**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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##### **FORM10-Q**

 

| **ý**         |   | **Quarterly report pursuant to  section 13 or 15(d) of the Securities Exchange Act of 1934 for the  quarterly period ended:**                                                                                           |
|--------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|               |   |                                                                                                                                                                                                                         |
| **March 31, 2003** |
|               |   |                                                                                                                                                                                                                         |
| **o**              |   | **Transition report pursuant to  section 13 or 15(d) of the Securities Exchange Act of 1934 for the  transition period from         to         ** |

** **

**Commission File Number:  000-31145**

 

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**VICURON PHARMACEUTICALS INC.**

(Exact name of registrant asspecified in its charter)

 

| **Delaware**                                                      |   | **04-3278032**                             |
|-------------------------------------------------------------------|--------|--------------------------------------------|
| (State or  other jurisdiction   of incorporation or organization) |   | (I.R.S.  Employer   Identification Number) |

 

**455 South Gulph Road, King of Prussia, PA19406**

(Address of principal executiveoffices) (Zip Code)

** **

**(610) 205-2300**

(Registrant’s telephone number,including area code)

 

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Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrantwas required to file such report(s) and (2) has been subject to suchfiling requirements for the past 90 days. Yes ý  No o.

 

Indicate bycheck mark whether the registrant is an accelerated filer (as defined in Rule12b-2 of the Exchange Act).  Yes ýNo o.

 

On May 11,2003, there were 47,681,820 common shares outstanding of the registrant’s onlyclass of common stock.

 

The Exhibit Index begins onpage 39.

 

 

 

**VICURON PHARMACEUTICALS INC.**

**Quarterly Report on Form 10-Q**

**For the Three Months Ended March 31, 2003**

 

**INDEX**

 

** **
| **PART I.**  | **FINANCIAL INFORMATION**                                                                              |
|--------------|--------------------------------------------------------------------------------------------------------|
|         |                                                                                                   |
| **Item 1.**  | **Condensed  Consolidated Financial Statements**                                                       |
|         |                                                                                                   |
|         | Condensed  Consolidated Balance Sheets as of March 31, 2003 and December 31, 2002  (Unaudited)         |
|         |                                                                                                   |
|         | Consolidated  Statements of Operations for the Three Months Ended March 31, 2003 and 2002  (Unaudited) |
|         |                                                                                                   |
|         | Consolidated  Statements of Cash Flows for the Three Months Ended March 31, 2003 and 2002  (Unaudited) |
|         |                                                                                                   |
|         | Notes  to Condensed Consolidated Financial Statements                                                  |
|         |                                                                                                   |
| **Item 2.**  | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations**        |
|         |                                                                                                   |
| **Item 3.**  | **Quantitative and Qualitative Disclosures  About Market Risk**                                        |
|         |                                                                                                   |
| **Item 4.**  | **Controls and Procedures**                                                                            |
|         |                                                                                                   |
| **PART II.** | **OTHER INFORMATION**                                                                                  |
|         |                                                                                                   |
| **Item 1.**  | **Legal Proceedings**                                                                                  |
|         |                                                                                                   |
| **Item 2.**  | **Changes in Securities and Use of Proceeds**                                                          |
|         |                                                                                                   |
| **Item 3.**  | **Defaults upon Senior Securities**                                                                    |
|         |                                                                                                   |
| **Item 4.**  | **Submission of Matters to a Vote of Security  Holders**                                               |
|         |                                                                                                   |
| **Item 5.**  | **Other Information**                                                                                  |
|         |                                                                                                   |
| **Item 6.**  | **Exhibits and Reports on Form 8-K**                                                                   |
|         |                                                                                                   |
|         | **Signatures**                                                                                         |
|         |                                                                                                   |
|         | **Certifications**                                                                                     |
|         |                                                                                                   |
|         | **Exhibit  Index**                                                                                     |

 

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**PART I –FINANCIAL INFORMATION**

 

**ITEM 1****.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**VICURON PHARMACEUTICALS INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

(unaudited)

(in thousands)

 
|                                            |   | **March 31,  2003** |    | **December  31,  2002** |   |
|-------------------------------------------------|--------|---------------------|---------|-------------------------|--------|
|                                            |   |                |    |
|                                            |   |                |    |                    |   |
| **ASSETS**                                      |   |                |    |                    |   |
| Current assets:                                 |   |                |    |                    |   |
| Cash and cash equivalents                       |   | $                   | 39,668  |                    | $      | 28,271 |   |
| Marketable securities                           |   | 105,697             |    | 34,034                  |   |
| Accounts receivable, net                        |   | 3,287               |    | —                  |   |
| Prepaid expenses and other current assets       |   | 4,905               |    | 5,451                   |   |
|                                            |   |                |    |                    |   |
| Total current assets                            |   | 153,557             |    | 67,756                  |   |
| Property, plant and equipment                   |   | 32,151              |    | 4,875                   |   |
| Intangible assets, net                          |   | 20,621              |    | —                  |   |
| Long-term receivables                           |   | 8,180               |    | —                  |   |
| Long-term marketable securities - restricted    |   | 6,133               |    | —                  |   |
| Long-term marketable securities - other         |   | 440                 |    | —                  |   |
| Other assets                                    |   | 357                 |    | 105                     |   |
|                                            |   |                |    |                    |   |
| Total assets                                    |   | $                   | 221,439 |                    | $      | 72,736 |   |
|                                            |   |                |    |                    |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**  |   |                |    |                    |   |
| Current liabilities:                            |   |                |    |                    |   |
| Accounts payable                                |   | $                   | 20,306  |                    | $      | 6,491 |   |
| Accrued liabilities                             |   | 9,247               |    | 11,098                  |   |
| Advances received                               |   | 3,296               |    | —                  |   |
| Current portion of long-term debt               |   | 2,242               |    | 3,500                   |   |
| Current portion of deferred revenue             |   | 2,186               |    | 1,519                   |   |
|                                            |   |                |    |                    |   |
| Total current liabilities                       |   | 37,277              |    | 22,608                  |   |
| Long-term debt, less current portion            |   | 5,455               |    | 698                     |   |
| Deferred revenue, less current portion          |   | 500                 |    | 500                     |   |
| Other long-term liabilities                     |   | 360                 |    | 264                     |   |
|                                            |   |                |    |                    |   |
| Total liabilities                               |   | 43,592              |    | 24,070                  |   |
|                                            |   |                |    |                    |   |
| Stockholders’ equity:                      |   |                |    |                    |   |
| Common stock                                    |   | 48                  |    | 26                      |   |
| Additional paid-in capital                      |   | 439,082             |    | 202,365                 |   |
| Deferred stock compensation                     |   | (1,249              | )       | (1,171                  | )      |
| Accumulated other comprehensive income (loss)   |   | (215                | )       | 65                      |   |
| Accumulated deficit                             |   | (259,819            | )       | (152,619                | )      |
|                                            |   |                |    |                    |   |
| Total stockholders’ equity                 |   | 177,847             |    | 48,666                  |   |
|                                            |   |                |    |                    |   |
| Total liabilities and stockholders’ equity |   | $                   | 221,439 |                    | $      | 72,736 |   |

 

The accompanying notes are an integral part of the condensedconsolidated financial statements.

 

1

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**VICURON PHARMACEUTICALS INC.**

## **CONSOLIDATED STATEMENTS OF OPERATIONS**

(unaudited)

(in thousands, except per share amounts)

 
|                                                                             |   | **Three  Months Ended**   |     |
|----------------------------------------------------------------------------------|--------|---------------------------|----------|
|                                                                             |   | **March 31,********2003** |     | **March 31,  2002** |   |
|                                                                             |   |                      |     |
|                                                                             |   |                      |     |   |   |
| Revenues:                                                                        |   |                      |     |   |   |
| Collaborative research and development, contract  services and government grants |   | $                         | 1,717    |   | $ | 1,554 |   |
| License fees and milestones                                                      |   | 41                        |     | 258 |   |
|                                                                             |   |                      |     |   |   |
| Total revenues                                                                   |   | 1,758                     |     | 1,812 |   |
|                                                                             |   |                      |     |   |   |
| Operating expenses:                                                              |   |                      |     |   |   |
| Research and development                                                         |   | 12,723                    |     | 9,997 |   |
| General and administrative                                                       |   | 2,082                     |     | 2,501 |   |
| Acquired in-process research and development                                     |   | 94,532                    |     | — |   |
|                                                                             |   |                      |     |   |   |
| Total operating expenses                                                         |   | 109,337                   |     | 12,498 |   |
|                                                                             |   |                      |     |   |   |
| Loss from operations                                                             |   | (107,579                  | )        | (10,686 | ) |
|                                                                             |   |                      |     |   |   |
| Other income (expense):                                                          |   |                      |     |   |   |
| Interest income                                                                  |   | 449                       |     | 345 |   |
| Interest expense                                                                 |   | (70                       | )        | (62 | ) |
|                                                                             |   |                      |     |   |   |
| Net loss                                                                         |   | $                         | (107,200 | ) | $ | (10,403 | ) |
|                                                                             |   |                      |     |   |   |
| Net loss per share:                                                              |   |                      |     |   |   |
| Basic and diluted                                                                |   | $                         | (3.15    | ) | $ | (0.45 | ) |
|                                                                             |   |                      |     |   |   |
| Weighted average shares                                                          |   | 33,995                    |     | 23,261 |   |

 

The accompanying notes are an integral part of the condensedconsolidated financial statements.

 

2

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**VICURON PHARMACEUTICALS INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

(unaudited)

(in thousands)

 

 
|                                                                         |   | **Three  Months Ended March 31,** |     |
|------------------------------------------------------------------------------|--------|-----------------------------------|----------|
|                                                                         |   | **2003**                          |     | **2002** |   |
|                                                                         |   |                              |     |   |   |
| **Cash flows from operating  activities:**                                   |   |                              |     |   |   |
| Net loss                                                                     |   | $                                 | (107,200 | ) | $ | (10,403 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities: |   |                              |     |   |   |
| Depreciation and amortization                                                |   | 668                               |     | 314 |   |
| Non-cash stock compensation expense                                          |   | 434                               |     | 696 |   |
| Acquired in-process research and development                                 |   | 94,532                            |     | — |   |
| Changes in operating assets and liabilities, net  of effect of merger:       |   |                              |     |   |   |
| Employee notes receivable                                                    |   | —                            |     | 10 |   |
| Accounts receivable                                                          |   | (17                               | )        | — |   |
| Prepaid expenses and other current assets                                    |   | 3,298                             |     | 578 |   |
| Long-term receivables                                                        |   | (228                              | )        | — |   |
| Other assets                                                                 |   | (251                              | )        | 2 |   |
| Accounts payable                                                             |   | 3,027                             |     | (765 | ) |
| Accrued liabilities                                                          |   | (978                              | )        | 800 |   |
| Advances received                                                            |   | (382                              | )        | — |   |
| Deferred revenue                                                             |   | (282                              | )        | (1,561 | ) |
| Other long-term liabilities                                                  |   | 25                                |     | 27 |   |
|                                                                         |   |                              |     |   |   |
| Net cash used in operating activities                                        |   | (7,354                            | )        | (10,302 | ) |
|                                                                         |   |                              |     |   |   |
| **Cash flows from investing  activities:**                                   |   |                              |     |   |   |
| Purchases of marketable securities                                           |   | —                            |     | (7,526 | ) |
| Sales/maturities of marketable securities                                    |   | 18,488                            |     | 13,620 |   |
| Additions to property and equipment                                          |   | (2,975                            | )        | (204 | ) |
| Net cash and cash equivalents acquired in  Biosearch merger                  |   | 746                               |     | — |   |
|                                                                         |   |                              |     |   |   |
| Net cash provided by investing activities                                    |   | 16,259                            |     | 5,890 |   |
|                                                                         |   |                              |     |   |   |
| **Cash flows from financing  activities:**                                   |   |                              |     |   |   |
| Proceeds from issuance of common stock                                       |   | 158                               |     | 292 |   |
| Proceeds from long-term debt                                                 |   | 2,764                             |     | — |   |
| Repayments of long-term debt                                                 |   | (526                              | )        | (342 | ) |
|                                                                         |   |                              |     |   |   |
| Net cash provided by (used in) financing  activities                         |   | 2,396                             |     | (50 | ) |
|                                                                         |   |                              |     |   |   |
| Effect of exchange rate changes on cash and cash  equivalents                |   | 96                                |     | — |   |
|                                                                         |   |                              |     |   |   |
| Net change in cash and cash equivalents                                      |   | 11,397                            |     | (4,462 | ) |
| Cash and cash equivalents at beginning of period                             |   | 28,271                            |     | 31,349 |   |
|                                                                         |   |                              |     |   |   |
| Cash and cash equivalents at end of period                                   |   | $                                 | 39,668   |   | $ | 26,887 |   |
|                                                                         |   |                              |     |   |   |
| **Supplemental cash flow  information:**                                     |   |                              |     |   |   |
| Cash paid during the period for interest                                     |   | $                                 | 50       |   | $ | 65 |   |
|                                                                         |   |                              |     |   |   |
| **Supplemental disclosure of  non-cash investing activities:**               |   |                              |     |   |   |
| Common stock and stock options issued in Biosearch  merger                   |   | $                                 | 236,089  |   | $ | — |   |

 

The accompanying notes are an integral part of the condensedconsolidated financial statements.

 

3

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**NOTES TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS**

 

**1.  Basis ofPresentation**

 

Theaccompanying interim financial statements are unaudited and have been preparedin accordance with accounting principles generally accepted in the UnitedStates of America for interim financial information and with the instructionsto Form 10-Q.  Accordingly, certaininformation and footnote disclosures normally included in annual financialstatements have been condensed or omitted. The year-end condensed consolidatedbalance sheet data was derived from audited financial statements but does notinclude all disclosures required by accounting principles generally accepted inthe United States of America.  Theinterim financial statements, in the opinion of management, reflect alladjustments (including normal recurring accruals) necessary for a fairpresentation of the results for the interim periods ended March 31, 2003 and2002.

 

Theresults of operations for the interim periods are not necessarily indicative ofthe results of operations to be expected for the fiscal year or any otherinterim period.  These condensedconsolidated interim financial statements should be read in conjunction withthe audited financial statements for the year ended December 31, 2002, whichare included in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2002.

