##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISION Washington, D.C. 20549
 FORM 10-Q þ
    

Quarterly
report pursuant to Section 13 or 15(d) of the Securities
Exchange
Act of 1934.For the quarterly period ended March 31, 2005o
    

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
    
    (I.R.S. Employerincorporation or organization)
    
    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 þ       No o Check whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange
Act). Yes þ       No o As of May 6, 2005 there were 35,767,808 shares of the Registrants Common Stock outstanding,
par value $0.001 per share. This quarterly report on Form 10-Q consists of 42 pages.    1




---



MYOGEN, INC.
FORM 10-Q INDEX PageNumberPART I. Financial Information
    
    
    3ITEM 1. Consolidated Financial Statements (unaudited)
    
    
    3Consolidated
Balance Sheets As of March 31, 2005 and December 31,
2004
    
    
    3Consolidated Statements of Operations For the Three Months Ended March 31, 2005 and 2004 and the Cumulative Period from June 10,
1996 (Inception) to March 31, 2005
    
    
    4Consolidated Statements of Cash Flows For the Three Months Ended March 31, 2005 and 2004 and the Cumulative Period from June 10,
1996 (Inception) to March 31, 2005
    
    
    5Notes to Consolidated Financial Statements
    
    
    6ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    38ITEM 4. Controls and Procedures
    
    
    39PART II. Other Information
    
    
    40ITEM 1. Legal Proceedings
    
    
    40ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    40ITEM 3. Defaults Upon Senior Securities
    
    
    40ITEM 4. Submission of Matters to a Vote of Security Holders
    
    
    40ITEM 5. Other Information
    
    
    40ITEM 6. Exhibits
    
    
    40SIGNATURES
    
    
    41EXHIBIT INDEX
    
    
    42Certification of Principal Executive OfficerCertification of Principal Financial OfficerSection 1350 Certification
  2




---



##### Table of Contents



PART I. FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS MYOGEN, INC.
(A Development Stage Enterprise) 
 CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 March 31,
    
    
    December 31,2005
    
    
    2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    55,052,621
    
    
    $
    71,258,294Short-term investments
    
    
    45,097,749
    
    
    
    48,330,819Accrued interest receivable
    
    
    333,352
    
    
    
    290,972Trade accounts receivable
    
    
    1,105,095
    
    
    
    946,177Research and development contract amounts due
within one year
    
    
    1,550,000
    
    
    
    300,000Inventories
    
    
    230,803
    
    
    
    258,120Prepaid expenses and other current assets
    
    
    1,282,665
    
    
    
    1,679,340Total current assets
    
    
    104,652,285
    
    
    
    123,063,722Long-term investments
    
    
    1,498,181
    
    
    
    Property and equipment, net
    
    
    2,725,730
    
    
    
    2,503,579Other assets
    
    
    27,299
    
    
    
    35,421Total assets
    
    $
    108,903,495
    
    
    $
    125,602,722LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    13,520,176
    
    
    $
    10,681,667Accrued liabilities
    
    
    1,013,825
    
    
    
    1,941,083Current portion of deferred revenue
    
    
    1,823,188
    
    
    
    1,823,188Current portion of deferred rent
    
    
    61,706
    
    
    
    59,456Current portion of capital lease obligations
    
    
    67,610
    
    
    
    59,924Current portion of notes payable, net of discount
    
    
    1,556,271
    
    
    
    1,821,806Total current liabilities
    
    
    18,042,776
    
    
    
    16,387,124Deferred revenue, net of current portion
    
    
    942,956
    
    
    
    1,398,753Deferred rent, net of current portion
    
    
    200,877
    
    
    
    217,616Capital lease obligations, net of current portion
    
    
    90,074
    
    
    
    112,728Notes payable, net of current portion and discount
    
    
    
    
    
    
    172,100Commitments and contingencies (See Note 9)Stockholders equity:Preferred Stock, $0.001 par value; 5,000,000 shares
authorized at March 31, 2005 and December 31, 2004,
no shares issued or outstanding
    
    
    
    
    
    
    Common stock, $0.001 par value; 100,000,000
shares authorized and 35,766,892 and 35,731,581
shares issued and outstanding as of March 31, 2005
and December 31, 2004, respectively
    
    
    35,767
    
    
    
    35,732Additional paid-in-capital
    
    
    286,219,616
    
    
    
    286,017,266Deferred stock-based compensation
    
    
    (2,089,120
    )
    
    
    (2,534,535
    )Accumulated other comprehensive loss
    
    
    (76,217
    )
    
    
    (42,203
    )Deficit accumulated during the development stage
    
    
    (194,463,234
    )
    
    
    (176,161,859
    )Total stockholders equity
    
    
    89,626,812
    
    
    
    107,314,401Total liabilities and stockholders equity
    
    $
    108,903,495
    
    
    $
    125,602,722
 The accompanying notes are an integral part of these consolidated financial statements. 3




---



##### Table of Contents



MYOGEN, INC.
(A Development Stage Enterprise) 
 CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 CumulativePeriod fromFor the Three Months Ended
    
    
    June 10, 1996March 31,
    
    
    (Inception) to2005
    
    
    2004
    
    
    March 31, 2005Revenues:Product sales
    
    $
    908,853
    
    
    $
    851,647
    
    
    $
    11,650,250Research and development contracts
    
    
    1,705,797
    
    
    
    1,339,628
    
    
    
    9,322,6002,614,650
    
    
    
    2,191,275
    
    
    
    20,972,850Costs and expenses:Cost of product sold
    
    
    308,115
    
    
    
    271,130
    
    
    
    4,071,914Research and
development
(excluding
stock-based
compensation
expense of
$264,047, $615,948
and $5,090,836,
respectively)
    
    
    17,405,405
    
    
    
    14,624,436
    
    
    
    160,248,786Selling, general
and administrative
(excluding
stock-based
compensation
expense of
$251,890, $595,906
and $4,298,222,
respectively)
    
    
    3,243,768
    
    
    
    2,235,278
    
    
    
    30,341,947Stock-based
compensation
expense
    
    
    515,937
    
    
    
    1,211,854
    
    
    
    9,389,05821,473,225
    
    
    
    18,342,698
    
    
    
    204,051,705Loss from operations
    
    
    (18,858,575
    )
    
    
    (16,151,423
    )
    
    
    (183,078,855
    )Interest income, net
    
    
    562,818
    
    
    
    171,878
    
    
    
    3,784,084Loss before income taxes
    
    
    (18,295,757
    )
    
    
    (15,979,545
    )
    
    
    (179,294,771
    )Income taxes
    
    
    5,618
    
    
    
    6,876
    
    
    
    88,800Net loss
    
    
    (18,301,375
    )
    
    
    (15,986,421
    )
    
    
    (179,383,571
    )Accretion of mandatorily redeemable
convertible preferred stock
    
    
    
    
    
    
    
    
    
    
    (32,499,556
    )Deemed dividend related to beneficial
conversion feature of preferred stock
    
    
    
    
    
    
    
    
    
    
    (39,935,388
    )Net loss attributable to common
stockholders
    
    $
    (18,301,375
    )
    
    $
    (15,986,421
    )
    
    $
    (251,818,515
    )Basic and diluted net loss per common
share
    
    $
    (0.51
    )
    
    $
    (0.60
    )Weighted average common shares
outstanding
    
    
    35,757,832
    
    
    
    26,461,163
 The accompanying notes are an integral part of these consolidated financial statements. 4




---



##### Table of Contents



MYOGEN, INC.
(A Development Stage Enterprise) 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 CumulativePeriod FromFor the Three Months Ended
    
    
    June 10, 1996March 31,
    
    
    (Inception) to2005
    
    
    2004
    
    
    March 31, 2005Cash Flows From Operating Activities:Net loss
    
    $
    (18,301,375
    )
    
    $
    (15,986,421
    )
    
    $
    (179,383,571
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    218,046
    
    
    
    113,449
    
    
    
    1,847,277Amortization of deferred stock-based compensation
    
    
    515,937
    
    
    
    1,211,854
    
    
    
    9,389,058Amortization of debt discount
    
    
    34,404
    
    
    
    34,404
    
    
    
    320,449Amortization of investment (discount) premium
    
    
    (9,189
    )
    
    
    222,893
    
    
    
    811,965Stock exchanged for license
    
    
    
    
    
    
    
    
    
    
    1,163,229Loss on disposal of property and equipment
    
    
    
    
    
    
    
    
    
    
    34,672Changes in operating assets and liabilities:Trade accounts receivable
    
    
    (207,678
    )
    
    
    73,777
    
    
    
    (272,020
    )Research and development contract amounts
    
    
    (1,250,000
    )
    
    
    (922,961
    )
    
    
    (550,000
    )Inventories
    
    
    27,317
    
    
    
    (69,334
    )
    
    
    (230,803
    )Prepaid expenses, accrued interest and other assets
    
    
    449,574
    
    
    
    145,310
    
    
    
    (1,625,315
    )Accounts payable
    
    
    3,026,948
    
    
    
    353,210
    
    
    
    13,044,395Deferred revenue
    
    
    (455,797
    )
    
    
    (416,667
    )
    
    
    1,766,144Accrued liabilities
    
    
    (1,190,402
    )
    
    
    (426,268
    )
    
    
    536,570Net cash used in operating activities
    
    
    (17,142,215
    )
    
    
    (15,666,754
    )
    
    
    (153,147,950
    )Cash Flows From Investing Activities:Acquisitions of property and equipment
    
    
    (410,391
    )
    
    
    (287,741
    )
    
    
    (4,566,701
    )Proceeds from sale of property and equipment
    
    
    
    
    
    
    
    
    
    
    332,473Purchases of investments
    
    
    (12,747,697
    )
    
    
    (37,719,991
    )
    
    
    (447,561,266
    )Proceeds from maturities and sales of investments
    
    
    14,470,041
    
    
    
    27,600,000
    
    
    
    400,248,137Net cash provided by (used in)
investing activities
    
    
    1,311,953
    
    
    
    (10,407,732
    )
    
    
    (51,547,357
    )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
    
    
    131,862
    
    
    
    9,576
    
    
    
    130,877,256Proceeds from notes payable
    
    
    
    
    
    
    
    
    
    
    5,250,000Payments on notes payable
    
    
    (472,039
    )
    
    
    (428,059
    )
    
    
    (3,590,519
    )Proceeds from related party note
    
    
    
    
    
    
    
    
    
    
    370,275Repayments of related party note
    
    
    
    
    
    
    
    
    
    
    (289,887
    )Payments on capital leases
    
    
    (16,778
    )
    
    
    (6,809
    )
    
    
    (123,075
    )Net cash (used in) provided by
financing activities
    
    
    (356,955
    )
    
    
    (425,292
    )
    
    
    259,645,654Effect of exchange rates on cash
    
    
    (18,456
    )
    
    
    (10,053
    )
    
    
    102,274Net (decrease) increase in cash and cash equivalents
    
    
    (16,205,673
    )
    
    
    (26,509,831
    )
    
    
    55,052,621Cash and cash equivalents, beginning of period
    
    
    71,258,294
    
    
    
    44,337,721
    
    
    
    Cash and cash equivalents, end of period
    
    $
    55,052,621
    
    
    $
    17,827,890
    
    
    $
    55,052,621Supplemental Disclosure of Non-Cash Financing Activities:Acquisition of property and equipment under capital leases
    
