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UNITED STATES
SECURITIES AND EXCHANGE COMMISION  FORM 10-Q  [X]
    
    Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.For the quarterly period ended March 31, 2004[   ]
    
    Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.For the transition period from ________ to ________. Commission File Number000-50438 Myogen, Inc.  Delaware
    
    84-1348020(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 7575 West 103rd Avenue, Suite 102
Westminster, CO 80021
(303) 410-6666
(Address, including zip code, and telephone number,
including area code, of principal executive offices) Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [   ] Check whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes [   ] No [X] As of May 7, 2004 there were 26,484,611 shares of the Registrants Common
Stock outstanding, par value $0.001 per share. This quarterly report on Form 10-Q consists of 29 pages. 1




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MYOGEN, INC.
FORM 10-Q INDEX Number
    
    PagePART I. Financial Information
    
    
    3ITEM 1. Consolidated Financial Statements (unaudited)
    
    
    3Consolidated Balance Sheets
as of March 31, 2004 and December 31, 2003
    
    
    3Consolidated Statements of Operations 
for the three months ended March 31, 2004 and
2003 and the cumulative period from June 10, 1996
(date of inception) through March 31, 2004
    
    
    4Consolidated Statements of Cash Flows 
for the three months ended March 31, 2004 and
2003 and the cumulative period from June 10, 1996
(date of inception) through March 31, 2004
    
    
    5Notes to Consolidated Financial Statements
    
    
    7ITEM 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    12ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    25ITEM 4. Controls and Procedures
    
    
    26PART II. Other Information
    
    
    27ITEM 1. Legal Proceedings
    
    
    27ITEM 2. Changes in Securities and Use of Proceeds
    
    
    27ITEM 3. Defaults Upon Senior Securities
    
    
    27ITEM 4. Submission of Matters to a Vote of Security Holders
    
    
    27ITEM 5. Other Information
    
    
    27ITEM 6. Exhibits and Reports on Form 8-K
    
    
    27SIGNATURES
    
    
    28EXHIBIT INDEX
    
    
    29Certification of Principal Executive OfficerCertification of Principal Financial OfficerSection 1350 Certification
 2




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PART I. FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS MYOGEN, INC.
(A Development Stage Enterprise) 
 CONSOLIDATED BALANCE SHEETS
(Unaudited)
 March 31,
    
    December 31,2004
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    17,827,890
    
    
    $
    44,337,721Short-term investments
    
    
    76,316,568
    
    
    
    69,914,627Accrued interest receivable
    
    
    614,025
    
    
    
    607,393Trade accounts receivable
    
    
    1,170,470
    
    
    
    1,274,861Research and development contract amounts due within one year
    
    
    2,547,961
    
    
    
    1,625,000Inventories
    
    
    793,616
    
    
    
    724,282Prepaid expenses and other current assets
    
    
    1,274,754
    
    
    
    1,434,174Total current assets
    
    
    100,545,284
    
    
    
    119,918,058Long-term investments
    
    
    3,503,210
    
    
    
    Property and equipment, net
    
    
    1,476,635
    
    
    
    1,304,028Other assets
    
    
    46,960
    
    
    
    51,238Total assets
    
    $
    105,572,089
    
    
    $
    121,273,324LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    7,894,652
    
    
    $
    7,594,935Accrued liabilities
    
    
    923,230
    
    
    
    1,350,114Current portion of deferred revenue
    
    
    1,666,667
    
    
    
    1,666,667Current portion of capital lease obligations
    
    
    38,770
    
    
    
    37,015Current portion of notes payable, net of discount
    
    
    1,683,226
    
    
    
    1,639,246Total current liabilities
    
    
    12,206,545
    
    
    
    12,287,977Deferred revenue, net of current portion
    
    
    2,531,362
    
    
    
    2,948,029Capital lease obligations, net of current portion
    
    
    113,053
    
    
    
    121,617Notes payable, net of current portion and discount
    
    
    1,556,271
    
    
    
    1,993,906Commitments and contingencies (See Note 9)Stockholders equity:Preferred Stock, $0.001 par value; 5,000,000 shares
authorized at March 31, 2004 and December 31, 2003, no
shares issued or outstanding
    
    
    
    
    
    
    Common stock, $0.001 par value; 100,000,000 shares
authorized and 26,465,885 and 26,457,927 shares issued and
outstanding as of March 31, 2004 December 31, 2003,
respectively
    
    
    26,466
    
    
    
    26,458Additional paid-in-capital
    
    
    228,919,923
    
    
    
    229,080,380Deferred stock-based compensation
    
    
    (5,348,315
    )
    
    
    (6,730,195
    )Other comprehensive income
    
    
    30,238
    
    
    
    22,185Deficit accumulated during the development stage
    
    
    (134,463,454
    )
    
    
    (118,477,033
    )Total stockholders equity
    
    
    89,164,858
    
    
    
    103,921,795Total liabilities and stockholders equity
    
    $
    105,572,089
    
    
    $
    121,273,324
 The accompanying notes are an integral part of these consolidated financial statements. 3




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MYOGEN, INC.
(A Development Stage Enterprise) 
 CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 CumulativePeriod fromFor the Three Months Ended
    
    June 10, 1996March 31,
    
    (Inception) to2004
    
    2003
    
    March 31, 2004Revenues:Product sales
    
    $
    851,647
    
    
    $
    656,385
    
    
    $
    8,275,361Research and development contracts
    
    
    1,339,628
    
    
    
    
    
    
    
    2,349,9332,191,275
    
    
    
    656,385
    
    
    
    10,625,294Costs and expenses:Cost of product sold
    
    
    271,130
    
    
    
    206,897
    
    
    
    2,957,816Research and
development
(excluding
stock-based
compensation
expense of
$615,948, $438,354
and $3,471,657,
respectively)
    
    
    14,624,436
    
    
    
    6,351,237
    
    
    
    103,344,106Selling, general
and administrative
(excluding
stock-based
compensation
expense of
$595,906, $333,296
and $2,665,679,
respectively)
    
    
    2,235,278
    
    
    
    931,523
    
    
    
    20,074,027Stock-based
compensation
expense
    
    
    1,211,854
    
    
    
    771,650
    
    
    
    6,137,33618,342,698
    
    
    
    8,261,307
    
    
    
    132,513,285Loss from operations
    
    
    (16,151,423
    )
    
    
    (7,604,922
    )
    
    
    (121,887,991
    )Interest income, net
    
    
    171,878
    
    
    
    27,296
    
    
    
    2,571,873Loss before income taxes
    
    
    (15,979,545
    )
    
    
    (7,577,626
    )
    
    
    (119,316,118
    )Income taxes
    
    
    6,876
    
    
    
    2,315
    
    
    
    67,673Net loss
    
    
    (15,986,421
    )
    
    
    (7,579,941
    )
    
    
    (119,383,791
    )Accretion of mandatorily redeemable
convertible preferred stock
    
    
    
    
    
    
    (3,670,185
    )
    
    
    (32,499,556
    )Deemed dividend related to beneficial
conversion feature of preferred stock
    
    
    
    
    
    
    
    
    
    
    (39,935,388
    )Net loss attributable to common
stockholders
    
    $
    (15,986,421
    )
    
    $
    (11,250,126
    )
    
    $
    (191,818,735
    )Basic and diluted net loss per common
share
    
    $
    (0.60
    )
    
    $
    (10.95
    )Weighted average common shares
outstanding
    
    
    26,461,163
    
    
    
    1,027,618
 The accompanying notes are an integral part of these consolidated financial statements. 4




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MYOGEN, INC.
(A Development Stage Enterprise) 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 For the Three Months EndedMarch 31,
    
    CumulativePeriod FromJune 10, 1996(Inception) to2004
    
    2003
    
    March 31, 2004Cash Flows From Operating Activities:Net loss
    
    $
    (15,986,421
    )
    
    $
    (7,579,941
    )
    
    $
    (119,383,791
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    113,449
    
    
    
    110,929
    
    
    
    1,125,684Amortization of deferred stock-based compensation
    
    
    1,211,854
    
    
    
    771,650
    
    
    
    6,137,336Amortization of debt discount
    
    
    34,404
    
    
    
    34,404
    
    
    
    182,834Amortization of investment premium
    
    
    222,893
    
    
    
    60,450
    
    
    
    461,743Stock exchanged for license
    
    
    
    
    
    
    
    
    
    
    1,163,229Loss on disposal of property and equipment
    
    
    
    
    
    
    321
    
    
    