 

OnMarch 26, 2003, the Company changed its name from Versicor Inc. to VicuronPharmaceuticals Inc.

 

**2. Basic and Diluted Net Loss per Share**

 

Basic net loss per share is computed using theweighted-average number of shares of common stock outstanding. Diluted net lossper share does not differ from basic net loss per share since potential sharesof common stock are anti-dilutive for all periods presented and therefore areexcluded from the calculation of diluted net loss per share. The followingpotentially dilutive shares of common stock were excluded from the computationof net loss per share because their effect was anti-dilutive (in thousands):

 
|                                           |   | **March 31,** |   |
|------------------------------------------------|--------|---------------|--------|
|                                           |   | **2003**      |   | **2002** |   |
|                                           |   |          |   |   |   |
| Shares issuable upon exercise of stock options |   | 8,536         |   | 3,308 |   |
| Shares issuable upon exercise of warrants      |   | 195           |   | 344 |   |
| Shares subject to repurchase                   |   | —        |   | 5 |   |
|                                           |   | 8,731         |   | 3,657 |   |

 

**3. Acquisition of Biosearch Italia S.p.A.**

 

**OnFebruary 28, 2003, Vicuron Pharmaceuticals Inc, or the Company, acquired all ofthe outstanding shares of Biosearch Italia S.p.A., a publicly listed company inItaly.  In connection with theacquisition, the Company issued 1.77 shares of its common stock for eachoutstanding share of Biosearch stock, or approximately 21.4 millionshares.  The Company also issued optionscovering approximately 4.3 million common shares, including options issued toreplace options that were held by Biosearch employees and consultants at thedate of the acquisition.**

** **

Biosearchhas used natural product sourcing for the discovery, development and productionof novel anti-infective drugs with a primary emphasis on Europe. Theacquisition will substantially enhance the Company’s capabilities with respectto discovery, pre-clinical and clinical development, and manufacturing, as wellas the Company’s European market presence and effectiveness. The combinedcompany will have substantially greater presence in two of the three majorpharmaceutical markets (North 

 

4

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America and Europe) as well as anenhanced product portfolio for collaborations in Asia. The North Americanrights to the Company’s lead antibiotic product candidate, dalbavancin, havebeen licensed from Biosearch and by acquiring the global rights the Companywill eliminate royalties and manufacturing fees in North America, acquire thefull potential of dalbavancin in Europe and enhance the Company’s commercializationeffectiveness for its lead antifungal drug, anidulafungin, in  Europe. As a result, the Company believesall of these benefits will increase its margin and profitability prospects fordalbavancin and anidulafungin upon regulatory approval in North America andEurope. The Company also believes that European approval can now be obtainedwith only a modest increase in the clinical development expenses alreadyplanned for its North American filings.

** **

**Thepurchase price of the acquisition is approximately $243.1 million determined asfollows (in thousands):**

** **
| Issuance of Vicuron shares                    |   | $     | 232,912 |   |
|-----------------------------------------------|--------|-------|---------|--------|
| Issuance of options to acquire Vicuron shares |   | 3,177 |    |
| Transaction costs                             |   | 6,978 |    |
|                                          |   | $     | 243,067 |   |

** **

Thefair value of the Vicuron shares used in determining the purchase price was$10.97 per share based on the average closing price of Vicuron’s stock from thetwo days before through two days after July 31, 2002, the date of the publicannouncement of the merger. The fair value of the options to acquire Vicuron shareswas determined using the Black-Scholes option pricing model assuming a marketprice of $10.30, an exercise price of $10.62, an expected average life of fouryears, a weighted average interest rate of 3.90%; volatility of 104%, and noexpected dividends.

** **

**Theacquisition was recorded as a purchase for accounting purposes and theCompany’s consolidated financial statements include Biosearch’s operatingresults from the date of acquisition. The purchase price was allocated to the assets purchased and liabilitiesassumed based upon their fair values, including the fair value of in-processresearch and development and other intangibles.  The allocation of the purchase price is as follows:**

** **
| Current assets                      |   | $       | 107,595 |   |
|-------------------------------------|--------|---------|---------|--------|
| Property, plant and equipment       |   | 24,466  |    |
| In-process research and development |   | 94,532  |    |
| Identifiable intangible assets      |   | 20,786  |    |
| Other assets                        |   | 14,356  |    |
| Current liabilities                 |   | (17,535 | )       |
| Long-term liabilities               |   | (1,133  | )       |
|                                |   | $       | 243,067 |   |

** **

The Company recorded anon-cash charge to operations in the first quarter of 2003 of $94.5 million foracquired in-process research and development. The valuation of in-process research and development represents theestimated fair value relating to incomplete research and development projectswhich, at the time of the acquisition, had no alternative future use and forwhich technological feasibility had not been established.  The valuationof the acquired in-process research and development was based on the result ofa valuation using the income approach and applying the percentage completion torisk-adjust the discount rates associated with the in-process projects.  The two significant in-process projectsrelate primarily to the development of a novel antibiotic to treat Gram-positivebacteria, ramoplanin, fair valued at $25.0 million and a novelsecond-generation glycopeptide agent, dalbavancin, fair valued at$64.0 million. These in-process projects require additional significantrigorous scientific and clinical testing expected to be completed in the secondhalf of 2004 with cash inflows from product sales forecasted to begin in 2005.One project is estimated to be approximately 80% complete (based on cost) andthe other project is approximately 45% complete (based on cost), an additional$3.0 million and $16.1 million, respectively for each project, foradditional 

 

5

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scientificresearch and chemical development, expenses associated with conducting clinicaltrials for various stages, and legal and regulatory expenses in connection withthe drug approval process are projected to be required to complete thein-process projects. Both significant in-process projects are still undergoingclinical trials and have not received regulatory approval. The primary risk incompleting the projects is the successful completion of the clinical testingand regulatory approval process. This process is time and research intensiveand new drugs face significant challenges before they can be brought to themarket. Any delay in the approval process could have significant consequencesincluding increased costs thus jeopardizing the economic returns expected to berealized, delay in the rollout of the product with potential lower revenues dueto competing products reaching the market and potential loss of credibility tothe company’s scientific team.

** **

**As thefair value of the net assets acquired exceeds the purchase price paid, there isnegative goodwill arising on the acquisition of $6.6 million.  This amount has been allocated to the valuesof property, plant and equipment and intangible assets acquired pro rata totheir deemed fair values as at the acquisition date.**

** **

**Theidentifiable intangible assets arising from the merger, after allocation ofnegative goodwill, total $20.8 million and represent primarily $14.2 millionfor Biosearch’s patents and core technology, $5.0 million for their library ofmicrobial extracts and $1.4 million for their bioinformatics softwareplatform.  These identifiable intangibleassets have estimated useful lives of between five and ten years.**

 

Asa result of the Company’s merger with Biosearch, the Company acquiredadditional long-term debt relating to a loan agreement entered into byBiosearch in November 2000 with MIUR to fund certain research projects undertakenby Biosearch.  This loan matures inJanuary 2011, and at March 31, 2003, the amount outstanding under this loan was$1.2 million.

 

**In addition, in March 2003, the Company received proceedsof $2.8 million from a loan facility entered into by Biosearch in July 2002with the Basilicata Region of Italy for the construction of the Company’smanufacturing plant in Pisticci.  Underthe loan agreement, the Company has a total loan facility of $8.1 million (atexchange rates prevailing at March 31, 2003) of which the Company has drawndown $2.8 million.  The loan matures in2012.**

** **

Biosearch has historicallyfunded a portion of its operations through research grants and loan subsidiesawarded by Italian and EU authorities. Under applicable law, any transfer of thosegrants and subsidies (including transfer by merger) requires written approvalfrom the Italian bank authorized to make the disbursement on behalf of thegovernment and from the appropriate Italian or EU authorities. In connectionwith the merger, the Company is in the process of applying for permission totransfer Biosearch’s grants and subsidies to itself.  However, as the merger has recently been completed, the Italianand EU authorities have not as yet reached an official decision on whether toapprove the transfer requests. If the transfers are not approved, the Companymight be required to repay some or all of the grants and subsidies received byBiosearch prior to the merger, in the aggregate amount of up to approximately$1.8 million as of March 31, 2003 and the Company may forfeit grants andsubsidies awarded to Biosearch but not yet disbursed as of March 31, 2003 bythe authorized bank, in the aggregate amount of up to approximately $1.1million as of March 31, 2003 (each estimate based on exchange rates prevailingat March 31, 2003).

** **

**Thefollowing unaudited pro forma consolidated financial information has beenprepared as if the acquisition of Biosearch had occurred as of January 1, 2002(in thousands, except per share amounts):**

** **

**6**

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** **
|                    |   | **Three  Months Ended March 31,** |    |
|-------------------------|--------|-----------------------------------|---------|
|                    |   | **2003**                          |    | **2002** |   |
|                    |   |                              |    |   |   |
| Revenues                |   | $                                 | 2,213   |   | $ | 2,295 |   |
|                    |   |                              |    |   |   |
| Net loss                |   | $                                 | (18,743 | ) | $ | (13,731 | ) |
|                    |   |                              |    |   |   |
| Net loss per share:     |   |                              |    |   |   |
| Basic and diluted       |   | $                                 | (0.39   | ) | $ | (0.31 | ) |
|                    |   |                              |    |   |   |
| Weighted average shares |   | 47,678                            |    | 44,493 |   |

** **

**Theunaudited pro forma consolidated financial information are not necessarilyindicative of the Company’s future results of operations or the results ofoperations which might have occurred had the acquisition actually taken placeon January 1, 2002.**

** **

**4.  Stock Options – Fair ValueDisclosures**

** **

**TheCompany applies the measurement principles of Accounting Principles BoardOpinion No. 25, “Accounting for Stock issued to Employees”, in accounting forits employee stock options.  Hadcompensation expense for options granted to employees been determined based onthe fair value at the grant date as prescribed by Statement of FinancialAccounting Standards No. 123, “Accounting for Stock Based Information”, theCompany’s net loss and net loss per share would have been as follows:**

** **
|                                                                                                    |   | **Three  Months Ended March 31,**         |     |
|---------------------------------------------------------------------------------------------------------|--------|-------------------------------------------|----------|
|                                                                                                    |   | **2003**                                  |     | **2002** |   |
|                                                                                                    |   | **(in thousands, except per share data)** |     |
|                                                                                                    |   |                                      |     |   |   |
| Net loss, as reported                                                                                   |   | $                                         | (107,200 | ) | $ | (10,403 | ) |
|                                                                                                    |   |                                      |     |   |   |
| Add: stock-based emloyee compensation expense  included in net loss                                     |   | 311                                       |     | 682 |   |
|                                                                                                    |   |                                      |     |   |   |
| Less: total stock-based employee compensation,  determined under fair value based method for all awards |   | (2,346                                    | )        | (1,652 | ) |
|                                                                                                    |   |                                      |     |   |   |
| Net loss, pro forma                                                                                     |   | $                                         | (109,235 | ) | $ | (11,373 | ) |
|                                                                                                    |   |                                      |     |   |   |
| Basic and diluted net loss per share:                                                                   |   |                                      |     |   |   |
| As reported                                                                                             |   | $                                         | (3.15    | ) | $ | (0.45 | ) |
|                                                                                                    |   |                                      |     |   |   |
| Pro forma                                                                                               |   | $                                         | (3.21    | ) | $ | (0.49 | ) |
|                                                                                                         |        |                                           |          |  |  |  |  |  |

** **

**5. Recent Accounting Pronouncements**

 

InNovember 2002, the EITF reached a consensus on Issue No. 00-21, ‘‘RevenueArrangements with Multiple Deliverables.’’ EITF Issue No. 00-21 providesguidance on how to account for arrangements that 

 

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involvethe delivery or performance of multiple products, services and/or rights to useassets. The provisions of EITF Issue No. 00-21 will apply to revenuearrangements entered into in fiscal periods beginning after June 15, 2003.  We believe that the adoption of thisstandard will have no material impact on our financial statements.

 

In January 2003, the FASBissued FASB Interpretation (‘‘FIN’’) No. 46, ‘‘Consolidation of VariableInterest Entities, an Interpretation of ARB No. 51.’’ FIN No. 46 requirescertain variable interest entities to be consolidated by the primarybeneficiary of the entity if the equity investors in the entity do not have thecharacteristics of a controlling financial interest or do not have sufficientequity at risk for the entity to finance its activities without additionalsubordinated financial support from other parties. FIN No. 46 is effectiveimmediately for all new variable interest entities created or acquired afterJanuary 31, 2003. For variable interest entities created or acquired prior toFebruary 1, 2003, the provisions of FIN No. 46 must be applied for the firstinterim or annual period beginning after June 15, 2003. The Company believesthat the adoption of this standard will have no material impact on itsfinancial statements.

 

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**ITEM 2. ****MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

*The following discussion of our financial conditionand results of operations should be read in conjunction with the financialstatements and notes to those statements included elsewhere in this QuarterlyReport on Form 10-Q and our audited financial statements for the year- endedDecember 31, 2002 included in our Annual Report on Form 10-K previously filedwith the SEC. This discussion may contain forward-looking statements thatinvolve risks and uncertainties.  Thewords “believe,” “expect,” “anticipate,” “may,” “will,” or “could” and similarexpressions or the negatives of these words and phrases are intended toidentify forward-looking statements.  Asa result of many factors, such as those set forth under “Risk Factors” andelsewhere in this document and in our Annual Report, our actual results maydiffer significantly from those anticipated in these forward-lookingstatements.*

 

**Overview**

 

Weare a biopharmaceutical company focused on the discovery, development andmarketing of drugs for the treatment of serious bacterial and fungalinfections, primarily in the hospital setting. Since our inception on May 2, 1995 as a wholly-owned subsidiary ofSepracor Inc., we have devoted substantially all of our efforts to establishingour business and conducting research and development activities related to ourproprietary product candidates, including anidulafungin and dalbavancin, aswell as collaborative product candidates.

 

Since1996, we have been operating as an independent company and on August 8, 2000,we sold 4,600,000 shares of our common stock at $11 per share in an initialpublic offering, and on September 7, 2000 the underwriters exercised anover-allotment option and purchased an additional 690,000 shares of commonstock at $11 per share.  We receivedtotal net proceeds from the initial public offering and the over-allotment ofapproximately $52.7 million.

