---





UNITED STATES

SECURITIES AND
EXCHANGE COMMISSION

Washington, D.C. 20549



---





FORM 10-Q





x Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934

for the quarterly period ended: September 30, 2003



 ̈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





---





VICURON PHARMACEUTICALS INC.

(Exact name of registrant as specified 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, PA 19406

(Address of principal executive offices) (Zip Code)



(610) 205-2300

(Registrants telephone number, including area code)





Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s) and (2) has been subject to such filing requirements for the past 90
days. Yes  x     No ̈.



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes  x     No ̈.



On November 3, 2003, there were 53,859,205 common shares outstanding of the registrants
only class of common stock.



The Exhibit Index begins on page
36.





---



---

VICURON PHARMACEUTICALS INC.



Quarterly Report on Form 10-Q



For the Three Months Ended September 30, 2003



INDEX



|PART I.  |  | FINANCIAL INFORMATION                                                                                                   
|-------- |  | ------------------------------------------------------------------------------------------------------------------------
|Item 1.  |  | Condensed Consolidated Financial Statements                                                                             
|         |  | Condensed Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002 (Unaudited)                        
|         |  | Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2003 and 2002 (Unaudited)
|         |  | Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 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                                                                                                           



---

PART I  FINANCIAL INFORMATION



ITEM 1.    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





VICURON PHARMACEUTICALS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(in thousands)



|                                           |  | September 30, 2003 |          |   | December 31, 2002 |  
|------------------------------------------ |  | ------------------ | -------- | - | ----------------- | -
|ASSETS                                     |  |                    |          |   |                   |  
|Current assets:                            |  |                    |          |   |                   |  
|Cash and cash equivalents                  |  | $                  | 124,063  |   |                   | $
|Marketable securities                      |  |                    | 48,978   |   |                   |  
|Accounts receivable, net                   |  |                    | 5,152    |   |                   |  
|Prepaid expenses and other current assets  |  |                    | 9,199    |   |                   |  
|                                           |  |                    |          |   |                   |  
|Total current assets                       |  |                    | 187,392  |   |                   |  
|Property, plant and equipment              |  |                    | 34,687   |   |                   |  
|Intangible assets, net                     |  |                    | 21,562   |   |                   |  
|Long-term receivables                      |  |                    | 9,670    |   |                   |  
|Long-term marketable securitiesrestricted |  |                    | 6,740    |   |                   |  
|Other assets                               |  |                    | 335      |   |                   |  
|                                           |  |                    |          |   |                   |  
|Total assets                               |  | $                  | 260,386  |   |                   | $
|                                           |  |                    |          |   |                   |  
|LIABILITIES AND STOCKHOLDERS EQUITY       |  |                    |          |   |                   |  
|Current liabilities:                       |  |                    |          |   |                   |  
|Accounts payable                           |  | $                  | 14,321   |   |                   | $
|Accrued liabilities                        |  |                    | 12,797   |   |                   |  
|Current portion of long-term debt          |  |                    | 1,785    |   |                   |  
|Current portion of deferred revenue        |  |                    | 555      |   |                   |  
|                                           |  |                    |          |   |                   |  
|Total current liabilities                  |  |                    | 29,458   |   |                   |  
|                                           |  |                    |          |   |                   |  
|Long-term debt, less current portion       |  |                    | 5,197    |   |                   |  
|Deferred revenue, less current portion     |  |                    | 1,989    |   |                   |  
|Other long-term liabilities                |  |                    | 336      |   |                   |  
|                                           |  |                    |          |   |                   |  
|Total liabilities                          |  |                    | 36,980   |   |                   |  
|                                           |  |                    |          |   |                   |  
|Stockholders equity:                      |  |                    |          |   |                   |  
|Common stock                               |  |                    | 54       |   |                   |  
|Additional paid-in capital                 |  |                    | 518,369  |   |                   |  
|Deferred stock compensation                |  |                    | (785     | ) |                   |  
|Accumulated other comprehensive income     |  |                    | 10,341   |   |                   |  
|Accumulated deficit                        |  |                    | (304,573 | ) |                   |  
|                                           |  |                    |          |   |                   |  
|Total stockholders equity                 |  |                    | 223,406  |   |                   |  
|                                           |  |                    |          |   |                   |  
|Total liabilities and stockholders equity |  | $                  | 260,386  |   |                   | $
|                                           |  |                    |          |   |                   |  



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





1



---

VICURON PHARMACEUTICALS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per share
amounts)





|                                                                                |  | Three Months Ended |         |   |  |  | Nine Months Ended  |  
|------------------------------------------------------------------------------- |  | ------------------ | ------- | - |  |  | ------------------ | -
|                                                                                |  | September 30, 2003 |         |   |  |  | September 30, 2002 |  
|Revenues:                                                                       |  |                    |         |   |  |  |                    |  
|Collaborative research and development, contract services and government grants |  | $                  | 2,173   |   |  |  |                    | $
|License fees and milestones                                                     |  |                    | 626     |   |  |  |                    |  
|                                                                                |  |                    |         |   |  |  |                    |  
|Total revenues                                                                  |  |                    | 2,799   |   |  |  |                    |  
|                                                                                |  |                    |         |   |  |  |                    |  
|Operating expenses:                                                             |  |                    |         |   |  |  |                    |  
|Research and development                                                        |  |                    | 18,113  |   |  |  |                    |  
|General and administrative                                                      |  |                    | 4,164   |   |  |  |                    |  
|Acquired in-process research and development                                    |  |                    |        |   |  |  |                    |  
|                                                                                |  |                    |         |   |  |  |                    |  
|Total operating expenses                                                        |  |                    | 22,277  |   |  |  |                    |  
|                                                                                |  |                    |         |   |  |  |                    |  
|Loss from operations                                                            |  |                    | (19,478 | ) |  |  |                    |  
|Other income (expense):                                                         |  |                    |         |   |  |  |                    |  
|Investment income                                                               |  |                    | 607     |   |  |  |                    |  
|Interest expense                                                                |  |                    | (43     | ) |  |  |                    |  
|                                                                                |  |                    |         |   |  |  |                    |  
|Net loss                                                                        |  | $                  | (18,914 | ) |  |  |                    | $
|                                                                                |  |                    |         |   |  |  |                    |  
|Net loss per share:                                                             |  |                    |         |   |  |  |                    |  
|Basic and diluted                                                               |  | $                  | (0.36   | ) |  |  |                    | $
|                                                                                |  |                    |         |   |  |  |                    |  
|Weighted average shares                                                         |  |                    | 52,799  |   |  |  |                    |  
|                                                                                |  |                    |         |   |  |  |                    |  







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



2



---

VICURON PHARMACEUTICALS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)





|                                                                            |  | Nine Months Ended September 30, |         
|--------------------------------------------------------------------------- |  | ------------------------------- | --------
|                                                                            |  | 2003                            |         
|Cash flows from operating activities:                                       |  |                                 |         
|Net loss                                                                    |  | $                               | (151,954
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                                 |         
|Depreciation and amortization                                               |  |                                 | 3,440   
|Non-cash stock compensation expense                                         |  |                                 | 1,437   
|Acquired in-process research and development                                |  |                                 | 94,532  
|Changes in operating assets and liabilities, net of effect of merger:       |  |                                 |         
|Employee notes receivable                                                   |  |                                 |        
|Accounts receivable                                                         |  |                                 | (1,622  
|Prepaid expenses and other current assets                                   |  |                                 | 2,329   
|Long-term receivables                                                       |  |                                 | (1,130  
|Other assets                                                                |  |                                 | 225     
|Accounts payable                                                            |  |                                 | (3,581  
|Accrued liabilities                                                         |  |                                 | 2,573   
|Deferred revenue                                                            |  |                                 | (904    
|Other long-term liabilities                                                 |  |                                 | 72      
|                                                                            |  |                                 |         
|Net cash used in operating activities                                       |  |                                 | (54,583 
|                                                                            |  |                                 |         
|Cash flows from investing activities:                                       |  |                                 |         
|Purchases of marketable securities                                          |  |                                 | (49,620 
|Sales/maturities of marketable securities                                   |  |                                 | 127,491 
|Additions to property and equipment                                         |  |                                 | (11,229 
|Net cash and cash equivalents acquired in Biosearch merger                  |  |                                 | 772     
|                                                                            |  |                                 |         
|Net cash provided by (used in) investing activities                         |  |                                 | 67,414  
|                                                                            |  |                                 |         
|Cash flows from financing activities:                                       |  |                                 |         
|Proceeds from issuance of common stock, net                                 |  |                                 | 78,886  
|Proceeds from long-term debt                                                |  |                                 | 2,693   
|Repayments of long-term debt                                                |  |                                 | (1,574  
|                                                                            |  |                                 |         
|Net cash provided by financing activities                                   |  |                                 | 80,005  
|                                                                            |  |                                 |         
|Effect of exchange rate changes on cash and cash equivalents                |  |                                 | 2,956   
|                                                                            |  |                                 |         
|Net change in cash and cash equivalents                                     |  |                                 | 95,792  
|                                                                            |  |                                 |         
|Cash and cash equivalents at beginning of period                            |  |                                 | 28,271  
|                                                                            |  |                                 |         
|Cash and cash equivalents at end of period                                  |  | $                               | 124,063 
|                                                                            |  |                                 |         
|Supplemental cash flow information:                                         |  |                                 |         
|Cash paid during the period for interest                                    |  | $                               | 159     
|                                                                            |  |                                 |         
|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 condensed consolidated financial statements.





3



---

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



1. Basis of Presentation



The accompanying interim financial
statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q. Accordingly, certain information
and footnote disclosures normally included in annual financial statements have been condensed or omitted. The year-end condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures
required by accounting principles generally accepted in the United States of America. The interim financial statements, in the opinion of management, reflect all adjustments (including normal recurring adjustments) necessary for a fair presentation
of the results for the interim periods ended September 30, 2003 and 2002.



The
results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the fiscal year or any other interim period. These condensed consolidated interim financial statements should be read in
conjunction with the audited financial statements for the year ended December 31, 2002, which are included in the Companys Annual Report on Form 10-K for the year ended December 31, 2002.



On March 26, 2003, as a result of the merger, the Company changed its name from Versicor Inc.
to Vicuron Pharmaceuticals Inc.



2. Basic and Diluted Net Loss per Share



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



|                                               |  | September 30,
|---------------------------------------------- |  | -------------
|                                               |  | 2003         
|Shares issuable upon exercise of stock options |  | 9,082        
|Shares issuable upon exercise of warrants      |  | 195          
|Shares subject to repurchase                   |  |             
|                                               |  |              
|                                               |  | 9,277        
|                                               |  |              



3. Merger with Biosearch Italia
S.p.A.



On February 28, 2003, Vicuron Pharmaceuticals Inc., or the
Company, acquired all of the outstanding shares of Biosearch Italia S.p.A., a publicly listed company in Italy. In connection with the merger transaction, the Company issued 1.77 shares of its common stock for each outstanding share of Biosearch
stock, or approximately 21.4 million shares. The Company also issued options covering approximately 4.3 million common shares, including options issued to replace options that were held by Biosearch employees and consultants at the date of the
transaction.



Biosearch has used natural product sourcing for the discovery,
development and production of novel anti-infective drugs with a primary emphasis on Europe. The merger transaction substantially enhances the Companys capabilities with respect to discovery, pre-clinical development, and manufacturing, as well
as the Companys European market presence and effectiveness. The combined company has substantially greater presence in two of the three major pharmaceutical markets (North



4



---

America and Europe) as well as an enhanced product portfolio for collaborations in Asia. The North American rights to the
Companys lead antibiotic product candidate, dalbavancin, had been previously licensed from Biosearch and, by acquiring the global rights, the Company eliminated the royalties and manufacturing fees in North America, acquired the full potential
of dalbavancin in Europe and enhanced the Companys commercialization effectiveness for its lead antifungal drug, anidulafungin, in Europe. As a result, the Company believes all of these benefits will increase its margin and profitability
prospects for dalbavancin and anidulafungin upon regulatory approval in North America and Europe. The Company also believes that European approval can now be obtained with only a modest increase in the clinical development expenses already planned
for its North American filings.



The purchase price of the merger transaction
was approximately $243.1 million, determined as follows (in thousands):



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



The fair 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 the two days before through two days after July 31, 2002, the date of the public announcement of the merger. The fair value
of the options to acquire Vicuron shares was determined using the Black-Scholes option pricing model assuming a market price of $10.30, an exercise price of $10.62, an expected average life of four years, a weighted average interest rate of 3.90%;
volatility of 104%, and no expected dividends.