    34,309Changes in operating assets and liabilities:Trade accounts receivable
    
    
    73,777
    
    
    
    (1,971
    )
    
    
    (416,686
    )Research and development contract amounts
    
    
    (922,961
    )
    
    
    
    
    
    
    (1,547,961
    )Inventories
    
    
    (69,334
    )
    
    
    23,630
    
    
    
    (793,616
    )Prepaid expenses, accrued interest and other assets
    
    
    145,310
    
    
    
    728,519
    
    
    
    (2,158,429
    )Accounts payable
    
    
    353,210
    
    
    
    (1,236,613
    )
    
    
    7,339,223Deferred revenue
    
    
    (416,667
    )
    
    
    
    
    
    
    3,198,029Accrued liabilities
    
    
    (426,268
    )
    
    
    689,436
    
    
    
    683,638Net cash used in operating activities
    
    
    (15,666,754
    )
    
    
    (6,399,187
    )
    
    
    (103,974,458
    )Cash Flows From Investing Activities:Acquisitions of property and equipment
    
    
    (287,741
    )
    
    
    (57,591
    )
    
    
    (2,724,297
    )Proceeds from sale of property and equipment
    
    
    
    
    
    
    
    
    
    
    332,473Purchases of investments
    
    
    (37,719,991
    )
    
    
    (5,763,490
    )
    
    
    (361,063,402
    )Proceeds from maturities of short-term investments
    
    
    27,600,000
    
    
    
    7,561,942
    
    
    
    280,974,600Net cash (used in) provided by
investing activities
    
    
    (10,407,732
    )
    
    
    1,740,861
    
    
    
    (82,480,626
    )Cash Flows From Financing Activities:Proceeds from issuance of mandatorily redeemable convertible preferred stock, net of issuance
costs
    
    
    
    
    
    
    
    
    
    
    127,151,604Proceeds from issuance of common stock, net of issuance costs
    
    
    9,576
    
    
    
    5,468
    
    
    
    73,560,789Proceeds from notes payable
    
    
    
    
    
    
    
    
    
    
    5,250,000Payments on notes payable
    
    
    (428,059
    )
    
    
    
    
    
    
    (1,769,678
    )Proceeds from related party note
    
    
    
    
    
    
    
    
    
    
    370,275Repayments of related party note
    
    
    
    
    
    
    
    
    
    
    (289,887
    )Payments on capital leases
    
    
    (6,809
    )
    
    
    (6,319
    )
    
    
    (63,701
    )Net cash (used in) provided by
financing activities
    
    
    (425,292
    )
    
    
    (851
    )
    
    
    204,209,402Effect of exchange rates on cash
    
    
    (10,053
    )
    
    
    (89,466
    )
    
    
    73,572Net (decrease) increase in cash and cash equivalents
    
    
    (26,509,831
    )
    
    
    (4,748,643
    )
    
    
    17,827,890Cash and cash equivalents, beginning of period
    
    
    44,337,721
    
    
    
    6,993,146
    
    
    
    Cash and cash equivalents, end of period
    
    $
    17,827,890
    
    
    $
    2,244,503
    
    
    $
    17,827,890
 5




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For the Three Months EndedMarch 31,
    
    CumulativePeriod FromJune 10, 1996(Inception) to2004
    
    2003
    
    March 31, 2004Supplemental Disclosure of Non-Cash Financing Activities:Acquisition of property and equipment under capital leases
    
    $
    3,016
    
    
    
    
    
    
    $
    214,985Common stock issued in exchange for notes receivable
    
    
    
    
    
    
    
    
    
    
    81,362Convertible preferred stock issued in exchange for license
    
    
    
    
    
    
    
    
    
    
    1,163,229Mandatorily redeemable convertible preferred stock issued in lieu of cash commission on issuance
of Series D mandatorily redeemable convertible preferred stock
    
    
    
    
    
    
    
    
    
    
    928,961
 The accompanying notes are an integral part of these consolidated financial statements. 6




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MYOGEN, INC. 
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 Note 1:Basis of Presentation The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States and with the instructions to Form 10-Q and Article 10 of
Regulation S-X for interim financial information. Accordingly, they do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the three-month period ended March 31, 2004 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2004. For further information, refer to the consolidated
financial statements and footnotes thereto as of and for the year ended
December 31, 2003, included in the Annual Report on Form 10-K of Myogen Inc.
(the Company or Myogen) filed with the Securities and Exchange Commission
on March 1, 2004. The Company has generated limited revenue to date and its activities have
consisted primarily of developing products, licensing products, raising capital
and recruiting personnel. Accordingly, the Company is considered to be in the
development stage as of March 31, 2004 as defined in Statement of Financial
Accounting Standards (SFAS) No. 7, Accounting and Reporting by Development
Stage Enterprises. Note 2:Liquidity The Company has incurred significant losses and negative cash flows from
operations in every fiscal period since June 10, 1996 (Inception). For the
three months ended March 31, 2004, the Company incurred losses from operations
of $16,151,423 and negative cash flows from operations of $15,666,754. For the
years ended December 31, 2003, 2002 and 2001, the Company incurred losses from
operations of $42,972,596, $28,815,118 and $17,770,643, respectively, and
negative cash flows from operations of $31,706,160, $26,459,454 and
$16,409,817, respectively. As of March 31, 2004, the Company had a deficit
accumulated during the development stage of $134,463,454. Management
anticipates that operating losses and negative cash flows from operations will
continue for at least the next several years. To date, the Company has satisfied its cash commitments primarily through
public and private placements of equity securities. From Inception to March 31,
2004, the Company raised $200,712,393 of net cash proceeds from the sale of
equity securities. Management believes that the cash on hand will be sufficient to continue
operations for at least the next 12 months. Failure to generate sufficient
revenues or raise additional capital could have a material adverse effect on
the Companys ability to achieve its intended business objectives. Management
plans on raising additional financing to meet future working capital and
capital expenditure needs. There can be no assurance that such additional
financing will be available or, if available, that such financing can be
obtained on terms satisfactory to the Company. Note 3:Inventory Components March 31,
    
    December 31,2004
    
    2003Finished products
    
    $
    280,426
    
    
    $
    207,262Raw materials
    
    
    513,190
    
    
    
    517,020Total inventories
    
    $
    793,616
    
    
    $
    724,282
 7




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Note 4:Comprehensive Loss A reconciliation of net loss to comprehensive loss is as follows: Three Months EndedMarch 31,2004
    
    2003Net loss
    
    $
    (15,986,421
    )
    
    $
    (7,579,941
    )Change in unrealized gain (loss)
on investments available for
sale
    
    
    12,403
    
    
    
    34,488Foreign currency translation
adjustment
    
    
    (4,350
    )
    
    
    (86,786
    )Total comprehensive loss
    
    $
    (15,978,368
    )
    
    $
    (7,632,239
    )
 Note 5:Revenue Recognition Myogen recognizes revenue in accordance with SEC Staff Accounting Bulletin
No. 104 Revenue Recognition in Financial Statements (SAB 104). The Company
considers this methodology to be the most appropriate for its business model
and current revenue streams. Product Sales Sales are recognized when the following four revenue recognition criteria
are met: (i) persuasive evidence of an arrangement exists; (ii) product is
shipped from the distributor to the customer; (iii) the selling price is fixed
or determinable; and (iv) collection is reasonably assured. Once the product is
shipped to the customer, the Company does not allow product returns. Research and development contracts Myogen may enter into collaborative agreements with pharmaceutical
companies where the other party receives exclusive marketing and distribution
rights for certain products for set time periods and set geographic areas. The
rights associated with this research and development are assigned or can be
assigned to the collaborator through a license at the collaborators option.
The terms of the collaborative agreements can include nonrefundable funding of
research and development efforts, licensing fees, payments based on achievement
of certain milestones, and royalties on product sales. Non-refundable license fees received are recorded as deferred revenue once
received or irrevocably committed and are recognized ratably over the longer of
the development period to which they relate or the expected duration of the
contractual relationship. Where there are two or more distinct phases embedded
into one contract (such as product development and subsequent commercialization
or manufacturing), the contracts may be considered multiple element
arrangements. When it can be demonstrated that each of these phases are at fair
value, they are treated as separate earnings processes with upfront fees being
recognized over only the initial product development phase. The relevant time
period for the product development phase is based on management estimates and
could vary depending upon the outcome of clinical trials and the regulatory
approval process. As a result, management continually reviews the appropriate
time period. Milestones based on designated achievement points that are considered at
risk and substantive at the inception of the collaborative contract are
recognized as earned when the earnings process is complete and the

corresponding payment is reasonably assured. The Company evaluates whether
milestones are at risk and substantive based on the contingent nature of the
milestone, specifically reviewing factors such as the technological and
commercial risk that needs to be overcome and the level of investment required.
Milestone payments related to arrangements under which the Company has
continuing performance obligations are recognized as revenue upon achievement
of the milestone only if all of the following conditions are met: the milestone
payments are non-refundable; achievement of the milestone was not reasonably
assured at the inception of the arrangement; substantive effort is involved in
achieving the milestone; and the amount of the milestone is reasonable in
relation to the effort expended or the risk associated with the achievement of
the milestone. If any of these conditions are not met, the milestone 8