 

OnApril 9, 2002, we completed a private placement of 2,993,800 shares of ourcommon stock to selected institutional investors at a purchase price of $15 pershare.  We received net proceeds fromthe private placement of approximately $41.9 million.

 

On February 28, 2003, we acquired all of the outstanding shares ofBiosearch Italia S.p.A., a publicly listed company in Italy.  We issued 1.77 shares of our common stockfor each outstanding share of Biosearch stock, or approximately 21.4 millionshares.  We also issued options coveringapproximately 4.3 million common shares, including options issued to replace orassume options that were held by Biosearch employees and consultants at thetime of the acquisition.

 

On March 26, 2003, we changed our name from Versicor Inc. to VicuronPharmaceuticals Inc.

 

Sincewe began our operations in May 1995, we have not generated any revenues fromproduct sales.  In April 2003, we fileda New Drug Application, or NDA, for our lead antifungal product candidate,anidulafungin, for the treatment of esophageal candidiasis.  Anidulafungin is also currently beingstudied in a Phase III clinical trial for invasive candidiasis/candidemia inapproximately 300 patients and has also completed enrollment in a 30 patientPhase III clinical trial for aspergillosis in combination with a liposomalamphotericin formulation.  Our leadantibiotic product candidate, dalbavancin, is in Phase III clinical trials forboth complicated and uncomplicated skin and soft tissue infections, eachclinical trial with approximately 550 patients, and is in a Phase II clinicaltrial for catheter-related bloodstream infections with approximately 90patients.  We also have two furtherproduct candidates: ramoplanin which is being developed by Genome Therapeutics,our licensee in North America, which is in a Phase III clinical trial for thereduction of vancomycin-resistant *enterococci*(VRE) bloodstream infections in patients at risk and a Phase II clinical trialfor the treatment of *Clostridium difficle*-associateddiarrhea, and BI-Acne, a novel antibiotic for which we have completed a Phase Iclinical trial.  We also have severallead compounds in preclinical studies.

 

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Our revenues in the nearterm are expected to consist primarily of collaborative research payments,license fees and milestone payments to be received from our collaborators.  Some of these payments are dependent onachievement of specified milestones. If our development efforts result inclinical success, regulatory approval and successful commercialization of ourproduct candidates, we will generate revenues from sales of these productcandidates and from receipt of royalties on sales of these product candidates.

 

Ourexpenses have consisted primarily of costs incurred when in-licensing existingproduct candidates, research and development of new product candidates and inconnection with our collaboration agreements, and from general andadministrative costs associated with our operations and our merger withBiosearch. We expect licensing costs to increase as development milestones areachieved, and our research and development expenses to increase as we continueto develop our product candidates.  Wealso expect that our general and administrative expenses will increase due toour integration with Biosearch and as we add personnel, combine our operations and continue to expand our research anddevelopment operations.  We expect toincur sales and marketing expenses in the future when we establish our salesand marketing organization.

 

Sinceour inception, we have incurred significant losses. As of March 31, 2003, wehad an accumulated deficit of $259.8 million including the $94.5 millionwrite-off of acquired in-process research and development resulting from ourmerger with Biosearch.  Biosearch hasalso incurred net losses since its inception in 1996 and had an accumulateddeficit of $54.8 million as at February 28, 2003.  We anticipate incurring additional losses, which may increase,for the foreseeable future, including at least through December 31, 2004.

 

We have a limited history of operations. We anticipatethat our quarterly results of operations will fluctuate for the foreseeablefuture due to several factors, including payments made or received pursuant tolicensing or collaboration agreements, progress of our research and developmentefforts, and the timing and outcome of regulatory approvals. Our limitedoperating history makes predictions of future operations difficult orimpossible.

 

**Major Research and Development Projects**

 

Our ongoing clinical trials of anidulafungin and dalbavancin are our twomost significant research and development projects, comprising 37% and 22%,respectively, of our total research and development expenditure since January1, 2001.

# ** **

# **Anidulafungin**

 

Anidulafunginis our lead antifungal product candidate. We in-licensed anidulafugin from Eli Lilly pursuant to the May 1999agreement described below.  In April2003, we filed an NDA for anidulafungin for the treatment of esophagealcandidiasis.  In addition, as of March31, 2003, the intravenous formulation of anidulafungin is in:

 

•                  Phase III clinical trial for the treatment ofaspergillosis, patient enrollment completed; and

•                  Phase III clinical trial for the treatment of invasivecandidiasis/candidemia.

 

InMay 1999, we obtained from Eli Lilly an exclusive worldwide license for thedevelopment and commercialization of anidulafungin.  We paid $11.0 million for the license and an additional $3.0million for product inventory (which we have received).  As a result, we recognized $14.0 million ofresearch and development costs in 1999. If specified milestones are achieved on the intravenous formulation ofanidulafungin in the United States and Canada, we will be obligated to makeadditional payments of up to $14.0 million to Eli Lilly, part of which ispayable to Eli Lilly in April 2003 upon submission of the NDA.  We are also obligated to make additionalpayments of up to $8.0 million to Eli Lilly if specified milestones on theintravenous formulation of anidulafungin are achieved in Europe, and additionalpayments of up to $8.0 million if specified milestones on the intravenousformulation of anidulafungin are achieved in Japan.  We are obligated to make additional payments to Eli Lilly of upto $21.0 million if sales of an intravenous formulation of anidulafungin exceedspecified targets in the United States and Canada, Europe and Japan.  In 

 

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addition, we are obligated to make royaltypayments in respect of sales of any product resulting from the compound.

 

Weare not currently developing an oral formulation of anidulafungin and do notpresently intend to do so in the future. However, under the license agreement with Eli Lilly, we are obligated tomake additional payments to Eli Lilly of up to $25.0 million if, and only if,specified milestones are achieved on an oral formulation of anidulafungin inthe United States, additional payments of up to $15.0 million if specifiedmilestones are achieved on an oral formulation of anidulafungin in Europe, andadditional payments of up to $15.0 million if specified milestones are achievedon an oral formulation of anidulafungin in Japan.  In addition, we are obligated to make additional payments to EliLilly of up to $24.0 million if, and only if, sales of an oral formulation ofanidulafungin exceed specified targets worldwide.  Because an oral formulation of anidulafungin is not currentlyfeasible, we believe that it is unlikely that we will be obligated tomake any of these payments to Eli Lilly. We have also granted to Eli Lilly anoption to license the exclusive worldwide rights to any oral formulation ofanidulafungin, which is exercisable upon successful completion of Phase IIclinical trials. If Eli Lilly exercises this option, Eli Lilly would pay us anup-front fee and royalties based on net product sales, and would reimburse usfor any milestone payments paid plus the value, on a cost-plus basis, of allprior development expenses attributed to the development and commercializationof the oral formulation of anidulafungin. However, due to the speculativenature of the oral formulation of anidulafungin, we believe that it is unlikely that we will be entitled to receive feesor royalties and reimbursement of expenses from Eli Lilly.

 

Researchand development expense allocated to our anidulafungin project, expressed as apercentage of total research and development expense for the period was:

 

•                  26% for the three months ended March 31, 2003compared to 37% for the three months ended March 31, 2002;

•                  42% for the year 2002 compared to 35% for theyear 2001 and 12% for the year 2000; and

•                  32% in the aggregate from the inception of ourcompany through March 31, 2003.

 

Our development administration overhead costs are included in totalresearch and development expense for each period, but are not allocated to ourvarious projects.

 

The goal of our anidulafungin project is to obtain marketing approvalfrom the U.S. Food and Drug Administration, or FDA, and analogous internationalagencies; and we will consider the project substantially complete if we obtainthose approvals even though subsequent to that time we might incur additionalexpenses in conducting additional clinical trials and follow-up studies.  To obtain the first of such approvals, wefiled an NDA with the FDA in April 2003 for the treatment of esophagealcandidiasis.  Material cash inflowsrelating to our anidulafungin project will not commence until after marketingapprovals are obtained, and then only if anidulafungin finds acceptance in themarketplace.  To date, we have not receivedany revenues from product sales of anidulafungin.  Because of the many risks and uncertainties relating to thecompletion of clinical trials, receipt of marketing approvals and acceptance inthe marketplace, we cannot predict when material cash inflows from ouranidulafungin project will commence, if ever.

 

A failure to obtain marketing approval for anidulafungin would likelyhave the following results on our operations, financial position and liquidity:

 

•                  because our research and development projectsare independent, a failure to obtain marketing approval for anidulafungin wouldnot necessarily interrupt our development programs for dalbavancin or our otherproduct candidates or pre-clinical compounds; however, we might reduce ourdevelopment staff (unless one or more of our other product candidates is thenentering late stage clinical trials, in which case we might re-assignanidulafungin staff to those projects);

 

•                  we would be relieved of our contingentobligation to make further milestone payments and royalty payments to EliLilly;

 

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•                  we would not earn any sales revenue fromanidulafungin, which would increase the likelihood that we would need to obtainadditional financing for our other development efforts; and

 

•                  our reputation among investors might beharmed, which might make it more difficult for us to obtain equity capital onattractive terms or at all.

 

**Dalbavancin**

 

Dalbavancinis our lead antibiotic product candidate. As of March 31, 2003, dalbavancin is in:

 

•                  Phase III clinical trials for the treatment ofskin and soft tissue infections; and

•                  Phase II clinical trials for the treatment ofcatheter-related blood stream infections.

 

Researchand development expense allocated to our dalbavancin project, expressed as apercentage of total research and development expense for the period was:

 

•                  21% for the three months ended March 31, 2003compared to 26% for the three months ended March 31, 2002;

•                  23% for the year 2002 compared to 21% for the year2001 and 6% for the year 2000; and

•                  16% in the aggregate from the inception of ourcompany through March 31, 2003.

 

Ourdevelopment administration overhead costs are included in total research anddevelopment expense for each period, but are not allocated to our variousprojects.

 

Thegoal of our dalbavancin project is to obtain marketing approval from the FDAand analogous international agencies; and we will consider the projectsubstantially complete if we obtain those approvals even though subsequent tothat time we might incur additional expenses in conducting additional clinicaltrials and follow-up studies.  Before wecan obtain such marketing approvals, we will need to complete pivotal Phase IIIclinical trials with satisfactory results and submit a NDA to the FDA.  In any case, we would not expect to file aNDA for dalbavancin until the second half of 2004, at the earliest.  We are unable to estimate the coststo completion for our dalbavancin project due to the risks surrounding theclinical trial process, including the risk that we may repeat, revise or expandthe scope of our ongoing clinical trials or conduct additional clinical trialsto secure marketing approvals and the additional risks listed under the caption“If clinical trials for our products are unsuccessful or delayed, we will beunable to meet our anticipated development and commercialization timelines,which could harm our business and cause our stock price to decline.”  Materialcash inflows relating to our dalbavancin project will not commence until aftermarketing approvals are obtained, and then only if dalbavancin finds acceptancein the marketplace.  Because of the manyrisks and uncertainties relating to the completion of clinical trials, receiptof marketing approvals and acceptance in the marketplace, we cannot predictwhen material cash inflows from our dalbavancin project will commence, if ever.

 

A failure to obtain marketing approval fordalbavancin would likely have the following results on our operations,financial position and liquidity:

 

•                  because our research and development projectsare independent, a failure to obtain marketing approval for dalbavancin wouldnot necessarily interrupt our development programs for anidulafungin or ourother product candidates or pre-clinical compounds; however, we might reduceour development staff (unless one or more of our other product candidates isthen entering late stage clinical trials, in which case we might re-assigndalbavancin staff to those projects);

 

•                  we would not earn any sales revenue fromdalbavancin, which would increase the likelihood that we would need to obtainadditional financing for our other development efforts; and

 

•                  our reputation among investors might beharmed, which might make it more difficult for us to obtain equity capital onattractive terms or at all.

 

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**Risks relating to our Major Research and Development Projects**

 

We face many risks that could prevent or delaythe completion of our anidulafugin and dalbavancin projects, including thoselisted under the caption, “Risk Factors – Risks Related to Operating in OurIndustry.”

# ** **

# **Development Administration**

 

Researchand development expense comprising development administration overhead costs,expressed as a percentage of total research and development expense for theperiod was:

 

•                  17% for the three months ended March 31, 2003compared to 11% for the three months ended March 31, 2002;

•                  12% for the year 2002 compared to 7% for theyear 2001 and 15% for the year 2000; and

•                  8% in the aggregate from the inception of ourcompany through March 31, 2003.

 

Ourdevelopment administration overhead costs are included in total research anddevelopment expense for each period, but are not allocated to our variousprojects.

# ** **

# **Other Research and Development Projects**

 

Theremaining 41% of our total research and development expenses since January 1,2001 include 4% relating to non-cash stock compensation expense.  The remaining 37% were generated by variouspre-clinical studies and drug discovery programs, including our collaborationswith Pfizer and Novartis described below.

 

*Oxazolidinones collaboration with Pfizer.*  InMarch 1999, we entered into a collaboration agreement with PharmaciaCorporation, now Pfizer, pursuant to which we are collaborating to discover,synthesize and develop second and third generation oxazolidinone productcandidates.  In connection with thecollaboration, Pfizer made an equity investment in us of $3.8 million and paidus research support and license fee payments. Under the terms of the agreement and in consideration for our researchobligations, we are entitled to receive funding from Pfizer to support some ofour full-time researchers.  If specifiedmilestones are achieved, Pfizer is obligated to pay us additional payments ofup to $14.0 million for each compound, a portion of which may be creditedagainst future royalty payments to which we are entitled on the worldwide salesof any drug developed and commercialized from the collaboration.  In October 2000, Pfizer increased itsfunding for this collaboration by 30%, and in June 2001, we received amilestone payment for the initiation of clinical development of one of thecompounds.  In July 2002, we agreed withPfizer by amendment to extend the collaboration by an additional three years,through March 2005.  Through March 31,2003, Pfizer has made aggregate payments to us under this collaborationagreement (excluding equity investments) of $14.8 million.

 

Researchand development expense allocated to our collaboration with Pfizer, expressedas a percentage of total research and development expense for the period was:

 

•                  6% for the three months ended March 31, 2003compared to 7% for the three months ended March 31, 2002;

•                  7% for the year 2002 compared to 10% for theyear 2001 and 19% for the year 2000; and

•                  9% in the aggregate from January 1, 1999through March 31, 2003.