    $
    905
    
    
    
    3,016
    
    
    $
    276,297Common 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
    
    
    
    
    
    
    
    
    
    
    928,961Conversion of Series B convertible preferred stock for common stock upon initial public offering
    
    
    
    
    
    
    
    
    
    
    804Conversion of mandatorily redeemable preferred stock for common stock upon initial public offering
    
    
    
    
    
    
    
    
    
    
    159,688,153Deferred research and development contract revenue due within one year
    
    
    
    
    
    
    
    
    
    
    1,000,000
 The accompanying notes are an integral part of these consolidated financial statements. 5




---



##### Table of Contents



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 U.S. generally accepted accounting principles (GAAP) 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 GAAP 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, 2005 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2005. For further information, refer to the consolidated
financial statements and footnotes thereto as of and for the year ended December 31, 2004, 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 15, 2005. 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, 2005 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, 2005, the
Company incurred losses from operations of $18,858,575 and negative cash flows from operations of
$17,142,215. For the years ended December 31, 2004, 2003 and 2002, the Company incurred losses
from operations of $58,483,712, $42,972,596 and $28,815,118, respectively, and negative cash flows
from operations of $47,698,031, $31,706,160 and $26,459,454, respectively. As of March 31, 2005,
the Company had a deficit accumulated during the development stage of $194,463,234. 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 through March 31, 2005, the Company has raised
$258,028,860 of net cash proceeds from the sale of equity securities. Based on current spending projections, management believes that the existing cash, cash
equivalents and investments will be sufficient to continue operations through at least the first
quarter of 2006. 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 to conduct additional financings 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: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, 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. 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: 6




---



##### Table of Contents



CumulativePeriod FromJune 10, 1996Three Months Ended
    
    
    (Inception) toMarch 31,
    
    
    March 31,2005
    
    
    2004
    
    
    2005Net loss
attributable to
common
stockholders, as
reported
    
    $
    (18,301,375
    )
    
    $
    (15,986,421
    )
    
    $
    (251,818,515
    )Add: Total
stock-based
employee
compensation
expense included in
reported net loss
    
    
    494,381
    
    
    
    1,159,673
    
    
    
    8,102,018Deduct: Total
stock-based
employee
compensation
expense determined
under fair value
based method
    
    
    (1,281,681
    )
    
    
    (1,392,767
    )
    
    
    (11,688,032
    )Pro forma net loss
    
    $
    (19,088,675
    )
    
    $
    (16,219,515
    )
    
    $
    (255,404,529
    )Pro forma basic and
diluted net loss
per common share
    
    $
    (0.53
    )
    
    $
    (0.61
    )Basic and diluted
net loss per common
share, as reported
    
    $
    (0.51
    )
    
    $
    (0.60
    )
 Note 4:Inventory Components March 31,
    
    
    December 31,2005
    
    
    2004Finished products
    
    $
    196,916
    
    
    $
    211,770Raw materials
    
    
    33,887
    
    
    
    46,350Total inventories
    
    $
    230,803
    
    
    $
    258,120
 Note 5:Comprehensive Loss A reconciliation of net loss to comprehensive loss is as follows: Three Months EndedMarch 31,2005
    
    
    2004Net loss
    
    $
    (18,301,375
    )
    
    $
    (15,986,421
    )Change in unrealized gain (loss)
on investments available for
sale
    
    
    (23,262
    )
    
    
    12,403Foreign currency translation
adjustment
    
    
    (10,751
    )
    
    
    (4,350
    )Total comprehensive loss
    
    $
    (18,335,388
    )
    
    $
    (15,978,368
    )
 Note 6:Revenue Recognition Myogen recognizes revenue in accordance with SEC Staff Accounting Bulletin No. 104 Revenue
Recognition in Financial Statements(SAB 104). Arrangements with multiple elements are accounted
for in accordance with Emerging Issues Task Force Issue No. 00-21, Revenue Arrangements with
Multiple Deliverables, or EITF 00-21. The Company considers this methodology to be the most
appropriate for its business model and current revenue streams. Product Sales Product 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s
consignment stock 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. 7




---



##### Table of Contents



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 non-refundable funding of research and
development efforts, licensing fees, payments based on achievement of certain milestones, and
royalties on product sales. Myogen analyzes its multiple element arrangements to determine whether
the elements can be separated and accounted for individually as separate units of accounting in
accordance with EITF 00-21. The Company recognizes up-front license payments as revenue if the
license has stand-alone value, the Company does not have ongoing involvement or obligations, and
the fair value of the undelivered items can be determined. If the license is considered to have
stand-alone value but the fair value on any of the undelivered items cannot be determined, the
license payments are recognized as revenue over the period of performance for such undelivered
items or services. 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 in 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 is 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 frequently reviews the appropriate time
period. Milestone payments based on designated achievement points that are considered at risk and
substantive at the inception of the collaborative contract are recognized when the earnings process
is complete and the corresponding payment is reasonably assured. The Company evaluates whether
milestone payments 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 payment 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 in order to match
revenues to expenses incurred 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. Note 7:Net Loss Per Common Share 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 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 the calculation of diluted shares outstanding, using the treasury stock method, is
summarized as follows: 8




---



##### Table of Contents



Three Months EndedMarch 31,2005
    
    
    2004Common stock related to options
    
    
    1,571,828
    
    
    
    2,315,388Warrants
    
    
    4,521
    
    
    
    38,592Total
    
    
    1,576,349
    
    
    
    2,353,930
 Note 8:Accounts Payable Accounts payable are comprised of the following: March 31,
    
    
    December 31,2005
    
    
    2004Trade
    
    $
    204,795
    
    
    $
    171,311Research and development
    
    
    13,086,857
    
    
    
    10,290,083Related party
    
    
    228,524
    
    
    
    220,273$
    13,520,176
    
    
    $
    10,681,667
 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. Note 10:Geographic Information 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, 2005 have occurred in Europe
through the Companys subsidiary. Three Months EndedMarch 31,2005
    
    
    2004Product sales:Netherlands
    
    $
    362,902
    
    
    $
    242,223Germany
    
    
    261,663
    
    
    
    189,671United Kingdom
    
    
    201,910
    
    
    
    147,729France
    
    
    70,653
    
    
    
    80,267Italy
    
    
    
    
    
    
    179,881Other
    
    
    11,725
    
    
    
    11,876$
    908,853
    
    
    $
    851,647
 9




---



##### Table of Contents



March 31,
    
    
    December 31,2005
    
    
    2004Property and equipment, net:United States
    
    $
    2,666,867
    
    
    $
    2,451,999Europe
    
    
    58,863
    
    
    
    51,580$
    2,725,730
    
    
    $
    2,503,579
 Note 11:Recent Accounting Pronouncements On December 16, 2004, the Financial Accounting Standards Board issued SFAS No. 123 (revised
2004), Share-Based Payment, which is a revision of SFAS No. 123. SFAS No. 123(R) supersedes APB
No. 25, and amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in SFAS No.
123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all
share-based payments to employees, including grants of employee stock options, to be recognized in
the income statement based on their fair values. Pro forma disclosure is no longer an alternative. SFAS No. 123(R) and the related interpretations must be adopted no later than January 1, 2006.
The Company expects to adopt SFAS No. 123(R) on January 1, 2006. SFAS No. 123(R) permits companies to adopt its requirements using one of two methods: 1. A modified prospective method in which compensation cost is recognized beginning with
the effective date (a) based on the requirements of SFAS No. 123(R) for all share-based payments
granted after the effective date and (b) based on the requirements of SFAS No. 123 for all
awards granted to employees prior to the effective date of SFAS No. 123(R) that remain unvested
on the effective date. 2. A modified retrospective method which includes the requirements of the modified
prospective method described above, but also permits entities to restate based on the amounts
previously recognized under SFAS No. 123 for purposes of pro forma disclosures either (a) all
prior periods presented or (b) prior interim periods of the year of adoption. The Company is still assessing the appropriate transition method. As permitted by SFAS No. 123, the Company currently accounts for share-based payments to
employees using the APB No. 25 intrinsic value method and, therefore, generally recognizes no
compensation cost for employee stock options. Accordingly, the adoption of SFAS No. 123(R)s fair
value method will have an impact on the Companys results of operations, although it will have no
impact on the Companys overall financial position or cash flows. Statement No. 123(R) also
requires the benefits of tax deductions in excess of recognized compensation cost to be reported as
a financing cash flow, rather than as an operating cash flow. This requirement will reduce net
operating cash flows and increase net financing cash flows in periods after adoption. While the
Company cannot estimate what those amounts will be in the future (because they depend on, among
other things, when employees exercise stock options), there were no operating cash flows recognized
in prior periods for such excess tax deductions for stock option exercises. The Company has not yet
determined the method of adoption or the effect of adopting SFAS 123(R), and has not determined whether the adoption will result in amounts that are similar to
the current pro forma disclosures under SFAS No. 123. 10




---



##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This information should be read in conjunction with the financial statements and the notes
thereto included in Item 1 of Part I of this Quarterly Report and the audited financial statements
and notes thereto and Managements Discussion and Analysis of Financial Condition and Results of
Operations for the year ended December 31, 2004 contained in our 2004 Annual Report on Form 10-K. 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. Forward-looking statements in this report include statements relating to:  
    the development of enoximone, ambrisentan and darusentan, including projected
development and clinical trial timelines;
    expected trends and projections relating to sales of Perfan® I.V. and our income and
expense line items; and
    expectations regarding our financial condition and liquidity, including the adequacy of
our existing capital resources. 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, in our Form 10-K for the year ended December 31, 2004 and in our other periodic
reports on Form 10-Q and Form 8-K. 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 currently market an intravenous (i.v.) formulation of enoximone, Perfan® I.V., in Europe
for the treatment of acute decompensated heart failure and we have three product candidates in
late-stage clinical development: enoximone capsules for the treatment of patients with advanced
chronic heart failure, ambrisentan for the treatment of patients with pulmonary arterial
hypertension (PAH) and darusentan for the treatment of patients with resistant systolic
hypertension. All three of our product candidates are orally administered small molecules that we
believe offer advantages over currently available therapies and have the potential to address unmet
needs in their respective markets.  
    Enoximone.We believe that chronic oral administration of low doses of enoximone
capsules has the potential to alleviate symptoms and reduce hospitalizations for patients
with advanced chronic heart failure, resulting in a decrease in associated health care
costs and improvement in patients quality of life. We are evaluating enoximone capsules in
three Phase III trials (ESSENTIAL I & II and EMPOWER) and we completed the treatment phase
of one additional Phase III trial in February 2004 (EMOTE). In November 2004, we announced
the completion of the treatment 11