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payments are deferred and recognized as revenue over the term of the
arrangement as the Company completes its performance obligations. Revenue
from research funding is recognized when the services are
performed in order to match revenues to expenses incurred and are typically
based on the fully burdened cost of a researcher working on a collaboration.
Revenue is recognized ratably over the period as services are performed, with
the balance reflected as deferred revenue until earned. Note 6:Net Loss Per Common Share Net loss per common share is calculated in accordance with SFAS No. 128,
Earnings Per Share(SFAS 128) and SEC Staff Accounting Bulletin No. 98 (SAB
98). Under the provisions of SFAS 128 and SAB 98, basic net loss per common
share is computed by dividing the net loss attributable to common stockholders
for the period by the weighted average number of common shares outstanding
during the period and diluted net loss per common share is computed by giving
effect to all dilutive potential common stock, including options, mandatorily
redeemable convertible preferred stock, convertible preferred stock and
warrants. Diluted net loss per common share for all periods presented is the same as
basic net loss per share because the potential common shares were
anti-dilutive. Anti-dilutive common shares not included in net loss
attributable to common stockholders are summarized as follows: Three Months EndedMarch 31,2004
    
    2003Common stock related to options
    
    
    2,315,388
    
    
    
    1,799,894Warrants
    
    
    38,592
    
    
    
    25,188Convertible preferred stock
    
    
    
    
    
    
    160,721Mandatorily redeemable convertible
preferred stock
    
    
    
    
    
    
    13,625,321Total
    
    
    2,353,930
    
    
    
    15,611,124
 The Companys historical capital structure is not indicative of its
prospective structure due to the automatic conversion of all shares of
preferred stock into common stock concurrent with the closing of the Companys
initial public offering. The 2003 anti-dilutive common shares are not
indicative of the 2004 anti-dilutive common shares. Accordingly, historical
basic net loss per common share should not be used as an indicator of future
earnings per common share. Note 7:Stock-Based Compensation The Company measures compensation expense to employees using the intrinsic
value method as prescribed by Accounting Principles Board Opinion (APB) No.
25, Accounting For Stock Issued to Employees(APB 25) and provides pro forma
disclosures of net loss as if the fair value based method was applied as
prescribed by SFAS No. 123, Accounting for Stock-Based Compensation(SFAS
123). Accordingly, as allowable under SFAS 123, the Company does not recognize
compensation expense for options granted to employees when the exercise price
equals or exceeds the fair value of common stock as of the grant date.
Stock-based awards to consultants are accounted for under the provisions of
SFAS 123 and Emerging Issues Task Force (EITF) Issue 96-18, Accounting for
Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services. 9




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Had employee compensation cost for the Companys stock-based compensation
plan been determined based on the fair value at the grant dates for awards
using the Black-Scholes model prescribed by SFAS 123, the Companys pro forma
net loss and pro forma net loss per share would be as follows: Three Months EndedMarch 31,2004
    
    2003Net loss attributable
to common
stockholders, as
reported
    
    $
    (15,986,421
    )
    
    $
    (11,250,126
    )Add: Total stock-based
employee compensation
expense included in
reported net loss
    
    
    1,159,673
    
    
    
    593,416Deduct: Total
stock-based employee
compensation expense
determined under fair
value based method
    
    
    (1,392,767
    )
    
    
    (582,420
    )Pro forma net loss
    
    $
    (16,219,515
    )
    
    $
    (11,239,130
    )Pro forma basic and
diluted net loss per
share
    
    $
    (0.61
    )
    
    $
    (10.94
    )Basic and diluted net
loss per share, as
reported
    
    $
    (0.60
    )
    
    $
    (10.95
    )
 Note 8:Accounts Payable Accounts payable are comprised of the following: March 31,
    
    December 31,2004
    
    2003Trade
    
    $
    229,492
    
    
    $
    679,827Research and development
    
    
    7,279,958
    
    
    
    6,510,549Related party
    
    
    385,202
    
    
    
    404,559$
    7,894,652
    
    
    $
    7,594,935
 Note 9:Commitments and Contingencies In the ordinary course of its business, the Company makes certain
indemnities, commitments and guarantees under which it may be required to make
payments in relation to certain transactions. These include indemnities of
clinical investigators, consultants and contract research organizations
involved in the development of the Companys clinical stage products,
indemnities of distributors of its marketed product, indemnities to its lenders
and indemnities to directors and officers of the Company to the maximum extent
permitted under the laws of the State of Delaware. The duration of these
indemnities, commitments and guarantees varies, and in certain cases, is
indefinite. The majority of these indemnities, commitments and guarantees do
not provide for any limitation of the maximum potential future payments the
Company could be obligated to make. The Company has not recorded any liability
for these indemnities, commitments and guarantees in the accompanying
consolidated balance sheets. However, the Company accrues for losses for any
known contingent liability, including those that may arise from indemnification
provisions, when future payment is probable and in accordance with SFAS No. 5,
Accounting for Contingencies. No such losses have been recorded to date. 10




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Note 10:Business Segments The Company operates in the United States and in certain countries
throughout Europe under one operating segment. All product sales from Inception
to March 31, 2004 have occurred in Europe through the Companys subsidiary. Three Months EndedMarch 31,2004
    
    2003Product sales:Germany
    
    $
    189,671
    
    
    $
    156,263Netherlands
    
    
    242,223
    
    
    
    171,635United Kingdom
    
    
    147,729
    
    
    
    121,144Italy
    
    
    179,881
    
    
    
    99,295France
    
    
    80,267
    
    
    
    99,161Other
    
    
    11,876
    
    
    
    8,887$
    851,647
    
    
    $
    656,385
 March 31,
    
    December 31,2004
    
    2003Long-lived assets:United States
    
    $
    1,411,757
    
    
    $
    1,234,685Europe
    
    
    64,878
    
    
    
