<PAGE>   1
   
                                                    This filing is made pursuant
                                                    to Rule 424(b) (4) under
                                                    the Securities Act of
                                                    1933 in connection with
                                                    Registration No. 333-4424
    
 
   
PROSPECTUS
    
 
   
                                1,800,000 Shares
    
                                      LOGO
 
   
                              IDEC PHARMACEUTICALS
    

                                  COMMON STOCK
                            ------------------------
   
ALL OF THE SHARES OF COMMON STOCK OFFERED HEREBY ARE BEING SOLD BY THE COMPANY.
THE COMMON STOCK OF THE COMPANY IS QUOTED ON THE NASDAQ NATIONAL
           MARKET UNDER THE SYMBOL "IDPH." ON JUNE 6, 1996, THE
           REPORTED LAST SALE PRICE OF THE COMMON STOCK ON
                      THE NASDAQ NATIONAL MARKET WAS
                      $24 1/4 PER SHARE.
    
 
                            ------------------------
 
THE OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
         BEGINNING ON PAGE 6 FOR INFORMATION THAT SHOULD BE
                   CONSIDERED BY PROSPECTIVE INVESTORS.
                            ------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
    EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
       SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
       COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
         PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
            CRIMINAL OFFENSE.
                            ------------------------
 
   
                               PRICE $24 A SHARE
    
                            ------------------------
 
   

<TABLE>
<CAPTION>
                                                              UNDERWRITING
                                             PRICE TO           DISCOUNTS            PROCEEDS TO
                                              PUBLIC       AND COMMISSIONS(1)        COMPANY(2)
                                         ----------------  -------------------  ---------------------
<S>                                      <C>               <C>                  <C>
Per Share............................         $24.00              $1.44                $22.56
Total(3).............................      $43,200,000         $2,592,000            $40,608,000
</TABLE>

    
 
- ------------
 
    (1) The Company has agreed to indemnify the Underwriters against certain
        liabilities, including liabilities under the Securities Act of 1933, as
        amended.
    (2) Before deducting expenses payable by the Company estimated at $275,000.
   
    (3) The Company has granted the Underwriters an option, exercisable within
        30 days of the date hereof, to purchase up to an aggregate of 270,000
        additional Shares at the price to public less underwriting discounts and
        commissions for the purpose of covering over-allotments, if any. If the
        Underwriters exercise such option in full, the total price to public,
        underwriting discounts and commissions and proceeds to Company will be
        $49,680,000, $2,980,800 and $46,699,200, respectively. See
        "Underwriters."
    
 
                            ------------------------
 
   
     The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to the approval of certain legal
matters by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP,
counsel for the Underwriters. It is expected that delivery of the Shares will be
made on or about June 12, 1996 at the offices of Morgan Stanley & Co.
Incorporated, New York, N.Y., against payment therefor in same day funds.
    
                            ------------------------
 
MORGAN STANLEY & CO.                                       PUNK, ZIEGEL & KNOELL
            Incorporated
 
   
June 6, 1996
    

<PAGE>   2
 
     NO PERSON IS AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN AS CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR
DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF
THE SHARES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER
OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO
THE DATE HEREOF.
                            ------------------------
 
                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                             PAGE
                                             ----
<S>                                          <C>
Prospectus Summary.........................    3
Risk Factors...............................    6
Use of Proceeds............................   13
Common Stock Price Range and Dividends.....   13
Capitalization.............................   14
Dilution...................................   15
Selected Consolidated Financial Data.......   16
Management's Discussion and Analysis of
  Financial Condition and Results
  of Operations............................   17
 
<CAPTION>
                                             PAGE
                                             ----
<S>                                          <C>
Business...................................   21
Management.................................   38
Principal Shareholders.....................   41
Description of Capital Stock...............   43
Underwriters...............................   46
Legal Matters..............................   47
Experts....................................   47
Available Information......................   47
Index to Consolidated Financial
  Statements...............................  F-1
</TABLE>

 
                            ------------------------
 
                INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
 
   
     The following documents or portions of documents filed by the Company (File
No. 0-19311) with the Commission are incorporated herein by reference: (a)
Annual Report on Form 10-K for the fiscal year ended December 31, 1995; (b) Form
10-K/A for the fiscal year ended December 31, 1995; (c) Quarterly Report on Form
10-Q for the quarter ended March 31, 1996; (d)Form 10-Q/A for the quarter ended
March 31, 1996; (e) Current Report on Form 8-K dated May 21, 1996; and (f) the
description of the Company's Common Stock which is contained in its Registration
Statement on Form 8-A filed under the Exchange Act on May 24, 1991, including
any amendments or reports filed for the purpose of updating such description.
    
 
     All reports and other documents subsequently filed by the Company pursuant
to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to the filing
of a post-effective amendment which indicates that all securities offered hereby
have been sold or which deregisters all securities remaining unsold, shall be
deemed to be incorporated by reference herein and to be a part hereof from the
date of filing of such reports and documents. Any statement contained in a
document incorporated by reference herein shall be deemed modified or superseded
for purposes of this Prospectus to the extent that a statement contained or
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
 
     The Company will provide without charge to each person to whom this
Prospectus is delivered a copy of any or all of such documents which are
incorporated herein by reference (other than exhibits to such documents unless
such exhibits are specifically incorporated by reference into the documents that
this Prospectus incorporates). Written or oral requests for copies should be
directed to Secretary, IDEC Pharmaceuticals Corporation, at the Company's
executive offices located at 11011 Torreyana Road, San Diego, CA 92121; (619)
550-8500.
                            ------------------------
 
     IDEC Pharmaceuticals(R), the Company's stylized logo and PRIMATIZED(R) are
registered United States trademarks of the Company and PROVAX(TM) is a trademark
of the Company.
                            ------------------------
 
     IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMPANY'S
COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZATION, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. SUCH
TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR OTHERWISE.
 
     IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). SEE "UNDERWRITERS."
 
                                        2

<PAGE>   3
 
                               PROSPECTUS SUMMARY
 
     The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements and notes thereto appearing
elsewhere in this Prospectus. Unless otherwise indicated, the information
contained in this Prospectus assumes no exercise of the Underwriters'
over-allotment option. Unless the context otherwise requires, references in this
Prospectus to "IDEC Pharmaceuticals" and the "Company" shall refer to IDEC
Pharmaceuticals Corporation and its wholly owned subsidiary IDEC Seiyaku, a
Japanese corporation. This Prospectus contains, in addition to historical
information, forward-looking statements that involve risks and uncertainties.
Investors should carefully consider the information set forth under the heading
"Risk Factors."
 
                                  THE COMPANY
 
   
     IDEC Pharmaceuticals Corporation ("IDEC Pharmaceuticals" or the "Company")
is a biopharmaceutical company developing products for the long-term management
of immune system cancers and autoimmune and inflammatory diseases. The Company
is currently focused on non-Hodgkin's B-cell lymphomas, which afflict
approximately 225,000 patients in the United States, and rheumatoid arthritis,
which afflicts approximately 2 million people in the United States. The
Company's antibody products for treatment of non-Hodgkin's B-cell lymphomas are
being developed in collaborative relationships with Genentech, Inc.
("Genentech") in the United States (IDEC-C2B8 and IDEC-Y2B8), Genentech's
affiliate F. Hoffmann-LaRoche Ltd. ("Hoffmann-LaRoche") worldwide except the
United States and Japan (IDEC-C2B8) and Zenyaku Kogyo, Ltd. ("Zenyaku") in Japan
(IDEC-C2B8). The Company's lead PRIMATIZED antibody product for the treatment of
rheumatoid arthritis is being developed worldwide in collaboration with
SmithKline Beecham, p.l.c. ("SmithKline Beecham"). IDEC Pharmaceuticals has
seven additional product candidates in various stages of development.
    
 
     The Company's lead cancer product, IDEC-C2B8, is a pan-B antibody
genetically engineered to harness the patient's own immune system for the
treatment of non-Hodgkin's B-cell lymphomas. The Company has completed
enrollment in a Phase III clinical trial of IDEC-C2B8 as a single agent. In May
1996, the Company announced preliminary results on the first 48 evaluable
patients (out of 166 patients enrolled) in its Phase III trial which confirmed
the response rate and safety profile seen in clinical trials to date.
Specifically, of the first 48 evaluable patients, 23 responded to treatment with
IDEC-C2B8, for an overall response rate of 47.9%. Six of these responses were
complete responses (12.5%) and 17 were partial responses (35.4%). In these
clinical trials, IDEC-C2B8 as a single agent has shown response rates that are
equivalent to or greater than those produced by single agent chemotherapies, yet
patients have suffered neither the bone marrow damage nor the range and severity
of other toxicities associated with conventional cancer treatments. Furthermore,
treatment with IDEC-C2B8 can be completed in a matter of weeks rather than over
several months, which is typical of chemotherapy. In a Phase I/II clinical trial
of IDEC-C2B8 involving 34 evaluable patients with relapsed disease, 17 patients
(50%) experienced a complete or partial response (i.e., tumor shrinkage of 50%
or greater) and five of these patients had tumor remissions lasting for more
than 20 months, three of which are ongoing. The Company is also conducting a
40-patient Phase II trial of IDEC-C2B8 administered in combination with
conventional chemotherapy. An interim analysis of the first 29 evaluable
patients showed that all patients had experienced a complete or partial
response, of which 28 have ongoing remissions of six to 22 months.
 
     The second cancer product under development with Genentech, IDEC-Y2B8, is
an antibody linked to an yttrium radioisotope, a source of radiation suitable
for outpatient radiotherapy, and is designed to provide a targeted, injectable
treatment for non-Hodgkin's B-cell lymphomas. IDEC-Y2B8 is used in conjunction
with IDEC-In2B8, which provides tumor imaging and dosing information prior to
therapeutic administration of IDEC-Y2B8. The Company completed a Phase I study
of IDEC-Y2B8 in 14 patients in early 1995; 64% of these patients experienced
complete or partial responses following a single dose of IDEC-Y2B8. Single doses
of IDEC-Y2B8 showed clinical activity comparable to that of intensive, multiple
dose, salvage chemotherapy and provided response durations exceeding those of
the patients' most recent chemotherapy. During 1996, the Company and Genentech
plan to initiate a Phase I/II study with IDEC-Y2B8 using a kit that simplifies
product administration.
 
                                        3

<PAGE>   4
 
   
     Patient treatment has been completed in a Phase II randomized,
placebo-controlled, double-blinded clinical trial of the Company's lead
PRIMATIZED antibody product, IDEC-CE9.1, for the treatment of rheumatoid
arthritis. In late May 1996, SmithKline Beecham unblinded the 136 patient Phase
II study and observed positive clinical activity for IDEC-CE9.1 versus the
placebo arm of the study. Over the next few months, SmithKline Beecham will
complete its analysis of the Phase II data and determine how to proceed with
future development of IDEC-CE9.1 in rheumatoid arthritis. PRIMATIZED antibodies
are proprietary, genetically-engineered, monoclonal antibodies assembled from
portions of monkey and human antibodies designed to avoid adverse immune
reactions and are intended for use in the long-term management of chronic
autoimmune diseases such as rheumatoid arthritis. In a Phase I/II clinical trial
in patients with moderate to severe rheumatoid arthritis, 20 of 40 patients
treated with IDEC-CE9.1 experienced clinically significant reductions of their
rheumatoid arthritis symptoms. These results were obtained without
infusion-related or serious therapy-related adverse effects, or diminution of
therapeutic response following repeat administration. Currently clinical
development of this product is being conducted by the Company's partner,
SmithKline Beecham, which also has begun Phase II clinical trials for a second
indication, severe asthma. The Company has extended its PRIMATIZED technology to
other research and development collaborations with Mitsubishi Chemical
Corporation ("Mitsubishi"), Seikagaku Corporation ("Seikagaku") and Eisai Co.,
Ltd. ("Eisai") directed at the development of additional proprietary products
for treatment of autoimmune or inflammatory diseases.
    
 
     The Company has manufactured supplies of each of the antibodies used in its
clinical programs and expects to meet early commercial demand for IDEC-C2B8 from
its existing manufacturing facility. The Company's manufacturing process employs
a proprietary technology involving a gene expression system that allows the
efficient production of proteins at yields that may be significantly higher than
current, competing cell-culture methods. During 1996, the Company will
manufacture IDEC-C2B8, IDEC-Y2B8, IDEC-In2B8 and other product candidates for
clinical trials and has provided production or process development services to
several biopharmaceutical and pharmaceutical companies on a contract basis,
including Pharmacia & Upjohn, Inc. ("Pharmacia & Upjohn") and OraVax, Inc.
("OraVax"). Additionally, the Company is performing contract cell-line
development for Hoffmann-La Roche, Pharmacia & Upjohn and Biogen, Inc.
("Biogen") and has licensed its gene-expression technology to Genentech and
Chugai Pharmaceutical Co., Ltd. ("Chugai").
 
     The Company's strategy is to capitalize on its specialized antibody
development strengths by addressing serious and inadequately managed indications
in immune system cancers and autoimmune and inflammatory diseases by: (i)
developing products that target immune system cells and exert their therapeutic
activity in a selective and relatively non-toxic manner; (ii) leveraging its
technology platform to a number of disease indications representing significant
unmet medical needs; (iii) utilizing its high-yield, proprietary, mammalian cell
expression technology to become a world-class biologics manufacturer; (iv)
establishing strategic alliances to cover pre-clinical and clinical development
costs while retaining substantial North American marketing rights; and (v)
focusing the Company's products on cost-effective long-term management of
disease.
 
                                  RISK FACTORS
 
     In addition to the other information contained in this Prospectus, the
discussion of risk factors on pages 6 to 12 of this Prospectus should be
considered carefully in evaluating an investment in the Common Stock. The risks
of investing in the Common Stock include the following factors: "Uncertainties
Associated with Clinical Trials;" "Reliance on Third Party Development and
Marketing Efforts;" "Lengthy Regulatory Process; No Assurance of Regulatory
Approvals;" "Additional Financing Requirements and Uncertain Access to Capital
Markets;" "Limited Manufacturing Experience;" "Patents and Proprietary Rights;"
"Dependence on Key Personnel;" "Rapid Technological Change and Substantial
Competition;" "Limited Sales and Marketing Experience;" "History of Operating
Losses; Accumulated Deficit;" "Possible Volatility of Stock Price;"
"Uncertainties Regarding Health Care Reimbursement and Reform;" "Product
Liability Exposure;" "Dilution;" "Effect of Certain Charter Provisions;
Antitakeover Effects of Articles of Incorporation, California Law and Certain
Agreements;" and "Environmental Concerns."
 
                                        4

<PAGE>   5
 
                                  THE OFFERING
 
   

<TABLE>
<S>                                                <C>
Common Stock offered.............................  1,800,000 shares(1)
Common Stock to be outstanding after the
  offering.......................................  17,071,261 shares(1)(2)
Use of proceeds..................................  Primarily to fund the establishment of a
                                                   marketing and sales infrastructure, to
                                                   fund detailed engineering studies for
                                                   expansion of manufacturing capacity, to
                                                   secure additional office, laboratory and
                                                   warehouse facilities, to provide working
                                                   capital for the product launch of
                                                   IDEC-C2B8, if approved, and for general
                                                   corporate purposes. See "Use of Proceeds."
Nasdaq National Market symbol....................  IDPH
</TABLE>

    
 
                      SUMMARY CONSOLIDATED FINANCIAL DATA
 

<TABLE>
<CAPTION>
                                                                                                THREE MONTHS
                                                     YEAR ENDED DECEMBER 31,                  ENDED MARCH 31,
                                       ---------------------------------------------------   ------------------
                                        1991       1992       1993       1994       1995       1995      1996
                                       -------   --------   --------   --------   --------   --------   -------
                                                          (IN THOUSANDS, EXCEPT SHARE DATA)
<S>                                    <C>       <C>        <C>        <C>        <C>        <C>        <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
  Contract research revenue..........  $ 5,233   $  3,212   $  4,329   $  5,143   $ 12,136   $  3,347   $ 2,936
  License fees.......................    1,000      2,000      8,385      2,300     11,500      5,000     7,000
                                       -------   --------   --------   --------   --------   --------   -------
      Total revenues.................    6,233      5,212     12,714      7,443     23,636      8,347     9,936
Total operating expenses(3)..........   13,139     20,715     22,985     25,959     40,037     18,630     7,495
Net income (loss)....................  $(5,780)  $(12,704)  $ (8,882)  $(18,031)  $(17,292)  $(10,424)  $ 1,847
Net income (loss) per share..........  $  (.88)  $  (1.39)  $   (.96)  $  (1.65)  $  (1.18)  $   (.75)  $   .10
Shares used in calculation of net
  income (loss) per share............    6,544      9,168      9,265     10,931     14,650     13,937    19,121
</TABLE>

 
   

<TABLE>
<CAPTION>
                                                                                  AS OF MARCH 31, 1996
                                                                               --------------------------
                                                                               ACTUAL      AS ADJUSTED(4)
                                                                               -------     --------------
                                                                                     (IN THOUSANDS)
<S>                                                                            <C>         <C>
CONSOLIDATED BALANCE SHEETS DATA:
Cash, cash equivalents and securities available-for-sale.....................  $25,849        $ 66,182
Total assets.................................................................   55,206          95,539
Notes payable, less current portion..........................................    6,385           6,385
Total shareholders' equity...................................................   39,478          79,811
</TABLE>

    
 
- ------------
(1) Assumes the Underwriters' over-allotment option is not exercised. See
    "Underwriters."
 
(2) Excludes outstanding warrants to purchase 740,149 shares of Common Stock,
    outstanding options to purchase 3,267,539 shares of Common Stock and
    outstanding convertible preferred stock convertible into 2,067,120 shares of
    Common Stock as of March 31, 1996.
 
(3) Includes a one-time charge of $3,000,000 for the year ended December 31,
    1992 for unification of the Company's operations in San Diego, California
    and $11,437,000 for the year ended December 31, 1995 and during the three
    months ended March 31, 1995 for the repurchase of technology rights to the
    Company's lymphoma products from ML/MS Associates, L.P.
 
   
(4) Adjusted to reflect the sale by the Company of 1,800,000 shares offered
    hereby and the anticipated use of proceeds.
    
 
                                        5

<PAGE>   6
 
                                  RISK FACTORS
 
     Prospective purchasers of the Shares offered hereby should carefully
consider the following risk factors in addition to the other information
presented in this Prospectus.
 
UNCERTAINTIES ASSOCIATED WITH CLINICAL TRIALS
 
     IDEC Pharmaceuticals Corporation ("IDEC Pharmaceuticals" or the "Company")
has conducted and plans to continue to undertake extensive and costly clinical
testing to assess the safety and efficacy of its potential products. The rate of
completion of the Company's clinical trials is dependent upon, among other
factors, the rate of patient enrollment. Patient enrollment is a function of
many factors, including the nature of the Company's clinical trial protocols,
existence of competing protocols, size of the patient population, proximity of
patients to clinical sites and eligibility criteria for the study. Delays in
patient enrollment will result in increased costs and delays, which could have a
material adverse effect on the Company. The Company cannot assure that patients
enrolled in the Company's clinical trials will respond to the Company's product
candidates. Setbacks are to be expected in conducting human clinical trials.
Failure to comply with the United States Food and Drug Administration ("FDA")
regulations applicable to such testing can result in delay, suspension or
cancellation of such testing, and/or refusal by the FDA to accept the results of
such testing. In addition, the FDA may suspend clinical trials at any time if it
concludes that the subjects or patients participating in such trials are being
exposed to unacceptable health risks. Further, there can be no assurance that
human clinical testing will show any current or future product candidate to be
safe and effective or that data derived therefrom will be suitable for
submission to the FDA. See "Business -- Government Regulation."
 
RELIANCE ON THIRD PARTY DEVELOPMENT AND MARKETING EFFORTS
 
     The Company has adopted a research, development and product
commercialization strategy that is dependent upon various arrangements with
strategic partners and others. The success of the Company's products is
substantially dependent upon the success of these outside parties in performing
their obligations, which include, but are not limited to, providing funding and
performing research and development with respect to the Company's products. The
Company's strategic partners may also develop products that may compete with the
Company. Although IDEC Pharmaceuticals believes that its partners have an
economic incentive to succeed in performing their contractual obligations, the
amount and timing of resources that they devote to these activities is not
within the control of the Company. There can be no assurance that these parties
will perform their obligations as expected or that any revenue will be derived
from such arrangements. The Company has entered into collaborative agreements
with Genentech, Inc. ("Genentech"), Zenyaku Kogyo, Ltd. ("Zenyaku"), SmithKline
Beecham, p.l.c. ("SmithKline Beecham"), Mitsubishi Chemical Corporation
("Mitsubishi"), Seikagaku Corporation ("Seikagaku") and Eisai Co., Ltd.
("Eisai"). These agreements generally may be terminated at any time by the
strategic partner, typically on short notice to the Company. If one or more of
these partners elect to terminate their relationship with the Company, or if the
Company or its partners fail to achieve certain milestones, it could have a
material adverse effect on the Company's ability to fund the related programs
and to develop any products that may have resulted from such collaborations.
There can be no assurance that these collaborations will be successful. In
addition, some of the Company's current partners have certain rights to control
the planning and execution of product development and clinical programs, and
there can be no assurance that such partners' rights to control aspects of such
programs will not impede the Company's ability to conduct such programs in
accordance with the schedules currently contemplated by the Company for such
programs and will not otherwise impact the Company's strategy. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business -- Strategic Alliances."
 
LENGTHY REGULATORY PROCESS; NO ASSURANCE OF REGULATORY APPROVALS
 
     The testing, manufacturing, labeling, advertising, promotion, export and
marketing, among other things, of the Company's proposed products are subject to
extensive regulation by governmental authorities in the United States and other
countries. In the United States, pharmaceutical products are regulated by the
FDA
 
                                        6

<PAGE>   7
 
under the Federal Food, Drug, and Cosmetic Act and other laws, including, in the
case of biologics, the Public Health Service Act. At the present time, the
Company believes that its products will be regulated by the FDA as biologics.
Manufacturers of biologics may also be subject to state regulation.
 
   
     The steps required before a biologic may be approved for marketing in the
United States generally include (i) preclinical laboratory tests and animal
tests, (ii) the submission to the FDA of an Investigational New Drug application
("IND") for human clinical testing, which must become effective before human
clinical trials may commence, (iii) adequate and well-controlled human clinical
trials to establish the safety and efficacy of the product, (iv) the submission
to the FDA of a Product License Application ("PLA") and Establishment License
Application ("ELA") or a Biologics License Application ("BLA"), (v) FDA review
of the PLA/ELA or BLA, and (vi) satisfactory completion of an FDA inspection of
the manufacturing facility or facilities at which the product is made to assess
compliance with Good Manufacturing Practices ("GMP"). The testing and approval
process requires substantial time, effort, and financial resources and there can
be no assurance that any approval will be granted on a timely basis, if at all.
There can be no assurance that Phase I, Phase II or Phase III testing will be
completed successfully within any specific time period, if at all, with respect
to any of the Company's product candidates. Furthermore, the FDA may suspend
clinical trials at any time on various grounds, including a finding that the
subjects or patients are being exposed to an unacceptable health risk.
    
 
     The results of the preclinical studies and clinical studies, together with
detailed information on the manufacture and composition of the product, are
submitted to the FDA in the form of a PLA/ELA or BLA requesting approval to
market the product. Before approving a PLA/ELA or BLA, the FDA will inspect the
facilities at which the product is manufactured, and will not approve the
product unless GMP compliance is satisfactory. The FDA may deny a PLA/ELA or BLA
if applicable regulatory criteria are not satisfied, require additional testing
or information, and/or require postmarketing testing and surveillance to monitor
the safety or efficacy of a product. There can be no assurance that FDA approval
of any PLA/ELA or BLA submitted by the Company will be granted on a timely basis
or at all. Also, if regulatory approval of a product is granted, such approval
may entail limitations on the indicated uses for which it may be marketed.
 
     Both before and after approval is obtained, violations of regulatory
requirements, including the preclinical and clinical testing process, the
PLA/ELA or BLA review process, or thereafter (including after approval) may
result in various adverse consequences, including the FDA's delay in approving
or refusal to approve a product, withdrawal of an approved product from the
market, and/or the imposition of criminal penalties against the manufacturer
and/or license holder. For example, license holders are required to report
certain adverse reactions to the FDA, and to comply with certain requirements
concerning advertising and promotional labeling for their products. Also,
quality control and manufacturing procedures must continue to conform to GMP
regulations after approval, and the FDA periodically inspects manufacturing
facilities to assess compliance with GMP. Accordingly, manufacturers must
continue to expend time, monies and effort in the area of production and quality
control to maintain GMP compliance. In addition, discovery of problems may
result in restrictions on a product, manufacturer or holder, including
withdrawal of the product from the market. Also, new government requirements may
be established that could delay or prevent regulatory approval of the Company's
products under development.
 
     The Company will also be subject to a variety of foreign regulations
governing clinical trials and sales of its products. Whether or not FDA approval
has been obtained, approval of a product by the comparable regulatory
authorities of foreign countries must be obtained prior to the commencement of
marketing of the product in those countries. The approval process varies from
country to country and the time may be longer or shorter than that required for
FDA approval. At least initially, the Company intends, to the extent possible,
to rely on foreign licensees to obtain regulatory approval for marketing its
products in foreign countries.
 
     Under the Orphan Drug Act, the FDA may grant orphan drug designation to
drugs intended to treat a "rare disease or condition," which generally is a
disease or condition that affects fewer than 200,000 individuals in the United
States. Orphan drug designation must be requested before submitting a PLA/ELA or
BLA. After the FDA grants orphan drug designation, the generic identity of the
therapeutic agent and its potential orphan use are publicly disclosed by the
FDA. Orphan drug designation does not convey any
 
                                        7

<PAGE>   8
 
advantage in, or shorten the duration of, the regulatory review and approval
process. If a product that has an orphan drug designation subsequently receives
FDA approval for the indication for which it has such designation, the product
is entitled to orphan exclusivity, i.e., the FDA may not approve any other
applications to market the same drug for the same indication, except in certain
very limited circumstances, for a period of seven years.
 