 

Thegoal of our collaboration with Pfizer is to discover, synthesize and obtainmarketing approval for second and third generation oxazolidinone productcandidates.  We supply research productleads and other specified intellectual property to the collaboration.  The collaboration also depends upon Pfizerto develop the product candidates, to obtain marketing approval from the FDA andanalogous international agencies and to manufacture and sell any productsresulting from the collaboration. Material cash inflows in the form of royalties relating to thiscollaboration will not commence until after marketing approvals are 

 

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obtained, and then only if the product findsacceptance in the marketplace.  Oneproduct candidate resulting from the collaboration has entered into Phase Iclinical trials.  In order to obtainmarketing approval, Pfizer will need to complete Phase I, II and III clinicaltrials with satisfactory results and submit a NDA to the FDA.  Pfizer is under no obligation to continuethe development of any product candidate resulting from thiscollaboration.  Because of this, and thesubstantial risks and uncertainties relating to the completion of clinicaltrials, receipt of marketing approvals and acceptance in the marketplace, wecannot predict when material cash inflows from our collaboration with Pfizerwill commence, if ever.

 

*Deformylase inhibitors collaboration with Novartis.*** **In March 1999,we entered into a collaboration agreement with Novartis Pharma AG pursuant towhich we are collaborating to discover and develop novel deformylaseinhibitors.  In connection with thecollaboration, Novartis made an initial equity investment in us of $3.0million.  We have also received a numberof milestone payments from Novartis and are entitled to receive additionalpayments of up to $2.25 million for each compound, plus up to $13.0 million forour compounds or up to $7.25 million for Novartis compounds upon theachievement of specified milestones. Novartis may deduct a portion of these milestone payments from theroyalties it will be obligated to pay us on the worldwide sales of any drugdeveloped and commercialized from this collaboration.  As a result of progress achieved by the collaboration, in July2002 we agreed with Novartis by amendment to extend the collaboration by anadditional year, through March 2003.  InFebruary 2003, we further agreed with Novartis by amendment to extend thecollaboration by an additional two years through March 2005.  Through March 31, 2003, Novartis has madeaggregate payments to us under this agreement (excluding equity investments) of$11.1 million.

 

Researchand development expense allocated to our collaboration with Novartis, expressedas a percentage of total research and development expense for the period was:

 

•                  5% for the three months ended March 31, 2003compared to 6% for the three months ended March 31, 2002;

•                  5% for the year 2002 compared to 8% for theyear 2001 and 17% for the year 2000; and

•                  8% in the aggregate from January 1, 1999through March 31, 2003.

 

Thegoal of our collaboration with Novartis is to discover, synthesize and obtainmarketing approval for deformylase inhibitor product candidates.  We are responsible for supplying research tothe collaboration, according to a research plan developed by a joint researchcommittee.  Our research obligationscurrently extend through March 2005. Novartis provides us with funding to support some of our researchers onthis project.  The collaboration willdepend upon Novartis to conduct the development of product candidates and toobtain marketing approval from the FDA and analogous internationalagencies.  Material cash inflows in theform of royalties relating to this collaboration will not commence until aftermarketing approvals are obtained, and then only if the product finds acceptancein the marketplace.  Currently allcompounds identified by the collaboration are still in pre-clinicalstages.  In order to obtain marketingapproval, Novartis will need to initiate and complete Phase I, II and IIIclinical trials with satisfactory results and submit a NDA to the FDA.  Novartis is under no obligation to continuethe development of any product candidate resulting from thiscollaboration.  Because of this, and themany risks and uncertainties relating to the completion of clinical trials,receipt of marketing approvals and acceptance in the marketplace, we cannotpredict when material cash inflows from our collaboration with Novartis willcommence, if ever.

 

In addition to the work on deformylaseinhibitors, under the collaboration agreement we have been delivering toNovartis a series of screening assays based on novel anti-bacterialtargets.  For each screen that Novartisaccepts as validated, we receive a milestone payment.  In August 2001 and January 2002, Novartis paid us our fourth andfifth milestone payments, respectively, as a result of our delivery of ourfourth and fifth target-based screens, which we expect will be used inNovartis’ high-throughput screening laboratory to identify new anti-infectivesand upon which we will be eligible for milestones and royalties

 

A failure by Pfizer or Novartis to pursue orobtain marketing approval for any product candidate resulting from ourcollaborations could have the following results on our operations, financialposition and liquidity:

 

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•                  wewould not receive any further milestone payments or any royalty revenue fromthe collaborations; and

•                  whilewe do not rely on any particular external development collaboration to producemarketable products (and, ultimately, royalty revenues), the failure of all ourexternal development collaborations would increase the likelihood that we wouldneed to obtain additional financing for our internal research and developmentefforts.

# ** **

# **Deferred Stock Compensation**

 

We have recorded deferred stock compensationexpense in connection with the grant of stock options to employees andconsultants. Deferred stock compensation for options granted to employees isthe difference between the fair value for financial reporting purposes of ourcommon stock on the date such options were granted and their exercise price.Deferred stock compensation for options granted to consultants has beendetermined in accordance with Statement of Financial Accounting Standards No.123, “Accounting for Stock Based Compensation,” as the fair value of the equityinstruments issued. Deferred stock compensation for options granted toconsultants is periodically remeasured as the underlying options vest inaccordance with Emerging Issues Task Force No. 96-18, “Accounting for EquityInstruments that are Issued to Other Than Employees for Acquiring, or inConjunction with Selling Goods or Services.”

 

We recorded deferred stock compensation of$512,000 and $39,000 in the three months ended March 31, 2003 and 2002,respectively.  These amounts wererecorded as a component of stockholders’ equity and are being amortized ascharges to operations over the vesting periods of the options.  We recorded amortization of deferred stockcompensation of $434,000 and $696,000 in the three months ended March 31, 2003and 2002, respectively.

 

**Results of Operations**

 

**Three Months Ended March 31, 2003Compared to Three Months Ended March 31, 2002**

# ** **

# **Revenues**

 

Revenues were $1.8 million in both the threemonths ended March 31, 2003 and 2002. Revenues in 2003 consisted of $1.5 million of collaborative research anddevelopment fees from Pfizer and Novartis and $0.3 million of collaborativeresearch and development and grant revenue from our research operations inItaly.  Revenues in 2002 consistedprimarily of collaborative research and development fees from Pfizer andNovartis and a milestone payment from Novartis.

# ** **

# **Research and Development Expenses**

 

Research and development expenses were $12.7million and $10.0 million in the three months ended March 31, 2003 and 2002, respectively.  The increase in expenditure is partly due tothe fact that the 2003 number includes $1.2 million for Italian research costsresulting from our merger with Biosearch and also due to an increase in our developmentteam headcount resulting in increased expenditure of $1.1 million.

# ** **

# **General and Administrative Expenses**

 

Generaland administrative expenses were $2.1 million and $2.5 million in the threemonths ended March 31, 2003 and 2002, respectively.  General and administrative expenses include amortization ofnon-cash stock compensation of $284,000 and $455,000 in the three months endedMarch 31, 2003 and 2002, respectively. Other general and administrative expenses were $1.8 million for thefirst quarter of 2003 compared to $2.0 million for the first quarter of2002.  The increase in expenses in thefirst quarter of 2003 resulting from our operations in Italy of $358,000 weremore than offset by a reduction in US expenses, as a result of significant businessdevelopment activities in the first quarter of 2002.

 

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**Acquired In-Process Research and Development**

 

**In thefirst quarter of 2003, we recorded a non cash charge to operations of $94.5million for acquired in-process research and development resulting from ourmerger with Biosearch.  This amountrepresents the estimated fair value relating to incomplete research anddevelopment projects which, at the time of the merger, had no alternativefuture use and for which technological feasibility had not been established.**

 

**Other Income (Expense)**

 

Netother income (expense) was $379,000 and $283,000 in the three months endedMarch 31, 2003 and 2002, respectively. The increased income in the first quarter of 2003 from our Italianinvestments of $207,000 was partially offset by a reduction in our US interestincome as a result of lower returns on investments during the 2003 period.

# ** **

# **Liquidity and Capital Resources**

 

Wehave funded our operations principally with the proceeds of $78.5 million froma series of nine preferred stock offerings over the period 1995 through 1999,and net proceeds of $52.7 million from our initial public offering received inAugust and September 2000.  In addition,in April 2002, we completed a private placement of shares of common stock toselected institutional investors from which we received net proceeds ofapproximately $41.9 million.  We alsoincreased our cash and cash equivalents and unrestricted marketable securitiesby $99.1 million as a result of our merger with Biosearch on February 28, 2003.

 

As of March 31, 2003, we have also receivedapproximately $28.9 million in payments for collaborative research, contractservices and milestone payments, as well as license fees from ourcollaborators, including Sepracor. Of these payments, $1.4 million constitutesdeferred revenue as of March 31, 2003.

 

Wealso have a $6.0 million term loan and a fully draw down $2.0 million equipmentnote with a commercial bank.  Proceedsfrom the loan were used to repay Sepracor for leasehold improvements to ourfacilities and for general corporate purposes. Proceeds from draw downs on theequipment note were used to finance capital expenditure. The terms of the termloan were renegotiated in January 2003 and the final payment on the loan is nowdue on December 31, 2004. The final note balance is also payable on December31, 2004. Also, in January 2003, the term loan was amended to include athree-year equipment note for $1.5 million that we are able to draw down onthrough December 31, 2003.  Theprincipal of this note is payable in equal installments beginning on March 31,2004 with the final payment due on December 31, 2005.  To date, we have not drawdown on this note.

 

Asa result of our merger with Biosearch, we acquired additional long-term debtrelating to a loan agreement entered into by Biosearch in November 2000 withMIUR to fund certain research projects undertaken by Biosearch.  This loan matures in January 2011 and atMarch 31, 2003, the amount outstanding under this loan is $1.2 million.

 

Inaddition, in March 2003, we received proceeds of $2.8 million from a loanfacility entered into by Biosearch in July 2002 with the Basilicata Region ofItaly for the construction of our manufacturing plant in Pisticci.  Under the loan agreement, we have a totalloan facility of $8.1 million (at exchange rates prevailing at March 31, 2003)of which we have drawn down $2.8 million. The loan matures in 2012.

 

Cashused in operations was $7.4 million and $10.3 million in the three months endedMarch 31, 2003 and 2002, respectively. The net loss for the first quarter of 2003 of $107.2 million was reducedfor non-cash charges for acquired in-process research and development of $94.5million resulting from our merger with Biosearch and non-cash charges fordepreciation and amortization and amortization of non-cash stock compensationexpense of $1.1 million.  Prepaidexpenses and other current assets decreased by $3.3 million primarily due toacquisition costs paid in 2002 relating to the Biosearch merger which was onlycompleted in 2003.  Accounts payableincreased by $3.0 million primarily due to the increase in our Italian accounts

 

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payable balances in March2003.  In the first quarter of 2002, thenet loss of $10.4 million was offset by non-cash charges relating todepreciation and amortization of non-cash stock compensation expense of $1.0million.  Deferred revenue decreased by$1.6 million due to the timing of receipts of quarterly collaborative researchand development funding.

 

Cashprovided by investing activities was $16.3 million and $5.9 million in thethree months ended March 31, 2003 and 2002, respectively.  The principal source of cash in bothquarters resulted from the net sale of marketable securities to fund operatinglosses and the mix of our investment portfolio of cash and cash equivalents andmarketable securities.  The increase incapital expenditure of $2.8 million in 2003 is primarily due to theconstruction of our manufacturing plant in Pisticci, Italy.  In 2003, we also acquired cash and cashequivalents of $746,000, net of acquisition costs, in connection with ourmerger with Biosearch.

 

Cashprovided by (used in) financing activities was $2.4 million and $(50,000) inthe three months ended March 31, 2003 and 2002, respectively.  In the first quarter of 2003, we receivedproceeds of $2.8 million from our loan facility in Italy for the constructionof our manufacturing plant.

 

AtMarch 31, 2003, our cash and cash equivalents and unrestricted marketablesecurities totaled $145.8 million compared to $62.3 million at December 31,2002.

 

We expect to have negativecash flow from operations for the foreseeable future. We expect to incurincreasing research and development, and general and administrative expenses,including expenses relating to clinical development, additions to personnel,production and commercialization efforts and the integration of our operationswith those of Biosearch.  Our futurecapital requirements will depend on a number of factors, including our successin developing markets for our products, payments received or made undercollaboration agreements, the timing and outcome of regulatory approvals, theneed to acquire licenses to new products or compounds, the status ofcompetitive products and the availability of other financing.  We believe our existing cash and cashequivalents and marketable securities will be sufficient to fund our operatingexpenses, debt repayments and capital requirements for between the next 18 to24 months.

 

**Recent Accounting Pronouncements**

 

InNovember 2002, the EITF reached a consensus on Issue No. 00-21, ‘‘RevenueArrangements with Multiple Deliverables.’’ EITF Issue No. 00-21 providesguidance on how to account for arrangements that involve the delivery orperformance of multiple products, services and/or rights to use assets. Theprovisions of EITF Issue No. 00-21 will apply to revenue arrangements enteredinto in fiscal periods beginning after June 15, 2003.  We believe that the adoption of this standard will have nomaterial impact on our financial statements.

 

In January 2003, the FASBissued FASB Interpretation (‘‘FIN’’) No. 46, ‘‘Consolidation of VariableInterest Entities, an Interpretation of ARB No. 51.’’ FIN No. 46 requirescertain variable interest entities to be consolidated by the primarybeneficiary of the entity if the equity investors in the entity do not have thecharacteristics of a controlling financial interest or do not have sufficientequity at risk for the entity to finance its activities without additionalsubordinated financial support from other parties. FIN No. 46 is effectiveimmediately for all new variable interest entities created or acquired afterJanuary 31, 2003. For variable interest entities created or acquired prior toFebruary 1, 2003, the provisions of FIN No. 46 must be applied for the firstinterim or annual period beginning after June 15, 2003. The Company believesthat the adoption of this standard will have no material impact on itsfinancial statements.

