Report on Form 10-K for the year ended December 31, 2003.

Item 4. Controls and Procedures

     Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of the design and operation of Connetics’ disclosure controls and procedures. This evaluation was performed as of June 30, 2004. Our disclosure controls and procedures are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Based on their evaluation, the CEO and CFO concluded that our disclosure

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controls and procedures were effective in timely alerting them to material information required to be included in our periodic SEC reports. In addition, our CEO and CFO concluded that during the quarter ended June 30, 2004, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

     We do not have a plan or program to repurchase shares of our common stock. Prior to 2000, however, we have accepted a total of 46,708 shares of our common stock surrendered by our chief executive officer as partial repayments of loans totaling approximately $321,000 plus accrued interest.

Item 4. Submission of Matters to a Vote of Security Holders

     On May 7, 2004, we held our annual meeting of stockholders. At the meeting, the stockholders approved the following matters by the following votes:

1) Election of the following directors:

Name	For		Withheld
Alexander E. Barkas, Ph.D.		26,857,393		2,147,912
Eugene Bauer, M.D.		22,096,573		6,908,732
Andrew Eckert		27,401,751		1,603,554
Denise Gilbert, Ph.D.		27,793,331		1,211,974
John C. Kane		27,401,836		1,603,469
Thomas D. Kiley		27,610,226		1,395,079
Leon E. Panetta		18,411,814		10,593,491
G. Kirk Raab		26,735,521		2,269,784
Thomas G. Wiggans		27,587,394		1,417,911

2)  Ratification of the appointment of Ernst & Young LLP to serve as the Company’s independent auditors for the fiscal year ending
December 31, 2004:

For	Against		Abstain
27,536,743		961,130		507,432

Item 6. Exhibits and Reports on Form 8-K

     (a) Exhibits.

Exhibit
Number	Description
10.1	Connetics Corporation 1995 Employee Stock Purchase Plan (as amended and restated through May 7, 2004) and form of Subscription Agreement
10.2	Sublease Agreement between The Board of Trustees of the Leland Stanford Junior University and Incyte Pharmaceuticals, Inc., dated May 6, 2004
10.3	Sublease Consent between The Board of Trustees of the Leland Stanford Junior University and Incyte Corporation and Connetics Corporation, dated May 6, 2004
10.4	Agreement Regarding Sublease and Lease between The Board of Trustees of the Leland Stanford Junior University and Connetics Corporation, dated May 6, 2004

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Exhibit
Number	Description
10.5	First Amendment to Lease between The Board of Trustees of the Leland Stanford Junior University and Incyte Corporation, dated May 6, 2004
31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
32.2	Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350

(b) Reports on Form 8-K. We filed or furnished the following Current Reports on Form 8-K during the quarter ended June 30, 2004. The information furnished under Item 9, Regulation FD Disclosure or Item 12, Results of Operations and Financial Condition is not deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934.

(i)	Current Report on Form 8-K dated April 8, 2004, filed with the Securities and Exchange Commission on April 9, 2004, under Item 5, Other Events, and Item 7, Financial Statements & Exhibits.
(ii)	Current Report on Form 8-K dated April 14, 2004, filed with the Securities and Exchange Commission on April 15, 2004, under Item 5, Other Events, and Item 7, Financial Statements & Exhibits.
(iii)	Current Report on Form 8-K/A dated March 4, 2004, filed with the Securities and Exchange Commission on April 30, 2004, under Item 2, Acquisition or Disposition of Assets, and Item 7 Financial Statements, Pro Forma Financial Information and Exhibits.
(iv)	Current Report on Form 8-K dated May 4, 2004, furnished to the Securities and Exchange Commission on May 4, 2004, under Item 7, Financial Statements & Exhibits, and Item 12 Results of Operations and Financial Condition.
(v)	Current Report on Form 8-K/A dated March 4, 2004, filed with the Securities and Exchange Commission on May 6, 2004, under Item 2, Acquisition or Disposition of Assets, and Item 7, Financial Statements, Pro Forma Financial Information & Exhibits.
(vi)	Current Report on Form 8-K dated June 10, 2004, filed with the Securities and Exchange Commission on June 14, 2004, under Item 5, Other Events.
(vii)	Current Report on Form 8-K dated June 15, 2004, furnished to the Securities and Exchange Commission on June 15, 2004, under Item 7, Financial Statements and Exhibits, and Item 9, Regulation FD Disclosure.

21

SIGNATURE

      Pursuant to the requirements 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.

                        Connetics Corporation

By:	/s/ John L. Higgins
	John L. Higgins
	Executive Vice President, Finance and Corporate Development and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer and Duly Authorized Officer of the Registrant)

Date: August 5, 2004

22

INDEX TO EXHIBITS

Exhibit
Number	Description
10.1	Connetics Corporation 1995 Employee Stock Purchase Plan (as amended and restated through May 7, 2004) and form of Subscription Agreement
10.2	Sublease Agreement between The Board of Trustees of the Leland Stanford Junior University and Incyte Pharmaceuticals, Inc., dated May 6,2004
10.3	Sublease Consent between The Board of Trustees of the Leland Stanford Junior University and Incyte Corporation and Connetics Corporation, dated May 6, 2004
10.4	Agreement Regarding Sublease and Lease between the Board of Trustees of the Leland Stanford Junior University and Connetics Corporation, dated May 6, 2004
10.5	First Amendment to Lease between The Board of Trustees of the Leland Stanford Junior University and Incyte Corporation, dated May 6, 2004
31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
32.2	Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350

23

EX-10.1

                                                                    EXHIBIT 10.1

                              CONNETICS CORPORATION
                        1995 EMPLOYEE STOCK PURCHASE PLAN
                  (AS AMENDED AND RESTATED THROUGH MAY 7, 2004)
                 Adopted by the Board of Directors Feb. 17, 2000
                    Approved by the Stockholders May 11, 2000

1.    PURPOSE. The purpose of the Plan is to provide employees of the Company
and its Designated Subsidiaries with an opportunity to purchase Common Stock of
the Company. It is the intention of the Company to have the Plan qualify as an
"Employee Stock Purchase Plan" under Section 423 of the Internal Revenue Code of
1986, as amended. The provisions of the Plan shall, accordingly, be construed so
as to extend and limit participation in a manner consistent with the
requirements of that section of the Code.

2.    DEFINITIONS.

      (a)   "Board" means the Board of Directors of the Company.

      (b)   "Code" means the Internal Revenue Code of 1986, as amended.

      (c)   "Common Stock" means the Common Stock of the Company.

      (d)   "Company" means Connetics Corporation a Delaware corporation.

      (e)   "Compensation" means all regular straight time gross earnings,
excluding payments for overtime, shift premium, incentive compensation,
incentive payments, bonuses, commissions and other compensation.

      (f)   "Continuous Status as an Employee" means the absence of any
interruption or termination of service as an Employee. Continuous Status as an
Employee shall not be considered interrupted in the case of a leave of absence
agreed to in writing by the Company, provided that such leave is for a period of
not more than 90 days or reemployment upon the expiration of such leave is
guaranteed by contract or statute.

      (g)   "Contributions" means all amounts credited to the account of a
participant pursuant to the Plan.

      (h)   "Designated Subsidiaries" means the Subsidiaries which have been
designated by the Board from time to time in its sole discretion as eligible to
participate in the Plan.

      (i)   "Employee" means any person, including an Officer, who is
customarily employed for at least twenty (20) hours per week and more than five
(5) months in a calendar year by the Company or one of its Designated
Subsidiaries.

      (j)   "Exchange Act" means the Securities Exchange Act of 1934, as
amended.

      (k)   "Purchase Date" means the last day of each Purchase Period of the
Plan.

      (l)   "Offering" means the grant of rights to purchase Common Stock of the
Company under the Plan to eligible Employees.

      (m)   "Offering Date" means the first business day of each Offering Period
of the Plan. In the case of an individual who becomes an eligible Employee after
the first business day of an Offering Period but prior to the first business day
of the last calendar quarter of such Offering Period, the term "Offering Date"
means the first business day of the calendar quarter coinciding with or next
succeeding the day on which that individual becomes an eligible Employee.
Options granted after the first business day of an Offering Period will be
subject to the same terms as the options granted on the first business day of
such Offering Period except that they will have a different grant date (thus,
potentially, a different exercise price) and, because they expire at the same
time as the options granted on the first business day of such Offering Period, a
shorter term.

                                      -1-


      (n)   "Offering Period" means a period of twenty-four (24) months
commencing on December 1 and June 1 of each year, except as otherwise set forth
in SECTION 4(a), or such other period as the Board of Directors may determine
prior to the commencement of an Offering Period, but which period shall not
exceed twenty-four (24) months.

      (o)   "Officer" means a person who is an officer of the Company within the
meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated under the Exchange Act.

      (p)   "Option Price" means the price at which the shares are offered in a
given Offering Period, calculated as set forth in SECTION 7(b).

      (q)   "Plan" means this Employee Stock Purchase Plan.

      (r)   "Purchase Period" means a period of six (6) months within an
            Offering Period.

      (s)   "Subsidiary" means a corporation, domestic or foreign, of which not
less than 50% of the voting shares are held by the Company or a Subsidiary,
whether or not such corporation now exists or is hereafter organized or acquired
by the Company or a Subsidiary.

3.    ELIGIBILITY.

      (a)   Any person who is an Employee as of the Offering Date of a given
Offering Period shall be eligible to participate in such Offering Period under
the Plan subject to the requirements of SECTION 5(a) and the limitations imposed
by Section 423(b) of the Code.

      (b)   Any provisions of the Plan to the contrary notwithstanding, no
Employee shall be granted an option under the Plan (i) if, immediately after the
grant, such Employee (or any other person whose stock would be attributed to
such Employee pursuant to Section 424(d) of the Code) would own stock and/or
hold outstanding options to purchase stock possessing five percent (5%) or more
of the total combined voting power or value of all classes of stock of the
Company or of any subsidiary of the Company, or (ii) if such option would permit
his or her rights to purchase stock under all employee stock purchase plans
(described in Section 423 of the Code) of the Company and its Subsidiaries to
accrue at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) of fair
market value of such stock (determined at the time such option is granted) for
each calendar year in which such option is outstanding at any time.

4.    OFFERING PERIODS AND PURCHASE PERIODS.

      (a)   Offering Periods. The Plan shall be implemented by a series of
Offering Periods of twenty-four (24) months duration, with new Offering Periods
commencing on or about June 1 and December 1 of each year (or at such other time
or times as may be determined by the Board of Directors). In particular, upon
adoption of this Plan as amended and restated, a new Offering Period shall
commence on June 1, 2003. The Plan shall continue until terminated in accordance
with SECTION 20 of this Plan. The Board of Directors of the Company shall have
the power to change the duration and/or the frequency of Offering Periods with
respect to future offerings without stockholder approval if such change is
announced at least fifteen (15) days prior to the scheduled beginning of the
first Offering Period to be affected. The terms and conditions of an Offering
Period shall be incorporated by reference into the Plan and treated as part of
the Plan. The provisions of separate Offering Periods need not be identical, but
each Offering shall include (thorough incorporation of the provisions of this
Plan by reference into the document comprising the Offering or otherwise) the
Offering Period, and the substance of the provisions contained in SECTIONS 5
through 13, inclusive. An Employee may only participate in one Offering Period
at a time.

      (b)   Purchase Periods. Each Offering Period shall consist of consecutive
Purchase Periods of six (6) months duration. The last day of each Purchase
Period shall be the "Purchase Date" for such Purchase Period. A Purchase Period
commencing on June 1 shall end on the next November 30. A Purchase Period
commencing on December 1 shall end on the next May 31. In particular, upon
adoption of this Plan as amended and restated, a new Purchase Period shall
commence on June 1, 2003. The Board of Directors of the Company shall have the
power to change the duration and/or frequency of Purchase Periods with respect
to future purchases without stockholder

                                       2


approval if such change is announced at least fifteen (15) days prior to the
scheduled beginning of the first Purchase Period to be affected.

5.    PARTICIPATION.

      (a)   An eligible Employee may become a participant in the Plan by
completing a subscription agreement on the form provided by the Company and
filing it with the Company's payroll office prior to the applicable Offering
Date, unless a later time for filing the subscription agreement is set by the
Board for all eligible Employees with respect to a given offering. The
subscription agreement shall set forth the percentage of the participant's
Compensation (which shall be greater than or equal to zero percent (0%) but not
more than fifteen percent (15%)) to be paid as Contributions pursuant to the
Plan.

      (b)   Payroll deductions shall commence on the first payroll following the
Offering Date and shall end on the last payroll paid on or prior to the last
Purchase Period of the Offering Period to which the subscription agreement is
applicable, unless sooner terminated by the participant as provided in SECTION
10.

6.    METHOD OF PAYMENT OF CONTRIBUTIONS.

      (a)   The participant shall elect to have payroll deductions made on each
payday during the Offering Period in an amount greater than or equal to zero
percent (0%) but not more than fifteen percent (15%) of such participant's
Compensation on each such payday. All payroll deductions made by a participant
shall be credited to his or her account under the Plan. A participant may not
make any additional payments into such account.

      (b)   A participant may discontinue his or her participation in the Plan
as provided in SECTION 10, or, on one occasion only during a Purchase Period,
may increase or decrease the rate of his or her Contributions during the
Offering Period by completing and filing with the Company a change of status
notice. The change in rate shall be effective for the first full payroll period
commencing no fewer than ten (10) business days following the Company's receipt
of the change of status notice, unless this change is processed more quickly.

      (c)   Notwithstanding the foregoing, to the extent necessary to comply
with Section 423(b)(8) of the Code and SECTION 3(b) of this Plan, a
participant's payroll deductions may be decreased to 0% at such time during any
Offering Period which is scheduled to end during the current calendar year that
the aggregate of all payroll deductions accumulated with respect to such
Offering Period and any other Offering Period ending within the same calendar
year equal $25,000. Payroll deductions shall re-commence at the rate provided in
such participant's subscription Agreement at the beginning of the first Offering
Period which is scheduled to end in the following calendar year, unless
terminated by the participant as provided in SECTION 10.

7.    GRANT OF OPTION.

      (a)   On the Offering Date of each Offering Period, each eligible Employee
participating in such Offering Period shall be granted an option to purchase on
each Purchase Date a number of shares of the Company's Common Stock determined
by dividing such Employee's Contributions accumulated prior to such Purchase
Date and retained in the participant's account as of the Purchase Date by the
Option Price; provided however, that the maximum number of shares an Employee
may purchase during each Offering Period shall be determined at the Offering
Date by dividing $50,000 by the fair market value of a share of the Company's
Common Stock on the Offering Date, and provided further that such purchase shall
be subject to the limitations set forth in SECTIONS 3(b) and 13. The fair market
value of a share of the Company's Common Stock shall be determined as provided
in SECTION 7(b).

      (b)   The option price per share of the shares offered in a given Offering
Period ("Option Price") shall be the lower of:

      (i)   eighty-five percent (85%) of the fair market value of a share of the
            Company's Common Stock on the Offering Date, or

                                       3


      (ii)  eighty-five percent (85%) of the fair market value of a share of the
            Company's Common Stock on the Purchase Date;

The fair market value of the Company's Common Stock on a given date shall be
determined by the Board in its discretion based on the closing price of the
Common Stock for such date (or, in the event that the Common Stock is not traded
on such date, on the immediately preceding trading date), as reported by the
National Association of Securities Dealers Automated Quotation (Nasdaq) National
Market or, if such price is not reported, the mean of the bid and asked prices
per share of the Common Stock as reported by Nasdaq or, in the event the Common
Stock is listed on a stock exchange, the fair market value per share shall be
the closing price on such exchange on such date (or, in the event that the
Common Stock is not traded on such date, on the immediately preceding trading
date), as reported in The Wall Street Journal.

      (c)   In connection with each Offering made under the Plan, the Board or
the Committee may specify a maximum number of shares that may be purchased by
any employee as well as a maximum aggregate number of shares that may be
purchased by all eligible employees pursuant to such Offering. In addition, in
connection with each Offering that contains more than one Purchase Date, the
Board or the Committee may specify a maximum aggregate number of shares which
may be purchased by all eligible employees on any give Purchase Date under the
Offering. If the aggregate purchase of shares upon exercise of rights granted
under the Offering would exceed any such maximum aggregate number, the Board or
the Committee shall make a pro rata allocation of the shares available in as
nearly a uniform manner as is practicable and as it deems to be equitable.