     In 1994, the Company obtained orphan drug designation for IDEC-C2B8,
IDEC-Y2B8 and IDEC-In2B8 from the FDA to treat low-grade B-cell lymphoma. There
can be no assurance that any of these compounds will receive orphan exclusivity
for the low-grade B-cell lymphoma indication, and it is possible that
competitors of the Company could obtain approval, and attendant orphan drug
exclusivity, for these same compounds for the low-grade B-cell lymphoma
indication, thus precluding the Company from marketing its products for the same
indication in the United States. In addition, even if the Company does obtain
orphan exclusivity for any of its compounds for low-grade B-cell lymphoma, there
can be no assurance that competitors will not receive approval of other,
different drugs or biologics for low-grade B-cell lymphoma. Although obtaining
FDA approval to market a product with orphan drug exclusivity can be
advantageous, there can be no assurance that the scope of protection or the
level of marketing exclusivity that is currently afforded by orphan drug
designation will remain in effect in the future. See "Business -- Government
Regulations."
 
ADDITIONAL FINANCING REQUIREMENTS AND UNCERTAIN ACCESS TO CAPITAL MARKETS
 
     The Company has expended and will continue to expend substantial funds to
complete the research, development, manufacturing and marketing of its products.
The Company intends to seek additional funding for these purposes through a
combination of new collaborative arrangements, strategic alliances, additional
equity or debt financings or from other sources. There can be no assurance that
such additional funds will be available on acceptable terms, if at all. Even if
available, the cost of funds may result in substantial dilution to current
shareholders. If adequate funds are not available from operations or additional
sources of financing, the Company's business could be materially and adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
 
LIMITED MANUFACTURING EXPERIENCE
 
     The Company has not yet commercialized any products. To conduct clinical
trials on a timely basis, to obtain regulatory approval and to be commercially
successful, the Company must manufacture its products either directly or through
third parties in commercial quantities in compliance with regulatory
requirements and at an acceptable cost. Although the Company has produced its
products in the laboratory, scaled its production process to pilot levels and
has the ability to manufacture commercial quantities of certain of its products,
the Company has not yet produced commercial quantities nor received regulatory
approval for such production. The Company anticipates that production of its
products in commercial quantities will create technical as well as financial
challenges for the Company. The Company has limited experience in manufacturing,
and no assurance can be given as to the ultimate performance of the Company's
manufacturing facility in San Diego, its suitability for approval for commercial
production or the Company's ability to make a successful transition to
commercial production.
 
     During 1996, the Company will manufacture IDEC-C2B8, IDEC-Y2B8 and
IDEC-In2B8 and other product candidates for clinical trials at its manufacturing
facility in San Diego, California. The Company anticipates that its facility in
San Diego should provide sufficient production capacity to meet clinical and
early commercial requirements of IDEC-C2B8 product. However, there can be no
assurance that the Company will be able to produce adequate quantities of its
products to meet clinical and early commercial requirements in a cost-effective
manner or that the Company's current manufacturing facility will be approved by
the FDA.
 
     The Company is dependent upon Genentech to fulfill long-term manufacturing
demands for its IDEC-C2B8 product and SmithKline Beecham to fulfill all of the
manufacturing requirements for IDEC-CE9.1. Genentech is currently constructing a
larger manufacturing plant to satisfy such long-term
 
                                        8

<PAGE>   9
 
demands. The Company is considering the addition of another manufacturing
facility to meet its long-term requirements for additional products under
development. Failure by the Company or its strategic partners to establish
additional manufacturing capacity on a timely basis would have a material
adverse effect on the Company. See "Business -- Manufacturing."
 
PATENTS AND PROPRIETARY RIGHTS
 
     The Company's success will depend, in large part, on its ability to
maintain a proprietary position in its products through patents, trade secret
and orphan drug designation. IDEC Pharmaceuticals holds one issued and one
allowed United States patent, 18 United States patent applications and numerous
corresponding foreign patent applications, and has licenses to patents or patent
applications of other entities. No assurance can be given, however, that the
patent applications of the Company or the Company's licensors will be issued or
that any issued patents will provide competitive advantages for the Company's
products or will not be successfully challenged or circumvented by its
competitors. Moreover, there can be no assurance that any patents issued to the
Company or the Company's licensors will not be infringed by others or will be
enforceable against others. In addition, there can be no assurance that the
patents, if issued, would not be held invalid or unenforceable by a court of
competent jurisdiction. Enforcement of the Company's patents may require
substantial financial and human resources. Moreover, the Company may have to
participate in interference proceedings if declared by the United States Patent
and Trademark Office to determine priority of inventions, which typically take
several years to resolve and could result in substantial cost to the Company.
 
     A substantial number of patents have already been issued to other
biotechnology and biopharmaceutical companies. Particularly in the monoclonal
antibody field, competitors may have filed applications for or have been issued
patents and may obtain additional patents and proprietary rights relating to
products or processes competitive with or similar to those of the Company. To
date, no consistent policy has emerged regarding the breadth of claims allowed
in biopharmaceutical patents. There can be no assurance that patents do not
exist in the United States or in foreign countries or that patents will not be
issued that would have an adverse effect on the Company's ability to market its
products. Accordingly, the Company expects that commercializing monoclonal
antibody-based products may require licensing and/or cross-licensing of patents
with other companies in this field. There can be no assurance that the licenses,
which might be required for the Company's processes or products, would be
available, if at all, on commercially acceptable terms. The ability to license
any such patents and the likelihood of successfully contesting the scope or
validity of such patents are uncertain and the costs associated therewith may be
significant. If the Company is required to acquire rights to valid and
enforceable patents but cannot do so at a reasonable cost, the Company's ability
to manufacture or market its products would be materially adversely affected.
 
     Specifically, the Company is aware of several patents and patent
applications which may affect the Company's ability to make, use and sell its
products, including United States patent applications and foreign counterparts
filed by Bristol-Myers that disclose antibodies to a B7 antigen, a recently
issued United States patent assigned to Columbia University which the Company
believes has been exclusively licensed to Biogen, Inc. ("Biogen") that discloses
monoclonal antibodies to the 5C8 antigen found on T cells, a European patent
issued in January 1996 to Protein Design Labs, Inc. ("Protein Design Labs") that
discloses methods of making amino acid substitutions in antibody structures and
a number of issued patents that relate to various aspects of radioimmunotherapy
and methods of treating patients with anti-CD4 antibodies.
 
     The owners, or licensees of the owners, of these patents may assert that
one or more of the Company's products infringe one or more claims of such
patents. If legal action is commenced against the Company to enforce any of
these patents and the plaintiff in such action prevails, the Company could be
prevented from practicing the subject matter claimed in such patents. In such
event or under other appropriate circumstances, the Company may attempt to
obtain licenses to such patents. However, no assurance can be given that any
owner would license the patents to the Company at all or on terms that would
permit commercialization of the Company's products. An inability to
commercialize such products could have a material adverse effect impact on the
Company's operations and ability to pursue its long-term objectives.
 
                                        9

<PAGE>   10
 
     Furthermore, the patent position worldwide of biotechnology companies in
relation to proprietary products is highly uncertain and involves complex legal
and factual questions. There is a substantial backlog of biotechnology patents
at the United States Patent and Trademark Office. The Company also relies on
trade secrets and proprietary know-how which it seeks to protect, in part, by
confidentiality agreements with its employees and consultants. There can be no
assurance that these agreements will not be breached, that the Company will have
adequate remedies for any breach, or that the Company's trade secrets will not
otherwise become known or be independently developed by competitors. See
"Business -- Patents and Proprietary Technology."
 
DEPENDENCE ON KEY PERSONNEL
 
     The Company's success depends in part upon the continued contributions of
its senior management and key scientific and technical personnel. The Company's
success is also dependent upon its ability to attract and retain additional
qualified scientific, technical, manufacturing and managerial personnel and to
develop and maintain relationships with qualified clinical researchers.
Significant competition exists among pharmaceutical and biotechnology companies
for such personnel, and there can be no assurance that the Company will retain
such personnel or that it will be able to attract, assimilate and retain such
personnel as may be required in the future or to develop and maintain
relationships with such researchers. The Company does not maintain or intend to
purchase "key person" life insurance on any of its personnel. See
"Business -- Employees" and "Management."
 
RAPID TECHNOLOGICAL CHANGE AND SUBSTANTIAL COMPETITION
 
     The pharmaceutical industry is subject to rapid and substantial
technological change. Technological competition in the industry from
pharmaceutical and biotechnology companies, universities, governmental entities
and others diversifying into the field is intense and is expected to increase.
Most of these entities have significantly greater research and development
capabilities than the Company, as well as substantially more marketing,
financial and managerial resources, and represent significant competition for
the Company. Acquisitions of or investments in competing biotechnology companies
by large pharmaceutical companies could increase such competitors' financial,
marketing and other resources. There can be no assurance that developments by
others will not render the Company's products or technologies noncompetitive or
that the Company will be able to keep pace with technological developments.
Competitors have developed or are in the process of developing technologies that
are or, in the future, may be the basis for competitive products. Some of these
products may have an entirely different approach or means of accomplishing
similar therapeutic effects to those products being developed by the Company.
These competing products may be more effective and less costly than the products
developed by the Company. In addition, conventional drug therapy, surgery and
other more familiar treatments and modalities will offer competition to the
Company's products. See "Business -- Competition."
 
LIMITED SALES AND MARKETING EXPERIENCE
 
     Commercialization of the Company's products is expensive and
time-consuming. The Company has adopted a strategy of pursuing collaborative
agreements with strategic partners that provide for co-promotion of certain of
the Company's products. In the event that the Company elects to participate in
co-promotion efforts in the United States or Canada, and in those instances
where the Company has retained exclusive marketing rights in specified
territories, the Company will need to build a sales and marketing capability in
the targeted markets. The Company currently has a limited marketing staff and no
sales personnel. There can be no assurance that the Company will be able to
establish a successful direct sales and marketing capability in any or all
targeted markets or that it will be successful in gaining market acceptance for
its products. To the extent that the Company enters into co-promotion or other
licensing arrangements, any revenues received by the Company will be dependent
on the efforts of third parties and there can be no assurance that such efforts
will be successful. Outside of the United States and Canada, the Company has
adopted a strategy to pursue collaborative arrangements with established
pharmaceutical companies for marketing, distribution and sale of its products.
There can be no assurance that any of these companies or their sublicensees will
successfully market, distribute or sell the Company's products or that the
Company will be able to establish and maintain successful co-promotion or
distribution arrangements. Failure to establish a sales capability in the United
States or outside the United States may have a material adverse effect on the
Company. See "Business -- Sales and Marketing."
 
                                       10

<PAGE>   11
 
HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICIT
 
     The Company has incurred annual operating losses since its inception in
1985. As of March 31, 1996, the Company's accumulated deficit was approximately
$77.0 million. The Company anticipates that such operating losses will continue
for at least the next two years. Such losses have been and will be principally
the result of the various costs associated with the Company's research and
development, clinical and manufacturing activities. The Company has not
generated operating profits from the commercial sale of its products. All
revenues to date have resulted from collaborative research, development and
licensing arrangements, research grants and interest income. The Company has no
products approved by the FDA or any foreign authority and does not expect to
achieve profitable operations on an annual basis unless product candidates now
under development receive FDA or foreign regulatory approval and are thereafter
commercialized successfully. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
 
POSSIBLE VOLATILITY OF STOCK PRICE
 
     The stock market has from time to time experienced significant price and
volume fluctuations that may be unrelated to the operating performance of
particular companies. In addition, the market price of the Company's Common
Stock, like the stock prices of many publicly traded biotechnology companies,
has been highly volatile. Announcements of technological innovations or new
commercial products by the Company or its competitors, developments or disputes
concerning patent or proprietary rights, publicity regarding actual or potential
medical results relating to products under development by the Company or its
competitors, regulatory developments in both the United States and foreign
countries, public concern as to the safety of biotechnology products and
economic and other external factors, as well as period-to-period fluctuations in
financial results may have a significant impact on the market price of the
Company's Common Stock. It is likely that in some future quarter the Company's
operating results will be below the expectations of public market analysts and
investors. In such event, the price of the Company's Common Stock would likely
be materially adversely affected.
 
UNCERTAINTIES REGARDING HEALTH CARE REIMBURSEMENT AND REFORM
 
     The future revenues and profitability of biopharmaceutical companies as
well as the availability of capital may be affected by the continuing efforts of
government and third party payors to contain or reduce costs of health care
through various means. For example, in certain foreign markets pricing or
profitability of prescription pharmaceuticals is subject to government control.
In the United States, there have been, and the Company expects that there will
continue to be, a number of federal and state proposals to implement similar
government controls. While the Company cannot predict whether any such
legislative or regulatory proposals will be adopted, the announcement or
adoption of such proposals could have a material adverse effect on the Company's
business, financial condition or prospects.
 
     The Company's ability to commercialize its products successfully will
depend in part on the extent which appropriate reimbursement levels for the cost
of such products and related treatment are obtained from governmental
authorities, private health insurers and other organizations, such as health
maintenance organizations ("HMOs"). Third-party payors are increasingly
challenging the prices charged for medical products and services. Also, the
trend toward managed health care in the United States and the concurrent growth
of organizations such as HMOs, which could control or significantly influence
the purchase of health care services and products, as well as legislative
proposals to reform health care or reduce government insurance programs may all
result in lower prices for the Company's products. The cost containment measures
that health care payors and providers are instituting and the effect of any
health care reform could materially adversely affect the Company's ability to
operate profitably. See "Business -- Pharmaceutical Pricing and Reimbursement."
 
                                       11

<PAGE>   12
 
PRODUCT LIABILITY EXPOSURE
 
     Clinical trials, manufacturing, marketing and sale of any of the Company's
or its strategic partners' pharmaceutical products licensed by the Company may
expose the Company to product liability claims. The Company currently carries
limited product liability insurance. There can be no assurance that the Company
or its strategic partners will be able to continue to maintain or obtain
additional insurance or, if available, that sufficient coverage can be acquired
at a reasonable cost. An inability to obtain sufficient insurance coverage at an
acceptable cost or otherwise protect against potential product liability claims
could prevent or inhibit the commercialization of pharmaceutical products
developed by the Company or its strategic partners. A product liability claim or
recall would have a material adverse effect on the business and financial
condition of the Company.
 
DILUTION
 
   
     The public offering price will exceed the Company's net tangible book value
per share immediately after the offering. New investors will experience an
immediate dilution in net tangible book value as of March 31, 1996 of
approximately $19.32 per share. See "Dilution." Additional dilution will occur
upon exercise of outstanding options and warrants and conversion of convertible
preferred stock. See "Description of Capital Stock."
    
 
EFFECT OF CERTAIN CHARTER PROVISIONS; ANTITAKEOVER EFFECTS OF ARTICLES OF
INCORPORATION, CALIFORNIA LAW AND CERTAIN AGREEMENTS
 
     The Company's Board of Directors has the authority to issue up to 8,000,000
shares of Preferred Stock and to determine the price, rights, preferences,
privileges and restrictions, including voting and conversion rights of such
shares, without any further vote or action by the Company's shareholders. The
rights of the holders of Common Stock will be subject to, and may be adversely
affected by, the rights of the holders of any Preferred Stock that may be issued
in the future. The issuance of Preferred Stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of making it more difficult for a third party to
acquire a majority of the outstanding voting stock of the Company. Further,
certain provisions of the Company's Articles of Incorporation and of California
law could delay or make more difficult a merger, tender offer or proxy contest
involving the Company. In addition, the Company's collaborative agreement with
Genentech provides Genentech with the right to purchase the Company's
co-promotion rights under such agreement upon a change of control of the
Company. All of the foregoing could discourage potential acquisition proposals
for the Company. See "Business -- Strategic Alliances" and "Description of
Capital Stock -- Preferred Stock."
 
ENVIRONMENTAL CONCERNS
 
     The Company's research and development involves the controlled use of
hazardous materials, chemicals and radioactive compounds. Although the Company
believes that its safety procedures for handling and disposing of such materials
comply with the standards prescribed by state and federal regulations, the risk
of accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident, the Company could be held liable
for any damages that result and any such liability could exceed the resources of
the Company. In addition, disposal of radioactive materials used by the Company
in its research efforts may only be made at approved facilities. Approval of a
site in California has been delayed indefinitely. The Company currently stores
such radioactive materials on site. The Company may incur substantial cost to
comply with environmental regulations. See "Business -- Environmental
Regulation."
 
                                       12

<PAGE>   13
 
                                USE OF PROCEEDS
 
   
     The net proceeds to the Company from the sale of the 1,800,000 shares of
Common Stock offered hereby are estimated to be approximately $40.3 million
($46.4 million if the Underwriters' over-allotment option is exercised in full)
after deducting underwriting discounts and commissions and estimated expenses of
the offering. The Company anticipates that the net proceeds of this offering
will be used primarily to fund the Company's establishment of a marketing and
sales infrastructure, to fund detailed engineering studies for expansion of its
manufacturing capacity, to secure additional office, laboratory and warehouse
facilities, to provide working capital for the product launch of IDEC-C2B8, if
approved, and for general corporate purposes. The use of proceeds is subject to
change based upon competitive developments, the rate of the Company's progress
in product development, the timing of regulatory approval and the availability
of various methods of financing, including agreements with other companies
relating to the development and marketing of the Company's products. The Company
reserves the right, at the discretion of its Board of Directors, to reallocate
its use of the proceeds of this offering in response to these and other factors.
Pending such uses, the net proceeds will be temporarily invested in
investment-grade, interest-bearing marketable securities.
    
 
                     COMMON STOCK PRICE RANGE AND DIVIDENDS
 
     The Company's Common Stock is traded on The Nasdaq National Market under
the symbol "IDPH." The following table sets forth for the periods indicated the
high and low reported sale prices as reported by The Nasdaq National Market.
 
   

<TABLE>
<CAPTION>
                                                                       COMMON
                                                                    STOCK PRICE
                                                                   --------------
                                                                   HIGH       LOW
                                                                   ----       ---
    <S>                                                            <C>        <C>
    Year Ended December 31, 1994
         First Quarter...........................................  $ 6 3/4    $ 37/8
         Second Quarter..........................................    4 1/2      21/4
         Third Quarter...........................................    3 3/16     23/8
         Fourth Quarter..........................................    3          21/8
    Year Ended December 31, 1995
         First Quarter...........................................    4 5/8      21/8
         Second Quarter..........................................    5 5/8      31/2
         Third Quarter...........................................    8 3/4      51/4
         Fourth Quarter..........................................   23 5/8      71/8
    Year Ending December 31, 1996
         First Quarter...........................................   23 1/8     157/8
         Second Quarter (through June 6, 1996)...................   32 5/8     221/8
</TABLE>

    
 
     A recent reported last sale price for the Company's Common Stock as
reported on The Nasdaq National Market is set forth on the cover page of this
Prospectus. On April 1, 1996, there were approximately 508 holders of record of
the Company's Common Stock.
 
     The Company has never declared or paid any cash dividends on the Common
Stock. The Company expects to retain its earnings for the development and
expansion of its business and, therefore, does not intend to pay dividends on
its Common Stock in the foreseeable future. Any future determination to pay cash
dividends will be at the discretion of the Company's Board of Directors and will
depend upon the earnings of the Company, its financial condition, capital
requirements and other factors as the Company's Board of Directors may deem
relevant.
 
                                       13

<PAGE>   14
 
                                 CAPITALIZATION
 
   
     The following table sets forth the capitalization of the Company at March
31, 1996, and as adjusted to reflect the sale of 1,800,000 shares of Common
Stock offered by the Company hereby and the application of the estimated net
proceeds therefrom at a public offering price of $24.00 per share (after
deducting underwriting discounts and commissions and estimated offering expenses
payable by the Company):
    
 
   

<TABLE>
<CAPTION>
                                                                             MARCH 31, 1996
                                                                        ------------------------
                                                                         ACTUAL      AS ADJUSTED
                                                                        --------     -----------
                                                                              (UNAUDITED)
                                                                             (IN THOUSANDS)
<S>                                                                     <C>          <C>
Notes payable, less current portion (1)...............................  $  6,385      $   6,385
Shareholders' equity:
  Convertible preferred stock, no par value, 8,000,000 shares
     authorized; 229,889 shares issued and outstanding, at liquidation
     value............................................................    19,086         19,086
  Common stock, no par value, 50,000,000 shares authorized; 15,271,261
     shares issued and outstanding; 17,071,261 shares issued and
     outstanding, as adjusted (2).....................................    94,476        134,809
  Paid-in capital.....................................................     2,923          2,923
  Unrealized gains on securities available-for-sale...................         6              6
  Accumulated deficit.................................................   (77,013)       (77,013)
                                                                        --------       --------
          Total shareholders' equity..................................    39,478         79,811
                                                                        --------       --------
          Total capitalization........................................  $ 45,863      $  86,196
                                                                        ========       ========
</TABLE>

    
 
- ---------------
(1) See Note 5 of Notes to Consolidated Financial Statements for information
    concerning the Company's notes payable.
 
(2) Excludes (i) warrants to purchase 740,149 shares of Common Stock, (ii)
    options to purchase 3,267,539 shares of Common Stock and (iii) convertible
    preferred stock convertible into 2,067,120 shares of Common Stock, each
    outstanding as of March 31, 1996. See Note 8 of Notes to Consolidated
    Financial Statements.
 
                                       14

<PAGE>   15
 
                                    DILUTION
 
   
     The net tangible book value of the Company at March 31, 1996 was
$39,478,000 or $2.59 per share. Net tangible book value per share represents the
amount of total tangible assets less total liabilities of the Company, divided
by the number of shares of Common Stock outstanding. After giving effect to the
sale by the Company of 1,800,000 shares of Common Stock in this offering at the
offering price of $24.00 per share (calculated after deduction of underwriting
discount and commissions and estimated expenses associated with the offering)
the net tangible book value of the Company at March 31, 1996 would have been
$79,811,000 or $4.68 per share of Common Stock. This represents an immediate
increase in net tangible book value of $2.09 per share to existing shareholders
and an immediate dilution in net tangible book value of $19.32 per share to the
purchasers of the Common Stock in the offering.
    
 
     The following table illustrates the calculation of the per share dilution
described above:
 
   

<TABLE>
    <S>                                                                   <C>       <C>
    Public offering price per share(1)..................................            $ 24.00
                                                                                    =======
      Net tangible book value per share prior to the offering...........  $ 2.59
      Increase in net tangible book value per share attributable to new
         investors......................................................    2.09
                                                                          ------
                                                                               -
    Net tangible book value per share after giving effect to the
      offering..........................................................               4.68
                                                                                    -------
    Dilution per share to new investors.................................            $ 19.32
                                                                                    =======
</TABLE>

    
 
- ------------
   
(1) Before deduction of underwriting discounts and commissions and offering
    expenses associated with the offering to be paid by the Company.
    
 
     All of the above computations assume no exercise of outstanding warrants or
options to purchase Common Stock and no conversion of outstanding convertible
preferred stock. As of March 31, 1996, the Company also has an additional
740,149 shares of Common Stock issuable upon exercise of outstanding warrants.
As of March 31, 1996, options to purchase 3,267,539 shares of Common Stock were
outstanding under the Company's stock option plans. Finally, as of March 31,
1996, 2,067,120 shares of Common Stock are issuable upon conversion of
outstanding convertible preferred stock. Further dilution may result from the
exercise of such outstanding warrants and options or the conversion of such
outstanding shares of preferred stock. See "Description of Capital Stock."
 
                                       15

<PAGE>   16
 
                      SELECTED CONSOLIDATED FINANCIAL DATA
 
     The selected consolidated financial data presented below under the captions
"Consolidated Statements of Operations Data" and "Consolidated Balance Sheets
Data" for, and as of the end of, each of the years in the five-year period ended
December 31, 1995, are derived from the consolidated financial statements of the
Company, which consolidated financial statements have been audited by KPMG Peat
Marwick LLP, independent certified public accountants. The consolidated
financial statements as of December 31, 1994 and 1995, and for each of the years
in the three-year period ended December 31, 1995, and the report thereon, are
included elsewhere in this Prospectus. The selected consolidated financial data
presented below for the three months ended March 31, 1995 and 1996, and as of
March 31, 1996, are derived from the unaudited consolidated financial statements
of the Company included elsewhere in this Prospectus that, in the opinion of
management, include all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of the information included therein. The
information set forth below is not necessarily indicative of the results of
future operations and should be read in conjunction with the Consolidated
Financial Statements and related Notes thereto that are included in this
Prospectus and with "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
 

<TABLE>
<CAPTION>
                                                                                                            THREE MONTHS
                                                                YEAR ENDED DECEMBER 31,                    ENDED MARCH 31,
                                                  ----------------------------------------------------   -------------------
                                                    1991       1992       1993       1994       1995       1995       1996
                                                  --------   --------   --------   --------   --------   --------   --------
                                                                    (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                               <C>        <C>        <C>        <C>        <C>        <C>        <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
  Contract research revenues....................  $  5,233   $  3,212   $  4,329   $  5,143   $ 12,136   $  3,347   $  2,936
  License fees..................................     1,000      2,000      8,385      2,300     11,500      5,000      7,000
                                                  ---------  ---------  ---------  ---------  ---------  ---------  ---------
        Total revenues..........................     6,233      5,212     12,714      7,443     23,636      8,347      9,936
Operating expenses:
  Research and development......................    10,928     14,519     18,723     21,191     22,488      5,538      5,641
  General and administrative....................     2,211      3,196      4,262      4,768      6,112      1,655      1,854
  Acquired technology rights....................     --         --         --         --        11,437     11,437      --
  Unification costs.............................     --         3,000      --         --         --         --         --
                                                  ---------  ---------  ---------  ---------  ---------  ---------  ---------
        Total operating expenses................    13,139     20,715     22,985     25,959     40,037     18,630      7,495
                                                  ---------  ---------  ---------  ---------  ---------  ---------  ---------
Income (loss) from operations...................    (6,906)   (15,503)   (10,271)   (18,516)   (16,401)   (10,283)     2,441
Interest income (expense), net..................     1,126      2,340      1,174        485       (891)      (141)      (594)
Other income....................................     --           459        215      --         --         --         --
                                                  ---------  ---------  ---------  ---------  ---------  ---------  ---------
Net income (loss)...............................  $ (5,780)  $(12,704)  $ (8,882)  $(18,031)  $(17,292)  $(10,424)  $  1,847
                                                  =========  =========  =========  =========  =========  =========  =========
Net income (loss) per share.....................  $   (.88)  $  (1.39)  $   (.96)  $  (1.65)  $  (1.18)  $   (.75)  $    .10
Shares used in calculation of net income (loss)
  per share.....................................     6,544      9,168      9,265     10,931     14,650     13,937     19,121
</TABLE>

 

<TABLE>
<CAPTION>
                                                                                                              AS OF
                                                                    AS OF DECEMBER 31,                      MARCH 31,
                                                   ----------------------------------------------------     ---------
                                                     1991       1992       1993       1994       1995         1996
                                                   --------   --------   --------   --------   --------     ---------
                                                                             (IN THOUSANDS)
<S>                                                <C>        <C>        <C>        <C>        <C>          <C>
CONSOLIDATED BALANCE SHEETS DATA:
Cash, cash equivalents and securities available-
  for-sale.......................................  $ 54,251   $ 43,624   $ 26,503   $ 20,601   $ 24,010     $ 25,849
Total assets.....................................    58,399     52,649     50,728     45,494     47,626       55,206
Notes payable, less current portion..............       222        156      3,572      7,386      6,598        6,385
Total shareholders' equity.......................  $ 54,893   $ 43,787   $ 35,674   $ 27,896   $ 31,169     $ 39,478
</TABLE>

 
                                       16

<PAGE>   17
 

                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
     This Prospectus contains predictions, estimates and other forward-looking
statements that involve a number of risks and uncertainties including, without
limitation, those set forth in "Risk Factors." While this outlook represents the
Company's current judgment on the future direction of its business, such risks
and uncertainties could cause actual results to differ materially from any
future performance suggested in this Management's Discussion and Analysis of
Financial Condition and Results of Operations.
 