 

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**RISKFACTORS**

 

*Certain information contained inthis Quarterly Report on Form 10-Q consists of forward-looking statements.  Important factors that could cause actualresults to differ materially from such forward-looking statements include thefollowing:*

 

**Risks Related to Our Business**

 

**If we areunable to develop and successfully commercialize our product candidates, wemight not generate significant revenues or become profitable.**

 

To date, wehave not commercialized any products or recognized any revenue from productsales and none of our product candidates are approved for sale. Successfulcommercialization of a new drug product requires significant investment inresearch and development, pre-clinical testing and clinical trials, regulatoryapproval, and sales and marketing activities. Most of our product candidatesare in early stages of development, one is being reviewed by the U.S. Food andDrug Administration, or FDA, and three are in clinical trials. Our efforts tocommercialize our product candidates are subject to a variety of risks inherentin the development of biopharmaceutical products based on new technologies.These risks include the following:

 

•                  Pre-clinical testing andclinical trials are protracted, expensive and uncertain processes. It mighttake us and our collaborators several years to complete the testing process,and failure can occur at any stage of the process. Success in pre-clinicaltesting and early clinical trials does not ensure that later clinical trialswill be successful;

 

•                  Any or all ofour new drug marketing applications might be denied by the FDA and analogousforeign regulators;

 

•                  Our product candidates,even if found to be safe and effective, might be difficult to develop intocommercially viable drugs or to manufacture on a large scale or might beuneconomical to market commercially;

 

•                  Third-party proprietary rights might precludeus from marketing our drugs;

 

•                  Third parties might market superior drugs orbe more effective in marketing equivalent drugs; and

 

•                  Even if our productcandidates are successfully developed and effectively marketed, the size oftheir potential market might change such that our sales revenue is less thaninitially contemplated.  In any suchcase, we might never generate sufficient or sustainable revenues to enable usto become profitable.

 

**We expectto incur losses for the foreseeable future and might never achieveprofitability.**

 

We have incurred net lossessince our inception in 1995. Before deemed dividends, accretion to redemptionvalue of our preferred stock and write-off of acquired in-process research anddevelopment, our net losses were $1.1 million in 1995, $4.8 million in 1996,$6.3 million in 1997, $12.6 million in 1998, $29.2 million in 1999, $15.3million in 2000, $32.8 million in 2001, $48.8 million in 2002 and $12.7 millionfor the first three months of 2003. As of March 31, 2003, our accumulateddeficit was $259.8 million including the $94.5 million write-off of acquired in-processresearch and development resulting from our merger with Biosearch.  Our losses to date have resulted principallyfrom:

 

•                  research and developmentcosts relating to the in-licensing and development of our product candidates,which represented approximately 82% of our aggregate operating expenses fromour inception through March 31, 2003; and

 

•                  general and administrativecosts relating to our operations, which represented approximately 18% of ouraggregate operating expenses from our inception through March 31, 2003.

 

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On February 28, we mergedwith Biosearch, which also has incurred net losses since its inception in 1996.Biosearch’s net losses were $23.6 million for 2000, $9.8 million for 2001 and $9.0millionfor 2002 and $5.4 million from January 1, 2003 through the acquisition date ofFebruary 28, 2003.  At February 28,2003, Biosearch had an accumulated deficit of $54.8 million.  Biosearch’s losses resulted principallyfrom:

 

•                  research anddevelopment costs relating to the discovery, development and manufacture ofBiosearch’s product candidates, representing 79% of Biosearch’s aggregateoperating expenses from January 1, 2000 through February 28, 2003.

 

•                  general and administrativecosts relating to Biosearch’s operations, representing 25% of Biosearch’saggregate operating expenses from January 1, 2000 through February 28, 2003;but these expenses were partially offset by amortization of negative goodwill,less losses on trading securities in the net amount of (4%) of Biosearch’saggregate operating expenses from January 1, 2000 through February 28, 2003.

 

We expect to incursubstantial and increasing losses for the foreseeable future as a result ofincreases in our research and development costs, including costs associatedwith conducting pre-clinical testing and clinical trials, and charges relatedto purchases of technology or other assets. We expect that our operating losseswill fluctuate significantly from quarter to quarter as a result of increasesor decreases in our research and development efforts, the execution ortermination of collaborative arrangements, the initiation, success or failureof clinical trials, or other factors. Our company’s chances for achievingprofitability will depend on numerous factors, including success in:

 

•                  qualifying for and receiving grants andsubsidies;

•                  developing and testing new productcandidates;

•                  licensing rights to our product candidates tothird parties;

•                  receiving regulatory approvals;

•                  manufacturing products;

•                  marketing products; and

•                  competing with products from other companies.

 

Many of these factors willdepend on circumstances beyond our control. We cannot assure you that we willbecome profitable.

 

**Ourrevenues are subject to significant fluctuations, which makes it difficult todraw meaningful comparisons from period-to-period changes in our operatingresults.**

 

We expect that substantiallyall of our revenues for the foreseeable future will result from payments undercollaborative arrangements. To date, these payments have taken the form ofup-front payments, reimbursement for research and development expenses andmilestone payments. Milestone payments to our company under collaborativearrangements are subject to significant fluctuation in both timing and amount.As a result, comparisons of our revenues and results of operations betweenperiods might not produce meaningful indications of our progress towardcommercializing one or more product candidate. Moreover, the historicalrevenues of Vicuron and Biosearch on a stand-alone basis might not beindicative of our future performance or of our ability to continue to achieveadditional milestones and to receive additional milestone payments from ourcollaborators.

 

**If wecannot enter into new in-licensing arrangements, our product portfolio andpotential profitability could be harmed.**

 

An important component ofour business strategy is to in-license drug compounds discovered by otherpharmaceutical and biotechnology companies or academic research laboratories,in order to develop them ourselves. Currently we in-license anidulafungin fromEli Lilly. Anidulafungin is our lead antifungal product candidate and one ofour four product candidates in clinical development. Under our licensearrangement with Eli Lilly, we acquired exclusive worldwide rights toanidulafungin. This license arrangement will terminate on a on acountry-by-country basis upon the later of 10 years from the date of 

 

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the first commercial sale of anidulafungin in the country or theexpiration of all product patents in the country.  Competition for new promising compounds can be intense. If we arenot able to identify future in-licensing opportunities and enter into futurelicensing arrangements on acceptable terms, our future product portfolio andpotential profitability could be harmed.

 

**If we donot establish and maintain collaborations or if our collaborators do notperform, we will be unable to develop our joint product candidates.**

 

We have entered intocollaborative arrangements with third parties to develop productcandidates.  Additional collaborationsmight be necessary in order for us to fund our research and developmentactivities and third-party manufacturing arrangements, seek and obtainregulatory approvals and successfully commercialize our existing and futureproduct candidates. If we do not maintain our existing collaborativearrangements or do not enter into additional collaborative arrangements, thenumber of product candidates from which we could receive future revenues woulddecline. In addition, our dependence on collaborative arrangements with thirdparties subjects us to a number of risks, including the following:

 

•                  The collaborativearrangements might not be on terms favorable to us. Agreements withcollaborators typically allow the collaborators significant discretion inelecting whether to pursue any of the planned activities.  We cannot control the amount and timing ofresources our collaborators devote to the product candidates or theirprioritization of the product candidates, and our collaborators might choose topursue alternative products;

 

•                  Ourcollaborators might also not perform their obligations as expected. Businesscombinations or significant changes in a collaborator’s business strategy mightadversely affect a collaborator’s willingness or ability to complete itsobligations to us.

 

•                  Moreover, we could become involved indisputes with our collaborators which could lead to delays in, or the terminationof, our development programs with them, as well as time-consuming and expensivelitigation or arbitration.

 

•                  Even if we fulfill our obligations under acollaborative agreement, our collaborators can generally terminate theagreements under specified circumstances.

 

If anycollaborator were to terminate or breach their agreement with us, or otherwisefail to complete its obligations in a timely manner, our chances ofsuccessfully commercializing products could be harmed.

 

**If clinicaltrials for our product candidates are unsuccessful or delayed, we will beunable to meet our anticipated development and commercialization timelines,which could harm our business and cause our stock price to decline.**

 

Before obtaining regulatoryapprovals for the commercial sale of any products we might develop, we mustdemonstrate through pre-clinical testing and clinical trials that our productcandidates are safe and effective for use in humans. Conducting pre-clinicaltesting and clinical trials is a protracted, time-consuming and expensiveprocess. Completion of clinical trials might take several years or more.  Our commencement and rate of completion ofclinical trials might be delayed by many factors, including:

 

•                  slower than expected rate of hospital andpatient recruitment;

•                  inability to manufacture sufficientquantities of the study drug for use in clinical trials;

•                  unforeseen safety issues;

•                  lack of efficacy during the clinical trials;

•                  inability to adequately follow patients aftertreatment;

•                  governmental or regulatory delays; or

•                  a decision to expand clinical trials or addstudies to increase the statistical significance of the results.

 

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In addition, the resultsfrom pre-clinical testing and early clinical trials are often not predictive ofresults obtained in later clinical trials. In general, a number of new drugshave shown promising results in early clinical trials, but subsequently failedto establish sufficient safety and efficacy data to obtain necessary regulatoryapprovals. Data obtained from pre-clinical and clinical activities aresusceptible to varying interpretations, which might delay, limit or preventregulatory approval. In addition, regulatory delays or rejections might beencountered as a result of many factors, including perceived defects in thedesign of clinical trials and changes in regulatory policy during the period ofproduct development.

 

As of March 31, 2003, wehave one product candidate, anidulafungin, being reviewed by the FDA and threeproduct candidates in clinical trials: dalbavancin in Phase III; ramoplanin inPhase III; and BI-Acne which has completed Phase I. We also have anidulafunginin Phase III for additional indications. Patient follow-up for these clinical trials has been limited and moretrials will be required before we will be able to apply for regulatoryapprovals.

 

Clinical trials conducted byus or by third parties on our behalf might not demonstrate sufficient safetyand efficacy to obtain the requisite regulatory approvals for anidulafungin,dalbavancin, ramoplanin or BI-Acne or any other potential product candidates.Such a failure might delay development of our other product candidates andhinder our ability to conduct related pre-clinical testing and clinical trials.It might also cause regulatory authorities to prohibit us from undertaking anyadditional clinical trials for our other product candidates. Our other productcandidates are in pre-clinical development, and we have not submitted investigationalnew drug applications, or INDs, to commence clinical trials involving thesecompounds. Our pre-clinical development efforts might not be successfullycompleted and we might not file further INDs. Any delays in, or termination of,our clinical trials would harm our development and commercialization timelines,which could cause our stock price to decline. Any of these events could alsoimpede our ability to obtain additional financing.

 

**If ourthird-party clinical trial managers do not perform, clinical trials for ourproduct candidates might be delayed or unsuccessful.**

 

As of March 31, 2003, we had31 full-time clinical development employees in the United States and one inItaly. We expect to continue to rely on third parties, including ourcollaborators, clinical research organizations and outside consultants, toassist us in managing and monitoring clinical trials. If these third partiesfail to perform satisfactorily under the terms of our agreements with them,clinical trials for our product candidates might be delayed or unsuccessful.Furthermore, the FDA and/or other regulatory agencies of the EU or Italy, mightinspect some of our clinical investigational sites, our collaborators’ recordsand our facilities and files to determine if the clinical trials were conductedaccording to good clinical practices. If the FDA determines that our clinicaltrials were not in compliance with applicable requirements, we might berequired to repeat the clinical trials.

 

**If ourfuture products are not accepted by the market, we are not likely to generatesignificant revenues or become profitable.**

 

Even if we obtain regulatoryapproval to market products in the future, we might not gain market acceptanceamong physicians, patients, healthcare payors and the medical community. Thedegree of market acceptance of any pharmaceutical product that we might developwill depend on a number of factors, including:

 

•                  demonstration of clinical efficacy andsafety;

 

•                  cost-effectiveness;

 

•                  potential advantages over alternative therapies,including fewer side effects or easier administration;

 

•                  reimbursement policies of government andthird-party payors; and

 

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•                  the effectiveness of our marketing anddistribution capabilities.

 

Physicians will notrecommend therapies using any of our future products until clinical data orother factors demonstrate their safety and efficacy as compared to other drugsor treatments. Even if the clinical safety and efficacy of therapies using anyof our future products is established, physicians might elect not to recommendthe therapies for a number of other reasons, including the possibility that themode of administration of our future product might not be effective for theirpatients’ indications and location. For example, many antibiotic or antifungalproducts are typically administered by infusion or injection, which requiressubstantial cost and inconvenience to patients and might not be practical innon-hospital settings.

 

Physicians, patients, third-partypayors and the medical community might not accept and utilize any productcandidates that we or our collaborators develop. If none of our future productsachieve significant market acceptance, we are not likely to generatesignificant revenues or become profitable.

# ** **

# **Ifwe are unable to attract and retain skilled employees and consultants, we willbe unable to develop and commercialize our product candidates.**

 

We are highly dependent onour skilled management and scientific staff. In order to pursue our productdevelopment, marketing and commercialization plans, we might need to hireadditional personnel with experience in clinical testing, governmentregulation, manufacturing, marketing and finance. We might not be able toattract and retain personnel on acceptable terms given the intense competitionfor such personnel among high technology enterprises, including biotechnology,pharmaceutical and healthcare companies, universities and non-profit researchinstitutions. Most of our management and scientific staff do not haveemployment contracts. If we lose a significant number of these persons, or areunable to attract and retain qualified personnel, our business, financialcondition and results of operations might be harmed. We do not maintain key personlife insurance on any of our personnel.

 

In addition, we rely onconsultants and members of our scientific and clinical advisory boards toassist us in formulating research and development strategies. All of theseconsultants and the members of our scientific and clinical advisory boards areemployed by others, and they might have commitments to, or advisory orconsulting agreements with, others that might limit their availability to us.If we lose the services of these advisors, our achievement of our developmentobjectives might be impeded, and our business, financial condition and resultsof operations might be harmed. Finally, except for work performed specificallyfor and at our direction, the inventions or processes discovered by ourscientific and clinical advisory board members and other consultants will notbecome our intellectual property, but will be the intellectual property of theindividuals or their institutions. If we desire access to these inventions, wewill be required to obtain appropriate licenses from the owners. We face therisk that we might not be able to obtain such licenses on favorable terms or atall.