8.    EXERCISE OF OPTION. Unless a participant withdraws from the Plan as
provided in SECTION 10, his or her option for the purchase of shares will be
exercised automatically on each Purchase Date of an Offering Period, and the
maximum number of shares, including fractional shares, subject to the option
will be purchased at the applicable option price with the accumulated
Contributions in his or her account. The shares purchased upon exercise of an
option hereunder shall be deemed to be transferred to the participant on the
Purchase Date. During his or her lifetime, a participant's option to purchase
shares hereunder is exercisable only by him or her.

9.    DELIVERY. As promptly as practicable after each Purchase Date of each
Offering Period, the Company shall arrange the delivery to each participant, as
appropriate, of a certificate representing the shares purchased upon exercise of
his or her option or the deposit of such number of shares with the broker
selected by the Company for administration of Plan stock purchases, as
determined by the Company. Any cash remaining to the credit of a participant's
account under the Plan after a purchase by him or her of shares at the
termination of each Offering Period, or which is insufficient to purchase a full
share of Common Stock of the Company, shall be carried over to the next Offering
Period if the Employee continues to participate in the Plan, or if the Employee
does not continue to participate, shall be returned to said participant.

10.   VOLUNTARY WITHDRAWAL; TERMINATION OF EMPLOYMENT.

      (a)   A participant may withdraw all but not less than all the
Contributions credited to his or her account under the Plan at any time prior to
each Purchase Date by giving written notice to the Company. All of the
participant's Contributions credited to his or her account will be paid to him
or her promptly after receipt of his or her notice of withdrawal and his or her
option for the current period will be automatically terminated, and no further
Contributions for the purchase of shares will be made during the Offering
Period.

      (b)   Upon termination of the participant's Continuous Status as an
Employee prior to the Purchase Date of an Offering Period for any reason,
including retirement or death, the Contributions credited to his or her account
will be returned to him or her or, in the case of his or her death, to the
person or persons entitled thereto under SECTION 15, and his or her option will
be automatically terminated.

      (c)   If an Employee fails to remain in Continuous Status as an Employee
of the Company for at least twenty (20) hours per week during the Offering
Period in which the employee is a participant, he or she will be deemed to have
elected to withdraw from the Plan and the Contributions credited to his or her
account will be returned to him or her and his or her option terminated.

                                       4


      (d)   A participant's withdrawal from an offering will not have any effect
upon his or her eligibility to participate in a succeeding offering or in any
similar plan which the Company may adopt after the date of this Plan.

11.   AUTOMATIC WITHDRAWAL. If on the Purchase Date of any Purchase Period in an
Offering Period, the fair market value of the shares is lower than it was on the
Offering Date of such Offering Period (after taking into account any adjustment
during the Offering Period pursuant to SECTION 19(a)), all participants in such
Offering Period shall (a) acquire the shares reserved for the participant for
such Purchase Period, and (b) automatically be (i) withdrawn from the Offering
Period following the acquisition of shares, and (ii) enrolled in the Offering
Period that commences on the next business day.

12.   INTEREST.

      (a)   All payroll deductions credited to the account of a participant
under the Plan shall accrue interest. In the case of participants primarily
employed in Australia, such amounts credited to a participant's account shall be
deposited with a bank in Australia. In the case of participants primarily
employed in the United States, such amounts credited to a participant's account
shall be deposited with a bank in the United States. With respect to
participants employed in other jurisdictions, the Board shall determine the
location of the bank where amounts credited to a participant's account shall be
deposited.

      (b)   Any interest attributable to amounts credited to the account of a
participant under the Plan shall be paid to the account of the participant and
shall form part of that participant's Contributions.

      (c)   The Company shall be entitled to deduct from the interest earned on
amounts credited to the account of a participant any bank and government charges
referable to that participant's Contributions and an amount representing a
reasonable apportionment of the cost of administering the Plan, as determined by
the Board from time to time. In addition, the Company shall be entitled to
withhold from such interest an amount sufficient to satisfy any applicable
income and employment tax withholding obligations.

      (d)   The Company shall advise each participant of the amount of interest
(net of any bank, government and administration charges deducted) earned in
respect of amounts credited to the account of a participant for the relevant tax
period.

13.   STOCK SUBJECT TO THE PLAN.

      (a)   Subject to adjustment upon changes in capitalization of the Company
as provided in SECTION 19(a), the maximum aggregate number of Shares which may
be optioned and sold under the Plan shall be Eight Hundred Thousand (800,000)
shares, plus an annual increase to be added on each November 30, equal to the
lesser of:

      (i)   one half of one percent (0.5%) of the total number of shares of
            Common Stock outstanding on such anniversary date; or

      (ii)  a number of shares determined by the Board prior to the anniversary
            date, which number shall be less than (i) above.

The Shares may be authorized, but unissued, or reacquired Common Stock. If the
total number of shares which would otherwise be subject to options granted
pursuant to SECTION 7(a) on the Offering Date of an Offering Period exceeds the
number of shares then available under the Plan (after deduction of all shares
for which options have been exercised or are then outstanding), the Company
shall make a pro rata allocation of the shares remaining available for option
grant in as uniform a manner as shall be practicable and as it shall determine
to be equitable. In such event, the Company shall give written notice of such
reduction of the number of shares subject to the option to each Employee
affected thereby and shall similarly reduce the rate of Contributions, if
necessary.

      (b)   The participant will have no interest or voting right in shares
covered by his or her option until such option has been exercised.

                                       5


      (c)   Shares to be delivered to a participant under the Plan will be
registered in the name of the participant or in the name of the participant and
his or her spouse.

14.   ADMINISTRATION. The Board, or a committee named by the Board, shall
supervise and administer the Plan and shall have full power to adopt, amend and
rescind any rules deemed desirable and appropriate for the administration of the
Plan and not inconsistent with the Plan, to determine when and how rights to
purchase stock of the Company shall be granted and the provisions of each such
Offering Period (which need not be identical), to construe and interpret the
Plan and rights granted under it, and to establish, amend and revoke rules and
regulations for the administration of the Plan. The composition of the committee
shall be in accordance with the requirements to obtain or retain any available
exemption from the operation of Section 16(b) of the Exchange Act pursuant to
Rule 16b-3 under the Exchange Act.

15.   DESIGNATION OF BENEFICIARY.

      (a)   A participant may file a written designation of a beneficiary who is
to receive any shares and cash, if any, from the participant's account under the
Plan in the event of such participant's death subsequent to the end of a
Purchase Period but prior to delivery to him or her of such shares and cash. In
addition, a participant may file a written designation of a beneficiary who is
to receive any cash from the participant's account under the Plan in the event
of such participant's death prior to the Purchase Date of an Offering Period. If
a participant is married and the designated beneficiary is not the spouse,
spousal consent shall be required for such designation to be effective.

      (b)   Such designation of beneficiary may be changed by the participant
(and his or her spouse, if any) at any time by written notice. In the event of
the death of a participant and in the absence of a beneficiary validly
designated under the Plan who is living at the time of such participant's death,
the Company shall deliver such shares and/or cash to the executor or
administrator of the estate of the participant, or if no such executor or
administrator has been appointed (to the knowledge of the Company), the Company,
in its discretion, may deliver such shares and/or cash to the spouse or to any
one or more dependents or relatives of the participant, or if no spouse,
dependent or relative is known to the Company, then to such other person as the
Company may designate.

16.   TRANSFERABILITY. Neither Contributions credited to a participant's account
nor any rights with regard to the exercise of an option or to receive shares
under the Plan may be assigned, transferred, pledged or otherwise disposed of in
any way (other than by will, the laws of descent and distribution, or as
provided in SECTION 15) by the participant. Any such attempt at assignment,
transfer, pledge or other disposition shall be without effect, except that the
Company may treat such act as an election to withdraw funds in accordance with
SECTION 10.

17.   USE OF FUNDS. Contributions received by the Company under the Plan shall
constitute general funds of the Company.

18.   REPORTS. Individual accounts will be maintained for each participant in
the Plan. Statements of account will be given to participating Employees
promptly following the Purchase Date, which statements will set forth the
amounts of Contributions, the per share purchase price, the number of shares
purchased and the remaining cash balance, if any.

19.   ADJUSTMENTS UPON CHANGES IN CAPITALIZATION; CORPORATE TRANSACTIONS.

      (a)   Adjustment. Subject to any required action by the shareholders of
the Company, the number of shares of Common Stock covered by each option under
the Plan which has not yet been exercised and the number of shares of Common
Stock which have been authorized for issuance under the Plan but have not yet
been placed under option (collectively, the "Reserves"), as well as the price
per share of Common Stock covered by each option under the Plan which has not
yet been exercised, shall be proportionately adjusted for any increase or
decrease in the number of issued shares of Common Stock resulting from a stock
split, reverse stock split, stock dividend, combination or reclassification of
the Common Stock, or any other increase or decrease in the number of shares of
Common Stock effected without receipt of consideration by the Company; provided,
however, that conversion of any convertible securities of the Company shall not
be deemed to have been "effected without receipt of consideration". Such
adjustment shall be made by the Board, whose determination in that respect shall
be final, binding and conclusive. Except as expressly provided herein, no issue
by the Company of shares of stock of any class, or securities convertible into
shares of stock of any

                                       6


class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares of Common Stock subject to an option.

      (b)   Corporate Transactions. In the event of the proposed dissolution or
liquidation of the Company, the Offering Period will terminate immediately prior
to the consummation of such proposed action, unless otherwise provided by the
Board. In the event of a proposed sale of all or substantially all of the assets
of the Company, or the merger of the Company with or into another corporation,
each option under the Plan shall be assumed or an equivalent option shall be
substituted by such successor corporation or a parent or subsidiary of such
successor corporation, unless the Board determines, in the exercise of its sole
discretion and in lieu of such assumption or substitution, to shorten the
Offering Period then in progress by setting a new Purchase Date (the "New
Purchase Date"). If the Board shortens the Offering Period then in progress in
lieu of assumption or substitution in the event of a merger or sale of assets,
the Board shall notify each participant in writing, at least ten (10) days prior
to the New Purchase Date, that the Purchase Date for his or her option has been
changed to the New Purchase Date and that his or her option will be exercised
automatically on the New Purchase Date, unless prior to such date he or she has
withdrawn from the Offering Period as provided in SECTION 10. For purposes of
this paragraph, an option granted under the Plan shall be deemed to be assumed
if, following the sale of assets or merger, the option confers the right to
purchase, for each share of option stock subject to the option immediately prior
to the sale of assets or merger, the consideration (whether stock, cash or other
securities or property) received in the sale of assets or merger by holders of
Common Stock for each share of Common Stock held on the effective date of the
transaction (and if such holders were offered a choice of consideration, the
type of consideration chosen by the holders of a majority of the outstanding
shares of Common Stock); provided, however, that if such consideration received
in the sale of assets or merger was not solely common stock of the successor
corporation or its parent (as defined in Section 424(e) of the Code), the Board
may, with the consent of the successor corporation and the participant, provide
for the consideration to be received upon exercise of the option to be solely
common stock of the successor corporation or its parent equal in fair market
value to the per share consideration received by holders of Common Stock and the
sale of assets or merger.

      The Board may, if it so determines in the exercise of its sole discretion,
also make provision for adjusting the Reserves, as well as the price per share
of Common Stock covered by each outstanding option, in the event that the
Company effects one or more reorganizations, recapitalizations, rights offerings
or other increases or reductions of shares of its outstanding Common Stock, and
in the event of the Company being consolidated with or merged into any other
corporation.

20.   AMENDMENT OR TERMINATION.

      (a)   The Board of Directors of the Company may at any time terminate or
amend the Plan. Except as provided in SECTION 19(b), no such termination may
affect options previously granted, nor may an amendment make any change in any
option theretofore granted which adversely affects the rights of any
participant. In addition, to the extent necessary to comply with Rule 16b-3
under the Exchange Act, or under Section 423 of the Code (or any successor rule
or provision or any applicable law or regulation), the Company shall obtain
shareholder approval in such a manner and to such a degree as so required.

      (b)   Without shareholder consent and without regard to whether any
participant rights may be considered to have been adversely affected, the Board
(or its committee) shall be entitled to change the Offering Periods and Purchase
Periods, limit the frequency and/or number of changes in the amount withheld
during an Offering Period, establish the exchange ratio applicable to amounts
withheld in a currency other than U.S. dollars, permit payroll withholding in
excess of the amount designated by a participant in order to adjust for delays
or mistakes in the Company's processing of properly completed withholding
elections, establish reasonable waiting and adjustment periods and/or accounting
and crediting procedures to ensure that amounts applied toward the purchase of
Common Stock for each participant properly correspond with amounts withheld from
the participant's Compensation, and establish such other limitations or
procedures as the Board (or its committee) determines in its sole discretion
advisable which are consistent with the Plan.

21.   NOTICES. All notices or other communications by a participant to the
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.

                                       7


22.   CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued with
respect to an option unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Exchange Act, the rules and regulations
promulgated under those Acts, and the requirements of any stock exchange upon
which the shares may then be listed, and shall be further subject to the
approval of counsel for the Company with respect to such compliance. As a
condition to the exercise of an option, the Company may require the person
exercising such option to represent and warrant at the time of any such exercise
that the shares are being purchased only for investment and without any present
intention to sell or distribute such shares if, in the opinion of counsel for
the Company, such a representation is required by any of the aforementioned
applicable provisions of law.

23.   TERM OF PLAN; EFFECTIVE DATE. The Plan shall become effective upon the
earlier to occur of its adoption by the Board of Directors or its approval by
the shareholders of the Company. It shall continue in effect for a term of
twenty (20) years unless sooner terminated under SECTION 20.

24.   ADDITIONAL RESTRICTIONS OF RULE 16B-3. The terms and conditions of options
granted hereunder to, and the purchase of shares by, persons subject to Section
16 of the Exchange Act shall comply with the applicable provisions of Rule
16b-3. This Plan shall be deemed to contain, and such options shall contain, and
the shares issued upon exercise thereof shall be subject to, such additional
conditions and restrictions as may be required by Rule 16b-3 to qualify for the
maximum exemption from Section 16 of the Exchange Act with respect to Plan
transactions.

25.   PLAN APPROVAL. The Plan was initially approved by the Board and the
stockholders of the Company in the year 2000. In December 2002, the Board
approved an amendment and restatement of the Plan to provide (a) that a
participant may increase or decrease his or his percentage of payroll
withholding once during each Purchase Period, (b) that a participant may elect
to have payroll deductions made on each payday during an Offering Period in an
amount greater than or equal to zero percent (0%) but not more than fifteen
percent (15%) of the participant's Compensation and (c) for certain other
administrative changes, which amendments are not subject to stockholder
approval. The amendments described in the previous sentence shall be effective
for Offering Periods commencing on or after June 1, 2003. In May 2004, the Board
approved an amendment and restatement of the Plan to provide that all payroll
deductions credited to the account of a participant under the Plan shall accrue
interest subject to the provisions of Section 12 of the Plan, which amendment is
not subject to stockholder approval. The amendment described in the previous
sentence shall be effective for Offering Periods commencing on or after June 1,
2004.

                               * * * * * * * * * *

                                       8


                              CONNETICS CORPORATION
                        1995 EMPLOYEE STOCK PURCHASE PLAN
                    SUBSCRIPTION AGREEMENT FOR U.S. EMPLOYEES

1.    I, ________________________, hereby elect to participate in the CONNETICS
CORPORATION 1995 Employee Stock Purchase Plan (the "Plan") for the Offering
Period Offering Period ______________, 20___ to _______________, 20__, and
subscribe to purchase shares of the Company's Common Stock in accordance with
this Subscription Agreement and the Plan.

2.    I elect to have Contributions in the amount of ____% of my Compensation,
as those terms are defined in the Plan, applied to this purchase. I understand
that this amount must be greater than or equal to zero percent (0%) but not more
than fifteen percent (15%) of my Compensation during the Offering Period.
(PLEASE NOTE THAT NO FRACTIONAL PERCENTAGES ARE PERMITTED).

3.    I hereby authorize payroll deductions from each paycheck during the
Offering Period at the rate stated in Item 2 of this Subscription Agreement. I
understand that all payroll deductions made by me shall be credited to my
account under the Plan and that I may not make any additional payments into such
account. I understand that all payments made by me shall be accumulated for the
purchase of shares of Common Stock at the applicable purchase price determined
in accordance with the Plan. I further understand that, except as otherwise set
forth in the Plan, shares will be purchased for me automatically on the Purchase
Date of each Offering Period unless I otherwise withdraw from the Plan by giving
written notice to the Company for such purpose.