The transaction was recorded as
a purchase for accounting purposes and the combined companies consolidated financial statements include Biosearchs operating results from the date of the closing of the transaction. The purchase price was allocated to the assets
purchased and liabilities assumed based upon their fair values, including the fair value of in-process research and development and other intangibles. The allocation of the purchase price was 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 a non-cash charge
to operations in the first quarter of 2003 of $94.5 million for acquired in-process research and development. The valuation of in-process research and development represents the estimated fair value relating to incomplete research and development
projects which, at the time of the transaction, had no alternative future use and for which technological feasibility had not been established. The valuation of the acquired in-process research and development was based on the result of a valuation
using the income approach and applying the percentage completion to risk-adjust the discount rates associated with the in-process projects. The two significant in-process projects relate primarily to the development of a novel antibiotic to treat
Gram-positive bacteria, ramoplanin and a novel second-generation glycopeptide agent, dalbavancin.





5



---

Both significant in-process projects are still undergoing clinical trials and have not received regulatory approval. The
primary risk in completing the projects is the successful completion of the clinical testing and regulatory approval process. This process is time and research intensive and new drugs face significant challenges before they can be brought to the
market. Any delay in the approval process could have significant consequences, including increased costs, thus jeopardizing the economic returns expected to be realized, delay in the rollout of the product with potential lower revenues due to
competing products reaching the market and potential loss of credibility to the companys scientific team.



Current assets included $90.3 million in marketable securities.



As the fair value of the net assets acquired exceeds the purchase price paid, there is negative goodwill arising on the transaction of $6.6 million. This amount has been
allocated to the values of property, plant and equipment and intangible assets acquired pro rata to their deemed fair values as of the transaction date.



The identifiable intangible assets arising from the merger, after allocation of negative goodwill, total $20.8 million and represent primarily $14.2 million for
Biosearchs patents and core technology, $5.0 million for their library of microbial extracts and $1.4 million for their bioinformatics software platform. These identifiable intangible assets have estimated useful lives of between five and
thirteen years.



As a result of the Companys merger with Biosearch, the
Company acquired additional long-term debt relating to a loan agreement entered into by Biosearch in November 2000 with the Ministero Istruzione Università Ricerca, or MIUR, to fund certain research projects undertaken by Biosearch. This loan
matures in January 2011, and at September 30, 2003, the amount outstanding under this loan was $1.2 million.



In addition, in March 2003, the Company received net proceeds of $2.8 million from a loan facility entered into by Biosearch in July 2002 with the Basilicata Region of Italy for the construction of the Companys
manufacturing plant in Pisticci. Pursuant to the loan agreement, the Company has a total loan facility of $8.6 million (at exchange rates prevailing at September 30, 2003) of which the Company has drawn down $2.9 million. The loan matures in 2012.



Biosearch historically funded a portion of its operations through research
grants and loan subsidies awarded by Italian and EU authorities. Under applicable law, any transfer of those grants and subsidies (including transfer by merger) requires written approval from the Italian bank authorized to make the disbursement on
behalf of the government and from the appropriate Italian or EU authorities. In connection with the merger, the Company is in the process of applying for permission to transfer Biosearchs grants and subsidies to itself. If the transfers are
not approved, the Company might be required to repay some or all of the grants and subsidies received by Biosearch prior to the merger, in the aggregate amount of up to approximately $1.9 million as of September 30, 2003 and the Company may forfeit
grants and subsidies awarded to Biosearch but not yet disbursed as of September 30, 2003 by the authorized bank, in the aggregate amount of up to approximately $1.2 million as of September 30, 2003 (each estimate is based upon exchange rates
prevailing at September 30, 2003).





6



---

The following unaudited pro forma consolidated financial information has been prepared as if the merger with Biosearch
had occurred as of January 1, 2002 (in thousands, except per share amounts):



|                        |  | Nine Months EndedSeptember 30, |        
|----------------------- |  | ------------------------------ | -------
|                        |  | 2003                           |        
|Revenues                |  | $                              | 8,216  
|                        |  |                                |        
|Net loss                |  | $                              | (63,481
|                        |  |                                |        
|Net loss per share:     |  |                                |        
|Basic and diluted       |  | $                              | (1.28  
|                        |  |                                |        
|Weighted average shares |  |                                | 49,414 
|                        |  |                                |        



The unaudited pro forma consolidated
financial information are not necessarily indicative of the Companys future results of operations or the results of operations which might have occurred had the merger actually taken place on January 1, 2002.



4. Stock Options  Fair Value Disclosures



The Company applies the measurement principles of Accounting Principles Board Opinion No.
25, Accounting for Stock issued to Employees, in accounting for its employee stock options. Had compensation expense for options granted to employees been determined based on the fair value at the grant date as prescribed by Statement of
Financial Accounting Standards No. 123, Accounting for Stock Based Information, the Companys net loss and net loss per share would have been as follows:



|                                                                                                       |  | Three Months EndedSeptember 30,       |         |   | Nine Months EndedSeptember 30, |  
|------------------------------------------------------------------------------------------------------ |  | ------------------------------------- | ------- | - | ------------------------------ | -
|                                                                                                       |  | 2003                                  |         |   | 2002                           |  
|                                                                                                       |  | (in thousands, except per share data) |        
|Net Loss, as reported                                                                                  |  | $                                     | (18,914 | ) |                                | $
|Add: stock-based employee compensation expense included in net loss                                    |  |                                       | 259     |   |                                |  
|Less: total stock-based employee compensation, determined under fair value based method for all awards |  |                                       | (4,908  | ) |                                |  
|                                                                                                       |  |                                       |         |   |                                |  
|Net loss pro forma                                                                                     |  | $                                     | (23,563 | ) |                                | $
|                                                                                                       |  |                                       |         |   |                                |  
|Basic and diluted net loss per share: As reported                                                      |  | $                                     | (0.36   | ) |                                | $
|                                                                                                       |  |                                       |         |   |                                |  
|Pro forma                                                                                              |  | $                                     | (0.45   | ) |                                | $
|                                                                                                       |  |                                       |         |   |                                |  



5. Comprehensive Loss



For the three and nine month periods ended September 30, 2003 and 2002,
the components of total comprehensive loss are as follows:



|                                        |  | Three Months EndedSeptember 30, |         |   | Nine Months EndedSeptember 30, |  
|--------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | -
|                                        |  | 2003                            |         |   | 2002                           |  
|Net loss                                |  | $                               | (18,914 | ) |                                | $
|Foreign currency translation adjustment |  |                                 | 1,876   |   |                                |  
|Unrealized gain (loss) on investments   |  |                                 | 47      |   |                                |  
|                                        |  |                                 |         |   |                                |  
|Other comprehensive loss                |  |                                 | 1,923   |   |                                |  
|                                        |  |                                 |         |   |                                |  
|Comprehensive loss                      |  | $                               | (16,991 | ) |                                | $
|                                        |  |                                 |         |   |                                |  



6. Recent Accounting Pronouncements



In November 2002, the Emerging Issues Task Force (EITF)
reached a consensus on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. EITF Issue No. 00-21 provides guidance on how to account for arrangements that



7



---

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



In January 2003, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation (FIN) No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51. FIN No. 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if
the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other
parties. FIN No. 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN No. 46 must be
applied for the first interim or annual period beginning after December 15, 2003. The Company believes that the adoption of this standard will have no material impact on its financial statements.



In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments
with Characteristics of Both Liabilities and Equity (SFAS No. 150). The Statement establishes standards for how certain financial instruments with characteristics of both liabilities and equity must be classified and measured. SFAS
No. 150 requires that a financial instrument that is within its scope be classified as a liability, or an asset in some circumstances. Many of those instruments were previously classified as equity. The Statement is effective for financial
instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The Company does not have any financial instruments with characteristics of both
liabilities and equity.



8



---

ITEM 2 . MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and notes to those statements
included elsewhere in this Quarterly Report on Form 10-Q and our audited financial statements for the year-ended December 31, 2002 included in our Annual Report on Form 10-K/A previously filed with the SEC. This discussion may contain
forward-looking statements that involve risks and uncertainties. The words believe, expect, anticipate, may, will, or could and similar expressions or the negatives of these
words and phrases are intended to identify forward-looking statements. As a result of many factors, such as those set forth under Risk Factors and elsewhere in this document and in our Annual Report, our actual results may differ
significantly from those anticipated in these forward-looking statements.



Overview



We are a transatlantic biopharmaceutical company
focused on the discovery, development and marketing of drugs for the treatment of serious bacterial and fungal infections, primarily in the hospital setting. Since our inception on May 2, 1995 as a wholly-owned subsidiary of Sepracor Inc., we have
devoted substantially all of our efforts to establishing our business and conducting research and development activities related to our proprietary product candidates, including anidulafungin and dalbavancin, as well as collaborative product
candidates.



Since 1996, 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 initial public offering, and on September 7, 2000 the underwriters exercised an over-allotment option and purchased an additional 690,000 shares of common stock
at $11 per share. We received total net proceeds from the initial public offering and the over-allotment of approximately $52.7 million.



On April 9, 2002, we completed a private placement of 2,993,800 shares of our common stock to selected institutional investors at a purchase price of $15 per share. We
received net proceeds from the private placement of approximately $41.9 million.



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



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



On July 17, 2003, we sold 6,000,000 shares of our common stock at $13.85 per
share in a public offering. We received net proceeds of $77.8 million.



Since
we began our operations in May 1995, we have not generated any revenues from product sales. In April 2003, we filed a New Drug Application, or NDA, for our lead antifungal product candidate, anidulafungin, for the treatment of esophageal candidiasis
which was accepted for review by the FDA in June 2003. Anidulafungin is also currently being studied in a Phase III clinical trial for invasive candidiasis/candidemia in up to 300 patients and has also completed enrollment in a 30 patient Phase III
clinical trial for aspergillosis in combination with a liposomal amphotericin formulation. Our lead antibiotic product candidate, dalbavancin, is in Phase III clinical trials for both complicated and uncomplicated skin and soft tissue infections,
each clinical trial with approximately 550 patients, and completed enrollment of a Phase II clinical trial for catheter-related bloodstream infections. In addition, in early October 2003 we initiated a Phase III clinical trial, which will include up
to 150 patients to evaluate the safety and efficacy of dalbavancin, relative to vancomycin, one of the current standards of care for the treatment of skin and soft tissue infections. We also have two further product candidates: ramoplanin which is
being developed by Genome Therapeutics, our licensee in North America, which is in a Phase III clinical trial for the reduction of vancomycin-resistant enterococci (VRE) bloodstream infections in patients at risk and a Phase II clinical trial
for the treatment of Clostridium difficle-associated diarrhea; and VIC-Acne, a novel antibiotic for which we have completed a Phase I clinical trial. We also have several lead compounds in preclinical studies.





9



---

Our revenues in the near term 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 on the achievement of specified milestones. If our development efforts result in clinical success, regulatory approval and successful commercialization of
our product candidates, we will generate revenues from sales of these product candidates and from receipt of royalties on sales of these product candidates.



Our expenses have consisted primarily of costs incurred when in-licensing existing product candidates, research and development of new product candidates and in
connection with our collaboration agreements, and from general and administrative costs associated with our operations and our merger with Biosearch. We expect licensing costs to increase as development milestones are achieved, and our research and
development expenses to increase as we continue to develop our product candidates. We also expect that our general and administrative expenses will increase due to our integration with Biosearch and as we add personnel, combine our operations and
continue to expand our research and development operations. We expect to incur sales and marketing expenses in the future when we establish our sales and marketing organization.



Since our inception we have incurred significant losses. As of September 30, 2003, we had an accumulated deficit of $304.6 million,
including the $94.5 million write-off of acquired in-process research and development resulting from our merger with Biosearch. Biosearch has also incurred net losses since its inception in 1996 and had an accumulated deficit 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 anticipate that our quarterly results of operations will fluctuate for the foreseeable future due to several factors,
including payments made or received pursuant to licensing or collaboration agreements, the progress of our research and development efforts, and the timing and outcome of regulatory approvals. Our limited operating history makes predictions of
future operations difficult or impossible.



Major Research and Development
Projects



Our ongoing clinical trials of anidulafungin and dalbavancin are
our two most significant research and development projects, comprising 33% and 25%, respectively, of our total research and development expenditure since January 1, 2001.