---



##### Table of Contents



phase of both ESSENTIAL trials. We plan to report preliminary data for the ESSENTIAL trials in July 2005.
    Ambrisentan.We believe that ambrisentan may have several clinical benefits over
existing PAH therapies, including greater and more durable efficacy, low incidence of liver
toxicity, once daily dosing and lower incidence of interactions with other drugs. 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 & -2, in January 2004. We expect to
complete enrollment in ARIES-2 by the end of June 2005 and ARIES-1 in the fourth quarter of
2005. We plan to report preliminary results from each of the ARIES trials approximately six
months following the completion of enrollment in each trial.
    Darusentan.We believe that there is a significant need for a therapeutic agent that,
when used in combination with currently available medications, is capable of lowering blood
pressure in patients suffering from resistant systolic hypertension (i.e., patients whose
blood pressure cannot be adequately controlled with existing medication). We believe that
darusentan may be an agent that is capable of improving control of blood pressure in this
patient population, leading to the potential for enhanced patient outcomes, such as a
reduction in the number of serious cardiac events and the progression of chronic kidney
disease. In July 2004, we announced the initiation of a Phase IIb clinical trial to
evaluate the safety and efficacy of darusentan in patients with resistant systolic
hypertension. In April 2005, we announced the completion of patient enrollment in the Phase
IIb clinical trial of darusentan. We expect the treatment phase of this trial will be
completed on July 8, 2005 and we intend to report results of the trial one or two months
thereafter. 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 pathological cardiac hypertrophy and its
progression to heart failure. A subset of these targets forms the basis of our drug discovery
research program. 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 $194.5 million
as of March 31, 2005. We incurred operating losses of $18.9 million and $16.2 million for the three
months ended March 31, 2005 and 2004, respectively, and $58.5 million, $43.0 million, $28.8 million
for the years 2004, 2003 and 2002, respectively. Our research and development expenses have
historically been much higher than our revenues. Our current revenue is derived solely from sales of Perfan® I.V. in Europe and research and
development contract revenues from our agreement with Novartis Institutes for BioMedical Research,
Inc. (Novartis) signed in October 2003. Prior to our licensing the worldwide rights to enoximone
in 1998, Perfan® I.V. was marketed in Europe by Aventis. In 1999, we formed our wholly-owned German
subsidiary, Myogen GmbH, to manage our sales and marketing activities in Europe. From 2000 through
2002, we entered into agreements with distributors to distribute Perfan® I.V. in Belgium, France,
Germany, Ireland, Italy, Luxembourg, the Netherlands and the United Kingdom. We recorded our first
sales of Perfan® I.V. in 2000. Even if our sales and marketing efforts lead to 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 a contract manufacturer, 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, 2005, we have incurred expenses of
approximately $87.7 million, $41.1 million and $10.6 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 12




---



##### Table of Contents



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. We have a discovery research effort, which is conducted by our scientists, through
collaborative agreements with academic laboratories and in conjunction with Novartis. In October
2003, we entered into a research collaboration with Novartis for the discovery and development of
novel drugs for the treatment of cardiovascular disease. In exchange for license payments and a
commitment to fund our research, Novartis has the exclusive right to license drug targets and
compounds developed through the collaboration. To date, Novartis has not licensed any drug targets
or compounds under the terms of the collaboration. If Novartis does execute a license, Novartis
will be obligated to fund all further development of the licensed product candidate, make payments
to us upon the achievement of certain milestones and pay us royalties for sales of any products
that are successfully commercialized. Upon the completion of Phase II clinical trials of any
product candidate Novartis has licensed from us, we have the option to enter into a co-promotion
and profit sharing agreement with them for that product candidate, subject to our reimbursement of
a portion of the development expenses incurred up to that point, our agreement to share the future
development and marketing expenses and elimination of the royalty payable to us. Our selling, general and administrative expense category consists of our sales, marketing,
business development, finance, accounting and general administration costs. These costs are
comprised of expenses related directly to our staff, as well as external costs associated with
service providers such as consultants, lawyers, accountants and insurers. We anticipate that
selling, general and administrative expenses will increase significantly in the foreseeable future
based on our expectation that we will expand our efforts to prepare for the potential
commercialization of enoximone capsules and ambrisentan. Our on-going development programs for enoximone capsules, ambrisentan and darusentan will be
lengthy and expensive. Even if these trials show our product candidates to be safe and effective in
treating their target conditions, we do not expect to be able to record commercial sales of any of
our product candidates for several years. As a result of these development program expenses and the
costs of preparing for the possible commercial launch of enoximone and ambrisentan, we expect to
incur significant and growing losses for the foreseeable future. Although the size and timing of
our future operating losses is subject to significant uncertainty, we expect them to continue to
increase over the next several years as we continue to fund our development programs and prepare
for potential commercial launch of our product candidates. Our primary source of working capital
has been equity financings. The pace and outcome of our clinical development programs and the progress of our discovery
research program are difficult to predict. If we enter into additional third party collaborations
or acquire new product candidates, the timing and amounts of any related licensing payments or
expenses are likely to be highly variable. As a result, we anticipate that our quarterly results
will fluctuate for the foreseeable future. In view of this variability and of our limited operating
history, we believe that period-to-period comparisons of our operating results are not meaningful
and you should not rely on them as indicative of our future performance. Results of Operations for the Three Months Ended March 31, 2005 and 2004 Revenues Three Months EndedMarch 31,2005
    
    2004(In thousands)Revenues:Product sales
    
    $
    909
    
    
    $
    852Research and development contracts
    
    
    1,706
    
    
    
    1,340$
    2,615
    
    
    $
    2,192
 13




---



##### Table of Contents



Product sales Product sales were derived from sales of Perfan® I.V. in Europe. Sales in United States
dollars increased due to the increased euro/dollar exchange rate in the first quarter 2005, as
compared to the first quarter 2004. We expect that Perfan® I.V. unit sales in 2005 will be similar to 2004 sales, and we do not
expect sales of this product to become significant compared to our level of expenses. Research and development contracts revenue Research and development contracts revenues for the three months ended March 31, 2005 were
related to the research collaboration with Novartis initiated in October 2003. The research and
development contracts revenue for the three months ended March 31, 2005 mainly consisted of license
revenue totaling $417,000 and research support funding of $1.25 million. The research and
development contracts revenue for the three months ended March 31, 2004 mainly consisted of license
revenue totaling $417,000 and research support funding of $923,000. The license revenue is derived
from the non-refundable upfront payment made by Novartis in 2003, which is being 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 31,2005
    
    
    2004(In thousands)Costs and expenses:Cost of product sold
    
    $
    308
    
    
    $
    271Research and development (excluding
stock-based compensation expense)
    
    
    17,405
    
    
    
    14,624Selling, general and administrative
(excluding stock-based compensation
expense)
    
    
    3,244
    
    
    
    2,235Stock-based compensation expense
    
    
    516
    
    
    
    1,212$
    21,473
    
    
    $
    18,342
 Cost of Product Sold The cost of product sold for Perfan® I.V. increased in the three months ended March 31, 2005
compared to the same period in 2004, primarily due to the increase in product sales in United
States dollars. The cost of goods sold, as a percentage of Perfan® I.V. sales, was 34% for the
three months ended March 31, 2005 as compared to 32% for the same quarter in 2004. Research and Development Research and development expenses, excluding stock-based compensation expenses, are summarized
as follows: Three Months EndedMarch 31,2005
    
    
    2004(In thousands)DevelopmentEnoximone capsules
    
    $
    10,021
    
    
    $
    7,108Ambrisentan
    
    
    4,538
    
    
    
    3,722Darusentan
    
    
    1,220
    
    
    
    1,241Total development
    
    
    15,779
    
    
    
    12,071
 14




---



##### Table of Contents



Three Months EndedMarch 31,2005
    
    
    2004(In thousands)License feesEnoximone
    
    
    
    
    
    
    Ambrisentan
    
    
    
    
    
    
    1,500Darusentan
    
    
    
    
    
    
    Other
    
    
    59
    
    
    
    108Total license fees
    
    
    59
    
    
    
    1,608Discovery research
    
    
    1,567
    
    
    
    945Total research and development
    
    $
    17,405
    
    
    $
    14,624
 The $2.9 million increase in development costs for enoximone capsules in the three months
ended March 31, 2005 as compared to the same period in 2004 was primarily due to the following:  
    $2.6 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;
    $290,000 increase related to the initiation of several Phase I enoximone studies;
and
    $240,000 increase in the internal costs associated with the management of the
enoximone trials primarily due to an increase in the number of employees. These increases were partially offset by a $395,000 decrease related to the conclusion of our
EMOTE study in March 2004. The $816,000 increase in development costs for ambrisentan in the three months ended March 31,
2005 as compared to the same period in 2004 was primarily related to:  
    $1.0 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 two Phase III ARIES
trials and the related extension study;
    $235,000 increase in expenses related to consulting and other external costs for
ambrisentan; and
    $65,000 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 $300,000 decrease related to the conclusion of our
Phase II PAH trial and decreased costs related to the extension study and a decrease of $170,000 in
expenses related to work on developing the commercial manufacturing process for ambrisentan, which
was due to the variability in the timing of this work. The development costs for darusentan in the three months ended March 31, 2005 were consistent
with the same period in 2004. Discovery research expenses increased by about $620,000 in the three months ended March 31,
2005 as compared to the same period in 2004. The increase related to increased staffing levels and
to increased lab supply and equipment costs. Selling, General and Administrative The $1.0 million increase in selling, general and administrative expense for the three months
ended March 31, 2005 as compared to the same period in 2004 was due to an increase of $330,000
related to increased staffing and related recruiting costs, $295,000 increase in professional
service and related consulting costs, $235,000 related to increased marketing costs and a $140,000
increase related to conferences and travel costs. 15




---



##### Table of Contents



Stock-Based Compensation Stock-based compensation expenses decreased due to the continued vesting of below-market
options granted to employees prior to the initial public offering. Since the initial public
offering in 2003, the Company has not granted options to employees with exercise prices below the
fair market value on the date of grant. The stock-based compensation expense for each period was
allocated between selling, general and administrative and research and development as follows: Three Months EndedMarch 31,2005
    
    
    2004(In thousands)Research and development
    
    $
    264
    
    
    $
    616Selling, general and administrative
    
    
    252
    
    
    
    596$
    516
    
    
    $
    1,212
 Interest Income, Net Interest income net of interest expense was $563,000 and $172,000 for the three months ended
March 31, 2005 and 2004, respectively. Interest income was $650,000 and $303,000 for the three
months ended March 31, 2005 and 2004, respectively. The increase in interest income in 2005 relates
to the increased investment balance in 2005 as a result of the funds raised in our September 2004
financing. Interest expense declined to $87,000 from $131,000 for the three months ended March 31,
2005 and 2004, respectively, as a result of the reduced balance remaining on our term loan. Liquidity and Capital Resources Our cash, cash equivalents and investments amounted to $101.6 million and $119.6 million at
March 31, 2005 and December 31, 2004, respectively. From our inception on June 10, 1996 to March
31, 2005, we funded our operations primarily with $258.0 million (net of issuance costs) from
private equity financings and our public offerings, $5.3 million from term loans, $11.7 million
from sales of Perfan® I.V., $10.5 million related to our research and development contract with
Novartis and $3.8 million from net interest income earned on cash equivalents and investments. Our cash outflows in the next 12 months are expected to consist primarily of external expenses
related to our research and development programs, sales and marketing expenses and payroll costs.
Our cash outflows beyond one year are also expected to consist primarily of external expenses
related to our research and development programs, sales and marketing expenses and payroll costs.
We believe that our cash, cash equivalents and investment balances will allow us to fund our future
working capital and capital expenditures through at least the end of the first quarter of 2006 and
potentially longer if the results of our ESSENTIAL trials and/or Phase IIb trial of darusentan do
not support further development. 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. Although we expect that our
existing resources could be adequate to support our operations for a longer period of time under
certain scenarios, there can be no assurance that this can, in fact, be accomplished. We intend to pursue potential additional collaborations and financing transactions to meet our
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 us. 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. Our cash, cash equivalents and investments are held in a variety of interest-bearing
instruments, consisting of United States government and agency securities, high-grade United States
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. 16




