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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  FORM 10-Q [X]
    
    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.For the quarterly period ended June 30, 2004[   ]
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.For the
transition period from ___________ to ____________.
 Commission File Number000-50438 Myogen, Inc.  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    84-1348020
(I.R.S. Employer
Identification No.)
 7575 West 103rd Avenue, Suite 102
Westminster, CO 80021
(303) 410-6666
(Address, including zip code, and telephone number,
including area code, of principal executive offices) Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes
[X]    No [   ] Check whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes [   ]    No [X] As of August 4, 2004 there were 26,521,144 shares of the Registrants
Common Stock outstanding, par value $0.001 per share. This quarterly report on
Form 10-Q consists of 35 pages. 1




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MYOGEN, INC.
FORM 10-Q INDEX Number
    
    
    
    PagePART I. Financial Information
    
    
    3ITEM 1.
    
    Consolidated Financial Statements (unaudited)
    
    
    3Consolidated Balance
SheetsAs of June 30, 2004 and December 31, 2003
    
    
    3Consolidated Statements of OperationsFor the Three Months and Six Months Ended June 30, 2004 and 2003 and the Cumulative Period from June 10, 1996 (Inception) to June 30, 2004
    
    
    4Consolidated Statements of Cash FlowsFor the Three Months and Six Months Ended June 30, 2004 and 2003 and the Cumulative Period from June 10, 1996 (Inception) to June 30, 2004
    
    
    5Notes to Consolidated Financial Statements
    
    
    7ITEM 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12ITEM 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    30ITEM 4.
    
    Controls and Procedures
    
    
    31PART II. Other Information
    
    
    32ITEM 1.
    
    Legal Proceedings
    
    
    32ITEM 2.
    
    Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    32ITEM 3.
    
    Defaults Upon Senior Securities
    
    
    32ITEM 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    32ITEM 5.
    
    Other Information
    
    
    32ITEM 6.
    
    Exhibits and Reports on Form 8-K
    
    
    32SIGNATURES
    
    
    34EXHIBIT INDEX
    
    
    352003 Employee Stock Purchase Plan OfferingCertification of Principal Executive OfficerCertification of Principal Financial OfficerSection 1350 Certification
  2




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PART I. FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS MYOGEN, INC.
(A Development Stage Enterprise) 
 CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 June 30,
    
    December 31,2004
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    13,931,887
    
    
    $
    44,337,721Short-term investments
    
    
    68,388,299
    
    
    
    69,914,627Accrued interest receivable
    
    
    454,326
    
    
    
    607,393Trade accounts receivable
    
    
    1,277,245
    
    
    
    1,274,861Research and development contract amounts due within one year
    
    
    2,247,000
    
    
    
    1,625,000Inventories
    
    
    679,626
    
    
    
    724,282Prepaid expenses and other current assets
    
    
    1,328,018
    
    
    
    1,434,174Total current assets
    
    
    88,306,401
    
    
    
    119,918,058Long-term investments
    
    
    3,490,523
    
    
    
    Property and equipment, net
    
    
    1,999,208
    
    
    
    1,304,028Other assets
    
    
    42,798
    
    
    
    51,238Total assets
    
    $
    93,838,930
    
    
    $
    121,273,324LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    9,034,599
    
    
    $
    7,594,935Accrued liabilities
    
    
    972,764
    
    
    
    1,350,114Current portion of deferred revenue
    
    
    1,666,667
    
    
    
    1,666,667Current portion of capital lease obligations
    
    
    41,452
    
    
    
    37,015Current portion of notes payable, net of discount
    
    
    1,728,295
    
    
    
    1,639,246Total current liabilities
    
    
    13,443,777
    
    
    
    12,287,977Deferred revenue, net of current portion
    
    
    2,114,695
    
    
    
    2,948,029Capital lease obligations, net of current portion
    
    
    105,616
    
    
    
    121,617Notes payable, net of current portion and discount
    
    
    1,106,952
    
    
    
    1,993,906Commitments and contingencies (See Note 9)Stockholders equity:Preferred Stock, $0.001 par value; 5,000,000 shares
authorized at June 30, 2004 and December 31, 2003, no shares
issued or outstanding
    
    
    
    
    
    
    Common stock, $0.001 par value; 100,000,000 shares
authorized and 26,520,586 and 26,457,927 shares issued and
outstanding as of June 30, 2004 and December 31, 2003,
respectively
    
    
    26,521
    
    
    
    26,458Additional paid-in-capital
    
    
    228,834,480
    
    
    
    229,080,380Deferred stock-based compensation
    
    
    (4,084,705
    )
    
    
    (6,730,195
    )Accumulated other comprehensive income
    
    
    (34,583
    )
    
    
    22,185Deficit accumulated during the development stage
    
    
    (147,673,823
    )
    
    
    (118,477,033
    )Total stockholders equity
    
    
    77,067,890
    
    
    
    103,921,795Total liabilities and stockholders equity
    
    $
    93,838,930
    
    
    $
    121,273,324
 The accompanying notes are an integral part of these consolidated financial statements. 3




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MYOGEN, INC.
(A Development Stage Enterprise) 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 CumulativeFor the Three Months Ended
    
    For the Six Months Ended
    
    Period fromJune 30,
    
    June 30,
    
    June 10, 1996(Inception) to2004
    
    2003
    
    2004
    
    2003
    
    June 30, 2004Revenues:Product sales
    
    $
    899,831
    
    
    $
    708,425
    
    
    $
    1,751,478
    
    
    $
    1,364,810
    
    
    $
    9,175,192Research and development contracts
    
    
    1,663,667
    
    
    
    
    
    
    
    3,003,295
    
    
    
    
    
    
    
    4,013,6002,563,498
    
    
    
    708,425
    
    
    
    4,754,773
    
    
    
    1,364,810
    
    
    
    13,188,792Costs and expenses:Cost of product sold
    
    
    277,574
    
    
    
    227,049
    
    
    
    548,704
    
    
    
    433,946
    
    
    
    3,235,390Research and
development
(excluding
stock-based
compensation expense
of $535,183, $304,040,
$1,151,131, $742,394
and $4,006,840,
respectively)
    
    
    12,461,672
    
    
    
    11,218,657
    
    
    
    27,086,108
    
    
    
    17,569,894
    
    
    
    115,805,778Selling, general and
administrative
(excluding
stock-based
compensation expense
of $586,839,
$189,196,
$1,182,745, $522,492
and $3,252,518,
respectively)
    
    
    2,046,850
    
    
    
    970,048
    
    
    
    4,282,128
    
    
    
    1,901,571
    
    
    
    22,120,877Stock-based
compensation expense
    
    
    1,122,022
    
    
    
    493,236
    
    
    
    2,333,876
    
    
    
    1,264,886
    
    
    
    7,259,35815,908,118
    
    
    
    12,908,990
    
    
    
    34,250,816
    
    
    
    21,170,297
    
    
    
    148,421,403Loss from operations
    
    
    (13,344,620
    )
    
    
    (12,200,565
    )
    
    
    (29,496,043
    )
    
    
    (19,805,487
    )
    
    
    (135,232,611
    )Interest income (expense), net
    
    
    136,762
    
    
    
    (35,550
    )
    
    
    308,640
    
    
    
    (8,254
    )
    
    
    2,708,635Loss before income taxes
    
    
    (13,207,858
    )
    
    
    (12,236,115
    )
    
    
    (29,187,403
    )
    
    
    (19,813,741
    )
    
    
    (132,523,976
    )Income taxes
    
    
    2,511
    
    
    
    8,320
    
    
    
    9,387
    
    
    
    10,635
    
    
    
    70,184Net loss
    
    
    (13,210,369
    )
    
    
    (12,244,435
    )
    
    
    (29,196,790
    )
    
    
    (19,824,376
    )
    
    
    (132,594,160
    )Accretion of mandatorily redeemable
convertible preferred stock
    
    
    
    
    
    
    (3,670,184
    )
    
    
    
    
    
    
    (7,340,369
    )
    
    
    (32,499,556
    )Deemed dividend related to beneficial
conversion feature of preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (39,935,388
    )Net loss attributable to common
stockholders
    
    $
    (13,210,369
    )
    
    $
    (15,914,619
    )
    
    $
    (29,196,790
    )
    
    $
    (27,164,745
    )
    
    $
    (205,029,104
    )Basic and diluted net loss per common
share
    
    $
    (0.50
    )
    
    $
    (15.47
    )
    
    $
    (1.10
    )
    
    $
    (26.41
    )Weighted average common shares outstanding
    
    
    26,490,954
    
    
    
    1,028,736
    
    
    
    26,476,058
    
    
    
    1,028,517
 The accompanying notes are an integral part of these consolidated financial statements. 4




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MYOGEN, INC.
(A Development Stage Enterprise) 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 CumulativeFor the Six Months Ended
    