4.    I understand that I may discontinue at any time prior to the Purchase Date
my participation in the Plan as provided in Section 10 of the Plan. I also
understand that I can decrease the rate of my Contributions on one occasion only
during any Purchase Period by completing and filing a change of status notice
with such decrease taking effect for the first full payroll period commencing no
fewer than ten (10) business days following the Company's receipt the change of
status notice, unless this change is processed more quickly. Further, I may
change the rate of deductions for future Offering Periods by filing a new
Subscription Agreement, and any such change will be effective as of the
beginning of the next Offering Period. In addition, I acknowledge that, unless I
discontinue my participation in the Plan as provided in Section 10 of the Plan,
my election will continue to be effective for each successive Offering Period.

5.    I have received a copy of the Company's most recent description of the
Plan and a copy of the complete "CONNETICS CORPORATION 1995 Employee Stock
Purchase Plan." I understand that my participation in the Plan is in all
respects subject to the terms of the Plan.

6.    Shares purchased for me under the Plan should be issued in the name(s) of
(name of employee or employee and spouse only):

                       __________________________________

                       __________________________________

7.    In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due to me under the Plan:

NAME: _____________________________________         ____________________
(Please print) (First) (Middle) (Last)                   (Relationship)

__________________________________
             (Address)

__________________________________

                                      -1-


8.    I understand that if I dispose of any shares received by me pursuant to
the Plan within two years after the Offering Date (the first day of the Offering
Period during which I purchased such shares) or within one year after the
Purchase Date, I will be treated for federal income tax purposes as having
received ordinary compensation income at the time of such disposition in an
amount equal to the excess of the fair market value of the shares on the
Purchase Date over the price which I paid for the shares, regardless of whether
I disposed of the shares at a price less than their fair market value at the
Purchase Date. The remainder of the gain or loss, if any, recognized on such
disposition will be treated as capital gain or loss.

      I hereby agree to notify the Company in writing within 30 days after the
date of any such disposition, and I will make adequate provision for federal,
state or other tax withholding obligations, if any, which arise upon the
disposition of the Common Stock. The Company may, but will not be obligated to,
withhold from my compensation the amount necessary to meet any applicable
withholding obligation including any withholding necessary to make available to
the Company any tax deductions or benefits attributable to the sale or early
disposition of Common Stock by me.

9.    If I dispose of such shares at any time after expiration of the 2-year and
1-year holding periods, I understand that I will be treated for federal income
tax purposes as having received compensation income only to the extent of an
amount equal to the lesser of (1) the excess of the fair market value of the
shares at the time of such disposition over the purchase price which I paid for
the shares under the option, or (2) 15% of the fair market value of the shares
on the Offering Date. The remainder of the gain or loss, if any, recognized on
such disposition will be treated as capital gain or loss.

      I understand that this tax summary is only a summary and is subject to
change. I further understand that I should consult a tax advisor concerning the
tax implications of the purchase and sale of stock under the Plan.

10.   I hereby agree to be bound by the terms of the Plan. The effectiveness of
this Subscription Agreement is dependent upon my eligibility to participate in
the Plan.

SIGNATURE: ____________________________________

SOCIAL SECURITY OR TAX I.D. #: _______________________

DATE: _______________________

SPOUSE'S SIGNATURE (necessary if beneficiary is not spouse):

____________________________________________________________
(Signature)

____________________________________
(Print name)

                                      -2-


                              CONNETICS CORPORATION
                        1995 EMPLOYEE STOCK PURCHASE PLAN
                 SUBSCRIPTION AGREEMENT FOR AUSTRALIAN EMPLOYEES

1.    I, ________________________, hereby elect to participate in the CONNETICS
CORPORATION 1995 Employee Stock Purchase Plan (the "Plan") for the Offering
Period Offering Period ______________, 20___ to _______________, 20__, and
subscribe to purchase shares of the Company's Common Stock in accordance with
this Subscription Agreement and the Plan.

2.    I elect to have Contributions in the amount of ____% of my Compensation,
as those terms are defined in the Plan, applied to this purchase. I understand
that this amount must be greater than or equal to zero percent (0%) but not more
than fifteen percent (15%) of my Compensation during the Offering Period.
(PLEASE NOTE THAT NO FRACTIONAL PERCENTAGES ARE PERMITTED).

3.    I hereby authorize payroll deductions from each paycheck during the
Offering Period at the rate stated in Item 2 of this Subscription Agreement. I
understand that all payroll deductions made by me shall be credited to my
account under the Plan and that I may not make any additional payments into such
account. I understand that all payments made by me shall be accumulated for the
purchase of shares of Common Stock at the applicable purchase price determined
in accordance with the Plan. I further understand that, except as otherwise set
forth in the Plan, shares will be purchased for me automatically on the Purchase
Date of each Offering Period unless I otherwise withdraw from the Plan by giving
written notice to the Company for such purpose.

4.    I understand that I may discontinue at any time prior to the Purchase Date
my participation in the Plan as provided in Section 10 of the Plan. I also
understand that I can decrease the rate of my Contributions on one occasion only
during any Purchase Period by completing and filing a change of status notice
with such decrease taking effect for the first full payroll period commencing no
fewer than ten (10) business days following the Company's receipt the change of
status notice, unless this change is processed more quickly. Further, I may
change the rate of deductions for future Offering Periods by filing a new
Subscription Agreement, and any such change will be effective as of the
beginning of the next Offering Period. In addition, I acknowledge that, unless I
discontinue my participation in the Plan as provided in Section 10 of the Plan,
my election will continue to be effective for each successive Offering Period.

5.    I have received a copy of the Company's most recent description of the
Plan and a copy of the complete "CONNETICS CORPORATION 1995 Employee Stock
Purchase Plan." I understand that my participation in the Plan is in all
respects subject to the terms of the Plan.

6.    Shares purchased for me under the Plan should be issued in the name(s) of
(name of employee or employee and spouse only):

                     _____________________________________

                     _____________________________________

7.    In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due to me under the Plan:

NAME: _____________________________________         ____________________
(Please print) (First) (Middle) (Last)                   (Relationship)

__________________________________
             (Address)

__________________________________

                                      -1-


      I understand that the tax summary in the Explanatory Booklet is only a
summary and is subject to change. I further understand that I should consult a
tax advisor concerning the tax implications of the purchase and sale of stock
under the Plan.

10.   I hereby agree to be bound by the terms of the Plan. The effectiveness of
this Subscription Agreement is dependent upon my eligibility to participate in
the Plan.

SIGNATURE: ____________________________________

SOCIAL SECURITY OR TAX I.D. #: _____________________________

DATE: _____________________________

SPOUSE'S SIGNATURE (necessary if beneficiary is not spouse):

____________________________________________________________
(Signature)

____________________________________________________________
(Print name)

                                      -2-


                              CONNETICS CORPORATION
                        1995 EMPLOYEE STOCK PURCHASE PLAN
                             CHANGE OF STATUS NOTICE


  [ ] WITHDRAWAL FROM 1995 EMPLOYEE STOCK PURCHASE PLAN

I, __________________________, hereby elect to withdraw my participation in the
CONNETICS CORPORATION 1995 Employee Stock Purchase Plan (the "Plan") for the
Offering Period ______________, 20___ to _______________, 20__. This withdrawal
covers all Contributions credited to my account and is effective on the date
designated below.

I understand that all Contributions credited to my account will be paid to me
within ten (10) business days of receipt by the Company of this Notice of
Withdrawal and that my option for the current period will automatically
terminate, and that no further Contributions for the purchase of shares can be
made by me during the Offering Period.

I further understand and agree that I shall be eligible to participate in
succeeding Offering Periods only by delivering to the Company a new Subscription
Agreement.

If the undersigned is an Officer or Director of CONNETICS CORPORATION or other
person subject to Section 16 of the Securities Exchange Act of 1934, the
signature below indicates that, in addition to the foregoing, I understand that
under rules promulgated by the U.S. Securities and Exchange Commission I may not
re-enroll in the Plan for a period of six (6) months after withdrawal.


  [ ] CHANGE IN PAYROLL DEDUCTION

I, __________________________, hereby elect to change my rate of payroll
deduction under the Plan as follows. I elect to have Contributions in the amount
of ____% of my Compensation, as those terms are defined in the Plan, applied
toward the purchase of shares under the Plan. I understand that this amount must
be greater than or equal to zero percent (0%) but not more than fifteen percent
(15%) of my Compensation during the Offering Period. (PLEASE NOTE THAT NO
FRACTIONAL PERCENTAGES ARE PERMITTED).

An increase or a decrease in payroll deduction will be effective for the first
full payroll period commencing no fewer than ten (10) business days following
the Company's receipt of this notice, unless this change is processed more
quickly.

                                       2



  [ ] CHANGE OF BENEFICIARY

This change of beneficiary shall terminate my previous beneficiary designation
under the Plan. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due to me under the Plan:

NAME: _____________________________________         ____________________
(Please print) (First) (Middle) (Last)                   (Relationship)

__________________________________
             (Address)

__________________________________

SIGNATURE: ____________________________________

SOCIAL SECURITY OR TAX I.D. #: _____________________________

DATE: _____________________________

SPOUSE'S SIGNATURE (necessary if beneficiary is not spouse):

____________________________________________________________
(Signature)

_______________________________________
(Print name)

                                       2

EX-10.2

                                                                    Exhibit 10.2

                               SUBLEASE AGREEMENT


                                       I.
                                  DEFINED TERMS


Basic Rent:                Months                 Monthly Basic Rent

                           1-75                   $110,428.75 per month

Broker:             CRESA Partners (representing both Sublessor and Sublessee)

Building:           3160 Porter Drive, Palo Alto, California

Effective           Date: May 6, 2004

Expiration          Date: March 31, 2011

Landlord:           The Board of Trustees of the Leland Stanford Junior
                    University

Master              Lease: That certain Lease dated as of June 19, 1997 by and
                    between Landlord, as landlord, and Incyte Pharmaceuticals,
                    Inc., predecessor-in-interest to Sublessor, as tenant, as
                    amended by (i) Notice of Commencement Date dated October 28,
                    1998 (the "October 1998 Notice"), (ii) Notice of Base Rent
                    and Rentable Area dated November 24, 1998 (the "November
                    1998 Notice (#1)"), (iii) Notice of Rent Commencement Date
                    and Expiration Date dated November 24, 1998 (the "November
                    1998 Notice (#2)"), and (iv) First Amendment to Lease dated
                    as of May 6, 2004 (the "First Amendment").

Permitted           Uses: The uses permitted in Section 7.1 of the Master Lease.

Premises:           The entire Building consisting of approximately 96,025
                    rentable square feet, as more particularly described in the
                    Master Lease attached hereto as Exhibit A

Commencement Date:  The earlier of (i) January 1, 2005, or (ii) the date
                    Sublessee commences business operations in the Sublet Space

Letter of Credit:   $663,000.00, subject to reduction in accordance
                    with Section 6

Sublessee:          Connetics Corporation, a Delaware corporation

                                       1.


Sublessee's Address:    Prior to Commencement Date:
                        Connetics Corporation
                        3290 West Bayshore Road
                        Palo Alto, CA  94303
                        Attn: Christopher T. Holman,
                              Director of Facilities and Production Planning

                        On and after Commencement Date:
                        Connetics Corporation
                        3160 Porter Drive
                        Palo Alto, CA  94304
                        Attn: Christopher T. Holman,
                              Director of Facilities and Production Planning
Sublessee's Share:      100%

Sublessor:              Incyte Corporation, a Delaware corporation

Sublessor's Address:    Incyte Corporation
                        Experimental Station
                        Route 141 and Henry Clay Road
                        Building 336
                        Wilmington, DE  19880
                        Attn:  General Counsel

                        with a copy to:

                        Incyte Corporation
                        Experimental Station
                        Route 141 and Henry Clay Road
                        Building 336
                        Wilmington, DE  19880
                        Attn: Chief Financial Officer

Sublet Space:           The entire Premises

Sublease Term:          Seventy five (75) months

Exhibits:               Exhibit A - Master Lease
                        Exhibit B - List of FF&E
                        Exhibit C - List of Exercise Equipment
                        Exhibit D - Closure Plan
                        Exhibit E - Responsible Party Letter


                                       2.


                                      II.


     THIS SUBLEASE AGREEMENT ("Sublease") is entered as of the Effective Date by
and between Sublessor and Sublessee. Sublessor and Sublessee are each sometimes
referred to in this Sublease as a "Party" and collectively as "Parties."

     THE PARTIES ENTER this Sublease on the basis of the following facts,
understandings and intentions:

     A.   Sublessor is presently the lessee of the Premises pursuant to the
Master Lease by and between Landlord and Sublessor. A copy of the Master Lease
with all exhibits and addenda thereto is attached hereto as Exhibit A.

     B.   Sublessor desires to sublease the Sublet Space to Sublessee and
Sublessee desires to sublease the Sublet Space from Sublessor on all of the
terms, covenants and conditions hereinafter set forth.

     C.   All of the terms and definitions in the Defined Terms section of this
Sublease are incorporated herein by this reference. Capitalized terms used in
this Sublease and not otherwise defined herein shall have the meanings given to
them in the Master Lease.

     NOW, THEREFORE, IN CONSIDERATION of the mutual covenants and promises of
the Parties, the Parties hereto agree as follows:

     1.   SUBLEASE TERM.

          a.   COMMENCEMENT AND EXPIRATION OF SUBLEASE TERM. The Sublease Term
shall commence on the Commencement Date and end on the Expiration Date. If for
any reason Sublessor does not deliver possession of the Sublet Space to
Sublessee on or before January 1, 2005, then this Sublease shall not terminate.
Sublessor will have no liability for such failure to deliver the Sublet Space,
but the Basic Rent and Additional Rent due hereunder shall not commence until
the date possession of the Sublet Space is given to Sublessee. Sublessor shall
sublease to Sublessee, and Sublessee shall sublease from Sublessor the Sublet
Space for the Sublease Term upon all of the terms, covenants and conditions
herein contained.

          b.   EARLY ACCESS. During the period between July 1, 2004 and the
Commencement Date (the "Early Access Period"), Sublessee shall be permitted to
enter the Sublet Space for the sole purpose of performing improvements and
installing Sublessee's equipment, furniture and other personal property, at
Sublessee's sole cost and expense. Under no circumstances may Sublessee conduct
business in the Sublet Space during the Early Access Period. All the terms and
conditions of this Sublease (including without limitation, Sublessee's indemnity
and insurance obligations hereunder and Sublessee's obligation hereunder to
maintain, at its cost, the Building [other than the Building Structure, which
Landlord is obligated to maintain under the Master Lease], the Building Systems
and the parking areas within the Building Common Area in accordance with the
terms of the Master Lease) shall apply during the


                                       3.


Early Access Period, except that Sublessee shall not be obligated to pay during
the Early Access Period (i) Basic Rent, (ii) Real Estate Taxes, (iii) insurance
maintained by Landlord pursuant to the Master Lease, (iv) utilities or (v) the
cost of maintaining the landscape areas within the Building Common Area. Without
limiting the generality of the foregoing, Sublessee shall be responsible for
repairing, at its cost, any damage to the Building or the Building Common Area
arising out of or resulting from Sublessee's performance of any Alterations (as
defined in the Master Lease) and/or installation of equipment, furniture or
other personal property during the Early Access Period. Sublessee's early access
shall also be conditioned upon Sublessee's not being in default hereunder and
the Parties having received the prior written consent of Landlord to this
Sublease. Any Alterations performed by Sublessee during the Early Access Period
shall be performed in accordance with the terms of this Sublease (including,
without limitation, the need to obtain the prior written consent of Sublessor
and Landlord thereto). Sublessee agrees to deliver its plans and specifications
for any Alterations to be performed by or on behalf of Sublessee during the
Early Access Period simultaneously to Landlord and to Sublessor. Sublessor's
consent to such Alterations shall not be unreasonably withheld and shall be
given or denied within three (3) business days after Sublessor's receipt of
Landlord's written consent to such Alterations. Without limiting the generality
of the foregoing, the Parties agree that it shall be reasonable for Sublessor to
withhold its consent to any Alterations (i) which have not been approved by
Landlord, or (ii) which have been approved by Landlord, but which Landlord has
notified Sublessor (and/or Sublessee), at the time of Landlord's approval of
such Alterations, will be required to be removed from the Sublet Space upon the
expiration or earlier termination of the Master Lease.