    69,343$
    1,476,635
    
    
    $
    1,304,028
 11




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS Forward-Looking Statements This quarterly report on Form 10-Q, including this Managements Discussion
and Analysis of Financial Condition and Results of Operations, contains
forward-looking statements regarding future events and our future results, such
as statements of our plans, objectives, expectations, beliefs, assumptions and
intentions. Words such as expect, anticipate, target, goal, project,
intend, plan, believe, seek, estimate, variations of such words, and
similar expressions are intended to identify such forward-looking statements.
In addition, any statements which refer to projections of our future financial
performance, our anticipated growth and trends in our business, and other
characterizations of future events or circumstances, are forward-looking
statements. These forward-looking statements are only predictions and are
subject to risks, uncertainties, and assumptions. Our actual results could
differ materially from those discussed in the forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in Risk Factors, other cautionary statements
included in this report and in our annual report filed on Form 10-K on March 1,
2004. We are providing the information in this quarterly report filed on Form
10-Q as of the date of this report. Except as required by law, we undertake no
duty to update any forward-looking statements to reflect the effect on those
statements of subsequent events or changes in our expectations or assumptions. Overview We are a biopharmaceutical company focused on the discovery, development
and commercialization of small molecule therapeutics for the treatment of
cardiovascular disorders. We believe that our advanced understanding of the
biology of cardiovascular disease combined with our clinical development
expertise in cardiovascular therapeutics provide us with the capability to
discover novel therapies, as well as identify, license or acquire products that
address serious, debilitating cardiovascular disorders that are not adequately
treated with existing therapies. We have three product candidates in late-stage clinical development:
enoximone capsules for the treatment of chronic heart failure, ambrisentan for
the treatment of pulmonary arterial hypertension and darusentan for the
treatment of resistant hypertension. We are evaluating enoximone capsules in
four Phase III trials, one of which was completed in February 2004. If these
trials progress as planned, we expect the two trials that we believe will be
required for regulatory approval will be fully enrolled before the end of May
and patients will have completed treatment by the end of 2004. We completed a
Phase II clinical trial of ambrisentan in September 2003 and announced the
initiation of the two pivotal Phase III trials, ARIES-1 and -2, in January 2004.
We expect to complete patient enrollment in ARIES-1 and -2 in the first half
of 2005. This timing is somewhat uncertain due to on-going competing
trials for the same indication. We intend to begin Phase IIb clinical evaluation of darusentan in
2004. All of our product candidates are orally administered small molecules
that we believe offer advantages over currently available therapies. In
addition, we currently market an intravenous formulation of enoximone, Perfan
I.V., for the treatment of acute decompensated heart failure in eight countries
in Europe. On March 25, 2004, we announced preliminary results of EMOTE, a
non-pivotal Phase III study of enoximone capsules in 201 patients with the most
advanced stages of chronic heart failure who are dependent on intravenous
(i.v.) inotrope therapy. The study was designed to evaluate enoximone capsules
as effective treatment to wean patients off of i.v. inotrope therapy and
potentially support the two ongoing Phase III pivotal studies, ESSENTIAL I &
II. Analysis of the primary endpoint, wean success at 30 days, demonstrated a
wean success rate of 61% in the enoximone-treated group and 51% in the
placebo-treated group. This difference did not reach statistical significance.
The key secondary endpoints, which also evaluated wean from i.v. inotrope
therapy, but over time rather than at a fixed 30-day time point, were achieved,
demonstrating a therapeutic benefit over a range of time periods. The safety
results demonstrated no statistical difference in serious adverse events or
mortality between the groups receiving placebo or enoximone capsules. Through our internal research program and academic collaborations, we are
developing an advanced understanding of the biological pathways of heart
disease and have discovered several novel molecular targets that we believe
play a key role in heart failure. To further advance our discovery research
program, we entered into a research collaboration with the Novartis Institutes
for BioMedical Research, Inc. (Novartis) for the discovery and development of
novel drugs for the treatment of cardiovascular disease 12




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in October 2003. In exchange for license payments and a commitment to fund
our research, Novartis has an exclusive right to license drug targets and
compounds developed through the collaboration. We are in the development stage and since inception have devoted
substantially all of our efforts to the discovery, in-licensing and development
of drugs to treat cardiovascular disease. We have incurred losses each year
since our inception and had an accumulated deficit of $134.5 million as of
March 31, 2004. We incurred operating losses of $16.2 million and $7.6 million
for the three months ended March 31, 2004 and 2003, respectively and $43.0
million, $28.8 million and $17.8 million for the years 2003, 2002 and 2001,
respectively. Our research and development expenses have historically been
much higher than our revenues. Our current revenue is derived from research and development contract
revenues from our agreement with Novartis signed in October 2003 and sales of
Perfan I.V. in eight European countries. Even if our research and development
contract revenues continue to increase and our sales and marketing efforts lead
to modest increases in Perfan I.V. sales in future periods, we do not expect
that such increases will result in a material reduction in our overall net
loss. Our cost of product sold reflects the cost of Perfan I.V., which we
purchase exclusively from contract manufacturers, and the cost of royalties
payable to Aventis. Our primary business activities have been focused on the development of
enoximone capsules, ambrisentan and darusentan. From inception to March 31,
2004, we have incurred expenses of approximately $58.0 million, $22.5 million
and $6.3 million for the development of enoximone capsules, ambrisentan and
darusentan, respectively. These expenses represent both clinical development
costs and the costs associated with non-clinical support activities such as
toxicological testing, manufacturing process development and regulatory
consulting services. We also report the costs of product licenses in this
category, including our milestone obligations associated with the licensing of
enoximone, ambrisentan and darusentan. While some of our research and development expenses are the result of the
internal costs related directly to our employees, a majority of the expenses
are charged to us by external service providers, including clinical research
organizations and contract manufacturers. The cost of our clinical trial
programs is the most significant portion of our development expenses, with the
number of patients enrolled in a trial and the attendant level of contract
research organization and clinical site activity being the principal cost
determinants. We expect that expenses in the research and development category
will increase for the foreseeable future as we add personnel and expand our
clinical trial activities. The amount of the increase is difficult to predict
due to the uncertainty inherent in the timing of clinical trial initiations,
the rate of patient enrollment and the detailed design of future trials. In
addition, the results from our trials, as well as the results of trials of
similar drugs under development by others, will influence the number, size and
duration of planned and unplanned trials. Results of Operations Three Months Ended March 31, 2004 and 2003 Revenues Three Months EndedMarch 31,2004
    
    2003(In thousands)Revenues:Product sales
    
    $
    852
    
    
    $
    656Research and development contracts
    
    
    1,340
    
    
    
    $
    2,192
    
    
    $
    656
 Product sales Product sales were derived from sales of Perfan I.V. in Europe. We had an
increase of approximately 22% in sales volume, partially offset by a decrease
in the average selling price. Approximately $110,000
of the increase in 2004 as compared to 2003 was due to a favorable change
in the euro exchange rate. We do not anticipate future growth in Perfan I.V.
sales. 13




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##### Table of Contents



Research and development contracts revenue Research and development contracts revenues for the three months ended
March 31, 2004 were related to the research collaboration with Novartis entered
into in October 2003; therefore, there was no corresponding revenue in the
prior period. The research and development revenue consists of license revenue
totaling $417,000 and research support funding of $923,000. The license revenue
is related to the non-refundable upfront payment from Novartis, which is
recognized ratably over three-years. The research support funding is related to
the fully burdened cost of the researchers working on the further development
of specific potential drug targets and is recognized in the period in which the
services are performed and expenses are incurred. Costs and Expenses Three Months EndedMarch 31,2004
    
    2003(In thousands)Costs and expenses:Cost of product sold
    
    $
    271
    
    
    $
    207Research and development (excluding
stock-based compensation)
    
    
    14,624
    
    
    
    6,351Selling, general and administrative (excluding
stock-based compensation expense)
    
    
    2,235
    
    
    
    932Stock-based compensation
    
    
    1,212
    
    
    
    772$
    18,342
    
    
    $
    8,262
 Cost of Product Sold The cost of product sold for Perfan I.V. increased slightly in the three
months ended March 31, 2004 as compared to the same period in 2003 due to the
increased number of units sold. The cost of Perfan I.V. sold as a percentage
of product sales was 31.8% and 31.5% for the three months ended March 31, 2004
and 2003, respectively. Research and Development Research and development expenses, excluding stock-based compensation
expenses are summarized as follows: Three Months EndedMarch 31,2004
    
    2003(In thousands)DevelopmentEnoximone capsules
    
    $
    7,108
    
    
    $
    4,362Ambrisentan
    
    
    3,722
    
    
    
    1,135Darusentan

    
    
    1,241
    
    
    
    Total development
    
    
    12,071
    
    
    
    5,497License feesEnoximone
    
    
    
    
    
    
    Ambrisentan
    
    
    1,500
    
    
    
    Darusentan
    
    
    
    
    
    
    Other
    
    
    108
    

    
    
    Total license fees
    
    
    1,608
    
    
    
    Discovery research
    
    
    945
    
    
    
    854Total research and development
    
    $
    14,624
    
    
    $
    6,351
 14




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##### Table of Contents



The increase in development costs for enoximone capsules in the three
months ended March 31, 2004 as compared to the same period in 2003 was primarily due to the
following:  
    
    $1.9 million increase in clinical investigator site payments
and external contract costs associated with clinical monitoring and
program management efforts, as a result of higher patient enrollment
and ongoing patient progress in the ESSENTIAL trials;
    
    $410,000 increase in analytical testing associated with the
development of enoximone capsules;
    
    $378,000 increase in the internal costs associated with the
management of the enoximone trials, primarily due to an increase in
our staff; and
    
    $263,000 increase in costs associated with producing clinical
trial materials for the ESSENTIAL trial. The
increase in development costs for ambrisentan in the three months
ended March 31, 2004 as compared to the same period in 2003 was primarily related to:  
    
    $2.1 million increase in expenses due to the cost of
initiating our two Phase III ARIES trials and the related extension
study;
    
    $410,000 increase in expenses related to work on developing
the commercial manufacturing process for ambrisentan;
    
    $325,000 increase in expenses due to the extension study for
our Phase II PAH trial; and
    