    Period FromJune 30,
    
    June 10, 1996(Inception) to2004
    
    2003
    
    June 30, 2004Cash Flows From Operating Activities:Net loss
    
    $
    (29,196,790
    )
    
    $
    (19,824,376
    )
    
    $
    (132,594,160
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    239,328
    

    
    
    208,688
    
    
    
    1,251,563Amortization of deferred stock-based compensation
    
    
    2,333,876
    
    
    
    1,264,886
    
    
    
    7,259,358Amortization of debt discount
    
    
    68,808
    
    
    
    68,807
    
    
    
    217,238Amortization of investment premium
    
    
    454,147
    
    
    
    14,150
    
    
    
    692,997Stock exchanged for license
    
    
    
    
    
    
    
    
    
    
    1,163,229Loss on disposal of property and equipment
    
    
    363
    
    
    
    11,951
    
    
    
    34,672Changes in operating assets and liabilities:Trade accounts receivable
    
    
    (40,766
    )
    
    
    176,806
    
    
    
    (531,229
    )Research and development contract amounts
    
    
    (622,000
    )
    
    
    
    
    
    
    (1,247,000
    )Inventories
    
    
    44,656
    
    
    
    54,746
    
    
    
    (679,626
    )Prepaid expenses, accrued interest and other assets
    
    
    253,095
    
    
    
    (137,636
    )
    
    
    (2,050,644
    )Accounts payable
    
    
    1,505,338
    
    
    
    2,172,053
    
    
    
    8,491,351Deferred revenue
    
    
    (833,334
    )
    
    
    
    
    
    
    2,781,362Accrued liabilities
    
    
    (376,983
    )
    
    
    (251,364
    )
    
    
    732,923Net cash used in operating activities
    
    
    (26,170,262
    )
    
    
    (16,241,289
    )
    
    
    (114,477,966
    )Cash Flows From Investing Activities:Acquisitions of property and equipment
    
    
    (928,295
    )
    
    
    (79,267
    )
    
    
    (3,364,851
    )Proceeds from sale of property and equipment
    
    
    
    
    
    
    3,457
    
    
    
    332,473Purchases of investments
    
    
    (60,684,872
    )
    
    
    (7,202,794
    )
    
    
    (384,028,283
    )Proceeds from maturities of short-term investments
    
    
    58,209,420
    
    
    
    18,894,475
    
    
    
    311,584,020Net cash (used in) provided by
investing activities
    
    
    (3,403,747
    )
    
    
    11,615,871
    
    
    
    (75,476,641
    )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
    
    
    65,774
    
    
    
    5,468
    
    
    
    73,616,987Proceeds from notes payable
    
    
    
    
    
    
    
    
    
    
    5,250,000Payments on notes payable
    
    
    (866,713
    )
    
    
    (266,269
    )
    
    
    (2,208,332
    )Proceeds from related party note
    
    
    
    
    
    
    
    
    
    
    370,275Repayments of related party note
    
    
    
    
    
    
    
    
    
    
    (289,887
    )Payments on capital leases
    
    
    (20,445
    )
    
    
    (13,876
    )
    
    
    (77,337
    )Net cash (used in) provided by
financing activities
    
    
    (821,384
    )
    
    
    (274,677
    )
    
    
    203,813,310Effect of exchange rates on cash
    
    
    (10,441
    )
    
    
    140,630
    
    
    
    73,184Net (decrease) increase in cash and cash equivalents
    
    
    (30,405,834
    )
    
    
    (4,759,465
    )
    
    
    13,931,887Cash and cash equivalents, beginning of period
    
    
    44,337,721
    
    
    
    6,993,146
    
    
    
    Cash and cash equivalents, end of period
    
    $
    13,931,887
    
    
    $
    2,233,681
    
    
    $
    13,931,887
 5




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CumulativeFor the Six Months Ended
    
    Period FromJune 30,
    
    June 10, 1996(Inception) to2004
    
    2003
    
    June 30, 2004Supplemental Disclosure of Non-Cash Financing Activities:Acquisition of property and equipment under capital leases
    
    $
    8,881
    
    
    
    
    
    
    $
    220,850Common 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. 6




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MYOGEN, INC. 
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 Note 1:Basis of Presentation The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States and with the instructions to Form 10-Q and Article 10 of
Regulation S-X for interim financial information. Accordingly, they do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the three and six month periods ended June 30, 2004 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2004. For further information, refer to the consolidated
financial statements and footnotes thereto as of and for the year ended
December 31, 2003, included in the Annual Report on Form 10-K of Myogen Inc.
(the Company or Myogen) filed with the Securities and Exchange Commission
on March 1, 2004. The Company has generated limited revenue to date and its activities have
consisted primarily of developing products, licensing products, raising capital
and recruiting personnel. Accordingly, the Company is considered to be in the
development stage as of June 30, 2004 as defined in Statement of Financial
Accounting Standards (SFAS) No. 7, Accounting and Reporting by Development
Stage Enterprises. Note 2:Liquidity The Company has incurred significant losses and negative cash flows from
operations in every fiscal period since June 10, 1996 (Inception). For the
three and six months ended June 30, 2004, the Company incurred losses from
operations of $13,344,620 and $29,496,043 and negative cash flows from
operations of $26,170,262 for the six months ended June 30, 2004. For the
years ended December 31, 2003, 2002 and 2001, the Company incurred losses from
operations of $42,972,596, $28,815,118 and $17,770,643, respectively, and
negative cash flows from operations of $31,706,160, $26,459,454 and
$16,409,817, respectively. As of June 30, 2004, the Company had a deficit
accumulated during the development stage of $147,673,823. Management
anticipates that operating losses and negative cash flows from operations will
continue for at least the next several years. To date, the Company has satisfied its cash commitments primarily through
public and private placements of equity securities. From Inception to June 30,
2004, the Company raised $200,768,591 of net cash proceeds from the sale of
equity securities. Based on current spending projections, management believes that the cash
on hand will be sufficient to continue operations through the middle of 2005.
However, 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, which include the completion of development and
commercialization of its product candidates and the continuation of its
research and development programs. Management plans on raising additional
financing to meet future working capital and capital expenditure needs. There
can be no assurance that such additional financing will be available or, if
available, that such financing can be obtained on terms satisfactory to the
Company. Note 3: Inventory Components June 30,
    
    December 31,2004
    
    2003Finished products
    
    $
    179,260
    
    
    $
    207,262Raw materials
    
    
    500,366
    
    
    
    517,020Total inventories
    
    $
    679,626
    
    
    $
    724,282
 7




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Note 4:Comprehensive Loss A reconciliation of net loss to comprehensive loss is as follows: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net loss
    
    $
    (13,210,369
    )
    
    $
    (12,244,435
    )
    
    $
    (29,196,790
    )
    
    $
    (19,824,376
    )Change in unrealized gain (loss)
on investments available for
sale
    
    
    (63,438
    )
    
    
    (99,118
    )
    
    
    (51,035
    )
    
    
    (64,630
    )Foreign currency translation
adjustment
    
    
    (1,383
    )
    
    
    (148,855
    )
    
    
    (5,733
    )
    
    
    62,069Total comprehensive loss
    
    $
    (13,275,190
    )
    
    $
    (12,492,408
    )
    
    $
    (29,253,558
    )
    
    $
    (19,826,937
    )
 Note 5:Revenue Recognition Myogen recognizes revenue in accordance with SEC Staff Accounting Bulletin
No. 104 Revenue Recognition in Financial Statements (SAB 104). The Company
considers this methodology to be the most appropriate for its business model
and current revenue streams. Product Sales Sales are recognized when the following four revenue recognition criteria
are met: (i) persuasive evidence of an arrangement exists; (ii) product is
shipped from the distributor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. 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. Non-refundable license fees received are recorded as deferred revenue once
received or irrevocably committed and are recognized ratably over the longer of
the development period to which they relate or the expected duration of the
contractual relationship. Where there are two or more distinct phases embedded
into one contract (such as product development and subsequent commercialization
or manufacturing), the contracts may be considered multiple element
arrangements. When it can be demonstrated that each of these phases are at fair
value, they are treated as separate earnings processes with upfront fees being
recognized over only the initial product development phase. The relevant time
period for the product development phase is based on management estimates and
could vary depending upon the outcome of clinical trials and the regulatory
approval process. As a result, management 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 payment is reasonably assured. The Company evaluates whether
milestones are at risk and substantive based on the contingent nature
of the milestone, specifically reviewing factors such as the technological and
commercial risk that needs to be overcome and the level of investment required.
Milestone payments related to arrangements under which the Company has
continuing performance obligations are recognized as revenue upon achievement
of the milestone only if all of the following conditions are met: the milestone
payments are non-refundable; achievement of the milestone was not reasonably
assured at the inception of the arrangement; substantive effort is involved in
achieving the milestone; and the amount of the milestone 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 8