 

**If ourthird-party manufacturers do not produce our product candidates on a timelybasis, clinical trials and commercialization of our product candidates could bedelayed.**

 

We currently do not havemanufacturing facilities capable of manufacturing products in quantitiesnecessary for large-scale trials or marketing. The Aventis plant in Brindisi,Italy, will be our initial manufacturing site for anidulafungin anddalbavancin, and subsequently we intend to manufacture products in our ownmanufacturing plant in Pisticci, Italy, which is currently under construction.To the extent that our manufacturing capabilities are insufficient to produceall of the necessary active ingredients for our current and future productcandidates, we anticipate that we might need to rely on third parties tomanufacture some or all of these active ingredients. We currently obtain someactive ingredients from ChemSyn Laboratories, a department of Eagle-PicherTechnologies, L.L.C. However, there are a limited number of facilities in whichour product candidates can be produced, and third-party manufacturers havelimited experience in manufacturing anidulafungin, dalbavancin, ramoplanin andBI-Acne in quantities sufficient for conducting clinical trials or forcommercialization.  Difficulties areoften encountered in manufacturing new products, including problems involvingproduction yields, quality control and assurance, shortage of qualifiedpersonnel, compliance with FDA and other regulations, production costs, anddevelopment of advanced manufacturing techniques and process controls. Anycontract manufacturer

 

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might not perform as agreed or might not remain in the contractmanufacturing business for the time we require to successfully develop, produceand market our product candidates. If any of our contract manufacturers failsto perform satisfactorily under its agreements with us, such as by failing todeliver the required quantities of our product candidates for clinical use on atimely basis and at commercially reasonable prices, and if we do not find areplacement manufacturer or develop our own manufacturing capabilities,clinical trials involving our product candidates, or commercialization of ourproducts, could be delayed.

 

**If we donot establish successful marketing and sales capabilities or do not enter intosuccessful marketing arrangements with third parties, we will not be able tocommercialize our future products and will not become profitable.**

 

We intend to sell a portionof our future products through our own sales force. At present, however, wehave no sales and marketing infrastructure and we lack any experience in directmarketing, sales and distribution. Our future profitability will depend in parton our ability to develop a direct sales and marketing force to sell our futureproducts, if any, to our target market. We might not be able to attract andretain qualified salespeople or be able to build an efficient and effectivesales and marketing force. To the extent that we enter into marketing and salesarrangements with other companies, our revenues will depend on the efforts ofothers. These efforts might not be successful. If we are unable to enter intothird-party arrangements, then we must substantially expand our marketing andsales force in order to achieve commercial success for certain products, and tocompete with other companies that have experienced and well-funded marketingand sales operations.

 

**We mightseek additional funding, which could dilute our stockholders or imposeburdensome financial restrictions, and if we do not obtain necessary funding,we might be forced to delay or curtail the development of our productcandidates.**

 

We expect to incurincreasing research and development and general and administrative expensesover the next several years. Based on our current plans and assumptions, weestimate that our cash and liquid assets at March 31, 2003 will be sufficientto fund our operating losses for the next 18 to 24 months.  However, if our plans change and/or ourassumptions are inaccurate, we might need to seek capital sooner thananticipated. Some of our more significant plans and assumptions relate to:

 

•                  payments received or made under possiblefuture collaborative agreements;

•                  continued progress in the research anddevelopment of our future products;

•                  costs associated with protecting our patentand other intellectual property rights;

•                  costs associated with developing marketingand sales capabilities; and

•                  the rate of market acceptance of any futureproducts.

 

Other than with respect toour $1.5 million line of credit for equipment financing that we entered into inJanuary 2003 and our Italian loan facility for the construction of ourmanufacturing plant, we have no committed sources of additional capital. To theextent our capital resources are insufficient to meet our future capitalrequirements, we will have to raise additional funds to continue thedevelopment of our product candidates. We might also seek additional fundingmuch earlier than we would otherwise need, in order to take advantage ofattractive opportunities in the capital markets.

 

We might seek to raisefunds from a traditional lender or through public or private debt or equityofferings. To the extent we raise additional capital through the sale of equityor convertible debt securities, the securities could be sold at a discount toprevailing market price and the issuance of those securities could result indilution to our stockholders. Moreover, the incurrence of debt financing couldresult in a substantial portion of our operating cash flow being dedicated tothe payment of principal and interest on such indebtedness, and we might besubject to restrictive covenants as a result of such debt financing. This couldrender us more vulnerable to competitive pressures and economic downturns andcould impose restrictions on our operations. If adequate funds are not available from any of those sources, ourbusiness might be harmed. We might be required to delay, reduce the scope of,or eliminate one or more of our research and development programs or otherwisesignificantly curtail operations. In addition, we might be

 

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required to obtain fundsby entering into arrangements with collaborators on unattractive terms orrelinquish rights to certain technologies or drug candidates that we would nototherwise relinquish in order to continue independent operations.

 

**If we makeany more strategic acquisitions, we will incur a variety of costs and mightnever realize the anticipated benefits.**

 

We recently merged withBiosearch and, if appropriate opportunities become available, we might attemptto acquire additional products, product candidates or businesses that webelieve are a strategic fit with our business. Currently, however, we are not aparty to any additional acquisition agreements. If we pursue any transaction ofthat sort, the process of negotiating the acquisition and integrating anacquired product, product candidate or business might result in operatingdifficulties and expenditures and might require significant managementattention that would otherwise be available for ongoing development of ourbusiness, whether or not any such transaction is ever consummated. Moreover, wemight never realize the anticipated benefits of any acquisition. Futureacquisitions could result in potentially dilutive issuances of equitysecurities, the incurrence of debt, contingent liabilities and/or impairmentexpenses related to goodwill and impairment or amortization expenses related toother intangible assets, which could harm our financial condition.

 

**If our useof hazardous materials results in contamination or injury, we could suffersignificant financial loss.**

 

Our operations include thecontrolled use of hazardous materials, primarily small quantities of toxicbiological materials and chemical compounds which we store, collect, combine,analyze and, at times, produce in connection with our research andmanufacturing activities. We cannot eliminate the risk of accidentalcontamination or injury from these materials. In the event of an accident orenvironmental discharge, we might be held liable for any resulting damages. Wedo not currently maintain separate insurance to cover contamination or injuriesrelating to hazardous materials, and such liabilities might not be covered byour general liability insurance coverage.

 

**Risks Related to our Recent Merger with Biosearch andInternational Expansion**

 

**The ongoingintegration of Vicuron and Biosearch management following the recent mergerwill present significant challenges.**

 

Our merger with Biosearchwas only recently completed and we will face significant challenges incombining our management and internal control and disclosure systems in atimely and efficient manner. This integration will be complex andtime-consuming because, among other things, our executive officers will belocated in separate U.S. and Italian offices. Our U.S. management team hasrecently relocated from the San Francisco Bay Area to King of Prussia,Pennsylvania, while the management of our Italian operations will remain inGerenzano, Italy. If we are unable to integrate our management and internalsystems successfully, we might not achieve the anticipated potential benefitsof the merger.

 

**WhenNasdaq’s currently proposed director-independence rules are adopted, compliancewith both the new rules and our bylaws, as amended by the merger agreement,might require us to increase the size of our board.**

 

We have eight directors onour board, four of whom were associated with Vicuron prior to the merger andthe other four of whom were associated with Biosearch. In connection with themerger, we amended our bylaws in a manner that is intended, among other things,to maintain an even balance of legacy Vicuron directors and legacy Biosearchdirectors on the board for three years from the date of the completion of themerger. If we decide to add additional directors to the board during thatthree-year period, our bylaws effectively require us to add an even number ofdirectors (with one-half of the additional directors proposed by the fourlegacy Vicuron directors and the other half proposed by the four legacyBiosearch directors) in order to maintain an equal number of legacy Vicuron andBiosearch directors on the board.

 

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Our bylaws might make itmore difficult for us to comply with Nasdaq’s recently proposeddirector-independence rule. Although Nasdaq’s proposed rule is still subject tochange, the current version announced by Nasdaq on March 25, 2003, includes thefollowing requirements, among others:

 

•*Majorityof Independent Directors.*Nasdaq’s proposed rule will require that amajority of our board must be comprised of independent directors, and adirector will not be ‘‘independent’’ if, among other disqualifications, in anyof the past three years he or his non-employee family members received morethan $60,000 from our company, other than for his service as a director, or ifthe director is a controlling shareholder or officer of an entity to which ourcompany has made payments in excess of $200,000 or 5% of either entity’s grossrevenues. We believe that two of our eight directors currently qualify asindependent under the proposed standards.

 

•*ComplianceDeadline.*Nasdaq’s proposed rule provides that if compliance withthe new rule requires any changes to our board, we will be required to complycommencing with our 2004 annual meeting. If the Nasdaq proposal is adopted, we will comply with the new rules intheir final form. In order for a majority of our directors to be independent,we would need to (a) ask up to three of our non-independent directors to resignfollowed by appointment of three new independent directors and/or (b) increasethe size of our board by adding up to six additional independent directors. Anyincrease in the size of our board or change in its membership might give riseto inefficiencies, which might cause some board actions to be delayed.

 

**We might berequired to repay some or all of the Italian and/or EU research grants and loansubsidies previously received by Biosearch and we might not qualify or beapproved for new grants and subsidies.**

 

Biosearch and its subsidiaryhistorically funded a portion of their operations through research grants andloan subsidies awarded by Italian and EU authorities. Under applicable law, anytransfer of those grants and subsidies (including transfer by merger) requireswritten approval from the Italian bank authorized to make the disbursement onbehalf of the government and from the appropriate Italian or EU authorities. Inconnection with the merger, we applied for permission to transfer Biosearch’sgrants and subsidies to our Italian branch. Although the merger has recentlybeen completed, the Italian and EU authorities have not as yet reached anofficial decision on whether to approve our transfer requests. If the transfersare approved, we intend to apply for further permission to contribute thegrants and subsidies to Vicuron Italy S.r.l., our newly-formed subsidiary inItaly. We face the risk that one or both of the transfers might not be approved,in which case we might be required to repay some or all of the grants andsubsidies received by Biosearch prior to the merger, in the aggregate amount ofup to approximately $1.8 million as of March 31, 2003 and we may forfeit grantsand subsidies awarded to Biosearch but not yet disbursed as of March 31, 2003by the authorized bank, in the aggregate amount of up to approximately $1.1million as of March 31, 2003 (each estimate based on exchange rates thenprevailing). Regardless of whether or not we are required to repay thosegrants, we anticipate that our Italian subsidiary will be eligible to apply fornew research grants and subsidies from both the Italian and EU authorities.However, grants and subsidies are awarded in the discretion of those authoritiesand we face the risk that our Italian subsidiary might not qualify or beapproved for any additional grants or subsidies in the future.

 

**As a resultof our recently completed merger, we will operate in both the United States andItaly, which will increase our costs of doing business and might result inadditional, unexpected challenges.**

 

As a result of our recentlycompleted merger, our operations will be located both in the United States andItaly. This expansion will cost us time and resources that we would not have tospend if our operations were confined within one country only, such as:

 

•                  our management will need to devote additionaltime to overseeing operations in two countries;

 

•                  language barriers withinour company and with contractual counterparties in Italy might result inmisunderstandings, improperly executed instructions and additional translationcosts, and language translations themselves might lead to inaccuracies; and

 

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•                  internal transportationand communications costs will increase in order for personnel, resources andideas to be shared between the two countries.

 

The increased time andresources we spend to manage operations internationally will result in anincrease in our historical cost of doing business. In addition, internationaloperations might present other challenges. For example, the culturaldifferences between business operations (generally including employer-employeerelations) in the United States and those in Italy might reduce some of thebenefits of the merger.

 

**Complyingwith two national regulatory structures might result in administrativechallenges.**

 

Our operations must complywith applicable laws of and rules of the United States (including Californialaw, Delaware corporate law and the rules and regulations of the Securities andExchange Commission and the Nasdaq National Market), the EU legal system andthe Republic of Italy (including the rules and regulations of CONSOB and BorsaItaliana, which collectively regulate companies listed on Italy’s publicmarkets such as the Nuovo Mercato). Conducting our operations in a mannerdesigned to comply with all applicable laws and rules will require us toallocate additional time and resource to regulatory compliance matters. Forexample:

 

•              issuing eachmaterial announcement in both English and Italian might cause administrativechallenges;

 

•              submitting filings andapplications with regulatory and governmental authorities in the U.S., Italyand the EU, and approving translations of each significant document into theother language, if necessary, would be time-consuming and expensive and mightdistract our executives from their primary focus of managing our business, andlanguage translations themselves might lead to inaccuracies;

 

•                  under Italian employment law, our relationswith our employees in Italy is governed by collective bargaining agreementsnegotiated at the national level (and over which we have no control), whichreduces the methods customarily available in the United States to motivate anddiscipline our Italian employees;

 

•              under European Union data protectionregulations, we are unable to send without restriction private  personal data, including many employmentrecords and some clinical trial data, from our Italian offices to our U.S.offices; and tariffs, customs, duties, import restrictions, tax effects andother trade barriers might delay or increase the cost of relocating personneland, if marketing approvals are obtained, commercial quantities of our productsbetween nations.

 

# **Weare subject to risks resulting from fluctuations in the exchange rate of thedollar relative to the euro, which could cause costs to be greater than weexpect and introduce additional volatility in our reported quarterly results.**

 

As a result of the recentlycompleted merger, we are exposed to risks associated with foreign currencytransactions insofar as we might desire to use dollars to make contractpayments denominated in euros or vice versa. As the net positions of our unhedgedforeign currency transactions fluctuates, our earnings might be negativelyaffected. In addition, we are exposed to risks associated with the translationof euro-denominated financial results and accounts into U.S. dollars. Althoughour reporting currency remains the U.S. dollar, a portion of our consolidatedrevenues and costs now arise in euros, which we restate in dollars for purposesof financial reporting.  In addition,the reported carrying value of our euro-denominated assets and liabilities willbe affected by fluctuations in the value of the U.S. dollar as compared to theeuro. Accordingly, changes in the value of the U.S. dollar relative to the euromight have an adverse effect on our reported results of operations andfinancial condition, and fluctuations in exchange rates might introduceadditional volatility in our reported results and accounts from period toperiod.