     2.   CONDITION OF SUBLET SPACE.

          a.   PHYSICAL CONDITION. Sublessor shall deliver the Sublet Space with
all Building Systems in good working order and with the Building in compliance
with the Americans with Disabilities Act of 1990 and applicable building codes,
as the same are in effect as of the commencement of the Early Access Period.
Prior to the commencement of the Early Access Period, Sublessor shall have
complied with the closure plan attached hereto as Exhibit D and incorporated
herein by this reference (the "Closure Plan"). For purposes of complying with
Section 2 of the Closure Plan (entitled "Lab Equipment"), Sublessor shall
decontaminate biosafety cabinets with potential viral contamination with
decontaminates acceptable to the City of Palo Alto Fire Department. Sublessee
acknowledges and agrees that in order for Sublessor to comply with the Closure
Plan, Sublessee shall be required to provide, and hereby agrees to provide by no
later than June 1, 2004, a responsible party letter to the City of Palo Alto
Fire Department, in the form of Exhibit E attached hereto and incorporated
herein by this reference. As of the Effective Date, Sublessee acknowledges that
Sublessee shall have conducted Sublessee's own investigation of the Sublet Space
and the physical condition thereof, including accessibility and location of
utilities, and improvements, which in Sublessee's judgment affect or influence
Sublessee's use of the Sublet Space and Sublessee's willingness to enter this
Sublease, and subject to the first and second sentences of this Section 2.a,
shall accept the Sublet Space in "AS IS" condition and repair. Sublessee
acknowledges that Sublessor has made no representations of any kind in
connection with improvements or physical conditions on, or bearing on, the use
of the Sublet Space. Sublessee shall rely solely on Sublessee's own inspection
and examination of such items and not on any representations of Sublessor,
express or implied. Without limiting the generality of the foregoing, Sublessee
acknowledges and agrees



that Sublessor shall not provide any fiber access to the Sublet Space other than
any fiber access that may currently exist in the Sublet Space as of the
Effective Date. Subject to the first and second sentences of this Section 2.a,
Sublessee further recognizes and agrees that neither Sublessor nor Landlord
shall be required to perform any work of construction or alteration to the
Sublet Space to ready the same for Sublessee's occupancy.

          b.   FURTHER INSPECTION. Sublessee represents and warrants to
Sublessor that as of the Effective Date Sublessee shall examine and inspect all
matters with respect to taxes, income and expense data, insurance costs, bonds,
permissible uses, the Master Lease, zoning, covenants, conditions and
restrictions and all other matters which in Sublessee's judgment bear upon the
value and suitability of the Sublet Space for Sublessee's purposes. Sublessee
has and will rely solely on Sublessee's own inspection and examination of such
items and not on any representations of Sublessor, express or implied.

          c.   TRANSFER OF FF&E. Effective as of the commencement of the Early
Access Period, Sublessor transfers to Sublessee, in consideration of the sum of
One and 00/100 Dollars ($1.00), Sublessor's right, title and interest in and to
the furniture, trade fixtures and equipment located in the Sublet Space as of
the Effective Date and identified on Exhibit B attached hereto and incorporated
herein by this reference (collectively, the "FF&E"). SUBLESSEE HEREBY
ACKNOWLEDGES AND AGREES THAT THE FF&E IS USED AND CONVEYED AND ACCEPTED "AS-IS"
WITHOUT ANY WARRANTIES OR REPRESENTATIONS OF ANY KIND OR NATURE, INCLUDING,
WITHOUT LIMITATION, AS TO MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE,
WHETHER EXPRESS OR IMPLIED, OR WHETHER WRITTEN OR ORAL, CONCERNING ANY AND ALL
DEFECTS OF A PHYSICAL NATURE, WHETHER IN MATERIAL OR WORKMANSHIP AND WHETHER OR
NOT SUCH DEFECT WOULD BE VISIBLE OR APPARENT UPON SUBLESSEE'S FULL INSPECTION
AND EXAMINATION OF THE FF&E. Sublessee, at its sole cost and expense, shall be
responsible for repairing, maintaining and insuring (in accordance with the
terms of the Master Lease) the FF&E. In addition, Sublessee, at its sole cost
and expense, shall be responsible for removing the FF&E from the Sublet Space,
in accordance with the terms of the Master Lease, upon the earlier of (i) the
termination of this Sublease; or (ii) the expiration or earlier termination of
the Master Lease, in the event (A) this Sublease becomes effective as a direct
lease between Landlord and Sublessee, and/or (B) the Master Lease, upon the
expiration of the Sublease Term, continues as a direct lease between Landlord
and Sublessee. In addition, Sublessee, at its sole cost and expense, shall be
responsible for any and all licensing, connection requirements and maintenance
fees and contracts associated with the FF&E.

          d.   OPTION TO PURCHASE EXERCISE EQUIPMENT. Sublessee shall have the
option to purchase, effective as of the commencement of the Early Access Period,
Sublessor's right, title and interest in and to the exercise equipment located
in the Sublet Space as of the Effective Date and identified on Exhibit C
attached hereto and incorporated herein by this reference (collectively, the
"Exercise Equipment"), for a cash purchase price in the amount of Twenty Six
Thousand and 00/100 Dollars ($26,000.00). If Sublessee elects to purchase the
Exercise Equipment pursuant to this Section 2.d, Sublessee shall deliver written
notice to Sublessor confirming such election no later than fourteen (14) days
after the Effective Date. In the event Sublessee purchases the Exercise
Equipment pursuant to this Section 2.d, SUBLESSEE


                                       5.


ACKNOWLEDGES AND AGREES THAT THE EXERCISE EQUIPMENT HAS BEEN USED AND SHALL BE
CONVEYED AND ACCEPTED "AS-IS" WITHOUT ANY WARRANTIES OR REPRESENTATIONS OF ANY
KIND OR NATURE, INCLUDING, WITHOUT LIMITATION, AS TO MERCHANTABILITY OR FITNESS
FOR A PARTICULAR PURPOSE, WHETHER EXPRESS OR IMPLIED, OR WHETHER WRITTEN OR
ORAL, CONCERNING ANY AND ALL DEFECTS OF A PHYSICAL NATURE, WHETHER IN MATERIAL
OR WORKMANSHIP AND WHETHER OR NOT SUCH DEFECT WOULD BE VISIBLE OR APPARENT UPON
SUBLESSEE'S FULL INSPECTION AND EXAMINATION OF THE EXERCISE EQUIPMENT. In the
event Sublessee purchases the Exercise Equipment pursuant to this Section 2.d,
Sublessee, at its sole cost and expense, shall be responsible for repairing,
maintaining and insuring (in accordance with the terms of the Master Lease) the
Exercise Equipment. In addition, in the event Sublessee purchases the Exercise
Equipment pursuant to this Section 2.d, Sublessee, at its sole cost and expense,
shall be responsible for removing the Exercise Equipment from the Sublet Space,
in accordance with the terms of the Master Lease, upon the earlier of (i) the
termination of this Sublease; or (ii) the expiration or earlier termination of
the Master Lease, in the event (A) this Sublease becomes effective as a direct
lease between Landlord and Sublessee, and/or (B) the Master Lease, upon the
expiration of the Sublease Term, continues as a direct lease between Landlord
and Sublessee. In addition, in the event Sublessee purchases the Exercise
Equipment pursuant to this Section 2.d, Sublessee, at its sole cost and expense,
shall be responsible for any and all licensing, connection requirements and
maintenance fees and contracts associated with the Exercise Equipment.

     3.   SUBLEASE SUBJECT TO MASTER LEASE.

          a.   INCLUSIONS. It is expressly understood, acknowledged and agreed
by Sublessee that all of the other terms, conditions and covenants of this
Sublease shall be those stated in the Master Lease except as excluded in Section
3.b herein. Whenever the word "Premises" is used in the Master Lease, for
purposes of this Sublease, the word "Sublet Space" shall be substituted.
Sublessee shall be subject to, bound by and comply with all of said Articles and
Sections of the Master Lease with respect to the Sublet Space and shall satisfy
all applicable terms and conditions of the Master Lease for the benefit of both
Sublessor and Landlord, it being understood and agreed that, for purposes of
this Sublease, as between Sublessor and Sublessee, wherever in the Master Lease
the word "Tenant" appears, the word "Sublessee" shall be substituted, and
wherever the word "Landlord" appears, for the purposes of this Sublease, the
word "Sublessor" shall be substituted; wherever the words "Tenant's Share"
appears, for the purposes of this Sublease, the words "Sublessee's Share" shall
be substituted; and that upon the breach by Sublessee of any of said terms,
conditions or covenants of the Master Lease incorporated into this Sublease or
upon the failure of Sublessee to pay Rent or otherwise comply with any of the
provisions of this Sublease, Sublessor may, but shall not be obligated to,
exercise any and all rights and remedies granted to Landlord by the Master
Lease. In the event of any conflict between the terms of this Sublease and the
terms of the Master Lease, the terms of this Sublease shall control as between
Sublessor and Sublessee. It is further understood and agreed that Sublessor has
no duty or obligation to Sublessee under the aforesaid Articles and Sections of
the Master Lease other than to maintain the Master Lease in full force and
effect during the term of this Sublease; provided, however, that Sublessor shall
not be liable to Sublessee for any termination of the Master Lease prior to the
Expiration Date which is not caused solely by the


                                       6.


fault or default of Sublessor. Whenever the provisions of the Master Lease
incorporated as provisions of this Sublease require the written consent of
Landlord, said provisions shall be construed to require the written consent of
both Landlord and Sublessor. Sublessee hereby acknowledges that it has read and
is familiar with all the terms of the Master Lease, and agrees that this
Sublease is subordinate and subject to the Master Lease and that any termination
of the Master Lease shall likewise terminate this Sublease unless Landlord and
Sublessee have entered into a recognition and attornment agreement whereby
Landlord has agreed to accept this Sublease as a direct lease between Landlord
and Sublessee.

          b.   MODIFICATION OF INCORPORATED PROVISIONS. For so long as this
Sublease continues in effect between Sublessor and Sublessee, the following
provisions of the Master Lease, which have been incorporated into this Sublease
pursuant to Section 3.a above, shall be modified as between Sublessor and
Sublessee as follows: (i) in Section 8.4, "Landlord" shall mean Landlord, and
not Sublessor; (ii) the last sentence of Section 9.3(a) is deleted and replaced
with the following: "Alterations shall be at least equal in quality to the
improvements in the Sublet Space as of the Effective Date"; (iii) as used in
Section 10.1, "Landlord" shall mean Landlord, and not Sublessor, and Sublessee
acknowledges and agrees that Sublessor shall not have any liability by reason of
any injury to Sublessee's business or interference with Sublessee's business
arising from the making of any repairs, alterations or improvements to any
portion of the Building or to fixtures, appurtenances and equipment therein by
Landlord pursuant to such Section 10.1; (iv) as used in Section 21.7, "Landlord"
shall mean Landlord, and not Sublessor; (v) Section 42.4 is modified to delete
the parenthetical "(and if against Landlord, shall)"; and (vi) Sublessee
acknowledges and agrees that by incorporating Section 42.8 into this Sublease,
Sublessee shall be obligated to pay all holdover rent payable by Sublessor to
Landlord under the Master Lease in the event of any holdover by Sublessee.

          c.   EXCLUSIONS. For so long as this Sublease continues in effect
between Sublessor and Sublessee, the following Sections and portions of the
Master Lease shall not be incorporated into this Sublease: Section 1; Section 2
(except for the following definitions, which are incorporated into this
Sublease: "Agents", "Alterations", "Applicable Laws", "Building Structure",
"Building Systems", "Building Common Area", "Environmental Laws", "Environmental
Activity", "Hazardous Material", "Interest Rate", "Landlord's Tax Statement",
"Real Estate Taxes", "Stanford Research Park", "Tax Year", "Tenant's Hazardous
Materials", "Tenant's Property", "Termination Date", and "3160/3170 Porter Drive
Site" (as defined in the First Amendment); Sections 4.1 through 4.3, inclusive;
Sections 5.1 through 5.3, inclusive; the phrase "during the first five years of
the Term" four (4) lines from the bottom of Section 6.1(c); Sections 8.1 and
8.2, inclusive; the phrase "After completion of the Tenant Improvement Work" at
the beginning of Section 9.1; the phrase "except as expressly provided in
attached Exhibit B with respect to the Base Building Work" in Section 13.1;
Section 16; Section 17; Section 18; Section 25; Section 30; Section 33; the last
sentence of Section 42.6; Exhibits B, C-1, C-2, D, and E, inclusive; the October
1998 Notice; the November 1998 Notice (#1); and the November 1998 Notice (#2).

          d.   TIME FOR NOTICE. For so long as this Sublease continues in effect
between Sublessor and Sublessee, the time limits provided for in the provisions
of the Master Lease for the giving of notice, making of demands, performance of
any act, condition or covenant, or the exercise of any right, remedy or option,
are amended for the purposes of this


                                       7.


Sublease by lengthening or shortening the same in each instance by five (5)
days, as appropriate, so that notices may be given, demands made, or any act,
condition or covenant performed, or any right, remedy or option hereunder
exercised, by Sublessor or Sublessee, as the case may be, within the time limit
relating thereto contained in the Master Lease. If the Master Lease allows only
five (5) days or less for Sublessor to perform any act, or to undertake to
perform such act, or to correct any failure relating to the Premises or the
Lease, then Sublessee shall nevertheless be allowed three (3) days to perform
such act, undertake such act and/or correct such failure. Notwithstanding the
foregoing, in the event Landlord provides concurrent written notice to Sublessor
and Sublessee, which written notice copies both Parties, of any failure by
Sublessee to perform any act, or to undertake to perform such act, or to correct
any failure relating to the Premises or the Lease, then Sublessee shall be
entitled to the same time limit provided for in the provisions of the Master
Lease for Sublessor to perform such act, undertake to perform such act and/or
correct such failure.

     4.   PERFORMANCE BY SUBLESSOR; STATUS OF MASTER LEASE.

          a.   SUBLESSOR'S PERFORMANCE CONDITIONED ON LANDLORD'S PERFORMANCE.
Sublessee recognizes that Sublessor is not in a position to render any of the
services or to perform any of the obligations required of Landlord by the terms
of the Master Lease. Therefore, despite anything to the contrary in this
Sublease, Sublessee agrees that performance by Sublessor of its obligations
under this Sublease is conditioned on performance by Landlord of its
corresponding obligations under the Master Lease, and Sublessor will not be
liable to Sublessee for any default of Landlord under the Master Lease.
Sublessee will not have any claim against Sublessor based on Landlord's failure
or refusal to comply with any of the provisions of the Master Lease unless that
failure or refusal is a result of Sublessor's act or failure to act. Despite
Landlord's failure or refusal to comply with any of those provisions of the
Master Lease, this Sublease will remain in full force and effect and Sublessee
will pay the Basic Rent and additional rent and all other charges provided for
in this Sublease without any abatement, deduction or setoff, except and then
only to the extent Sublessor is entitled to and receives any abatement,
deduction or setoff under the express terms of the Master Lease. Except as
expressly provided in this Sublease, Sublessee agrees to be subject to, and
bound by, all of the covenants, agreements, terms, provisions, and conditions of
the Master Lease, as though Sublessee was the Tenant under the Master Lease.

          b.   OBTAINING LANDLORD'S CONSENT. Whenever the consent of Landlord is
required under the Master Lease, or whenever Landlord fails to perform its
obligations under the Master Lease, Sublessor agrees to use its reasonable, good
faith efforts to obtain, upon Sublessee's written request and at Sublessee's
sole cost and expense, such consent or performance on behalf of Sublessee.

     5.   RENT.

          a.   BASIC RENT. Sublessee shall pay to Sublessor the Basic Rent in
advance on the first day of each month of the Sublease Term, commencing on the
Commencement Date. In the event the first day of the Sublease Term shall not be
the first day of a calendar month or the last day of the Sublease Term is not
the last day of the calendar month, the Basic Rent shall be appropriately
prorated based on a thirty (30) day month. All installments


                                       8.


of Basic Rent shall be delivered to Sublessor's Address, or at such other place
as may be designated in writing from time to time by Sublessor, in lawful money
of the United States and without deduction or offset for any cause whatsoever.

          b.   ADDITIONAL RENTAL. Commencing on the Commencement Date, Sublessee
shall be responsible for Sublessee's Share of all costs and expenses of every
kind and nature which may be imposed, at any time, on Sublessor pursuant to the
Master Lease (except for Basic Rent, as defined in the Master Lease) including,
but not limited to, Real Estate Taxes, insurance maintained by Landlord pursuant
to the Master Lease, all costs and expenses relating to Landlord's ownership and
operation of the Building and the Building Common Area, and other additional
rent (collectively, "Additional Rent"). As hereinafter used, "Rent" shall
include Basic Rent, all Additional Rent to be paid by Sublessee pursuant to this
Section 5.b, and all other amounts payable by Sublessee under this Sublease.

          c.   UTILITIES. Sublessee shall contract directly with all utilities
providers to receive invoices directly (in Sublessee's name) from such utilities
providers for utilities consumed in the Sublet Space.