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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 6: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, mandatorily redeemable convertible preferred stock,
convertible preferred stock and warrants. Diluted net loss per common share for all periods presented is the same as
basic net loss per share because the potential common shares were
anti-dilutive. Anti-dilutive common shares not included in net loss
attributable to common stockholders are summarized as follows: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Common stock related to options
    
    
    1,981,101
    
    
    
    1,905,751
    
    
    
    2,181,372
    
    
    
    1,878,850Warrants
    
    
    6,463
    
    
    
    35,668
    
    
    
    13,991
    
    
    
    30,933Convertible preferred stock
    
    
    
    
    
    
    160,721
    
    
    
    
    
    
    
    160,721Mandatorily redeemable
convertible preferred stock
    
    
    
    
    
    
    13,625,321
    
    
    
    
    
    
    
    13,625,321Total
    
    
    1,987,564
    
    
    
    15,727,461
    
    
    
    2,195,363
    
    
    
    15,695,825
 The Companys historical capital structure is not indicative of its
prospective structure due to the automatic conversion of all shares of
preferred stock into common stock concurrent with the closing of the Companys
initial public offering. The 2003 anti-dilutive common shares are not
indicative of the 2004 anti-dilutive common shares. Accordingly, historical
basic net loss per common share should not be used as an indicator of future
earnings per common share. Note 7:Stock-Based Compensation The Company measures compensation expense to employees using the intrinsic
value method as prescribed by Accounting Principles Board Opinion (APB) No.
25, Accounting For Stock Issued to Employees(APB 25) and provides pro forma
disclosures of net loss as if the fair value based method was applied as
prescribed by SFAS No. 123, Accounting for Stock-Based Compensation(SFAS
123). Accordingly, the Company does not recognize compensation expense for
options granted to employees when the exercise price equals or exceeds the fair
value of common stock as of the grant date. Stock-based awards to consultants
are accounted for under the provisions of SFAS 123 and Emerging Issues Task
Force (EITF) Issue 96-18, Accounting for Equity Instruments That Are Issued
to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services. 9




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##### Table of Contents



Had employee compensation cost for the Companys stock-based compensation
plan been determined based on the fair value at the grant dates for awards
using the Black-Scholes model prescribed by SFAS 123, the Companys pro forma
net loss and pro forma net loss per share would be as follows: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net loss
attributable to
common
stockholders, as
reported
    
    $
    (13,210,369
    )
    
    $
    (15,914,619
    )
    
    $
    (29,196,790
    )
    
    $
    (27,164,745
    )Add: Total
stock-based
employee
compensation
expense included in
reported net loss
    
    
    1,122,216
    
    
    
    343,021
    
    
    
    2,281,889
    
    
    
    936,437Deduct: Total
stock-based
employee
compensation
expense determined
under fair value
based method
    
    
    (1,558,056
    )
    
    
    (290,331
    )
    
    
    (2,950,823
    )
    
    
    (872,751
    )Pro forma net loss
    
    $
    (13,646,209
    )
    
    $
    (15,861,929
    )
    
    $
    (29,865,724
    )
    
    $
    (27,101,059
    )Pro forma basic and
diluted net loss
per common share
    
    $
    (0.52
    )
    
    $
    (15.41
    )
    
    $
    (1.13
    )
    
    $
    (26.35
    )Basic and diluted
net loss per common
share, as reported
    
    $
    (0.50
    )
    
    $
    (15.47
    )
    
    $
    (1.10
    )
    
    $
    (26.41
    )
 Note 8:Accounts Payable Accounts payable are comprised of the following: June 30,
    
    December 31,2004
    
    2003Trade
    
    $
    187,706
    
    
    $
    679,827Research and development
    
    
    8,588,079
    
    
    
    6,510,549Related party
    
    
    258,814
    
    
    
    404,559$
    9,034,599
    
    
    $
    7,594,935
 Note 9:Commitments and Contingencies In the ordinary course of its business, the Company makes certain
indemnities, commitments and guarantees under which it may be required to make
payments in relation to certain transactions. These include indemnities of
clinical investigators, consultants and contract research organizations
involved in the development of the Companys clinical stage products,
indemnities of distributors of its marketed product, indemnities to its lenders
and indemnities to directors and officers of the Company to the maximum extent
permitted under the laws of the State of Delaware. The duration of these
indemnities, commitments and guarantees varies, and in certain cases, is
indefinite. The majority of these indemnities, commitments and guarantees does
not provide for any limitation of the maximum potential future payments the
Company could be obligated to make. The Company has not recorded any liability
for these indemnities, commitments and guarantees in the accompanying
consolidated balance sheets. However, the Company accrues for losses for any
known contingent liability, including those that may arise from indemnification
provisions, when future payment is probable and in accordance with SFAS No. 5,
Accounting for Contingencies. No such losses have been recorded to date. 10




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Note 10:Business Segments The Company operates in the United States and in certain countries
throughout Europe under one operating segment. All product sales from Inception
to June 30, 2004 have occurred in Europe through the Companys subsidiary. Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Product sales:Germany
    
    $
    201,680
    
    
    $
    179,188
    
    
    $
    391,351
    
    
    $
    335,451Netherlands
    
    
    245,393
    
    
    
    208,896
    
    
    
    487,616
    
    
    
    380,531United Kingdom
    
    
    232,027
    
    
    
    113,147
    
    
    
    379,756
    
    
    
    234,291Italy
    
    
    120,990
    
    
    
    129,283
    
    
    
    300,871
    
    
    
    228,578France
    
    
    87,205
    
    
    
    68,442
    
    
    
    167,472
    
    
    
    167,603Other
    
    
    12,536
    
    
    
    9,469
    
    
    
    24,412
    
    
    
    18,356$
    899,831
    
    
    $
    708,425
    
    
    $
    1,751,478
    
    
    $
    1,364,810
 June 30,
    
    December 31,2004
    
    2003Property and equipment,
net:United States
    
    $
    1,941,301
    
    
    $
    1,234,685Europe
    
    
    57,907
    
    
    
    69,343$
    1,999,208
    
    
    $
    1,304,028
 11




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS Forward-Looking Statements This quarterly report on Form 10-Q, including this Managements Discussion
and Analysis of Financial Condition and Results of Operations, contains
forward-looking statements regarding future events and our future results, such
as statements of our plans, objectives, expectations, beliefs, assumptions and
intentions. Words such as expect, anticipate, target, goal, project,
intend, plan, believe, seek, estimate, variations of such words, and
similar expressions are intended to identify such forward-looking statements.
In addition, any statements which refer to projections of our future financial
performance, our anticipated growth and trends in our business, and other
characterizations of future events or circumstances are forward-looking
statements. These forward-looking statements are only predictions and are
subject to risks, uncertainties, and assumptions. Our actual results could
differ materially from those discussed in the forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in Risk Factors, other cautionary statements
included in this report and in our Form 10-K for the year ended December 31,
2003 and in Myogens 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 have three product candidates in late-stage clinical development:
enoximone capsules for the treatment of chronic heart failure, ambrisentan for
the treatment of pulmonary arterial hypertension (PAH) and darusentan for the
treatment of resistant hypertension. We are evaluating enoximone capsules in
three Phase III trials and we completed one other Phase III trial, in February
2004. In May, we announced the completion of enrollment of 1,800 patients in
ESSENTIAL I & II. The trials will continue until there have been a total of
956 primary endpoint events (cardiovascular hospitalization or all-cause
mortality). We expect that this specified number of events will have occurred
by the end of 2004. We completed a Phase II clinical trial of ambrisentan in
September 2003 and announced the initiation of the two pivotal Phase III
trials, ARIES-1 and -2, in January 2004. Our goal is to complete enrollment in
these two trials by the end of the first half of 2005. This timing is
increasingly uncertain due to a number of factors, including the declining
numbers of patients with PAH who are treatment naïve seen at clinical trial
sites and competing on-going trials. We are committing additional resources in
an effort to accelerate patient enrollment in order to increase the likelihood
of completing enrollment in the expected time frame. 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.
All three of our product candidates are orally administered small molecules
that we believe offer advantages over currently available therapies. In
addition, we currently market an intravenous (i.v.) formulation of enoximone,
Perfan I.V., for the treatment of acute decompensated heart failure in eight
countries in Europe. On March 25, 2004, we announced preliminary results of EMOTE, a
non-pivotal Phase III study of enoximone capsules in 201 patients with the most
advanced stages of chronic heart failure who are dependent on i.v. inotrope
therapy. The study was designed to evaluate enoximone capsules as effective
treatment to wean patients off of i.v. inotrope therapy and potentially support
the two ongoing Phase III pivotal studies, ESSENTIAL I & II. Analysis of the
primary endpoint, wean success at 30 days, demonstrated a wean success rate of
61% in the enoximone-treated group and 51% in the placebo-treated group. This
difference did not reach statistical significance. The key secondary endpoints,
which also evaluated wean from i.v. inotrope therapy, but over time rather than
at a fixed 30-day time point, were achieved, demonstrating a therapeutic
benefit over periods of 60, 90 and 120 days of treatment with enoximone. The
safety results demonstrated no statistical difference in serious adverse events
or mortality between the groups receiving placebo or enoximone capsules.
Additional results will be presented at the 8th 12