---



##### Table of Contents



At March 31, 2005, we had approximately $2.7 million in net fixed assets. We expect to
purchase additional equipment and to invest in leasehold improvements in 2005, and we expect our
spending on fixed assets to grow in future years. Operating activities resulted in net cash outflows of $17.1 million and $15.7 million for the
three months ended March 31, 2005 and 2004, respectively. The cumulative net cash outflow from
operating activities from our inception to March 31, 2005 was $153.1 million. The use of cash in
all periods was primarily a result of our losses from operations. Investing activities resulted in net cash inflows of $1.3 million and net cash outflows of
$10.4 million for the three months ended March 31, 2005 and 2004, respectively. The net cash inflow
for the three months ended March 31, 2005 resulted from $0.4 million in capital asset expenditures
and $12.7 million in purchases of investments offset by $14.5 million in proceeds related to the
maturity of investments. The net cash outflow for the three months ended March 31, 2004 resulted
from $0.3 million in capital asset expenditures and $37.7 million in purchases of investments
offset by $27.6 million in proceeds from the sale of short-term investments. Cumulative investing
activities from inception to March 31, 2005 resulted in net cash outflows of $51.5 million, with
$4.6 million in net capital asset expenditures offset by $332,000 in proceeds from the sale of
property and equipment and $447.6 million in purchases of investments offset by $400.2 million in
proceeds from the maturity of investments. Financing activities resulted in net cash outflows of $0.4 million and $0.4 million for the
three months ended March 31, 2005 and 2004, respectively. Financing activities for the three months
ended March 31, 2005 and 2004 consisted primarily of payments of $472,000 and $428,000 on our term
loan, respectively. Cumulative financing activities from our inception to March 31, 2005 resulted
in net cash inflows of $259.6 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 our
September 2004 financing and borrowings under our term loans. Total operating lease expense for the three months ended March 31, 2005 and 2004 was
approximately $125,000 and $100,000, respectively. We have future payment commitments for
operating leases of approximately $1.3 million, principally for our office and laboratory space as
of March 31, 2005. 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. 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 consolidated financial
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. We believe the following policies to be the most critical to an understanding of our financial
condition and results of operations because they require us to make estimates, assumptions and
informed management judgments about matters that are inherently uncertain:  
    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. 17




---



##### Table of Contents



Revenue Recognition We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 104 Revenue
Recognition in Financial Statements(SAB 104). Arrangements with multiple elements are accounted
for in accordance with Emerging Issues Task Force Issue No. 00-21, Revenue Arrangements with
Multiple Deliverables,or EITF 00-21. We consider this methodology to be the most appropriate for
our business model and current revenue streams. Product Sales.Product 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s consignment stock 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, we do not allow product returns. 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 non-refundable licensing fees, funding of research and development efforts, payments based
on achievement of certain milestones, and royalties on product sales. We analyze our multiple
element arrangements to determine whether the elements can be separated and accounted for
individually as separate units of accounting in accordance with EITF 00-21. We recognize up-front
license payments as revenue if the license has stand-alone value, we do not have ongoing
involvement or obligations, and the fair value of the undelivered items can be determined. If the
license is considered to have stand-alone value but the fair value on any of the undelivered items
cannot be determined, the license payments are recognized as revenue over the period of performance
for such undelivered items or services. 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 is 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 frequently reviews the appropriate time
period. Milestone payments, 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 milestone payments 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 payment 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 we complete our 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 18




---



##### Table of Contents



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 activities
in support of our 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. 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 prior to our initial public offering, there was no public
market for our common stock, we have estimated the fair value of these equity instruments using
various valuation methods. Subsequent to 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, 2004, we recorded a full valuation allowance of $63.5 million
against our net deferred tax asset balance, due to uncertainties related to the ultimate recovery
of 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. Recent Accounting Pronouncements On December 16, 2004, the Financial Accounting Standards Board issued SFAS No. 123 (revised
2004),Share-Based Payment, which is a revision of SFAS No. 123. SFAS No. 123(R) supersedes APB
No. 25, and amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in SFAS No.
123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all
share-based payments to employees, including grants of employee stock options, to be recognized in
the income statement based on their fair values. Pro forma disclosure is no longer an alternative. SFAS No. 123(R) and the related interpretations must be adopted no later than January 1, 2006.
We expect to adopt SFAS No. 123(R) effective as of January 1, 2006. SFAS No. 123(R) permits companies to adopt its requirements using one of two methods: 1. A modified prospective method in which compensation cost is recognized beginning with
the effective date (a) based on the requirements of SFAS No. 123(R) for all share-based payments
granted after the effective date and (b) based on the requirements of SFAS No. 123 for all
awards granted to employees prior to the effective date of SFAS No. 123(R) that remain unvested
on the effective date. 19




---



##### Table of Contents



2. A modified retrospective method which includes the requirements of the modified
prospective method described above, but also permits entities to restate based on the amounts
previously recognized under SFAS No. 123 for purposes of pro forma disclosures either (a) all prior periods
presented or (b) prior interim periods of the year of adoption. We are still assessing the appropriate transition method. As permitted by SFAS No. 123, we currently account for share-based payments to employees using
the APB No. 25 intrinsic value method and, as such, generally recognize no compensation cost for
employee stock options. Accordingly, the adoption of SFAS No. 123(R)s fair value method will have
an impact on our results of operations, although it will have no impact on our overall financial
position or cash flows. Statement No. 123(R) also requires the benefits of tax deductions in excess
of recognized compensation cost to be reported as a financing cash flow, rather than as an
operating cash flow. This requirement will reduce net operating cash flows and increase net
financing cash flows in periods after adoption. While we cannot estimate what those amounts will be
in the future (because they depend on, among other things, when employees exercise stock options),
there were no operating cash flows recognized in prior periods for such excess tax deductions for
stock option exercises. We have not yet determined the method of adoption or the effect of adopting
SFAS 123(R) and have not determined whether the adoption will result in amounts that are similar to
the current pro forma disclosures under SFAS No. 123. 20




---



##### Table of Contents



RISK FACTORS Our business faces significant risks. These risks include those described below and may
include additional risks of which we are not currently aware or which we currently do not believe
are material. If any of the events or circumstances described in the following risks actually
occurs, our business, financial condition or results of operations could be materially adversely
affected and such events or circumstances could cause our actual results to differ materially from
the results contemplated by the forward-looking statements contained in this report. These risks
should be read in conjunction with the other information set forth in this report as well as in our
annual report onForm 10-Kfor the year ended December 31, 2004 and in our other periodic reports
onForm 10-QandForm 8-K. Risks Related to Our Business 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 clinical evaluation, regulatory review and 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. We have a history of operating losses and we may never become profitable. We have experienced significant operating losses since our inception in 1996. At March 31,
2005, we had an accumulated deficit of $194.5 million. For the year ended December 31, 2004 we had
an operating loss of $58.5 million and for the years ended December 31, 2003 and 2002, we had
operating losses of $43.0 million and $28.8 million, respectively. Revenues from the commercial
sales of our only approved product, Perfan® I.V., were $3.3 million and $2.8 million for the years
ended December 31, 2004 and 2003, respectively, and we will not achieve profitability from the
sales of this product alone. We also do not expect that research and development revenue, which was
$6.6 million and $1.0 million in 2004 and 2003, respectively, will become sufficient for us to
achieve profitability. We have funded our operations principally from the sale of our equity
securities. We expect to continue to incur substantial additional operating losses for the next
several years as we pursue our clinical trials, research and development efforts and
commercialization of our product candidates. To become profitable, we, either alone or with our
collaborators, must successfully develop, manufacture and market our product candidates, or
continue to identify, develop, acquire, manufacture and market other new product candidates. We may
never have any significant revenues or become profitable. 21




---



##### Table of Contents



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, preparing for
potential commercial launch of our product candidates and expanding our discovery research
programs. In the first quarter of 2005, our operations consumed approximately $5.7 million of cash
per month, compared to $5.2 million of cash per month in 2004. This rate of cash consumption would
have increased by an average of $0.5 million per month had research and development funding not
been received. We expect that our monthly cash used by operations will continue to increase for the
next several years. Based on current spending projections, we believe that our current cash, cash
equivalents and investments are sufficient to fund operations through at least the end of the first
quarter of 2006. 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. We may experience delays in our clinical trials that could adversely affect our financial
position and our commercial prospects. 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 some cardiovascular disease
trials is particularly intense because of the limited number of leading specialist physicians and
the geographic concentration of major clinical centers. A number of factors may prevent us from completing our projected goals for enrollment or
decrease the pace of enrollment in our Phase III ARIES trials of ambrisentan in PAH. These factors
include the inclusion of placebo control groups; competing trials being conducted by Encysive
Pharmaceuticals Inc. of sitaxsentan in substantially similar PAH patient populations; the Phase IV
trial of bosentan in PAH patients with Class II symptoms being conducted by Actelion Ltd; the
continued market adoption of bosentan; the continued or increased off-label prescription of
sildenafil in patients with PAH based on the results of a Phase III trial conducted by Pfizer and
reported at the annual conference of the American College of Chest
Physicians in October 2004; pivotal clinical trials proposed to
be conducted by ICOS Corporation and Eli Lilly of oral tadalafil in
PAH; and
FDA approval of sildenafil or sitaxsentan for PAH. We have committed substantial resources to the
ARIES trials in an attempt to increase the likelihood of completing enrollment in an acceptable
time frame. These efforts may not be successful in maintaining our projected current enrollment
rates. As a result of the numerous factors which can affect the pace of progress of clinical trials,
our trials may take longer to enroll patients than we anticipate, if they can be completed at all.
Delays in patient enrollment in the trials may increase our costs and slow our product development
and approval process. Our product development costs will also increase if we need to perform more
or larger clinical trials than planned. If other companies product candidates show favorable
results, we may conduct additional clinical trials. 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. 22




---



##### Table of Contents



In addition, we may experience delays in closing out our clinical trials and analyzing
clinical trial data after the patient treatment phase of a trial has been completed. This is of
particular concern with large, international trials such as ESSENTIAL I & II and ARIES-1 & -2. 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 conditions. 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. 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. 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
condition 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 or prove to be safe. 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. 23