Anidulafungin



Anidulafungin is our lead antifungal product candidate. We in-licensed anidulafungin from Eli Lilly pursuant to the May 1999 agreement described below. In April 2003, we
filed an NDA for anidulafungin for the treatment of esophageal candidiasis. In addition, as of September 30, 2003, the intravenous formulation of anidulafungin is in:



| | · | Phase III clinical trial for the treatment of aspergillosis, patient enrollment completed; and
| | - | ----------------------------------------------------------------------------------------------



| | · | Phase III clinical trial for the treatment of invasive candidiasis/candidemia.
| | - | ------------------------------------------------------------------------------



In May 1999, we obtained from Eli Lilly an exclusive worldwide license for the development and commercialization of anidulafungin. We paid $11.0 million for the
license and an additional $3.0 million for product inventory (which we have received). As a result, we recognized $14.0 million of research and development costs in 1999. If specified milestones are achieved on the intravenous formulation of
anidulafungin in the United States and Canada, we will be obligated to make additional payments of up to $8.0 million to Eli Lilly. We paid Eli Lilly $6.0 million in May 2003 in connection with the submission of the NDA. We are also obligated to
make additional payments of up to $8.0 million to Eli Lilly if specified milestones on the intravenous formulation of anidulafungin are achieved in Europe, and additional payments of up to $8.0 million if specified milestones on the intravenous
formulation of anidulafungin are achieved in Japan. We are obligated to make additional payments to Eli Lilly of up to $21.0 million if sales of an intravenous formulation of anidulafungin exceed specified targets in the United States and Canada,
Europe and Japan. In addition, we are obligated to make royalty payments in respect of sales of any product resulting from the compound.



10



---

We are not currently developing an oral formulation of anidulafungin and do not presently intend to do so in the future.
However, under the license agreement with Eli Lilly, we are obligated to make 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 in the United States,
additional payments of up to $15.0 million if specified milestones are achieved on an oral formulation of anidulafungin in Europe, and additional payments of up to $15.0 million if specified milestones are achieved on an oral formulation of
anidulafungin in Japan. In addition, we are obligated to make additional payments to Eli Lilly of up to $24.0 million if, and only if, sales of an oral formulation of anidulafungin exceed specified targets worldwide. Because an oral formulation of
anidulafungin is not currently feasible, we believe that it is unlikely that we will be obligated to make any of these payments to Eli Lilly. We have also granted to Eli Lilly an option to license the exclusive worldwide rights to any oral
formulation of anidulafungin, which is exercisable upon successful completion of Phase II clinical trials. If Eli Lilly exercises this option, Eli Lilly would pay us an up-front fee and royalties based on net product sales, and would reimburse us
for any milestone payments paid plus the value, on a cost-plus basis, of all prior development expenses attributed to the development and commercialization of the oral formulation of anidulafungin. However, due to the speculative nature of the oral
formulation of anidulafungin, we believe that it is unlikely that we will be entitled to receive fees or royalties and reimbursement of expenses from Eli Lilly.



Research and development expense allocated to our anidulafungin project, expressed as a percentage of total research and development expense for the period was:



| | · | 23% for the nine months ended September 30, 2003 compared to 46% for the nine months ended September 30, 2002;
| | - | --------------------------------------------------------------------------------------------------------------



| | · | 42% for the year 2002 compared to 35% for the year 2001 and 12% for the year 2000; and
| | - | --------------------------------------------------------------------------------------



| | · | 30% in the aggregate from the inception of our company through September 30, 2003.
| | - | ----------------------------------------------------------------------------------



Our development administration overhead costs are included in total research and development expense for each period, but are not allocated
to our various projects.



The goal of our anidulafungin project is to obtain
marketing approval from the U.S. Food and Drug Administration, or FDA, and analogous international agencies. We will consider the project substantially complete if we obtain those approvals even though subsequent to that time we might incur
additional expenses in conducting additional clinical trials and follow-up studies. To obtain the first of such approvals, we filed an NDA with the FDA in April 2003 for the treatment of esophageal candidiasis which was accepted by the FDA for
review in June 2003. Material cash inflows relating to our anidulafungin project will not commence until after marketing approvals are obtained, and then only if anidulafungin finds acceptance in the marketplace. To date, we have not received any
revenues from product sales of anidulafungin. Because of the many risks and uncertainties relating to the completion of clinical trials, receipt of marketing approvals and acceptance in the marketplace, we cannot predict when material cash inflows
from our anidulafungin project will commence, if ever.



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



| | · | because our research and development projects are independent, a failure to obtain marketing approval for anidulafungin would not necessarily interrupt our development programs for
dalbavancin or our other product candidates or pre-clinical compounds; however, we might reduce our development staff (unless one or more of our other product candidates is then entering late stage clinical trials, in which case we might re-assign
anidulafungin staff to those projects);
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | we would be relieved of our contingent obligation to make further milestone payments and royalty payments to Eli Lilly;
| | - | -----------------------------------------------------------------------------------------------------------------------



11



---

| | · | we would not earn any sales revenue from anidulafungin, which would increase the likelihood that we would need to obtain additional financing for our other development efforts; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | our reputation among investors might be harmed, which might make it more difficult for us to obtain equity capital on attractive terms or at all.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------



Dalbavancin



Dalbavancin is our lead antibiotic product candidate. As of September 30, 2003, dalbavancin is in:



| | · | Phase III clinical trials for the treatment of skin and soft tissue infections; and
| | - | -----------------------------------------------------------------------------------



| | · | Phase II clinical trial for the treatment of catheter-related blood stream infections, enrollment completed.
| | - | ------------------------------------------------------------------------------------------------------------



In addition, in early October 2003 we initiated a Phase III clinical trial to evaluate the
safety and efficacy of dalbavancin versus vancomycin, one of the current standards of care for the treatment of skin and soft tissue infections.



Research and development expense allocated to our dalbavancin project, expressed as a percentage of total research and development expense for the period was:



| | · | 28% for the nine months ended September 30, 2003, compared to 18% for the nine months ended September 30, 2002;
| | - | ---------------------------------------------------------------------------------------------------------------



| | · | 23% for the year 2002, compared to 21% for the year 2001 and 6% for the year 2000; and
| | - | --------------------------------------------------------------------------------------



| | · | 19% in the aggregate from the inception of our company through September 30, 2003.
| | - | ----------------------------------------------------------------------------------



Our development administration overhead costs are included in total research and development expense for each period, but are not allocated
to our various projects.



The goal of our dalbavancin project is to obtain
marketing approval from the FDA and analogous international agencies. We will consider the project substantially complete if we obtain those approvals even though subsequent to that time we might incur additional expenses in conducting additional
clinical trials and follow-up studies. Before we can obtain such marketing approvals, we will need to complete pivotal Phase III clinical trials with satisfactory results and submit a NDA to the FDA. In any case, we would not expect to file a NDA
for dalbavancin until the second half of 2004, at the earliest. We are unable to estimate the costs to completion for our dalbavancin project due to the risks surrounding the clinical trial process, including the risk that we may repeat, revise or
expand the scope of our ongoing clinical trials or conduct additional clinical trials to secure marketing approvals and the additional risks listed under the caption Risk FactorsRisk Related to Our Business. If clinical trials for
our products are unsuccessful or delayed, we will be unable to meet our anticipated development and commercialization timelines, which could harm our business and cause our stock price to decline. Material cash inflows relating to our dalbavancin
project will not commence until after marketing approvals are obtained, and then only if dalbavancin finds acceptance in the marketplace. Because of the many risks and uncertainties relating to the completion of clinical trials, receipt of marketing
approvals and acceptance in the marketplace, we cannot predict when material cash inflows from our dalbavancin project will commence, if ever.



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



| | · | because our research and development projects are independent, a failure to obtain marketing approval for dalbavancin would not necessarily interrupt our development programs for
anidulafungin or our other product candidates or pre-clinical compounds, however, we might reduce our development staff (unless one or more of our other product candidates is then entering late stage clinical trials, in which case we might re-assign
dalbavancin staff to those projects);
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | we would not earn any sales revenue from dalbavancin, which would increase the likelihood that we would need to obtain additional financing for our other development efforts; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | our reputation among investors might be harmed, which might make it more difficult for us to obtain equity capital on attractive terms or at all.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------





12



---

Risks relating to our Major Research and Development Projects



We face many risks that could prevent or delay the completion of our anidulafugin and
dalbavancin projects, including those listed under the caption, Risk Factors  Risks Related to Operating in Our Industry.



Development Administration



Research and development expense comprising development administration overhead costs, expressed as a percentage of total research and development expense for the period
was:



| | · | 14% for the nine months ended September 30, 2003, compared to 12% for the nine months ended September 30, 2002;
| | - | ---------------------------------------------------------------------------------------------------------------



| | · | 12% for the year 2002, compared to 7% for the year 2001 and 15% for the year 2000; and
| | - | --------------------------------------------------------------------------------------



| | · | 9% in the aggregate from the inception of our company through September 30, 2003.
| | - | ---------------------------------------------------------------------------------



Our development administration overhead costs are included in total research and development expense for each period, but are not allocated
to our various projects.



Other Research and Development Projects



The remaining research and development projects were generated by various
pre-clinical studies and drug discovery programs, including our collaborations with Pfizer and Novartis described below.



Oxazolidinones collaboration with Pfizer.In March 1999, we entered into a collaboration agreement with Pharmacia Corporation, now Pfizer, pursuant to which we are
collaborating to discover, synthesize and develop second and third generation oxazolidinone product candidates. In connection with the collaboration, Pfizer made an equity investment in us of $3.8 million and paid us research support and license fee
payments. Under the terms of the agreement and in consideration for our research obligations, we are entitled to receive funding from Pfizer to support some of our full-time researchers. If specified milestones are achieved, Pfizer is obligated to
pay us additional payments of up to $14.0 million for each compound, a portion of which may be credited against future royalty payments to which we are entitled on the worldwide sales of any drug developed and commercialized from the collaboration.
In October 2000, Pfizer increased its funding for this collaboration by 30%, and in June 2001, we received a milestone payment for the initiation of clinical development of one of the compounds. In July 2002, pursuant to an amendment to the
collaboration agreement, we agreed to extend the collaboration by an additional three years, through March 2005. Through September 30, 2003, Pfizer has made aggregate payments to us under this collaboration agreement (excluding equity investments)
of $15.7 million.



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



| | · | 5% for the nine months ended September 30, 2003, compared to 5% for the nine months ended September 30, 2002;
| | - | -------------------------------------------------------------------------------------------------------------



| | · | 7% for the year 2002 compared to 10% for the year 2001 and 19% for the year 2000; and
| | - | -------------------------------------------------------------------------------------



| | · | 8% in the aggregate from January 1, 1999 through September 30, 2003.
| | - | --------------------------------------------------------------------



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



13



---

obtained, and then only if the product finds acceptance in the marketplace. One product candidate resulting from the
collaboration has entered into Phase I clinical trials. In order to obtain marketing approval, Pfizer will need to complete Phase I, II and III clinical trials with satisfactory results and submit a NDA to the FDA. Pfizer is under no obligation to
continue the development of any product candidate resulting from this collaboration. Because of this fact and the substantial risks and uncertainties relating to the completion of clinical trials and the receipt of marketing approvals and acceptance
in the marketplace, we cannot predict when material cash inflows from our collaboration with Pfizer will commence, if ever.



Deformylase inhibitors collaboration with Novartis.    In March 1999, we entered into a collaboration agreement with Novartis Pharma AG
pursuant to which we are collaborating to discover and develop novel deformylase inhibitors. In connection with the collaboration Novartis made an initial equity investment in us of $3.0 million. We have also received a number of milestone payments
from Novartis and are entitled to receive additional payments of up to $2.25 million for each compound, plus up to $13.0 million for our compounds or up to $7.25 million for Novartis compounds upon the achievement of specified milestones. Novartis
may deduct a portion of these milestone payments from the royalties it will be obligated to pay us on the worldwide sales of any drug developed and commercialized from this collaboration. As a result of progress achieved through the collaboration,
in July 2002 we agreed to amend the collaboration agreement to extend the collaboration by an additional year, through March 2003. In February 2003, we further agreed to amend the collaboration agreement to extend the collaboration by an additional
two years through March 2005. In September 2003, we announced achievement of a late-stage preclinical milestone for which we received a milestone payment from Novartis. Through September 30, 2003, Novartis has made aggregate payments to us under
this agreement (excluding equity investments) of $12.4 million.