    $250,000 increase in internal expenses associated with the
management of the ambrisentan trials, primarily due to an increase
in the number of employees. These increases were partially offset by a $330,000 decrease related to
the conclusion of our Phase II PAH trial. In the three months ended March 31, 2004, the license fees were primarily
attributable to the initiation of the ambrisentan Phase III trials totaling
$1.5 million. Discovery research expenses were consistent in the three months ended
March 31, 2004 as compared to the same period in 2003. Selling, General and Administrative The $1.3 million increase in selling, general and administrative expense
for the three months ending March 31, 2004 as compared to the same period in
2003 primarily relates to a $470,000 increase in insurance and professional
service costs related to becoming a public company, an increase of $250,000
related to increased staffing and related recruiting costs, $100,000 in
increased costs related to our German facility, an increase of $75,000 in
market research costs and an increase of $70,000 in consulting costs. Stock-Based Compensation Stock-based compensation expenses increased due to an increase in the
number of options granted to employees and consultants and an increase in the
fair value of our common stock. The stock-based compensation expense for each
period was allocated between selling, general and administrative and research
and development as follows: Three Months EndedMarch 31,2004
    
    2003(In thousands)Research and development
    
    $
    616
    
    
    $
    439Selling, general and administrative
    
    
    596
    
    
    
    333$
    1,212
    
    
    $
    772
 15




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##### Table of Contents



Interest Income, Net Interest income net of interest expense was $172,000 and $27,000 for the
three months ended March 31, 2004 and 2003, respectively. Interest income was
$303,000 and $147,000 for the three months ended March 31, 2004 and 2003,
respectively. The increase in interest income in 2004 relates to the increased
investment balance for the first quarter of 2004. Interest expense was $131,000
and $120,000 for the three months ended March 31, 2004 and 2003, respectively. Accretion of Mandatorily Redeemable Convertible Preferred Stock Accretion of mandatorily redeemable convertible preferred stock was $3.7
million for the three months ended March 31, 2003, and represents the accretion
associated with the Series A, Series C and Series D mandatorily redeemable
convertible preferred stock issued by us. There is no corresponding expense in
2004 due to the conversion of all shares of the Series A, C and D mandatorily
redeemable convertible preferred stock into common stock on November 4, 2003. Liquidity and Capital Resources From our inception on June 10, 1996 to March 31, 2004, we primarily funded
our operations with $200.7 million (net of issuance costs) from private equity
financings and our initial public offering, $5.3 million from term loans, $8.3
million from sales of Perfan I.V., $4.0 million related to a research and
development contract and $2.6 million from net interest income earned on cash
equivalents and short- and long-term investments. Cash, cash equivalents and
short-term investments amounted to $94.1 million at March 31, 2004. Long-term
investments were $3.5 million at March 31, 2004. On August 27, 2003, we raised
net proceeds of $39.9 million through the sale of additional shares of our
Series D preferred stock. In addition, on November 7, 2003 we completed our
initial public offering and raised net proceeds of $73.3 million. Our cash
outflows in the next 12 months are expected to consist primarily of external
expenses related to our research and development programs, as well as payroll
costs. We believe our cash is sufficient to meet these needs. Our cash outflows
beyond one year are also expected to consist primarily of external expenses
related to our research and development programs, as well as payroll costs. We
believe that our cash, cash equivalents and investment balance, together with
the proceeds of the Novartis collaboration, will allow us to fund our future
working capital and capital expenditures for the next 12 months. We intend to
pursue potential additional collaborations and future equity offerings. Our cash, cash equivalents and short- and long-term investments are held
in a variety of interest-bearing instruments, consisting of U.S. government and
agency securities, high-grade U.S. corporate bonds, municipal bonds,
mortgage-backed securities, commercial paper and money market accounts. Our
Board of Directors has approved our written investment policy, which limits our
investment instruments to those mentioned above. We review compliance with this
policy on a monthly basis. At March 31, 2004, we had approximately $1.5 million in net fixed assets.
We expect to purchase additional equipment and to invest in leasehold
improvements, and we expect our spending on capital assets to grow in future
years. Operating activities resulted in net cash outflows of $15.7 million and
$6.4 million for the three months ended March 31, 2004 and 2003, respectively.
The cumulative net cash outflow from operating activities from our inception to
March 31, 2004 was $104.0 million. The use of cash in all periods was primarily
a result of our losses from operations. Investing activities resulted in net cash outflows of $10.4 million and a
net cash inflow of $1.7 million for the three month periods ended March 31,
2004 and 2003, respectively. The net cash outflow for the three months ended
March 31, 2004 resulted from $288,000 in capital asset expenditures and $37.7
million in purchases of short-term and long-term investments offset by $27.6
million in proceeds related to the maturity of short-term investments. The net
cash inflow for the three months ended March 31, 2003 resulted from $58,000 in
capital asset expenditures and $5.8 million in purchases of short-term
investments offset by $7.6 million in proceeds from the sale of short-term
investments. Cumulative investing activities from inception to March 31, 2004
resulted in net cash outflows of $82.5 million, with $2.7 million in net
capital asset expenditures offset by $322,000 in proceeds from the sale of
property and equipment and $361.1 million in purchases of short-term and
long-term investments offset by $281.0 million in proceeds from the maturity of
short-term investments. 16




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##### Table of Contents



Financing activities resulted in net cash outflows of $425,000 and $1,000
for the three months ended March 31, 2004 and 2003, respectively. Financing
activities for the three months ended March 31, 2004 consisted primarily of
payments of $428,000 on our term loan. Cumulative financing activities from our
inception to March 31, 2004 resulted in net cash inflows of $204.2 million,
primarily related to the issuance of our Series A, C and D preferred stock, the
sale of shares of our common stock in our initial public offering and
borrowings under our term loans. In November 2003, we completed an initial public offering of 5,750,000
shares of our common stock, including the underwriters over-allotment.
Concurrent with the initial public offering, all of the 98,021,120 shares of
convertible preferred stock outstanding automatically converted into common
stock at a five-to-one ratio, resulting in the issuance of 19,604,186 shares of
common stock. The Company received net proceeds of $73.3 million from its
initial public offering, net of $7.2 million in expenses and underwriters
discount relating to the issuance and distribution of the securities. Total operating lease expense for the three months ended March 31, 2004
and 2003 was approximately $100,000 for each period. We have future payment
commitments for operating leases of approximately $1.1 million, principally for
our office and laboratory space. In addition, many of our contracts with
clinical research organizations, contract manufacturers, academic research
agreements and others contain termination provisions that would require us to
make final payments if we were to terminate prematurely. The size of these
payments depends upon the timing and circumstances of the termination and
therefore the extent of the future commitments cannot be meaningfully
quantified. We anticipate that our current cash, cash equivalents and short-term and
long-term investments will be sufficient to fund our operations for at least
the next 12 months. However, our forecast of the period of time through which
our financial resources will be adequate to support our operations is a
forward-looking statement that involves risks and uncertainties, and actual
results could vary materially. If we are unable to raise additional capital
when required or on acceptable terms, we may have to significantly delay, scale
back or discontinue one or more of our clinical trials, those aspects of our
drug discovery program not funded by Novartis or other aspects of our
operations. Critical Accounting Policies Our consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States. The
preparation of these financial consolidated statements requires us to make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. Our critical accounting
policies that require the use of estimates and informed management judgments
include:  
    
    revenue recognition;
    
    accounting for research and development expenses;
    
    estimating the value of our equity instruments for use in deferred
stock-based compensation calculations; and
    
    accounting for income taxes. Revenue Recognition. We recognize revenue in accordance with SEC Staff Accounting Bulletin No.
104 Revenue Recognition in Financial Statements (SAB 104). We consider this
methodology to be the most appropriate for our business model and current
revenue streams. Product Sales.Sales are recognized when the following four revenue
recognition criteria are met: (i) persuasive evidence of an arrangement exists;
(ii) product is shipped from the distributor to the customer; (iii) the selling
price is fixed or determinable; and (iv) collection is reasonably assured. Once
the product is shipped to the customer, the Company does not allow product
returns. 17