 

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**Risks Related to Operating in Our Industry**

 

**If weexperience delays in obtaining regulatory approvals, or are unable to obtainthem at all, for one or more of our product candidates, commercialization ofthose products will be delayed**

 

Our efforts to develop andmarket our product candidates will be subject to extensive and rigorousdomestic regulation. FDA rules govern, among other matters, the development,testing, manufacture, safety, efficacy, record-keeping, labeling, storage,approval, advertising, promotion, sale and distribution of pharmaceuticalproducts in the United States. Any products that we market abroad will also besubject to extensive regulation by foreign governments. In order to obtainpermission to sell our product candidates, we must provide the FDA and foreignregulatory authorities with clinical data demonstrating that our proposed drugsare safe in humans and effective at treating an indicated condition. None ofour product candidates has been approved for sale in the United States or anyforeign market, and we cannot predict whether regulatory clearance will beobtained for any product that we are developing or intend to develop. Theregulatory review and approval process takes many years, is dependent upon thetype, complexity and novelty of the product candidate, requires the expenditureof substantial resources, involves post-marketing surveillance, and mightinvolve ongoing requirements for post-marketing studies. Delays in obtainingregulatory approvals might:

 

•                  impede the commercialization of any drugsthat we or our collaborators develop;

•                  require us or our collaborators to complywith costly additional procedures;

•                  diminish any competitive advantage that we or ourcollaborators might attain from early market introduction of a new product; and

•                  delay or eliminate our receipt of revenues orroyalties.

 

Any required approvals, once granted, might bewithdrawn. Further, if we do not comply with applicable FDA and foreignregulatory requirements at any stage during the regulatory process, we might besubject to sanctions, including:

 

•                  imposed delays in clinical trials orcommercialization;

•                  refusal by the FDA and foreign regulators toreview pending market approval applications or supplements to approvalapplications;

•                  product recalls or seizures;

•                  suspension of production;

•                  withdrawals of previouslyissued marketing approvals; and

•                  fines, civil penalties and criminalprosecutions.

 

We choose to develop someproprietary product candidates ourselves and to out-license other productcandidates to third parties for collaborative development. The licensing orcollaboration agreement will generally specify which party is responsible fordirecting the clinical trial process and seeking regulatory approvals.Regardless of whether the process is directed by us or by our collaborators, ineach case we face the risk that our clinical trials might be unsuccessful, andthat the FDA will not grant us marketing approval. We might also encounterdelays or rejections based upon future changes in government regulation,legislation or FDA policy during the period of product development, clinicaltrials and FDA regulatory review. If we do not obtain required governmentalapprovals, we will be precluded from marketing the candidate for which approvalwas sought. If regulatory clearance for marketing a future product is granted,this clearance will be limited to those disease states and conditions for whichthe product is demonstrated through clinical trials to be safe and effective.

 

Outside the United States,the ability to market a product is contingent upon receiving a marketingauthorization from the appropriate regulatory authorities. This foreignregulatory approval process typically includes all of the risks associated withFDA clearance described above and might include additional risks.

 

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**If ourmanufacturing subsidiary or our contract manufacturers fail to comply withapplicable Good Manufacturing Practice requirements, we could be subject tofines or other sanctions, or be precluded from marketing any future products.**

 

Manufacturing facilities arerequired to comply with FDA Good Manufacturing Practice regulations. Evenfacilities outside the United States must comply with these regulations if themanufactured products will be sold in the United States. Good ManufacturingPractice regulations include requirements relating to quality control andquality assurance as well as to maintenance of records and documentation.Manufacturing facilities are subject to inspection by the FDA. These facilitiesmust be approved before we can use them in commercial manufacturing of ourproducts. Comparable Good Manufacturing Practice regulations also apply in theEU, Italy and other foreign countries. Our contract manufacturers and ourmanufacturing subsidiary might not be able to comply with the applicable GoodManufacturing Practice requirements and other FDA or other EU, Italian orforeign regulatory agencies’ regulatory requirements.

 

**If we donot compete successfully in the development and commercialization of productsand keep pace with rapid technological change, we will be unable to capture andsustain a meaningful market position.**

 

The biotechnology andpharmaceutical industries are highly competitive and subject to significant andrapid technological change as researchers learn more about diseases and developnew technologies for treatment. Our competitors in the United States andelsewhere are numerous and include, among others, major multinationalpharmaceutical and chemical companies, specialized biotechnology companies anduniversities, and other research institutions. Specifically:

 

•                  if anidulafunginreceives FDA and international marketing approval, it will face competitionfrom commercially available drugs such as amphotericin B (marketed by severalmanufacturers), fluconazole (marketed as Difulcan by Pfizer), itraconazole(marketed as Sporanox by Johnson & Johnson), and potentially fromcaspofungin (marketed as Cancidas by Merck), which was the first to receive FDAapproval of a new class of antifungal agents called echinocandins (which includes anidulafungin). Merck initiallyobtained approval only for the narrow indication of aspergillosis salvagetherapy, but might in the future expand the scope of Cancidas to include otherserious fungal infections, such as esophageal and invasive candidiasis;

 

•                  if dalbavancinreceives FDA and international marketing approval, it will face competitionfrom commercially available drugs such as vancomycin (marketed generically byseveral manufacturers), teicoplanin (marketed as Targocid by Aventis onlyoutside of the United States), linezolid(marketed as Zyvox by Pfizer) and quinupristin/dalfopristin (marketed asSynercid by Aventis), and drug candidates in clinical development such asdaptomycin (expected to be marketed as Cidecin by Cubist), which is currentlybeing reviewed by the FDA; and

 

•                  if ramoplaninreceives FDA and international marketing approval, it will face competitionfrom commercially available drugs such as oral vancomycin (marketed genericallyby several manufacturers) as well as drugs focused on the treatment (as opposedto prevention) of bloodstream vancomycin-resistant enterocci infections inhospitalized patients, such as linezolid (marketedas Zyvox by Pfizer) and quinupristin/dalfopristin (marketed as Synercid byAventis).

 

Our future products, if any,might also compete with new products currently under development or developedby others in the future.

 

Many of our potentialcompetitors, either alone or together with their collaborators, havesubstantially greater financial resources and larger research and developmentand marketing teams than we do. In addition, many of these competitors, eitheralone or together with their collaborators, have significantly greaterexperience than we do in developing, manufacturing and marketing products. As aresult, these competitors’ products might come to market sooner or might proveto be more effective, to be less expensive, to have fewer side effects or to beeasier to administer than ours. In any such case, sales of our eventualproducts would likely suffer and we might never recoup the significantinvestments we are making to develop these product candidates.

 

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**If ourintellectual property rights do not adequately protect our product candidatesor future products, others could compete against us more directly, which wouldhurt our business.**

 

Our success depends in parton our ability to:

 

•                  obtain patents or rights to patents;

•                  protect trade secrets;

•                  operate without infringing upon theintellectual property rights of others; and

•                  prevent others from infringing ourintellectual property rights.

 

We will be able toprotect our intellectual property from unauthorized use by third parties onlyto the extent that our intellectual property is covered by valid andenforceable patents or is effectively maintained as a trade secret. Based oninformation available as of March 31, 2003, we have 34 issued U.S. patents and12 U.S. patent applications, 429 foreign patents and 87 foreign patentapplications. Our license agreement with Eli Lilly with respect toanidulafungin covers 14 U.S. patents, 12 U.S. patent applications, 71 foreignpatents and 125 foreign patent applications. Our collaborative agreement withPfizer with respect to the development of oxazolidinones includes three U.S.patents and four U.S. patent applications. Our collaborative agreement withNovartis includes three U.S. patent applications.  We also acquired 452 additional patents and 96 patentapplications as a result of our recent merger with Biosearch.

 

The patent position ofbiopharmaceutical companies involves complex legal and factual questions and,therefore, we cannot predict with certainty whether they will be enforceable.We have in the past and might in the future receive office actions or othernotices from U.S. or foreign patent authorities seeking to limit or otherwisequalify some patent claims. Patents, if issued, might be challenged,invalidated or circumvented. Thus, any patents that we own or license fromthird parties might not provide any protection against competitors. Our pendingpatent applications, those we might file in the future, or those we mightlicense from third parties, might not result in patents being issued. Also,patent rights might not provide us with adequate proprietary protection orcompetitive advantages against competitors with similar technologies. The lawsof many foreign countries do not protect intellectual property rights to thesame extent as do the laws of the United States.

 

In addition to patents, werely on trade secrets and proprietary know-how. We seek protection, in part,through confidentiality and proprietary information agreements. Theseagreements might not provide meaningful protection or adequate remedies for ourtechnology in the event of unauthorized use or disclosure of confidential andproprietary information. Failure to protect our intellectual property rightscould seriously impair our competitive position and harm our business.

 

**If thirdparties claim we are infringing their intellectual property rights, we couldsuffer significant litigation or licensing expenses or be prevented frommarketing our future products.**

 

Research has been conductedfor many years in the areas in which we focus our research and developmentefforts. This has resulted in a substantial number of issued patents and aneven larger number of still-pending patent applications. Patent applications inthe United States are, in most cases, maintained in secrecy until patents are issued.The publication of discoveries in the scientific or patent literaturefrequently occurs substantially later than the date on which the underlyingdiscoveries were made. Our commercial success will depend significantly on anability to operate without infringing the patents and other intellectualproperty rights of third parties. However, our technologies might infringe thepatents or violate other intellectual property rights of third parties withoutour knowledge. In the event an infringement claim is brought against us, wemight be required to pay legal and other expenses to defend such a claim and,if our defense is unsuccessful, we might be prevented from pursuing productdevelopment and commercialization and might be subject to damage awards.

 

The biotechnology andpharmaceutical industries have been characterized by extensive litigationregarding patents and other intellectual property rights. The defense andprosecution of intellectual property legal actions, U.S. Patent and TrademarkOffice interference proceedings and related legal and administrativeproceedings in the United States and internationally involve complex legal andfactual questions. As a result, such proceedings are costly and time-consumingto pursue and their outcome is uncertain. Litigation might be necessary to:

 

29

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•                  enforce patents that weown or license;

•                  protect trade secrets or know-how that we ownor license; or

•                  determine the enforceability, scope andvalidity of the intellectual property rights of others.

 

If we become involved inany litigation, interference or other administrative proceedings, we will incursubstantial expense and the efforts of our technical and management personnelwill be significantly diverted. An adverse determination might subject us toloss of proprietary position or to significant liabilities, or require us toseek licenses that might not be available from third parties. We might berestricted or prevented from manufacturing and selling products, if any, in theevent of an adverse determination in a judicial or administrative proceeding orif we fail to obtain necessary licenses. Costs associated with thesearrangements might be substantial and might include ongoing royalties.Furthermore, we might not be able to obtain the necessary licenses onsatisfactory terms, if at all.

 

**If thegovernment and third-party payors fail to provide adequate coverage andreimbursement rates for our future products, if any, our revenues and prospectsfor profitability will be harmed.**

 

In both domestic and foreignmarkets, our sales of any future products will depend in part upon theavailability of reimbursement from third-party payors. Such third-party payorsinclude government health administration authorities, managed care providers,private health insurers and other organizations. These third-party payors areincreasingly challenging the price, and examining the cost effectiveness, ofmedical products and services. In addition, significant uncertainty exists as tothe reimbursement status of newly approved healthcare products. We might needto conduct post-marketing studies in order to demonstrate thecost-effectiveness of any future products to such payors’ satisfaction. Suchstudies might require us to commit a significant amount of management time andfinancial and other resources. Our future products might not ultimately beconsidered cost-effective. Adequate third-party reimbursement might not beavailable to enable us to maintain price levels sufficient to realize anappropriate return on investment in product development. Domestic and foreigngovernments continue to propose and pass legislation designed to reduce thecost of healthcare. For example, in some foreign markets, the governmentcontrols prescription pharmaceuticals’ pricing and profitability. In the UnitedStates, we expect that there will continue to be federal and state proposals toimplement similar governmental control. In addition, increasing emphasis onmanaged care in the United States will continue to put pressure onpharmaceutical product pricing.  Costcontrol initiatives could decrease the price that we would receive for anyproducts in the future, which would limit our revenues and profitability. Accordingly,legislation and regulations affecting the pricing of pharmaceuticals mightchange before our proposed products are approved for marketing.  Adoption of such legislation could furtherlimit reimbursement for pharmaceuticals.

 

**If asuccessful product liability claim or series of claims is brought against usfor uninsured liabilities or in excess of insured liabilities, we could beforced to pay substantial damage awards.**

 

The use of any of ourproduct candidates in clinical trials, and the sale of any approved products,might expose us to product liability claims. We currently maintain, productliability insurance coverage in the amount of $10 million per occurrence and$10 million in the aggregate. Such insurance coverage might not protect usagainst all of the claims to which we might become subject. We might not beable to maintain adequate insurance coverage at a reasonable cost or insufficient amounts or scope to protect us against potential losses. In theevent a claim is brought against us, we might be required to pay legal and otherexpenses to defend the claim, as well as uncovered damage awards resulting froma claim brought successfully against us. Furthermore, whether or not we areultimately successful in defending any such claims, we might be required todirect financial and managerial resources to such defense and adverse publicitycould result, all of which could harm our business.

 

30

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**Risks Related to the Securities Markets**

 

**Our stockprice has been and is likely to continue to be volatile, and could suffer adecline in value.**

 

The trading price of ourcommon stock is likely to be highly volatile and could be subject to widefluctuations in price in response to various factors, many of which are beyondour control, including:

 

•                  clinical trial data;

•                  general economic conditions;

•                  changes in, or failure to achieve, financialestimates by securities analysts;

•                  future sales of equity or debt securities;

•                  new products or services introduced orannounced by us or our competitors;

•                  announcements of scientific innovations by usor our competitors;

•                  actual or anticipated variations in ourannual and quarterly operating results;

•                  conditions or trends in the biotechnology andpharmaceutical industries;

•                  announcements by us ofsignificant acquisitions, strategic collaborations, joint ventures or capitalcommitments;

•                  additions or departures of key personnel;

•                  new regulatory legislation adopted in theUnited States or abroad; and

•                  sales of our common stock.