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



| |  | 4% for the nine months ended September 30, 2003, compared to 5% for the nine months ended September 30, 2002;
| | - | -------------------------------------------------------------------------------------------------------------



| |  | 5% for the year 2002, compared to 8% for the year 2001 and 17% for the year 2000; and
| | - | -------------------------------------------------------------------------------------



| |  | 5% in the aggregate from January 1, 1999 through September 30, 2003.
| | - | --------------------------------------------------------------------



The goal of our collaboration with Novartis is to discover, synthesize and obtain marketing approval for deformylase inhibitor product candidates. We are responsible for
supplying research to the collaboration according to a research plan developed by a joint research committee. Our research obligations currently extend through March 2005. Novartis provides us with funding to support some of our researchers on this
project. The collaboration will depend upon Novartis to conduct the development of product candidates and to obtain marketing approval from the FDA and analogous international agencies. Material cash inflows in the form of royalties relating to this
collaboration will not commence until after marketing approvals are obtained, and then only if the product finds acceptance in the marketplace. Currently all compounds identified by the collaboration are still in pre-clinical stages. In order to
obtain marketing approval, Novartis will need to initiate and complete Phase I, II and III clinical trials with satisfactory results and submit a NDA to the FDA. Novartis is under no obligation to continue the development of any product candidate
resulting from this collaboration. Because of this fact and the many risks and uncertainties relating to the completion of clinical trials and the receipt of marketing approvals and acceptance in the marketplace, we cannot predict when material cash
inflows from our collaboration with Novartis will commence, if ever.



In
addition to the work on deformylase inhibitors, under the collaboration agreement we have been delivering to Novartis a series of screening assays based on novel anti-bacterial targets. For each screen that Novartis accepts as validated, we receive
a milestone payment. In August 2001 and January 2002, Novartis paid us our fourth and fifth milestone payments, respectively, as a result of our delivery of our fourth and fifth target-based screens, which we expect will be used in Novartis
high-throughput screening laboratory to identify new anti-infectives and upon which we will be eligible for milestones and royalties.



14



---

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



| |  | we would not receive any further milestone payments or any royalty revenue from the collaborations; and
| | - | -------------------------------------------------------------------------------------------------------



| |  | while we do not rely on any particular external development collaboration to produce marketable products (and, ultimately, royalty revenues), the failure of all of our external
development collaborations would increase the likelihood that we would need to obtain additional financing for our internal research and development efforts.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Deferred Stock Compensation



We have recorded deferred stock compensation expense in connection with the grant of stock options to employees and consultants. Deferred stock compensation for options
granted to employees is the difference between the fair value for financial reporting purposes of our common stock on the date such options were granted and their exercise price. Deferred stock compensation for options granted to consultants has
been determined in accordance with Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation, as the fair value of the equity instruments issued. Deferred stock compensation for options granted to
consultants is periodically remeasured as the underlying options vest in accordance with Emerging Issues Task Force, or EITF, Issue No. 96-18, Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling Goods or Services.



We recorded deferred stock
compensation of $881,000 and $196,000 in the nine months ended September 30, 2003 and 2002, respectively. These amounts were recorded as a component of stockholders equity and are being amortized as charges to operations over the vesting
periods of the options. We recorded amortization of deferred stock compensation of $1.4 and $1.9 million in the nine months ended September 30, 2003 and 2002, respectively.



Results of Operations



Three Months Ended September 30, 2003 Compared to Three Months Ended September 30, 2002



Revenues



Revenues were $2.8 million and $1.5 million in the three months ended September 30, 2003 and 2002. Revenues in 2003 consisted of $1.6 million of collaborative research
and development fees from Pfizer and Novartis and $0.6 million of collaborative research and development and grant revenue from our research operations in Italy. We also achieved the latest milestone in our ongoing research collaboration with
Novartis Pharma AG, which focused on the development of peptide deformylase inhibitor antibiotics. This achievement triggered a milestone payment to us. Fifty percent of the milestone was recognized as revenue and fifty percent was deferred during
the quarter. The deferred revenue is creditable in the amount of 50% against future royalty payments on net sales of the compound. Revenues in 2002 also consisted primarily of collaborative research and development fees from Pfizer and Novartis.



Research and Development Expenses



Research and development expenses were $18.1 million and $12.7 million in the three months
ended September 30, 2003 and 2002, respectively. The increase in these expenditures is due to an increase relating to our ongoing clinical trials of proprietary product candidates, including anidulafungin and dalbavancin, as well as collaborative
product candidates and Italian research costs resulting from our merger with Biosearch.



General and Administrative Expenses



General and administrative expenses were $4.2 million and $2.1 million in the three months ended September 30, 2003 and 2002, respectively. The increase in expenses in the third quarter of 2003 resulted from our operations in Italy plus
additional costs related to the commencement of the development of a sales and marketing infrastructure.



15



---

Other Income (Expense)



Net other income (expense) was $564,000 and $335,000 in the three months ended September 30, 2003 and 2002, respectively. The increased
income in the third quarter of 2003 was due to an increase in interest bearing cash and marketable securities partially offset by a decrease in interest rates combined with realized gains on the sales of securities.



Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002



Revenues



Revenues were $6.8 million and $4.8 million in the nine months ended September 30, 2003 and
2002. Revenues in 2003 consisted of $4.6 million of collaborative research and development fees from Pfizer and Novartis and $1.6 million of collaborative research and development and grant revenue from our research operations in Italy. We also
achieved the latest milestone in our ongoing research collaboration with Novartis Pharma AG, which focused on the development of peptide deformylase inhibitor antibiotics. This achievement triggered a milestone payment to us. Fifty percent of the
milestone was recognized as revenue and fifty percent was deferred during the quarter. The deferred revenue is creditable in the amount of 50% against future royalty payments on net sales of the compound. Revenues in 2002 consisted primarily of
collaborative research and development fees from Pfizer and Novartis.



Research and Development Expenses



Research and
development expenses were $56.0 million and $34.8 million in the nine months ended September 30, 2003 and 2002, respectively. The increase in these expenditures is partly due to the fact that the 2003 number includes a $6.0 million payment to Eli
Lilly for the anidulafungin milestone payment, Italian research costs resulting from our merger with Biosearch and increased costs associated with our ongoing clinical trials of anidulafungin and dalbavancin.



General and Administrative Expenses



General and administrative expenses were $9.9 million and $6.7 million in the nine months
ended September 30, 2003 and 2002, respectively. The increase in expenses in the first nine months of 2003 resulted from additional costs related to the commencement of the development of a sales and marketing infrastructure and our recently
acquired operations in Italy.



Acquired In-Process
Research and Development



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



Other Income (Expense)



Net other income (expense) was $1.6 million and $992,000 in the nine months ended September 30, 2003 and 2002, respectively. The increased income in the first nine months
of 2003 was due to an increase in our interest bearing cash and marketable securities and realized gains from the sale of securities, which was partially offset by a reduction in our United States interest income as a result of lower returns on
investments during this nine month period.



Financial Condition



Assets



As of September 30, 2003 and December 31, 2002, we held total assets of $260.4 million and
$72.7 million, respectively. The increase in total assets was primarily due to the merger with Biosearch Italia S.p.A. and the sale of 6,000,000 shares of our common stock at $13.85 per share in a public offering.



Liabilities



As of September 30, 2003 and December 31, 2002, our total liabilities equaled $29.5 million
and $22.6 million, respectively. The increase in total liabilities was primarily due to the merger with Biosearch Italia S.p.A.



Stockholders Equity



As of September 30, 2003 and December 31, 2002, our total stockholders equity equaled $223.4 and $48.7, respectively. The increase in our stockholders equity
was primarily due to the issuance of stock in connection with our merger with Biosearch Italia S.p.A. and the sale of 6,000,000 shares of our common stock at $13.85 per share in a public offering. These increases were partially offset by our year to
date loss of $152 million.



Liquidity and Capital Resources



We have funded our operations principally with the net proceeds of $78.5
million from preferred stock offerings over the period 1995 through 1999, and net proceeds of $52.7 million from our initial public offering received in August and September 2000. In addition, in April 2002, we completed a private placement of
shares of common stock to selected institutional investors from which we received net proceeds of approximately $41.9 million. We also increased our cash and cash equivalents and unrestricted marketable securities by $99.1 million as a result of our
merger with Biosearch on February 28, 2003. On July 17, 2003, we sold 6,000,000 shares of our common stock at $13.85 per share in a stock offering. We received net proceeds of $77.8 million.



We have also received payments for collaborative research, contract services and milestone
payments, as well as license fees from our collaborators, including Sepracor. Of these payments, $1.0 million constitutes deferred revenue as of September 30, 2003.



We also have a $6.0 million term loan and a $2.0 million equipment note with a commercial bank, the latter of which is fully drawn at this
time. Proceeds from the loan were used to repay Sepracor for leasehold improvements to our facilities and for general corporate purposes. Proceeds from draw downs on the equipment note were used to finance capital expenditures. The terms of the term
loan were modified in January 2003 and the final payment on the loan is now due on December 31, 2004. The final note balance is also payable on December 31, 2004. Also, in January 2003, the term loan was amended to include a three-year equipment
note for $1.5 million that we are able to draw down through December 31, 2003. The principal 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 drawn down
on this note.



As a result of our merger with Biosearch, we acquired additional
long-term debt relating to a loan agreement entered into by Biosearch in November 2000 with Ministero Istruzione Università Ricerca, or MIUR, to fund certain research projects undertaken by Biosearch. This loan matures in January 2011
and at September 30, 2003, the amount outstanding under this loan is $1.2 million.



In addition, in March 2003, we received proceeds of $2.8 million from a loan facility entered into by Biosearch in July 2002 with the Basilicata Region of Italy for the construction of our manufacturing plant in Pisticci. Under the loan
agreement, we have a total loan facility of $8.6 million (at exchange rates prevailing at September 30, 2003), of which we have drawn $2.9 million. The loan matures in 2012.



Cash used in operations was $54.6 million and $32.0 million in the nine months ended September 30, 2003 and 2002, respectively. The net loss
for the first nine months of 2003 of $152.0 million was reduced for non-cash charges for acquired in-process research and development of $94.5 million resulting from our merger with Biosearch and non-cash charges for depreciation and amortization
and amortization of non-cash stock compensation expense of $3.4 million. Prepaid expenses and other current assets decreased by $2.3 million primarily due to costs paid in 2002 relating to the Biosearch merger, which was completed in 2003.



16



---

In the first nine months of 2002, the net loss of $35.7 million was offset by non-cash charges relating to depreciation
and amortization of non-cash stock compensation expense of $2.8 million.



Cash
provided by investing activities was $67.4 million and $5.1 million in the nine months ended September 30, 2003 and 2002, respectively. The principal source of cash in both periods resulted from the net sale of marketable securities to fund
operating losses and the mix of our investment portfolio of cash and cash equivalents and marketable securities. The capital expenditures of $11.2 million in 2003 is primarily due to the construction of our manufacturing plant in Pisticci, Italy.



Cash provided by financing activities was $80.0 million and $41.7 in the nine
months ended September 30, 2003 and 2002, respectively. In the first nine months of 2003, we received proceeds of $2.8 million from our loan facility in Italy for the construction of our manufacturing plant. On July 17, 2003, we sold 6,000,000
shares of our common stock at $13.85 per share in a follow-on public offering. We received net proceeds of $77.8 million. The $41.9 million in the first nine months of 2002 was primarily due to the completion of a private placement of shares of our
common stock to selected institutional investors.



At September 30,
2003, our cash and cash equivalents and unrestricted marketable securities totaled $173.0 million compared to $62.3 million at December 31, 2002.



We expect to have negative cash flow from operations for the foreseeable future. We also expect to incur increasing 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 operations with those of Biosearch. Our future capital requirements will depend
on a number of factors, including our success in developing markets for our products, payments received or made under collaboration agreements, the timing and outcome of regulatory approvals, the need to acquire licenses to new products or
compounds, the status of competitive products and the availability of other financing. We believe our existing cash and cash equivalents and marketable securities at September 30, 2003 will be sufficient to fund our operating expenses, debt
repayments and capital requirements for between the next 18 to 24 months.



Recent Accounting Pronouncements



In November 2002, the EITF
reached a consensus on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services
and/or rights to use assets. The provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. We believe that the adoption of this standard will have no material impact on our
financial statements.