---



##### Table of Contents



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. Even if our products meet safety and efficacy endpoints in clinical trials, regulatory
authorities may not approve them, or we may face post-approval problems that require withdrawal
of our products from the market. Our product candidates may not be approved even if they achieve their endpoints in clinical
trials. Regulatory agencies, including the FDA, or their advisors may disagree with our
interpretations of data from pre-clinical studies and clinical trials. Regulatory agencies also may
approve a product candidate for fewer conditions than requested or may grant approval subject to
the performance of post-marketing studies for a product candidate. In addition, regulatory agencies
may not approve the labeling claims that are necessary or desirable for the successful
commercialization of our product candidates. Even if we receive regulatory approvals, our product candidates may later exhibit adverse
effects that limit or prevent their widespread use or that force us to withdraw those product
candidates from the market. In addition, a marketed product continues to be subject to strict
regulation after approval and may be required to undergo post-approval studies. Any unforeseen
problems with an approved product or any violation of regulations could result in restrictions on
the product, including its withdrawal from the market. Any delay in, or failure to receive or
maintain regulatory approval for, any of our products could prevent us from ever generating
meaningful revenues or achieving profitability. Ambrisentan and darusentan belong to a class of drugs called endothelin receptor antagonists,
which may cause liver, testicular and fetal abnormalities. Bosentan, a product of Actelion, Inc.,
also belongs to this class of drugs, and the FDA, as a condition of the approval of bosentan,
required that Actelion distribute bosentan via a closed distribution system. This distribution
system seeks to manage the post-marketing risk of an approved medication through: (i) limited
access through a number of specialty distributor pharmacies; (ii) registration of all practitioners
prescribing the medication; (iii) registration of all patients receiving the medication; (iv)
written certification by the practitioner that the medication is being prescribed for a medically
appropriate use; (v) review of safety warnings with the patient by the practitioner; (vi) an
ongoing comprehensive program to monitor, collect, track, and report adverse event and other safety
related information from patients receiving the medication; and (vii) distribution of a medication
guide to patients that addresses concerns about liver toxicity and pregnancy and the actions
patients should take to avoid these adverse events. Since ambrisentan and darusentan belong to the
same class of drugs as bosentan, the FDA may require that ambrisentan and darusentan be distributed
through a closed distribution system that would increase distribution costs and may make patient
access and reimbursement more difficult. 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 three times a day, there was a statistically significant increase in
the mortality rate in the group of patients receiving 100 milligram enoximone capsules three times
a day compared to the group of patients receiving placebo capsules: 36% of the patients treated
with 100 milligrams enoximone capsules three times a day 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. Although 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. 24




---



##### Table of Contents



Abnormal elevations of liver function test results have been reported as complications in trials
of endothelin receptor antagonists. Abnormal elevations of liver function test (LFT) results, which are indicative of potential
liver toxicity, have been reported as complications in trials of endothelin receptor antagonists.
If the results of any of our clinical trials, including the trials relating to ambrisentan and
darusentan, indicate higher than expected levels of abnormal LFTs, we may not receive regulatory
approval to market the product candidate and our product, if approved for marketing, may not be
able to compete with other products. Endothelin receptor antagonists, including ambrisentan and darusentan, have demonstrated toxicity
in animals. Prior to regulatory approval for a product candidate, we are required to conduct studies of
our product candidates on animals to determine if they have the potential to have toxic effects.
The toxicology tests for ambrisentan and darusentan indicated that they both cause birth defects in
rabbits and rats. Other toxicology tests indicated that ambrisentan and darusentan caused damage to
the testes causing infertility in rats and that ambrisentan had the potential to cause damage to
the testes in dogs. We assume that similar toxicities could occur in humans. As a result, we will
only seek approval for, and the FDA will only consider approving ambrisentan and darusentan for,
the treatment of severe diseases such as PAH or resistant systolic hypertension. Neither ambrisentan nor
darusentan should be taken by women who are pregnant, or are capable of getting pregnant and not
practicing adequate forms of birth control; however, there can be no assurance that ambrisentan or
darusentan will not be taken by such women. Additionally, there can be no assurance that a patient
will not exceed the recommended dose of our products and suffer adverse consequences. Market acceptance of our product candidates is uncertain. We cannot assure you that physicians will prescribe or patients will use enoximone capsules,
ambrisentan or darusentan, if they are approved. Physicians will prescribe our products only if
they determine, based on experience, clinical data, side effect profiles and other factors, that
they are preferable to other products then in use or beneficial in combination with other products.
Recommendations and endorsements by influential physicians will be essential for market acceptance
of our products and we may not be able to obtain these recommendations and endorsements. Because of
prior reports of increased mortality caused by high dose enoximone capsules in earlier clinical
trials, physicians may be unwilling to use enoximone capsules in treating their patients.
Physicians may not be willing to use ambrisentan and darusentan because of demonstrated adverse
side effects such as damage to testes in some animal species. Additionally, market acceptance of
endothelin receptor antagonists will be limited because they are known to cause birth defects in
animals and are believed to do the same in humans. Enoximone capsules for the treatment of advanced chronic heart failure, ambrisentan for the
treatment of PAH and darusentan for the treatment of resistant systolic hypertension address highly
competitive markets and the availability of other drugs and devices for the same conditions may
slow or reduce market acceptance of our products. Drugs such as beta blockers, angiotensin
converting enzyme inhibitors and diuretics have been on the market for many years, and physicians
have experience with prescribing these products for the treatment of chronic heart failure and
hypertension. In addition, an angiotensin receptor blocker was recently approved for the treatment
of heart failure. Bosentan, a non-selective endothelin receptor antagonist, is a drug that has
been approved for PAH, the same condition we intend for ambrisentan, and has been available since
December 2001. Adoption of ambrisentan may be slow if physicians continue to prescribe bosentan. In
addition, sitaxsentan, an ETA selective endothelin receptor antagonist like ambrisentan, may be an
alternative treatment for PAH based on the preliminary results of recent pivotal Phase III clinical
trials. Sitaxsentan is at a more advanced stage of development than ambrisentan and is likely to be
on the market before ambrisentan if it is approved. If sitaxsentan is approved and achieves market
acceptance prior to ambrisentan, the adoption of ambrisentan may be slowed or reduced. Pfizer Inc.
completed clinical trials for sildenafil for the treatment of PAH, reported results of the trial at
the annual conference of the American College of Chest Physicians in October 2004 and filed an NDA
for expansion of its label. The results of the recent sildenafil and sitaxsentan studies and FDA
approval of the drugs in 2005 and/or 2006 may slow market adoption of ambrisentan if it is
approved. Many other factors influence the adoption of new pharmaceuticals, including marketing and
distribution restrictions, adverse publicity, product pricing and reimbursement by third-party
payors. Even if our product candidates achieve market acceptance, the market may not be large
enough and/or prevailing market pricing may not be high enough to result in significant revenues.
The failure of our product candidates to achieve market acceptance would prevent us from ever
generating meaningful product revenues. 25




---



##### Table of Contents



If we become subject to product liability claims, the damages may exceed our insurance. It is impossible to predict from the results of animal studies the potential adverse effects
that a product candidate may have in humans. We face the risk that the use of our product
candidates in human clinical trials will result in adverse effects. If we complete clinical testing
for our product candidates and receive regulatory approval to market our products, we will mark our
products with warnings that identify the known potential adverse effects and the patients who
should not receive our product. We cannot assure that physicians and patients will comply with
these warnings. In addition, unexpected adverse effects may occur even with use of our products
that have received approval for commercial sale. In pre-clinical testing, ambrisentan and darusentan caused birth defects in animals. Based on
these results and similar results with other endothelin receptor antagonists, we have concluded
that ambrisentan and darusentan could cause birth defects in humans. Neither ambrisentan nor
darusentan should be taken by women who are pregnant, or are capable of getting pregnant and not
practicing adequate forms of birth control; however, there can be no assurance that ambrisentan or
darusentan will not be taken by such women. Additionally, there can be no assurance that a patient
will not exceed the recommended dose of our products and suffer adverse consequences. If a child is
born with a birth defect or a patient suffers harm from exceeding the approved dose on our
products, we may be subject to product liability claims that exceed any insurance coverage that may
be in effect at the time. Regardless of their merit or eventual outcome, liability claims may result in:  
    decreased demand for our products and product candidates;
    injury to our reputation;
    withdrawal of clinical trial participants;
    costs of related litigation;
    substantial monetary awards to patients and others;
    loss of revenues; and
    the inability to commercialize our products and product candidates. We have obtained liability insurance of $10 million for Perfan® I.V. and our product
candidates in clinical trials. We cannot predict all of the possible harms or side effects that may
result and, therefore, the amount of insurance coverage we currently hold, or that we or our
collaborators may obtain, may not be adequate to protect us from any liabilities. In addition, if
any of our product candidates are approved for marketing, we may seek additional insurance
coverage. We may be unable to obtain additional coverage or afford such coverage. We may not have
sufficient resources to pay for any liabilities resulting from a claim beyond the limit of our
insurance coverage. If we cannot protect against potential liability claims, we or our
collaborators may find it difficult or impossible to commercialize our products. We may not be able
to renew or increase our insurance on reasonable terms, if at all. If we are unable to develop adequate sales, marketing or distribution capabilities or enter
into agreements with third parties to perform some of these functions, we will not be able to
commercialize our products effectively. We have limited experience in sales, marketing and distribution. To directly market and
distribute any products, we must build a sales and marketing organization with appropriate
technical expertise and distribution capabilities. We may attempt to build such a sales and
marketing organization on our own or with the assistance of a contract sales organization. For some
market opportunities, we may need to enter into co-promotion or other licensing arrangements with
larger pharmaceutical or biotechnology firms in order to increase the commercial success of our
products. We may not be able to establish sales, marketing and distribution capabilities of our own
or enter into such arrangements with third parties in a timely manner or on acceptable terms. To
the extent that we enter into co-promotion or other licensing arrangements, our product revenues
are likely to be lower than if we directly marketed and sold our products, and some or all of the
revenues we receive will depend upon the efforts of third parties, and these 26




---



##### Table of Contents



efforts may not be successful. Additionally, building marketing and distribution capabilities may be more
expensive than we anticipate, requiring us to divert capital from other intended purposes or
preventing us from building our marketing and distribution capabilities to the desired levels. Since we will rely on third-party manufacturers, we may be unable to control the availability or
cost of producing our products. There can be no assurance that our products, if approved, can be manufactured in sufficient
commercial quantities, in compliance with regulatory requirements and at an acceptable cost.
Although there are several potential manufacturers capable of manufacturing our products, we intend
to select and rely initially on one third-party to manufacture each of our approved products.
Establishing a replacement source for any of our products could require at least 12 months and
significant additional expense. We will need to expand relationships with manufacturers we have
used in the past or establish new relationships with different third-party manufacturers for our
products. We may not be able to contract for manufacturing capabilities on acceptable terms, if at
all. Furthermore, third-party manufacturers may encounter manufacturing or quality control problems
or may be unable to obtain or maintain the necessary governmental licenses and approvals to
manufacture our products. Any such failure could delay or prevent us from receiving regulatory
approvals and marketing our products. Our dependence on third parties may reduce our profit margins
and delay or limit our ability to develop and commercialize our products on a timely and
competitive basis. Our third-party manufacturers and their manufacturing facilities and processes are subject to
regulatory approval, which may delay or disrupt our development and commercialization efforts. Third-party manufacturers of our products or product candidates must ensure that all of the
processes, methods and equipment are compliant with the current Good Manufacturing Practices, or
cGMP, and conduct extensive audits of vendors, contract laboratories and suppliers. The cGMP
requirements govern quality control of the manufacturing process and documentation policies and
procedures. Compliance by third-party manufacturers with cGMP requires record keeping and quality
control to assure that the product meets applicable specifications and other requirements.
Manufacturing facilities are subject to inspection by regulatory agencies at any time. If an
inspection by regulatory authorities indicates that there are deficiencies, third-party
manufacturers could be required to take remedial actions, stop production or close the facility,
which would disrupt the manufacturing processes and limit the supplies of our products or product
candidates. If they fail to comply with these requirements, we also may be required to curtail the
clinical trials of our product candidates, and may not be permitted to sell our products or may be
limited in the jurisdictions in which we are permitted to sell them. Due to our reliance on contract research organizations and 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 ESSENTIAL and
ARIES trials, as well as the clinical trials for darusentan. In addition, in certain countries
outside of the United States, we rely on third parties to interact on our behalf with applicable
regulatory authorities. 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. Errors or omissions by third
party providers may also create errors in publicly reported results, forcing us to revise our
previous disclosures or having other adverse affects on our business or stock price. 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. 27