     The following discussion should be read in conjunction with the
Consolidated Financial Statements and related Notes thereto of IDEC
Pharmaceuticals.
 
OVERVIEW
 
     IDEC Pharmaceuticals is primarily engaged in the research and development
of products for the long-term management of immune system cancers and autoimmune
and inflammatory diseases. To date, the Company has not received any revenue
from the commercial sale of its products. The Company has funded its operations
primarily through the sale of equity securities and the issuance of debt, as
well as through contract research and license fee revenues received in
connection with collaborative arrangements entered into with the Company's
strategic partners. In 1995, the Company recognized aggregate contract research
and license fee revenues of $23.6 million.
 
     The Company has incurred increasing annual operating expenses and, as the
Company prepares for product commercialization, it expects such trends to
continue. In 1995, the Company incurred aggregate operating expenses of
approximately $40.0 million. The Company has incurred annual operating losses
since its inception in 1985, and anticipates that such operating losses will
continue for at least the next two years. As of March 31, 1996, the Company had
incurred a cumulative net loss of approximately $77.0 million.
 
RESULTS OF OPERATIONS
 
     THREE MONTHS ENDED MARCH 31, 1996 AND 1995
 
     Contract Research Revenues.  Contract research revenues totaled $2.9
million for the three months ended March 31, 1996 compared to $3.3 million for
the comparable period in 1995. The decrease in contract research revenues was
primarily due to decreased revenues from SmithKline Beecham as a result of the
transfer of clinical development of IDEC-CE9.1 to SmithKline Beecham in late
1995, partially offset by revenues from a new collaboration entered into with
Eisai in December 1995.
 
     License Fees.  License fees totaled $7.0 million for the three months ended
March 31, 1996 compared to $5.0 million for the comparable period in 1995.
License fees for the first three months of 1996 included $4.5 million for the
license to Chugai of the Company's proprietary vector technology for high
expression of recombinant proteins in mammalian cells, $1.5 million from
Genentech for the expansion of its collaboration with the Company to include two
radioconjugates, IDEC-Y2B8 and IDEC-In2B8, for the treatment and imaging,
respectively, of B-cell lymphomas and $1.0 million from Seikagaku for the
achievement of a product development milestone. License fees for the quarter
ended March 31, 1995 consisted of one-time licensing fees from new strategic
partnerships with Genentech and Seikagaku. License fee revenues can vary
significantly from year to year based upon the consummation of new strategic
alliances and the achievement of milestone events.
 
     Research and Development Expenses.  Research and development expenses
totaled $5.6 million for the three months ended March 31, 1996 compared to $5.5
million for the comparable period in 1995. Research and development expenses
consist of basic research and development, preclinical and clinical testing of
the Company's various products under development and manufacturing of products.
The Company expects to incur higher research and development expenses in the
future due to additional personnel to handle expanded manufacturing operations,
expanded clinical trials and additional regulatory related costs associated with
obtaining regulatory approvals for the Company's products and increased costs to
support expanding research and development programs.
 
                                       17

<PAGE>   18
 
     Beginning in 1988, the Company obtained funds from ML/MS Associates, L.P.
("ML/MS") for the development of the Company's lymphoma products. In connection
with such funding, ML/MS obtained rights in such products. In March 1995 the
Company repurchased such rights by the issuance of 1.0 million shares of its
Common Stock and 69,375 shares of 10% Series B Nonvoting Cumulative Convertible
Preferred Stock to ML/MS. For the three months ended March 31, 1995, the Company
recorded a noncash charge of $11.4 million, representing the purchase of the
acquired technology rights.
 
     General and Administrative Expenses.  General and administrative expenses
totaled $1.9 million for the three months ended March 31, 1996 compared to $1.7
million for the comparable period in 1995. General and administrative expenses
increased due to higher personnel and patent related expenses. General and
administrative expenses necessary to support expanded manufacturing operations,
expanded clinical trials, research and development and the creation of a
marketing and sales capability are expected to continue to increase for the
foreseeable future.
 
     Net Interest Expense.  Net interest expense totaled $.6 million for the
three months ended March 31, 1996 compared to $.1 million during the comparable
period in 1995. Net interest expense increased during the first quarter of 1996
and may increase significantly in the future due to an accounting requirement
under which the Company records a noncash charge to interest expense for the
excess of fair market value over the exercise price of certain common stock
warrants issued in connection with a debt financing.
 
     YEARS ENDED DECEMBER 31, 1995 AND 1994
 
     Contract Research Revenues.  Contract research revenues totaled $12.1
million in 1995 compared to $5.1 million in 1994. The increase in contract
research revenues was primarily a result of the new collaborations entered into
with Genentech and Eisai and ongoing efforts under a collaborative agreement
entered into with Seikagaku in December 1994. The Company expects that contract
research revenue derived from the SmithKline Beecham collaboration ($3.5 million
during 1995) will decrease significantly in future periods as the Company
completes its responsibility for clinical development of IDEC-CE9.1.
 
     License Fees.  License fees totaled $11.5 million in 1995 compared to $2.3
million in 1994. License fees increased in 1995 due to up-front licensing fees
earned from the new collaborations with Genentech, Eisai and Seikagaku in
addition to the licensing fees recognized from Zenyaku for the development and
marketing rights for IDEC-C2B8 in Japan.
 
     Research and Development Expenses.  Research and development expenses
totaled $22.5 million in 1995 compared to $21.2 million in 1994. The increase in
research and development expenses in 1995 was due primarily to higher personnel
and related expenses and license fee payments to acquire certain technology and
patent rights. In addition, the Company repurchased rights to its lymphoma
products from ML/MS in March 1995. See "-- Three Months Ended March 31, 1996 and
1995."
 
     General and Administrative Expenses.  General and administrative expenses
totaled $6.1 million in 1995 compared to $4.8 million in 1994. The increase in
general and administrative expenses in 1995 was due primarily to advisory and
other professional fees associated with structuring collaborative agreements,
including those associated with the Genentech collaboration, increased patent
filing fees related to recently-enacted patent treaties and higher personnel and
related expenses.
 
     Interest Income/Expense.  Net interest expense totaled $.9 million compared
to net interest income of $.5 million in 1994. The increase in net interest
expense in 1995 was the result of higher interest rates on new notes payable,
non-cash interest charges as described below, partially offset by increased
interest earnings on cash, cash equivalents and securities available-for-sale.
 
     Interest expense in 1995 also increased over the prior years and may
increase significantly in future periods due to an accounting requirement under
which the Company records a non-cash charge to interest expense for the excess
of the fair market value over the exercise price of certain common stock
warrants issued in connection with a debt financing as described in Note 8 to
the Consolidated Financial Statements. Interest expense for 1995 includes $.7
million in such non-cash charges to interest expense.
 
                                       18

<PAGE>   19
 
     Income Taxes.  IDEC Pharmaceuticals has incurred losses on an annualized
basis since inception; therefore, no provision for income taxes has been
recorded. The Company's net operating loss carryforwards available to offset
future taxable income are approximately $61.8 million for federal income tax
purposes and expire between 1999 and 2010. The future utilization of net
operating loss carryforwards may be limited under the Internal Revenue Code due
to an ownership change that occurred during 1991. However, the Company believes
that such limitations will not have a material impact upon the utilization of
the net operating loss carryforwards.
 
     YEARS ENDED DECEMBER 31, 1994 AND 1993
 
     Contract Research Revenues.  Contract research revenues for the year ended
December 31, 1994, increased to $5.1 million from $4.3 million in 1993. The
increase in contract research revenues in 1994 were primarily related to the
Company's ongoing collaborative efforts with SmithKline Beecham and Mitsubishi.
 
     License Fees.  License fees totaled $2.3 million in 1994 compared to $8.4
million in 1993. License fees declined in 1994 due to the timing of license fee
and milestone payments earned by the Company in 1993 for expanding its agreement
with SmithKline Beecham.
 
     Research and Development Expenses.  Research and development expenses
increased to $21.2 million in 1994 from $18.7 million in 1993. The increase in
research and development expenses in 1994 was due primarily to higher facility
and manufacturing expenses, personnel and related expenses, and payments to
medical centers in support of expanded clinical trials.
 
     General and Administrative Expenses.  General and administrative expenses
increased to $4.8 million in 1994 from $4.3 million in 1993. The increase from
1993 to 1994 was due to expenses necessary to support the Company's expansion of
research and development.
 
     Interest Income/Expense.  Net interest income for the year ended December
31, 1994 was $.5 million compared to $1.2 million in 1993. The decrease in net
interest income from 1993 to 1994 is due to lower balances in cash, cash
equivalents and securities available-for-sale, and an increase in interest
expense resulting from increases in notes payable used to finance certain
capital purchases.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     The Company has financed its operations and capital expenditures since
inception principally through the sale of equity securities, contract research
revenues, license fees, lease financing transactions and interest income. The
Company expects to finance its current and planned operations principally
through the proceeds of this offering, cash on hand and with funds from existing
collaborative agreements and contracts, which the Company believes will be
sufficient to meet its near-term operating requirements. Existing agreements and
contracts however, could be canceled by the parties to such contracts. In
addition, the Company intends to seek required additional funding through a
combination of new collaborative agreements, strategic alliances, additional
equity and debt financings or from other sources. There can be no assurance that
such additional funds will be available on acceptable terms, if at all. Should
the Company not enter into any such arrangements, the Company anticipates its
cash (including the proceeds of this offering), cash equivalents and securities
available-for-sale, together with the existing agreements and contracts, will be
sufficient to finance the Company's currently anticipated needs for operating
and capital expenditures through 1998. If adequate funds are not available from
operations or from additional sources of financing, the Company's business could
be materially and adversely affected.
 
     The Company's working capital and capital requirements will depend upon
numerous factors, including: the progress of the Company's preclinical and
clinical testing; manufacturing, research and development programs; timing and
cost of obtaining regulatory approvals; levels of resources that the Company
devotes to the development of manufacturing and marketing capabilities;
technological advances; status of competitors; and the ability of the Company to
establish collaborative arrangements with other organizations.
 
                                       19

<PAGE>   20
 
     Until required for operations, the Company's policy is to keep its cash
reserves in bank deposits, certificates of deposit, commercial paper, corporate
notes, United States government instruments and other readily marketable debt
instruments, all of which are investment-grade quality.
 
     At March 31, 1996, the Company had $25.8 million in cash, cash equivalents
and securities available-for-sale compared to cash, cash equivalents and
securities available-for-sale of $24.0 million at December 31, 1995. Sources of
cash, cash equivalents and securities available-for-sale at March 31, 1996
include $5.6 million from the issuance of convertible preferred and common stock
and $.8 million from the funding under an existing lease line. Uses of cash,
cash equivalents and securities available-for-sale during the three months ended
March 31, 1996 include $3.4 million used in operations and $.8 million used to
pay notes payable.
 
     In March 1995, the Company issued 1.0 million shares of its Common Stock
and 69,375 shares of 10% Series B Nonvoting Cumulative Convertible Preferred
Stock to ML/MS for the repurchase of all ML/MS rights in the Company's lymphoma
products. In the first quarter of 1995, the Company recorded a non-cash charge
of $11.4 million, representing the purchase of the acquired technology rights.
 
     The Company issued to Genentech 100,000 shares of its Series A-1 Nonvoting
Convertible Preferred Stock, 38,000 shares of its Series A-2 Nonvoting
Convertible Preferred Stock, 23,000 shares of its Series A-3 Nonvoting
Convertible Preferred Stock and 100,000 shares of its Series A-6 Nonvoting
Convertible Preferred Stock in April 1995, August 1995, March 1996, and May
1996, respectively. The issuances resulted in net proceeds of $19.6 million.
 
     In December 1995, the Company entered into a $1.5 million lease financing
agreement to finance equipment purchases. As of March 31, 1996, $.8 million in
capital equipment purchases have been funded under this agreement and the
remaining funding under this agreement is available until July 1, 1996. Included
in property and equipment at March 31, 1996, is $.2 million in equipment that
the Company anticipates financing under this agreement during the second quarter
of 1996.
 
                                       20

<PAGE>   21
 
 
                                   BUSINESS
 
     IDEC Pharmaceuticals is a biopharmaceutical company developing products for
the long-term management of immune system cancers and autoimmune and
inflammatory diseases. The Company is currently focused on non-Hodgkin's B-cell
lymphomas, which afflict approximately 225,000 patients in the United States,
and rheumatoid arthritis, which afflicts approximately 2 million people in the
United States. The Company's two antibody products for treatment of
non-Hodgkin's B-cell lymphomas are being developed in collaboration with
Genentech in the United States, Genentech's affiliate Hoffmann-LaRoche worldwide
except the United States and Japan and Zenyaku in Japan. The Company's lead
PRIMATIZED antibody product for the treatment of rheumatoid arthritis is being
developed worldwide in collaboration with SmithKline Beecham. IDEC
Pharmaceuticals has seven additional product candidates in various stages of
development.
 
BACKGROUND
 
     ANTIBODIES AND THE IMMUNE SYSTEM
 
     The immune system is composed of specialized cells, including B cells and T
cells, that function in the recognition, destruction and elimination of disease
causing foreign substances and of virally infected or malignant cells. The role
of these specialized cells is determined by receptors on the cell surface which
govern the interaction of the cell with foreign substances and with the rest of
the immune system. For example, each differentiated B cell of the immune system
has a different antibody anchored to its surface which serves as a receptor to
recognize foreign substances. This antibody then triggers the production of
additional antibodies which as free-floating molecules bind to and eliminate
these foreign substances. Each foreign substance is individually identifiable by
structures on its surface known as antigens, which serve as binding sites for
the specific antibodies. T cells play more diverse roles, including the
identification and destruction of virally infected or malignant cells.
 
     A variety of technologies have been developed to produce antibodies as
therapeutic agents. These include hybridoma technology and molecular biology
techniques such as gene cloning and expression, which can now be applied to the
generation, selection and production of hybrid monoclonal antibody varieties
known as chimeric and humanized antibodies, as well as strictly human
antibodies. Chimeric antibodies are constructed from portions of non-human
species (e.g., mouse) antibodies and human antibodies. In these applications,
the portion of the antibody responsible for antigen binding (the "variable
region") is taken from a non-human antibody and the remainder of the antibody
(the "constant region") is taken from a human antibody. Compared to mouse
("murine") monoclonal antibodies, chimeric antibodies generally exhibit lower
immunogenicity (the tendency to trigger an often adverse immune response such as
a human anti-mouse antibody, or "HAMA" response), are cleared more slowly from
the body, and function more naturally in the human immune system. Humanized
antibodies can be constructed by grafting several small pieces of a murine
antibody's variable region onto a constant region framework provided by a human
antibody. This process, known as "CDR grafting," reduces the amount of foreign
materials in the antibody, rendering it closer to a human antibody. However, the
construction of humanized antibodies by CDR grafting requires complex computer
modeling, and the properties of the resulting antibody are not completely
predictable and may, in fact, still trigger a HAMA response.
 
     NON-HODGKIN'S B-CELL LYMPHOMAS
 
     As with other cell types in the body, B cells and T cells may become
malignant and grow as immune system tumors, such as lymphomas. Non-Hodgkin's
B-cell lymphomas are cancers of the immune system which currently afflict
approximately 225,000 patients in the United States. Although there are
treatments for non-Hodgkin's B-cell lymphomas, there are currently no products
in the United States that have been approved by the FDA for use in treating
these cancers. Non-Hodgkin's B-cell lymphomas are diverse with respect to
prognosis and treatment, and are generally classified into one of three groups
(low, intermediate or high-grade) based on histology and clinical features. The
Company estimates that approximately 146,000 patients in the United States have
low-grade, 65,000 have intermediate-grade, and 14,000 have high-grade non-
Hodgkin's B-cell lymphoma. Patients with low-grade lymphomas have a fairly long
life expectancy from the
 
                                       21

<PAGE>   22
 
time of diagnosis (median survival 6.6 years), despite the fact that low-grade
lymphomas are almost always incurable. Intermediate-grade and high-grade
lymphomas are more rapidly growing forms of these cancers, which in a minority
of cases can be cured with early, aggressive chemotherapy. New diagnoses of non-
Hodgkin's lymphomas have increased approximately 7% annually over the past
decade, with 52,700 new diagnoses estimated for 1996. The increase is due in
part to the increasing prevalence of lymphomas in the AIDS patient population.
In approximately 90% of the cases in the United States, non-Hodgkin's lymphomas
are of B-cell origin, the remainder are T-cell lymphomas.
 
     Owing to the fluid nature of the immune system, B-cell lymphomas are
usually widely disseminated and characterized by multiple tumors at various
sites throughout the body at first presentation. Treatment courses with
chemotherapy or radiation therapy are the current standard of care and often
result in a limited number of remissions for patients with B-cell lymphomas. The
majority of patients in remission will relapse and ultimately die either from
their cancer or from complications of standard therapy. Fewer patients achieve
additional remissions following relapse and those remissions are generally of
shorter duration as the tumors become increasingly resistant to subsequent
courses of chemotherapy. Therapeutic product development efforts for these
cancers have focused on both improving treatment results and minimizing the
toxicities associated with standard treatment regimens. Immunotherapies with low
toxicity and demonstrated efficacy can be expected to reduce treatment and
hospitalization costs associated with side effects or opportunistic infections,
which can result from the use of chemotherapy and radiation therapy.
 
     AUTOIMMUNE AND INFLAMMATORY DISEASES
 
     Rheumatoid arthritis, systemic lupus erythematosus ("SLE"), psoriasis,
inflammatory bowel disease ("IBD") and multiple sclerosis ("MS") are autoimmune
and inflammatory diseases that require ongoing therapy and afflict more than 6
million patients in the United States. Of these, approximately 2 million people
are afflicted with rheumatoid arthritis. Autoimmune disease occurs when the
patient's immune system goes awry, initiating a cascade of events which results
in an attack by the patient's immune system against otherwise healthy tissue and
often includes inflammation of the involved tissue. In rheumatoid arthritis, the
disease attacks the synovial lining of the patient's joints, usually resulting
in the destruction of the joints of the hands, hips and knees. The patient's
condition evolves from constantly painful joints to the disability of deformed,
misaligned joints. Autoimmune diseases such as rheumatoid arthritis are
typically treated with products such as steroids and nonsteroidal,
anti-inflammatory agents and with other therapies, all of which are limited for
several reasons, including their lack of specificity and ineffectiveness when
used chronically. Furthermore, steroids suppress the immune system and make the
patient susceptible to infections while nonsteroidal, anti-inflammatory agents
have been implicated in the formation of gastro-intestinal ulcerations.
 
     ANTIBODIES AND THE REGULATION OF IMMUNE SYSTEM CELLS
 
     Monoclonal antibodies may be used to bind to specific subsets of human
immune system cells and may act to deplete or to suppress the activity of the
targeted cells. Indeed, the high specificity of monoclonal antibodies enables
them to discriminately act against different types of B cells or T cells.
Depletion of diseased immune cells or suppression of disease-causing immune
activities may be possible by using antibodies that attach to specific
determinants on the surface of target immune system cells. In particular, the
individual B and T cells of the immune system express a broad variety of surface
determinants (cell surface markers). Such determinants not only differentiate
one cell type from another, but also differentiate individual cells from other
cells with specificity for different antigens.
 
IDEC PHARMACEUTICALS' TECHNOLOGY
 
     IDEC Pharmaceuticals is developing products for the long-term management of
immune system cancers and autoimmune and inflammatory diseases. The Company's
antibody products bind to specific subsets of human immune system cells and act
to deplete or to suppress the activity of these targeted cells. The products are
administered intravenously and target cells located in easily accessible
compartments of the body, specifically the blood, the lymphatic fluid and the
synovial fluid.
 
                                       22

<PAGE>   23
 
     For treatment of non-Hodgkin's B-cell lymphomas, the Company's products
target a cell surface marker known as CD20 which is present only on B cells but
not on B cell precursors. These products act to reduce total B cell levels,
including both malignant and normal B cells. The depletion of normal B cells
observed in clinical experience, to date, has been only temporary, with
regeneration occurring within months. The Company believes that the successful
development of immunotherapeutic agents, such as IDEC-C2B8 and IDEC-Y2B8, will
complement and, in some cases, replace chemotherapeutic agents in the treatment
of non-Hodgkin's B-cell lymphomas.
 
     Due to their specificity and affinity for cell surface receptors,
monoclonal antibodies are also an attractive means by which to treat autoimmune
diseases. Attachment of monoclonal antibodies to specific cell surface receptors
can be used to suppress aberrant and unwanted immune activity. Historically,
however, the use of monoclonal antibodies as a ongoing therapy has been limited
by the body's rejection of the mouse derived components of the antibodies.
Murine monoclonal antibodies, which are structurally different from human
antibodies, tend to trigger adverse immune reactions when used as therapies.
These reactions include a HAMA response in which the patient's immune system
produces antibodies against the therapeutic antibody, thus limiting its
effectiveness.
 
     The Company has developed a proprietary PRIMATIZED antibody technology to
overcome HAMA responses and to avoid other immunogenicity problems by developing
monoclonal antibodies from primate rather than mouse B cells. These antibodies
are characterized by their strong similarity to human antibodies and by the
absence of mouse components. In March 1996, the Company received a Notice of
Allowance for a United States patent application claiming the Company's
PRIMATIZED antibodies. Underlying this proprietary technology is the Company's
discovery that macaque monkeys produce antibodies that are structurally
indistinguishable from human antibodies in their variable (antigen-binding)
regions. Further, the Company found that the macaque monkey can be immunized to
make antibodies that react with human, but not with macaque, antigens. Genetic
engineering techniques are then used to isolate the portions of the macaque
antibody gene which encode the variable region from a macaque B cell. This
genetic material is combined with constant region genetic material from a human
B cell and inserted into a host cell line which then expresses the desired
antibody specific to the given antigen. The result is a part human, part macaque
PRIMATIZED antibody which appears structurally to be so similar to human
antibodies that it may be accepted by the patient's immune system as "self."
This development allows the possibility of therapeutic intervention in chronic
diseases or other conditions that are not amenable to treatment with antibodies
containing mouse components.
 
     The Company has also discovered a proprietary antigen formulation, PROVAX,
which has shown the ability to induce cellular immunity, manifested by cytotoxic
T lymphocytes, in animals immunized with protein antigens. Cellular immunity is
a counterpart to antibody-based immunity and is responsible for the direct
destruction of virally infected and malignant cells. PROVAX is a combination of
defined chemical entities and may provide a practical means for the development
of effective immunotherapies that act through the induction of both antibody and
cell-mediated immunity. The Company believes such immunotherapies may be useful
for the treatment of certain cancers and viral diseases. Preliminary studies
also indicate that PROVAX can be safely administered by injection to human
subjects. The Company intends to make PROVAX available through licenses and
collaborations to interested partners for development of immunotherapeutic
vaccines.
 
                                       23

<PAGE>   24
 
STRATEGY
 
     IDEC Pharmaceuticals' strategy is to capitalize on its specialized antibody
development strengths by addressing serious and inadequately managed indications
in immune system cancers and autoimmune and inflammatory diseases. The key
elements of the Company's strategy include:
 
     DEVELOPING PRODUCTS THAT TARGET IMMUNE SYSTEM CELLS
 
     The Company has focused its development efforts to date on immune system
cancers and autoimmune diseases where current therapies are inadequate and where
monoclonal antibodies directed against immune system cells can play a
therapeutic role.
 
     LEVERAGING ITS TECHNOLOGY PLATFORM
 
     The Company's products share characteristics that allow the Company to
leverage its human and financial resources efficiently by applying a single
technology platform to a number of disease targets representing significant
unmet medical needs. Specifically, these products all target easily accessible
cells within the immune system and they are made using the same proprietary
mammalian cell expression technology and manufacturing process.
 
     UTILIZING ITS HIGH-YIELD, PROPRIETARY, MAMMALIAN CELL EXPRESSION TECHNOLOGY
TO BECOME A WORLD-CLASS BIOLOGICS MANUFACTURER
 
     The Company's highly productive mammalian cell expression technology allows
the Company to use its current "pilot" facility to manufacture commercial
quantities of product using a simple, reproducible cell culture process.
Exploiting a highly efficient recovery and purification process, the Company is
able to manufacture its products at a relatively low cost. The current facility
was completed in 1994 and its capacity was doubled in 1995.
 
     ESTABLISHING STRATEGIC ALLIANCES
 
     The Company's strategic partnering arrangements provide research and
development funding for the Company's North American product development. These
arrangements have also allowed the Company to postpone significant
infrastructure investments until revenue and cash flow from its products can
support these functions and until they are needed for the launch of products
which the Company has retained for itself in North America. Until then, the
Company plans to rely on its partners for the infrastructure required to support
product sales, such as through co-promotion, customer service, order entry, etc.
Outside of North America, the Company will rely on its partners to provide
access to foreign markets and potentially to act as customers for its
manufacturing capacity.
 