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##### Table of Contents



Annual Scientific Meeting of the Heart Failure Society of America on
September 15, 2004 in Toronto, Canada. Through our internal research program and academic collaborations, we are
developing an advanced understanding of the biological pathways of heart
disease and have discovered several novel molecular targets that we believe
play a key role in heart failure. In October 2003, to further advance our
discovery research program, we entered into a research collaboration with the
Novartis Institutes for BioMedical Research, Inc. (Novartis) for the
discovery and development of novel drugs for the treatment of cardiovascular
disease. In exchange for license payments and a commitment to fund our
research, Novartis has an exclusive right to license drug targets and compounds
developed through the collaboration. We are in the development stage and since inception have devoted
substantially all of our efforts to the discovery, in-licensing and development
of drugs to treat cardiovascular disease. We have incurred losses each year
since our inception and had an accumulated deficit of $147.7 million as of June
30, 2004. We incurred operating losses of $13.3 million, $29.5 million, $12.2
million, and $19.8 million for the three and six months ended June 30, 2004 and
2003, respectively and $43.0 million, $28.8 million and $17.8 million for the
years 2003, 2002 and 2001, respectively. Our research and development expenses
have historically been much higher than our revenues. Based on current
spending projections, we anticipate that our current cash, cash equivalents and
short-term and long-term investments will be sufficient to fund our operations
for through the middle of 2005. However, our forecast of the period of time
through which our financial resources will be adequate to support our
operations is a forward-looking statement that involves risks and
uncertainties, and actual results could vary materially. If we are unable to
raise additional capital when required or on acceptable terms, we may have to
significantly delay, scale back or discontinue one or more of our clinical
trials, those aspects of our drug discovery program not funded by Novartis or
other aspects of our operations. Our current revenue is derived from research and development contract
revenues from our agreement with Novartis signed in October 2003 and sales of
Perfan I.V. in eight European countries. Even if our research and development
contract revenues continue to increase and our sales and marketing efforts lead
to modest increases in Perfan I.V. sales in future periods, we do not expect
that such increases will result in a material reduction in our overall net
loss. Our cost of product sold reflects the cost of Perfan I.V., which we
purchase exclusively from contract manufacturers, and the cost of royalties
payable to Aventis. Our primary business activities have been focused on the development of
enoximone capsules, ambrisentan and darusentan. From inception to June 30,
2004, we have incurred expenses of approximately $63.8 million, $26.5 million
and $7.8 million for the development of enoximone capsules, ambrisentan and
darusentan, respectively. These expenses represent both clinical development
costs and the costs associated with non-clinical support activities such as
toxicological testing, manufacturing process development and regulatory
consulting services. We also report the costs of product licenses in this
category, including our milestone obligations associated with the licensing of
enoximone, ambrisentan and darusentan. While some of our research and development expenses are the result of the
internal costs related directly to our employees, a majority of the expenses
are charged to us by external service providers, including clinical research
organizations and contract manufacturers. The cost of our clinical trial
programs is the most significant portion of our development expenses, with the
number of patients enrolled in a trial and the attendant level of contract
research organization and clinical site activity being the principal cost
determinants. We expect that expenses in the research and development category
will increase for the foreseeable future as we add personnel and expand our
clinical trial activities. The amount of the increase is difficult to predict
due to the uncertainty inherent in the timing of clinical trial initiations,
the rate of patient enrollment and the detailed design of future trials. In
addition, the results from our trials, as well as the results of trials of
similar drugs under development by others, will influence the number, size and
duration of planned and unplanned trials. 13




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##### Table of Contents



Results of Operations Three Months Ended June 30, 2004 and 2003 Revenues Three Months EndedJune 30,2004
    
    2003(In thousands)Revenues:Product sales
    
    $
    900
    
    
    $
    708Research and development contracts
    
    
    1,664
    
    
    
    $
    2,564
    
    
    $
    708
 Product sales Product sales were derived from sales of Perfan I.V. in Europe. During
the period, we had an increase of approximately 17% in sales volume.
Approximately $80,000 of the increase in 2004 as compared to 2003 was due to a
favorable change in the euro exchange rate. We do not anticipate significant
future growth in Perfan I.V. sales. Research and development contracts revenue Research and development contracts revenues for the three months ended
June 30, 2004 were related to the research collaboration with Novartis entered
into in October 2003; therefore, there was no corresponding revenue in the
prior period. The research and development revenue for the three months ended
June 30, 2004 consists of license revenue totaling $417,000 and research
support funding of $1.2 million. The license revenue reflects the non-refundable
upfront payment from Novartis, 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 EndedJune 30,2004
    
    2003(In thousands)Costs and expenses:Cost of product sold
    
    $
    277
    
    
    $
    227Research and development (excluding
stock-based compensation)
    
    
    12,462
    
    
    
    11,219Selling, general and administrative
(excluding stock-based compensation
expense)
    
    
    2,047
    
    
    
    970Stock-based compensation
    
    
    1,122
    
    
    
    493$
    15,908
    
    
    $
    12,909
 Cost of Product Sold The cost of product sold for Perfan I.V. increased slightly in the three
months ended June 30, 2004 as compared to the same period in 2003 due to the
increased number of units sold. The cost of Perfan I.V. sold as a percentage
of product sales was 31% and 32% for the three months ended June 30, 2004 and
2003, respectively. 14




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##### Table of Contents



Research and Development Research and development expenses, excluding stock-based compensation
expenses are summarized as follows: Three Months EndedJune 30,2004
    
    2003(In thousands)DevelopmentEnoximone capsules
    
    $
    5,758
    
    
    $
    3,906Ambrisentan
    
    
    4,026
    
    
    
    1,532Darusentan
    
    
    1,463
    
    
    
    Total development
    
    
    11,247
    
    
    
    5,438License feesEnoximone
    
    
    
    
    
    
    Ambrisentan
    
    
    
    
    
    
    Darusentan
    
    
    
    
    
    
    5,000Other
    
    
    
    
    
    
    Total license fees
    
    
    
    
    
    
    5,000Discovery research
    
    
    1,215
    
    
    
    781Total research and development
    
    $
    12,462
    
    
    $
    11,219
 The increase in development costs for enoximone capsules in the three
months ended June 30, 2004 as compared to the same period in 2003 was primarily
due to the following:  
    
    $1.5 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; and
    
    $170,000 increase in the internal costs associated with the
management of the enoximone trials primarily due to an increase in
the number of employees. The increase in development costs for ambrisentan in the three months
ended June 30, 2004 as compared to the same period in 2003 was primarily
related to:  
    
    $2.1 million increase in expenses due to the cost of
initiating our two Phase III ARIES trials and the related extension
study;
    
    $850,000 increase in expenses related to work on developing
the commercial manufacturing process for ambrisentan; and
    
    $210,000 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 $750,000 decrease related to
the conclusion of our Phase II PAH trial in September 2003. The increase in development costs for darusentan in the three months ended
June 30, 2004 as compared to the same period in 2003 was related to costs for
preparations to initiate the Phase IIb clinical trial:  
    
    $1.1 million increase in expenses due to the cost of initiating our Phase IIb trial;
    
    $125,000 increase in expenses related to analytical and regulatory work; and
    
    $150,000 increase in internal expenses associated with the
management of the darusentan trials, primarily due to an increase in
the number of employees. In the three months ended June 30, 2003, the $5 million license fee was
attributable to the in-licensing of darusentan. 15




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##### Table of Contents



Discovery research expenses increased primarily due to increased staffing
costs related to our collaborative research program with Novartis in the three
months ended June 30, 2004 as compared to the same period in 2003 which was
prior to the initiation of the Novartis collaboration. Selling, General and Administrative The $1.1 million increase in selling, general and administrative expense
for the three months ending June 30, 2004 as compared to the same period in
2003 primarily relates to a $460,000 increase in insurance and professional
service costs related to becoming a public company, an increase of $275,000
related to increased staffing and related recruiting costs and $120,000 in
increased costs related to our German subsidiary primarily due to timing of
annual expenditures and an unfavorable change in the euro exchange rate. Stock-Based Compensation Stock-based compensation expenses increased due to an increase in the
number of options granted to employees and consultants and an increase in the
fair value of our common stock. The stock-based compensation expense for each
period was allocated between selling, general and administrative and research
and development as follows: Three Months EndedJune 30,2004
    