---



##### Table of Contents



If we do not find development and commercialization collaborators for our product candidates, we
may have to reduce or delay our rate of product development and commercialization and increase
our expenditures. Our existing collaborations have been with academic scientists and institutions for basic
scientific research and in 2003 we entered into a research collaboration with Novartis relating to
targets and compounds identified in our discovery research program. To date, we have not entered
into any collaboration agreements for the development or commercialization of our existing product
candidates. We plan to enter into relationships with selected pharmaceutical or biotechnology
companies to help develop and commercialize our product candidates. We may not be able to negotiate
collaborations with these other companies for the development or commercialization of our product
candidates on acceptable terms. If we are not able to establish such collaborative arrangements, we
may have to reduce or delay further development of some of our programs, increase our planned
expenditures and undertake development and commercialization activities at our own expense. Any development or commercialization collaborations we have entered into or may enter into
with pharmaceutical or biotechnology companies, including our research collaboration agreement with
Novartis, are or will be subject to a number of risks, including:  
    collaborators may not pursue further development and commercialization of compounds
resulting from collaborations or may elect not to renew research and development programs;
    collaborators may delay clinical trials, underfund a clinical trial program, stop a
clinical trial or abandon a product candidate, repeat or conduct new clinical trials or
require the development of a new formulation of a product candidate for clinical testing;
    a collaborator with marketing and distribution rights to one or more of our products
may not commit enough resources to the marketing and distribution of our products,
limiting our potential revenues from the commercialization of these products; and
    disputes may arise delaying or terminating the research, development or
commercialization of our product candidates, or resulting in significant legal
proceedings. Even if we receive regulatory approval for our product candidates, we will be subject to ongoing
regulatory obligations and review. Following any regulatory approval of our product candidates, we will be subject to continuing
regulatory obligations such as safety reporting requirements and additional post-marketing
obligations, including regulatory oversight of the promotion and marketing of our products. In
addition, we and our third-party manufacturers will be required to adhere to regulations setting
forth cGMP. These regulations cover all aspects of the manufacturing, storage, testing, quality
control and record keeping relating to our product candidates. Furthermore, we or our third-party
manufacturers must pass a pre-approval inspection of manufacturing facilities by the FDA and
foreign authorities before obtaining marketing approval and will be subject to periodic inspection
by these regulatory authorities. Such inspections may reveal compliance issues that could prevent
or delay marketing approval, or require the expenditure of financial or other resources to address.
If we fail to comply with applicable regulatory requirements, we may be subject to fines,
suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating
restrictions and criminal prosecution. Our success depends on retention of our President and Chief Executive Officer and other key
personnel. We are highly dependent on our President, Chief Executive Officer and Chairman, J. William
Freytag, Ph.D., and other members of our management team. We are named as the beneficiary on a term
life insurance policy covering Dr. Freytag in the amount of $2.0 million. We also depend on
academic collaborators for each of our research and development programs. The loss of any of our
key employees or academic collaborators could delay our discovery research program and the
development and commercialization of our product candidates or result in termination of them in
their entirety. Dr. Freytag, as well as others on our executive management team, has a severance
agreement with us, but the agreement provides for at-will employment with no specified term. Our
future success also will depend in large part 28




---



##### Table of Contents



on our continued ability to attract and retain other
highly qualified scientific, technical and management personnel, as well as personnel with expertise in clinical testing, governmental regulation
and commercialization. We face competition for personnel from other companies, universities, public
and private research institutions, government entities and other organizations. If we are
unsuccessful in our recruitment and retention efforts, our business will be harmed. We also rely on consultants, collaborators and advisors to assist us in formulating and
conducting our research. All of our consultants, collaborators and advisors are employed by other
employers or are self-employed and may have commitments to or consulting contracts with other
entities that may limit their ability to contribute to our company. If our discovery research program is not successful, we may be unable to develop additional
product candidates. We have devoted and expect to continue to devote significant resources to our discovery
research program. For the years ended December 31, 2004, 2003 and 2002, we spent $5.2 million, $3.3
million and $3.5 million, respectively, on our discovery research program. We are obligated under
sponsored research agreements to make annual payments of $250,000 to the University of Texas
Southwestern Medical Center. However, this program may not succeed in identifying additional
therapeutic targets, product candidates or products. If we do not develop new products, and if our
existing product candidates do not receive regulatory approval or achieve commercial success, we
would have no other way to achieve any meaningful revenue. Moreover, if we do not develop new
products, our revenues from any of our product candidates that are approved will eventually decline
as they face competition when any applicable patents, or periods of market exclusivity expire. The
collaboration agreement we entered into with Novartis in October 2003 provides Novartis with an
exclusive option to our discoveries, with limited exceptions, for a three year period ending
October 2006. Novartis may choose to terminate or not renew the agreement with us, possibly
delaying our development programs and increasing our operating loss. Our operations may be impaired unless we can successfully manage our growth. We expect to continue to expand our research and development, product development, sales and
marketing and administrative operations. Our number of employees and operational spending have
increased significantly each year since inception. This expansion has placed, and is expected to
continue to place, a significant strain on our management, operational and financial resources. To
manage further growth, we will be required to improve existing, and implement additional,
operational and financial systems, procedures and controls and hire, train and manage additional
employees. We cannot assure that (i) our current and planned personnel, systems, procedures and
controls will be adequate to support our anticipated growth, (ii) management will be able to hire,
train, retain, motivate and manage required personnel or (iii) management will be able to
successfully identify, manage and exploit existing and potential market opportunities. Our failure
to manage growth effectively could limit our ability to achieve our research and development and
commercialization goals. 29




---



##### Table of Contents



If we engage in any acquisition, we will incur a variety of costs, and we may never realize the
anticipated benefits of the acquisition. Since our inception, we have acquired three product candidates through in-licensing. One of
our strategies for business expansion is the acquisition of additional products and product
candidates. We may attempt to acquire these product candidates, or other potentially beneficial
technologies, through in-licensing or the acquisition of businesses, services or products that we
believe are a strategic fit with our business. Although we currently have no commitments or
agreements with respect to any acquisitions, if we undertake an acquisition, the process of
integrating the acquired business, technology, service or product may result in unforeseen
operating difficulties and expenditures and may divert significant management attention from our
ongoing business operations. Moreover, we may fail to realize the anticipated benefits of any
acquisition for a variety of reasons, such as an acquired product candidate proving to not be safe
or effective in later clinical trials. We may fund any future acquisition by issuing equity or debt
securities, which could dilute the ownership percentages of our existing stockholders. Acquisition
efforts can consume significant management attention and require substantial expenditures, which
could detract from our other programs. In addition, we may devote resources to potential
acquisitions that are never completed. Our attempts to increase future sales of Perfan® I.V. may be unsuccessful. Our current product sales revenue is derived solely from European sales of Perfan® I.V. and we
recorded $3.3 million in sales of this product in 2004. The revenue we receive on sales of Perfan®
I.V. currently exceeds our costs associated with having it manufactured and sold. The sales of
Perfan® I.V. fund our European sales efforts and help offset some of the costs we incur to develop
our product candidates. We believe that our sales and marketing efforts in Europe will, at most,
lead to only modest increases in Perfan® I.V. sales. Our sales may decline over time due to the
lack of patent protection for Perfan® I.V. and competition from other drugs sold for the same
condition as Perfan® I.V., some of which sell for significantly lower prices. If we do not maintain
or increase our sales of Perfan® I.V. in Europe, our operating losses will increase. We could also
be forced to discontinue our European sales program, depriving us of potential commercialization
and sales experience and contacts which may be important for the successful commercial launch of
any of our product candidates that receive regulatory approval. Our corporate compliance program cannot guarantee that we are in compliance with all potentially
applicable regulations. The development, manufacturing, pricing, sales, and reimbursement of our products, together
with our general operations, are subject to extensive regulation by federal, state and other
authorities within the United States and numerous entities outside of the United States. We are a
relatively small company with approximately 100 employees, approximately 40% of whom have joined us
in the last 12 months. We also have significantly fewer employees than many other companies that
have the same or fewer product candidates in late stage clinical development and we rely heavily on
third parties to conduct many important functions. As a publicly traded company we are subject to significant regulations, including the
Sarbanes-Oxley Act of 2002, some of which have either only recently been adopted or are currently
proposals subject to change. While we have developed and instituted a corporate compliance program
based on what we believe are the current best practices and continue to update the program in
response to newly implemented or changing regulatory requirements, we cannot assure that we are or
will be in compliance with all potentially applicable regulations. For example, in connection with
our assessment of the effectiveness of our internal control over financial reporting as of December
31, 2004, and the corresponding audit of that assessment by our independent registered public
accounting firm, we identified significant deficiencies in our internal controls over financial
reporting, none of which was determined to be a material weakness as defined by the Public
Company Accounting Oversight Board. However, we cannot assure you that we will not find significant
deficiencies or material weaknesses in the future. We also cannot assure that we could correct any
such weakness to allow our management to assess whether our internal control over financial
reporting are effective in time to enable our independent registered public accounting firm to
attest that such assessment will have been fairly stated in any report to be filed with the
Securities and Exchange Commission, or SEC, or attest that we have maintained effective internal
control over financial reporting. If we fail to comply with the Sarbanes-Oxley Act or any other
regulations we could be subject to a range of consequences, including restrictions on our ability
to sell equity or otherwise raise capital funds, suspension 30




---



##### Table of Contents



or termination of clinical trials, the failure to approve a product candidate, restrictions on our products or manufacturing processes,
withdrawal of products from the market, significant fines, or other sanctions or litigation. Pharmaceutical and biotechnology companies have faced lawsuits and investigations pertaining
to violations of health care fraud and abuse laws, such as the federal false claims act, the
federal anti-kickback statute, and other state and federal laws and regulations. While we have
developed and implemented a corporate compliance program based upon what we believe are current
best practices, we cannot guarantee that this program will protect us from future lawsuits or
investigations. If any such actions are instituted against us, and we are not successful in
defending ourselves or asserting our rights, those actions could have a significant impact on our
business, including the imposition of significant fines or other sanctions. Our operations involve hazardous materials, and compliance with environmental laws and
regulations is expensive. Our research and development activities involve the controlled use of hazardous materials,
including chemicals that cause cancer, volatile solvents, radioactive materials including tritium
and phosphorus-32 and biological materials including human tissue samples that have the potential
to transmit diseases. Our operations also produce hazardous waste. We are subject to a variety of
federal, state and local regulations relating to the use, handling and disposal of these materials.
We generally contract with third parties for the disposal of such substances and store certain low
level radioactive waste at our facility until the materials are no longer considered radioactive.
While we believe that we comply with current regulatory requirements, we cannot eliminate the risk
of accidental contamination or injury from these materials. We may be required to incur substantial
costs to comply with current or future environmental and safety regulations. If an accident or
contamination occurred, we would likely incur significant costs associated with civil penalties or
criminal fines and in complying with environmental laws and regulations. Although we currently
carry a $2.0 million pollution and remediation insurance policy, we cannot assure that this would
be sufficient to cover our potential liability if we experienced a loss or that such insurance will
continue to be available to us in the future. Changes in the economic, political, legal and business environments in foreign countries in which
we do business could limit or disrupt our current and future international sales and operations. We sell Perfan® I.V. in Europe and also expect to commercialize other products outside the
United States and, as a result, our international sales and operations could be limited or
disrupted by any of the following:  
    economic problems that disrupt foreign healthcare payment systems;
    the imposition of governmental controls and changes in regulatory requirements;
    less favorable intellectual property or other applicable laws;
    the inability to obtain any necessary foreign regulatory approvals of products in a
timely manner;
    import and export license requirements;
    economic weakness, including inflation, or political instability in particular foreign
economies and markets;
    business interruptions resulting from geo-political actions, including war and terrorism;
    compliance with tax, employment, immigration and labor laws;
    unexpected changes in tariffs, trade barriers and regulatory requirements;
    difficulties in staffing and managing international operations; and 31