     FOCUSING THE COMPANY'S PRODUCTS ON COST-EFFECTIVE LONG-TERM MANAGEMENT OF
DISEASE
 
     The Company is developing products that exert their therapeutic activity in
a targeted manner, thus having significant therapeutic effect without the
unwanted side-effects of less targeted therapies. The ease of use of these
products, when combined with their favorable side-effect profile allows their
use in outpatient settings, thereby potentially lowering the cost of treatment
and improving the patient's quality of life during therapy. The Company's
targeted physician audience is made up of the approximately 2,000
community-based oncology group practices and 3,000 rheumatologists in the United
States, which are easily definable and can be accessed with a relatively small
United States-based sales force.
 
                                       24

<PAGE>   25
 
PRODUCTS UNDER DEVELOPMENT
 
     The Company's primary products under development address immune system
cancers, such as lymphomas, and autoimmune and inflammatory diseases, such as
rheumatoid arthritis. In addition, the Company has discovered certain other
products through the application of its technology platform. The products in
pre-clinical and clinical development by the Company include the following.
 

<TABLE>
<CAPTION>
                                                                           DEVELOPMENT/MARKETING
PRODUCT CANDIDATE          INDICATION                 STATUS(1)            PARTNER AND TERRITORY
- ------------------  -------------------------  ------------------------  --------------------------
<S>                 <C>                        <C>                       <C>
IMMUNE SYSTEM CANCER PRODUCTS
     IDEC-C2B8      Non-Hodgkin's B-cell       Phase III (patient        Genentech (U.S.)
                    lymphomas                  accrual completed)        Zenyaku (Japan)
                                                                         Hoffmann-La Roche
                                                                         (through Genentech, rest
                                                                         of world)

     IDEC-Y2B8      Non-Hodgkin's B-cell       Phase I/II                Genentech (worldwide)
                    lymphomas
                    (radioimmunotherapy)

     IDEC-In2B8     Non-Hodgkin's B-cell       Phase I/II                Genentech (worldwide)
                    lymphomas (tumor imaging
                    and dosimetry)

AUTOIMMUNE AND INFLAMMATORY PRODUCTS

     PRIMATIZED     Rheumatoid arthritis       Phase II (randomized,     SmithKline Beecham
       IDEC-CE9.1                              double-blinded, placebo-  (worldwide)
                                               controlled; patient
                                               treatment completed)

     PRIMATIZED     Asthma                     Phase II                  SmithKline Beecham
       IDEC-CE9.1                                                        (worldwide)

     PRIMATIZED     Various autoimmune         Lead compound selected    Mitsubishi (Asia)
       Anti-B7      diseases

     PRIMATIZED     Various allergic           Lead compound selected    Seikagaku (Europe and
       Anti-CD23    conditions                                           Asia)

     Humanized      Various autoimmune         Lead compound selected    Eisai (Europe and Asia)
       Anti-gp39    diseases

     PRIMATIZED     Various autoimmune         Discovery                 Eisai (Europe and Asia)
       Anti-gp39    diseases

OTHER PRODUCTS
     Human Anti-    Respiratory syncytial      Lead compounds selected   No current partner
       RSV          virus infection
       Antibodies

     PROVAX         Antigen formulation for    Phase I                   No current partner
                    therapeutic vaccination
</TABLE>

 
- ------------
(1) "Lead compound selected" means agents have been identified that meet
    preselected criteria in assays for activity and potency. "Phase I" means
    initial human studies designed to establish the safety, dose tolerance and
    pharmacokinetics of a compound. "Phase I/II" means initial human studies
    designed to establish the safety, dose tolerance and pharmacokinetics of a
    compound and which maybe designed to show preliminary activity of a compound
    in patients with the targeted disease. "Phase II" means human studies
    designed to establish safety, optimal dosage and preliminary activity of a
    compound. "Phase III" means human studies designed to lead to accumulation
    of data sufficient to support a PLA, including data relating to efficacy.
 
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<PAGE>   26
 
     IMMUNE SYSTEM CANCER PRODUCTS
 
     IDEC Pharmaceuticals' objective with respect to treating non-Hodgkin's
B-cell lymphomas is to use its pan-B antibodies to target, bind to and
selectively eliminate both the patient's normal and malignant B cells.
 
     IDEC-C2B8.  IDEC-C2B8 is a genetically engineered, chimeric pan-B antibody
designed to harness the patient's own immune mechanisms to destroy tumor cells.
Laboratory studies performed by the Company have shown that the antibody
attaches to the CD20 antigen on B cells and activates a group of proteins known
as "complement," leading to normal and malignant B-cell destruction.
Additionally, the antibody, when bound to the CD20 antigen, recruits macrophages
and natural killer cells to attack the B cell. Through these and other
mechanisms, the antibody utilizes the body's immune defenses to lyse (rupture)
and deplete B cells. B cells have the capacity to regenerate from early
precursor cells that do not express the CD20 determinant. The depletion of
normal B cells observed in clinical experience to date has been only temporary,
with normal B cell regeneration occurring within months. The capacity of a tumor
to regrow after treatment with IDEC-C2B8 will depend on the number of malignant
B cells, or malignant B-cell precursors (if the malignancy first appeared within
a precursor cell), remaining after treatment.
 
     In April 1995, the Company and Genentech began a pivotal Phase III trial of
IDEC-C2B8 at over 30 clinical sites including leading cancer centers in the
United States and Canada. Patient enrollment for this trial was completed in
March 1996. In this single-arm, single-agent Phase III clinical trial, patients
with low-grade or follicular non-Hodgkin's B-cell lymphomas receive four weekly
infusions of IDEC-C2B8. The study will evaluate the tumor response rate to
treatment and duration of response in approximately 150 patients with relapsed
disease. In May 1996, the Company announced preliminary results on the first 48
evaluable patients (out of 166 patients enrolled) in its pivotal Phase III trial
of IDEC-C2B8. The preliminary results confirmed the response rate and safety
profile of the antibody seen in clinical trials to date. Specifically, of the
first 48 evaluable patients, 23 responded to treatment with IDEC-C2B8, for an
overall response rate of 47.9%. Six of these responses were complete responses
(12.5%) and 17 were partial responses (35.4%).
 
     In October 1994, the Company completed the Phase II portion of a Phase I/II
clinical trial with IDEC-C2B8 involving 34 evaluable patients with relapsed
low-grade or follicular lymphomas who received four weekly infusions of
IDEC-C2B8. In this trial, 17 of 34 (50%) evaluable patients experienced a
complete or partial response (i.e., tumor shrinkage of 50% or greater), with
five of these patients having tumor remissions lasting for more than 20 months
without maintenance therapy; three of these remissions are ongoing for periods
ranging from over 20 months to over 23 months. In clinical trials to date,
IDEC-C2B8 as a single agent has shown response rates which are equivalent to or
greater than that produced by single agent chemotherapy, yet patients have
suffered neither the bone marrow damage nor the range and severity of other
toxicities associated with conventional cancer treatments. Furthermore,
treatment with IDEC-C2B8 can be completed in a matter of weeks rather than over
several months, which is typical of chemotherapy.
 
     In November 1995, the Company completed enrollment for a Phase II clinical
trial of IDEC-C2B8 in combination with chemotherapy for the treatment of
low-grade, B-cell lymphoma. In this trial, patients were given alternating
cycles of IDEC-C2B8 and CHOP combination chemotherapy (cyclophosphamide,
doxorubicin, vincristine and prednisone), beginning and ending with the
antibody. In this ongoing combination therapy trial, all of the patients treated
to date have responded (100% overall response rate), while 28 out of 29 patients
have ongoing responses ranging from over six to over 22 months. Of the 29
patients completing all scheduled treatments, 19 (66%) have achieved a complete
response and 10 (34%) have achieved a partial response. In addition, because
IDEC-C2B8's mode of action is separate from that of conventional anti-cancer
drugs, the two treatments do not exhibit overlapping toxicities. The addition of
IDEC-C2B8 to the conventional chemotherapy regimen is designed to extend both
the quality and duration of tumor remissions achievable with chemotherapy alone,
without adding significantly to the toxicity of chemotherapy. This trial is
being conducted in parallel with ongoing studies of IDEC-C2B8 as a single agent
for treatment of lymphoma, and is an additional step in the development of this
product to show the possible breadth of applications of antibody therapy for
treatment of lymphomas.
 
     In addition to these findings, the Company observed, following combination
treatment with chemotherapy in six of seven patients, the disappearance from
their bone marrow of bcl-2, a chromosomal marker
 
                                       26

<PAGE>   27
 
associated with malignant cells, which was present prior to treatment. In the
pivotal Phase III trial as reported in May 1996, 28 patients who had completed
therapy with IDEC-C2B8 were evaluated for the presence of the bcl-2 tumor marker
either in the blood or in the marrow. The blood test showed 12 of 16 patients
converting from positive to negative bcl-2 status and the marrow sampling showed
six of 12 patients converting. Tracking this marker may provide information on
patient outcome, as well as a way to monitor minimal residual disease after
therapy. Research has shown that patients treated with conventional chemotherapy
alone do not become bcl-2 negative in the bone marrow. In addition, the presence
of residual bcl-2 positive cells in reinfused, purged autologous bone marrow
appears to correspond to a significantly increased risk of relapse in lymphoma
patients undergoing bone marrow transplantation. In future clinical studies, the
Company plans to evaluate further the effect of IDEC-C2B8 on this chromosomal
marker.
 
     IDEC-Y2B8 and IDEC-In2B8.  Due to the sensitivity of B-cell tumors to
radiation, radiation therapy has historically played, and continues to play, an
important role in the management of B-cell lymphomas. Radiation therapy
currently consists of external beam radiation focused on certain areas of the
body with tumor burden. IDEC Pharmaceuticals is developing two antibody products
which are intended to deliver targeted immunotherapy by means of injectable
radiation to target sites expressing the CD20 determinant, such as lymphatic
B-cell tumors. In clinical testing, IDEC-In2B8 is first used to image the
patient's tumor and to provide information for determining the proper dose of
the therapeutic product. The low-energy gamma particle emitted by IDEC-In2B8 is
detectable outside the body, thereby allowing an image to be taken. The
companion therapeutic product, IDEC-Y2B8, provides targeted radiation therapy by
emitting a high-energy beta particle which is absorbed by surrounding tissue,
leading to tumor destruction. The Company's objective with these products is to
provide safer, more effective radiation therapy than is possible with external
beam radiation and to provide this radiation therapy in an outpatient setting.
 
     IDEC-Y2B8 is an anti-CD20 murine antibody that is radiolabeled with the
isotope yttrium-90. This radioisotope is well suited for therapeutic purposes
because of its energy, radius of activity and half-life. It emits only beta
radiation. Other radioisotopes, such as iodine-131, emit both beta and gamma
radiation and at certain therapeutic doses require that the patient be
hospitalized and isolated in a lead-shielded room for several days. In contrast,
the beta particle emitted by yttrium-90 is absorbed by tissue immediately
adjacent to the antibody. The Company believes that this short penetrating
radiation will permit the use of the product in outpatient therapy.
 
     The Company completed a dose-escalating Phase I clinical trial with
IDEC-Y2B8 in early 1995. Response rates for this trial from single doses of
IDEC-Y2B8 in 14 patients included four complete responses (28%) and five partial
responses (36%) for an overall response rate (complete plus partial responses)
of 64%. Single doses of IDEC-Y2B8 showed clinical activity comparable to that of
intensive, multiple dose, salvage chemotherapy, with response durations
exceeding those of the patients' most recent chemotherapy. Starting at low doses
(20 milliCuries of yttrium-90), each patient in a group of three was given a
measured dose of radiation. As each radiation dose level was shown to be well
tolerated, each patient in a subsequent group was given a higher dose (up to 50
milliCuries of yttrium-90). As expected, at higher radiation doses, there was
observed destruction of cells in the bone marrow in addition to anti-tumor
activity. This adverse side effect was managed through autologous bone marrow
transplantation, involving the reconstitution of bone marrow from the patient's
own bone marrow cells and/or peripheral blood stem cells which were harvested
and, to the extent possible, purged of malignant cells prior to radiation
therapy. Three patients over 17 courses of therapy required this type of
supportive treatment following radiation therapy with IDEC-Y2B8. During 1996,
the Company and Genentech plan to initiate a Phase I/II clinical trial of
IDEC-Y2B8 using a kit that simplifies product administration.
 
     AUTOIMMUNE AND INFLAMMATORY PRODUCTS
 
     IDEC Pharmaceuticals is developing a new class of antibodies, termed
PRIMATIZED antibodies, that are of part human, part macaque monkey, origin.
These antibodies are structurally similar to, and potentially indistinguishable
by a patient's immune system from, human antibodies. PRIMATIZED antibodies may
provide therapeutic intervention for diseases or conditions not amenable to
chronic treatment with mouse-derived antibodies. The Company's objective with
its PRIMATIZED antibodies is to provide therapies that
 
                                       27

<PAGE>   28
 
can be used to control autoimmune diseases characterized by overactive immune
functions. The Company has entered into research and development collaborations
with SmithKline Beecham, Mitsubishi, Seikagaku and Eisai which all utilize the
Company's PRIMATIZED technology and which target distinct, cell surface
determinants. See "-- Strategic Alliances."
 
   
     PRIMATIZED IDEC-CE9.1.  Through its collaboration with SmithKline Beecham,
IDEC Pharmaceuticals is developing therapeutic products for the treatment of
autoimmune disease based on PRIMATIZED anti-CD4 antibodies. In order to develop
a PRIMATIZED anti-CD4 antibody, Company scientists immunized macaque monkeys
with the human CD4 antigen and harvested the resulting antibody-producing immune
cells. The gene responsible for the production of the desired anti-CD4 antibody
was isolated and used to develop the PRIMATIZED anti-CD4 antibody, IDEC-CE9.1.
This antibody consists of a variable region from a macaque monkey and a constant
region, that portion responsible for interaction with the immune system, from a
human. Upon analysis of the amino acid sequences comprising the IDEC-CE9.1
antibody, its structure was found to be indistinguishable from antibodies
normally produced by humans. In addition, IDEC-CE9.1 binds tightly to the CD4
antigen and exhibits desirable immunosuppressive activities. In October 1995,
the Company and SmithKline Beecham completed a Phase I/II clinical trial of
IDEC-CE9.1. The Phase I/II trial was a multi-dose, dose-escalating study of
IDEC-CE9.1 in 40 patients with moderate to severe rheumatoid arthritis. In the
study, 20 of the 40 patients treated over all dose groups experienced a
reduction of at least 20% in their rheumatoid arthritis symptoms (as measured by
the American College of Rheumatology criteria) and 13 of these responders showed
improvement of greater than 50%. These results were obtained without
infusion-related or serious therapy-related adverse effects, diminution of
therapeutic response following repeat administration or prolonged T-cell
depletion that others have observed with other anti-CD4 antibodies. SmithKline
Beecham is conducting a second, larger Phase II study of IDEC-CE9.1 in patients
with rheumatoid arthritis, that is randomized, double-blinded and placebo-
controlled; patient treatment in this trial was completed in the first quarter
of 1996. In late May 1996, SmithKline Beecham unblinded the 136 patient Phase II
study and observed positive clinical activity for IDEC-CE9.1 versus the placebo
arm of the study. Over the next few months, SmithKline Beecham will complete its
analysis of the Phase II data and determine how to proceed with future
development of IDEC-CE9.1 in rheumatoid arthritis. In addition, IDEC
Pharmaceuticals and SmithKline Beecham have begun expanding their investigation
of IDEC-CE9.1 for potential use in the treatment of asthma.
    
 
     PRIMATIZED Anti-B7.  In November 1993, the Company entered into a research
and development collaboration with Mitsubishi that focuses on the development of
PRIMATIZED antibodies directed at a B7 determinant. This B7 determinant appears
on the surface of antigen-presenting cells and is involved in the interaction of
these cells with T cells in triggering a cascade of immune system responses.
Antibodies directed at B7 determinants may block this cascade and, therefore,
may be useful in preventing unwanted immune responses in certain inflammatory
and chronic autoimmune conditions. Mitsubishi has actively shared in the
development process, generating animal models and participating in research with
the Company. This effort has resulted in the identification of a PRIMATIZED
antibody lead candidate which will undergo preclinical testing, process
development and manufacturing of clinical material during 1996.
 
     PRIMATIZED Anti-CD23.  In December 1994, the Company entered into a
collaboration with Seikagaku aimed at the development of PRIMATIZED anti-CD23
antibodies for the potential treatment of allergic rhinitis, asthma and other
allergic conditions. Antibodies against the CD23 receptor on certain white blood
cells inhibit the production of immune system molecules called immunoglobulin
class E, or IgE, which are known to trigger allergic conditions. At the same
time, anti-CD23 antibodies do not affect the production of the immunoglobulins
(the patient's own antibodies) responsible for granting protective immunity to
infectious agents. Thus, PRIMATIZED anti-CD23 antibodies may provide a unique
new approach to treating chronic illnesses such as allergic rhinitis and asthma.
This effort has resulted in the identification of a PRIMATIZED antibody lead
candidate which will undergo preclinical testing, process development and
manufacturing of clinical material during 1997.
 
     Humanized and PRIMATIZED Anti-gp39.  In December 1995, the Company entered
into a research and development collaborative agreement with Eisai. The
collaboration focuses on developing humanized and PRIMATIZED antibodies against
the gp39 antigen. This antigen, also referred to as the CD40 ligand, is an
essential immune system trigger for B-cell activation and antibody production.
Potential target indications
 
                                       28

<PAGE>   29
 
include transplantation and antibody-mediated autoimmune diseases such as
idiopathic thrombocytopenic purpura ("ITP") and SLE.
 
     The development of a humanized anti-gp39 antibody is based on technology
that the Company licensed from Dartmouth University where researchers have shown
that the binding of gp39 to its CD40 receptor on B cells is essential for proper
immune system function. These researchers generated anti-gp39 antibodies that
blocked this T-cell and B-cell interaction and halted disease progression in a
variety of animal models of disease characterized by abnormal or unwanted immune
response. Moreover, when researchers ended the animals' anti-gp39 treatments,
the animals' antibody-producing capacity returned to normal levels, but their
disease remained suppressed. Treatment with the anti-gp39 antibodies appeared to
have reset the animals' immune systems and restored a normal immune response.
Under the collaborative agreement, the Company and Eisai have agreed to develop
a humanized anti-gp39 antibody and launch additional efforts to develop a second
generation, PRIMATIZED anti-gp39 antibody. This effort has resulted in the
identification of a humanized anti-gp39 antibody lead candidate which will
undergo preclinical testing, process development and manufacturing of clinical
trial material in late 1996 or early 1997.
 
  OTHER PRODUCTS
 
     The Company has discovered certain other products through the application
of its technology platform.
 
     Human Anti-RSV Antibodies.  The Company has applied its technology to the
discovery and generation of fully human antibodies directed against the
respiratory syncytial virus ("RSV") which infects the lungs. RSV is responsible
for approximately 100,000 hospitalizations in the United States each year. The
Company intends to seek a commercial strategic partner with an infectious
disease franchise to conduct human clinical studies and to commercialize the
anti-RSV antibodies.
 
     PROVAX.  The Company has developed a proprietary antigen formulation,
PROVAX, that when mixed with soluble antigens, safely induces specific cytotoxic
T-lymphocyte ("CTL") responses, as well as strong antibody responses. CTLs are
important effectors of the immune response against virally infected or cancerous
cells and act by recognizing specific antigen fragments on those cells. The
Company announced in December 1995 that it had received a notice of allowance
for a United States patent covering methods using PROVAX to induce specific
CTL-mediated responses in humans and animals. The Company intends to seek
strategic partners for the development of PROVAX as an antigen formulation for
therapeutic vaccines.
 
     Research and development expenses of the Company were $18.7 million, $21.2
million and $22.5 million in 1993, 1994 and 1995, respectively, and $5.5 million
and $5.6 million in the three months ended March 31, 1995 and 1996,
respectively. See "-- Strategic Alliances."
 
STRATEGIC ALLIANCES
 
     The Company has entered into one or more strategic partnering arrangements
for each of its principal product development programs. Through these strategic
partners, the Company is funding a significant portion of its product
development costs and is capitalizing on the production, development,
regulatory, marketing and sales capabilities of its partners. Unless otherwise
indicated, the amounts shown below as potential payments include license fees,
research and development fees and, with respect to Genentech, SmithKline Beecham
and Zenyaku, equity investments, but do not include potential royalties. The
Company's entitlement to such payments depends on achieving milestones related
to development, clinical trials results and regulatory approvals and other
factors. These arrangements include:
 
     Genentech, Inc.  In March 1995, the Company and Genentech entered into a
collaborative agreement for the clinical development and commercialization of
the Company's anti-CD20 monoclonal antibody, IDEC-C2B8, for the treatment of
non-Hodgkin's B-cell lymphomas. In February 1996, the parties extended this
collaboration to include two radioconjugates, IDEC-Y2B8 and IDEC-In2B8.
Concurrent with the collaborative agreement, the Company and Genentech also
entered into an expression technology license agreement for a proprietary gene
expression technology developed by the Company and a preferred stock purchase
agreement providing for certain equity investments in the Company by Genentech.
Under the terms of these agreements, the Company may receive payments totaling
$57.0 million, subject to the attainment of certain milestones, of which $19.5
million has been recognized as of March 31, 1996. In addition, the
 
                                       29

<PAGE>   30
 
Company and Genentech will co-promote IDEC-C2B8 in the United States and the
Company and Genentech or its sublicensee will co-promote IDEC-C2B8 in Canada,
with the Company receiving a share of profits. Genentech will retain
commercialization rights throughout the rest of the world, except in Japan where
Zenyaku will be responsible for development, marketing and sales. Genentech has
granted Hoffmann-La Roche marketing rights outside of the United States. The
Company will receive royalties on sales outside the United States and Canada.
Additionally, pursuant to an expression technology license agreement, the
Company is entitled to receive royalties on sales of Genentech products
manufactured using the Company's proprietary gene expression technology.
Genentech may terminate this agreement for any reason beginning on the date of
availability of data from the first Phase III clinical trial of IDEC-C2B8. In
connection with the collaboration, Genentech purchased shares of the Company's
convertible preferred stock. The collaborative agreement between the Company and
Genentech provides two independent mechanisms by which either party may purchase
or sell its rights in the co-promotion territory from/to the other party. Upon
the occurrence of certain events that constitute a change of control of the
Company, Genentech may elect to present an offer to the Company to purchase the
Company's co-promotion rights. The Company must then accept Genentech's offer or
purchase Genentech's co-promotion rights for an amount scaled (using the profit
sharing ratio between the parties) to Genentech's offer. Under a second
mechanism, after a specified period of commercial sales and (i) upon a certain
number of years of declining co-promotion profits or (ii) if Genentech files for
U.S. regulatory approval on a competitive product during a limited period of
time, either party may offer to purchase the other party's co-promotion rights.
The offeree may either accept the offer price or purchase the offeror's
co-promotion rights at the offer price scaled to the offeror's share of
co-promotion profits. See "Principal Shareholders" and "Description of Capital
Stock."
 
     SmithKline Beecham, p.l.c.  In October 1992, the Company and SmithKline
Beecham entered into an exclusive worldwide collaborative research and license
agreement limited to the development and commercialization of therapeutic
products based on the Company's PRIMATIZED anti-CD4 antibodies. Under the terms
of this agreement, the Company may receive payments in excess of $60.0 million,
subject to the attainment of certain milestones, of which $28.6 million has been
recognized as of March 31, 1996. The Company will receive funding for anti-CD4
related research and development programs, as well as royalties and a share of
co-promotion profits in the United States and Canada on sales of products which
may be commercialized as a result of the collaboration. At any time, SmithKline
Beecham may terminate this agreement by giving the Company 30 days' written
notice based on a reasonable determination that the products do not justify
continued development or marketing. In connection with the collaboration,
SmithKline Beecham purchased shares of Common Stock and warrants exercisable
into Common Stock. See "Principal Shareholders."
 
     Mitsubishi Chemical Corporation.  In November 1993, the Company entered
into a three-year collaborative agreement with Mitsubishi for the development of
a PRIMATIZED anti-B7 antibody. The Company and Mitsubishi are currently in
discussions with Mitsubishi to extend the term of the agreement; there can be no
assurance that such discussions will be successful. Under the terms of the
agreement, the Company may receive payments totaling $12.2 million to fund
research of the PRIMATIZED anti-B7 antibody, subject to the attainment of
certain milestones, of which $5.7 million has been recognized as of March 31,
1996. Under the agreement, the Company has granted Mitsubishi an exclusive
license in Asia to make, use and sell PRIMATIZED anti-B7 antibody products. The
Company will receive royalties on sales of the developed products by Mitsubishi.
At any time, Mitsubishi may terminate this agreement by giving the Company 30
days' written notice based on a reasonable determination that the products do
not justify continued development or marketing or based on failure to reach
milestones.
 
     Seikagaku Corporation.  In December 1994, the Company and Seikagaku entered
into a collaborative development agreement and a license agreement aimed at the
development and commercialization of therapeutic products based on the Company's
PRIMATIZED anti-CD23 antibodies. Under the terms of these agreements, Seikagaku
may provide up to $26.0 million in milestone payments and support for research
and development, subject to the attainment of certain milestones, of which $5.4
million has been recognized as of March 31, 1996. Under the agreement, Seikagaku
has received exclusive rights in Europe and Asia to all products emerging from
the collaboration. The Company will receive royalties on eventual product sales
by
 
                                       30

<PAGE>   31
 
Seikagaku. At any time, Seikagaku may terminate this agreement by giving the
Company 60 days' written notice based on a reasonable determination that the
products do not justify continued development or marketing.
 
