**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**

 

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

 
| **ý**                                                                                                                   |   | **Quarterly report pursuant to  section 13 or 15(d) of the Securities Exchange Act of 1934**  |
|------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------|
|                                                                                                                         |   |                                                                                               |
| **for the quarterly period ended: June 30,  2003**                                                                           |
|                                                                                                                         |   |                                                                                               |
| **o**                                                                                                                        |   | **Transition report pursuant to  section 13 or 15(d) of the Securities Exchange Act of 1934** |
|                                                                                                                         |   |                                                                                               |
| **for the transition period from           to       ** |

 

**Commission File Number:  000-31145**

 

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**VICURON PHARMACEUTICALS INC.**

(Exact name of registrant asspecified in its charter)

 

| **Delaware**                                                     |   | **04-3278032**                            |
|------------------------------------------------------------------|--------|-------------------------------------------|
| (State or  other jurisdiction  of incorporation or organization) |   | (I.R.S.  Employer  Identification Number) |
|                                                             |   |                                      |
| **455 South Gulph Road, King of Prussia, PA  19406**             |
| (Address of  principal executive offices) (Zip Code)             |
|                                                             |   |                                      |
| **(610) 205-2300**                                               |
| (Registrant’s  telephone number, including area code)       |

 

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

 

Indicate bycheck mark whether the registrant is an accelerated filer (as defined in Rule12b-2 of the Exchange Act).  Yes ý  No o.

 

On August 4,2003, there were 53,839,358 common shares outstanding of the registrant’s onlyclass of common stock.

 

The Exhibit Index begins onpage 36.

 

 

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**VICURON PHARMACEUTICALS INC.**

**Quarterly Report on Form 10-Q**

**For the Three Months Ended June 30, 2003**

 

**INDEX**

 

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

 

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**PART I****– FINANCIAL INFORMATION**

 

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

 

**VICURONPHARMACEUTICALS INC.CONDENSED CONSOLIDATED BALANCESHEETS**(unaudited)(in thousands)

 
|                                            |   | **June 30,  2003** |    | **December  31,  2002** |   |
|-------------------------------------------------|--------|--------------------|---------|-------------------------|--------|
|                                            |   |               |    |                    |   |
| **ASSETS**                                      |   |               |    |                    |   |
| Current assets:                                 |   |               |    |                    |   |
| Cash and cash equivalents                       |   | $                  | 16,959  |                    | $      | 28,271 |   |
| Marketable securities                           |   | 100,126            |    | 34,034                  |   |
| Accounts receivable, net                        |   | 3,747              |    | —                  |   |
| Prepaid expenses and other current assets       |   | 9,098              |    | 5,451                   |   |
|                                            |   |               |    |                    |   |
| Total current assets                            |   | 129,930            |    | 67,756                  |   |
| Property, plant and equipment                   |   | 31,600             |    | 4,875                   |   |
| Intangible assets, net                          |   | 21,728             |    | —                  |   |
| Long-term receivables                           |   | 9,551              |    | —                  |   |
| Long-term marketable securities - restricted    |   | 6,514              |    | —                  |   |
| Long-term marketable securities - other         |   | 465                |    | —                  |   |
| Other assets                                    |   | 328                |    | 105                     |   |
|                                            |   |               |    |                    |   |
| Total assets                                    |   | $                  | 200,116 |                    | $      | 72,736 |   |
|                                            |   |               |    |                    |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**  |   |               |    |                    |   |
| Current liabilities:                            |   |               |    |                    |   |
| Accounts payable                                |   | $                  | 15,738  |                    | $      | 6,491 |   |
| Accrued liabilities                             |   | 12,067             |    | 11,098                  |   |
| Current portion of long-term debt               |   | 2,352              |    | 3,500                   |   |
| Current portion of deferred revenue             |   | 2,532              |    | 1,519                   |   |
|                                            |   |               |    |                    |   |
| Total current liabilities                       |   | 32,689             |    | 22,608                  |   |
| Long-term debt, less current portion            |   | 5,149              |    | 698                     |   |
| Deferred revenue, less current portion          |   | 500                |    | 500                     |   |
| Other long-term liabilities                     |   | 312                |    | 264                     |   |
|                                            |   |               |    |                    |   |
| Total liabilities                               |   | 38,650             |    | 24,070                  |   |
|                                            |   |               |    |                    |   |
| Stockholders’ equity:                      |   |               |    |                    |   |
| Common stock                                    |   | 48                 |    | 26                      |   |
| Additional paid-in capital                      |   | 439,667            |    | 202,365                 |   |
| Deferred stock compensation                     |   | (996               | )       | (1,171                  | )      |
| Accumulated other comprehensive income          |   | 8,418              |    | 65                      |   |
| Accumulated deficit                             |   | (285,671           | )       | (152,619                | )      |
|                                            |   |               |    |                    |   |
| Total stockholders’ equity                 |   | 161,466            |    | 48,666                  |   |
|                                            |   |               |    |                    |   |
| Total liabilities and stockholders’ equity |   | $                  | 200,116 |                    | $      | 72,736 |   |

 

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

 