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##### Table of Contents



Research and development contracts.We may enter into collaborative
agreements with pharmaceutical companies where the other party generally
receives exclusive marketing and distribution rights for certain products for
set time periods and set geographic areas. The rights associated with this
research and development are assigned or can be assigned to the collaborator or
through a license at the collaborators option. The terms of the collaborative
agreements can include nonrefundable licensing fees, funding of research and
development efforts, payments based on achievement of certain milestones, and
royalties on product sales. Non-refundable license fees received are recorded as deferred revenue once
received or irrevocably committed, and are recognized ratably over the longer
of the development period to which they relate or the expected duration of the
contractual relationship. Where there are two or more distinct phases embedded
into one contract (such as product development and subsequent commercialization
or manufacturing), the contracts may be considered multiple element
arrangements. When it can be demonstrated that each of these phases are at fair
value, they are treated as separate earnings processes with upfront fees being
recognized over only the initial product development phase. The relevant time
period for the product development phase is based on management estimates and
could vary depending upon the outcome of clinical trials and the regulatory
approval process. As a result, management continually reviews the appropriate
time period. Milestones, based on designated achievement points that are considered at
risk and substantive at the inception of the collaborative contract, are
recognized as earned when the earnings process is complete and the
corresponding payment is reasonably assured. We evaluate whether milestones are
at risk and substantive based on the contingent nature of the milestone,
specifically reviewing factors such as the technological and commercial risk
that needs to be overcome and the level of investment required. Milestone
payments related to arrangements under which we have continuing performance
obligations are recognized as revenue upon achievement of the milestone only if
all of the following conditions are met: the milestone payments are
non-refundable; achievement of the milestone was not reasonably assured at the
inception of the arrangement; substantive effort is involved in achieving the
milestone; and the amount of the milestone is reasonable in relation to the
effort expended or the risk associated with the achievement of the milestone.
If any of these conditions are not met, the milestone payments are deferred and
recognized as revenue over the term of the arrangement as the Company completes
its performance obligations. Revenue
from research funding is recognized when the services are
performed and is typically based on the fully burdened cost of a researcher
working on a collaboration. Revenue is recognized ratably over the period as
services are performed, with the balance reflected as deferred revenue until
earned. Accounting for research and development expenses.Our research and
development expense category is primarily composed of costs associated with
product development for enoximone capsules, ambrisentan and darusentan. These
expenses represent both clinical development costs and the costs associated
with non-clinical support activities such as toxicological testing,
manufacturing process development and regulatory consulting services. Clinical
development costs represent internal costs for personnel, external costs
incurred at clinical sites and contractual payments to third party clinical
research organizations to perform certain clinical trials. We also report the
costs of product licenses in this category, including our ongoing milestone
obligations associated with the licensing of ambrisentan and darusentan. Our
product candidates do not currently have regulatory approval; accordingly, we
expense the license and milestone fees when we incur the liability. We have a
discovery research effort, which is conducted in part on our premises by our
scientists and in part through collaborative agreements. While some of our research and development expenses are the result of the
internal costs related directly to our employees, a majority of the expenses
are charged to us by external service providers, including clinical research
organizations and contract manufacturers, and by our academic collaborators. We
accrue research and development expenses for activity occurring during the
fiscal period prior to receiving invoices from clinical sites and third party
clinical research organizations. We accrue external costs for clinical studies
based on the progress of the clinical trials, including patient enrollment,
progress by the enrolled patients through the trial, and contractual costs with
clinical research organizations and clinical sites. We record internal costs
primarily related to personnel in clinical development and external costs
related to non-clinical studies and basic research when incurred. Amounts
received from other parties to fund our research and development efforts where
the reimbursing party does not obtain any rights to the research or drug
candidates are recognized as a reduction to research and development expense as
the costs
are incurred. Significant judgments and estimates must be made and used in
determining the accrued 18




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##### Table of Contents



balance in any accounting period. Actual costs incurred
may or may not match the estimated costs for a given accounting period. We expect that expenses in the research and development category will
increase for the foreseeable future as we add personnel, expand our clinical
trial activities and increase our discovery research capabilities. The amount
of the increase is difficult to predict due to the uncertainty inherent in the
timing of clinical trial initiations, progress in our discovery research
program, the rate of patient enrollment and the detailed design of future
trials. In addition, the results from each of our trials, as well as the
results of trials of similar drugs under development by others, will influence
the number, size and duration of both planned and unplanned trials. Valuation of equity instruments.We record compensation expense related to
options issued to consultants and options issued to, or common stock sold to,
employees at less than the fair value. As a result, we have recorded deferred
stock-based compensation expense that represents, in the case of employees, the
difference between the option exercise price and the fair value of our common
stock. In the case of consultants, deferred stock-based compensation represents
the fair value of the options granted, computed using the Black-Scholes
option-pricing model. These expenses are based on the fair value of the options
and common stock. Because there has been no public market for our common stock
until recently, we have estimated the fair value of these equity instruments
using various valuation methods. Subsequent to the commencement of our initial
public offering on October 30, 2003, we estimate the fair value of these equity
instruments using the value for our common stock that the public market
establishes. Deferred stock-based compensation for employees is recognized over
the remaining vesting period of the related option. Deferred stock-based
compensation related to consultants is recognized over the vesting period of
the related option and the amount recognized is subject to change based on
changes in the fair value of our common stock. We recognize stock-based
compensation using an accelerated method as described in Financial Accounting
Standards Board Interpretation No. 28, Accounting for Stock Appreciation Rights
and Other Variable Stock Option or Award Plans, an Interpretation of APB
Opinions No. 15 and 25(FIN 28). Accounting for income taxes.We must make significant management judgments
when determining our provision for income taxes, our deferred tax assets and
liabilities and any valuation allowance recorded against our net deferred tax
assets. At December 31, 2003, we recorded a full valuation allowance of $39.5
million against our net deferred tax asset balance, due to uncertainties
related to our deferred tax assets as a result of our history of operating
losses. The valuation allowance is based on our estimates of taxable income by
jurisdiction in which we operate and the period over which our deferred tax
assets will be recoverable. In the event that actual results differ from these
estimates or we adjust these estimates in future periods we may need to change
the valuation allowance, which could materially impact our financial position
and results of operations. 19




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##### Table of Contents



RISK FACTORS Set forth below and elsewhere in this report, as well as in our annual report
filed on March 1, 2004, are risks and uncertainties that could cause actual
results to differ materially from the results contemplated by the
forward-looking statements contained in this report. We are at an early stage of development as a company and we do not have, and
may never have, any products that generate significant revenues. We are at an early stage of development as a biopharmaceutical company,
and we do not have any commercial products that generate significant revenues.
Our existing product candidates will require extensive additional clinical
evaluation, regulatory review, significant marketing efforts and substantial
investment before they could provide us with any revenues. Our efforts may not
lead to commercially successful drugs, for a number of reasons, including:  
    
    our product candidates may not prove to be safe and effective in
clinical trials;
    
    we may not be able to obtain regulatory approvals for our product
candidates or approvals may be narrower than we seek;
    
    we may not have adequate financial or other resources to complete
the development and commercialization of our product candidates; or
    
    any products that are approved may not be accepted in the
marketplace. Other than sales of Perfan I.V. in Europe, which are only minor, we do not
expect to be able to market any of our product candidates for a number of
years. If we are unable to develop, receive approval for, or successfully
commercialize any of our product candidates, we will be unable to generate
significant revenues. If our development programs are delayed, we may have to
raise additional capital or reduce or cease our operations. If we fail to obtain additional financing, we may be unable to complete the
development and commercialization of our product candidates or continue our
research and development programs. Our operations have consumed substantial amounts of cash since inception.
To date, our sources of cash have been primarily limited to the sale of our
equity securities. We expect to continue to spend substantial amounts on
research and development, including amounts spent on conducting clinical trials
for our product candidates, manufacturing clinical supplies and expanding our
discovery research programs. In the first quarter of 2004, our operations
consumed approximately $5.2 million of cash per month. In 2003, our operations
consumed approximately $2.6 million of cash per month, compared to $2.2 million
of cash per month in 2002. This rate of cash consumption was reduced by
research and development funding by an average of $0.5 million per month. We
expect that our monthly cash used by operations will continue to increase for
the next several years. We expect that our existing capital resources will be
sufficient to fund our operations for at least the next 12 months. We will be
required to raise additional capital to complete the development and
commercialization of our current product candidates. If we are unable to raise
additional capital when required or on acceptable terms, we may have to
significantly delay, scale back or discontinue one or more of our drug
development or discovery research programs. We also may be required to:  
    
    seek collaborators for our product candidates at an earlier stage
than otherwise would be desirable and on terms that are less favorable
than might otherwise be available; and  
    
    relinquish, license or otherwise dispose of rights to technologies,
product candidates or products that we would otherwise seek to develop
or commercialize ourselves on terms that are less favorable than might
otherwise be available. 20