    2003(In thousands)Research and development
    
    $
    535
    
    
    $
    304Selling, general and administrative
    
    
    587
    
    
    
    189$
    1,122
    
    
    $
    493
 Interest Income, Net Interest income net of interest expense was $137,000 and ($36,000) for the
three months ended June 30, 2004 and 2003, respectively. Interest income was
$256,000 and $119,000 for the three months ended June 30, 2004 and 2003,
respectively. The increase in interest income in 2004 relates to the increased
investment balance in 2004. Interest expense declined to $119,000 from $155,000
for the three months ended June 30, 2004 and 2003, respectively, as a result of
the pay down of our notes payable. Accretion of Mandatorily Redeemable Convertible Preferred Stock Accretion of mandatorily redeemable convertible preferred stock was $3.7
million for the three months ended June 30, 2003, and represents the accretion
associated with the Series A, Series C and Series D mandatorily redeemable
convertible preferred stock issued by us. There is no corresponding expense in
2004 because all shares of the Series A, C and D mandatorily redeemable
convertible preferred stock converted into common stock upon our initial public
offering on November 4, 2003. 16




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##### Table of Contents



Six Months Ended June 30, 2004 and 2003 Revenues Six Months EndedJune 30,2004
    
    2003(In thousands)Revenues:Product sales
    
    $
    1,752
    
    
    $
    1,365Research and development contracts
    
    
    3,003
    
    
    
    $
    4,755
    
    
    $
    1,365
 Product sales Product sales were derived from sales of Perfan I.V. in Europe. We had an
increase of approximately 19% in sales volume, partially offset by a 4%
decrease in the average selling price. Approximately $170,000 of the increase
in 2004 as compared to 2003 was due to a favorable change in the euro exchange
rate. We do not anticipate significant future growth in Perfan I.V. sales. Research and development contracts revenue Research and development contracts revenues for the six months ended June
30, 2004 were related to the research collaboration with Novartis entered into
in October 2003; therefore, there was no corresponding revenue in the prior
period. The research and development revenue for the six months ended June 30,
2004 consists of license revenue totaling $833,000 and research support funding
of $2.2 million, respectively. The license revenue reflects the non-refundable
upfront payment from Novartis, 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 Six Months EndedJune 30,2004
    
    2003(In thousands)Costs and expenses:Cost of product sold
    
    $
    549
    
    
    $
    434Research and development (excluding
stock-based compensation)
    
    
    27,086
    
    
    
    17,570Selling, general and administrative
(excluding stock-based compensation
expense)
    
    
    4,282
    
    
    
    1,901Stock-based compensation
    
    
    2,334
    
    
    
    1,265$
    34,251
    
    
    $
    21,170
 Cost of Product Sold The cost of product sold for Perfan I.V. increased slightly in the six
months ended June 30, 2004 as compared to the same period in 2003 due to the
increased number of units sold. The cost of Perfan I.V. sold as a percentage
of product sales was 31% and 32% for the six months ended June 30, 2004 and
2003, respectively. 17




---



##### Table of Contents



Research and Development Research and development expenses, excluding stock-based compensation
expenses are summarized as follows: Six Months EndedJune 30,2004
    
    2003(In thousands)DevelopmentEnoximone capsules
    
    $
    12,866
    
    
    $
    8,268Ambrisentan
    
    
    7,748
    
    
    
    2,667Darusentan
    
    
    2,704
    
    
    
    Total development
    
    
    23,318
    
    
    
    10,935License feesEnoximone
    
    
    
    
    
    
    Ambrisentan
    
    
    1,500
    
    
    
    Darusentan
    
    
    
    
    
    
    5,000Other
    
    
    108
    
    
    
    Total license fees
    
    
    1,608
    
    
    
    5,000Discovery research
    
    
    2,160
    
    
    
    1,635Total research and development
    
    $
    27,086
    
    
    $
    17,570
 The increase in development costs for enoximone capsules in the six months
ended June 30, 2004 as compared to the same period in 2003 was primarily due to
the following:  
    
    $3.4 million increase in clinical investigator site payments
and external contract costs associated with clinical monitoring and
program management efforts as a result of higher patient enrollment
and ongoing patient progress in the ESSENTIAL trials;
    
    $410,000 increase in costs associated with stability testing;
    
    $200,000 increase in costs associated with producing clinical
trial materials for the ESSENTIAL trials; and
    
    $540,000 increase in the internal costs associated with the
management of the enoximone trials primarily due to an increase in
the number of employees. The increase in development costs for ambrisentan in the six months ended
June 30, 2004 as compared to the same period in 2003 was primarily related to:  
    
    $4.2 million increase in expenses due to the cost of
initiating our two Phase III ARIES trials and the related extension
study;
    
    $1.2 million increase in expenses related to work on
developing the commercial manufacturing process for ambrisentan;
    
    $360,000 increase in expenses due to the extension study
associated with our Phase II PAH trial; and
    
    $465,000 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 $1.1 million decrease related
to the conclusion of our Phase II PAH trial in September 2003. 18




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##### Table of Contents



There were no development costs for darusentan in the six months ended
June 30, 2003. The development costs for darusentan in the six months ended
June 30, 2004 were related to costs for preparations to initiate the Phase IIb
clinical trial:  
    
    $1.9 million in expenses incurred from clinical research organizations for start-up activities;
    
    $300,000 in consulting costs;
    
    $210,000 in expenses related to analytical and regulatory work; and
    
    $300,000 in internal expenses associated with the management
of the darusentan trials primarily due to an increase in the number
of employees. In the six months ended June 30, 2004, the license fees were primarily
attributable to the initiation of the ambrisentan Phase III trials totaling
$1.5 million. In the six months ended June 30, 2003, the $5 million license fee
was attributable to the in-licensing of darusentan. Discovery research expenses increased due to increased staffing in the six
months ended June 30, 2004 as compared to the same period in 2003. Selling, General and Administrative The $2.4 million increase in selling, general and administrative expense
for the six months ending June 30, 2004 as compared to the same period in 2003
primarily relates to a $930,000 increase in insurance and professional service
costs related to becoming a public company, an increase of $555,000 related to
increased staffing and related recruiting costs, $220,000 in increased costs
related to our German subsidiary primarily due to timing of annual expenditures
and an unfavorable change in the euro exchange rate, an increase of $90,000 in
market research costs and an increase of $80,000 in consulting costs. Stock-Based Compensation Stock-based compensation expenses increased due to an increase in the
number of options granted to employees and consultants and an increase in the
fair value of our common stock. The stock-based compensation expense for each
period was allocated between selling, general and administrative and research
and development as follows: Six Months EndedJune 30,2004
    
    2003(In thousands)Research and development
    
    $
    1,151
    
    
    $
    742Selling, general and administrative
    
    
    1,183
    
    
    
    523$
    2,334
    
    
    $
    1,265
 Interest Income, Net Interest income net of interest expense was $309,000 and ($8,000) for the
six months ended June 30, 2004 and 2003, respectively. Interest income was
$559,000 and $266,000 for the six months ended June 30, 2004 and 2003,
respectively. The increase in interest income in 2004 relates to the increased
investment balance for the first half of 2004. Interest expense declined to
$250,000 from $274,000 for the six months ended June 30, 2004 and 2003,
respectively, as a result of the pay down of our notes payable. Accretion of Mandatorily Redeemable Convertible Preferred Stock Accretion of mandatorily redeemable convertible preferred stock was $7.3
million for the six months ended June 30, 2003, and represents the accretion
associated with the Series A, Series C and Series D mandatorily redeemable
convertible preferred stock issued by us. There is no corresponding expense in 19