     Eisai Co., Ltd.  In December 1995, the Company and Eisai entered into a
collaborative development agreement and a license agreement aimed at the
development and commercialization of humanized and PRIMATIZED anti-gp39
antibodies. Under the terms of these agreements, Eisai may provide up to $37.5
million in milestone payments and support for research and development, subject
to the attainment of certain milestones, of which $5.9 million has been
recognized as of March 31, 1996. Eisai will receive exclusive rights in Asia and
Europe to develop and market resulting products emerging from the collaboration,
with the Company receiving royalties on eventual product sales by Eisai. At any
time, Eisai may terminate this agreement by giving the Company 60 days' written
notice based on a reasonable determination that the products do not justify
continued development or marketing.
 
     Chugai Pharmaceutical Co., Ltd.  In March 1996, the Company and Chugai
entered into a worldwide license agreement (co-exclusive with IDEC
Pharmaceuticals, Genentech and up to two additional companies) for IDEC
Pharmaceuticals' proprietary vector technology for high expression of
recombinant proteins in mammalian cells. As part of the agreement, Chugai paid
an upfront licensing fee of $4.5 million to IDEC Pharmaceuticals, and will pay
royalties on sales of Chugai products manufactured using the technology.
 
MANUFACTURING
 
     From its inception, the Company has focused on establishing and maintaining
a leadership position in cell culture techniques for antibody manufacturing.
Cell culture provides a method for GMP manufacturing of clinical and commercial
grade protein products by reproducible techniques at various scales, up to many
kilograms of antibody. The Company's state-of-the-art manufacturing facility is
based on the suspension culture of mammalian cells in stainless steel vessels.
Suspension culture fermentation provides greater flexibility and more rapid
production of the large amounts of antibodies required for pivotal trials than
the bench-scale systems that were previously utilized by the Company. During
1995, the Company doubled the cell culture manufacturing capacity of its
facility with the installation of a second 2,750-liter production vessel that is
supported by existing upstream and downstream equipment. Consequently, the
Company believes it may be able to utilize its current facility for the early
commercialization of IDEC-C2B8 in the United States prior to relying on
additional capacity from a larger manufacturing plant currently under
construction by Genentech. Currently, the manufacturing facility is used to
produce clinical material for IDEC and to do contract manufacturing for Upjohn &
Pharmacia and Oravax. However, commercial sale of product manufactured at the
Company's manufacturing facility may occur only after approval of a BLA
including facility inspection by the FDA. See "-- Government Regulation." The
Company's facility is designed to provide same-site, same-scale manufacture of
products for both pivotal trial and commercial uses.
 
     During 1996, the Company will manufacture IDEC-C2B8, IDEC-Y2B8, IDEC-In2B8
and other product candidates for clinical trials at its manufacturing facility
in San Diego, California. The Company anticipates that its facility in San Diego
should provide sufficient production capacity to meet clinical and early
commercial requirements of IDEC-C2B8. The Company is relying on Genentech to
fulfill long-term manufacturing demands for its IDEC-C2B8 product and SmithKline
Beecham to fulfill all of the manufacturing requirements for IDEC-CE9.1. The
Company is considering the addition of another manufacturing facility to meet
its long-term requirements for its future pipeline products.
 
     The Company has developed a method of engineering mammalian cell cultures
using a proprietary gene expression technology that rapidly and reproducibly
selects for stable cells, producing high levels of desired proteins. This
technology allows the efficient production of proteins at yields that may be
significantly higher, and costs that may be significantly lower, than current,
competing cell culture methods. IDEC Pharmaceuticals has successfully applied
this technology to the commercial scale production of IDEC-C2B8.
 
     The Company has made its production technology platform available for
licensing to a small number of other biopharmaceutical and pharmaceutical
companies. In March 1995, Genentech, one of the premier companies in recombinant
DNA-based production, became the first to license the Company's gene expression
 
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<PAGE>   32
 
technology for its own product development efforts. This technology has also
been licensed to Chugai. Additionally, the Company is applying its gene
expression technology on a contract basis to develop specific high-yielding cell
lines for firms seeking to shorten product development cycles and reduce
production costs. In 1995, the Company established cell line development
contracts with Hoffmann-La Roche, Biogen and Pharmacia & Upjohn and
manufacturing contracts with OraVax and Pharmacia & Upjohn.
 
PATENTS AND PROPRIETARY TECHNOLOGY
 
     The biopharmaceutical field is characterized by a large number of patent
filings. A substantial number of patents have already been issued to other
biotechnology and biopharmaceutical companies. Particularly in the monoclonal
antibody field, competitors may have filed applications for or have been issued
patents and may obtain additional patents and proprietary rights relating to
products or processes competitive with or similar to those of the Company. To
date, no consistent policy has emerged regarding the breadth of claims allowed
in biopharmaceutical patents. There can be no assurance that patents do not
exist in the United States or in foreign countries or that patents will not be
issued that would have an adverse effect on the Company's ability to market its
products. Accordingly, the Company expects that commercializing monoclonal
antibody-based products may require licensing and/or cross-licensing of patents
with other companies in the field. There can be no assurance that the licenses,
which might be required for the Company's processes or products, would be
available on commercially acceptable terms, it at all. The ability to license
any such patents and the likelihood of successfully contesting the scope or
validity of such patents are uncertain and the costs associated therewith may be
significant. If the Company is required to acquire rights to valid and
enforceable patents but cannot do so at a reasonable cost, the Company's ability
to manufacture or market its products would be materially adversely affected.
 
     IDEC Pharmaceuticals holds one issued and one allowed United States patent,
18 United States patent applications and numerous corresponding foreign patent
applications. Certain other patents and/or applications owned by third parties
have been exclusively licensed, as in the case of anti-gp39 technology licensed
from Dartmouth University, or non-exclusively licensed by IDEC Pharmaceuticals.
The Company has filed trademark applications in the United States, Canada and in
certain international markets for the trademarks "PRIMATIZED," "PROVAX," "IDEC
Pharmaceuticals" and the Company's stylized logo. "IDEC Pharmaceuticals," the
logo and "PRIMATIZED" have been registered as trademarks in the United States.
 
     The Company has a pending United States patent application and foreign
counterparts broadly directed to its pan-B antibody technology, including
IDEC-C2B8, and the radioimmunoconjugates, IDEC-Y2B8 and IDEC-In2B8. The
Company's radioimmunoconjugate products include a patented chelating agent that
is non-exclusively licensed to the Company. The Company has received a Decision
to Grant from the European Patent Office on a patent covering IDEC-C2B8.
Genentech, IDEC Pharmaceuticals' collaborative partner for IDEC-C2B8, has
recently secured an exclusive license to a United States patent and counterpart
foreign patent applications assigned to Xoma Corporation ("XOMA") that relate to
chimeric antibodies against the CD20 antigen. Genentech has granted IDEC
Pharmaceuticals a sublicense to make, have made, use, and sell certain products,
including IDEC-C2B8, under such patents/applications. Genentech and the Company
will share certain up-front licensing fees and any royalties due to XOMA in the
Genentech/IDEC co-promotion territory.
 
     The Company has filed for worldwide patent protection on its PRIMATIZED
antibody technology. In March 1996, the Company received a Notice of Allowance
for a United States patent application claiming the Company's PRIMATIZED
antibodies. These applications generically and specifically cover the Company's
PRIMATIZED antibody technology.
 
     PROVAX, the Company's antigen formulation, is the subject matter of an
issued United States Patent; foreign counterparts are pending. In addition,
United States and foreign patent applications have been filed on aspects of the
Company's proprietary high-yield gene expression technology.
 
                                       32

<PAGE>   33
 
     Specifically, the Company is aware of several patents and patent
applications which may affect the Company's ability to make, use and sell its
products, including:
 
          (i) United States patent applications and foreign counterparts filed
     by Bristol-Myers that disclose antibodies to a B7 antigen.
 
          (ii) A recently issued United States patent assigned to Columbia
     University which the Company believes has been exclusively licensed to
     Biogen, disclosing monoclonal antibodies to the 5C8 antigen found on T
     cells. The Company believes the 5C8 antigen and gp39, the target for the
     Company's anti-gp39 antibodies and its collaboration with Eisai, may be the
     same protein expressed on the surface of T cells.
 
          (iii) A European patent issued in January 1996 to Protein Design Labs
     which discloses methods of making amino acid substitutions in antibody
     structures and may relate to the Company's "humanized" anti-gp39 antibody
     being developed in collaboration with Eisai.
 
          (iv) A number of issued patents that relate to various aspects of
     radioimmunotherapy and to methods of treating patients with anti-CD4
     antibodies.
 
     The owners, or licensees of the owners, of these patents may assert that
one or more of the Company's products infringe one or more claims of such
patents. If legal action is commenced against the Company to enforce any of
these patents and the plaintiff in such action prevails, the Company could be
prevented from practicing the subject matter claimed in such patents. In such
event or under other appropriate circumstances, the Company may attempt to
obtain licenses to such patents. However, no assurance can be given that any
owner would license the patents to the Company, at all or on terms that would
permit commercialization of the Company's products using such technology. An
inability to commercialize such products would have a material adverse effect on
the Company's operations and ability to pursue its long-term objectives.
 
     If the Company is required to enforce any of its patents, such enforcement
may require the use of substantial financial and human resources of the Company.
The Company may also have to participate in interference proceedings if declared
by the United State Patent and Trademark Office to determine priority of
invention, which typically take years to resolve and could also result in
substantial costs to the Company. Moreover, should the Company need to
circumvent existing patents, substantial delays and expense in product redesign
and development or significant legal expense and uncertainty in asserting
non-infringement, invalidity and/or unenforceability of any patent may also
result. The Company also relies upon unpatented trade secrets, and no assurance
can be given that others will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to the Company's
trade secrets or disclose such technology, or that the Company can meaningfully
protect such rights.
 
     IDEC Pharmaceuticals requires its employees, consultants, outside
scientific collaborators and sponsored researchers and other advisers to execute
confidentiality agreements upon the commencement of employment or consulting
relationships with the Company. These agreements provide that all confidential
information developed or made known to the individual during the course of the
individual's relationship with IDEC Pharmaceuticals is to be kept confidential
and not disclosed to third parties except in specific circumstances. In the case
of employees of the Company, the agreement provides that all inventions
conceived by such employees shall be the exclusive property of the Company.
There can be no assurance, however, that these agreements will provide
meaningful protection or adequate remedies for the Company's trade secrets in
the event of unauthorized use or disclosure of such information.
 
COMPETITION
 
     The development of therapeutic agents for human disease is intensely
competitive. Many different approaches are being developed or have already been
adopted into routine use for the management of diseases targeted by the Company.
Competitive approaches to the Company's products include radioimmunotherapies
and antibody-drug and antibody-toxin conjugates for cancers, and
chemotherapeutic agents and various immunologically based agents for cancers and
autoimmune disorders. Ultimately, the Company believes that
 
                                       33

<PAGE>   34
 
its products will be competitive or complementary to existing products and other
products still in development. In some cases, the Company's products may be used
along with other agents in "combination therapies."
 
     Many of the Company's existing or potential competitors have substantially
greater financial, technical and human resources than the Company and may be
better equipped to develop, manufacture and market products. In addition, many
of these companies have extensive experience in preclinical testing and human
clinical trials. These companies may develop and introduce products and
processes competitive with or superior to those of the Company. The Company is
aware that certain other companies are in the process of clinical testing of
potentially competitive biotechnology-based products. If approved for the same
indications for which the Company is developing products, such products may make
it more difficult for the Company to obtain approval of its own products or
reduce the potential market shares for the Company's products.
 
     The Company's competition will be determined in part by the potential
indications for which the Company's antibodies are developed and ultimately
approved by regulatory authorities. For certain of the Company's potential
products, an important factor in competition may be the timing of market
introduction versus that of competitive products. Accordingly, the relative
speed with which the Company develops its products, completes the required
approval processes and generates and markets commercial product quantities are
expected to be important competitive factors. The Company expects that
competition among products approved for sale will be based, among other factors,
on product activity, safety, reliability, availability, price, patent position
and new usage and purchasing patterns established by managed care and other
group purchasing organizations.
 
     The Company's competitive position also depends upon its ability to attract
and retain qualified personnel, obtain patent protection or otherwise develop
proprietary products or processes, secure sufficient capital resources to
complete product development and regulatory processes, to build a marketing and
sales organization, and to build or obtain large-scale manufacturing facilities,
if required beyond its facility in San Diego.
 
GOVERNMENT REGULATION
 
     The testing, manufacturing, labeling, advertising, promotion, export and
marketing, among other things, of the Company's proposed products are subject to
extensive regulation by governmental authorities in the United States and other
countries. In the United States, pharmaceutical products are regulated by the
FDA under the Federal Food, Drug, and Cosmetic Act and other laws, including, in
the case of biologics, the Public Health Service Act. At the present time, the
Company believes that its products will be regulated by the FDA as biologics.
Manufacturers of biologics may also be subject to state regulation.
 
     The steps required before a biologic may be approved for marketing in the
United States generally include (i) preclinical laboratory tests and animal
tests, (ii) the submission to the FDA of an IND for human clinical testing,
which must become effective before human clinical trials may commence, (iii)
adequate and well-controlled human clinical trials to establish the safety and
efficacy of the product, (iv) the submission to the FDA of a PLA and ELA, or in
certain circumstances (discussed below) a BLA, (v) FDA review of the PLA and the
ELA, or, where applicable, the BLA, and (vi) satisfactory completion of an FDA
inspection of the manufacturing facility or facilities at which the product is
made to assess compliance with GMP. The testing and approval process requires
substantial time, effort, and financial resources and there can be no assurance
that any approval will be granted on a timely basis, if at all.
 
     Preclinical tests include laboratory evaluation of the product, as well as
animal studies to assess the potential safety and efficacy of the product. The
results of the preclinical tests, together with manufacturing information and
analytical data, are submitted to the FDA as part of an IND, which must become
effective before human clinical trials may be commenced. The IND will
automatically become effective 30 days after receipt by the FDA, unless the FDA
before that time raises concerns or questions about the conduct of the trials as
outlined in the IND. In such a case, the IND sponsor and the FDA must resolve
any outstanding concerns before clinical trials can proceed. There can be no
assurance that submission of an IND will result in FDA authorization to commence
clinical trials.
 
                                       34

<PAGE>   35
 
     Clinical trials involve the administration of the investigational product
to healthy volunteers or patients under the supervision of a qualified principal
investigator. Further, each clinical study must be reviewed and approved by an
independent Institutional Review Board.
 
     Clinical trials typically are conducted in three sequential phases, but the
phases may overlap. In Phase I, the initial introduction of the drug into human
subjects, the drug is usually tested for safety (adverse effects), dosage
tolerance, absorption, metabolism, distribution, excretion and pharmacodynamics.
Phase II usually involves studies in a limited patient population to (i)
evaluate preliminarily the efficacy of the drug for specific, targeted
indications, (ii) determine dosage tolerance and optimal dosage and (iii)
identify possible adverse effects and safety risks. Phase III trials generally
further evaluate clinical efficacy and test further for safety within an
expanded patient population.
 
     In the case of products for severe or life-threatening diseases, the
initial human testing is sometimes done in patients rather than in healthy
volunteers. Since these patients are already afflicted with the target disease,
it is possible that such studies may provide evidence of efficacy traditionally
obtained in Phase II trials. These trials are frequently referred to as "Phase
I/II" trials. There can be no assurance that Phase I, Phase II or Phase III
testing will be completed successfully within any specific time period, if at
all, with respect to any of the Company's product candidates. Furthermore, the
FDA may suspend clinical trials at any time on various grounds, including a
finding that the subjects or patients are being exposed to an unacceptable
health risk.
 
     The results of the preclinical studies and clinical studies, together with
detailed information on the manufacture and composition of the product, are
submitted to the FDA in the form of a PLA/ELA or BLA requesting approval to
market the product. Before approving a PLA/ELA or BLA, the FDA will inspect the
facilities at which the product is manufactured, and will not approve the
product unless GMP compliance is satisfactory. The FDA may deny a PLA/ELA or BLA
if applicable regulatory criteria are not satisfied, require additional testing
or information, and/or require postmarketing testing and surveillance to monitor
the safety or efficacy of a product. There can be no assurance that FDA approval
of any PLA/ELA or BLA submitted by the Company will be granted on a timely basis
or at all. Also, if regulatory approval of a product is granted, such approval
may entail limitations on the indicated uses for which it may be marketed.
 
     On May 14, 1996, the FDA adopted a new regulation, effective May 24, 1996,
regarding the license application process for certain biological products. Those
biological products that fall within the regulation will be reviewed on the
basis of a single BLA, rather than a PLA/ELA. The BLA includes the same
information as the current PLA, but certain of the data now required as part of
the ELA do not have to be submitted or reviewed during the approval process.
This new rule is intended, at least in part, to lessen the regulatory burden on
manufacturers of certain biologics and accelerate the approval process. The
Company believes that its products currently in clinical trials fall within the
new regulation as monoclonal antibody products for in-vivo use. There can be no
assurance, however, that the FDA will consider the new regulation applicable to
any of the Company's products, or that the BLA process, if applicable to the
Company's products, will have the intended effect of reducing review times.
 
     Additionally, in March 1996, the FDA announced a new policy intended to
accelerate the approval process for cancer therapies. Previously, cancer
therapies have been approved primarily on the basis of data regarding patient
survival rates and/or improved quality of life. Evidence of partial tumor
shrinkage, while often part of the data relied on for approval, was considered
insufficient by itself to warrant approval of a cancer therapy, except in
limited situations. Under the FDA's new policy, which became effective
immediately, the FDA has significantly broadened the circumstances in which
evidence of partial tumor shrinkage is considered sufficient for approval. This
policy is intended to make it easier to study cancer therapies and shorten the
total time for marketing approvals.
 
     As a general matter, data regarding partial tumor shrinkage can be
developed in less time than survival data, and it may therefore be possible
under this policy to submit a BLA (or PLA/ELA if necessary) for cancer therapies
earlier than had previously been anticipated. There can be no assurance,
however, that the FDA's new policy will be deemed to apply to IDEC-C2B8 or any
of the Company's other products, or that, if applicable, the policy will, in
fact, accelerate the approval process. Moreover, the accelerated approval
process does not necessarily increase the likelihood that any of the Company's
products will be approved by the FDA.
 
                                       35

<PAGE>   36
 
Both before and after approval is obtained, violations of regulatory
requirements, including the preclinical and clinical testing process, the
PLA/ELA or BLA review process, or thereafter (including after approval) may
result in various adverse consequences, including the FDA's delay in approving
or refusal to approve a product, withdrawal of an approved product from the
market, and/or the imposition of criminal penalties against the manufacturer
and/or license holder. For example, license holders are required to report
certain adverse reactions to the FDA, and to comply with certain requirements
concerning advertising and promotional labeling for their products. Also,
quality control and manufacturing procedures must continue to conform to GMP
regulations after approval, and the FDA periodically inspects manufacturing
facilities to assess compliance with GMP. Accordingly, manufacturers must
continue to expend time, monies and effort in the area of production and quality
control to maintain GMP compliance. In addition, discovery of problems may
result in restrictions on a product, manufacturer or license holder, including
withdrawal of the product from the market. Also, new government requirements may
be established that could delay or prevent regulatory approval of the Company's
products under development.
 
     The Company will also be subject to a variety of foreign regulations
governing clinical trials and sales of its products. Whether or not FDA approval
has been obtained, approval of a product by the comparable regulatory
authorities of foreign countries must be obtained prior to the commencement of
marketing of the product in those countries. The approval process varies from
country to country and the time may be longer or shorter than that required for
FDA approval. At least initially, the Company intends, to the extent possible,
to rely on foreign licensees to obtain regulatory approval for marketing its
products in foreign countries.
 
     Orphan Drug Designation.  Under the Orphan Drug Act, the FDA may grant
orphan drug designation to drugs intended to treat a "rare disease or
condition," which generally is a disease or condition that affects fewer than
200,000 individuals in the United States. Orphan drug designation must be
requested before submitting a PLA/ELA or BLA. After the FDA grants orphan drug
designation, the generic identity of the therapeutic agent and its potential
orphan use are publicly disclosed by the FDA. Orphan drug designation does not
convey any advantage in, or shorten the duration of, the regulatory review and
approval process. If a product which has an orphan drug designation subsequently
receives FDA approval for the indication for which it has such designation, the
product is entitled to orphan exclusivity, i.e., the FDA may not approve any
other applications to market the same drug for the same indication, except in
certain very limited circumstances, for a period of seven years.
 
     In 1994, the Company obtained orphan drug designation for IDEC-C2B8,
IDEC-Y2B8, and IDEC-In2B8 from the FDA to treat low-grade B-cell lymphoma. There
can be no assurance that any of these compounds will receive orphan exclusivity
for the low-grade B-cell lymphoma indication, and it is possible that
competitors of the Company could obtain approval, and attendant orphan drug
exclusivity, for these same compounds for the low-grade B-cell lymphoma
indication, thus precluding the Company from marketing its product(s) for the
same indication in the United States. In addition, even if the Company does
obtain orphan exclusivity for any of its compounds for low-grade B-cell
lymphoma, there can be no assurance that competitors will not receive approval
of other, different drugs or biologics for low-grade B-cell lymphoma. Although
obtaining FDA approval to market a product with orphan drug exclusivity can be
advantageous, there can be no assurance that the scope of protection or the
level of marketing exclusivity that is currently afforded by orphan drug
designation will remain in effect in the future.
 
PHARMACEUTICAL PRICING AND REIMBURSEMENT
 
     The future revenues and profitability of biopharmaceutical companies as
well as the availability of capital may be affected by the continuing efforts of
government and third party payors to contain or reduce costs of health care
through various means. In the United States, there have been, and the Company
expects that there will continue to be, a number of federal and state proposals
to implement governmental control on pharmaceutical pricing. While the Company
cannot predict whether any such legislative or regulatory proposals will be
adopted, the adoption of such proposals could have a material adverse effect on
the Company's business, financial condition or prospects. In addition, the
Company's ability to commercialize its products successfully will depend in part
on the extent which appropriate reimbursement levels for the cost of such
products and related treatment are obtained from governmental authorities,
private health insurers and
 
                                       36

<PAGE>   37
 
other organizations, such as HMOs. Third party payors are increasingly
challenging the prices charged for medical products and services. Also, the
trend toward managed health care in the United States and the concurrent growth
of organizations such as HMOs, which could control or significantly influence
the purchase of health care services and products, as well as legislative
proposals to reform health care or reduce government insurance programs may all
result in lower prices for the Company's products. The cost containment measures
that health care payors and providers are instituting and the effect of any
health care reform could adversely affect the Company's ability to sell its
products and may have a material adverse effect on the Company.
 
SALES AND MARKETING
 
     Commercialization of the Company's products is expensive and
time-consuming. The Company has adopted a strategy of pursuing collaborative
agreements with strategic partners that provide for co-promotion of certain of
the Company's products. In the event that the Company elects to participate in
co-promotion efforts in the United States or Canada, and in those instances
where the Company has retained exclusive marketing rights in specified
territories, the Company will need to build a sales and marketing capability in
the targeted markets. The Company currently has a limited marketing staff. There
can be no assurance that the Company will be able to establish a sales and
marketing capability in any or all targeted markets or that it will be
successful in gaining market acceptance for its products. To the extent that the
Company enters into co-promotion or other licensing arrangements, any revenues
received by the Company will be dependent on the efforts of third parties and
there can be no assurance that such efforts will be successful.
 
     Outside of the United States and Canada, the Company has adopted a strategy
to pursue collaborative arrangements with established pharmaceutical companies
for marketing, distribution and sales of its products. There can be no assurance
that any of these companies or their sublicensees will successfully market or
distribute the Company's products or that the Company will be able to establish
a successful direct sales organization, co-promotion or distribution
arrangements.
 
EMPLOYEES
 
     As of March 31, 1996, the Company employed 185 persons, including 180
full-time and five part-time employees. The Company has 134 employees in
research and development, of whom 23 hold Ph.D. or M.D. degrees. In addition,
the Company retains 22 independent contractors. None of the Company's employees
are represented by a labor union or bound by a collective bargaining agreement.
Management believes that its overall relations with its employees are good.
 
ENVIRONMENTAL REGULATION
 
     The Company's research and development involves the controlled use of
hazardous materials, chemicals and various radioactive compounds. Although the
Company believes that its safety procedures for handling and disposing of such
materials comply with the standards prescribed by state and federal regulations,
the risk of accidental contamination or injury from these materials cannot be
completely eliminated. In the event of such an accident, the Company could be
held liable for any damages that result and any such liability could exceed the
resources of the Company. The Company may incur substantial cost to comply with
environmental regulations. The Company anticipates no material capital
expenditures to be incurred for environmental compliance in fiscal year 1996. In
addition, disposal of radioactive materials used by the Company in its research
efforts may only be made at approved facilities. Approval of a site in
California has been delayed indefinitely. The Company currently stores such
radioactive materials on site.
 
                                       37

<PAGE>   38
 
                                   MANAGEMENT
 
     Certain information about the Company's executive officers and directors as
of March 31, 1996 is set forth below:
 
   

<TABLE>
<CAPTION>
              NAME                 AGE                        TITLE
- ---------------------------------  ---    ----------------------------------------------
<S>                                <C>    <C>
William H. Rastetter, Ph.D.......   47    President, Chief Executive Officer and
                                          Chairman of the Board of Directors(1)
Antonio J. Grillo-Lopez, M.D.....   56    Senior Vice President, Medical and Regulatory
                                          Affairs
Nabil Hanna, Ph.D................   52    Senior Vice President, Research and
                                          Preclinical Development
William R. Rohn..................   52    Senior Vice President, Commercial and
                                          Corporate Development
Christopher J. Burman............   46    Vice President, Manufacturing Sciences
Connie L. Matsui.................   42    Vice President, Planning and Resource
                                          Development
Phillip M. Schneider.............   39    Vice President and Chief Financial Officer
Kenneth J. Woolcott..............   37    Vice President, Secretary, General Counsel and
                                          Licensing Executive
Brook H. Byers(2)................   50    Chairman Emeritus(2)
Charles C. Edwards, M.D..........   72    Director
John Groom.......................   57    Director
Kazuhiro Hashimoto...............   55    Director
Peter Barton Hutt................   61    Director
Franklin P. Johnson, Jr..........   67    Director
John P. McLaughlin...............   44    Director
The Honorable Lynn Schenk........   51    Director
</TABLE>

    
 
- ---------------
   
(1) In May 1996, Dr. Rastetter was appointed Chairman of the Board of Directors.
    