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We may experience delays in our clinical trials that could adversely affect
our financial position and our commercial prospects. With the exception of EMOTE, we do not know when our current clinical
trials will be completed, if at all. We also cannot accurately predict when
other planned clinical trials will begin or be completed. Many factors affect
patient enrollment, including the size of the patient population, the proximity
of patients to clinical sites, the eligibility criteria for the trial,
competing clinical trials and new drugs approved for the conditions we are
investigating. Other companies are conducting clinical trials and have
announced plans for future trials that are seeking or likely to seek patients
with the same diseases as those we are studying. Competition for patients in
cardiovascular disease trials is particularly intense because of the limited
number of leading cardiologists and the geographic concentration of major
clinical centers. Our Phase III ARIES trials for ambrisentan include placebo
control groups, which may decrease the pace of enrollment compared to our Phase
II trial. Encysive Pharmaceuticals Inc. is conducting a Phase III
clinical program of sitaxsentan in substantially similar indication
and patient populations concurrent with our ARIES trials, resulting
in direct competition for patient enrollment. Furthermore, Pfizer Inc
has conducted a Phase IV trial of sildenafil (Viagra) for the
treatment of pulmonary arterial hypertension and we anticipate that
the results of that trial will be announced in the near future. If
the results of that trial are positive, physicians may prescribe
sildenafil to significantly more patients than are currently taking
the drug for pulmonary arterial hypertension, which would further
reduce the pool of patients eligible for enrollment in our ARIES
trials. As a result of all of these factors, our trials may take longer to
enroll patients than we anticipate. Delays in patient enrollment in the trials
may increase our costs and slow down our product development and approval
process. In addition, two of our current clinical trials for enoximone capsules
are designed to continue until a pre-specified number of events have occurred
to the patients enrolled. Trials such as these are subject to delays stemming
from patient withdrawal and from lower than expected event rates, in addition
to the risk of slower than anticipated patient enrollment. These trials may
also incur increased costs if enrollment is increased in order to achieve the
desired number of events. Our product development costs will also increase if
we need to perform more or larger clinical trials than planned. Any delays in
completing our clinical trials will delay our ability to generate revenue from
product sales, and we may have insufficient capital resources to support our
operations. Even if we do have sufficient capital resources, our ability to
become profitable will be delayed. Adverse events in our clinical trials may force us to stop development of our
product candidates or prevent regulatory approval of our product candidates. Our product candidates may produce serious adverse events. These adverse
events could interrupt, delay or halt clinical trials of our product candidates
and could result in the Food and Drug Administration, or FDA, or other
regulatory authorities denying approval of our product candidates for any or
all targeted indications. An independent data safety monitoring board, the FDA,
other regulatory authorities or we may suspend or terminate clinical trials at
any time. We cannot assure you that any of our product candidates will be safe
for human use. Our applications for regulatory approval could be delayed or denied due
to problems with studies conducted before we in-licensed the product
candidates. We are developing product candidates, including enoximone capsules,
ambrisentan and darusentan, that we have in-licensed from other pharmaceutical
companies. Many of the pre-clinical studies and some of the clinical studies on
these product candidates were conducted by other companies before we
in-licensed the product candidates. In some cases, the studies were conducted
when regulatory requirements were different from today. We would incur
unanticipated costs and experience delays if we were required to repeat some or
all of those studies. Even if the previous studies are acceptable to regulatory
authorities, we may have to spend additional time analyzing and presenting the
results of the studies. Problems with the previous studies could cause our
regulatory applications to be delayed or rejected. For example, as a result of
changing regulatory standards, we may be required to repeat certain animal
toxicology studies for enoximone prior to the submission of our application for
marketing approval. If we must repeat these studies, we would experience an
increase in our expenditures and the final regulatory approval of enoximone
could be jeopardized or delayed. If our product candidates do not meet safety or efficacy endpoints in clinical
evaluations, they will not receive regulatory approval and we will be unable
to market them. Other than Perfan I.V., which is approved for use in several European
countries, our current product candidates, enoximone capsules, ambrisentan and
darusentan, are in clinical development and have not received regulatory
approval from the FDA or any foreign regulatory authority. The regulatory approval process typically is extremely expensive, takes
many years and the timing of any approval cannot be accurately predicted. If we
fail to obtain regulatory approval for our current or future product
candidates, we will be unable to market and sell such products and therefore
may never be profitable. 21




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As part of the regulatory approval process, we must conduct pre-clinical
studies and clinical trials for each product candidate to demonstrate safety
and efficacy. The number of pre-clinical studies and clinical trials that will
be required varies depending on the product candidate, the indication being
evaluated, the trial results and regulations applicable to any particular
product candidate. The results of pre-clinical studies and initial clinical trials of our
product candidates do not necessarily predict the results of later-stage
clinical trials. Preliminary results may not be confirmed upon full analysis
of the detailed results of a trial. Product candidates in later stages of
clinical trials may fail to show the desired safety and efficacy despite having
progressed through initial clinical trials. We cannot assure you that the data
collected from the pre-clinical studies and clinical trials of our product
candidates will be sufficient to support FDA or other regulatory approval. In
addition, the continuation of a particular study after review by an independent
data safety monitoring board does not necessarily indicate that our product
candidate will achieve the clinical endpoint. The FDA and other regulatory agencies can delay, limit or deny approval
for many reasons, including:  
    
    a product candidate may not be safe or effective;  
    
    the manufacturing processes or facilities we have selected may not
meet the applicable requirements; and  
    
    changes in their approval policies or adoption of new regulations
may require additional work. Any delay in, or failure to receive or maintain, approval for any of our
products could prevent us from ever generating meaningful revenues or achieving
profitability. There can be no assurance that enoximone capsules do not increase mortality. Clinical trials with type-III phosphodiesterase, or PDE-III, inhibitors,
including enoximone capsules, have shown that at certain doses these compounds
can increase the risk of mortality in specific patient populations. In studies
of enoximone capsules administered at doses of 100 to 300 milligrams three
times a day, some patients experienced abnormal rhythms in the beating of the
heart. In one Phase II placebo-controlled trial involving 151 patients
administered placebo capsules or enoximone capsules at 100 milligrams three
times a day, there was a statistically significant increase in the mortality
rate in the group of patients receiving enoximone capsules compared to the
group of patients receiving placebo capsules: 36% of the patients treated with
enoximone capsules died during the evaluation period versus 23% of the patients
treated with placebo. We are testing enoximone capsules administered at doses
of 25 and 50 milligrams three times a day. The preliminary results of the EMOTE
trial announced in March 2004 demonstrated a six-month mortality rate of 38%
for the group of patients receiving enoximone and 31% for the group of patients
receiving placebo. The difference in the mortality rates between these two
groups did not achieve statistical significance. We cannot assure you that
increased mortality will not occur at these lower doses in our larger pivotal
clinical trials or in commercial usage after approval. If we are unable to
clearly demonstrate that mortality is not increased by enoximone capsules at
these lower doses, we are not likely to receive regulatory approval to market
enoximone capsules. Due to our reliance on contract research organizations or other third parties
to conduct clinical trials, we are unable to directly control the timing,
conduct and expense of our clinical trials. We rely primarily on third parties to conduct our clinical trials,
including the EMOTE, ESSENTIAL and ARIES trials, as well as the planned
clinical trials for darusentan. As a result, we have had and will continue to
have less control over the conduct of the clinical trials, the timing and
completion of the trials, the required reporting of adverse events and the
management of data developed through the trial than would be the case if we
were relying entirely upon our own staff. Communicating with outside parties
can also be challenging, potentially leading to mistakes as well as
difficulties in coordinating activities. Outside parties may have staffing
difficulties, may undergo changes in priorities or may become financially
distressed, adversely affecting their willingness or ability to conduct our
trials. We may experience unexpected cost increases that are beyond our
control. Problems with the timeliness or quality of the work of a contract
research organization may lead us to seek to terminate the relationship and use
an alternative service provider. However, making this change may be costly and
may delay our trials, and contractual restrictions may make such a change
difficult or impossible. Additionally, it may be impossible to find a
replacement organization that can conduct our trials in an acceptable manner
and at an acceptable cost. 22