     6.   LETTER OF CREDIT.

          a.   FORM OF LETTER OF CREDIT. Upon execution of this Sublease, and as
a condition precedent to the effectiveness of this Sublease, Sublessee shall
deliver to Sublessor an irrevocable stand-by letter of credit in the amount of
Six Hundred Sixty Three Thousand and 00/100 Dollars ($663,000.00) (the "Letter
of Credit") as credit enhancement for Sublessee's faithful performance of all
terms, covenants and conditions of this Sublease and not as a security deposit,
as more particularly described in this Section 6. The Letter of Credit shall be
in form and substance and issued by a bank that is reasonably satisfactory to
Sublessor. Sublessor hereby confirms that Silicon Valley Bank is acceptable as
the initial issuer of the Letter of Credit. The Letter of Credit shall: (i) name
Sublessor as beneficiary, (ii) be effective upon the commencement date of the
Early Access Period, (iii) allow Sublessor to make partial and multiple draws
thereunder up to the face amount for the purposes permitted under this Section
6, (iv) require the issuing bank to pay to Sublessor the amount of a draw upon
receipt by such bank of a sight draft signed by Sublessor and presented to the
issuing bank, accompanied by Sublessor's statement that said draw is being made
in accordance with the terms of this Section 6, and (v) provide that Sublessor
can freely transfer the Letter of Credit upon an assignment or other transfer of
its interest in this Sublease to the assignee or transferee without having to
obtain the consent of Sublessee or the issuing bank. Sublessee shall be
responsible for all fees associated with issuance of the Letter of Credit.
Sublessor shall be entitled to draw upon the Letter of Credit in accordance with
this Section 6, or at any time within thirty (30) days prior to the expiration
date of the Letter of Credit unless Sublessee shall have delivered to Sublessor
a replacement Letter of Credit meeting the requirements of this Section 6 and
with an expiration date not less than twelve (12) months after the date of
delivery. The Letter of Credit (or a replacement thereof satisfactory to
Sublessor) shall remain in effect until the earlier of (i) the Expiration Date
(i.e., March 31, 2011), or (ii) the date this Sublease becomes effective as a
direct lease between Landlord and Sublessee.


                                       9.

          b.   DRAWS UNDER LETTER OF CREDIT. Sublessor shall have the right (but
shall not be obligated to) draw under the Letter of Credit to remedy any default
by Sublessee in the performance of its obligations under this Sublease, and/or
to compensate Sublessor for any losses, costs, liabilities or damages incurred
by Sublessor as a result of Sublessee's failure to perform its obligations under
this Sublease (collectively, "Losses"). In the event Sublessor draws under the
Letter of Credit pursuant to this subsection (b), Sublessor shall use or apply
the proceeds of such draw to remedy Sublessee's default and to compensate
Sublessor for Losses. If, despite the intent of the Parties that the Letter of
Credit not be considered a security deposit, a court of competent jurisdiction
determines that the Letter of Credit is in fact a security deposit, then
Sublessee hereby waives to the extent inconsistent with the foregoing any
restriction on the uses to which the proceeds of a draw under the Letter of
Credit may be applied as contained in Section 1950.7(c) of the California Civil
Code and/or any successor statute, if applicable. If Sublessor uses or applies
the proceeds of a draw under the Letter of Credit pursuant to this Section 6,
Sublessee shall, within ten (10) business days after demand therefor, deposit
cash or other collateral with the issuing bank and as required by the issuing
bank in an amount sufficient to restore the Letter of Credit to the amount
thereof in effect immediately prior to such draw, and Sublessee's failure to do
so shall, at Sublessor's option, be a non-curable default under this Sublease.
If Sublessee has performed all of its obligations under this Sublease, the
Letter of Credit, or so much thereof as has not theretofore been applied by
Sublessor in accordance with this Section 6 or reduced pursuant to the following
provisions of this Section 6, shall be returned, without payment of interest or
other increment for their use, to Sublessee upon the earlier of (i) the
Expiration Date (i.e., March 31, 2011), or (ii) the date this Sublease becomes
effective as a direct lease between Landlord and Sublessee. No trust
relationship is created herein between Sublessor and Sublessee with respect to
the Letter of Credit.

          c.   REDUCTION OF AMOUNT. Provided no default by Sublessee under this
Sublease has at any time occurred or is then occurring, the amount of the Letter
of Credit shall be (i) reduced to Three Hundred Thirty One Thousand Five Hundred
and 00/100 Dollars ($331,500.00) on the first day of the twenty-fifth (25th)
calendar month of the Sublease Term, and (ii) reduced to One Hundred Ten
Thousand Five Hundred and 00/100 Dollars ($110,500.00) on the first day of the
forty-ninth (49th) calendar month of the Sublease Term.

     7.   USE. The Sublet Space is to be used for the Permitted Uses, and for no
other purpose or business without the prior written consent of Sublessor and
Landlord. In no event shall the Sublet Space be used for a purpose or use
prohibited by the Master Lease.

     8.   INDEMNITY

          a.   SUBLESSEE INDEMNITY. In addition to, and without limitation of,
Sublessee's indemnity obligations under this Sublease incorporated by reference
from the Master Lease, Sublessee agrees to indemnify, protect, defend, with
attorneys approved by Sublessor in its reasonable discretion, and save and hold
harmless Sublessor and its trustees, directors, officers, agents and employees,
harmless from and against any and all losses, costs, liabilities, claims,
damages and expenses, including, without limitation, reasonable attorneys' fees
and costs, and reasonable investigation costs, that may at the time be asserted
against Sublessor by (a) Landlord for failure of Sublessee to perform any of the
covenants, agreements, terms, provisions, or conditions contained in the Master
Lease that Sublessee is obligated to perform


under the provisions of this Sublease, (b) any person or entity as a result of
Sublessee's failure to surrender possession of the Sublet Space in accordance
with the terms of this Sublease, or (c) any person or entity (including without
limitation, Interval [as defined in Section 15(h) below] or its assignee(s)) as
a result of Sublessee's performance of, or failure to perform, Sublessee's
obligations under the Walkway Agreement (as defined in Section 15(h) below).

          b.   SUBLESSOR INDEMNITY. Sublessor agrees to indemnify, defend, and
hold Sublessee and Sublessee's officers, directors and employees harmless from
and against any investigation and remediation costs to the extent arising from
or arising out of the release, treatment, storage, use or disposal of Hazardous
Materials in the Building or the Building Common Area by Sublessor or
Sublessor's agents, employees, officers, directors, trustees, contractors or
subcontractors. Sublessor's indemnification obligations hereunder shall extend
only to actual, out-of-pocket remediation costs (including reasonable attorneys'
fees and investigation, oversight and response costs) but shall not include
consequential damages or incidental damages such as lost profits or any loss of
rental value of the Sublet Space suffered or allegedly suffered by Sublessee or
any of Sublessee's agents, employees, officers, directors, trustees,
contractors, subcontractors, subtenants, assignees, licensees or invitees or
anyone claiming under Sublessee.

          c.   SURVIVAL. The provisions of this Section 8 will survive the
expiration or earlier termination of this Sublease.

     9.   RIGHT TO CURE SUBLESSEE'S DEFAULTS. For so long as this Sublease
continues in effect between Sublessor and Sublessee, if Sublessee shall at any
time fail to make any payment or perform any other obligation of Sublessee under
this Sublease, then Sublessor shall have the right, but not the obligation,
after the lesser of (i) five (5) days' notice to Sublessee, or (ii) the time
within which Landlord may act on Sublessor's behalf under the Master Lease, or
(iii) without notice to Sublessee in the case of any emergency, and without
waiving or releasing Sublessee from any obligations of Sublessee under this
Sublease, to make such payment or perform such obligation of Sublessee in such
manner and to such extent as Sublessor shall reasonably deem necessary. In
exercising any such right, Sublessor shall have the right to pay any reasonable
incidental costs and expenses, employ attorneys and other professionals, and
incur and pay reasonable attorneys' fees and other costs reasonably required in
connection with such failure to perform, and Sublessee shall pay to Sublessor,
upon demand, all such reasonable costs, fees and/or expenses paid or incurred by
Sublessor, together with interest thereon at the Interest Rate set forth in the
Master Lease.

     10.  DAMAGE AND DESTRUCTION. For so long as this Sublease continues in
effect between Sublessor and Sublessee, the following provisions shall apply
with respect to any damage or destruction of the Sublet Space:

          a.   TERMINATION OF MASTER LEASE. In the event Sublessor is entitled
to terminate the Master Lease under Section 16 of the Master Lease, Sublessee
shall be entitled to terminate this Sublease by written notice to Sublessor no
later than five (5) days prior to the date Sublessor is required to notify
Landlord of such election by Sublessor. Notwithstanding the foregoing,
Sublessor's right to


                                       11.


terminate the Master Lease pursuant to Section 16 of the Master Lease shall not
be conditioned in any way upon Sublessee also exercising Sublessee's right to
terminate this Sublease pursuant to this Section 10.a. If the Master Lease is
terminated by either Landlord or Sublessor pursuant to Section 16 of the Master
Lease, this Sublease shall automatically terminate as of the date of the
termination of the Master Lease, unless Landlord and Sublessee have theretofore
entered into a recognition and attornment agreement whereby Landlord has agreed
to accept this Sublease as a direct lease between Landlord and Sublessee.

          b.   CONTINUATION OF SUBLEASE. If the Master Lease is not terminated
following any damage or destruction as provided in Section 10.a above, subject
to any termination of this Sublease by Sublessee in accordance with Section 10.a
above, this Sublease shall remain in full force and effect and, upon Sublessee's
written request and at Sublessee's cost, Sublessor shall diligently enforce any
rights under the Master Lease to require Landlord to rebuild the Sublet Space.
Despite anything contained in the Master Lease to the contrary, as between
Sublessor and Sublessee only, in the event of damage to the Sublet Space
Sublessor will have no obligation to rebuild or restore any Alterations made by
or on behalf of Sublessee in the Sublet Space.

     11.  EMINENT DOMAIN. For so long as this Sublease continues in effect
between Sublessor and Sublessee, the following provisions shall apply with
respect to any condemnation of the Sublet Space:

          a.   TOTAL CONDEMNATION. If all of the Sublet Space is condemned by
eminent domain, inversely condemned or sold in lieu of condemnation, for any
public or a quasi-public use or purpose ("Condemned" or "Condemnation"), this
Sublease shall terminate as of the date of title vesting in such proceeding, and
Basic Rent shall be adjusted to the date of termination.

          b.   PARTIAL CONDEMNATION. In the event Sublessor is entitled to
terminate the Master Lease under Section 17 of the Master Lease, Sublessee shall
be entitled to terminate this Sublease by written notice to Sublessor no later
than five (5) days prior to the date Sublessor is required to notify Landlord of
such election by Sublessor. Notwithstanding the foregoing, Sublessor's right to
terminate the Master Lease pursuant to Section 17 of the Master Lease shall not
be conditioned in any way upon Sublessee also exercising Sublessee's right to
terminate this Sublease pursuant to this Section 11.b. If the Master Lease is
terminated by either Landlord or Sublessor pursuant to Section 17 of the Master
Lease, this Sublease shall automatically terminate as of the date of the
termination of the Master Lease, unless Landlord and Sublessee have theretofore
entered into a recognition and attornment agreement whereby Landlord has agreed
to accept this Sublease as a direct lease between Landlord and Sublessee. If the
Master Lease is not terminated following any such Condemnation, subject to any
termination of this Sublease by Sublessee in accordance with the first sentence
of this Section 11.b, this Sublease shall remain in full force and effect and,
upon Sublessee's written request and at Sublessee's cost, Sublessor shall
diligently enforce any rights under the Master Lease to require Landlord to
rebuild the Sublet Space. Despite anything contained in the Master Lease to the
contrary, as between Sublessor and Sublessee only, in the event of Condemnation
of the Sublet Space Sublessor will have no obligation to rebuild or restore any
Alterations made by or on behalf of Sublessee in the Sublet Space. Basic Rent
shall be equitably adjusted to take into account interference with Sublessee's
ability to conduct its operations on the Sublet Space as a result of the Sublet
Space being Condemned. Sublessee hereby waives the provisions of


                                      12.


California Code of Civil Procedure Section 1265.130 permitting a court of law to
terminate this Sublease.

          c.   SUBLESSEE'S AWARD. Subject to the provisions of the Master Lease,
Sublessee shall have the right to recover from the condemning authority, but not
from Sublessor, such compensation as may be separately awarded to Sublessee in
connection with costs and removing Sublessee's merchandise, furniture, fixtures,
leasehold improvements and equipment to a new location.

     12.  ASSIGNMENT AND SUBLETTING. For so long as this Sublease continues in
effect between Sublessor and Sublessee, the following provisions shall apply
with respect to any assignment and/or subletting of the Sublet Space by
Sublessee:

          a.   CONSENT REQUIRED. Sublessee shall not directly or indirectly
(including, without limitation, by merger, consolidation, reorganization,
acquisition or other transfer of any interest in Sublessee or by transfer to any
parent, subsidiary or affiliate of Sublessee), voluntarily or by operation of
law, sell, assign, encumber, mortgage, pledge or otherwise transfer or
hypothecate all or any part of its interest in or rights with respect to this
Sublease or the Sublet Space (collectively, "Assignment"), or permit all or any
portion of the Sublet Space to be occupied by anyone other than itself or sublet
all or any portion of the Sublet Space (including, without limitation, any
sublease to, or occupancy by, any parent, subsidiary or affiliate of Sublessee)
(collectively, "Sublease"), without obtaining Sublessor's prior written consent
in each instance, which consent shall not be unreasonably withheld or delayed.
In determining whether or not to consent to a proposed Assignment or Sublease,
Sublessor may consider the following factors, among others, all of which are
deemed reasonable: (i) whether the proposed assignee or subtenant has sufficient
financial capability to perform its obligations under this Sublease; (ii)
whether the proposed use of the Sublet Space by the proposed assignee or
subtenant is consistent with the Permitted Uses set forth in the Defined Terms
section of this Sublease; and (iii) whether Landlord has consented in writing to
the proposed Assignment or Sublease (it being understood that a condition to
Sublessor's consent to any Assignment or Sublease is Landlord's written consent
to the same). Any Assignment or Sublease that is not in compliance with this
Section 12 shall be null and void and, at the option of Sublessor, shall
constitute a noncurable default by Sublessee under this Sublease, and Sublessor
shall be entitled to pursue any right or remedy available to Sublessor under
this Sublease or under the laws of the State of California. No Assignment or
Sublease shall release or relieve Sublessee of its obligations under this
Sublease. The acceptance of Rent by Sublessor from any other person shall not be
deemed to be a waiver by Sublessor of any provision of this Sublease or to be a
consent to any Assignment or Sublease. Consent to one (1) Assignment or Sublease
shall not be deemed to constitute consent to any subsequent attempted Assignment
or Sublease.

          b.   ASSIGNMENT DOCUMENTATION. With respect to any Assignment, any
assignee approved by Sublessor pursuant to this Section 12 shall, from and after
the effective date of the Assignment, assume all obligations of Sublessee under
this Sublease and shall be and remain liable jointly and severally with
Sublessee for the payment of Rent, and for the performance of all of the terms,
covenants, conditions and agreements herein contained on Sublessee's part to be
performed. No Assignment shall be binding on Sublessor unless Sublessee shall
deliver to Sublessor a counterpart of the Assignment and an instrument that


                                      13.


contains a covenant of assumption by such assignee satisfactory in form and
substance to Sublessor, and consistent with the requirements of this Section
12.b. Any failure or refusal of such assignee to execute such instrument of
assumption shall constitute a default under this Sublease but shall not release
or discharge such assignee from its liability as set forth above.

          c.   TRANSFER CONSIDERATION. If Sublessor consents to an Assignment or
Sublease, as a condition thereto which the Parties hereby agree is reasonable,
Sublessee shall pay to Sublessor fifty percent (50%) of any rent, additional
rent or other consideration payable by the assignee or subtenant in connection
with the Assignment or Sublease in excess of the Basic Rent and Additional Rent
payable by Sublessee under this Sublease on a per rentable square foot basis if
less than all of the Sublet Space is transferred, in either case without any
deduction therefrom.