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2004 due to the conversion of all shares of the Series A, C and D
mandatorily redeemable convertible preferred stock into common stock on
November 4, 2003. Liquidity and Capital Resources From our inception on June 10, 1996 to June 30, 2004, we primarily funded
our operations with $200.8 million (net of issuance costs) from private equity
financings and our initial public offering, $9.2 million from sales of Perfan
I.V., $5.5 million related to a research and development contract, $5.3 million
from term loans and $2.7 million from net interest income earned on cash
equivalents and short- and long-term investments. Cash, cash equivalents and
investments were $85.8 million and $114.3 million at June 30, 2004 and December
31, 2003, respectively. On August 27, 2003, we raised net proceeds of $39.9
million through the sale of additional shares of our Series D preferred stock.
In addition, on November 7, 2003 we completed our initial public offering,
raising net proceeds of $73.3 million. Our cash outflows through the middle of
2005 are expected to consist primarily of external expenses related to our
research and development programs and payroll costs. We believe our cash is
sufficient to meet these needs. Our cash outflows beyond one year are also
expected to consist primarily of external expenses related to our research and
development programs, as well as payroll costs. Based on current spending, we
believe that our cash, cash equivalents and investment balance, together with
the proceeds of the Novartis collaboration, will allow us to fund our future
working capital and capital expenditures through the middle of 2005. We
intend to pursue potential additional collaborations and future equity
offerings. 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 short- and long-term investments are held
in a variety of interest-bearing instruments, consisting of U.S. government and
agency securities, high-grade U.S. corporate bonds, municipal bonds,
mortgage-backed securities, commercial paper and money market accounts. Our
Board of Directors has approved our written investment policy, which limits our
investment instruments to those mentioned above. We review compliance with this
policy on a monthly basis. At June 30, 2004, we had approximately $2.0 million in net fixed assets.
We expect to purchase additional equipment and to invest in leasehold
improvements, and we expect our spending on capital assets to grow in future
years. Operating activities resulted in net cash outflows of $26.2 million and
$16.2 million for the six months ended June 30, 2004 and 2003, respectively.
The cumulative net cash outflow from operating activities from our inception to
June 30, 2004 was $114.5 million. The use of cash in all periods was primarily
a result of our losses from operations. Investing activities resulted in net cash outflows of $3.4 million and a
net cash inflow of $11.6 million for the six months ended June 30, 2004 and
2003, respectively. The net cash outflow for the six months ended June 30, 2004
resulted from $928,000 in capital asset expenditures and $60.7 million in
purchases of short-term and long-term investments offset by $58.2 million in
proceeds related to the maturity of short-term investments. The net cash inflow
for the six months ended June 30, 2003 resulted from $79,000 in capital asset
expenditures and $7.2 million in purchases of short-term investments offset by
$18.9 million in proceeds from the sale of short-term investments. Cumulative
investing activities from inception to June 30, 2004 resulted in net cash
outflows of $75.5 million, with $3.4 million in net capital asset expenditures
offset by $332,000 in proceeds from the sale of property and equipment and
$384.0 million in purchases of short-term and long-term investments offset by
$311.6 million in proceeds from the maturity of short-term investments. Financing activities resulted in net cash outflows of $821,000 and
$275,000 for the six months ended June 30, 2004 and 2003, respectively.
Financing activities for the six months ended June 30, 2004 and 2003 consisted
primarily of payments of $867,000 and $266,000 on our term loan, respectively.
Cumulative financing activities from our inception to June 30, 2004 resulted in
net cash inflows of $203.8 million, primarily related to the issuance of our
Series A, C and D preferred stock, the sale of shares of our common stock in
our initial public offering and borrowings under our term loans. In November 2003, we completed an initial public offering of 5,750,000
shares of our common stock, including the underwriters over-allotment.
Concurrent with the initial public offering, all of the 98,021,120 shares of
convertible preferred stock outstanding automatically converted into common
stock at 20




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a five-to-one ratio, resulting in the issuance of 19,604,186 shares of
common stock. The Company received net proceeds of $73.3 million from its
initial public offering, net of $7.2 million in expenses and underwriters
discount relating to the issuance and distribution of the securities. Total operating lease expense for the six months ended June 30, 2004 and
2003 was approximately $270,000 and $200,000, respectively. We have future
payment commitments for operating leases of approximately $1.3 million,
principally for our office and laboratory space. In addition, many of our
contracts with clinical research organizations, contract manufacturers,
academic research agreements and others contain termination provisions that
would require us to make final payments if we were to terminate prematurely.
The size of these payments depends upon the timing and circumstances of the
termination, and therefore the extent of the future commitments cannot be
meaningfully quantified. Based on current spending projections, we anticipate that our current
cash, cash equivalents and short-term and long-term investments will be
sufficient to fund our operations through the middle of 2005. However, our
forecast of the period of time through which our financial resources will be
adequate to support our operations is a forward-looking statement that involves
risks and uncertainties, and actual results could vary materially. If we are
unable to raise additional capital when required or on acceptable terms, we may
have to significantly delay, scale back or discontinue one or more of our
clinical trials, those aspects of our drug discovery program not funded by
Novartis or other aspects of our operations. Critical Accounting Policies Our consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States. The
preparation of these financial consolidated statements requires us to make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. Our critical accounting
policies that require the use of estimates and informed management judgments
include:  
    
    revenue recognition;
    
    accounting for research and development expenses;
    
    estimating the value of our equity instruments for use in deferred
stock-based compensation calculations; and
    
    accounting for income taxes. Revenue Recognition. We recognize revenue in accordance with SEC Staff Accounting Bulletin No.
104 Revenue Recognition in Financial Statements (SAB 104). We consider this
methodology to be the most appropriate for our business model and current
revenue streams. Product Sales.Sales are recognized when the following four revenue
recognition criteria are met: (i) persuasive evidence of an arrangement exists;
(ii) product is shipped from the distributor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. 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. 21




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Non-refundable license fees received are recorded as deferred revenue once
received or irrevocably committed, and are recognized ratably over the longer
of the development period to which they relate or the expected duration of the
contractual relationship. Where there are two or more distinct phases embedded
into one contract (such as product development and subsequent commercialization
or manufacturing), the contracts may be considered multiple element
arrangements. When it can be demonstrated that each of these phases are at fair
value, they are treated as separate earnings processes with upfront fees being
recognized over only the initial product development phase. The relevant time
period for the product development phase is based on management estimates and
could vary depending upon the outcome of clinical trials and the regulatory
approval process. As a result, management 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 payment is reasonably assured. We evaluate whether milestones are at risk and substantive based on the contingent nature of the
milestone, specifically reviewing factors such as the technological and
commercial risk that needs to be overcome and the level of investment required.
Milestone payments related to arrangements under which we have continuing
performance obligations are recognized as revenue upon achievement of the
milestone only if all of the following conditions are met: the milestone
payments are non-refundable; achievement of the milestone was not reasonably
assured at the inception of the arrangement; substantive effort is involved in
achieving the milestone; and the amount of the milestone 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 and is typically based on the fully burdened cost of a researcher
working on a collaboration. Revenue is recognized ratably over the period as
services are performed, with the balance reflected as deferred revenue until
earned. Accounting for research and development expenses.Our research and
development expense category is primarily composed of costs associated with
product development for enoximone capsules, ambrisentan and darusentan. These
expenses represent both clinical development costs and the costs associated
with non-clinical support activities such as toxicological testing,
manufacturing process development and regulatory consulting services. Clinical
development costs represent internal costs for personnel, external costs
incurred at clinical sites and contractual payments to third party clinical
research organizations to perform certain clinical trials. We also report the
costs of product licenses in this category, including our ongoing milestone
obligations associated with the licensing of ambrisentan and darusentan. Our
product candidates do not currently have regulatory approval; accordingly, we
expense the license and milestone fees when we incur the liability. We have a
discovery research effort, which is conducted in part on our premises by our
scientists and in part through collaborative agreements. While some of our research and development expenses are the result of the
internal costs related directly to our employees, a majority of the expenses
are charged to us by external service providers, including clinical research
organizations and contract manufacturers, and by our academic collaborators. We
accrue research and development expenses for activity occurring during the
fiscal period prior to receiving invoices from clinical sites and third party
clinical research organizations. We accrue external costs for clinical studies
based on the progress of the clinical trials, including patient enrollment,
progress by the enrolled patients through the trial, and contractual costs with
clinical research organizations and clinical sites. We record internal costs
primarily related to personnel in clinical development and external costs
related to non-clinical studies and basic research when incurred. Amounts
received from other parties to fund our research and development efforts where
the reimbursing party does not obtain any rights to the research or drug
candidates are recognized as a reduction to research and development expense as
the costs are incurred. Significant judgments and estimates must be made and
used in determining the accrued balance in any accounting period. Actual costs
incurred may or may not match the estimated costs for a given accounting
period. We expect that expenses in the research and development category will
increase for the foreseeable future as we add personnel, expand our clinical
trial activities and increase our discovery research capabilities. The amount
of the increase is difficult to predict due to the uncertainty inherent in the
timing of clinical trial initiations, progress in our discovery research
program, the rate of patient enrollment and 22




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the detailed design of future trials. In addition, the results from each
of our trials, as well as the results of trials of similar drugs under
development by others, will influence the number, size and duration of both
planned and unplanned trials. Valuation of equity instruments.We record compensation expense related to
options issued to consultants and options issued to, or common stock sold to,
employees at less than the fair value. As a result, we have recorded deferred
stock-based compensation expense that represents, in the case of employees, the
difference between the option exercise price and the fair value of our common
stock. In the case of consultants, deferred stock-based compensation represents
the fair value of the options granted, computed using the Black-Scholes
option-pricing model. These expenses are based on the fair value of the options
and common stock. Because there has been no public market for our common stock
until recently, we have estimated the fair value of these equity instruments
using various valuation methods. Subsequent to 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.We record full valuation allowances against our net deferred tax asset
balances, due to uncertainties related to our deferred tax assets as a result
of our history of operating losses. The valuation allowance is based on our
estimates of taxable income by jurisdiction in which we operate and the period
over which our deferred tax assets will be recoverable. In the event that
actual results differ from these estimates or we adjust these estimates in
future periods we may need to change the valuation allowance, which could
materially impact our financial position and results of operations. 23