In January 2003, the FASB issued FIN No. 46,
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51. FIN No. 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity
investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN
No. 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN No. 46 must be applied for
the first interim or annual period beginning after June 15, 2003. The Company believes that the adoption of this standard will have no material impact on its financial statements.



17



---

RISK FACTORS



Certain information contained in this Quarterly Report on Form 10-Q consists of forward-looking statements. Important factors that could cause actual results to differ
materially from such forward-looking statements include the following:





Risks Related to Our Business



Our ability to become profitable is heavily dependent upon our obtaining FDA approval of anidulafungin and dalbavancin, our two lead product candidates, and marketing
them successfully.



In order to become profitable, we anticipate that we
will need to obtain FDA marketing approval for anidulafungin and dalbavancin and then commercialize them successfully. In April 2003, we filed a NDA with the FDA seeking approval to market anidulafungin for the treatment of esophageal candidiasis.
Dalbavancin is in Phase III clinical trials for the treatment of both complicated and uncomplicated skin and soft tissue infections and in a Phase II trial for catheter-related bloodstream infections. We expect to complete the Phase III trials in
the first half of 2004 and file a NDA for dalbavancin in the second half of 2004. Factors that could negatively affect or delay our receipt of FDA approval of one or both of these drugs include:



| | · | a refusal by the FDA to approve our NDAs for these drugs or a request for additional information or data.
| | - | ---------------------------------------------------------------------------------------------------------



| | · | delays in completing clinical trials for dalbavancin; and
| | - | ---------------------------------------------------------



| | · | negative or inconclusive results of our ongoing clinical trials of dalbavancin.
| | - | -------------------------------------------------------------------------------



Our success is also dependent upon successful commercialization of these two product candidates. Successful commercialization requires
acceptance of anidulafungin and dalbavancin by hospital-based physicians, patients and other medical decision makers.



Our success will further depend upon our ability to protect our intellectual property and products. We rely on a combination of patent, trade secret and regulatory
protections to protect us from competitors with similar technologies. With regard to anidulafungin, we rely on patents covering the compound, methods of production and methods of use to protect this product candidate from generic competition. With
regard to dalbavancin, we rely primarily on regulatory provisions, such as the data exclusivity provisions under the Hatch-Waxman Act, as well as patents and know-how to protect this product candidate from generic competition. However, in each case
there can be no assurances that we will obtain protection for any specified duration.



If we are unable to develop and successfully commercialize our product candidates, we might not generate significant revenues or become profitable.



To date, we have not commercialized any products or recognized any revenue from product sales and none of our product candidates are
approved for sale. Successful commercialization of a new drug product requires significant investment in research and development, pre-clinical testing and clinical trials, regulatory approval, and sales and marketing activities. Most of our product
candidates are in early stages of development, one is being reviewed by the FDA, and three are in clinical trials. Our efforts to commercialize our product candidates are subject to a variety of risks inherent in the development of biopharmaceutical
products based on new technologies. These risks include the following:



| | · | Pre-clinical testing and clinical trials are protracted, expensive and uncertain processes. It might take us and our collaborators several years to complete the testing process, and
failure can occur at any stage of the process. Success in pre-clinical testing and early clinical trials does not ensure that later clinical trials will be successful.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Any or all of our new drug marketing applications might be denied by the FDA and analogous foreign regulators.
| | - | --------------------------------------------------------------------------------------------------------------



| | · | Our product candidates, even if found to be safe and effective, might be difficult to develop into commercially viable drugs or to manufacture on a large scale or might be
uneconomical to market commercially.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Third-party proprietary rights might preclude us from marketing our drugs.
| | - | --------------------------------------------------------------------------



| | · | Third parties might market superior drugs or be more effective in marketing equivalent drugs.
| | - | ---------------------------------------------------------------------------------------------



| | · | Even if our product candidates are successfully developed and effectively marketed, the size of their potential market might change such that our sales revenue is less than
initially contemplated. In any such case, we might never generate sufficient or sustainable revenues to enable us to become profitable.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We expect to incur losses for the foreseeable future and might never achieve profitability.



We have incurred net losses since our inception in 1995. As of September 30, 2003, our accumulated deficit was $304.6 million, including the
$94.5 million write-off of acquired in-process research and development resulting from our merger with Biosearch.



Our accumulated deficit results from our net losses of $1.1 million in 1995, $4.8 million in 1996, $6.7 million in 1997 (including $0.4 million in accretion of
dividends on preferred stock), $15.1 million in 1998 (including $2.5 million in accretion of dividends on preferred stock), $67.4 million in 1999 (including deemed dividends of $35.1 million and $3.1 million in accretion of dividends on preferred
stock), $18.8 million in 2000 (including $3.5 million in accretion of dividends on preferred stock), $32.8 million in 2001, $48.8 million in 2002, and $152.0 million in the nine months ended September 30, 2003 (including a $94.5 million write-off of
acquired in-process research and development resulting from our merger with Biosearch).



Our losses to date have resulted principally from:



| | · | research and development costs relating to the in-licensing and development of our product candidates, which represented approximately 59.3% of our aggregate operating expenses from
our inception through September 30, 2003;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | write-off of in-process research and development expenses relating to our merger with Biosearch, which represented approximately 27.9% of our aggregate operating expenses from our
inception through September 30, 2003; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | general and administrative costs relating to our operations, which represented approximately 12.8% of our aggregate operating expenses from our inception through September 30, 2003.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



18



---

On February 28, 2003 we merged with 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 $9.0 million for 2002 and $5.4 million from January 1, 2003 through the merger date of February 28, 2003. At February 28, 2003, Biosearch had an accumulated deficit
of $54.8 million. Biosearchs losses resulted principally from:



| |  | research and development costs relating to the discovery, development and manufacture of Biosearchs product candidates, representing 79% of Biosearchs aggregate
operating expenses from January 1, 2000 through February 28, 2003; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | general and administrative costs relating to Biosearchs operations, representing 25% of Biosearchs aggregate operating expenses from January 1, 2000 through February 28,
2003.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



However, these expenses were partially offset by
amortization of negative goodwill, less losses on trading securities in the net amount of (4%) of Biosearchs aggregate operating expenses from January 1, 2000 through February 28, 2003.



We expect to incur substantial and increasing losses for the foreseeable future as a result
of increases in our research and development costs, including costs associated with conducting pre-clinical testing and clinical trials, and charges related to purchases of technology and other assets. We expect that our operating losses will
fluctuate significantly from quarter to quarter as a result of the timing of receipt of regulatory approval of anidulafungin and our other product candidates, the success of our commercialization efforts following regulatory approval, increases or
decreases in our research and development efforts, the execution or termination of collaborative arrangements, the initiation, success or failure of clinical trials, or other factors. Our prospects of achieving profitability will depend on numerous
factors, including success in:



| |  | receiving regulatory approvals for our product candidates;
| | - | ----------------------------------------------------------



| |  | developing and testing new product candidates;
| | - | ----------------------------------------------



| |  | licensing rights to our product candidates to third parties;
| | - | ------------------------------------------------------------



| |  | qualifying for and receiving grants and subsidies;
| | - | --------------------------------------------------



| |  | manufacturing products;
| | - | -----------------------



| |  | marketing products; and
| | - | -----------------------



| |  | competing with products from other companies.
| | - | ---------------------------------------------



Many of these factors will depend on circumstances beyond our control. We cannot assure you that we will become profitable.





19



---

If we do not compete successfully in the development and commercialization of products and keep pace with rapid
technological change, we will be unable to capture and sustain a meaningful market position.



The biotechnology and pharmaceutical industries are highly competitive and subject to significant and rapid technological change as researchers learn more about diseases and develop new technologies for treatment. Our
competitors in the United States and elsewhere are numerous and include, among others, major multinational pharmaceutical and chemical companies, specialized biotechnology companies and universities, and other research institutions. Specifically:



| |  | if anidulafungin receives FDA and international marketing approval, it will face competition from commercially available drugs such as anaphotericin B, fluconazole, itraconazole,
and potentially from caspofungin, which was the first to receive FDA approval of a new class of antifungal agents called echinocandins (which includes anidulafungin). One of our competitors initially obtained approval only for the narrow indication
of aspergillosis salvage therapy, but has recently expanded its scope to include other serious fungal infections;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | if dalbavancin receives FDA and international marketing approval, it will face competition from commercially available drugs such as vancomycin, teicoplanin, linezolid and
quinupristin/dalfopristin, and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | if ramoplanin receives FDA and international marketing approval, it will face competition from commercially available drugs such as oral vancomycin as well as drugs focused on the
treatment (as opposed to prevention) of bloodstream vancomycin-resistant enterocci infections in hospitalized patients, such as linezolid and quinupristin/dalfopristin.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



Many of our potential competitors, either alone or together with their
collaborators, have substantially greater financial resources and larger research and development and marketing teams than we do. In addition, many of these competitors, either alone or together with their collaborators, have significantly greater
experience than we do in developing, manufacturing and marketing products. As a result, these competitors products might come to market sooner or might prove to be more effective, to be less expensive, to have fewer side effects or to be
easier to administer than ours. In any such case, sales of our eventual products would likely suffer and we might never recoup the significant investments we are making to develop these product candidates.



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



Before obtaining regulatory approvals for the commercial sale of any products we might develop, we must demonstrate through pre-clinical testing and clinical trials that
our product candidates are safe and effective for use in humans. Conducting pre-clinical testing and clinical trials is a protracted, time-consuming and expensive process. Completion of clinical trials might take several years or more. Our
commencement and rate of completion of clinical trials might be delayed by many factors, including:



| |  | slower than expected rate of hospital and patient recruitment;
| | - | --------------------------------------------------------------



| |  | inability to manufacture sufficient quantities of the study drug for use in clinical trials;
| | - | --------------------------------------------------------------------------------------------



| |  | unforeseen safety issues;
| | - | -------------------------



| |  | lack of efficiency during the clinical trials;
| | - | ----------------------------------------------



| |  | inability to adequately follow patients after treatment;
| | - | --------------------------------------------------------



| |  | governmental or regulatory delays; or
| | - | -------------------------------------



| |  | a decision to expand clinical trials or add studies to increase the statistical significance of the results.
| | - | ------------------------------------------------------------------------------------------------------------



20



---

In addition, the results from pre-clinical testing and early clinical trials are often not predictive of results obtained
in later clinical trials. In general, a number of new drugs have shown promising results in early clinical trials, but subsequently failed to establish sufficient safety and efficacy data to obtain necessary regulatory approvals. Data obtained from
pre-clinical and clinical activities are susceptible to varying interpretations, which might delay, limit or prevent regulatory approval. In addition, regulatory delays or rejections might be encountered as a result of many factors, including
perceived defects in the design of clinical trials and changes in regulatory policy during the period of product development.



As of September 30, 2003, we have one product candidate, anidulafungin, being reviewed by the FDA and three product candidates in clinical trials: dalbavancin in Phase
III; ramoplanin in Phase III; and VIC-Acne which has completed Phase I. We also have anidulafungin in Phase III for an additional indication and dalbavancin and ramoplanin in Phase II each for an additional indication. Patient follow-up for these
clinical trials has been limited and more trials will be required before we will expect to apply for regulatory approvals.



Clinical trials conducted by us or by third parties on our behalf might not demonstrate sufficient safety and efficacy to obtain the requisite regulatory approvals for
anidulafungin, dalbavancin, ramoplanin or VIC-Acne or any other potential product candidates. Such a failure might delay development of our other product candidates and hinder our ability to conduct related pre-clinical testing and clinical trials.
It might also cause regulatory authorities to prohibit us from undertaking any additional clinical trials for our other product candidates. Our other product candidates are in pre-clinical development, and we have not submitted investigational new
drug applications, or INDs, to commence clinical trials involving these compounds. Our pre-clinical development efforts might not be successfully completed 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 also impede our ability to obtain additional financing.



If our third-party clinical trial managers do not perform, clinical trials for our product candidates might be delayed or unsuccessful.



As of September 30, 2003, we had 33 full-time clinical development
employees. We expect to continue to rely on third parties, including our collaborators, clinical research organizations and outside consultants, to assist us in managing and monitoring clinical trials. If these third parties fail 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, might inspect some of our clinical
investigational sites, our collaborators records and our facilities and files to determine if the clinical trials were conducted according to good clinical practices. If the FDA determines that our clinical trials were not in compliance with
applicable requirements, we might be required to repeat the clinical trials.