---



##### Table of Contents




    slower payment terms. Currency fluctuations may negatively affect our financial condition. We sell Perfan® I.V. in Europe and incur significant expenses, including for clinical trials,
outside the United States. As a result, our business is affected by fluctuations in exchange rates
between the United States dollar and foreign currencies. Our reporting currency is the United States dollar and,
therefore, financial positions are translated into United States dollars at the applicable foreign
exchange rates. Because our foreign currency revenues are significantly smaller than our foreign
currency expenses, exchange rate fluctuations may adversely affect our results of operations,
financial position and cash flows. Risks Related to Our Industry 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 bosentan, a non-selective endothelin
receptor antagonist for the treatment of PAH. United Therapeutics Corp. received FDA approval in
May 2002 for treprostinil for the treatment of PAH. GlaxoSmithKline plc markets epoprostenol for
PAH. Encysive Pharmaceuticals, Inc. is developing sitaxsentan, an ETA selective endothelin receptor
antagonist which has demonstrated efficacy in a Phase III study and may be approved for PAH earlier
than ambrisentan. Pfizer, Inc. has evaluated the use of sildenafil for the treatment of PAH, and
reported results of a 278-patient Phase III trial at the annual meeting of the American College of
Chest Physicians in October 2004. The results of this study suggest that sildenafil could become a
major competitor to ambrisentan. Pfizer filed an NDA with the FDA in December 2004 to expand the
labeling for sildenafil to include Class II and Class III
PAH. ICOS Corporation and Eli Lilly plan to conduct a pivotal
clinical trial to evaluate oral tadalafil in PAH. A number of other companies,
including Abbott Laboratories and Speedel, have ETA selective endothelin receptor antagonists in
late-stage clinical development and could compete with ambrisentan and darusentan. In addition, a
number of companies, including Actelion, Roche, Novartis AG and Speedel, are developing renin
inhibitors for the treatment of hypertension. 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 status of reimbursement from third-party payors for newly approved health care drugs is
uncertain and failure to obtain adequate reimbursement could limit our ability to generate
revenue. Our ability to commercialize pharmaceutical products may depend, in part, on the extent to
which reimbursement for the products will be available from:  
    government and health administration authorities;
    private health insurers;
    managed care programs; and
    other third-party payors. Significant uncertainty exists as to the reimbursement status of newly approved health care
products. Third-party payors, including Medicare, are challenging the prices charged for medical
products and 32




---



##### Table of Contents



services. Government and other third-party payors increasingly are attempting to
contain health care costs by limiting both coverage and the level of reimbursement for new drugs
and by refusing, in some cases, to provide coverage for uses of approved products for disease
conditions for which the FDA has not granted labeling approval. Third-party insurance coverage may
not be available to patients for our products. If government and other third-party payors do not
provide adequate coverage and reimbursement levels for our products, their market acceptance may be
reduced. Health care reform measures could adversely affect our business. The business and financial condition of pharmaceutical and biotechnology companies are
affected by the efforts of governmental and third-party payors to contain or reduce the costs of
health care. In the United States and in foreign jurisdictions there have been, and we expect that
there will continue to be, a number of legislative and regulatory proposals aimed at changing the
health care system. For example, in some countries other than the United States, pricing of
prescription drugs is subject to government control, and we expect proposals to implement similar
controls in the United States to continue. Another example of proposed reform that could affect our
business is the discussion of drug reimportation into the United States. In 2000, Congress directed
the FDA to adopt regulations allowing the reimportation of approved drugs originally manufactured
in the United States back into the United States from other countries where the drugs were sold at
a lower price. Although the Secretary of Health and Human Services has refused to implement this
directive, in July 2003 the House of Representatives passed a similar bill that does not require
the Secretary of Health and Human Services to act. The reimportation bills have not yet resulted in
any new laws or regulations; however, these and other initiatives remain subject to active debate
both on the federal and state levels and could decrease the price we or any potential collaborators
receive for our products, adversely affecting our profitability. We are unable to predict what additional legislation or regulation, if any, relating to the
health care industry or third-party coverage and reimbursement may be enacted in the future or what
effect such legislation or regulation would have on our business. Outside the United States certain
countries set prices in connection with the regulatory process. We cannot be sure that such prices
will be acceptable to us or our collaborative partners. The pendency or approval of such proposals
or reforms could result in a decrease in our stock price or limit our ability to raise capital or
to obtain strategic partnerships or licenses. The FDA has designated ambrisentan an orphan drug under the Orphan Drug Act. In addition, the
Commission of the European Communities, with a favorable opinion of the Committee for Orphan
Medicinal Products of the European Medicines Agency (EMEA), has granted orphan drug designation to
ambrisentan. The U.S. and European orphan drug designations provide incentives to manufacturers to
develop and market drugs for rare diseases, generally by entitling the first developer that
receives marketing approval for an orphan drug to a exclusive marketing period (typically seven
years in the United States and up to ten years in Europe) for that product. Orphan drug designation
does not increase the likelihood of eventual regulatory approval for a product candidate, including
ambrisentan, and orphan drug designation may be withdrawn by the FDA
and the EMEA in certain circumstances. In recent years, Congress and the EMEA have considered legislation to change the
orphan drug regulations to shorten the period of automatic market exclusivity and to grant
marketing rights to simultaneous developers of a drug. If the U.S. or European orphan drug
regulations are amended in this manner, any approved drugs for which we have been granted exclusive
marketing rights will face increased competition, which may decrease the amount of revenue we may
receive from these products. Changes in or interpretations of accounting rules and regulations, including recently enacted
changes relating to the expensing of stock options, could result in unfavorable accounting
charges or require us to change our compensation policies. Accounting methods and policies for business and market practices of biopharmaceutical
companies are subject to further review, interpretation and guidance from relevant accounting
authorities, including the SEC. The Financial Accounting Standards Board, or FASB, issued SFAS No.
123 (Revised 2004, FAS 123(R)) and its related implementation guidance in December 2004. FAS
123(R) focuses primarily on accounting for transactions in which an entity obtains employee
services in share-based payment transactions and will require us to measure the cost of employee
services received in exchange for an award of equity instruments based on the grant-date fair value
of the award (with limited exceptions). The cost will be recognized over the period during which an
employee is required to provide service in exchange for the award. We are required to implement FAS
123(R) as of the beginning of the first annual reporting period that begins after June 15, 2005 and
we intend to adopt the standard effective as of January 1, 2006. 33




---



##### Table of Contents



We currently are not required to record stock-based compensation charges if the employees
stock option exercise price equals or exceeds the fair value of our common stock at the date of
grant. As a result of our implementation of FAS 123(R), our future operating expenses will
increase. We rely heavily on stock options to compensate existing employees and attract new
employees. We may choose to reduce our reliance on stock options as a compensation tool as a result
of the impact of FAS 123(R). If we reduce our use of stock options, it may be more difficult for us
to attract, motivate and retain qualified employees. If we do not reduce our reliance on stock
options, our reported losses will increase. Although we believe that our accounting practices are consistent with current accounting
pronouncements, changes to or interpretations of accounting methods or policies in the future may
require us to reclassify, restate or otherwise change or revise our financial statements. Risks Related to Our Intellectual Property Since we may not obtain additional patent protection for enoximone capsules, we expect to rely
solely on the Hatch-Waxman Act and similar foreign statutes to obtain market exclusivity. The primary composition of matter patents covering enoximone have expired. We therefore have
no immediate and direct means to prevent third parties from making, selling, using or importing
enoximone in the United States, Europe, Japan or elsewhere. Instead, we expect to rely upon the
United States Drug Price Competition and Patent Term Restoration Act of 1984, commonly known as the
Hatch-Waxman Act, and applicable foreign legislation, to achieve market exclusivity for enoximone
capsules. For new drug applications, or NDAs, for new chemical entities not previously approved,
the Hatch-Waxman Act provides for marketing exclusivity to the first applicant to gain approval for
a particular drug by prohibiting acceptance or approval of an abbreviated new drug application, or
ANDA, from a generic competitor for up to five years after approval of the original NDA. This
exclusivity only applies to submissions of an ANDA and would not prevent a third party from
conducting pivotal clinical trials and thereafter filing a complete regulatory submission for
enoximone. Our competitors will be free during any period of statutory exclusivity to develop the
data necessary either to file an ANDA at the end of the exclusivity period or to conduct studies in
support of a complete NDA filing during the period of market exclusivity. European and Japanese law
may also provide us with marketing exclusivity following market approval. Although statutory
market exclusivity in Europe, the United States and Japan may apply even when the composition of
matter patent has already expired, it is possible that enoximone will not qualify for such
exclusivity, or alternatively, the terms of the Hatch-Waxman Act, or similar foreign statutes,
could be amended to our disadvantage. If we do not qualify for marketing exclusivity for enoximone
capsules, the competition we face would increase, reducing our potential revenues. We may not be able to extend market exclusivity for enoximone capsules by developing an extended
release formulation. Our current strategy includes attempting to obtain an additional period of market exclusivity
for enoximone capsules by developing an extended release formulation before the marketing
exclusivity period for enoximone capsules ends. We have not yet identified a specific extended
release formulation. If we pursue this development strategy, we expect to file for and obtain
patents covering the specific formulation developed, as well as its use for the treatment of
various diseases. If we successfully develop an extended release formulation of enoximone capsules
and successfully conduct clinical trials to demonstrate its safety and efficacy, a separate three
years of marketing exclusivity could be obtained. This would not, however, prevent a competitor
from filing an ANDA for the immediate release formulation after expiration of the five-year
exclusivity period. There can be no assurance that such an extended release formulation will be
successfully developed in a timely manner, that adequate patent protection can be obtained or that
any such formulation would provide a commercial advantage. In addition, many third parties have
patents covering many of the technologies and manufacturing processes needed to develop and make
extended release formulations. There can be no assurance that we can obtain rights to such patents
on attractive financial terms, if at all. 34