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RISK FACTORS Set forth below and elsewhere in this report, as well as in our annual report
on Form 10-K for the year ended December 31, 2003 and in Myogens other
periodic reports on Form 10-Q and Form 8-K, are risks and uncertainties that
could cause actual results to differ materially from the results contemplated
by the forward-looking statements contained in this report.  We are at an early stage of development as a company and we do not have, and
may never have, any products that generate significant revenues. We are at an early stage of development as a biopharmaceutical company,
and we do not have any commercial products that generate significant revenues.
Our existing product candidates will require extensive additional clinical
evaluation, regulatory review, significant marketing efforts and substantial
investment before they could provide us with any revenues. Our efforts may not
lead to commercially successful drugs, for a number of reasons, including:  
    
    our product candidates may not prove to be safe and effective in
clinical trials;
    
    we may not be able to obtain regulatory approvals for our product
candidates or approvals may be narrower than we seek;
    
    we may not have adequate financial or other resources to complete
the development and commercialization of our product candidates; or
    
    any products that are approved may not be accepted in the
marketplace. Other than sales of Perfan I.V. in Europe, which are only minor, we do not
expect to be able to market any of our product candidates for a number of
years. If we are unable to develop, receive approval for, or successfully
commercialize any of our product candidates, we will be unable to generate
significant revenues. If our development programs are delayed, we may have to
raise additional capital or reduce or cease our operations.  If we fail to obtain additional financing, we may be unable to complete the
development and commercialization of our product candidates or continue our
research and development programs. Our operations have consumed substantial amounts of cash since inception.
To date, our sources of cash have been primarily limited to the sale of our
equity securities. We expect to continue to spend substantial amounts on
research and development, including amounts spent on conducting clinical trials
for our product candidates, manufacturing clinical supplies and expanding our
discovery research programs. In 2004, this rate of cash consumption would have
been increased by an average of $0.4 million per month had research and
development funding not been received. In the first half of 2004, our
operations consumed approximately $4.4 million of cash per month, compared to
approximately $2.6 million of cash per month in calendar 2003. We expect that
our monthly cash used by operations will continue to increase for the next
several years. Based on current spending projections, we expect that our
existing capital resources will be sufficient to fund our operations through
the middle of 2005. 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. 24




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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. In
particular, a number of factors may decrease the pace of enrollment in our
Phase III ARIES trials of ambrisentan in pulmonary arterial hypertension (PAH)
below what we have projected. These factors include the inclusion of placebo
control groups, which may decrease the pace of enrollment compared to our Phase
II trial; competing trials being conducted by Encysive Pharmaceuticals Inc. of
sitaxsentan in substantially similar PAH patient populations; the potential
presentation of results of a Phase IV trial being conducted by Pfizer Inc of
sildenafil (Viagra) for the treatment of pulmonary arterial hypertension which,
if positive, may result in physicians prescribing sildenafil to significantly
more patients, which would further reduce the pool of patients eligible for
enrollment in our ARIES trials; and the expected Phase IV trial of bosentan in
PAH patients with Class II symptoms to be conducted by Actelion, Inc. We have
recently committed additional resources to the ARIES trials in an attempt to
increase the likelihood of completing enrollment in our expected time frame.
These efforts may not be successful in increasing or maintaining the current
enrollment rates. As a result of all 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. Delays in patient enrollment in the trials may
increase our costs and slow down our product development and approval process.
In addition, two of our current clinical trials for enoximone capsules are
designed to continue until a pre-specified number of events have occurred to
the patients enrolled. Trials such as these are subject to delays stemming from
patient withdrawal and from lower than expected event rates, in addition to the
risk of slower than anticipated patient enrollment. Our product development
costs will also increase if we need to perform more or larger clinical trials
than planned. Any delays in completing our clinical trials will delay our
ability to generate revenue from product sales, and we may have insufficient
capital resources to support our operations. Even if we do have sufficient
capital resources, our ability to become profitable will be delayed.  Adverse events in our clinical trials may force us to stop development of our
product candidates or prevent regulatory approval of our product candidates. Our product candidates may produce serious adverse events. These adverse
events could interrupt, delay or halt clinical trials of our product candidates
and could result in the Food and Drug Administration, or FDA, or other
regulatory authorities denying approval of our product candidates for any or
all targeted indications. An independent data safety monitoring board, the FDA,
other regulatory authorities or we may suspend or terminate clinical trials at
any time. We cannot assure you that any of our product candidates will be safe
for human use.  Our applications for regulatory approval could be delayed or denied due
to problems with studies conducted before we in-licensed the product
candidates. We are developing product candidates, including enoximone capsules,
ambrisentan and darusentan, that we have in-licensed from other pharmaceutical
companies. Many of the pre-clinical studies and some of the clinical studies on
these product candidates were conducted by other companies before we
in-licensed the product candidates. In some cases, the studies were conducted
when regulatory requirements were different from today. We would incur
unanticipated costs and experience delays if we were required to repeat some or
all of those studies. Even if the previous studies are acceptable to regulatory
authorities, we may have to spend additional time analyzing and presenting the
results of the studies. Problems with the previous studies could cause our
regulatory applications to be delayed or rejected. For example, as a result of
changing regulatory standards, we may be required to repeat certain animal
toxicology studies for enoximone prior to the submission of our application for
marketing approval. If we must repeat these studies, we would experience an
increase in our expenditures and the final regulatory approval of enoximone
could be jeopardized or delayed. 25




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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 indication being
evaluated, the trial results and regulations applicable to any particular
product candidate. The results of pre-clinical studies and initial clinical trials of our
product candidates do not necessarily predict the results of later-stage
clinical trials. Preliminary results may not be confirmed upon full analysis
of the detailed results of a trial. Product candidates in later stages of
clinical trials may fail to show the desired safety and efficacy despite having
progressed through initial clinical trials. We cannot assure you that the data
collected from the pre-clinical studies and clinical trials of our product
candidates will be sufficient to support FDA or other regulatory approval. In
addition, the continuation of a particular study after review by an independent
data safety monitoring board does not necessarily indicate that our product
candidate will achieve the clinical endpoint. The FDA and other regulatory agencies can delay, limit or deny approval
for many reasons, including:  
    
    a product candidate may not be safe or effective;
    
    the manufacturing processes or facilities we have selected may not
meet the applicable requirements; and
    
    changes in their approval policies or adoption of new regulations
may require additional work. Any delay in, or failure to receive or maintain, approval for any of our
products could prevent us from ever generating meaningful revenues or achieving
profitability.  There can be no assurance that enoximone capsules do not increase mortality. Clinical trials with type-III phosphodiesterase, or PDE-III, inhibitors,
including enoximone capsules, have shown that at certain doses these compounds
can increase the risk of mortality in specific patient populations. In studies
of enoximone capsules administered at doses of 100 to 300 milligrams three
times a day, some patients experienced abnormal rhythms in the beating of the
heart. In one Phase II placebo-controlled trial involving 151 patients
administered placebo capsules or enoximone capsules at 100 milligrams three
times a day, there was a statistically significant increase in the mortality
rate in the group of patients receiving enoximone capsules compared to the
group of patients receiving placebo capsules: 36% of the patients treated with
enoximone capsules died during the evaluation period versus 23% of the patients
treated with placebo. We are testing enoximone capsules administered at doses
of 25 and 50 milligrams three times a day. The preliminary results of the
EMOTE trial announced in March 2004 demonstrated a six-month mortality rate of
38% for the group of patients receiving enoximone and 31% for the group of
patients receiving placebo. 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.  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 EMOTE, ESSENTIAL and ARIES trials, as well as the clinical trials
for darusentan. As a result, we have had and will continue to 26