21



---

If our third-party manufacturers do not produce our product candidates on a timely basis, clinical trials and
commercialization of our product candidates could be delayed.



We
currently do not have manufacturing facilities capable of manufacturing products in quantities necessary for large-scale trials or marketing. The Aventis plant in Brindisi, Italy, and the Chemsyn Laboratories plant in the United States will be our
initial manufacturing sites for dalbavancin and anidulafungin, respectively. Subsequently, we intend to manufacture products in our own manufacturing plant in Pisticci, Italy, which is currently under construction. To the extent that our
manufacturing capabilities are insufficient to produce all of the necessary active ingredients for our current and future product candidates, we anticipate that we might need to rely on third parties to manufacture some or all of these active
ingredients. However, there are a limited number of facilities in which our product candidates can be produced, and third-party manufacturers have limited experience in manufacturing anidulafungin, dalbavancin, ramoplanin and VIC-Acne in quantities
sufficient for conducting clinical trials or for commercialization. Difficulties are often encountered in manufacturing new products, including problems involving production yields, quality control and assurance, shortage of qualified personnel,
compliance with FDA and other regulations, production costs, and development of advanced manufacturing techniques and process controls. Any contract manufacturer might not perform as agreed or might not remain in the contract manufacturing business
for the time we require to successfully develop, produce and market our product candidates. If any of our contract manufacturers fails to perform satisfactorily under its agreements with us, such as by failing to deliver the required quantities of
our product candidates for clinical use on a timely basis and at commercially reasonable prices, and if we do not find a replacement manufacturer or develop our own manufacturing capabilities, clinical trials involving our product candidates, or
commercialization of our products, could be delayed.



If we do not establish
successful marketing and sales capabilities or do not enter into successful marketing arrangements with third parties, we will not be able to commercialize our future products and will not become profitable.



We intend to sell a portion of our future products, including anidulafungin and dalbavancin,
through our own sales force. At present, however, we are in the early stages of developing a sales and marketing infrastructure and we lack any experience in direct marketing, sales and distribution. Our future profitability will depend in part on
our ability to develop a direct sales and marketing force to sell our future products, if any, to our target market. We might not be able to attract and retain qualified salespeople or be able to build an efficient and effective sales and marketing
force. To the extent that we enter into marketing and sales arrangements with other companies, our revenues will depend on the efforts of others. These efforts might not be successful. If we are unable to enter into third-party arrangements, then we
must substantially expand our marketing and sales force in order to achieve commercial success for certain products, and to compete with other companies that have experienced and well-funded marketing and sales operations.



If we cannot enter into new in-licensing arrangements, our product portfolio and potential
profitability could be harmed.



An important component of our business
strategy is to in-license drug compounds discovered by other pharmaceutical and biotechnology companies or academic research laboratories, in order to develop them ourselves. Currently we in-license anidulafungin from Eli Lilly. Anidulafungin is our
lead antifungal product candidate and one of our four product candidates in clinical development. Under our license arrangement with Eli Lilly, we acquired exclusive worldwide rights to anidulafungin. This license arrangement will terminate on a
country-by-country basis upon the later of the expiration of all product patents in the country or 10 years from the date of the first commercial sale of anidulafungin in the country. Competition for new promising compounds can be intense. If we are
not able to identify future in-licensing opportunities and enter into future licensing arrangements on acceptable terms, our future product portfolio and potential profitability could be harmed.



If we do not establish and maintain collaborations or if our collaborators do not perform,
we will be unable to develop our joint product candidates.



We have
entered into collaboration arrangements with third parties to develop product candidates. Additional collaborations might be necessary in order for us to fund our research and development activities and third-party manufacturing arrangements, to
seek and obtain regulatory approvals and to successfully commercialize our existing and future product candidates. If we do not maintain our existing collaborative arrangements or do not enter into additional collaborative arrangements, the number
of product candidates from which we could receive future revenues would decline. In addition, our dependence on collaborative arrangements with third parties subjects us to a number of risks, including the following:



| | · | The collaborative arrangements might not be on terms favorable to us. Agreements with collaborators typically allow the collaborators significant discretion in electing whether to
pursue any of the planned activities. We cannot control the amount and timing of resources our collaborators devote to the product candidates or their prioritization of the product candidates, and our collaborators might choose to pursue alternative
products.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





22



---

| | · | Our collaborators might also not perform their obligations as expected. Business combinations or significant changes in a collaborators business strategy might adversely
affect a collaborators willingness or ability to complete its obligations to us.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Moreover, we could become involved in disputes with our collaborators which could lead to delays in, or the termination of, our development programs with them, as well as
time-consuming and expensive litigation or arbitration.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Even if we fulfill our obligations under any collaborative agreement, our collaborators can generally terminate the agreements under specified circumstances.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------



If any collaborator were to terminate or breach their
collaborative agreement with us, or otherwise fail to complete its obligations in a timely manner, our chances of successfully commercializing products could be harmed.



If our future products are not accepted by the market, we are not likely to generate significant revenues or become profitable.



Even if we obtain regulatory approval to market products in the future,
we might not gain market acceptance among physicians, patients, healthcare payors and the medical community. The degree of market acceptance of any pharmaceutical product that we might develop will depend on a number of factors, including:



| | · | demonstrations of clinical efficacy and safety;
| | - | -----------------------------------------------



| | · | cost-effectiveness;
| | - | -------------------



| | · | potential advantages over alternative therapies, including fewer side effects or easier administration;
| | - | -------------------------------------------------------------------------------------------------------



| | · | reimbursement policies of government and third-party payors; and
| | - | ----------------------------------------------------------------



| | · | the effectiveness of our marketing and distribution capabilities.
| | - | -----------------------------------------------------------------



Physicians will not recommend therapies using any of our future products until clinical data or other factors demonstrate their safety and efficacy as compared to other
drugs or treatments. Even if the clinical safety and efficacy of therapies using any of our future products is established, physicians might elect not to recommend the therapies for a number of other reasons, including the possibility that the mode
of administration of our future product might not be effective for their patients indications and locations. For example, many antibiotic or antifungal products are typically administered by infusion or injection, which requires substantial
cost and inconvenience to patients and might not be practical in non-hospital settings.



Physicians, patients, third-party payors and the medical community might not accept and utilize any product candidates that we or our collaborators develop. If none of our future products achieve significant market acceptance, we are not
likely to generate significant revenues or become profitable.



If we are
unable to attract and retain skilled employees and consultants, we will be unable to develop and commercialize our product candidates.



We are highly dependent on our skilled management and scientific staff. In order to pursue our product development, marketing and commercialization plans, we might need
to hire additional personnel with experience in clinical testing, government regulation, manufacturing, marketing and finance. We might not be able to attract and retain personnel on acceptable terms given the intense competition for such personnel
among high technology enterprises, including biotechnology, pharmaceutical and healthcare companies, universities and non-profit research institutions. Most of our management and scientific staff do not have employment contracts. If we lose a
significant number of these persons, or are unable to attract and retain qualified personnel, our business, financial condition and results of operations might be harmed. We do not maintain key person life insurance on any of our personnel.



In addition, we rely on consultants and members of our scientific and clinical
advisory boards to assist us in formulating research and development strategies. All of these consultants and the members of our scientific and clinical advisory boards are employed by others, and they might have commitments to, or advisory or
consulting agreements with, others that might limit their availability to us. If we lose the services of these advisors, our achievement of our development objectives might be impeded, and our business, financial condition and results of operations
might be harmed. Finally, except for work performed specifically for and at our direction, the inventions or processes discovered by our scientific and clinical advisory board members and other consultants will not become our intellectual property,
but will be the intellectual property of the individuals or their institutions. If we desire access to these inventions, we will be required to obtain appropriate licenses from the owners. We face the risk that we might not be able to obtain such
licenses on favorable terms or at all.



23



---

Our revenues are subject to significant fluctuations, which makes it difficult to draw meaningful comparisons from
period-to-period changes in our operating results.



We expect that
substantially all of our revenues for the foreseeable future will result from payments under collaborative arrangements, with some European grant and subsidy revenue. To date, collaborative payments have taken the form of up-front payments,
reimbursement for research and development expenses and milestone payments. Milestone payments to us under collaborative arrangements are subject to significant fluctuation in both timing and amount. As a result, comparisons of our revenues and
results of operations between periods might not produce meaningful indications of our progress toward commercializing one or more product candidates. Moreover, the historical revenues of Vicuron and Biosearch on a stand-alone basis might not be
indicative of our future performance or of our ability to continue to achieve additional milestones and to receive additional milestone payments from our collaborators.



We might seek additional funding, which could dilute our stockholders or impose burdensome financial restrictions, and if we do not
obtain necessary funding, we might be forced to delay or curtail the development of our product candidates.



We expect to incur increasing research and development, general and administrative and sales and marketing expenses over the next several years. Based on our current
plans and assumptions, we estimate that our cash and liquid assets at September 30, 2003 will be sufficient to fund our operating losses for the next 12 to 24 months. However, if our plans change and/or our assumptions are inaccurate, we might need
to seek and obtain capital sooner than anticipated. Some of our more significant plans and assumptions relate to:



| | · | receipt of regulatory approval for anidulafungin and commencement of a marketing campaign for anidulafungin;
| | - | ------------------------------------------------------------------------------------------------------------



| | · | payments received or made under possible future collaborative agreements;
| | - | -------------------------------------------------------------------------



| | · | continued progress in the research and development of our future products;
| | - | --------------------------------------------------------------------------



| | · | costs associated with protecting our patent and other intellectual property rights;
| | - | -----------------------------------------------------------------------------------



| | · | costs associated with developing marketing and sales capabilities; and
| | - | ----------------------------------------------------------------------



| | · | the rate of market acceptance of any future products.
| | - | -----------------------------------------------------



Other than with respect to our $1.5 million line of credit for equipment financing that we entered into in January 2003 and our Italian loan facility for the construction
of our manufacturing plant, we have no committed sources of additional capital. To the extent our capital resources are insufficient to meet our future capital requirements, we will have to raise additional funds to continue the development of our
product candidates. We might also seek additional funding much earlier than we would otherwise need, in order to take advantage of attractive opportunities in the capital markets.



We might seek to raise funds from a traditional lender or through public or private debt or equity offerings. To the extent we raise
additional capital through the sale of equity or convertible debt securities, the securities could be sold at a discount to prevailing market price and the issuance of those securities could result in dilution to our stockholders. Moreover, the
incurrence of debt financing could result in a substantial portion of our operating cash flow being dedicated to the payment of principal and interest on such indebtedness, and we might be subject to restrictive covenants as a result of such debt
financing. This could render us more vulnerable to competitive pressures and economic downturns and could impose restrictions on our operations. If adequate funds are not available from any of those sources, our business 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 otherwise significantly curtail operations. In addition, we might be required to obtain funds by entering into arrangements with
collaborators on unattractive terms or relinquish rights to certain technologies or drug candidates that we would not otherwise relinquish in order to continue independent operations.



If we make any more strategic acquisitions, we will incur a variety of costs and might never realize the anticipated benefits.



We recently merged with Biosearch and, if appropriate opportunities
become available, we might attempt to acquire additional products, product candidates or businesses that we believe are a strategic fit with our business. Currently, however, we are not a party to any acquisition agreements. If we pursue any
transaction of that sort, the process of negotiating the acquisition and integrating an acquired product, product candidate or business might result in operating difficulties and expenditures and might require significant management attention that
would otherwise be available for ongoing development of our business, whether or not any such transaction is ever consummated. Moreover, we might never realize the anticipated benefits of any acquisition. Future acquisitions could result in
potentially dilutive issuances of equity securities, the incurrence of debt, contingent liabilities and/or impairment expenses related to goodwill and impairment or amortization expenses related to other intangible assets, which could harm our
financial condition.



24



---

If our use of hazardous materials results in contamination or injury, we could suffer significant financial loss.



Our operations include the controlled use of hazardous materials,
primarily small quantities of toxic biological materials and chemical compounds which we store, collect, combine, analyze and, at times, produce in connection with our research and manufacturing activities. We cannot eliminate the risk of accidental
contamination or injury from these materials. In the event of an accident or environmental discharge, we might be held liable for any resulting damages. We do not currently maintain separate insurance to cover contamination or injuries relating to
hazardous materials, and such liabilities might not be covered by our general liability insurance coverage.