     13.  INSURANCE. All insurance policies required to be carried by Sublessee
pursuant to the Master Lease shall contain a provision whereby Sublessor and
Landlord are each named as additional insureds under such policies.

     14.  BROKERAGE COMMISSION. Sublessor shall pay a brokerage commission to
the Broker for Sublessee's subletting of the Sublet Space as provided for in a
separate agreement between Sublessor and the Broker. Sublessee warrants for the
benefit of Sublessor that its sole contact with Sublessor or the Sublet Space in
connection with this transaction has been directly with Sublessor and the
Broker. Sublessee further warrants for the benefit of Sublessor that no other
broker or finder can properly claim a right to a commission or a finder's fee
based upon contacts between the claimant and Sublessee with respect to the other
party or the Sublet Space. Sublessee shall indemnify, defend by counsel
acceptable to Sublessor and hold Sublessor harmless from and against any loss,
cost or expense, including, but not limited to, attorneys' fees and court costs,
resulting from any claim for a fee or commission by any broker or finder, other
than any claims by the Broker, in connection with the Sublet Space and this
Sublease.

     15.  MISCELLANEOUS.

          a.   ENTIRE AGREEMENT. This Sublease contains all of the covenants,
conditions and agreements between the Parties concerning the Sublet Space, and
shall supersede all prior correspondence, agreements and understandings
concerning the Sublet Space, both oral and written. No addition or modification
of any term or provision of this Sublease shall be effective unless set forth in
writing and signed by both Sublessor and Sublessee.

          b.   CAPTIONS. All captions and headings in this Sublease are for the
purposes of reference and convenience and shall not limit or expand the
provisions of this Sublease.

          c.   LANDLORD'S CONSENT. This Sublease is conditioned upon Landlord's
written approval of this Sublease within thirty (30) days after the Effective
Date. If Landlord refuses to consent to this Sublease, or if the thirty (30) day
consent period expires, this Sublease shall terminate and neither Party shall
have any continuing obligation to the other with respect to the Sublet Space;
provided Sublessor shall return the Letter of Credit, if previously delivered to
Sublessor, to Sublessee.


                                      14.


          d.   AUTHORITY. Each person executing this Sublease on behalf of a
party hereto represents and warrants that he or she is authorized and empowered
to do so and to thereby bind the Party on whose behalf he or she is signing.

          e.   NOTICES. All notices, demands, consents and approvals which may
or are required to be given by either Party to the other hereunder shall be in
writing and either personally delivered, sent by commercial overnight courier,
or mailed, certified or registered, postage prepaid, and addressed to the Party
to be notified at the address for such Party as specified in the Defined Terms
section of this Sublease or to such other place as the Party to be notified may
from time to time designate by at least ten (10) days' notice to the notifying
Party. Notices shall be deemed served upon receipt or refusal to accept
delivery. Sublessee appoints as its agent to receive the service of all default
notices and notice of commencement of unlawful detainer proceedings the person
in charge of or apparently in charge of occupying the Sublet Space at the time,
and, if there is no such person, then such service may be made by attaching the
same on the main entrance of the Sublet Space.

          f.   PARKING AND SIGNAGE. Sublessee shall have all the rights of
"Tenant" under 7.2 of the Master Lease with regard to parking, subject to all of
the terms and conditions therein, provided all related costs shall be the sole
responsibility of Sublessee. In addition, subject to Landlord's prior written
consent in accordance with Section 34 of the Master Lease, Sublessee shall have
the right to install, at its sole cost and expense, a monument sign (i) above
the entrance to the Building, (ii) at the front of the Building, and (iii) at
the Porter Drive entrance leading to the Building. Sublessee, at its sole cost
and expense, shall: (A) maintain such signs in good working order during the
Sublease Term and (B) upon the earlier of (1) the termination of this Sublease,
or (2) the expiration or earlier termination of the Master Lease, in the event
(aa) this Sublease becomes effective as a direct lease between Landlord and
Sublessee and/or (bb) the Master Lease continues as a direct lease between
Landlord and Sublessee upon the expiration of the Sublease Term, remove such
signs and return the areas on which the signs are located to the condition in
which they existed prior to the installation of such signs.

          g.   APPROVAL OF CONTRACTORS FOR MAINTENANCE AND REPAIR OF BUILDING
SYSTEMS. Notwithstanding anything to the contrary set forth in this Sublease
and/or in the Master Lease, for so long as this Sublease continues in effect
between Sublessor and Sublessee, all contractors and subcontractors performing
any repairs and/or maintenance of the Building Systems on behalf of Sublessee
shall be subject to the prior written approval of Sublessor, which approval
shall not be unreasonably withheld or delayed. Sublessor hereby acknowledges its
approval of Therma Mechanical to perform repairs and/or maintenance of the
heating, ventilating, air-conditioning and plumbing Building Systems and of
Cupertino Electric to perform repairs and/or maintenance of the electrical
Building Systems.

          h.   WALKWAY AGREEMENT. Effective as of the commencement of the Early
Access Period, Sublessee agrees to perform and observe all of the obligations,
covenants, terms and conditions to be performed or observed by Sublessor under
the Walkway Agreement arising from and after the commencement of the Early
Access Period.


                                      15.


     IN WITNESS WHEREOF, the Parties hereto have executed one (1) or more copies
of this Sublease, effective as of the Effective Date.


                                   "SUBLESSOR"


                                   INCYTE CORPORATION, a Delaware corporation


                                   By: /s/ David Hastings
                                       --------------------------------------
                                   Its: EVP, CFO
                                       --------------------------------------


                                   By:
                                       --------------------------------------
                                   Its:
                                       --------------------------------------


                                   "SUBLESSEE"


                                   CONNETICS CORPORATION, a Delaware corporation


                                   By: /s/ John L. Higgins
                                       --------------------------------------
                                   Its: CFO
                                       --------------------------------------


                                   By:
                                       --------------------------------------
                                   Its:
                                       --------------------------------------



                                      16.

EX-10.3

                                                                    Exhibit 10.3

                                SUBLEASE CONSENT


     This Sublease Consent (the "CONSENT") is made as of May 6, 2004 by and
among THE BOARD OF TRUSTEES OF THE LELAND STANFORD JUNIOR UNIVERSITY, a body
having corporate powers under the laws of the State of California ("LANDLORD"),
INCYTE CORPORATION, a Delaware corporation, formerly known as Incyte
Pharmaceuticals, Inc. ("TENANT"), and CONNETICS CORPORATION, a Delaware
corporation ("SUBTENANT"), in the following factual context:

     A.   Landlord and Tenant are the parties to that certain Lease dated as of
June 19, 1997, as amended by (i) Notice of Commencement Date dated October 28,
1998, (ii) Notice of Base Rent and Rentable Area dated November 24, 1998, (iii)
Notice of Rent Commencement Date and Expiration Date dated November 24, 1998,
and (iv) First Amendment to Lease dated as of May 6, 2004 (as so amended, the
"LEASE"), under which Tenant leases from Landlord a two-story building commonly
known as 3160 Porter Drive in Palo Alto, California (the "PREMISES"), as more
particularly described in the Lease.

     B.   Tenant now desires to sublease the entire Premises to Subtenant
pursuant to a sublease in the form attached as EXHIBIT A (the "SUBLEASE").

     C.   Landlord is willing to consent to the Sublease, subject to the terms
and conditions set forth in this Consent.

     NOW THEREFORE, the parties agree as follows:

1.   CONSENT. Landlord hereby (a) consents to the execution and delivery of the
          Sublease, and to the subletting of the Premises from Tenant to
          Subtenant in accordance with the terms of the Sublease, and (b)
          acknowledges and agrees that Subtenant's proposed use of the Premises
          is permitted under the Lease.

2.   TERMS OF CONSENT. The Sublease is and shall remain at all times subject and
          subordinate in all respect to the Lease. This Consent shall not
          operate as a consent to or approval or ratification by Landlord of any
          specific provisions of the Sublease, and shall not modify or be deemed
          to modify or amend the Lease in any way, or to impose on Landlord any
          obligation to provide notice to, or obtain consent from, Subtenant
          with respect to amendments, defaults, waivers or any other matters
          pertaining to the Lease or the Premises. This Consent shall not be nor
          be deemed to be a consent to any future sublease requiring Landlord's
          consent under the Lease.

3.   RELEASE REGARDING HAZARDOUS SUBSTANCES. Subtenant represents to Landlord
          that Subtenant is aware that detectable amounts of hazardous
          substances and groundwater contaminants may have come to be located
          beneath and/or in the vicinity of the Premises, and is aware of
          Landlord's responsibility for such hazardous substances and
          groundwater contaminants under the terms of the Lease. Subtenant has
          made such investigations and inquiries (including, without limitation,
          indoor air quality



          tests) as it deems appropriate to ascertain the effects, if any, of
          such substances and contaminants on its operations and persons using
          the Premises. Landlord makes no representation or warranty with regard
          to the environmental condition of the Premises. Subject to Section 8.4
          of the Lease, Subtenant, on behalf of itself and its affiliated
          entities and their respective partners, employees, successors and
          assigns (collectively, "RELEASORS"), hereby covenants and agrees not
          to sue and forever releases and discharges Landlord, and its trustees,
          officers, directors, agents and employees for and from any and all
          claims, losses, damages, causes of action and liabilities, arising out
          of hazardous substances or groundwater contamination presently
          existing on, under, or emanating from or to the Premises. Subject to
          Section 8.4 of the Lease, Releasors understand and expressly waive any
          rights or benefits available under Section 1542 of the Civil Code of
          California or any similar provision in any other jurisdiction. Section
          1542 provides substantially as follows: "A general release does not
          extend to claims which the creditor does not know or suspect to exist
          in his favor at the time of executing the release, which if known by
          him must have materially affected his settlement with the debtor."

4.   USE OF NAME. Subtenant shall not use any name, trademark or service mark of
          Stanford University without the prior written consent of Landlord,
          which consent may be given or withheld in Landlord's sole discretion.

5.   ALTERATIONS. Landlord hereby agrees that to the extent Landlord's prior
          written consent is required under the Lease for any Alterations to the
          Premises by Subtenant during the Early Access Period or the Sublease
          Term (as such terms are defined in the Sublease), (a) provided that
          Subtenant delivers its plans and specifications for such Alterations
          simultaneously to Landlord and to Tenant, Landlord shall undertake its
          review of such plans and specifications simultaneously with Tenant,
          (b) Landlord's consent to such Alterations, which shall not be
          unreasonably withheld, shall be given or denied in writing within ten
          (10) business days after Landlord's receipt of such plans and
          specifications, and (c) Landlord shall notify Tenant and Subtenant in
          writing at the time of Landlord's consent to such Alterations whether
          such Alterations will be required to be removed upon the expiration or
          earlier termination of the Lease.

6.   ADDITIONAL SECURITY DEPOSIT. In consideration of and as a further condition
          to Landlord's consent to the Sublease, on or before the Commencement
          Date of the Sublease (as defined in the Sublease), Tenant shall
          deliver to Landlord an irrevocable stand-by letter of credit in the
          amount of Two Million Five Hundred Seventy Five Thousand and 00/100
          Dollars ($2,575,000.00) (the "LETTER OF CREDIT") as credit enhancement
          for Tenant's continued performance under the Lease and not as a
          security deposit, as more particularly described in this Section 6.


                                       2



          (a)  The Letter of Credit shall be in form and substance and issued by
          a bank that is reasonably satisfactory to Landlord. The Letter of
          Credit shall: (i) name Landlord as beneficiary; (ii) allow Landlord to
          make partial and multiple draws thereunder up to the face amount only
          for the purposes permitted under this Section 6, (iii) require the
          issuing bank to pay to Landlord the amount of a draw upon receipt by
          such bank of a sight draft signed by Landlord and presented to the
          issuing bank, accompanied by Landlord's statement that said draw is
          being made in accordance with the terms of this Section 6; and (iv)
          provide that Landlord can freely transfer it upon an assignment or
          other transfer of its interest in the Lease to the assignee or
          transferee without having to obtain the consent of Tenant or the
          issuing bank, provided that the assignee or transferee has agreed to
          be bound by Landlord's obligations under the Lease and this Section 6.
          Landlord shall be entitled to draw upon the Letter of Credit in
          accordance with this Section 6, or at any time within thirty (30) days
          prior to the expiration date of the Letter of Credit unless Tenant
          shall have delivered to Landlord a replacement Letter of Credit
          meeting the requirements of this Section 6 and with an expiration date
          not less than twelve (12) months after the date of delivery. The
          Letter of Credit (or a replacement thereof satisfactory to Landlord)
          shall remain in effect until the expiration (i.e., March 31, 2011) or
          the sooner termination of the Lease, howsoever arising.


          (b)  Landlord shall have the right (but shall not be obligated to)
          draw under the Letter of Credit for the following purposes only: (i)
          to remedy any monetary Event of Default by Tenant in the performance
          of its obligations under the Lease; and (ii) to compensate Landlord
          for any losses, costs, liabilities or damages incurred by Landlord as
          a result of Tenant's failure to perform its monetary obligations under
          the Lease (collectively, "Losses"); or (iii) in the event Landlord
          reasonably determines that there is a material impairment of Tenant's
          ability to meet its ongoing monetary obligations under the Lease. In
          the event Landlord draws under the Letter of Credit pursuant to
          subsections (b)(i) and (ii) above, Landlord shall use or apply the
          proceeds of such draw solely to, and only in such amount necessary to,
          remedy the monetary Event of Default by Tenant under the Lease and to
          compensate Landlord for Losses. In the event Landlord draws under the
          Letter of Credit pursuant to subsection (b)(iii) above, Landlord shall
          first apply the proceeds from the Letter of Credit to any rental
          obligations then due and unpaid under the Lease, and thereafter may
          apply the proceeds from the Letter of Credit to future, unpaid rental
          obligations due through the expiration date of the Lease, whether or
          not the Lease is terminated prior to such date. If, despite the intent
          of the parties that the Letter of Credit not be considered a security
          deposit, a court of competent jurisdiction determines that the Letter
          of Credit is in fact a security deposit, then Tenant hereby waives to
          the extent inconsistent with the foregoing any restriction on the uses
          to which the proceeds of a draw under the Letter of Credit may be
          applied as contained in Section 1950.7(c) of the California Civil Code
          and/or any successor statute, if applicable. If Landlord so uses or
          applies the proceeds of a draw under the Letter of Credit pursuant to
          this Section 6, Tenant shall, within ten (10) business days after
          demand therefor, deposit cash or other collateral with the issuing
          bank and as required by the issuing bank in an amount sufficient to


                                       3


          restore the Letter of Credit to the amount thereof in effect
          immediately prior to such draw, and Tenant's failure to do so shall,
          at Landlord's option, be an Event of Default under the Lease. In the
          event Landlord has drawn the entire Letter of Credit pursuant to
          subsection (b)(iii) above, and if Tenant subsequently provides
          adequate assurance, in Landlord's reasonable judgment, that Tenant
          will continue to perform its monetary obligations under the Lease,
          then upon Tenant's delivery of a replacement Letter of Credit for the
          full amount thereof in effect immediately prior to such draw, Landlord
          shall refund to Tenant that portion of the Letter of Credit proceeds
          not already applied to rent that has previously become due.


          (c)  The Letter of Credit, or so much thereof as has not theretofore
          been applied by Landlord in accordance with this Section 6 or reduced
          pursuant to the following provisions of this Section 6, shall be
          returned, without payment of interest or other increment for their
          use, to Tenant at the expiration (i.e., March 31, 2011) or sooner
          termination of the Lease. No trust relationship is created herein
          between Landlord and Tenant with respect to the Letter of Credit.


          (d)  Commencing on the second (2nd) month of the Sublease Term (as
          defined in the Sublease), the amount of the Letter of Credit shall be
          reduced by Thirty Four Thousand Seven Hundred Ninety Seven and 30/100
          Dollars ($34,797.30) per month, such that the Letter of Credit shall
          be reduced to a zero balance by the expiration of the Lease (i.e.,
          March 31, 2011).