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have less control over the conduct of the clinical trials, the timing and
completion of the trials, the required reporting of adverse events and the
management of data developed through the trial than would be the case if we
were relying entirely upon our own staff. Communicating with outside parties
can also be challenging, potentially leading to mistakes as well as
difficulties in coordinating activities. Outside parties may have staffing
difficulties, may undergo changes in priorities or may become financially
distressed, adversely affecting their willingness or ability to conduct our
trials. We may experience unexpected cost increases that are beyond our
control. Problems with the timeliness or quality of the work of a contract
research organization may lead us to seek to terminate the relationship and use
an alternative service provider. However, making this change may be costly and
may delay our trials, and contractual restrictions may make such a change
difficult or impossible. Additionally, it may be impossible to find a
replacement organization that can conduct our trials in an acceptable manner
and at an acceptable cost.  Our competitors may develop and market drugs that are less expensive, more
effective or safer than our product candidates. The pharmaceutical market is highly competitive. Many pharmaceutical and
biotechnology companies have developed or are developing products that will
compete with products we are developing. Several significant competitors are
working on, or already have approval for, drugs for the same indications as
enoximone capsules, ambrisentan and darusentan. It is possible that our
competitors will develop and market products that are less expensive, more
effective or safer than our future products or that will render our products
obsolete. Some of these products are in late-stage clinical trials. It is also
possible that our competitors will commercialize competing products before any
of our product candidates are approved and marketed. Actelion Ltd. received FDA
approval in December 2001 for Tracleer, a non-selective endothelin receptor
antagonist for the treatment of pulmonary arterial hypertension. United
Therapeutics Corp. received FDA approval in May 2002 for Remodulin for the
treatment of pulmonary arterial hypertension. GlaxoSmithKline plc markets
Flolan for pulmonary arterial hypertension. Encysive Pharmaceuticals, Inc. is
developing sitaxsentan, an ETA selective endothelin receptor antagonist which
has demonstrated efficacy in a Phase IIb/III study and may be approved for
pulmonary arterial hypertension earlier than ambrisentan. Pfizer is evaluating
the use of sildenafil (Viagra) for the treatment of pulmonary arterial
hypertension, and if successful, sildenafil could become a major competitor to
ambrisentan. A number of other companies, including Abbott Laboratories, have
ETA selective endothelin receptor antagonists in late-stage clinical
development and could compete with ambrisentan and darusentan. We expect that
competition from pharmaceutical and biotechnology companies, universities and
public and private research institutions will increase. Many of these
competitors have substantially greater financial, technical, research and other
resources than we do. We may not have the financial resources, technical and
research expertise or marketing, distribution or support capabilities to
compete successfully.  The market price of our common stock may be highly volatile. We cannot assure you that an active trading market for our common stock
will exist at any time. Holders of our common stock may not be able to sell
shares quickly or at the market price if trading in our common stock is not
active. Since initial trading of our stock began in October 2003 through August
3, 2004, our average daily trading volume has been 181,442 shares. The trading
price of our common stock is likely to be highly volatile and could be subject
to wide fluctuations in price in response to various factors, many of which are
beyond our control, including:  
    
    actual or anticipated results of our clinical trials;
    
    actual or anticipated regulatory approvals of our products or of competing products;
    
    changes in laws or regulations applicable to our products;
    
    changes in the expected or actual timing of our development programs;
    
    actual or anticipated variations in quarterly operating results;
    
    announcements of technological innovations by us, our collaborators or our competitors;
    
    new products or services introduced or announced by us or our competitors;
    
    changes in financial estimates or recommendations by securities analysts; 27




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
    
    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;
    
    sales of our common stock by us or our stockholders; and
    
    terms of potential financings. 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.  Since we will 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 direct means to prevent third parties from making,
selling, using or importing enoximone in the United States, Europe or Japan.
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.
Japanese law may provide us with marketing exclusivity in that country for a
period up to six years following Japanese marketing 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.  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 28




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applications. Once such patents have issued, we cannot predict how the
claims will be construed or enforced. 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. 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. Furthermore, enforcing a 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. 29




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We do not use derivative financial instruments in our investment portfolio
and have no foreign exchange contracts. Our financial instruments consist of
cash, cash equivalents, short-term investments, trade accounts receivable,
long-term investments, 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 June 30, 2004, we had an investment portfolio of short-term and
long-term investments in a variety of interest-bearing instruments, consisting
of U.S. government and agency securities, high-grade U.S. corporate bonds,
municipal bonds, mortgage-backed securities, commercial paper and money market
accounts of $71.9 million excluding those classified as cash and cash
equivalents. Our short-term investments consist primarily of bank notes,
various government obligations and asset-backed securities. These securities
are classified as available-for-sale and are recorded on the balance sheet at
fair market value with unrealized gains or losses reported as 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. The investment portfolio is subject to interest rate risk and will fall in
value in the event market interest rates increase. Due to the short duration of
our investment portfolio, we believe an immediate 10% change in interest rates
would not be material to our financial condition or results of operations. The euro is the functional currency for Myogen GmbH. We translate asset
and liability accounts to the U.S. dollar based on the exchange rate as of the
balance sheet date, while the income statement and cash flow statement amounts
are translated to the U.S. dollar at the average exchange rate for the period.
Exchange gains and losses resulting from such translation are included as a
separate component of stockholders equity. Transaction gains and losses are
recognized in income during the period in which they occur and are included in
selling, general and administrative expenses. In addition, we conduct clinical
trials in many countries, exposing us to cost increases if the U.S. dollar
declines in value compared to other currencies. 30




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ITEM 4. CONTROLS AND PROCEDURES We carried out an evaluation under the supervision and with the
participation of our management, including our Chief Executive Officer (CEO)
and Chief Financial Officer (CFO), of the effectiveness of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934, as amended (Exchange Act), as of the end of
the period covered by this report. Based on that evaluation, the CEO and CFO
have concluded that our disclosure controls and procedures are effective to
provide reasonable assurance that information required to be disclosed by us in
our periodic reports under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in Securities and Exchange
Commission rules and forms, and that such information is accumulated and
communicated to our management, including our CEO and CFO, as appropriate, to
allow timely decisions regarding required disclosure. It should be noted that
the design of any system of controls is based in part upon certain assumptions
about the likelihood of future events, and can therefore only provide
reasonable, not absolute, assurance that the design will succeed in achieving
its stated goals. In addition, we reviewed our internal controls, and there have been no
changes in our internal controls over financial reporting during the quarter
ended June 30, 2004 that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting. In the
second quarter of 2004, we implemented new accounting software as a result of
our growing complexity and the requirements of being a public company. 31




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PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings
    
    None
 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities On October 29, 2003, the Registration Statement on Form S-1 (Reg. No.
333-108301) (the Registration Statement) we filed to register our Common
Stock in our initial public offering was declared effective by the Securities
and Exchange Commission. We intend to continue to use the net proceeds of the offering for research and
development, general corporate purposes and working capital. We continually
assess the specific uses and allocations for these funds. As of June 30, 2004,
the $73.3 million of net proceeds remained available and were primarily
invested in short-term marketable securities. 
 Item 3. Defaults Upon Senior Securities
    
    None
 
 Item 4. Submission of Matters to a Vote of Security Holders On May 12, 2004, the Company held an Annual Meeting of Stockholders. At the
meeting, the stockholders voted on a proposals to elect directors to serve for
the ensuing year and until their successors are elected and to ratify the
selection by the Audit Committee of the Board of Directors of
PricewaterhouseCoopers LLP as independent registered public accounting firm of
the Company for its fiscal year ending December 31, 2004. The voting results on the two matters are set forth below:  1.
    
    Proposal to elect directors to serve for the ensuing year and until their
successors are elected: Director
    
    For
    
    Against
    
    AbstainJ. William Freytag
    
    
    17,266,028
    
    
    
    
    
    
    
    Michael R. Bristow
    
    
    17,257,278
    
    
    
    
    
    
    
    8,750Kirk K. Calhoun
    
    
    17,266,028
    
    
    
    
    
    
    
    Jerry T. Jackson
    
    
    17,265,028
    
    
    
    
    
    
    
    1,000Daniel J. Mitchell
    
    
    17,266,028
    
    
    
    
    
    
    
    Arnold L. Oronsky
    
    
    17,266,028
    
    
    
    
    
    
    
    Andrew H. Schiff
    
    
    17,266,028
    
    
    
    
    
    
    
    Sigrid Van Bladel
    
    
    17,245,628
    
    
    
    
    
    
    
    20,400
  2.
    
    Proposal to ratify the selection by the Audit Committee of the Board of
Directors of PricewaterhouseCoopers LLP as independent registered public
accounting firm of the Company for its fiscal year ending December 31,
2004: 17,266,028 For, none Against or Abstain. 
 Item 5. Other Information
    
    None
 
 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.33
    
    2003 Employee Stock Purchase Plan Offering31.1
    
    Certification of principal executive officer required by Rule 13a-14(a).31.2
    
    Certification of principal financial officer required by Rule 13a-14(a).32.1
    
    Section 1350 Certification.
 (b) Reports on Form 8-K. 32




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1. On April 30, 2004, the Company filed a current report on Form 8-K
entitled, Myogen Reports 2004 First Quarter Results. 2. On May 25, 2004, the Company filed a current report on Form 8-K
entitled Ambrisentan Phase II Results Presented at ATS 2004. 33




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SIGNATURES Pursuant to the requirements of the Exchange Act, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized. Date: August 9, 2004
    MYOGEN, INC./s/ Joseph L. TurnerJoseph L. TurnerSenior Vice President, Finance and
    Administration and Chief Financial Officer 34




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Exhibit No.
    
    Description10.33
    
    2003 Employee Stock Purchase Plan Offering31.1
    
    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.
 35