 

In addition, the stockmarket in general, and the Nasdaq National Market, the Nuovo Mercato and themarket for biotechnology and pharmaceutical stocks in particular, haveexperienced significant price and volume fluctuations. Over the 52-week periodending April 30, 2003, the market price of Vicuron common stock as reported onthe Nasdaq National Market ranged from a high of $14.10 to a low of $7.85.Volatility in the market price for particular companies has often beenunrelated or disproportionate to the operating performance of those companies.These broad market and industry factors might seriously harm the market priceof our common stock, regardless of our operating performance. In addition,securities class action litigation has often been initiated following periodsof volatility in the market price of a company’s securities. A securities classaction suit against us could result in substantial costs, potential liabilitiesand the diversion of management’s attention and resources.

 

**We haveimplemented anti-takeover provisions that could delay or prevent any attempt toreplace or remove the management.**

 

Provisions of our restatedcertificate of incorporation, our bylaws, as amended and restated uponcompletion of the merger, and our shareholder rights plan might increase thelikelihood that any third party would need to negotiate with our board prior toinitiating a takeover proposal for our company and could have the effect ofdelaying or preventing a change of control of our company. In addition, some ofour stockholders have entered into a stockholders agreement in which they haveagreed, for a period of three years following completion of the merger, to voteas recommended by the board on some issues. These provisions could delay orprevent an attempt to replace or remove our management.

 

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**ITEM 3: Quantitative and QualitativeDisclosures about Market Risk**

# ** **

# **Interest Rates**

# ** **

# **Our exposure to interest raterisk relates to our cash and cash equivalents and marketable securities as wellas our loans and notes with commercial banks. Our marketable securities are subject to interest rate risk and coulddecline in value if interest rates fluctuate. However, due to the conservative and short-term nature of theseinvestments, such exposure is limited. Our borrowings are also exposed to interest rate risk as the majority ofour debt is based on variable interest rates.**

# ** **

# **The table below presentsprincipal amounts and related weighted average interest rates by year ofmaturity for our cash and cash equivalents and marketable securities (inthousands):**

 

|                      |   | **2003** |    | **2004** |   | **2005** |   | **2006** |   |
|---------------------------|--------|----------|---------|----------|--------|----------|--------|----------|--------|
|                      |   |     |    |     |   |     |   |     |   |
| Cash and cash equivalents |   | $        | 39,668  |     | $      | —   |   | $        | — |   | $ | — |   |
| Average interest rate     |   | 1.51     | %       | —   |   | —   |   | —   |   |
|                      |   |     |    |     |   |     |   |     |   |
| Marketable securities     |   | $        | 105,429 |     | $      | 6,046    |   | $        | 105    |   | $ | 336 |   |
| Average interest rate     |   | 2.38     | %       | 2.74     | %      | 3.30     | %      | 4.00     | %      |

 

# **Our cash and cash equivalentsand marketable securities have increased substantially since December 31, 2002as a result of our recent merger with Biosearch.**

# ** **

# **The estimated fair value ofour cash and cash equivalents and marketable securities approximate theprincipal amounts reflected above based on the short-term maturities of thesefinancial instruments.**

# ** **

# **The estimated fair value ofour debt obligations approximates the principal amounts due based on theinterest rates currently available to us for debt with similar terms andremaining maturities.**

# ** **

# **Inflation**

# ** **

# **We do not believe thatinflation has had a material adverse impact on our business or operatingresults during the quarters presented.**

# ** **

# **Exchange Rates**

# ** **

# **As a result of our recent merger with Biosearch, we areexposed to risks resulting from fluctuations in the exchange rate of the dollarrelative to the euro.  A portion of ourconsolidated revenues and costs now arise in euros.  To manage this risk, we intend to maintain a portion of our cashand cash equivalents and marketable securities denominated in euros.**

 

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**ITEM4.  CONTROLS AND PROCEDURES**

 

We maintain disclosure controls and procedures that aredesigned to ensure that information required to be disclosed in our ExchangeAct reports is recorded, processed, summarized and reported within the timeperiods specified in the SEC’s rules and forms, and that such information isaccumulated and communicated to our management, including our President andChief Executive Officer and Chief Financial Officer, as appropriate, to allowtimely decisions regarding required disclosure. Management necessarily appliedits judgment in assessing the costs and benefits of such controls andprocedures which, by their nature, can provide only reasonable assuranceregarding management’s control objectives.

 

Within 90 days prior to the date of this report, wecarried out an evaluation, under the supervision and with the participation ofour management, including our President and Chief Executive Officer along withour Chief Financial Officer, of the effectiveness of the design and operationof our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14.Based upon the foregoing, our President and Chief Executive Officer along withour Chief Financial Officer concluded that our disclosure controls andprocedures are effective in timely alerting them to material information relatingto our company required to be included in our Exchange Act reports. There havebeen no significant changes in our internal controls or in other factors whichcould significantly affect internal controls subsequent to the date we carriedout our evaluation.

 

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**PART II –OTHER INFORMATION**

 

**ITEM 1.  LEGAL PROCEEDINGS**

 

Weare not a party to any significant legal proceedings.

 

# **ITEM2.  CHANGES IN SECURITIES AND USE OFPROCEEDS**

 

OnAugust 8, 2000, we sold 4,600,000 shares of common stock at $11 per share in aninitial public offering and on September 7, 2000, the underwriters executed anoverallotment option and purchased an additional 690,000 shares of common stockat $11.  We received net proceeds fromthe initial public offering and the overallotment of approximately $52.7million.  The net proceeds are beingused for the clinical development of our two product candidates, anidulafunginand dalbavancin, as well as for general corporate and working capital purposes.

 

OnApril 9, 2002, we completed a private placement of 2,993,800 shares of ourcommon stock to selected institutional investors for gross proceeds of $44.9million.  The private placement wasconducted pursuant to an exception under Rule 506 of Regulation D of theSecurities Act.  These shares weresubsequently registered with the SEC.

 

On February 28, 2003, we issued approximately 21.4million shares to acquire all of the outstanding shares of Biosearch ItaliaS.p.A.

 

**ITEM 3.  DEFAULTS UPON SENIOR SECURITIES**

 

None.

 

# **ITEM4.  SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

None.

 

# **ITEM 5.  OTHER INFORMATION**

 

None.

 

# **ITEM6.  EXHIBITS AND REPORTS ON FORM 8-K**

 

***Exhibits***

 

Theexhibits listed on the Exhibit List, which appears below following the signaturepage, are included or incorporated by reference in this Quarterly Report.

 

***Reports on Form8-K***

 

OnMarch 3, 2003, we filed a Form 8-K announcing the completion of our merger withBiosearch.

 

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OnMarch 17, 2003, we filed a Form 8-K attaching the conference call script for apresentation made by management regarding our Phase III trial results withanidulafungin for esophageal canididiasis.

 

OnMarch 26, 2003, we filed a Form 8-K reporting the change of our name fromVersicor Inc. to Vicuron Pharmaceuticals Inc.

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
|                | **VICURON PHARMACEUTICALS INC.**                                                           |
|---------------------|--------------------------------------------------------------------------------------------|
|                |                                                                                       |
|                |                                                                                       |
| Date:  May 15, 2003 | /s/  GEORGE F. HORNER III                                                                  |   |
|                | George  F. Horner III                                                                      |
|                | President and Chief Executive Officer(Principal Executive Officer and  Accounting Officer) |
|                |                                                                                       |
|                |                                                                                       |
| Date:  May 15, 2003 | /s/  DOV A. GOLDSTEIN, M.D.                                                                |   |
|                | Dov  A. Goldstein, M.D.                                                                    |
|                | Vice President, Finance and Chief Financial  Officer (Principal Financial Officer)         |

 

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**CERTIFICATIONS**

 

I, George F. Horner III, certify that:

 

1.             I have reviewedthis quarterly report on Form 10-Q of Vicuron Pharmaceuticals Inc.;

 

2.             Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.             Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.             The registrant’sother certifying officer and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

a)             Designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b)            Evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)             Presented in thisquarterly report our conclusions about the effectiveness of the disclosure controlsand procedures based on our evaluation as of the Evaluation Date;

 

5.             The registrant’sother certifying officer and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)             All significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)            Any fraud, whetheror not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.             The registrant’sother certifying officer and I have indicated in this quarterly report whetheror not there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

 
| Date:  May 15, 2003 | /s/ GEORGE F. HORNER III                |   |
|--------------------------|-----------------------------------------|--------|
|                     | **George F.  Horner III**               |
|                     | *President and Chief Executive Officer* |

 

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I, Dov A. Goldstein, certify that:

 

1.             I have reviewedthis quarterly report on Form 10-Q of Vicuron Pharmaceuticals Inc.;

 

2.             Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.             Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.             The registrant’sother certifying officer and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

a)             Designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b)            Evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)             Presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.             The registrant’sother certifying officer and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)             All significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)            Any fraud, whetheror not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.             The registrant’sother certifying officer and I have indicated in this quarterly report whetheror not there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 
| Date:   May 15, 2003 | /s/  DOV A. GOLDSTEIN, M.D.                   |   |
|---------------------------|-----------------------------------------------|--------|
|                      | **Dov A.  Goldstein, M.D.**                   |
|                      | *Vice President, Finance and Chief Financial* |
|                      | *Officer*                                     |

 

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**EXHIBITINDEX**

 

Pursuant to Item 601(a)(2)of Regulation S-K, this exhibit index immediately precedes the exhibits.

 

The following exhibits areincluded, or incorporated by reference, in this Quarterly Report on Form 10-Kfor fiscal year 2002 (and are numbered in accordance with Item 601 ofRegulation S-K).

 
| **Exhibit**

**Number**                                                                                                                                                                                                                                                                                                                                                                                                               |   | **Description** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |            |
| 2.1           Agreement and Plan of Merger, dated as of July 30, 2002,  by and between Vicuron Pharmaceuticals Inc. and Biosearch Italia, S.p.A. (the  body of the agreement was previously attached as Exhibit 2.1 to Vicuron’s  current report on Form 8-K, which was filed with the SEC on July 31, 2002 and  is incorporated by reference herein)                          |
|                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 2.2           First Amendment to Agreement and Plan of Merger entered  into on August 14, 2002, by and between Vicuron Pharmaceuticals Inc. and  Biosearch Italia S.p.A. (3)                                                                                                                                                                                                        |
|                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 2.3           Second Amendment to Agreement and Plan of Merger entered  into on October 29, 2002, by and between Vicuron Pharmaceuticals Inc. and  Biosearch Italia S.p.A. (3)                                                                                                                                                                                                      |
|                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 3.1           Fourth Amended and Restated Certificate of Incorporation  of Vicuron Pharmaceuticals Inc. (1)                                                                                                                                                                                                                                                                         |
|                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 3.2           Certificate of Amendment and Restatement of the  Certificate of Designations of Vicuron Pharmaceuticals Inc. (previously  attached as Exhibit 3.1 to Vicuron’s current report on Form 8-K, which was  filed with the SEC on July 11, 2001 and is incorporated herein by reference)                                                                               |
|                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 3.3           Certificate of Merger relating to the merger of Biosearch  Italia S.p.A. with and into Vicuron Pharmaceuticals Inc. (4)                                                                                                                                                                                                                                               |
|                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 3.4           Certificate of Ownership and Merger Merging Vicuron  Pharmaceuticals Inc. into Versicor Inc. (previously attached as Exhibit 3.1  to Vicuron’s current report on Form 8-K, which was filed with the SEC on  March 26, 2003 and is incorporated herein by reference)                                                                                              |
|                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 3.5           Amended and Restated Bylaws of Vicuron Pharmaceuticals  Inc., as currently in effect (4)                                                                                                                                                                                                                                                                              |
|                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.1           Form of Common Stock Certificate (1)                                                                                                                                                                                                                                                                                                                                  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.2           Warrant for the Purchase of Shares of Common Stock dated  as of March 10, 1997, by and between Genome Therapeutics, Inc. and Vicuron  Pharmaceuticals Inc. (1)                                                                                                                                                                                                        |
|                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.3           Form of Warrant for the Purchase of Shares of Series F  Preferred Stock dated as of June 25, 1999(1)                                                                                                                                                                                                                                                                  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.4           Second Amended and Restated Investors’ Rights Agreement  (1)                                                                                                                                                                                                                                                                                                     |
|                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.5           Shareholder Rights Agreement by and between Vicuron  Pharmaceuticals Inc. and American Stock Transfer & Trust Company, as  Rights Agent, dated June 28, 2001 (previously attached as Exhibit 4.1 to  Vicuron’s current report on Form 8-K, which was filed with the SEC on July  11, 2001 and is incorporated herein by reference)                           |
|                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.6           First Amendment to Shareholder Rights Agreement, dated  as of July 30, 2002, by and between Vicuron Pharmaceuticals Inc. and American  Stock Transfer & Trust Company, as Rights Agent (previously attached as  Exhibit 4.1 to Vicuron’s current report on Form 8-K, which was filed with the  SEC on July 31, 2002 and is incorporated by reference herein) |

 

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| 4.7           Registration Rights Agreement dated as of April 8, 2002,  by and between Vicuron Pharmaceuticals Inc. and the Purchasers listed on  Schedule A attached thereto (previously attached as Exhibit 4.1 to Vicuron’s  current report on Form 8-K, which was filed with the SEC on April 10, 2002  and is incorporated by reference herein) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                        |
| 9.1           Letter Agreement dated as of February 28, 2003, by and  between Vicuron Pharmaceuticals Inc. and Monte Titoli S.p.A. (4)                                                                                                                                                                                                                    |
|                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.1         Form of Indemnity Agreement (4)                                                                                                                                                                                                                                                                                                                        |
|                                                                                                                                                                                                                                                                                                                                                                                                        |
| 99.1         Certification under Section 906 of  the Sarbanes-Oxley Act of 2002(4)                                                                                                                                                                                                                                                                                  |

 

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(1) Filed as an exhibit toVicuron’s registration statement on Form S-1 (No. 333-33022) as amended,effective August 2, 2000, and incorporated herein by reference.

 

(2) Filed as an exhibit toVicuron’s Annual Report on Form 10-K, filed April 2, 2001, and incorporatedherein by reference.

 

(3) Filed as an exhibit toVicuron’s registration statement on Form S-4 (No. 333-98935) as amended,effective November 5, 2002, and incorporated herein by reference.

 

(4)Filed herewith.

 

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