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Our competitors may develop and market drugs that are less expensive, more
effective or safer than our product candidates. The pharmaceutical market is highly competitive. Many pharmaceutical and
biotechnology companies have developed or are developing products that will
compete with products we are developing. Several significant competitors are
working on, or already have approval for, drugs for the same indications as
enoximone capsules, ambrisentan and darusentan. It is possible that our
competitors will develop and market products that are less expensive, more
effective or safer than our future products or that will render our products
obsolete. Some of these products are in late-stage clinical trials. It is also
possible that our competitors will commercialize competing products before any
of our product candidates are approved and marketed. Actelion Ltd. received FDA
approval in December 2001 for Tracleer, a non-selective endothelin receptor
antagonist for the treatment of pulmonary arterial hypertension. United
Therapeutics Corp. received FDA approval in May 2002 for Remodulin for the
treatment of pulmonary arterial hypertension. GlaxoSmithKline plc markets
Flolan for pulmonary arterial hypertension. Encysive Pharmaceuticals, Inc. is
developing sitaxsentan, an ETA selective endothelin receptor antagonist which
has demonstrated efficacy in a Phase IIb/III study and may be approved for
pulmonary arterial hypertension earlier than ambrisentan. Pfizer is evaluating
the use of sildenafil (Viagra) for the treatment of pulmonary arterial
hypertension, and if successful, sildenafil could become a major competitor to
ambrisentan. A number of other companies, including Abbott Laboratories, have
ETA selective endothelin receptor antagonists in late-stage clinical
development and could compete with ambrisentan and darusentan. We expect that
competition from pharmaceutical and biotechnology companies, universities and
public and private research institutions will increase. Many of these
competitors have substantially greater financial, technical, research and other
resources than we do. We may not have the financial resources, technical and
research expertise or marketing, distribution or support capabilities to
compete successfully. The market price of our common stock may be highly volatile. We cannot assure you that an active trading market for our common stock
will exist at any time. Holders of our common stock may not be able to sell
shares quickly or at the market price if trading in our common stock is not
active. Since initial trading of our stock began in October 2003 through April
30, 2004, our average daily trading volume has been 200,474 shares. The trading
price of our common stock is likely to be highly volatile and could be subject
to wide fluctuations in price in response to various factors, many of which are
beyond our control, including:  
    
    actual or anticipated results of our clinical trials;
    
    actual or anticipated regulatory approvals of our products or of competing products;
    
    changes in laws or regulations applicable to our products;
    
    changes in the expected or actual timing of our development programs;
    
    actual or anticipated variations in quarterly operating results;
    
    announcements of technological innovations by us, our collaborators or our competitors;
    
    new products or services introduced or announced by us or our competitors;
    
    changes in financial estimates or recommendations by securities analysts;
    
    conditions or trends in the biotechnology and pharmaceutical industries;
    
    changes in the market valuations of similar companies;
    
    announcements by us of significant acquisitions, strategic
partnerships, joint ventures or capital commitments;
    
    additions or departures of key personnel;
    
    disputes or other developments relating to proprietary rights,
including patents, litigation matters and our ability to obtain patent
protection for our technologies; 23




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
    
    the loss of a collaborator, including Novartis;  
    
    developments concerning our collaborations;  
    
    trading volume of our common stock; and  
    
    sales of our common stock by us or our stockholders. In addition, the stock market in general, the Nasdaq National Market and
the market for technology companies in particular have experienced extreme
price and volume fluctuations that have often been unrelated or
disproportionate to the operating performance of those companies. Further,
there has been particular volatility in the market prices of securities of
biotechnology and life sciences companies. These broad market and industry
factors may seriously harm the market price of our common stock, regardless of
our operating performance. In the past, following periods of volatility in the
market, securities class-action litigation has often been instituted against
companies. Such litigation, if instituted against us, could result in
substantial costs and diversion of managements attention and resources. 24




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We do not use derivative financial instruments in our investment portfolio
and have no foreign exchange contracts. Our financial instruments consist of
cash, cash equivalents, short-term investments, trade accounts receivable,
accounts payable and long-term obligations. We consider investments that, when
purchased, have a remaining maturity of 90 days or less to be cash equivalents. We invest in marketable securities in accordance with our investment
policy. The primary objectives of our investment policy are to preserve
principal, maintain proper liquidity to meet operating needs and maximize
yields. Our investment policy specifies credit quality standards for our
investments and limits the amount of credit exposure to any single issue,
issuer or type of investment. The maximum allowable duration of a single issue
is 18 months with an average duration of the issues in the portfolio of nine
months. As of March 31, 2004, we had an investment portfolio of short-term and
long-term investments in a variety of interest-bearing instruments, consisting
of U.S. government and agency securities, high-grade U.S. corporate bonds,
municipal bonds, mortgage-backed securities, commercial paper and money market
accounts of $79.8 million excluding those classified as cash and cash
equivalents. Our short-term investments consist primarily of bank notes,
various government obligations and asset-backed securities. These securities
are classified as available-for-sale and are recorded on the balance sheet at
fair market value with unrealized gains or losses reported as a separate
component of stockholders equity. Unrealized losses are charged against income
when a decline in fair market value is determined to be other than temporary.
The specific identification method is used to determine the cost of securities
sold. The investment portfolio is subject to interest rate risk and will fall in
value in the event market interest rates increase. Due to the short duration of
our investment portfolio, we believe an immediate 10% change in interest rates
would not be material to our financial condition or results of operations. The euro is the functional currency for Myogen GmbH. We translate asset
and liability accounts to the U.S. dollar based on the exchange rate as of the
balance sheet date, while the income statement and cash flow statement amounts
are translated to the U.S. dollar at the average exchange rate for the period.
Exchange gains and losses resulting from such translation are included as a
separate component of stockholders equity. Transaction gains and losses are
recognized in income during the period in which they occur and are included in
selling, general and administrative expenses. In addition, we conduct clinical
trials in many countries, exposing us to cost increases if the U.S. dollar
declines in value compared to other currencies. 25




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ITEM 4. CONTROLS AND PROCEDURES We carried out an evaluation under the supervision and with the
participation of our management, including our Chief Executive Officer (CEO)
and Chief Financial Officer (CFO), of the effectiveness of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934, as amended (Exchange Act), as of the end of
the period covered by this report. Based on that evaluation, the CEO and CFO
have concluded that our disclosure controls and procedures are effective to
provide reasonable assurance that information required to be disclosed by us in
our periodic reports under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in Securities and Exchange
Commission rules and forms, and that such information is accumulated and
communicated to our management, including our CEO and CFO, as appropriate, to
allow timely decisions regarding required disclosure. It should be noted that
the design of any system of controls is based in part upon certain assumptions
about the likelihood of future events, and can therefore only provide
reasonable, not absolute, assurance that the design will succeed in achieving
its stated goals. In addition, we reviewed our internal controls, and there have been no
changes in our internal controls over financial reporting during the quarter
ended March 31, 2004 that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting. 26




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PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings
    None 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities On October 29, 2003, the Registration Statement on Form S-1 (Reg. No.
333-108301) (the Registration Statement) we filed to register our Common
Stock in our initial public offering was declared effective by the Securities
and Exchange Commission. We intend to continue to use the net proceeds of the offering for research and
development, general corporate purposes and working capital. We continually
assess the specific uses and allocations for these funds. As of March 31, 2004,
the $73.3 million of net proceeds remained available and were primarily
invested in short-term marketable securities. 
 Item 3. Defaults Upon Senior Securities
    None 
 Item 4. Submission of Matters to a Vote of Security Holders
    None 
 Item 5. Other Information
    None 
 Item 6. Exhibits and Reports on Form 8-K
    None (a) Exhibits 31.1
    
    Certification of principal executive officer required by Rule 13a-14(a).31.2
    
    Certification of principal financial officer required by Rule 13a-14(a).32.1
    
    Section 1350 Certification.
 (b) Reports on Form 8-K. 1. On January 12, 2004, the Company filed a current report on Form 8-K
entitled, Myogen Initiates Phase III Trials of Ambrisentan. 2. On February 18, 2004, the Company filed a current report on Form 8-K
entitled Myogen Reports 2003 Fourth Quarter And Full Year Results. 3. On March 26, 2004, the Company filed a current report on Form 8-K
entitled Myogen Reports Preliminary Results for EMOTE. 27




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SIGNATURES Pursuant to the requirements of the Exchange Act, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized. Date: May 11, 2004
    
    MYOGEN, INC./s/ Joseph L. TurnerJoseph L. TurnerSenior Vice President, Finance andAdministration and Chief Financial
Officer
 28




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Exhibit No.
    
    Description31.1
    
    Certification of principal executive officer required by Rule 13a-14(a).31.2
    
    Certification of principal financial officer required by Rule 13a-14(a).32.1
    
    Section 1350 Certification.
 29