 
   
(2) Mr. Byers did not stand for re-election at the Company's annual meeting of
    shareholders on May 22, 1996.
    
 
   
     DR. RASTETTER was appointed Chairman of the Board of Directors of the
Company on May 22, 1996. He has served as President and Chief Executive Officer
of the Company since December 1986 and Chief Financial Officer from 1988 to
1993. Dr. Rastetter has served as a Director of the Company since 1986. From
1984 to 1986, he was Director of Corporate Ventures at Genentech. From 1982 to
1984, Dr. Rastetter served in a scientific capacity at Genentech, directing the
Biocatalysis and Chemical Sciences groups. From 1975 to 1982, he held various
faculty positions at the Massachusetts Institute of Technology. Dr. Rastetter
received his Ph.D. in chemistry from Harvard University in 1975.
    
 
     DR. GRILLO-LOPEZ joined the Company as Vice President, Medical and
Regulatory Affairs in November 1992 from Du Pont Merck Pharmaceutical Company.
In January 1996, he was promoted to Senior Vice President, Medical and
Regulatory Affairs. He was employed by Du Pont Merck from 1987 to 1992, where he
most recently was Executive Medical Director for International Clinical Research
and Development and previously held various clinical and medical director
positions at the company. From 1980 to 1987, Dr. Grillo-Lopez was a Vice
President in charge of clinical therapeutics and Director of Clinical Oncology
Research at Warner Lambert Company's Parke Davis Pharmaceutical Research
Division. He trained as a hematologist and oncologist at the University of
Puerto Rico School of Medicine, San Juan, where he received his medical degree
and subsequently held faculty appointments. He has been an adjunct associate
professor in the Department of Medicine (Hematology and Medical Oncology) at the
University of Michigan Medical School; was a founder of the Puerto Rico Society
of Hematology and the Latin American Society of Hematology; and is a fellow of
the International Society of Hematology and the Royal Society of Medicine
(London).
 
     DR. HANNA joined the Company in February 1990 as Vice President, Research
and Preclinical Development. In 1993, Dr. Hanna was promoted to Senior Vice
President, Research and Preclinical
 
                                       38

<PAGE>   39
 
Development. From 1981 to 1990, Dr. Hanna served as Associate Director and then
Director of the Department of Immunology at a SmithKline Beecham company
focusing on autoimmune and chronic inflammatory diseases. From 1978 to 1981, he
was a research scientist at the NCI-Frederick Cancer Research Center, where he
studied the role of immune system cells in host defenses against cancer. From
1973 to 1978, Dr. Hanna was a lecturer in the Department of Immunology at the
Hebrew University Medical School in Israel, where he received his Ph.D. in
immunology.
 
     MR. ROHN joined the Company in August 1993 as Senior Vice President,
Commercial and Corporate Development. Prior to joining IDEC Pharmaceuticals, Mr.
Rohn was employed by Adria Laboratories from 1984, most recently as Senior Vice
President of Sales and Marketing with responsibilities for strategic and
commercial partnerships as well as all sales and marketing functions in the
United States. Prior to Adria, Mr. Rohn held marketing and sales management
positions at Abbott Laboratories, Warren-Teed Pharmaceuticals, Miles
Laboratories and Mead Johnson Laboratories. Mr. Rohn has a B.A. from Michigan
State University.
 
     MR. BURMAN joined the Company in May 1992 as Vice President, Manufacturing
Sciences. He previously served from 1989 to 1992 as Director of Manufacturing
Technology at Life Sciences International. From 1985 to 1989, he was t-PA
Operations and Technical Services Manager at Genentech, where he was responsible
for the start-up of the t-PA manufacturing facility and commercial-scale
manufacturing operations. From 1967 to 1985, he held a series of positions at
Wellcome Biotech Ltd., culminating in responsibility for worldwide cell culture
manufacturing operations. Mr. Burman holds a B.Sc. degree with honors in Applied
Biology from the Council for National Academic Awards in the United Kingdom. He
also holds graduate qualifications in Industrial Microbiology.
 
     MS. MATSUI joined the Company in November 1992 as Senior Director, Planning
and Resource Development with primary responsibility for strategic planning and
human resources. In December 1994, Ms. Matsui was promoted to Vice President,
Planning and Resource Development. As a consultant during 1992, Ms. Matsui
assisted in the planning and implementation of the Company's unification from
sites in Northern and Southern California to its present site in San Diego. From
1977 to 1991, she served in a variety of marketing and general management
positions at Wells Fargo Bank including Vice President and Manager responsible
for Consumer Retirement Programs and Vice President and Manager in charge of
company wide Employee Relations and Communications. Ms. Matsui has a B.A. and an
M.B.A. from Stanford University.
 
     MR. SCHNEIDER joined the Company in February 1987 as Director, Finance and
Administration and served as Senior Director, Finance and Administration from
1990 to 1991. In 1991, he became Vice President, Finance and Administration and
in 1996 he was appointed Vice President and Chief Financial Officer. From 1984
to 1987, Mr. Schneider served as the Manager of Financial Reporting and as a
Senior Analyst for Syntex Laboratories. He earned his C.P.A. while working for
KPMG Peat Marwick LLP as a Senior Accountant, received his M.B.A. at the
University of Southern California and received a B.S. from University of
California, Davis in biochemistry.
 
     MR. WOOLCOTT joined the Company in March 1989 as Intellectual Property
Counsel. In 1990, he became Intellectual Property and Licensing Counsel. Mr.
Woolcott was promoted to Deputy General Counsel in 1991 and General Counsel in
1992. In 1993, Mr. Woolcott was appointed Secretary of the Company. In 1994, he
was promoted to Vice President, Secretary, General Counsel & Licensing
Executive. From 1985 to 1987, he served as Patent Counsel and Associate Counsel
at Hybritech, Inc. From 1987 to 1989, he was engaged in the private practice of
law in Seattle, Washington. Mr. Woolcott earned his J.D. from George Washington
University and a B.S. from Pacific Lutheran University in biochemistry.
 
   
     MR. BYERS has been a Director of the Company since its founding, has served
as Chairman of the Board since April 1986, and was its President and Chief
Executive Officer through November 1986. Mr. Byers did not stand for re-election
at the Company's annual meeting of shareholders on May 22, 1996. He has been a
General Partner since 1977 at Kleiner Perkins Caufield & Byers, an investor in
the Company and was the founding president of four life science companies,
including Hybritech, Inc. Mr. Byers is a Director of five other publicly traded
life sciences companies, Arris Pharmaceuticals, InSite Vision Incorporated,
Athena Neurosciences, Inc., Pharmacopeia, Inc. and Ligand Pharmaceuticals
Incorporated. Mr. Byers also sits on the Foundation Board of Directors of the
University of California at San Francisco, and is a Director of seven
    
 
                                       39

<PAGE>   40
 
privately held companies. He is a graduate of the Georgia Institute of
Technology and holds an M.B.A. from Stanford Graduate School of Business.
 
     DR. EDWARDS is the retired President and Chief Executive Officer of Scripps
Institution of Medicine and Science, having joined the Institution in 1991. Dr.
Edwards served as the President and Chief Executive Officer of Scripps Clinic
and Research Foundation from 1977 to 1991. Previously, Dr. Edwards held a number
of positions with private, public and governmental entities including
Commissioner of the U. S. Food and Drug Administration and several positions
with the American Medical Association. Dr. Edwards is director of three other
publicly traded companies, Bergen Brunswig Corporation, Molecular Biosystems,
Inc. and Northern Trust of California. He received his B.S., M.D. and Honorary
Degree, Doctor of Science from the University of Colorado and received his M.S.
of Surgery from the University of Minnesota. Dr. Edwards has served as a
Director of the Company since May 1995.
 
     MR. GROOM has been President, Chief Executive Officer, and a Director of
Athena Neurosciences, Inc. since 1987. Mr. Groom also serves as a Director of
Ligand Pharmaceuticals Incorporated. From 1960 to 1985, Mr. Groom was employed
by Smith Kline & French Laboratories (SK&F), the pharmaceutical division of the
former SmithKline Beckman Corporation. He held a number of positions at SK&F,
including: President of SK&F International from 1980 to 1985; Vice President,
Europe; Managing Director, United Kingdom; Regional Director of Africa, Asia and
the Middle East; Managing Director, India; and Managing Director, Pakistan. Mr.
Groom has also served as Chairman of the International Section of the
Pharmaceutical Manufacturers Association. Mr. Groom is a Fellow of the
Association of Certified Accountants (UK) and has served as a Director of the
Company since September 1992.
 
     MR. HASHIMOTO has been, since 1981, Director of Research and Development of
Zenyaku, a private pharmaceutical company in Tokyo, Japan, and an investor in
the Company. Mr. Hashimoto was promoted to President of Zenyaku in July 1994. He
has served on Zenyaku's Board of Directors since 1977 and is a Director of two
privately held companies. Mr. Hashimoto has served as a Director of the Company
since July 1991.
 
     MR. HUTT, former Chief Counsel of the U. S. Food and Drug Administration,
is a Partner of the law firm of Covington & Burling in Washington, D.C., having
joined the firm in 1960. Mr. Hutt is a Director of CellGenesys, Inc., Emisphere
Technologies, Inc., Sparta Pharmaceuticals, Inc., Vivus, Inc., Parexel
International, Inc. and Interneuron Pharmaceuticals, Inc., as well as a Director
of one privately held company. Mr. Hutt received his L.L.B. degree from Harvard
University, received an L.L.M. degree from New York University and received an
A.B. degree from Yale University. He has served as a Director of the Company
since March 1991.
 
     MR. JOHNSON has been a General Partner at AMC Partners 84 since 1984. AMC
Partners 84 is the General Partner of Asset Management Associates 1984, an
investor in the Company. Mr. Johnson is also a Director of Amgen, Inc., Boole &
Babbage, Inc., and Tandem Computers Incorporated, as well as a Director of four
privately held companies. He has served as a Director of the Company since 1986.
 
     MR. MCLAUGHLIN joined Genentech, an investor in and corporate partner of
the Company, in 1987 as Vice President of Government Affairs. In February 1989,
Mr. McLaughlin was named Vice President, General Counsel and Secretary, and in
June 1993 he was named Senior Vice President and Secretary. In December 1995,
Mr. McLaughlin was appointed Executive Vice President and Secretary of
Genentech. Before joining Genentech, Mr. McLaughlin was a partner in Royer,
Shacknai & Mehle, where he represented major pharmaceutical companies and other
manufacturers. Previously, Mr. McLaughlin was counsel to the House Energy and
Commerce Subcommittee on Health and the Environment. He obtained his B.A. from
the University of Notre Dame and his J.D. from the Catholic University of
America. Mr. McLaughlin has served as a Director of the Company since May 1995.
 
     MS. SCHENK, currently an attorney, previously served as the United States
Congresswoman for the 49th District of the State of California from 1993 to
1995. She previously was an attorney in private practice from 1983 to 1993 and
served as the California Secretary of Business, Transportation and Housing from
1980 to 1983. Ms. Schenk is also a Director of Toy Biz, Inc. She received her
B.A. in Political Science from the University of California at Los Angeles,
earned her J.D. from the University of San Diego and attended the London School
of Economics. Ms. Schenk has served as a Director of the Company since May 1995.
 
                                       40

<PAGE>   41
 
                             PRINCIPAL SHAREHOLDERS
 
     The following table sets forth certain information known to the Company
with respect to the beneficial ownership of the Company's Common Stock as of
March 31, 1996, by (i) all persons who are beneficial owners of five percent or
more of the Company's Common Stock, (ii) each director; (iii) certain executive
officers, and (iv) all current directors and executive officers as a group.
 
   

<TABLE>
<CAPTION>
                                                                                  PERCENTAGE OF SHARES
                                                                                 BENEFICIALLY OWNED(1)
                                                                  SHARES         ----------------------
                                                               BENEFICIALLY       BEFORE        AFTER
            NAME AND ADDRESS OF BENEFICIAL OWNER                  OWNED          OFFERING      OFFERING
- -------------------------------------------------------------  ------------      --------      --------
<S>                                                            <C>               <C>           <C>
SmithKline Beecham p.1.c (2).................................     2,440,860        15.6%         14.0%
  New Horizons Court
  Brentford, Middlesex TW8 9EP England
Genentech, Inc. (3)..........................................     1,605,140         9.5           8.6
  460 Point San Bruno Boulevard
  South San Francisco, California 94080
ML/MS Associates, L.P........................................     1,000,000         6.5           5.9
  c/o Sprout Group
  3000 Sand Hill Road 4-270
  Building 3, Suite 250
  Menlo Park, California 94025
Amerindo Investment Advisors Inc.............................       773,500         5.1           4.5
  One Embarcadero Center, Suite 2300
  San Francisco, California 94111
Christopher J. Burman (4)....................................        72,407           *             *
Brook H. Byers (5)...........................................        62,383           *             *
Charles C. Edwards, M.D. (6).................................        23,500           *             *
Antonio J. Grillo-Lopez, M.D. (7)............................        83,747           *             *
John Groom (8)...............................................        31,041           *             *
Nabil Hanna, Ph.D. (9).......................................       189,614         1.2           1.1
Kazuhiro Hashimoto (10)......................................       681,667         4.5           4.0
Peter Barton Hutt (11).......................................        32,500           *             *
Franklin P. Johnson, Jr. (12)................................        71,737           *             *
John P. McLaughlin (3).......................................     1,605,140         9.5           8.6
William H. Rastetter, Ph.D. (13).............................       347,044         2.2           2.0
William R. Rohn (14).........................................        86,896           *             *
The Honorable Lynn Schenk (15)...............................        24,500           *             *
All directors and executive officers as a group (16 persons)
  (3 through 15)(16).........................................     3,497,027        19.6          17.8
</TABLE>

    
 
- ---------------
 
  *  Less than 1%
 
 (1) Percentage of beneficial ownership is calculated assuming 15,271,261 shares
     of Common Stock were outstanding on March 31, 1996. Beneficial ownership is
     determined in accordance with the rules of the United States Securities and
     Exchange Commission and generally includes voting or investment power with
     respect to securities. Shares of Common Stock subject to options and
     warrants currently exercisable or exercisable within 60 days after March
     31, 1996, as well as Nonvoting Convertible Preferred Stock, are deemed
     outstanding for computing the percentage of the person holding such options
     but are not deemed outstanding for computing the percentage of any other
     person. Except as indicated by footnote, and subject to community property
     laws where applicable, the persons named in the table have sole voting and
     investment power with respect to all shares of Common Stock shown as
     beneficially owned by them.
 
 (2) Includes 1,440,860 shares owned by SmithKline Beecham Corporation and
     warrants to purchase 400,000 shares held by S.R. One Limited ("S.R. One").
     SmithKline Beecham Corporation is a wholly-
 
                                       41

<PAGE>   42
 
     owned subsidiary of SmithKline Beecham and S.R. One is the venture capital
     subsidiary of SmithKline Beecham.
 
 (3) Includes Nonvoting Convertible Preferred Stock convertible into 1,605,140
     shares held by Genentech. Mr. McLaughlin, a director of the Company,
     disclaims beneficial ownership of the Nonvoting Convertible Preferred Stock
     held by Genentech. Does not include 100,000 shares of Nonvoting Convertible
     Preferred Stock issued to Genentech in May 1996. See "Description of
     Capital Stock -- Preferred Stock."
 
 (4) Includes options to purchase 72,407 shares held by Mr. Burman.
 
 (5) Includes 1,747 shares beneficially owned by Kleiner Perkins Caufield &
     Byers IV Associates ("KPCB IV Associates"). Mr. Byers is a General Partner
     of Kleiner Perkins Caufield & Byers, which is the Manager of KPCB IV
     Associates. Pursuant to a Form 4 dated October 1995 and filed with the
     United States Securities and Exchange Commission on November 8, 1995, Mr.
     Byers, a director of the Company, disclaims beneficial ownership of such
     shares except to the extent of his pecuniary interest arising from his
     General and Limited Partner interest in KPCB IV Associates. Includes
     options to purchase 15,000 shares held by Mr. Byers.
 
 (6) Includes options to purchase 22,500 shares held by Dr. Edwards.
 
 (7) Includes options to purchase 79,256 shares held by Dr. Grillo-Lopez.
 
 (8) Includes options to purchase 31,041 shares held by Mr. Groom.
 
 (9) Includes options to purchase 172,744 shares held by Dr. Hanna.
 
(10) Includes 666,667 shares held by Zenyaku. Mr. Hashimoto, a director of the
     Company, disclaims beneficial ownership of such shares. Includes options to
     purchase 15,000 shares held by Mr. Hashimoto.
 
(11) Includes options to purchase 32,500 shares held by Mr. Hutt.
 
(12) Includes 34,303 shares beneficially owned by Asset Management Partners. Mr.
     Johnson, a director of the Company, is the sole General Partner of Asset
     Management Partners. Mr. Johnson disclaims beneficial ownership of such
     shares except to the extent of his pecuniary interest arising from his
     general partner interest in Asset Management Partners. Includes options to
     purchase 15,000 shares held by Mr. Johnson.
 
(13) Includes options to purchase 253,263 shares held by Dr. Rastetter.
 
(14) Includes options to purchase 77,071 shares held by Mr. Rohn.
 
(15) Includes options to purchase 22,500 shares held by Ms. Schenk.
 
(16) Includes options to purchase 961,252 shares and Nonvoting Convertible
     Preferred Stock exercisable into 1,605,140 shares.
 
                                       42

<PAGE>   43
 
                          DESCRIPTION OF CAPITAL STOCK
 
     The authorized capital stock of the Company consists of 50,000,000 shares
of Common Stock, no par value ("Common Stock") and 8,000,000 shares of Preferred
Stock, no par value ("Preferred Stock").
 
COMMON STOCK
 
   
     As of March 31, 1996, there were approximately 15,271,261 shares of Common
Stock outstanding. See "Capitalization." The stock is held by 508 shareholders
of record. There will be 17,071,261 shares of Common Stock outstanding after
giving effect to the sale of the shares of Common Stock offered hereby. The
holders of Common Stock are entitled to one vote for each share held of record
on all matters submitted to a vote of the shareholders. Subject to preferential
rights with respect to any outstanding Preferred Stock, holders of Common Stock
are entitled to receive ratably such dividends, if any, as may be declared by
the Board of Directors out of funds legally available therefor. In the event of
a liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities and satisfaction of preemptive rights. The Common Stock has no
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the Common Stock. The outstanding shares
of Common Stock are, and the Common Stock to be outstanding upon completion of
the offering will be, fully paid and nonassessable.
    
 
PREFERRED STOCK
 
     As of March 31, 1996, there were 229,889 shares of Preferred Stock
outstanding. Pursuant to the Company's Articles of Incorporation, the Board of
Directors is authorized to issue up to an aggregate of 8,000,000 shares of
Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions, including the dividend rights, conversion rights,
voting rights, rights and terms of redemption, redemption price or prices,
liquidation preferences and the number of shares constituting any series or the
designations of such series, without any further vote or action by the
shareholders. The issuance of Preferred Stock in certain circumstances may have
the effect of delaying, deferring, or preventing a change in control of the
Company without further actions of the shareholders. The issuance of Preferred
Stock with voting and conversion rights may adversely affect the voting power of
the holders of Common Stock, including the loss of voting control to others.
 
     In March 1995, the Company issued 69,375 shares of 10% Series B Nonvoting
Cumulative Convertible Preferred Stock ("Series B Preferred Stock") in
connection with the repurchase of all ML/MS rights in the Company's lymphoma
products. Dividends on the Series B Preferred Stock accrue until March 15, 1997;
thereafter, accrued dividends are payable quarterly. No dividends or other
distribution will be paid or declared, other than Common Stock dividends in the
Company's Common Stock, or on Series A-7 Convertible Preferred Stock which is
not yet issued, unless and until accrued dividends on the Series B Preferred
Stock have been paid. On March 16, 1997, the Series B Preferred Stock and
accrued dividends will automatically be converted into Common Stock. Each share
of Series B Preferred Stock is convertible into the number of shares of Common
Stock equal to 100 divided by the higher of $3.75 or the average price of the
Company's Common Stock as reported by the Nasdaq National Market for the 20
trading days ending on March 1, 1997.
 
     Additionally, the Company issued 100,000 shares of its Series A-1 Nonvoting
Convertible Preferred Stock ("Series A-1 Preferred Stock") in April 1995, 37,521
shares of its Series A-2 Nonvoting Convertible Preferred Stock ("Series A-2
Preferred Stock") in August 1995 and 22,993 shares of its Series A-3 Nonvoting
Convertible Preferred Stock ("Series A-3 Preferred Stock") in March 1996, to
Genentech pursuant to the terms of a preferred stock purchase agreement. Each
share of Series A-1, A-2 and A-3 Preferred Stock is convertible at any time into
10 shares of Common Stock.
 
     In May 1996, the Company issued 100,000 shares of its Series A-6 Nonvoting
Convertible Preferred Stock ("Series A-6 Preferred Stock") to Genentech pursuant
to the terms of a preferred stock purchase agreement. Each share of Series A-6
Preferred Stock is convertible into the number of shares of Common Stock equal
to 75 divided by the average closing price of the Company's Common Stock as
reported by the
 
                                       43

<PAGE>   44
 
Nasdaq National Market for the 20 trading days following the earlier of (i) FDA
approval of IDEC-C2B8 or (ii) September 16, 2000.
 
OPTIONS
 
     As of March 31, 1996, options to purchase 3,147,539 shares of Common Stock
and 120,000 shares were outstanding under its 1988 Employee Stock Option Plan
and its 1993 Non-Employee Directors Stock Option Plan, respectively, 1,152,041
of which were exercisable in total on that date.
 
WARRANTS
 
     Under an investment agreement, the Company issued to S.R. One warrants
exercisable into 400,000 shares of Common Stock. Such warrants have a seven-year
term and are immediately exercisable at $12 per share. The Company has the right
to require that the warrants be automatically exercised under certain conditions
and the Company has notified S.R. One that it will require the exercise thereof
upon effectiveness of a registration statement covering resale of the underlying
shares. In connection with such exercise, S.R. One and SmithKline Beecham have
agreed not to sell any of the shares of the Company held by them for a period of
90 days from the date of this offering, except that number of shares held by
S.R. One that will equal $4.8 million in proceeds, which shares may be sold by
S.R. One at prices equal to or greater than the price to the public in this
offering. The Company expects to file the registration statement covering such
resales by S.R. One shortly after completing this offering.
 
     The Company also has issued warrants, in connection with lease equipment
arrangements, exercisable into 340,000 shares of Common Stock. Such warrants
have a six-year term and are immediately exercisable at prices ranging between
$2.29 and $6.22 per share. The holders of the warrants have the option to
exchange their warrants, without the payment of cash or consideration, for a
number of Common Shares equal to the difference between the number of shares
resulting by dividing the aggregate exercise price of the warrants by the fair
market value of the Common Stock on the date of exercise and the number of
shares that would have been otherwise issued under the exercise.
 
REGISTRATION RIGHTS
 
     Under the terms of the 1992 Amended and Restated Registration Rights
Agreement among the Company and the holders of the securities registrable
thereunder (the "1992 Registrable Securities"), if the Company proposes to
register any of its securities under the Act, either for its own account or for
the account of other security holders exercising registration rights, such
holders are entitled to notice of such registration and are entitled to include
shares of such Common Stock therein. These rights are subject to certain
conditions and limitations, among them the right of the underwriters of an
offering subject to the registration to limit the number of shares included in
such registration. Following this offering, the holders of approximately 666,667
shares of Common Stock and 400,000 shares of Common Stock issuable upon exercise
of outstanding warrants, or their transferees, will be entitled to certain
rights with respect to the registration of their 1992 Registrable Securities
under the Securities Act. The holders of the 1992 Registrable Securities may
also require the Company on not more than two occasions to file a registration
statement under the Act at its expense with respect to their shares of Common
Stock (and on not more than one occasion to file a registration statement under
the Act at its expense with respect to shares issuable upon the exercise of
certain warrants), and the Company is required to use its best efforts to effect
such registration, subject to certain conditions and limitations. Further,
certain of such holders may require the Company to file additional registration
statements on Form S-3, subject to certain conditions and limitations. The
holders of the 1992 Registrable Securities have waived their registration rights
in connection with the offering made hereby.
 
     Under the terms of the 1994 Registration Rights Agreement among the Company
and the holders of warrants exercisable into 340,149 shares of Common Stock (the
"1994 Registrable Securities"), if the Company proposes to register any of its
securities under the Act for its own account, such holders are entitled to
notice of such registration and are entitled to include shares of the 1994
Registrable Securities therein. These rights are subject to certain conditions
and limitations, among them the right of the underwriters of an
 
                                       44

<PAGE>   45
 
offering subject to the registration to limit the number of shares included in
such registration. The holders of 1994 Registrable Securities have waived their
registration rights in connection with the offering made hereby.
 
     Under the terms of the 1995 Registration Rights Agreement among the
Company, Genentech and ML/MS, if the Company proposes to register any of its
securities under the Act, either for its own account or for the account of other
security holders exercising registration rights, Genentech is entitled to notice
of such registration and is entitled to include 1995 Registrable Securities
therein. These rights are subject to certain conditions and limitations, among
them the right of the underwriters of an offering subject to the registration to
limit the number of shares included in such registration. Genentech has waived
its piggyback registration rights in connection with the offering made hereby.
Genentech may also require the Company to file a registration statement under
the Act at its expense with respect to its 1995 Registrable Securities, and the
Company is required to use its best efforts to effect such registration, subject
to certain conditions and limitations. Further, after March 15, 1997 ML/MS may
require the Company to file a single registration statement on Form S-3, subject
to certain conditions and limitations.
 
TRANSFER AGENT AND REGISTRAR
 
   
     The transfer agent and registrar for the Company's Common Stock is First
Interstate Bank Stock Transfer Department, Encino, California.
    