7.   LANDLORD/SUBTENANT EXTENSION AGREEMENT. Concurrently herewith, Landlord and
          Subtenant are entering into that certain Agreement Regarding Sublease
          and Lease (the "EXTENSION AGREEMENT"), pursuant to which, among other
          things, Landlord and Subtenant have agreed that (a) if the Lease is
          terminated prior to the expiration of its term, Landlord shall
          recognize the Sublease and Subtenant's occupancy of the Premises and
          the Sublease shall become effective as a direct lease between Landlord
          and Subtenant, and (b) upon the expiration of the Sublease, the Lease
          shall be extended as a direct lease between Landlord and Subtenant,
          all on the terms and conditions set forth in the Extension Agreement.
          In light of the Extension Agreement, Landlord and Subtenant hereby
          agree that (i) if for any reason the Sublease and/or the Lease becomes
          effective as a direct lease between Landlord and Subtenant, Tenant
          shall have no surrender obligations under the Lease (including without
          limitation, under Section 40 of the Lease), and Subtenant shall be
          solely responsible for satisfying any surrender obligations under the
          Lease (or the Extension Agreement); and (ii) if for any reason the
          Sublease and/or the Lease becomes effective as a direct lease between
          Landlord and Subtenant, Tenant shall have no obligations under the
          Sublease or the Lease, as applicable, arising from and after the date
          the Sublease or

                                       4


          the Lease, as applicable, becomes effective as a direct lease between
          Landlord and Subtenant.

8.   LIMITATION ON LANDLORD'S ACCEPTANCE OF OFFER. Notwithstanding anything to
          the contrary in Section 6(c) of the Extension Agreement (which amends,
          as between Landlord and Subtenant only, Section 18.4 of the Lease),
          Landlord hereby agrees that it shall not accept any Offer (as such
          term is defined in the amended Section 18.4 of the Lease) made by
          Subtenant to Landlord during the Sublease term unless Landlord intends
          to retain or occupy the portion of the Premises that is the subject of
          the Offer for Landlord's own use and benefit (and does not intend to
          further assign or sublease such space to a third party).

9.   SUBTENANT'S INSURANCE. Landlord and Tenant acknowledge that they have each
          reviewed the certificate of insurance that Subtenant proposes to
          deliver in connection with the Sublease, and that subject to the
          actual insurance policies being issued in conformance with Section
          21.2 of the Lease, the certificate of insurance evidences the types
          and levels of insurance coverage required by the Lease.

     IN WITNESS WHEREOF, the parties have executed this Consent as of the date
first above written.

                                     THE BOARD OF TRUSTEES OF THE
                                     LELAND STANFORD JUNIOR UNIVERSITY

                                     By Stanford Management Company

                                     By:  /s/ Jean Snider
                                          ------------------------------
                                          Jean Snider, Managing Director
                                             Stanford Research Park


                                     INCYTE CORPORATION

                                     By:  /s/ David Hastings
                                          ------------------------------

                                     Its: EVP, CFO
                                          ------------------------------


                                     CONNETICS CORPORATION

                                     By:  /s/ John L. Higgins
                                          ------------------------------

                                     Its: CFO
                                          ------------------------------




                                       5

EX-10.4

                                                                    Exhibit 10.4

                     AGREEMENT REGARDING SUBLEASE AND LEASE



     This Agreement Regarding Sublease and Lease (the "AGREEMENT") is made as of
May 6, 2004 by and between THE BOARD OF TRUSTEES OF THE LELAND STANFORD JUNIOR
UNIVERSITY, a body having corporate powers under the laws of the State of
California ("LANDLORD"), and CONNETICS CORPORATION, a Delaware corporation
("SUBTENANT"). Landlord and Subtenant are each sometimes referred to in this
Agreement as a "Party", and collectively as "Parties".

     The Parties enter into this Agreement on the basis of the following facts,
understandings and intentions:

     A.   Landlord and Incyte Corporation, formerly known as Incyte
Pharmaceuticals, Inc. ("TENANT"), are the parties to that certain Lease dated as
of June 19, 1997, as amended by (i) Notice of Commencement Date dated October
28, 1998, (ii) Notice of Base Rent and Rentable Area dated November 24, 1998,
and (iii) Notice of Rent Commencement Date and Expiration Date dated November
24, 1998 (as so amended, the "ORIGINAL LEASE"), under which Tenant leases from
Landlord a two-story building commonly known as 3160 Porter Drive in Palo Alto,
California (the "PREMISES"), as more particularly described in the Lease. A copy
of the Lease is attached hereto as EXHIBIT A.

     B.   Pursuant to a sublease of even date herewith, Tenant and Subtenant
have entered into a sublease of the entire Premises (the "SUBLEASE"), a copy of
which is attached hereto as EXHIBIT B, and Landlord has consented thereto.

     C.   Subtenant acknowledges that Landlord and Tenant have agreed to certain
further amendments to the Original Lease pursuant to a First Amendment to Lease
(the "First Amendment") being entered into concurrently with the Sublease, a
copy of which is attached hereto as EXHIBIT C. The Original Lease, as amended by
the First Amendment, is referred to herein as the "LEASE".

     D.   Landlord and Subtenant desire to make certain additional amendments to
the Lease that will apply only as between Landlord and Subtenant pursuant to the
terms of this Agreement. In addition, Landlord and Subtenant desire to document
certain additional agreements between them with respect to the Lease and the
Sublease.

     NOW THEREFORE, IN CONSIDERATION of the mutual covenants and premises of the
Parties, the Parties agree as follows:

     1.   NON-DISTURBANCE.

          a)   If the Lease is terminated for any reason prior to the expiration
of its term, Landlord shall recognize the Sublease and shall recognize
Subtenant's occupancy of the Premises, provided that no event of default (beyond
any applicable notice and cure or grace period) on the part of Subtenant is then
existing under the Sublease, and provided further that Subtenant's continuing
rights under the Sublease and the Lease shall be contingent on Subtenant having
complied with the terms of Section 1(c) below and Landlord actually receiving
the additional consideration provided in Section 1(c). The Sublease shall
immediately become effective as a direct lease between Landlord and Subtenant as
of the date of termination of the



Lease, and shall continue in effect until the expiration of the Sublease term,
whereupon the terms of Section 2 below shall govern Subtenant's continued
occupancy of the Premises. Subtenant's possession of the Premises and
Subtenant's rights and privileges under the Sublease shall not be disturbed,
diminished or interfered with by Landlord, so long as Subtenant is not in
default of its obligations under the Sublease. Subtenant shall attorn to
Landlord, such attornment to be effective and self-operative without the
execution of any further instrument, and Subtenant shall perform all of Tenant's
obligations under the Sublease directly to Landlord as if Landlord were the
sublessor under the Sublease.

          (b)  Subtenant agrees that if Landlord shall succeed to the interest
of Tenant as sublessor under the Sublease, and in any event upon the
commencement of the Extended Term (as defined in Section 2 below), Landlord
shall not be: (i) liable for any action or omission of Tenant under the
Sublease, (ii) subject to any offsets, claims or defenses that Subtenant might
have had against Tenant under the Sublease, (iii) bound by any rent or
additional rent that Subtenant might have paid for more than the current month
to Tenant under the Sublease, except for any such amounts transferred to
Landlord, or (iv) in any way responsible for any deposit or security deposit
delivered to Tenant, but not subsequently delivered to Landlord.

          (c)  As consideration for Landlord entering into this Agreement
(concurrently with the execution of this Agreement and effective as of the date
of this Agreement), Subtenant shall deliver to Landlord an irrevocable stand-by
letter of credit in the original amount of two million dollars ($2,000,000) (the
"LETTER OF CREDIT"), which Landlord may fully draw and retain upon termination
of the Lease during the Sublease term for any reason. The Letter of Credit shall
be in a form and substance and issued by a bank that is reasonably satisfactory
to Landlord. The Letter of Credit shall: (i) name Landlord as beneficiary; (ii)
allow Landlord to make partial and multiple draws thereunder up to the face
amount, as determined by Landlord; (iii) require the issuing bank to pay to
Landlord the amount of a draw upon receipt by such bank of a sight draft signed
by Landlord and presented to the issuing bank reciting that termination of the
Lease has occurred, giving rise to the ability of the Landlord to draw; and (iv)
provide that Landlord can freely transfer it upon an assignment or other
transfer of its interest in the Lease to the assignee or transferee, without
charge to Landlord and without recourse, and without having to obtain the
consent of Subtenant or the issuing bank. Landlord shall be entitled to draw
upon the Letter of Credit in accordance with the terms of this Section 1(c), or
at any time within thirty (30) days prior to the expiration date of the Letter
of Credit, unless Subtenant shall have delivered to Landlord a replacement
Letter of Credit meeting the requirements of this paragraph and with an
expiration date not less than twelve (12) months after the date of delivery. The
Letter of Credit (or, if applicable, a replacement thereof satisfactory to
Landlord) shall remain in effect until the expiration or the sooner termination
of the Sublease, subject to the reduction in face amount of the Letter of Credit
provided below. The Letter of Credit shall be held by Landlord as consideration
for its recognition of Subtenant as tenant under the Lease, and not as security
for Subtenant's performance under the Lease or the Sublease. No trust
relationship is created herein between Landlord and Subtenant with respect to
the Letter of Credit, and in no event shall the Letter of Credit or any proceeds
drawn thereunder be considered prepaid rent. Commencing on the nineteenth (19th)
month of the Sublease term, the Letter of Credit shall be reduced by Thirty Five
Thousand Eighty Seven Dollars and Seventy Two Cents ($35,087.72) per month, such
that the Letter of Credit shall be reduced to a zero balance by March 31, 2011
and will automatically expire. In the event of Landlord's receipt of a
replacement Letter of Credit in a reduced amount calculated at the time of
issuance of such replacement, Landlord shall surrender to Subtenant the Letter
of Credit previously held.

                                       2


     2.   LEASE EXTENSION. Landlord agrees that upon the expiration of the
Sublease, the Lease shall be extended as a direct lease between Landlord and
Subtenant, and by Subtenant's execution of this Agreement, Subtenant hereby
assumes all obligations of Tenant under the Lease as of the expiration date of
the term of the Sublease. The term of the Lease shall be extended for an
additional term commencing on April 1, 2011, and expiring on December 31, 2014
(the "EXTENDED TERM"). In consideration for Landlord's agreement to the
extension of the Lease term and Landlord's agreement to allow Subtenant to
assume the Extended Term of the Lease at the agreed-upon rental rate set forth
in this Agreement, on the Commencement Date of the Sublease, Subtenant shall pay
to Landlord the sum of One Million Six Hundred Fifty Thousand Dollars
($1,650,000).

     3.   AS-IS. Subtenant agrees and acknowledges that its assumption of
Tenant's obligations under the Lease during the Extended Term shall be based on
Subtenant's own knowledge of the Premises, and Subtenant shall accept the
Premises in its as-is condition existing as of the commencement of the Extended
Term, without any representation or warranty on the part of Landlord or any of
its agents, employees or contractors. Landlord shall have no obligation to
prepare the Premises for continued occupancy by Subtenant, and shall not be
obligated to make any contribution towards tenant improvements, alterations, or
any other items.

     4.   BASE RENT DURING EXTENDED TERM. The Base Rent under the Lease during
the Extended Term shall be as follows:




- ----------------------- -------------------------- ---------------------------
Months                  Lease Rate/Month           Monthly Base Rent
- ----------------------- -------------------------- ---------------------------
                                             
1-12                    $1.40 NNN                  $134,435
- ----------------------- -------------------------- ---------------------------
13-24                   $1.45 NNN                  $139,236.25
- ----------------------- -------------------------- ---------------------------
25-36                   $1.50 NNN                  $144,037.50
- ----------------------- -------------------------- ---------------------------
37-45                   $1.55 NNN                  $148,838.75
- ----------------------- -------------------------- ---------------------------




     5.   OPTIONS TO RENEW. For no additional consideration, Landlord hereby
grants to Subtenant two (2) options to renew the Lease (the "RENEWAL
OPTION(S)"), each Renewal Option for a period of three (3) years (the "RENEWAL
Term(s)"). The Renewal Option(s) shall be void if an "Event of Default" (as
described in Article 19 of the Lease) by Subtenant exists under the Lease,
either at the time of exercise of either Renewal Option or the time of
commencement of either Renewal Term. The Renewal Options must be exercised, if
at all, by written notice from Subtenant to Landlord given not less than nine
(9) months prior to the expiration of the Extended Term (in the case of the
first Renewal Option), and nine (9) months prior to the expiration of the first
Renewal Term (in the case of the second Renewal Option). The Renewal Terms shall
be upon the same terms and conditions as the original Term, except that the Base
Rent applicable to each Renewal Term shall be equal to ninety-five percent (95%)
of the Prevailing Market Rent as of the commencement date of that Renewal Term,
as determined pursuant to the attached EXHIBIT D. The Renewal Options are
personal to

                                       3


Subtenant and shall be inapplicable and null and void if Subtenant assigns the
whole of its interest under the Lease.

     6.   AMENDMENTS TO LEASE. As between Landlord and Subtenant only, the
following Sections of the Lease shall be amended as follows:

          (a)  Landlord agrees and acknowledges that Subtenant's proposed use of
the Premises is permitted under the Lease. Notwithstanding the foregoing, the
use of the Premises by any assignee of Subtenant's interest in the Lease, and
any subtenant of all or any portion of the Premises or subtenant shall strictly
comply with the requirements of Article 7 of the Lease.

          (b)  Section 4.3 of the Lease shall be deleted in its entirety.

          (c)  Section 18.4 of the Lease shall be deleted in its entirety and
the following substituted therefor:

          "If Tenant desires to assign Tenant's interest in the Premises or to
          sublease twenty-five percent (25%) or more of the Premises for more
          than three (3) years or for the balance of the Term (collectively, a
          "TRANSFER"), Tenant's Notice of Proposed Transfer shall also include a
          written offer that includes all of the substantial business terms that
          Tenant has offered to a Transferee which Tenant would execute if
          Landlord does not accept Tenant's offer (the "OFFER") and shall offer
          to Transfer Tenant's interest in the Premises to Landlord on such
          terms and conditions. Landlord shall have fifteen (15) days from
          Landlord's receipt of the Offer to accept the Offer by written notice
          to Tenant or to approve or disapprove the Transfer as provided in
          Section 18.3. If Landlord accepts the Offer, Landlord and Tenant shall
          consummate the Transfer within fifteen (15) days after Landlord's
          written notice of acceptance. The Transfer shall be consummated by
          Tenant's delivery to Landlord of a good and sufficient assignment of
          lease or sublease. If Landlord does not accept the Offer, but approves
          the Transfer, then in the event the terms of the Transfer are
          materially changed during subsequent negotiations to be more favorable
          to the Transferee, Tenant shall again deliver to Landlord an Offer in
          accordance with this Section, offering the interest to Landlord on
          such more favorable terms. Landlord shall then have another period of
          fifteen (15) days after receipt of such Offer to accept such Offer."


In the event Subtenant seeks consent for a Transfer (as defined in the foregoing
Section 18.4) during the Sublease term, it shall first comply with the foregoing
requirements regarding the Offer to Landlord, and then seek Tenant's consent to
the Transfer (whether to Landlord or to a third party).

          (d)  Section 24.7 of the Lease shall be amended as follows:

               (i)  The existing provisions of Section 24.7 shall be identified
          as subsection (a).


                                       4


               (ii) Section 24.7 shall be amended to add the following:

          "(b) Except for Hazardous Materials in the structural components of
the Building, and Hazardous Materials released to the environment (which are
dealt with in subsection (a) above), upon the expiration or earlier termination
of this Lease Tenant shall remove all Hazardous Materials from the Premises as
required by the City of Palo Alto closure ordinance. Tenant shall be responsible
for obtaining final certification of compliance with the Palo Alto facility
closure ordinance from the Palo Alto Fire Department and shall perform any work
requested by the Palo Alto Fire Department. Tenant shall coordinate all work to
be performed pursuant to this subsection through the Environmental Manager for
the Stanford Management Company, shall keep Landlord fully apprised of all work
performed, and shall provide Landlord with copies of reports documenting the
removal and proper disposal of Hazardous Materials under this Lease and in
compliance with the Palo Alto facility closure ordinance (referred to
hereinafter as "DOCUMENTATION OF COMPLETED FACILITY CLOSURE"). If, after
receiving Documentation of Completed Facility Closure, Landlord subsequently
finds additional Hazardous Materials at the Premises that are attributable to
activities at the Premises during the term of the Lease, Tenant shall reimburse
Landlord for the cost to remove and remediate any such Hazardous Materials.
Tenant shall be solely responsible for the proper handling, transport,
manifesting and disposal of any Hazardous Materials removed from the Premises
under this Section 24.7. Further, Tenant shall be identified as the generator of
any Hazardous Materials removed from the Premises, whether removed by Landlord
or Tenant, and Tenant's EPA generator ID number shall be used for manifesting
such material for offsite disposal.