When Nasdaqs currently proposed director-independence rules are adopted, compliance with 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 on our board. In connection with the
merger with Biosearch, we amended our bylaws in a manner that is intended, among other things, to maintain an even balance of legacy Versicor directors and legacy Biosearch directors on the board for three years from the date of the completion of
the merger. If we decide to add additional directors to the board during that three-year period, our bylaws effectively require us to add an even number of directors (with one-half of the additional directors proposed by the four legacy Versicor
directors and the other half proposed by the four legacy Biosearch directors) in order to maintain an equal number of legacy Versicor and Biosearch directors on the board. Our bylaws might make it more difficult for us to comply with Nasdaqs
recently proposed director-independence rule.



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 resign followed by appointment of three new independent directors and/or (b) increase the size of our board by adding up to six additional
independent directors. If the proposed rules are adopted in their current form, our board will also need to appoint an independent director as chairman of the audit committee. Any increase in the size of our board or change in its membership might
give rise to inefficiencies, which might cause some board actions to be delayed.



We might be required to repay some or all of the Italian and/or EU research grants and loan subsidies previously received by Biosearch and we might not qualify or be approved for new grants and subsidies.



Biosearch and its subsidiary historically funded a portion of their operations through
research grants and loan subsidies awarded by Italian and EU authorities. Under applicable law, any transfer of those grants and subsidies (including transfer by merger) requires written approval from the Italian bank authorized to make the
disbursement on behalf of the government and from the appropriate Italian or EU authorities. In connection with the merger, we applied for permission to transfer Biosearchs grants and subsidies to our Italian branch. Although the merger has
recently been completed, the Italian and EU authorities have not as yet reached an official decision on whether to approve our transfer requests. If the transfers are approved, we intend to apply for further permission to contribute the grants and
subsidies to Vicuron Pharmaceuticals Italy S.r.l., our wholly-owned subsidiary in Italy. 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 and subsidies
received by Biosearch prior to the merger, in the aggregate amount of up to approximately $1.9 million as of September 30, 2003, and we may forfeit grants and subsidies awarded to Biosearch but not yet disbursed as of September 30, 2003 by the
authorized bank, in the aggregate amount of up to approximately $1.2 million as of September 30, 2003 (each estimate based on exchange rates then prevailing). Regardless of whether or not we are required to repay those grants, we anticipate that our
Italian subsidiary will be eligible to apply for new research grants and subsidies from both the Italian and EU authorities. However, grants and subsidies are awarded in the discretion of those authorities and we face the risk that our Italian
subsidiary might not qualify or be approved for any additional grants or subsidies in the future.





25



---

Complying with two national regulatory structures might result in administrative challenges.



Our operations must comply with applicable laws of and rules of the United States (including
Delaware corporate law and the rules and regulations of the SEC and the Nasdaq National Market), the EU legal system and the Republic of Italy (including the rules and regulations of the Commissione Nazionale per le Società e la Borsa, or
CONSOB, and Borsa Italiana, which collectively regulate companies listed on Italys public markets such as the Nuovo Mercato). Conducting our operations in a manner designed to comply with all applicable laws and rules will require us to
allocate additional time and resources to regulatory compliance matters. For example:



| | · | issuing each material announcement in both English and Italian might cause administrative challenges;
| | - | -----------------------------------------------------------------------------------------------------



| | · | submitting filings and applications with regulatory and governmental authorities in the U.S., Italy and the EU, and approving translations of each significant document into the
other language, if necessary, would be time-consuming and expensive;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | under Italian employment law, our relations with our employees in Italy are governed by collective bargaining agreements negotiated at the national level (and over which we have no
control), which reduce the methods customarily available in the United States to motivate and/or make changes to our Italian workforce;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | under European Union data protection regulations, we are unable to send without restriction private personal data, including many employment records and some clinical trial data,
from our Italian offices to our U.S. offices; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | tariffs, customs, duties, import restrictions, tax effects and other trade barriers might delay or increase the cost of relocating personnel and, if marketing approvals are
obtained, commercial quantities of our products between nations.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We are subject to risks resulting from fluctuations in the exchange rate of the dollar relative to the euro, which could cause costs to be greater than we expect and introduce additional volatility in our reported quarterly results.



As a result of the recently completed merger, we are exposed to risks
associated with foreign currency transactions insofar as we might desire to use dollars to make contract payments denominated in euros or vice versa. As the net positions of our unhedged foreign currency transactions fluctuates, our earnings might
be negatively affected. In addition, we are exposed to risks associated with the translation of euro-denominated financial results and balances and cash flows into U.S. dollars. Although our reporting currency remains the U.S. dollar, a portion of
our consolidated revenues and costs now arise in euros, which we restate in dollars for purposes of financial reporting. In addition, the reported carrying value of our euro-denominated assets and liabilities will be affected by fluctuations in the
value of the U.S. dollar as compared to the euro. Accordingly, changes in the value of the U.S. dollar relative to the euro might have an adverse effect on our reported results of operations and financial condition, and fluctuations in exchange
rates might introduce additional volatility in our reported results and accounts from period to period.



All of our Italian subsidiarys contract parties have the right to terminate their contracts with us for a limited period after June 30, 2003.



On June 30, 2003, we contributed the former assets, liabilities and business of Biosearch to our wholly-owned subsidiary in Italy, Vicuron
Pharmaceuticals Italy S.r.l. Among the contributed assets were a number of contracts between us (as successor to Biosearch) and various third parties. As a result of the contribution, under Italian law, those third parties have the right to
terminate those contracts for a limited period. None of those parties exercised the identical rights they had in connection with our merger with Biosearch.



26



---

Risks Related to Operating in Our Industry



If we experience delays in obtaining regulatory approvals, or are unable to obtain them at
all, for one or more of our product candidates, commercialization of those products will be delayed.



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



| |  | impede the commercialization of any drugs that we or our collaborators develop;
| | - | -------------------------------------------------------------------------------



| |  | require us or our collaborators to comply with costly additional procedures;
| | - | ----------------------------------------------------------------------------



| |  | diminish any competitive advantage that we or our collaborators might attain from early market introduction of a new product; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------



| |  | delay or eliminate our receipt of revenues or royalties.
| | - | --------------------------------------------------------



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



| |  | imposed delays in clinical trials or commercialization;
| | - | -------------------------------------------------------



| |  | refusal by the FDA and foreign regulators to review pending market approval applications or supplements to approval applications;
| | - | ---------------------------------------------------------------------------------------------------------------------------------



| |  | product recalls or seizures;
| | - | ----------------------------



| |  | suspension of production;
| | - | -------------------------



| |  | withdrawals of previously issued marketing approvals; and
| | - | ---------------------------------------------------------



| |  | fines, civil penalties and criminal prosecutions.
| | - | -------------------------------------------------



We choose to develop some proprietary product candidates ourselves and to out-license other product candidates to third parties for collaborative development. The
licensing or collaboration agreement will generally specify which party is responsible for directing the clinical trial process and seeking regulatory approvals. Regardless of whether the process is directed by us or by our collaborators, in each
case we face the risk that our clinical trials might be unsuccessful, and that the FDA will not grant us marketing approval. We might also encounter delays or rejections based upon future changes in government regulation, legislation or FDA policy
during the period of product development, clinical trials and FDA regulatory review. If we do not obtain required governmental approvals, we will be precluded from marketing the candidate for which approval was sought. If regulatory clearance for
marketing a future product is granted, this clearance will be limited to those disease states and conditions for which the 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
marketing authorization from the appropriate regulatory authorities. This foreign regulatory approval process typically includes all of the risks associated with FDA clearance described above and might include additional risks.



27



---

If our manufacturing subsidiary or our contract manufacturers fail to comply with applicable Good Manufacturing
Practice requirements, we could be subject to fines or other sanctions, or be precluded from marketing any future products.



Manufacturing facilities are required to comply with the FDAs Good Manufacturing Practice regulations. Even facilities outside the United States, such as the
manufacturing plant we are constructing in Italy, must comply with these regulations if the manufactured products will be sold in the United States. Good Manufacturing Practice regulations include requirements relating to quality control and quality
assurance as well as to maintenance of records and documentation. Manufacturing facilities are subject to inspection by the FDA. These facilities must be approved before we can use them in commercial manufacturing of our products. Comparable Good
Manufacturing Practice regulations also apply in the EU, Italy and other foreign countries. Our contract manufacturers and our manufacturing subsidiary might not be able to comply with the applicable Good Manufacturing Practice requirements and
other FDA or other EU, Italian or foreign regulatory agencies regulatory requirements.



28



---

If our intellectual property rights do not adequately protect our product candidates or future products, others could
compete against us more directly, which would harm our business.



Our
success depends in part on our ability to protect our intellectual property from unauthorized use by third parties, which we will be able to do only to the extent that our intellectual property is covered by valid and enforceable patents or is
effectively maintained as a trade secret. We have rights relating to 33 issued U.S. patents, 15 U.S. patent applications, 447 foreign patents and 50 foreign patent applications. Of these patents and patent applications:



| |  | our non-Biosearch patent portfolio (including the Novartis collaboration patent applications mentioned below) as of September 30, 2003 includes five U.S. patents, 12 U.S. patent
applications and seven foreign patent applications; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | our Biosearch patent portfolio, as of March 31, 2003, includes an additional 28 U.S. patents, three U.S. patent applications, 447 foreign patents and 47 foreign patent applications
(of which, dalbavancin-related rights include four issued U.S. patents, four issued Canadian patents and one foreign patent application).
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Our collaborations involve the following patents:



| |  | our license agreement with Eli Lilly with respect to anidulafungin covers 15 U.S. patents, 10 U.S. patent applications, 79 foreign patents and 120 foreign patent applications;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | our collaborative agreement with Novartis covers two U.S. patent applications; and
| | - | ----------------------------------------------------------------------------------



| |  | our collaborative agreement with Pfizer (as successor to Pharmacia) with respect to the development of oxazolidinones covers four U.S. patents, six U.S. patent applications, two
Canadian patent applications and one foreign patent application.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The patent position of biopharmaceutical 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 other notices from U.S. or foreign patent authorities seeking to limit or otherwise qualify some patent claims. Patents, if issued, might be challenged, invalidated or circumvented. Thus, any patents that we own or license from third
parties might not provide any protection against competitors. Our pending patent applications, those we might file in the future, or those we might license from third parties, might not result in patents being issued. Also, we periodically review
our U.S. and foreign patent filings to determine whether their maintenance is commercially justified. As a result, we may determine from time to time to abandon certain patent applications or allow certain patents to lapse. Moreover, patent rights
might not provide us with adequate proprietary protection or competitive advantages against competitors with similar technologies. The laws of many foreign countries do not protect intellectual property rights to the same extent as do the laws of
the United States.



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



If third parties claim we are infringing their intellectual property rights, we could suffer significant litigation or licensing expenses
or be prevented from marketing our future products.



Our success depends
in part on our ability to operate without infringing upon the intellectual property rights of others. Research has been conducted for many years in the areas in which we focus our research and development efforts. This has resulted in a substantial
number of issued patents and an even larger number of still-pending patent applications. U.S. patent applications, which are not foreign filed can be maintained in secrecy until issuance. U.S. patent applications which are also intended for foreign
filing usually publish 18 months after the earliest priority date or within six months of the U.S. filing date, whichever is later. The publication of discoveries in the scientific or patent literature frequently occurs substantially later than the
date on which the underlying discoveries were made. Our commercial success will depend significantly on an ability to operate without infringing the patents and other intellectual property rights of third parties. However, our technologies might
infringe the patents or violate other intellectual property rights of third parties without our knowledge. In the event an infringement claim is brought against us, we might 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 product development and commercialization and might be subject to damage awards.



Our success also depends in part on our ability to prevent others from infringing our intellectual property rights. The biotechnology and pharmaceutical industries have
been characterized by extensive litigation regarding patents and other intellectual property rights. The defense and prosecution of intellectual property legal actions, U.S. Patent and Trademark Office interference proceedings and



29



---

related legal and administrative proceedings in the United States and internationally involve complex legal and factual questions. As a result, such
proceedings are costly and time-consuming to pursue and their outcome is uncertain. Litigation might be necessary to:



| |  | enforce patents that we own or license;
| | - | ---------------------------------------



| |  | protect trade secrets or know-how that we own or license; or
| | - | ------------------------------------------------------------



| |  | determine the enforceability, scope and validity of the intellectual property rights of others.
| | - | -----------------------------------------------------------------------------------------------



If we become involved in any litigation, interference or other administrative proceedings, we will incur substantial expense and the efforts
of our technical and management personnel will be significantly diverted. An adverse determination might subject us to loss of proprietary position or to significant liabilities, or require us to seek licenses that might not be available from third
parties. We might be restricted or prevented from manufacturing and selling products, if any, in the event of an adverse determination in a judicial or administrative proceeding or if we fail to obtain necessary licenses. Costs associated with these
arrangements might be substantial and might include ongoing royalties. Furthermore, we might not be able to obtain the necessary licenses on satisfactory terms, if at all.