 
                                       45

<PAGE>   46
 
                                  UNDERWRITERS
 
     Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof, the Underwriters named below have severally
agreed to purchase, and the Company has agreed to sell to them, severally, the
respective number of shares of Common Stock set forth opposite their respective
names of such Underwriters below:
 
   

<TABLE>
<CAPTION>
                                                                                NUMBER OF
                                       NAME                                      SHARES
    --------------------------------------------------------------------------  ---------
    <S>                                                                         <C>
    Morgan Stanley & Co. Incorporated.........................................    687,500
    Punk, Ziegel & Knoell, L.P................................................    687,500
    Brean Murray, Foster Securities Inc. .....................................     25,000
    Alex. Brown & Sons Incorporated...........................................     50,000
    Cowen & Company...........................................................     50,000
    Gerard Klauer Mattison & Co., LLC.........................................     25,000
    Hambrecht & Quist LLC.....................................................     50,000
    Kaufman Bros. Co., L.P. ..................................................     25,000
    Lehman Brothers Inc. .....................................................     25,000
    J.P. Morgan Securities Inc. ..............................................     50,000
    Needham & Company, Inc. ..................................................     25,000
    Ragen MacKenzie Incorporated..............................................     25,000
    Smith Barney Inc. ........................................................     50,000
    Vector Securities International, Inc. ....................................     25,000
                                                                                ---------
      Total...................................................................  1,800,000
                                                                                =========
</TABLE>

    
 
     The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by their
counsel, and to certain other conditions. The Underwriters are obligated to take
and pay for all of the shares of Common Stock offered hereby (other than those
covered by the over-allotment option described below) if any such shares are
taken.
 
   
     The Underwriters initially propose to offer part of the shares of Common
Stock offered hereby directly to the public at the public offering price set
forth on the cover page hereof and part to certain dealers at a price that
represents a concession not in excess of $.88 per share under the public
offering price. Any Underwriter may allow, and such dealers may reallow, a
concession not in excess of $.10 per share to other Underwriters or to certain
other dealers.
    
 
     The Company and the Underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the Securities Act.
 
   
     The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to 270,000 additional
shares of Common Stock at the public offering price set forth on the cover page
hereof, less underwriting discounts and commission. The Underwriters may
exercise such option to purchase solely for the purpose of covering
over-allotments, if any, made in connection with the offering of the shares of
Common Stock offered hereby. To the extent such option is exercised, each
Underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares of Common Stock as
the number set forth next to such Underwriter's name in the preceding table
bears to the total number of shares of Common Stock offered by the Underwriters
hereby.
    
 
     The Underwriters have informed the Company that they do not intend to
confirm sales to accounts over which they exercise discretionary authority.
 
                                       46

<PAGE>   47
 
     The Company and its executive officers and directors and certain
shareholders of the Company have agreed not to (a) offer, pledge, sell, contract
to sell, sell any option or contract to purchase, purchase any option or
contract to sell, grant any option, right or warrant to purchase, or otherwise
transfer or dispose of, directly or indirectly, any shares of Common Stock or
any securities convertible into or exercisable or exchangeable for Common Stock,
or (b) enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the Common
Stock, whether any such transaction described in clause (a) or (b) above is to
be settled by delivery of Common Stock or such other securities, in cash or
otherwise for a 90-day period after the date of this Prospectus, without the
prior written consent of Morgan Stanley & Co. Incorporated, except that the
Company may, without such consent, grant options or issue stock upon the
exercise of outstanding stock options, pursuant to the Company's stock option
plans, and issue stock upon exercise of the warrants.
 
     Pursuant to regulations promulgated by the Commission, market makers in the
Common Stock who are Underwriters or prospective underwriters ("passive market
makers") may, subject to certain limitations, make bids for or purchases of
shares of Common Stock until the earlier of the time of commencement (the
"Commencement Date") of offers or sales of the Common Stock contemplated by this
Prospectus or the time at which a stabilizing bid for such shares is made. In
general, on and after the date two business days prior to the Commencement Date
(1) such market maker's net daily purchases of the Common Stock may not exceed
30% of its average daily trading volume in such stock for the two full
consecutive calendar months immediately preceding the filing date of the
Registration Statement of which this Prospectus forms a part, (2) such market
maker may not effect transactions in, or display bids for, the Common Stock at a
price that exceeds the highest bid for the Common Stock by persons who are not
passive market makers and (3) bids made by passive market makers must be
identified as such.
 
                                 LEGAL MATTERS
 
     Certain legal matters with respect to the validity of the shares of Common
Stock offered hereby are being passed upon for the Company by Brobeck, Phleger &
Harrison LLP, Palo Alto, California. Certain legal matters are being passed upon
for the Underwriters by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian
LLP, Palo Alto, California.
 
                                    EXPERTS
 
     The consolidated financial statements and schedule of IDEC Pharmaceuticals
as of December 31, 1994 and 1995, and for each of the years in the three-year
period ended December 31, 1995, have been included herein and incorporated by
reference herein and in the Registration Statement in reliance upon the reports
of KPMG Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein and incorporated by reference herein, and upon the authority of
said firm as experts in accounting and auditing.
 
                             AVAILABLE INFORMATION
 
     This Prospectus, which constitutes a part of a Registration Statement on
Form S-3 (the "Registration Statement") filed by the Company with the Securities
and Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Securities Act"), omits certain of the information set forth in
the Registration Statement. Reference is hereby made to the Registration
Statement and to the exhibits thereto for further information with respect to
the Company and the securities offered hereby. Copies of the Registration
Statement and the exhibits thereto are on file at the offices of the Commission
and may be obtained upon payment of the prescribed fee or may be examined
without charge at the public reference facilities of the Commission described
below.
 
     The Company is subject to the informational requirements of the Exchange
Act and in accordance therewith files reports, proxy statements and other
information with the Commission. Such reports, proxy
 
                                       47

<PAGE>   48
 
statements and other information filed by the Company with the Commission can be
inspected and copied at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, and the following regional offices of the Commission: New York
Regional Office, Seven World Trade Center, 13th Floor, New York, New York 10048;
and Chicago Regional Office, Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such material can also be obtained from
the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon payment of prescribed rates. The Company's Common
Stock is quoted on the Nasdaq National Market. Reports, proxy statements and
other information concerning the Company may be inspected at the National
Association of Securities Dealers, Inc. at 1735 K Street, N.W., Washington, D.C.
20006.
 
                                       48

<PAGE>   49
 
                IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 

<TABLE>
<CAPTION>
                                                                                        PAGE
                                                                                        ----
<S>                                                                                     <C>
Report of KPMG Peat Marwick LLP.......................................................   F-2
Consolidated Balance Sheets...........................................................   F-3
Consolidated Statements of Operations.................................................   F-4
Consolidated Statements of Shareholders' Equity.......................................   F-5
Consolidated Statements of Cash Flows.................................................   F-6
Notes to Consolidated Financial Statements............................................   F-7
</TABLE>

 
                                       F-1

<PAGE>   50
 

                          INDEPENDENT AUDITORS' REPORT
 
The Board of Directors and Shareholders
IDEC Pharmaceuticals Corporation:
 
     We have audited the accompanying consolidated balance sheets of IDEC
Pharmaceuticals Corporation and subsidiary as of December 31, 1994 and 1995, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1995. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of IDEC
Pharmaceuticals Corporation and subsidiary as of December 31, 1994 and 1995, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1995, in conformity with generally
accepted accounting principles.
 
                                          KPMG PEAT MARWICK LLP
 
San Diego, California
February 2, 1996

 
                                       F-2

<PAGE>   51
 
                IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
 
                          CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)
 

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                                -------------------    MARCH 31,
                                                                  1994       1995        1996
                                                                --------   --------   -----------
                                                                                      (UNAUDITED)
<S>                                                             <C>        <C>        <C>
                                             ASSETS
Current assets:
  Cash and cash equivalents...................................  $ 13,691   $ 18,828    $  18,524
  Securities available-for-sale (note 2)......................     6,910      5,182        7,325
  Current portion of note receivable (note 4).................       494        640          680
  Contract research revenue receivables (note 7)..............       835      1,455        2,747
  License fees receivable.....................................     --         --           4,500
  Inventories.................................................     --         --             911
  Prepaid expenses and other current assets...................       707      1,333          914
                                                                --------   --------   -----------
          Total current assets................................    22,637     27,438       35,601
Restricted marketable security (note 5).......................     1,500        750          750
Property and equipment, net (notes 3 and 5)...................    19,041     17,955       17,569
Note receivable, less current portion (note 4)................     1,889      1,249        1,060
Deposits and other............................................       427        234          226
                                                                --------   --------   -----------
                                                                $ 45,494   $ 47,626    $  55,206
                                                                ========   ========    =========
                              LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Current portion of notes payable (note 5)...................  $  3,676   $  3,248    $   3,392
  Trade payable -- clinical materials.........................       781        238       --
  Accounts payable............................................       653        970          514
  Accrued expenses............................................     2,293      4,280        4,220
  Deferred contract research revenue (note 7).................     2,024      --          --
                                                                --------   --------   -----------
          Total current liabilities...........................     9,427      8,736        8,126
                                                                --------   --------   -----------
Notes payable, less current portion (note 5)..................     7,386      6,598        6,385

Other long-term liabilities...................................       785      1,123        1,217
Shareholders' equity (notes 2 and 8):
  Convertible preferred stock, no par value, 8,000 shares
     authorized; issued and outstanding: 207 shares at
     December 31, 1995 and 230 share at March 31, 1996, at
     liquidation value........................................     --        14,086       19,086
  Common stock, no par value, 25,000 shares authorized; issued
     and outstanding: 13,728 shares and 15,061 shares at
     December 31, 1994 and 1995, respectively, and 15,271
     shares at March 31, 1996.................................    87,779     93,554       94,476
  Additional paid-in capital..................................     1,699      2,379        2,923
  Unrealized gains (losses) on securities
     available-for-sale.......................................       (14)        10            6
  Accumulated deficit.........................................   (61,568)   (78,860)     (77,013)
                                                                --------   --------   -----------
          Total shareholders' equity..........................    27,896     31,169       39,478
Commitments (notes 5, 7 and 10)...............................
                                                                --------   --------   -----------
                                                                $ 45,494   $ 47,626    $  55,206
                                                                ========   ========    =========
</TABLE>

 
          See accompanying notes to consolidated financial statements.
 
                                       F-3

<PAGE>   52
 
                IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 

<TABLE>
<CAPTION>
                                                                               THREE MONTHS ENDED
                                            YEARS ENDED DECEMBER 31,               MARCH 31,
                                       ----------------------------------     --------------------
                                         1993         1994         1995         1995        1996
                                       --------     --------     --------     --------     -------
                                                                                  (UNAUDITED)
<S>                                    <C>          <C>          <C>          <C>          <C>
Revenues (note 7):
  Contract research revenues.........  $  4,329     $  5,143     $ 12,136     $  3,347     $ 2,936
  License fees.......................     8,385        2,300       11,500        5,000       7,000
                                       --------     --------     --------     --------      ------
     Total revenues (including
       related party revenues of
       $8,583 for the year ended
       December 31, 1995 and $4,000
       and $1,523 for the three
       months ended March 31, 1995
       and 1996, respectively).......    12,714        7,443       23,636        8,347       9,936
Operating expenses:
  Research and development (note
     7)..............................    18,723       21,191       22,488        5,538       5,641
  General and administrative.........     4,262        4,768        6,112        1,655       1,854
  Acquired technology rights (note
     8)..............................     --           --          11,437       11,437       --
                                       --------     --------     --------     --------      ------
     Total operating expenses........    22,985       25,959       40,037       18,630       7,495
                                       --------     --------     --------     --------      ------
Income (loss) from operations........   (10,271)     (18,516)     (16,401)     (10,283)      2,441
                                       --------     --------     --------     --------      ------
Other income (expense):
  Interest income....................     1,553          956        1,387          319         353
  Interest expense...................      (379)        (471)      (2,278)        (460)       (947)
  Other income.......................       215        --           --           --          --
                                       --------     --------     --------     --------      ------
     Total other income (expense)....     1,389          485         (891)        (141)       (594)
                                       --------     --------     --------     --------      ------
Net income (loss)....................  $ (8,882)    $(18,031)    $(17,292)    $(10,424)    $ 1,847
                                       ========     ========     ========     ========      ======
Net income (loss) per share..........  $  (0.96)    $  (1.65)    $  (1.18)    $  (0.75)    $  0.10
                                       ========     ========     ========     ========      ======
Shares used in computing net income
  (loss) per share...................     9,265       10,931       14,650       13,937      19,121
</TABLE>

 
          See accompanying notes to consolidated financial statements.
 
                                       F-4

<PAGE>   53
 
                IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
 
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                 (IN THOUSANDS)
 

<TABLE>
<CAPTION>
                        CONVERTIBLE
                      PREFERRED STOCK      COMMON STOCK     ADDITIONAL      UNREALIZED GAINS                          TOTAL
                      ----------------   ----------------    PAID-IN     (LOSSES) ON SECURITIES   ACCUMULATED     SHAREHOLDERS'
                      SHARES   AMOUNT    SHARES   AMOUNT     CAPITAL       AVAILABLE-FOR-SALE       DEFICIT          EQUITY
                      ------   -------   ------   -------   ----------   ----------------------   -----------   -----------------
<S>                   <C>      <C>       <C>      <C>       <C>          <C>                      <C>           <C>
Balance at December
  31, 1992..........     --    $ --      9,292    $77,343     $1,099              $--              $ (34,655)       $  43,787
Issuance of common
  stock under stock
  option plan.......     --      --        117       101       --                  --                 --                  101
Issuance of common
  stock under
  employee stock
  purchase plan.....     --      --         16        68       --                  --                 --                   68
Issuance of common
  stock warrants....     --      --       --        --           600               --                 --                  600
Net loss............     --      --       --        --         --                  --                 (8,882)          (8,882)
                        ---    -------   ------   -------     ------              ----              --------         --------
Balance at December
  31, 1993..........     --      --      9,425    77,512       1,699               --                  (43,537)          35,674
Issuance of common
  stock under stock
  option plan.......     --      --         24        26       --                  --                   --                   26
Issuance of common
  stock under
  employee stock
  purchase plan.....     --      --         38        85       --                  --                   --                   85
Issuance of common
  stock in stock
  offerings.........     --      --      4,241    10,156       --                  --                   --               10,156
Change in unrealized
  gains (losses) on
  securities
  available-for-sale     --      --       --        --         --                  (14)               --                  (14)
Net loss............     --      --       --        --         --                  --                (18,031)         (18,031)
                        ---    -------   ------   -------     ------              ----              --------         --------
Balance at December
  31, 1994..........     --      --      13,728   87,779       1,699               (14)              (61,568)          27,896
Issuance of common
  stock under stock
  option plans......     --      --        167       697       --                  --                 --                  697
Issuance of common
  stock under
  employee stock
  purchase plan.....     --      --         63       256       --                  --                                     256
Issuance of series
  A-1 and A-2
  convertible
  preferred stock
  pursuant to terms
  of a collaborative
  agreement.........    138     7,149     --        --         --                  --                 --                7,149
Issuance of common
  stock and series B
  convertible
  preferred stock to
  acquire technology
  rights............     69     6,937    1,000     4,500       --                  --                 --               11,437
Issuance of common
  stock for
  services..........     --      --        103       322       --                  --                 --                  322
Amortization of fair
  value change in
  common stock
  warrants..........     --      --       --        --           680               --                 --                  680
Change in unrealized
  gains (losses) on
  securities
  available-for-sale     --      --       --        --         --                   24                --                   24
Net loss............     --      --       --        --         --                  --                (17,292)         (17,292)
                        ---    -------   ------   -------     ------              ----              --------         --------
Balance at December
  31, 1995..........    207    14,086    15,061   93,554       2,379                10               (78,860)          31,169
Issuance of common
  stock under stock
  option plans......     --      --        150       352       --                  --                 --                  352
Issuance of common
  stock under
  employee stock
  purchase plan.....     --      --         43       211       --                  --                 --                  211
Issuance of series
  A-3 convertible
  preferred stock
  pursuant to terms
  of a collaborative
  agreement.........     23     5,000     --        --         --                  --                 --                5,000
Issuance of common
  stock for
  services..........     --      --         17       359       --                  --                 --                  359
Amortization of fair
  value change in
  common stock
  warrants..........     --      --       --        --           544               --                 --                  544
Change in unrealized
  gains (losses) on
  securities
  available-for-sale     --      --       --        --         --                   (4)               --                   (4)
Net income..........     --      --       --        --         --                  --                  1,847            1,847
                        ---    -------   ------   -------     ------              ----              --------         --------
Balance at March 31,
  1996
  (unaudited).......    230    $19,086   15,271   $94,476     $2,923              $  6             $ (77,013)       $  39,478
                        ===    =======   ======   =======     ======              ====              ========         ========
</TABLE>

 
          See accompanying notes to consolidated financial statements.
 
                                       F-5

<PAGE>   54
 
                IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
 

<TABLE>
<CAPTION>
                                                                                          THREE MONTHS ENDED
                                                            YEARS ENDED DECEMBER 31,          MARCH 31,
                                                         ------------------------------   ------------------
                                                           1993       1994       1995       1995      1996
                                                         --------   --------   --------   --------   -------
                                                                                             (UNAUDITED)
<S>                                                      <C>        <C>        <C>        <C>        <C>
Cash flows from operating activities:
  Net income (loss)....................................  $ (8,882)  $(18,031)  $(17,292)  $(10,424)  $ 1,847
  Adjustments to reconcile net income (loss) to net
    cash provided by (used in) operating activities:
    Depreciation and amortization......................       716      2,422      2,401        587       644
    Amortization of premiums on marketable
      securities.......................................       404      --         --         --        --
    Payments on note receivable........................       255        562        495        114       148
    Amortization of discount on trade
      payable -- clinical materials....................       305      --         --         --        --
    Gains (losses) on sales of marketable securities
      and securities available-for-sale................       (27)        (1)         5      --        --
    Acquired technology rights.........................     --         --        11,437     11,437     --
    Issuance of common stock for services..............     --         --           322        148       359
    Amortization of fair value change in common stock
      warrants.........................................     --         --           680         25       544
    Change in assets and liabilities:
      Inventories......................................     1,913      --         --         --         (911)
      License fees receivable..........................     --         --         --         --       (4,500)
      Prepaid expenses, deposits and other assets......       137       (268)      (713)    (2,040)     (864)
      Accounts payable, accrued expenses and other
         liabilities...................................     1,819       (315)     2,643        544      (423)
      Trade payable -- clinical materials..............      (175)    (3,506)      (543)     --         (238)
      Accrued unification costs........................    (2,246)     --         --         --        --
      Deferred contract research revenue...............     1,315      --        (2,024)     --        --
                                                         --------   ---------  --------   --------   --------
         Net cash provided by (used in) operating
           activities..................................    (4,466)   (19,137)    (2,589)       391    (3,394)
Cash flows from investing activities:
  Purchase of property and equipment...................   (17,523)    (1,619)    (1,315)      (178)     (258)
  Purchase of marketable securities and securities
    available-for-sale.................................   (34,116)    (6,551)    (8,218)    (1,490)   (5,977)
  Sales and maturities of marketable securities and
    securities available-for-sale......................    55,873     14,962     10,715      1,000     3,830
                                                         --------   ---------  --------   --------   --------
         Net cash provided by (used in) investing
           activities..................................     4,234      6,792      1,182       (668)   (2,405)
Cash flows from financing activities:
  Proceeds from notes payable..........................     4,616      7,500      2,500      --          779
  Payments on notes payable............................      (140)    (1,400)    (4,058)    (1,917)     (847)
  Proceeds from issuance of common stock, net..........       169     10,267        953         16       563
  Proceeds from issuance of convertible preferred
    stock, net.........................................     --         --         7,149      --        5,000
  Proceeds from issuance of common stock warrants,
    net................................................       600      --         --         --        --
                                                         --------   ---------  --------   --------   --------
         Net cash provided by (used in) financing
           activities..................................     5,245     16,367      6,544     (1,901)    5,495
Net increase (decrease) in cash and cash equivalents...     5,013      4,022      5,137     (2,178)     (304)
Cash and cash equivalents, beginning of period.........     4,656      9,669     13,691     13,691    18,828
                                                         --------   ---------  --------   --------   --------
Cash and cash equivalents, end of period...............  $  9,669   $ 13,691   $ 18,828   $ 11,513   $18,524
                                                         ========   =========  ========   ========   ========
Supplemental disclosures of cash flow information:
  Cash paid during the period for interest.............  $     51   $    466   $  1,518   $    334   $   408
</TABLE>

 
          See accompanying notes to consolidated financial statements.
 
                                       F-6

<PAGE>   55
 
                IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    (THE FINANCIAL INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE MONTHS
                  ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
 
NOTE 1:  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
     Organization and Business:  IDEC Pharmaceuticals Corporation (the
"Company") was incorporated on July 19, 1985, under the laws of the State of
California to engage in the research and development of targeted immunotherapies
for cancer and autoimmune diseases.
 
     Principles of Consolidation:  The consolidated financial statements include
the financial statements of IDEC Pharmaceuticals Corporation and its wholly
owned subsidiary IDEC Seiyaku. All significant intercompany balances and
transactions have been eliminated in consolidation.
 
     Cash and Cash Equivalents:  For the purposes of financial statement
presentation, the Company considers all highly liquid investments in debt
securities with original maturities of three months or less to be cash
equivalents.
 
     Securities Available-for-Sale:  Securities available-for-sale are carried
at fair value, with unrealized gains and losses, net of tax, reported as a
separate component of shareholders' equity. The cost of securities sold is based
on the specific identification method.
 
     Inventories:  Inventories are stated at the lower of cost or market. Cost
is determined in a manner which approximates the first-in, first-out (FIFO)
method. Inventories consist of work-in process at March 31, 1996.
 
     Property and Equipment:  Property and equipment are stated at cost.
Depreciation on property and equipment is calculated using the straight-line
method over the estimated useful lives of the assets, generally ranging from
three to seven years. Leasehold improvements are amortized straight-line over
the shorter of the lease term or estimated useful life of the asset.
 
     Fair Value of Financial Instruments:  Statement of Financial Accounting
Standards No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires that fair values be disclosed for most of the Company's financial
instruments. The carrying amount of cash, cash equivalents and securities
available-for-sale, note receivable, contract research revenue receivables,
accounts payable, accrued expenses, trade payable -- clinical materials and
notes payable are considered to be representative of their respective fair
values.
 
     Research and Development Costs:  All research and development costs are
expensed in the period incurred. Clinical grant costs are fully accrued upon
patient enrollment.
 
     Contract Research Revenues and License Fees:  Contract research revenues
are recognized at the time research and development activities are performed
under the terms of the research contracts. Contract payments received in excess
of amounts earned are classified as deferred contract research revenue. Contract
research revenue earned in excess of contract payments received is classified as
contract research revenue receivables. License fees include milestone payments
and non-refundable fees from the sale of product rights under agreements with
third parties. Revenues from milestone payments are recognized when the results
or events stipulated in the agreement have been achieved.
 
     Income Taxes:  Income taxes are accounted for under the asset and liability
method where deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled.
 
     Net Income (Loss) Per Share:  Net income per share is computed in
accordance with the treasury stock method. Net income per share is based upon
the weighted average number of common shares and dilutive
 
                                       F-7

<PAGE>   56
 
                IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
    (THE FINANCIAL INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE MONTHS
                  ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
 
common stock equivalents during the period in which they are outstanding. Common
stock equivalents include outstanding stock options under the Company's stock
option plans, outstanding warrants to purchase the Company's common stock and
outstanding convertible preferred stock convertible into shares of the Company's
common stock. Dual presentation of primary and fully diluted net income per
share is not shown on the face of the statements of operations because the
differences are insignificant. Computations of net loss per share use the
weighted average number of common shares outstanding. Common equivalent shares
from common stock options, warrants and convertible preferred stock are excluded
from the computations as their effect is anti-dilutive.
 
     Use of Estimates:  Management of the Company has made a number of estimates
and assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent liabilities to prepare these consolidated financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from these estimates.
 
     Unaudited Financial Information:  The financial information as of March 31,
1996 and for the three months ended March 31, 1995 and 1996 is unaudited. In the
opinion of management, such information includes all adjustments, consisting of
normal recurring adjustments, necessary for the fair presentation of results for
the interim periods presented. Interim results are not necessarily indicative of
results for a full year.
 
     New Accounting Standards:  Effective January 1, 1996, the Company adopted
Financial Accounting Standards Board Statement No. 123, "Accounting for
Stock-Based Compensation" ("Statement No. 123"), which does not have a material
effect on the Company's consolidated financial statements. Statement No. 123
allows companies to expand the use of fair value accounting for stock
compensation plans or requires companies that elect to retain the current
approach for recognizing stock-based compensation expense to make annual pro
forma disclosures of the Company's operating results as if they had adopted the
fair value method. Management of the Company has retained the current approach
for recognizing stock-based compensation will provide pro forma disclosures in
the notes to the annual 1996 consolidated financial statements.
 
     Effective January 1, 1996, the Company adopted Financial Accounting
Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" ("Statement No. 121").
Statement No. 121 requires losses from impairment to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. The adoption of Statement No. 121 did not have a
material effect on the Company's consolidated financial statements for the three
months ended March 31, 1996.
 
