New York, NY, March 17, 1999 -- SmallCaps Online LLC reiterated its BUY recommendation today on Cypress Bioscience, Inc. (Nasdaq: CYPB) following an announcement that the FDA had approved Cypress’ Prosorba® column to treat moderate to severe rheumatoid arthritis (RA).

Excerpts from the report follow:

As we have been anticipating, CYPB announced today that the FDA has approved the Prosorba column for use in moderate to severe rheumatoid arthritis (RA). The formal product launch is planned for April 1999, with commercialization efforts being coordinated in partnership with Fresenius AG. The Prosorba column received label claims for use in adult patients of moderate to severe RA with long-standing disease who have failed or are intolerant of disease-modifying anti-rheumatic drugs (DMARDs). We are reiterating our BUY recommendation following the FDA approval of Prosorba for RA, and further discussions with senior management pertaining to their partnership with Fresenius AG, and continue to believe that CYPB is significantly undervalued based on the potential of Prosorba.

Large Market Opportunity: RA is a chronic disease that causes pain, swelling, stiffness and loss of function in the joints of the body, and inflammation and other problems in other areas of the body. According to the American College of Rheumatology, RA afflicts approximately 1% to 2% of the worldwide population, totaling approximately 2.5 million Americans. More than 60% of those afflicted are women. There have been many studies published on the direct medical costs, and total costs, attributed to RA, and we estimate that the direct medical costs in the US (excluding financial losses) exceeds $5 billion. The "difficult-to-treat" market for which Prosorba is indicated, and has shown to be effective, is estimated to be roughly 250,000 patients in the US alone; given its performance in clinical trials and the difficulty in treating this complex disease, we believe the ultimate target market could be significantly larger.

Partnership with Fresenius: Last week, CYPB announced it had signed a definitive agreement with Fresenius to distribute, in a partnership arrangement, the Prosorba column in the US, Europe, Latin America and, subject to certain conditions, in Japan and other Asian countries. Under the agreement:

• Fresenius will make an upfront investment of $1.5 million in equity and warrants ($1 million equity at market, and $500K for warrants to purchase CYPB at $7.50 per share);
• Fresenius will make license payments based upon US and international sales hurdles of up to $54 million;
• In the US, CYPB and Fresenius will produce and market the Prosorba column in partnership, whereby CYPB and Fresenius will share in the costs of development, further registrations and marketing, and will split all profits on a 50/50 basis (or a 60/40 basis in years where revenues exceed $25 million); nota bene: in our initiating coverage report of October 14, 1998, we forecast revenues in excess of $50 million in Year 2000 (see our website at www.SmallCapsOnline.com for a copy of our model from 10/14/98);
• Fresenius is responsible for registration and marketing Prosorba outside of the US;
• Fresenius, in return for an option to purchase the Prosorba manufacturing facility, will provide a Line of Credit of approximately $7 million to CYPB, which will facilitate manufacturing scale-up.

Benefits of Fresenius Partnership for CYPB: As we stated in our last update, we believe Fresenius is the ideal partner for CYPB for Prosorba, given their international presence and leadership in worldwide dialysis and other acute care centers and services. Benefits of this partnership to CYPB, and their shareholders include:

• Fresenius, a leading manufacturer of apheresis equipment, will design "Prosorba-friendly" equipment and disposables to make the Prosorba treatment more readily available — including in clinics operated by Fresenius Medical Care AG (majority-owned by Fresenius), a leading chain of apheresis centers in the US;
• CYPB will share in the profits on disposable sales in the US, which management estimates at approximately $20 million at peak sales;
• The financial considerations will reduce CYPB cash burn by roughly 50%, and eliminates the need for CYPB capital investment in facility and inventory; management believes it may reach break-even without additional financings;
• Fresenius’ participation in international clinical development and regulatory should accelerate European registration by roughly 2 years.

We view this partnership with Fresenius to be extremely valuable to CYPB and its shareholders. While complex in terms of financial consideration, management believes that this "joint-venture like" partnership arrangement will ultimately lead to CYPB receiving approximately a 25% share of the profits on Prosorba sales (versus 15% for Fresenius), factoring in adjustments for the license payments based upon achievement of certain European and US sales hurdles.

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