If the government and third-party payors fail to provide adequate coverage and reimbursement rates for our future products, if any, our
revenues and prospects for profitability will be harmed.



In both domestic
and foreign markets, our sales of any future products will depend in part upon the availability of reimbursement from third-party payors. Such third-party payors include government health administration authorities, managed care providers, private
health insurers and other organizations. These third-party payors are increasingly challenging the price, and examining the cost effectiveness, of medical products and services. In addition, significant uncertainty exists as to the reimbursement
status of newly approved healthcare products. We might need to conduct post-marketing studies in order to demonstrate the cost-effectiveness of any future products to such payors satisfaction. Such studies might require us to commit a
significant amount of management time and financial and other resources. Our future products might not ultimately be considered cost-effective. Adequate third-party reimbursement might not be available to enable us to maintain price levels
sufficient to realize an appropriate return on investment in product development. Domestic and foreign governments continue to propose and pass legislation designed to reduce the cost of healthcare. For example, in some foreign markets, the
government controls prescription pharmaceuticals pricing and profitability. In the United States, we expect that there will continue to be federal and state proposals to implement similar governmental control. In addition, increasing emphasis
on managed care in the United States will continue to put pressure on pharmaceutical product pricing. Cost control initiatives could decrease the price that we would receive for any products in the future, which would limit our revenues and
profitability. Accordingly, legislation and regulations affecting the pricing of pharmaceuticals might change before our proposed products are approved for marketing. Adoption of such legislation could further limit reimbursement for
pharmaceuticals.



If a successful product liability claim or series of
claims is brought against us for uninsured liabilities or in excess of insured liabilities, we could be forced to pay substantial damage awards.



The use of any of our product candidates in clinical trials, and the sale of any approved products, might expose us to product liability claims. We currently maintain,
product liability insurance coverage in the amount of $10 million per occurrence and $10 million in the aggregate. Such insurance coverage might not protect us against all of the claims to which we might become subject. We might not be able to
maintain adequate insurance coverage at a reasonable cost or in sufficient amounts or scope to protect us against potential losses. In the event a claim is brought against us, we might be required to pay legal and other expenses to defend the claim,
as well as uncovered damages awards resulting from a claim brought successfully against us. Furthermore, whether or not we are ultimately successful in defending any such claims, we might be required to direct financial and managerial resources to
such defense and adverse publicity could result, all of which could harm our business.



30



---

Risks Related to the Securities Markets



Our stock price has been and is likely to continue to be volatile, and could suffer a
decline in value.



The trading price of our common stock is likely to be
highly volatile and could be subject to wide fluctuations in price in response to various factors, many of which are beyond our control, including:



| | · | the results of our clinical trials and those of our competitors, and any significant delays or unexpected complications in our clinical trials;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------



| | · | decisions by regulatory authorities with respect to our development efforts and product candidates;
| | - | ---------------------------------------------------------------------------------------------------



| | · | public concern regarding the safety and efficacy of drugs we develop;
| | - | ---------------------------------------------------------------------



| | · | new products or services introduced or announced by us or our competitors;
| | - | --------------------------------------------------------------------------



| | · | announcements of scientific innovations by us or our competitors;
| | - | -----------------------------------------------------------------



| | · | actual or anticipated variations in our annual and quarterly operating results;
| | - | -------------------------------------------------------------------------------



| | · | conditions or trends in the biotechnology and pharmaceutical industries;
| | - | ------------------------------------------------------------------------



| | · | announcements by us of significant acquisitions, strategic collaborations, joint ventures or capital commitments;
| | - | -----------------------------------------------------------------------------------------------------------------



| | · | additions or departures of key personnel;
| | - | -----------------------------------------



| | · | general economic conditions;
| | - | ----------------------------



| | · | changes in, or failure to achieve, financial estimates by securities analysts;
| | - | ------------------------------------------------------------------------------



| | · | new regulatory legislation adopted in the United States or abroad;
| | - | ------------------------------------------------------------------



| | · | future sales of equity or debt securities by us;
| | - | ------------------------------------------------



| | · | new regulatory legislation adopted in the United States or abroad; and
| | - | ----------------------------------------------------------------------



| | · | sales of our common stock by our directors, officers or significant stockholders.
| | - | ---------------------------------------------------------------------------------



In addition, the stock market in general, and the Nasdaq National Market, the Nuovo Mercato and the market for biotechnology and
pharmaceutical stocks in particular, have experienced significant price and volume fluctuations. Over the 52-week period ending October 27, 2003, the market price of Vicuron common stock as reported on the Nasdaq National Market ranged from a high
of $18.60 to a low of $9.75 and our average daily trading volume was 255,077 shares. Volatility in the market price for particular companies has often been unrelated or disproportionate to the operating performance of those companies. These broad
market and industry factors might seriously harm the market price of our common stock, regardless of our operating performance. In addition, securities class action litigation has often been initiated following periods of volatility in the market
price of a companys securities. A securities class action suit against us could result in substantial costs, potential liabilities and the diversion of managements attention and resources.



We have implemented anti-takeover provisions that could discourage or prevent a takeover,
even if an acquisition would be beneficial to our stockholders.



Provisions of our restated certificate of incorporation, our amended and restated bylaws and our shareholder rights plan, or poison pill, increase the likelihood that any third party would need to negotiate with our board prior
to initiating a takeover proposal for us and could have the effect of delaying or preventing a change of control of our company. For example, our board of directors, without further stockholder approval, may issue preferred stock (or, in the face of
a potential acquirors increased ownership, rights to purchase our common stock for a nominal price) that could delay or prevent a change of control, as well as reduce the voting power of holders of our common stock. In addition, some of our
stockholders have entered into a stockholders agreement in which they have agreed, for a period of three years following completion of the merger, to vote as recommended by the board on some issues. These provisions could delay or prevent an attempt
to replace or remove our management. The foregoing factors could also limit the price that investors or an acquiror might be willing to pay in the future for shares of our common stock.





31



---

ITEM 3: Quantitative and Qualitative Disclosures about Market Risk



Interest Rates



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



The table below presents principal amounts and related weighted average interest rates by
year of maturity for our cash and cash equivalents and marketable securities (in thousands):



|                          |  | 2003 |         |   | 2004 |   |   | 2005 |  |   | 2006 |  
|------------------------- |  | ---- | ------- | - | ---- | - | - | ---- |  | - | ---- | -
|Cash and cash equivalents |  | $    | 124,063 |   |      | $ |  |      |  | $ |     |  
|Average interest rate     |  |      | 1.16    | % |      |   |  |      |  |   |     |  
|Marketable securities     |  | $    | 48,978  |   |      | $ |  |      |  | $ |     |  
|Average interest rate     |  |      | 1.26    | % |      |   |   | %    |  |   |      | %



Our cash and cash equivalents and
marketable securities have increased substantially since December 31, 2002 as a result of our merger with Biosearch and the follow-on public offering of our common stock in July 2003.



The estimated fair value of our cash and cash equivalents and marketable securities approximate the principal amounts reflected above based
on the short-term maturities of these financial instruments.



The
estimated fair value of our debt obligations approximates the principal amounts due based on the interest rates currently available to us for debt with similar terms and remaining maturities.



Inflation



We do not believe that inflation has had a material adverse impact on our business or operating results during the quarters presented.



Exchange Rates



As a result of our recent merger with Biosearch, we are exposed to risks resulting from
fluctuations in the exchange rate of the dollar relative to the euro. A portion of our consolidated revenues and costs now arise in euros. To manage this risk, we intend to maintain a portion of our cash and cash equivalents and marketable
securities denominated in euros.



32



---

ITEM 4 . CONTROLS AND PROCEDURES



We maintain
disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms,
and that such information is accumulated and communicated to our management, including each of our President and Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management
necessarily applied its judgment in assessing the costs and benefits of such controls and procedures which, by their nature, can provide only reasonable assurance regarding managements control objectives.



As of September 30, 2003, we carried out an evaluation, under the supervision and with the
participation of our management, including our President and Chief Executive Officer along with our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon the foregoing, our President and Chief Executive Officer along with our Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to our
company required to be included in our Exchange Act reports. There have been no significant changes in our internal controls or in other factors which could significantly affect internal controls subsequent to September 30, 2003.



33



---

PART II  OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS



We are not a party to
any significant legal proceedings.



ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS



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



On
April 9, 2002, we completed a private placement of 2,993,800 shares of our common stock to selected institutional investors for gross proceeds of $44.9 million. The private placement was conducted pursuant to an exception under Rule 506 of
Regulation D of the Securities Act. These shares were subsequently registered with the SEC.



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



On July 17, 2003, we sold 6,000,000 shares of common stock at $13.85 per share in a public offering. We received net proceeds of $77.8
million.



ITEM 3. DEFAULTS UPON SENIOR SECURITIES



None.



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



None



ITEM 5. OTHER INFORMATION



None.



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



Exhibits





The exhibits listed on the Exhibit List, which appears below following the signature page, are included or incorporated by reference in this Quarterly Report.





Reports on Form 8-K





On July 7, 2003, we filed a Current Report on Form 8-K with the SEC, which attached certain material contracts of Biosearch as exhibits to the report.



On July 18, 2003, we filed a Current Report on Form 8-K with the SEC, which attached a form
of underwriting agreement as an exhibit to the report.



On August 14, 2003, we
filed a Current Report on Form 8-K with the SEC, announcing our earnings for the second quarter of 2003.





34



---

SIGNATURES



Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|                        |  | VICURON PHARMACEUTICALS INC.                                                               
|----------------------- |  | -------------------------------------------------------------------------------------------
|                        | 
|Date: November 13, 2003 |  | /s/    GEORGE F. HORNER III                                                                
|                        |  |                                                                                            
|                        |  | George F. Horner III                                                                       
|                        |  | President and Chief Executive Officer (Principal Executive Officer and Accounting Officer) 
|                        | 
|Date: November 13, 2003 |  | /s/    DOV A. GOLDSTEIN, M.D.                                                              
|                        |  |                                                                                            
|                        |  | Dov A. Goldstein, M.D.                                                                     
|                        |  | Executive Vice President, Finance and Chief Financial Officer (Principal Financial Officer)



35



---

EXHIBIT INDEX



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



The
following exhibits are included, or incorporated by reference, in this Quarterly Report on Form 10-K for fiscal year 2002 (and are numbered in accordance with Item 601 of Regulation 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. (2)                                                                                                                                                                                            
|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. (2)                                                                                                                                                                                          
|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. (3)                                                                                                                                                                                                                                         
|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.(5)                                                                                                                                                                                                                                                          
|3.5            |  | Amended and Restated Bylaws of Vicuron Pharmaceuticals Inc., as currently in effect (5)                                                                                                                                                                                                                                                                 
|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 (3)                                                                                                                                                                                          
|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 herein by reference)



36



---

|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 herein by reference)
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|9.1  |  | Letter Agreement dated as of February 28, 2003, by and between Vicuron Pharmaceuticals Inc. and Monte Titoli S.p.A. (5)                                                                                                                                                                                                           
|31.1 |  | Certification of George F. Horner III under Section 302 of the Sarbanes-Oxley act of 2002 (6)                                                                                                                                                                                                                                     
|31.2 |  | Certification of Dov A. Goldstein, M.D. under Section 302 of the Sarbanes-Oxley act of 2002 (6)                                                                                                                                                                                                                                   
|32.1 |  | Certification under Section 906 of the Sarbanes-Oxley Act of 2002 (6)                                                                                                                                                                                                                                                             



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



(3) Filed as an exhibit to Vicurons Current Report on Form 8-K, filed
July 11, 2001, and incorporated herein by reference.



(4) Filed as an exhibit
to Vicurons Annual Report on Form 10-K/A, filed March 3, 2003, and incorporated herein by reference.



(5) Filed as an exhibit to Vicurons Quarterly Report on Form 10-Q, filed May 15, 2003, and incorporated herein by reference.



(6) Filed herewith.



37