March 17, 1999
RECOMMENDATION: BUY

CYPRESS BIOSCIENCE, INC. (NASDAQ: CYPB)

Exchange Symbol.....................CYPB (NASDAQ)
Price of Common Stock (03/22/99).............$3.66
30-Day Average Trading Volume............172,000
Shares Outstanding.........................39.5mm
52-Week High/Low......................$3.96/$1.43

Address...............4350 Executive Drive, Suite 325
.................................San Diego, CA  92121
Telephone/Fax.............619-452-2323 / 619-452-1212
Chairman & CEO............Jay D. Kranzler, M.D., Ph.D.
President & COO.......................Carl Bobkoski

Recent Developments

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.

For Additional Information

Sources for Additional Information

www.CypressBio.com	CYPB's corporate website
www.SmallCapsOnline.com	SmallCaps Online's site for company information and research
www.FDA.gov	US Food and Drug Administration homepage
www.rheumatology.org	American College of Rheumatology homepage
www.arthritis.org	Arthritis Foundation homepage
www.WHO.int	World Health Organization homepage
www.AABB.org	American Association of Blood Banks homepage
www.AMA-Assn.org	American Medical Association homepage
www.SEC.gov	U.S. Securities and Exchange Commission, with links to EDGAR filings

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