NOTE 2:  SECURITIES AVAILABLE-FOR-SALE
 
     Securities available-for-sale consist of the following (tables in
thousands):
 

<TABLE>
<CAPTION>
                                                                DECEMBER 31, 1994
                                                --------------------------------------------------
                                                                GROSS          GROSS
                                                AMORTIZED     UNREALIZED     UNREALIZED     MARKET
                                                  COSTS         GAINS          LOSSES       VALUE
                                                ---------     ----------     ----------     ------
    <S>                                         <C>           <C>            <C>            <C>
    Corporate securities......................   $ 2,999         $  2           $ (3)       $2,998
    Certificate of deposit....................        75           --          --               75
    U.S. government agencies..................     3,850            5            (18)        3,837
                                                 -------         ----           ----        ------
                                                 $ 6,924         $  7           $(21)       $6,910
                                                 =======         ====           ====        ======
</TABLE>

 
                                       F-8

<PAGE>   57
 
                IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
    (THE FINANCIAL INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE MONTHS
                  ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
 

<TABLE>
<CAPTION>
                                                                DECEMBER 31, 1995
                                                --------------------------------------------------
                                                                GROSS          GROSS
                                                AMORTIZED     UNREALIZED     UNREALIZED     MARKET
                                                  COSTS         GAINS          LOSSES       VALUE
                                                ---------     ----------     ----------     ------
    <S>                                         <C>           <C>            <C>            <C>
    Corporate securities......................   $ 2,828         $  1          -$-          $2,829
    U.S. government agencies..................     2,344            9          --            2,353
                                                ---------         ---        ----------     ------
                                                 $ 5,172         $ 10          -$-          $5,182
                                                 =======      ========       ========       ======
</TABLE>

 

<TABLE>
<CAPTION>
                                                                  MARCH 31, 1996
                                                --------------------------------------------------
                                                                GROSS          GROSS
                                                AMORTIZED     UNREALIZED     UNREALIZED     MARKET
                                                  COSTS         GAINS          LOSSES       VALUE
                                                ---------     ----------     ----------     ------
    <S>                                         <C>           <C>            <C>            <C>
    Corporate securities......................   $ 6,475         $  1          -$-          $6,476
    U.S. government agencies..................       844            5          --              849
                                                 -------         ----           ----        ------
                                                 $ 7,319         $  6          -$-          $7,325
                                                 =======         ====           ====        ======
</TABLE>

 
     The net unrealized holding gain (loss) on securities available-for-sale
included as a separate component of shareholders' equity at December 31, 1994,
1995 and March 31, 1996 totaled $(14,000), $10,000 and $6,000, respectively. The
gross realized gains on sales of securities available-for-sale for the years
ended December 31, 1994, and 1995 totaled $9,000 and $4,000, respectively, and
the gross realized losses for the years ended December 31, 1994 and 1995 totaled
$8,000 and $9,000, respectively.
 
     The amortized cost and estimated fair value of securities
available-for-sale by contractual maturity are shown below (table in thousands):
 

<TABLE>
<CAPTION>
                                                  DECEMBER 31, 1995              MARCH 31, 1996
                                               ------------------------     ------------------------
                                               AMORTIZED     ESTIMATED      AMORTIZED     ESTIMATED
                                                 COST        FAIR VALUE       COST        FAIR VALUE
                                               ---------     ----------     ---------     ----------
    <S>                                        <C>           <C>            <C>           <C>
    Due in one year or less..................   $ 4,672        $4,681        $ 7,319        $7,325
    Due after one year through three years...       500           501          --            --
                                                 ------        ------
                                                $ 5,172        $5,182        $ 7,319        $7,325
                                                 ======        ======
</TABLE>

 
NOTE 3:  PROPERTY AND EQUIPMENT
 
     Property and equipment consists of the following (table in thousands):
 

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                            -------------------     MARCH 31,
                                                             1994        1995         1996
                                                            -------     -------     ---------
    <S>                                                     <C>         <C>         <C>
    Furniture and fixtures................................  $   596     $   608      $   697
    Machinery and equipment...............................    7,506       8,153        8,349
    Leasehold improvements................................   15,205      15,639       15,612
                                                            -------     -------      -------
                                                             23,307       4,400       24,658
    Accumulated depreciation and amortization.............   (4,266)     (6,445)      (7,089)
                                                            -------     -------      -------
                                                            $19,041     $17,955      $17,569
                                                            =======     =======      =======
</TABLE>

 
NOTE 4:  NOTE RECEIVABLE
 
     In November 1992, the Company loaned $3,200,000 to the landlord of its
headquarters in San Diego, California, to assist in financing construction of
leasehold improvements. The promissory note bears interest at
 
                                       F-9

<PAGE>   58
 
                IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
    (THE FINANCIAL INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE MONTHS
                  ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
 
8.75 percent and matures in January 2000. Interest and principal payments are
due monthly and are paid from the landlord's rents received from the Company
(Note 10).
 
NOTE 5:  NOTES PAYABLE
 
     Notes payable consist of the following (table in thousands):
 

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                                -------------------     MARCH 31,
                                                                 1994        1995         1996
                                                                -------     -------     ---------
<S>                                                             <C>         <C>         <C>
17.74% notes, due in monthly installments, with a final
  payment of $1,125 due at maturity in 1998, secured by
  equipment, lease deed of trust, and a patent and trademark
  collateral assignment.......................................  $ 7,357     $ 5,758      $ 5,363
17.53% note, due in monthly installments, with a final payment
  of $375 due at maturity in 1999, secured by equipment, lease
  deed of trust, and a patent and trademark collateral
  assignment..................................................    --          2,245        2,128
10.39% note, due in monthly installments, maturing 1995,
  secured by equipment........................................      257       --           --
10.18% note, due in monthly installments, maturing 1997,
  secured by equipment........................................    2,048       1,413        1,244
10.17% note, due in monthly installments, maturing 1995,
  secured by equipment........................................      886       --           --
9.32% note, due in monthly installments, maturing 1997,
  secured by equipment........................................    --          --             749
9.92% note, due in monthly installments, maturing 1997,
  secured by equipment........................................      192         130          114
Other notes, due in monthly installments, maturing thru 1997,
  secured by equipment........................................      322         300          179
                                                                -------     -------      -------
                                                                 11,062       9,846        9,777
Current portion...............................................   (3,676)     (3,248)      (3,392)
                                                                -------     -------      -------
                                                                $ 7,386     $ 6,598      $ 6,385
                                                                =======     =======      =======
</TABLE>

 
     In December 1995, the Company entered into a $1,500,000 lease financing
agreement to finance equipment. As of March 31, 1996 and December 31, 1995, the
unfunded borrowing capacity under this agreement was $712,000 and $1,500,000,
respectively, and is available until July 1, 1996, at an interest rate equal to
9.15 percent adjusted for changes in the three-year Treasury Notes at the date
of funding.
 
     The Company provided additional security for $2,240,000, $1,543,000 and
$1,358,000 of the notes payable at December 31, 1994, 1995 and March 31, 1996,
respectively, with a $1,500,000 irrevocable standby letter of credit at December
31, 1994 and a $750,000 irrevocable standby letter of credit at December 31,
1995 and March 31, 1996, that renews annually with a final expiration in 1999.
During 1994, the Company pledged as collateral a marketable security to secure
the irrevocable standby letter of credit. The restricted marketable security is
stated at cost, which approximates market.
 
     Certain notes payable contain financial covenants, including restrictions
on incurring certain additional indebtedness, working capital and a requirement
for maintaining minimum aggregated cash, cash equivalents and securities
available-for-sale balances of $12,000,000. At March 31, 1996 and December 31,
1995, the Company was in compliance with all covenants.
 
     The aggregate maturities of notes payable for each of the five years
subsequent to December 31, 1995, are as follows: 1996, $3,248,000; 1997,
$3,404,000; 1998, $2,754,000; and 1999, $440,000.
 
                                      F-10

<PAGE>   59
 
                IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
    (THE FINANCIAL INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE MONTHS
                  ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
 
NOTE 6:  401(k) EMPLOYEE SAVINGS PLAN
 
     The Company has a qualified 401(k) Employee Savings Plan ("401(k) Plan"),
available to substantially all employees over the age of 21. The Company may
make discretionary contributions to the 401(k) Plan, which vest immediately.
There were no discretionary contributions for the years ended December 31, 1993,
1994, 1995 and the three months ended March 31, 1996.
 
NOTE 7:  RESEARCH AND DEVELOPMENT
 
     In December 1995, the Company and Eisai Co. Ltd. ("Eisai") entered into a
collaborative development agreement and a license agreement aimed at the
development and commercialization of humanized and PRIMATIZED anti-gp39
antibodies. Under the terms of these agreements, Eisai may provide up to
$37,500,000 in milestone payments and support for research and development.
Eisai will receive exclusive rights in Asia and Europe to develop and market
resulting products emerging from the collaboration, with the Company receiving
royalties on eventual product sales by Eisai. Eisai may terminate these
agreements based on a reasonable determination that the products do not justify
continued development or marketing. Included in contract research revenues for
the year ended December 31, 1995 and for the three months ended March 31, 1996
is $2,500,000 and $1,375,000, respectively, to fund product development, which
approximates the research and development costs incurred under the program.
Included in license fees for the year ended December 31, 1995, is $2,000,000
earned under these agreements.
 
     In December 1994, the Company and Seikagaku Corporation ("Seikagaku")
entered into a collaborative development agreement and a license agreement aimed
at the development and commercialization of a PRIMATIZED anti-CD23 antibody.
Under the terms of these agreements, Seikagaku may provide up to $26,000,000 in
milestone payments and support for research and development. The Company and
Seikagaku will share co-exclusive, worldwide rights to all products emerging
from the collaboration, with the Company receiving royalties on eventual product
sales by Seikagaku. Seikagaku may terminate these agreements based on a
reasonable determination that the products do not justify continued development
or marketing. Included in contract research revenues for the year ended December
31, 1995 and the three months ended March 31, 1996 is $2,500,000 and $875,000,
respectively, to fund product development, which approximates the research and
development costs incurred under the program. Included in license fees for the
year ended December 31, 1995 and the three months ended March 31, 1996, is
$1,000,000 earned under these agreements for each of the respective periods.
 
     In November 1993, the Company entered into a collaborative research and
development agreement and a license agreement with Mitsubishi Chemical
Corporation ("Mitsubishi Chemical"), for the development of a PRIMATIZED anti-B7
antibody. Under the terms of the collaboration, Mitsubishi may provide up to
$12,000,000 in milestone payments and support for research and development. The
Company will be reimbursed for its research efforts, receive milestone payments,
retain certain marketing rights and receive royalties on sales of any products
commercialized by Mitsubishi Chemical. Mitsubishi Chemical may terminate this
agreement if certain development objectives are not attained. Included in
contract research revenues for the years ended December 31, 1994, 1995 and the
three months ended March 31, 1996 is $1,500,000, $2,047,000 and $500,000,
respectively, to fund product development, which approximates the research and
development costs incurred under the program. Included in license fees are
milestone and licensing payments of $385,000, $300,000 and $1,000,000 for the
years ended December 31, 1993, 1994 and 1995, respectively, earned under these
agreements.
 
     In October 1992, the Company and SmithKline Beecham p.1.c. ("SmithKline
Beecham") entered into a collaborative research and license agreement aimed at
the development and commercialization of therapeutic products based on the
Company's PRIMATIZED anti-CD4 antibodies. Under the terms of the agreement,
 
                                      F-11

<PAGE>   60
 
                IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
    (THE FINANCIAL INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE MONTHS
                  ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
 
the Company will receive aggregate payments that have the potential of reaching
in excess of $60,000,000, subject to the attainment of certain milestones. The
Company will receive funding for anti-CD4 related research and development
programs, royalties and a share of co-promotion profits (in North America) on
sales of products which may be commercialized as a result of the agreement.
SmithKline Beecham may terminate this agreement based on a reasonable
determination that the products do not justify continued development or
marketing. Included in contract research revenues for the years ended December
31, 1993, 1994 and 1995 is $3,700,000, $3,201,000 and $3,488,000, respectively,
to fund product development, which approximates the research and development
costs incurred under the program. Included in license fees are milestone and
licensing payments of $8,000,000, and $2,000,000, for the years ended December
31, 1993 and 1994, respectively, earned under the agreement.
 
     The Company performed research under certain other contracts and,
accordingly, realized revenues and recognized expenses in the accompanying
consolidated statements of operations.
 
     Related Party Arrangements:  In March 1995, the Company and Genentech, Inc.
("Genentech") entered into a collaborative agreement for the clinical
development and commercialization of the Company's anti-CD20 monoclonal
antibody, IDEC-C2B8, for the treatment of non-Hodgkin's B-cell lymphomas. In
February 1996, Genentech exercised its option to extend its collaboration with
the Company to include two radioconjugates, IDEC-Y2B8 and IDEC-In2B8, also for
the treatment of B-cell lymphomas. Concurrent with the collaborative agreement
the Company and Genentech also entered into an expression technology license
agreement for a proprietary gene expression technology developed by the Company
and a preferred stock purchase agreement providing for certain equity
investments in the Company by Genentech, see Note 8. Under the terms of these
agreements, the Company may receive payments totaling $57,000,000, subject to
the attainment of certain milestones. In addition, the Company and Genentech
will co-promote IDEC-C2B8 in the United States and the Company and Genentech or
its sublicensee will co-promote IDEC-C2B8 in Canada, with the Company receiving
a share of profits. Under the terms of separate agreements with Genentech,
commercialization of IDEC-C2B8 outside the United States will be the
responsibility of F. Hoffmann-La Roche Ltd, one of the world's largest
pharmaceuticals firms, except in Japan where Zenyaku Kogyo Co., Ltd will be
responsible for development, marketing and sales. The Company will receive
royalties on sales outside the U.S. and Canada. Additionally, the Company will
receive royalties on sales of Genentech products manufactured using the
Company's proprietary gene expression system. Genentech may terminate this
agreement for any reason beginning on the date of availability of data from the
first Phase III clinical trial of IDEC-C2B8. Included in contract research
revenues for year ended December 31, 1995 is $1,083,000 to fund specific product
development, which approximates the research and development costs incurred for
the services provided. Included in license fees are payments of $5,500,000, and
$1,500,000, for the year ended December 31, 1995 and the three months ended
March 31, 1996, respectively, earned under the agreement.
 
     In June 1991, the Company and Zenyaku Kogyo Co., Ltd. ("Zenyaku") entered
into a product rights agreement and a stock purchase agreement under which the
Company granted Zenyaku a license to manufacture, use and sell certain products
for cancer and autoimmune therapeutic applications. In November 1995, the
Company and Zenyaku terminated the product rights agreement and concurrently the
Company, Zenyaku and Genentech entered into a joint development, supply and
license agreement where Zenyaku received exclusive rights to develop, market and
sell IDEC-C2B8 in Japan which resulted in the Company recognizing $2,000,000 in
license fees from Zenyaku for the year ended December 31, 1996. Included in
contract research revenues for the three months ended March 31, 1996 is $23,000
to fund specific product development, which approximates the research and
development costs incurred for the services provided.
 
                                      F-12

<PAGE>   61
 
                IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
    (THE FINANCIAL INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE MONTHS
                  ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
 
NOTE 8:  SHAREHOLDERS' EQUITY
 
     Convertible Preferred stock:  In March 1995, the Company entered into an
agreement to issue 1,000,000 shares of its common stock and 69,000 shares of 10
percent Series B Nonvoting Cumulative Convertible Preferred Stock ("Series B
Preferred Stock") for the repurchase of all Merrill Lynch/Morgan Stanley, L.P.
("ML/MS") rights in the Company's lymphoma products. The stock issuances
resulted in a non-cash charge to operating expenses of $11,437,000, representing
the purchase of the acquired technology rights. The Series B Preferred Stock is
recorded on the balance sheet at its liquidation preference of $100 per share.
Dividends shall accrue until March 15, 1997, thereafter, accrued dividends shall
be payable quarterly. No dividends or other distribution shall be paid or
declared, other than common stock dividends on the Company's common stock, or on
Series A-7 Convertible Preferred Stock which is not yet issued, unless and until
accrued dividends on the Series B Preferred Stock have been paid. On March 16,
1997, the Series B Preferred Stock and accrued dividends will automatically be
converted into common stock. Cumulative dividends in arrears at March 31, 1996
totaled $724,000 or $10.49 per share. Each share of Series B Preferred Stock is
convertible into the number of shares of common stock as equals 100 divided by
the higher of $3.75 or the average closing price of the Company's common stock
as reported by the Nasdaq National Market for the 20 trading days ending on
March 1, 1997.
 
     Additionally, the Company issued 100,000 shares of its Series A-1 Nonvoting
Convertible Preferred Stock ("Series A-1 Preferred Stock") in April 1995, 38,000
shares of its Series A-2 Nonvoting Convertible Preferred Stock ("Series A-2
Preferred Stock") in August 1995 and 23,000 shares of its Series A-3 Nonvoting
Convertible Preferred Stock ("Series A-3 Preferred Stock") in March 1996, to
Genentech pursuant to the terms of a preferred stock purchase agreement. The
preferred stock purchase agreement was entered into concurrently with a
collaboration agreement as described in Note 7. The Series A-1 Preferred Stock,
Series A-2 Preferred Stock and Series A-3 Preferred Stock are recorded on the
balance sheet at their liquidation preference per share of $50, $67 and $217,
respectively, net of issuance costs. Each share of Series A-1 Preferred Stock,
Series A-2 Preferred Stock and Series A-3 Preferred Stock is convertible at any
time into ten shares of common stock.
 
     Common stock:  In March 1995, the Company issued 1,000,000 shares of its
common stock for the repurchase of all ML/MS rights in the Company's lymphoma
products, see convertible preferred stock above. In May 1994, the shareholders
approved an increase in the number of authorized common shares to 25,000,000
shares. In June 1994, the Company completed a public offering of 2,800,000
shares of its common stock resulting in net proceeds of $6,821,000. In December
1994, the Company issued 1,441,000 shares of its common stock pursuant to the
terms of a collaborative research and license agreement with SmithKline Beecham
resulting in net proceeds of $3,335,000.
 
     Stock Option Plans:  The Company has two active stock option plans.
 
     The 1988 Employee Stock Option Plan (the "Option Plan") was approved by the
shareholders in 1988 and was amended in 1992, 1993, 1994 and 1995. Under the
Option Plan, options for the purchase of the Company's common stock may be
granted to key employees (including officers), directors and outside
consultants. Options may be designated as incentive stock options or as
nonqualified stock options and generally vest over four years, except under a
provision of the plan which allows them to accelerate their vesting under
certain conditions. Options under the Option Plan, which have a term of up to
ten years, are exercisable at a price per share not less than the fair market
value (85 percent of fair market value for nonqualified options) on the date of
grant. The aggregate number of shares authorized for issuance under the Option
Plan is 3,480,000. At March 31, 1996, 1,029,000 options were vested and
exercisable.
 
                                      F-13

<PAGE>   62
 
                IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
    (THE FINANCIAL INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE MONTHS
                  ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
 
     In September 1993, the Company adopted the 1993 Non-Employee Directors
Stock Option Plan (the "Directors Plan"), which was approved by the shareholders
in May 1994 and was amended in 1995. A total of 250,000 shares of common stock
are reserved for issuance to individuals who serve as non-employee members of
the Board of Directors. Options under the Directors Plan, which have a term of
up to ten years, are exercisable at a price per share not less than the fair
market value on the date or grant and vest over four years. At March 31, 1996
and December 31, 1995, 50,000 and 25,000 options, respectively, were vested and
exercisable.
 
     The following table summarizes the activity under the Company's option
plans during 1995, 1994 and 1993 (table in thousands, except per share amounts):
 

<TABLE>
<CAPTION>
                                                DIRECTORS PLAN                 OPTION PLAN
                                          --------------------------    --------------------------
                                          SHARES          PRICE         SHARES          PRICE
                                          ------     ---------------    ------     ---------------
    <S>                                   <C>        <C>                <C>        <C>
    Outstanding at December 31, 1992....     --      $            --     1,489     $ 0.88 to 18.25
    Granted.............................     --                   --       487       4.25 to  7.50
    Exercised...........................     --                   --      (117)      3.75 to  7.75
    Cancelled...........................     --                   --      (128)      0.88 to 18.25
                                            ---       --------------    ------      --------------
    Outstanding at December 31, 1993....     --                   --     1,731       0.88 to 18.25
    Granted.............................     35                 5.63     2,052       2.50 to  6.19
    Exercised...........................     --                   --       (24)      0.88 to  2.56
    Cancelled...........................     --                   --    (1,413)      0.88 to 18.25
                                            ---       --------------    ------      --------------
    Outstanding at December 31, 1994....     35                 5.63     2,346       0.88 to  7.75
    Granted.............................     70        2.38 to  4.38       311       2.56 to 12.38
    Exercised...........................    (10)                5.63      (157)      0.88 to  7.75
    Cancelled...........................    (10)                2.38       (33)      1.50 to  7.75
                                            ---       --------------    ------      --------------
    Outstanding at December 31, 1995....     85        2.38 to  5.63     2,467     $ 0.88 to 12.38
    Granted.............................     35                19.13     1,003               20.13
    Exercised...........................     --                   --      (150)      0.88 to  5.75
    Cancelled...........................     --                   --      (172)      2.50 to 20.13
                                            ---       --------------    ------      --------------
    Outstanding at March 31, 1996.......    120      $ 2.38 to 19.13     3,148     $ 0.88 to 20.13
                                            ===       ==============    ======      ==============
</TABLE>

 
     Employee Stock Purchase Plan:  In May 1993, the shareholders adopted the
Company's Employee Stock Purchase Plan (the "Purchase Plan"), which was amended
in 1995. A total of 345,000 shares of common stock are reserved for issuance.
For the years ended December 31, 1993, 1994, 1995 and the three months ended
March 31, 1996, 16,000, 38,000, 63,000 and 43,000 shares, respectively, were
issued under the Purchase Plan.
 
     Stock Warrants:  Under an investment agreement and in part subject to the
Company's accomplishment of certain research and development objectives, SR One
Limited, SmithKline Beecham's venture capital subsidiary, purchased 200,000
common stock warrants in each of 1992 and 1993 for $566,000 and $600,000,
respectively, net of issuance costs, which was recorded as additional paid-in
capital. Such warrants have a seven-year term and are exercisable at $12 per
share. The warrants are immediately exercisable and the Company has the right to
require that the warrants be automatically exercised if the closing price of the
Company's stock exceeds $15 per share for 90 consecutive trading days.
 
     In December 1994 and August 1995, concurrent with the completion of a debt
financing, the Company issued warrants for the purchase of 294,000 and 46,000
shares, respectively, of common stock. Such warrants
 
                                      F-14

<PAGE>   63
 
                IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
    (THE FINANCIAL INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE MONTHS
                  ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
 
have a six-year term and are immediately exercisable at prices ranging between
$2.29 and $6.22 per share. The holders of the warrants have the option to
exchange their warrants, without the payment of cash or consideration, for a
number of common shares equal to the difference between the number of shares
resulting by dividing the aggregate exercise price of the warrants by the fair
market value of the common stock on the date of exercise and the number of
shares that would have been otherwise issued under the exercise. The excess, if
any, of the fair market value of the warrants on each measurement date over the
exercise price is amortized over the remaining periods of the related debt as a
non-cash charge to interest expense.
 
     At March 31, 1996, 740,000 warrants to purchase common stock were
outstanding.
 
NOTE 9:  INCOME TAXES
 
     The following table summarizes the tax effects of temporary differences
that give rise to significant portions of the deferred tax assets and deferred
tax liabilities at December 31, 1994 and 1995 (table in thousands):
 

<TABLE>
<CAPTION>
                                                                       1994         1995
                                                                     --------     --------
    <S>                                                              <C>          <C>
    Deferred tax assets:
      Accrued expenses.............................................  $    253     $    253
      Deferred rent expense........................................       451          270
      Deferred contract research revenue...........................        --          812
      Acquired technology rights...................................     4,591           --
      Capitalized state research and experimentation costs.........     1,883        1,655
      Research and experimentation credit..........................     3,907        3,283
      Net operating loss carryforwards.............................    22,938       20,566
      Other........................................................       541          253
                                                                     --------     --------
         Total gross deferred tax assets...........................    34,564       27,092
      Valuation allowance..........................................   (34,564)     (26,912)
                                                                     --------     --------
         Net deferred tax assets...................................        --          180
    Deferred tax liabilities:
      Property and equipment, principally due to difference in
         depreciation..............................................        --         (180)
                                                                     --------     --------
         Total gross deferred tax liabilities......................        --         (180)
                                                                     --------     --------
    Net deferred taxes.............................................  $     --     $     --
                                                                     ========     ========
</TABLE>

 
     In 1995, the Company recognized an increase in the valuation allowance of
$7,652,000.
 
     As of December 31, 1995, the Company had net operating loss and research
and experimentation tax credit carryforwards for Federal income tax purposes of
approximately $61,821,000 and $2,804,000, respectively, which expire between
1999 and 2010.
 
     Net operating loss carryforwards and research and experimentation tax
credit carryforwards as of December 31, 1995 for state income tax purposes are
approximately $20,638,000 and $1,102,000, respectively. The net operating loss
carryforwards expire between 1996 and 2000 and the research and experimentation
tax credit carryforwards expire between 2004 and 2010.
 
     The utilization of net operating losses and tax credits incurred prior to
the Company's initial public offering in 1991, may be subject to an annual
limitation under the Internal Revenue Code, due to a cumulative
 
                                      F-15

<PAGE>   64
 
                IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
    (THE FINANCIAL INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE MONTHS
                  ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
 
change in ownership of more than 50 percent. However, the Company believes that
such limitations will not have a material impact upon the utilization of such
net operating loss carryforwards.
 
NOTE 10:  COMMITMENTS
 
     Lease Commitments:  In July 1992, the Company entered into a 15-year
operating lease for its headquarters, which commenced in 1993. The Company has
the option to extend the term of the lease for two additional periods of five
years each. In addition to the monthly lease payments, the lease agreement
provides for the Company to pay all operating costs associated with the
facility. The lease agreement provides for scheduled rental increases;
accordingly lease expense is recognized on a straight-line basis over the term
of the lease. In connection with the lease agreement, the Company loaned
$3,200,000 to the landlord (Note 4). The Company also leases laboratory and
office equipment and another facility under several noncancellable operating
leases expiring at various dates through 1997.
 
     Future minimum lease payments under all operating leases as of December 31,
1995, are as follows (table in thousands):
 

<TABLE>
        <S>                                                                  <C>
        1996...............................................................  $ 3,299
        1997...............................................................    3,245
        1998...............................................................    2,757
        1999...............................................................    2,867
        2000...............................................................    2,982
        2001 and thereafter................................................   24,233
                                                                             -------
                                                                              39,383
        Sublease income....................................................   (1,498)
                                                                             -------
        Total minimum lease payments.......................................  $37,885
                                                                             =======
</TABLE>

 
     Lease expense under all operating leases totaled $2,305,000, $3,076,000,
$3,097,000 and $797,158 for the years ended December 31, 1993, 1994, 1995, and
the three months ended March 31, 1996, respectively.
 
     License Agreements:  In connection with its research and development
efforts, the Company has entered into various license agreements with unrelated
parties which provide the Company with rights to develop, produce and market
products using certain know-how, technology and patent rights maintained by the
parties. Terms of the various license agreements require the Company to pay
royalties from future sales, if any, on specified products using the resulting
technology. As of December 31, 1995, such royalties have not commenced on the
aforementioned license agreements.
 
                                      F-16

<PAGE>   65
 
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