          (c)  Tenant shall terminate, or amend to exclude the Premises from,
all environmental or health and safety permits it holds with the Bay Area Air
Quality Management District, the City of Palo Alto Fire Department, the City of
Palo Alto Sanitary Sewer District, the Department of Health Services and any
other agency for the Premises or activities at the Premises, and provide written
confirmation of such to Landlord. Tenant shall be responsible for any
notifications required to environmental, health or safety agencies and for
performing any obligations associated with termination of permits it holds or
held and closure of related equipment, structures and facilities."

          (e)  Article 30 of the Lease shall be deleted in its entirety.

          (f)  Article 31 of the Lease shall be deleted in its entirety and the
following substituted therefor:

          "Tenant agrees to pay as Additional Rent under this Lease its
          proportionate share of the reasonable cost of any transit services or
          traffic mitigation programs which Landlord implements in the Stanford
          Research Park, including without limitation charges for service and
          surcharges imposed directly or indirectly on the Premises by any
          governmental agencies on or with respect to transit (including transit
          services which may be provided in the future to occupants of the
          Stanford Research Park) or automobile usage or parking facilities
          (collectively, "TRANSIT FEES"). Tenant's


                                       5


          share of Transit Fees shall be assessed pro rata and on a
          non-discriminatory basis, based on a reasonable standard applied in a
          non-discriminatory manner by Landlord (for example, based on the
          rentable area of the Improvements as compared to the total rentable
          area of the Stanford Research Park (or the area being served by the
          service, if less than the entire Stanford Research Park), or based on
          the average employee headcount in the Premises as compared to the
          overall employee density of the Stanford Research Park). Tenant shall
          not be required to pay any Transit Fees for programs that do not serve
          the Premises. In no event shall Tenant's share of Transit Fees exceed
          twenty cents ($.20) per year per square foot of Rentable Area in the
          Premises, subject to annual adjustment (as of April 1, 2005 and each
          April 1 thereafter during the Term) to reflect percentage increases in
          the Consumer Price Index published by the U.S. Department of Labor,
          Bureau of Labor Statistics (San Francisco, Oakland, San Jose Area, All
          Urban Consumers, All Items, 1982-84 - 100), or if such index is no
          longer published, a successor or substitute index designated by
          Landlord in its reasonable discretion, which shall be published by a
          governmental agency and reflecting changes in consumer prices in the
          San Francisco Bay Area."


          (g)  The following paragraph shall be added to the Lease as a new
Section 42.16:

          "Tenant shall use commercially reasonable efforts to do business with
          vendors located in the City of Palo Alto for the purchase of personal
          property, furniture, equipment and supplies used in connection with
          Tenant's operations at the Premises. To the maximum extent permitted
          under applicable laws and regulations, Tenant shall also book all
          sales made from the Premises and orders taken at the Premises as
          occurring in the City of Palo Alto, even though the account may be
          transferred elsewhere for collection or the delivery of merchandise
          sold or the performance of services ordered may be made elsewhere.
          Tenant agrees and acknowledges that the foregoing requirements are
          intended to maximize sales and use tax revenues to the City of Palo
          Alto."

     7.   INTENTIONALLY OMITTED.

     8.   SUBTENANT'S WALKWAY RIGHTS. Subtenant agrees and acknowledges that by
assuming the rights and obligations of Tenant under the Lease, Subtenant shall
also assume all obligations of Tenant, as successor-in-interest to Incyte
Genomics, Inc., under that certain First Amendment to the Lease dated as of July
19, 2000 by and between Interval Research Corporation and Incyte Genomics, Inc.,
a copy of which is attached as EXHIBIT E.

     9.   RIGHT OF FIRST OFFER. Landlord hereby grants to Subtenant a right of
first offer (the "RIGHT OF FIRST OFFER") to lease any one of those certain
parcels of improved real property


                                       6


that are adjacent to the Premises and which are commonly known as 3170 Porter
Drive, 3150 Porter Drive and 3145 Porter Drive (hereinafter referred to
individually and collectively as the "ADJACENT PREMISES") in the event that
during the term of the Sublease or the Extended Term (but not during any Renewal
Term except as provided in subsection (d) below) any current tenant of an
Adjacent Premises (hereinafter individually and collectively referred to as an
"ADJACENT TENANT") elects not to renew or extend the term of its lease in
existence as of the date of this Agreement.

          (a)  The Right of First Offer shall not apply to any renewal or
extension of a lease for an Adjacent Premises between Landlord and an Adjacent
Tenant that is granted to such Adjacent Tenant in its lease. In the event an
Adjacent Tenant has no right to such renewal or extension but desires to enter
into negotiations with Landlord regarding a renewal or extension, Landlord shall
deliver written notice to Tenant that Landlord intends to enter into such
negotiations. In the event Tenant desires to make a competing offer to lease the
Adjacent Premises, Tenant shall deliver written notice to Landlord within ten
(10) business days after receipt of Landlord's notice. Upon receipt of such
notice from Tenant, Landlord agrees that it will engage in concurrent
negotiations with such Adjacent Tenant and Tenant for a period of at least
fifteen (15) business days; provided that Landlord shall have no obligation to
give priority or preference to Tenant over the Adjacent Tenant.

          (b)  In the event Landlord desires to enter into an agreement with a
third party (other than an Adjacent Tenant) for the lease of the Adjacent
Premises during the term of the Sublease or the Extended Term of the Lease (but
not any Renewal Term), Landlord shall deliver to Subtenant a notice setting
forth the terms and conditions upon which Landlord would be willing to lease the
Adjacent Premises (the "NOTICE"), which terms and conditions shall be based on
Landlord's reasonable determination of the fair market rental value of the
Adjacent Premises, whereupon Subtenant shall have ten (10) business days in
which to elect by delivery of written notice to Landlord whether to lease the
Adjacent Premises on all of the terms and conditions of the Notice.

          (c)  If Subtenant does not exercise its Right of First Offer with
regard to the Notice within the ten (10) business day period, Landlord may lease
the Adjacent Premises to any third party upon any terms and conditions Landlord
elects, and the Right of First Offer shall terminate and have no further force
or effect during the term of the Sublease or the Extended Term of the Lease with
respect to the particular Adjacent Premises that was the subject of the Notice.

          (d)  If Subtenant exercises its Right of First Offer with regard to
the Notice, the Parties shall enter into a new lease with respect to the
Adjacent Premises (separate and apart from the Lease) on the terms of the Notice
and using the Lease as the basis for the lease of the Adjacent Premises, and
making only such changes as are reasonably necessary to conform the new lease to
the terms and conditions of the Notice. The execution of a lease for any portion
of the Adjacent Premises shall not terminate the Right of First Offer as to the
remaining buildings comprising the Adjacent Premises. Additionally, the Right of
First Offer as to 3170 Porter Drive (but no other Adjacent Premises) shall
remain in effect during any Renewal Term. The Right of First Offer is personal
to Subtenant and shall be inapplicable and null and void if Subtenant assigns
its interest under the Sublease or Lease.

     10.  SUPERSEDING EFFECT. The Parties agree that in the event of any
conflict between the terms of this Agreement and the terms of the Lease, or the
terms of this Agreement and the terms of the Sublease, the terms of this
Agreement shall prevail as between the Parties only.


                                       7


     IN WITNESS WHEREOF, the Parties have executed this Agreement Regarding
Sublease and Lease as of the date first above written.

                                THE BOARD OF TRUSTEES OF THE LELAND
                                STANFORD JUNIOR UNIVERSITY

                                By Stanford Management Company



                                By: /s/ Jean Snider
                                    -------------------------------
                                    Jean Snider, Managing Director
                                        Stanford Research Park



                                CONNETICS CORPORATION


                                By: /s/ John L. Higgins
                                    -------------------------------

                                Its: CFO
                                     -------------------------------




                                       8

EX-10.5

                                                                    Exhibit 10.5

                            FIRST AMENDMENT TO LEASE

     This First Amendment to Lease (this "Amendment") is made as of May 6,
2004 by and between THE BOARD OF TRUSTEES OF THE LELAND STANFORD JUNIOR
UNIVERSITY, a body having corporate powers under the laws of the State of
California ("LANDLORD"), and Incyte Corporation, a Delaware corporation
("TENANT"), in the following factual context:

     A.   Landlord and Tenant, formerly known as Incyte Pharmaceuticals, Inc.,
are the parties to that certain Lease dated as of June 19, 1997, as amended by
(i) Notice of Commencement Date dated October 28, 1998, (ii) Notice of Base Rent
and Rentable Area dated November 24, 1998, and (iii) Notice of Rent Commencement
Date and Expiration Date dated November 24, 1998 (as so amended, the "LEASE"),
under which Tenant leases from Landlord a two-story building commonly known as
3160 Porter Drive in Palo Alto, California, as more particularly described in
the Lease. Capitalized terms used in this Amendment and not otherwise defined
herein shall have the meanings given to them in the Lease.

     B.   Landlord and Tenant now desire to further amend the Lease as provided
in this Amendment.

     NOW THEREFORE, the parties hereby agree as follows:

     1.   BASIC LEASE INFORMATION. Article 1 of the Lease is hereby amended to
modify the following terms:

          Building Address/Address of Tenant:  3160 Porter Drive
                                               Palo Alto, CA 94304


     2.   PREMISES. The last four sentences of Section 3.1 of the Lease, and all
references in the Lease (including, without limitation, in Article 14 of the
Lease) to "Ground Lease," and "Ground Lessee" are hereby deleted. The defined
term "Ground Lease Property" shall be replaced with the defined term "3160/3170
Porter Drive Site", which shall mean the total area of both the Premises and the
land and improvements adjacent to the Premises that are commonly identified as
3170 Porter Drive, and currently leased to Lockheed Martin Corporation.

     3.   USE. Section 7.1 of the Lease is hereby amended to delete the second
sentence of such section and to substitute the following:

          "For the purposes of this Lease, "research and development" means uses
          primarily related to the study, testing, engineering, design, analysis
          and experimental development of products, processes, or services
          related to current or new technologies. Research and development may
          include limited manufacturing, fabricating, processing, assembling or
          storage of prototypes, products or materials, or similar related
          activities, where such activities are incidental to research,
          development or evaluation. Examples of research and development uses
          include, but are not limited to, computer software and hardware firms,
          electronic research firms, biotechnical firms, medical device firms,
          and pharmaceutical research laboratories. Related administrative uses,
          such as (a) finance, marketing, sales, accounting, purchasing, or
          corporate offices, (b) provisions of services to others on or
          off-site, and (c) related educational uses, may also be included
          provided they remain supportive to the primary uses of research and
          development and are part of the same research and development firm.
          Related administrative uses may constitute up to ninety percent (90%)
          of the Rentable Area of the Premises so long as at least ten percent
          (10%) of such Rentable Area is devoted to the primary uses of research
          and development."


     4.   INITIAL IMPROVEMENT WORK. The parties agree that the terms and
conditions of Sections 8.1 and 8.2 have been fully performed and are no longer
applicable to the Lease; provided, however, Tenant's acceptance of the Premises
pursuant to Section 8.2 remains subject to latent defects.

     5.   LANDLORD'S INDEMNITY. Landlord's indemnity as set forth in Section 8.4
shall also benefit any assignee of Tenant's leasehold estate, and any subtenant
that subleases the entire Premises for substantially all of the remaining term
of the Lease.


                                       2


     6.   ALTERATIONS. Notwithstanding anything to the contrary in Article 9 of
the Lease or elsewhere in the Lease, Landlord hereby acknowledges and agrees
that Tenant shall not be obligated or required to remove, upon the Termination
Date, any Alterations existing in the Premises as of the date of this Amendment.
In addition, the following modifications are hereby made to Article 9 of the
Lease:

          (a) The phrase "Notwithstanding the foregoing" at the beginning of the
          second sentence of Section 9.1 is hereby deleted and replaced with the
          following: "Notwithstanding the foregoing, after completion of
          Tenant's initial improvements to the Premises, . . "

          (b) All references to the "Tenant Improvement Allowance" in Section
          9.5 are hereby deleted.

     7.   INDEMNITY. Tenant's indemnity with respect to the condition of the
Premises or any occurrence on the Premises, as set forth in clause (c) of
Section 21.1(a) of the Lease, is hereby modified to add the following words
after the word "Agents": "or to the extent of Landlord's liability pursuant to
Section 8.4 of this Lease."

     8.   CONFIDENTIALITY. The second sentence of Article 28 of the Lease is
hereby modified to add the following at the end thereof: "but does not include,
and shall not be deemed to include, disclosures by either party as required (a)
to comply with the rules of any exchange upon which the disclosing party's
shares are traded, (b) to comply with the requirements of applicable law, or (c)
to facilitate any sale or financing of the Premises or the land underlying the
Premises, so long as any party who receives any of the information described in
the first sentence of this Article 28 in connection with such sale or financing
agrees in writing to maintain the confidentiality of such information pursuant
to the first sentence of this Article 28."

     9.   EFFECT OF AMENDMENT. As modified by this Amendment, the Lease remains
in full force and effect.


                                       3


         IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.

                                THE BOARD OF TRUSTEES OF THE LELAND
                                STANFORD JUNIOR UNIVERSITY

                                By Stanford Management Company



                                By: /s/ Jean Snider
                                    -------------------------------
                                    Jean Snider, Managing Director
                                        Stanford Research Park



                                INCYTE CORPORATION


                                By: /s/ David Hastings
                                    -------------------------------

                                Its: EVP, CFO
                                     -------------------------------



                                       4

EX-31.1

                                                                    EXHIBIT 31.1
                                  CERTIFICATION

I, Thomas G. Wiggans, certify that:

1.      I have reviewed this quarterly report on Form 10-Q of Connetics
Corporation;

2.      Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;

3.      Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;

4.      The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)      designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;

b)      evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and

c)      disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and

5.      The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):

a)      all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and

b)      any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.


Date: August 5, 2004


/s/ Thomas G. Wiggans
- ------------------------------------
Thomas G. Wiggans
President and Chief Executive Officer

EX-31.2

                                                                    EXHIBIT 31.2
                                  CERTIFICATION

I, John L. Higgins, certify that:

1.      I have reviewed this quarterly report on Form 10-Q of Connetics
Corporation;

2.      Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;

3.      Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;

4.      The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)      designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;

b)      evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and

c)      disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and

5.      The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):

a)      all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and

b)      any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.


Date: August 5, 2004


/s/ John L. Higgins
- --------------------------------------------
John L. Higgins
Executive Vice President, Finance and
Corporate Development and Chief Financial Officer

EX-32.1

                                                                    EXHIBIT 32.1

                    CERTIFICATION OF CHIEF EXECUTIVE OFFICER

In connection with the periodic report of Connetics Corporation (the "Company")
on Form 10-Q for the period ended June 30, 2004 as filed with the Securities and
Exchange Commission (the "Report"), I, Thomas G. Wiggans, President and Chief
Executive Officer of the Company, hereby certify as of the date hereof, solely
for purposes of Title 18, Chapter 63, Section 1350 of the United States Code,
that to the best of my knowledge:

(1)     the Report fully complies with the requirements of Section 13(a) or
15(d), as applicable, of the Securities Exchange Act of 1934, and

(2)     the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company at
the dates and for the periods indicated.

Date: August 5, 2004

/s/ Thomas G. Wiggans
- ------------------------------------
Thomas G. Wiggans
President and Chief Executive Officer

EX-32.2

                                                                    EXHIBIT 32.2

                    CERTIFICATION OF CHIEF FINANCIAL OFFICER

In connection with the periodic report of Connetics Corporation (the "Company")
on Form 10-Q for the period ended June 30, 2004 as filed with the Securities and
Exchange Commission (the "Report"), I, John L. Higgins, Chief Financial Officer,
Executive Vice President, Finance and Corporate Development of the Company,
hereby certify as of the date hereof, solely for purposes of Title 18, Chapter
63, Section 1350 of the United States Code, that to the best of my knowledge:

(1)     the Report fully complies with the requirements of Section 13(a) or
15(d), as applicable, of the Securities Exchange Act of 1934, and

(2)     the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company at
the dates and for the periods indicated.

Date: August 5, 2004

/s/ John L. Higgins
- ------------------------------------------------------
John L. Higgins
Executive Vice President, Finance and
Corporate Development and Chief Financial Officer