---



##### Table of Contents



We rely on compounds and technology licensed from third parties and termination of any of those
licenses would result in the loss of significant rights. We have exclusive, worldwide licenses to enoximone for the treatment of cardiovascular
disease, ambrisentan for all conditions, and darusentan for all conditions other than cancer. We
also have the worldwide exclusive rights to certain patents and patent applications licensed from
the University of Colorado and the University of Texas Southwestern Medical Center and rights to
license future technology and patent applications arising out of research sponsored at those
institutions related to heart failure. Key financial and other terms for future technology would
still need to be negotiated with the research institutions, and it may not be possible to obtain
any such license on terms that are satisfactory to us. Our licenses generally may be terminated by the licensor if we fail to perform our obligations
under the license, including obligations to develop and commercialize the compounds and
technologies under license. The license agreements also generally require us to meet specified milestones or show
commercially reasonable diligence in the development and commercialization of the compounds or
technology under the license. If our agreements are terminated, we would lose the rights to the
product candidates, reducing our potential revenues. If we are unable to protect our proprietary technology, we may not be able to compete
effectively. Our success depends in part on our ability to obtain and enforce patent protection for our
products, both in the United States and other countries, to prevent our competitors from
developing, manufacturing and marketing products based on our technology. The scope and extent of
patent protection for our product candidates is uncertain and frequently involves complex legal and
factual questions. We cannot predict the breadth of claims that will be allowed and issued in
patents related to biotechnology or pharmaceutical applications. Once such patents have issued, we
cannot predict how the claims will be construed or enforced or whether applicable statutes,
regulations or case law will change in any material respect. In addition, statutory differences
between countries may limit the protection we can obtain on some of our inventions outside of the
United States. For example, methods of treating humans are not patentable in many countries outside
of the United States. Furthermore, the patents that we have licensed with respect to enoximone, ambrisentan and
darusentan are owned by third parties. These third parties, with our advice and input, are
responsible for and control the prosecution and enforcement of these patents. A failure by these
third parties to adequately prosecute and enforce these patents could result in a decline in the
value of the patents and have a material adverse effect on our business. Since we collaborate with
third parties on some of our technology, there is also the risk that disputes may arise as to the
rights to technology or drugs developed in collaboration with other parties. The coverage claimed in a patent application can be significantly narrowed before a patent is
issued, both in the United States and other countries. We do not know whether any of our pending or
future patent applications will result in the issuance of patents. To the extent patents have been
issued or will be issued, we do not know whether these patents will be subject to further
proceedings that may limit their scope, provide significant proprietary protection or competitive
advantage, or cause them to be circumvented or invalidated. Furthermore, patents already issued to
us, or patents that may issue on our pending applications, may become subject to dispute, including
interference, reissue or reexamination proceedings in the United States, or opposition proceedings
in foreign countries. Any of these proceedings could result in the limitation or loss of rights.
Additionally, changes in applicable patent law, including case law, could impact the
interpretation, scope or enforceability of our patents and limit our ability to exclude competitors
from entering our markets and utilizing our technology. We also rely on trade secrets and proprietary know-how to develop and maintain our competitive
position. While we believe that we have protected our trade secrets, some of our current or former
employees, consultants, scientific advisors or collaborators may unintentionally or willfully
disclose our confidential information to competitors or use our proprietary technology for their
own benefit. If our collaborative partners, employees or consultants develop inventions or
processes independently that may be applicable to our products under development, disputes may
arise about ownership of proprietary rights to those inventions and/or processes. Such inventions
and/or processes will not necessarily become our property, but may remain the property of those
persons or their employers. Protracted and costly litigation could be necessary to enforce and
determine the scope of our proprietary rights. Furthermore, enforcing a 35




---



##### Table of Contents



claim alleging the infringement of our trade secrets would be expensive and difficult to prove, making the outcome
uncertain. Our competitors may also independently develop equivalent knowledge, methods and
know-how or gain access to our proprietary information through some other means. We may be accused of infringing on the proprietary rights of third parties, which could impair
our ability to successfully commercialize our product candidates. Our success depends in part on operating without infringing the proprietary rights of third
parties. It is possible that we may infringe on intellectual property rights of others without
being aware of the infringement. If a patent holder believes that one of our product candidates
infringes on its patent, it may sue us even if we have received patent protection for our
technology. If another party claims we are infringing its technology, we could face a number of
issues, including the following:  
    defending a lawsuit, which is very expensive and time consuming;
    defending against an interference proceeding in the United States Patent and Trademark
Office, which also can be very expensive and time consuming;
    an adverse decision in a lawsuit or in an interference proceeding resulting in the loss
of some or all of our rights to our intellectual property;
    paying a large sum for damages if we are found to be infringing;
    being prohibited from making, using, selling or offering for sale our product
candidates or our products, if any, until we obtain a license from the patent holder. Such
a license may not be granted to us on satisfactory terms, if at all, and even if we are
granted a license, we may have to pay substantial royalties or grant cross-licenses to our
patents; and
    redesigning the manufacturing methods or the use claims of our product candidates so
that they do not infringe on the other partys patent in the event that we are unable to
obtain a license, which, even if possible, could require substantial additional capital,
could necessitate additional regulatory approval, and could delay commercialization. Risks Related to Our Stock The market price of our common stock has been and may continue to 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. The trading price of our common stock has been and 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; 36




---



##### Table of Contents




    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;
    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. Our principal stockholders and management own a significant percentage of our stock and will be
able to exercise significant influence. Our executive officers, directors and principal stockholders, together with their affiliates,
currently own approximately 52% of our voting stock, including shares subject to their outstanding
options and warrants, and we expect that this group will continue to hold a significant percentage
of our outstanding voting stock. Accordingly, these stockholders will likely be able to have a
significant impact on the composition of our board of directors and continue to have significant
influence over our operations. This concentration of ownership could have the effect of delaying or
preventing a change in our control or otherwise discouraging a potential acquirer from attempting
to obtain control of us, which in turn could limit the market value of our common stock. Issuance of shares in connection with financing transactions or under stock plans and outstanding
warrants will dilute current stockholders. Pursuant to our 2003 Equity Incentive Plan, our management is authorized to grant stock
options to our employees, directors and consultants, and our employees are eligible to participate
in our 2003 Employee Stock Purchase Plan. As of March 31, 2005, options to purchase a total of
3,841,044 shares were outstanding under the Plan (most of which have exercise prices below our
current market price) and options to purchase 1,408,170 shares remained available for grant under
the plan. The reserve under our 2003 Equity Incentive Plan will automatically increase each
January 1 by the lesser of five percent of the number of total outstanding shares of our common
stock on such date or 2,500,000 shares, subject to the ability of our board of directors to prevent
or reduce such increase. Additionally, we have 250,000 shares of our common stock reserved for
issuance under our 2003 Employee Stock Purchase Plan, approximately 20,000 of which were issued as
of March 31, 2005. The reserve under our 2003 Employee Stock Purchase Plan will automatically
increase each January 1 by the lesser of 1.25% of the number of total outstanding shares of our
common stock on such date or 500,000 shares, subject to the ability of our board of directors to
prevent or reduce such increase. In addition, we also have warrants outstanding to purchase
1,878,351 shares of our common stock, all of which have exercise prices below our current market
price. Our stockholders will incur dilution upon exercise of any outstanding stock options or
warrants. In addition, if 37




---



##### Table of Contents



we raise additional funds by issuing additional common stock, or
securities convertible into or exchangeable or exercisable for common stock, further dilution to
our existing stockholders will result, and new investors could have rights superior to existing
stockholders. Some provisions of our charter documents and Delaware law may have anti-takeover effects that
could discourage, delay or prevent a change of control or management, even if such changes would
be beneficial to our stockholders. Provisions in our certificate of incorporation and bylaws, as well as provisions of Delaware
law, could make it more difficult for a third party to acquire us, even if doing so would benefit
our stockholders. Since management is appointed by the board of directors, any inability to effect
a change in the board may result in the entrenchment of management. These provisions include:  
    authorizing the issuance of blank check preferred stock;
    limiting the removal of directors by the stockholders to removal for cause;
    prohibiting stockholder action by written consent, thereby requiring all stockholder
actions to be taken at a meeting of our stockholders;
    eliminating the ability of stockholders to call a special meeting of stockholders; and
    establishing advance notice requirements for nominations for election to the Board of
Directors or for proposing matters that can be acted upon at stockholder meetings. In addition, we are subject to Section 203 of the Delaware General Corporation Law, which
generally prohibits a Delaware corporation from engaging in any of a broad range of business
combinations with an interested stockholder for a period of three years following the date on which
the stockholder became an interested stockholder. This provision could have the effect of delaying
or preventing a change of control, whether or not it is desired by or beneficial to our
stockholders. 
 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 and the average duration
of the issues in the portfolio is less than nine months. As of March 31, 2005, we had an investment portfolio of investments in a variety of
interest-bearing instruments, consisting of United States government and agency securities,
high-grade United States corporate bonds, municipal bonds, mortgage-backed securities and money
market accounts of $46.6 million excluding those classified as cash and cash equivalents. Our
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 accumulated other
comprehensive income, 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. Investments in fixed-rate interest-earning instruments carry varying degrees of interest rate
risk. The fair market value of our fixed-rate securities may be adversely impacted due to a rise in
interest rates. In general, securities with longer maturities are subject to greater interest-rate
risk than those with shorter maturities. Due in part to this factor, our investment income may fall
short of expectations or we may suffer losses in principal if securities are sold that have
declined in market value due to changes in interest rates. 38




---



##### Table of Contents



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 United States 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 United States 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/(deficit). 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 United States dollar declines in value compared to other currencies. 
 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 were effective as of the end of the period covered by this Quarterly Report. 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, 2005 that have materially
affected, or are reasonably likely to materially affect, our internal controls over financial
reporting. 39




---



##### Table of Contents



PART II. OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS None 
 ITEM 2. UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS On November 4, 2003, we closed the sale of 5,000,000 shares of our common stock in our initial
public offering (the Offering), and on November 7, 2003, we closed the sale of an additional
750,000 shares of our common stock pursuant to the exercise by the underwriters of an
over-allotment option. The Registration Statement on Form S-1 (Reg. No. 333-108301) (the
Registration Statement) we filed to register our common stock in the Offering was declared
effective by the Securities and Exchange Commission on October 29, 2003. The Offering commenced as
of October 29, 2003 and did not terminate before any securities were sold. The offering was
completed and all shares were sold at an initial price per share of $14.00. The aggregate purchase
price of the Offering amount registered was $80,500,000. The managing underwriters for the initial public offering were Credit Suisse First Boston LLC,
J.P. Morgan Securities Inc., CIBC World Markets Corp. and Lazard Freres & Co. LLC. We incurred
expenses in connection with the Offering of $7.2 million, which consisted of direct payments of:
(i) $1.4 million in legal, accounting and printing fees; (ii) $5.6 million in underwriters
discounts, fees and commissions; and (iii) $0.2 million in miscellaneous expenses. After deducting expenses of the offering, we received net offering proceeds of approximately
$73.3 million. As of March 31, 2005, we held approximately $44.5 million of the proceeds from the
Offering, all of which are invested in short-term financial instruments. We intend to use these
remaining proceeds for research and development, general corporate purposes and working capital.
We regularly assess the specific uses and allocations for these funds. 
 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  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. 40




---



##### Table of Contents



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 10, 2005
    
    MYOGEN, INC./s/ Joseph L. TurnerJoseph L. TurnerSenior Vice President, Finance andAdministration and Chief Financial Officer(Principal Financial
and Accounting Officer)
 41




---



##### Table of Contents



EXHIBIT INDEX 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.
 42