1

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**VICURONPHARMACEUTICALS INC.CONSOLIDATED STATEMENTS OFOPERATIONS**(unaudited)(in thousands, except per share amounts)

 
|                                                                             |   | **Three  Months Ended** |    | **Six Months  Ended** |   |
|----------------------------------------------------------------------------------|--------|-------------------------|---------|-----------------------|--------|
|                                                                             |   | **June 30,  2003**      |    | **June 30,  2002**    |   | **June 30,  2003** |   | **June 30,  2002** |   |
|                                                                             |   |                    |    |                  |   |   |   |   |   |
| Revenues:                                                                        |   |                    |    |                  |   |   |   |   |   |
| Collaborative research and development, contract  services and government grants |   | $                       | 2,148   |                  | $      | 1,490 |   | $ | 3,865 |   | $ | 3,044 |   |
| License fees and milestones                                                      |   | 130                     |    | —                |   | 171 |   | 258 |   |
|                                                                             |   |                    |    |                  |   |   |   |   |   |
| Total revenues                                                                   |   | 2,278                   |    | 1,490                 |   | 4,036 |   | 3,302 |   |
|                                                                             |   |                    |    |                  |   |   |   |   |   |
| Operating expenses:                                                              |   |                    |    |                  |   |   |   |   |   |
| Research and development                                                         |   | 25,158                  |    | 12,068                |   | 37,883 |   | 22,065 |   |
| General and administrative                                                       |   | 3,643                   |    | 2,036                 |   | 5,724 |   | 4,537 |   |
| Acquired in-process research and development                                     |   | —                  |    | —                |   | 94,532 |   | — |   |
|                                                                             |   |                    |    |                  |   |   |   |   |   |
| Total operating expenses                                                         |   | 28,801                  |    | 14,104                |   | 138,139 |   | 26,602 |   |
|                                                                             |   |                    |    |                  |   |   |   |   |   |
| Loss from operations                                                             |   | (26,523                 | )       | (12,614               | )      | (134,103 | ) | (23,300 | ) |
|                                                                             |   |                    |    |                  |   |   |   |   |   |
| Other income (expense):                                                          |   |                    |    |                  |   |   |   |   |   |
| Interest income                                                                  |   | 718                     |    | 436                   |   | 1,168 |   | 781 |   |
| Interest expense                                                                 |   | (47                     | )       | (62                   | )      | (117 | ) | (124 | ) |
|                                                                             |   |                    |    |                  |   |   |   |   |   |
| Net loss                                                                         |   | $                       | (25,852 | )                     | $      | (12,240 | ) | $ | (133,052 | ) | $ | (22,643 | ) |
|                                                                             |   |                    |    |                  |   |   |   |   |   |
| Net loss per share:                                                              |   |                    |    |                  |   |   |   |   |   |
|                                                                             |   |                    |    |                  |   |   |   |   |   |
| Basic and diluted                                                                |   | $                       | (0.54   | )                     | $      | (0.47 | ) | $ | (3.25 | ) | $ | (0.92 | ) |
|                                                                             |   |                    |    |                  |   |   |   |   |   |
| Weighted average shares                                                          |   | 47,709                  |    | 26,008                |   | 40,890 |   | 24,642 |   |

 

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

 

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**VICURONPHARMACEUTICALS INC.CONSOLIDATED STATEMENTS OF CASH FLOWS**(unaudited)(in thousands)

 
|                                                                         |   | **Six Months  Ended June 30,** |     |
|------------------------------------------------------------------------------|--------|--------------------------------|----------|
|                                                                         |   | **2003**                       |     | **2002** |   |
|                                                                         |   |                           |     |   |   |
| **Cash flows from operating  activities:**                                   |   |                           |     |   |   |
| Net loss                                                                     |   | $                              | (133,052 | ) | $ | (22,643 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities: |   |                           |     |   |   |
| Depreciation and amortization                                                |   | 2,064                          |     | 628 |   |
| Non-cash stock compensation expense                                          |   | 845                            |     | 1,291 |   |
| Acquired in-process research and development                                 |   | 94,532                         |     | — |   |
| Changes in operating assets and liabilities, net  of effect of merger:       |   |                           |     |   |   |
| Employee notes receivable                                                    |   | —                         |     | 13 |   |
| Accounts receivable                                                          |   | (293                           | )        | — |   |
| Prepaid expenses and other current assets                                    |   | 2,339                          |     | 860 |   |
| Long-term receivables                                                        |   | (1,149                         | )        | — |   |
| Other assets                                                                 |   | (216                           | )        | (8 | ) |
| Accounts payable                                                             |   | (2,128                         | )        | (173 | ) |
| Accrued liabilities                                                          |   | 1,878                          |     | 592 |   |
| Advances received                                                            |   | (403                           | )        | — |   |
| Deferred revenue                                                             |   | (395                           | )        | (677 | ) |
| Other long-term liabilities                                                  |   | 48                             |     | 54 |   |
|                                                                         |   |                           |     |   |   |
| Net cash used in operating activities                                        |   | (35,930                        | )        | (20,063 | ) |
|                                                                         |   |                           |     |   |   |
| **Cash flows from investing  activities:**                                   |   |                           |     |   |   |
| Purchases of marketable securities                                           |   | —                         |     | (15,091 | ) |
| Sales/maturities of marketable securities                                    |   | 28,963                         |     | 24,177 |   |
| Additions to property and equipment                                          |   | (7,858                         | )        | (516 | ) |
| Net cash and cash equivalents acquired in  Biosearch merger                  |   | 746                            |     | — |   |
|                                                                         |   |                           |     |   |   |
| Net cash provided by investing activities                                    |   | 21,851                         |     | 8,570 |   |
|                                                                         |   |                           |     |   |   |
| **Cash flows from financing  activities:**                                   |   |                           |     |   |   |
| Proceeds from issuance of common stock, net                                  |   | 564                            |     | 42,209 |   |
| Proceeds from long-term debt                                                 |   | 2,779                          |     | 491 |   |
| Repayments of long-term debt                                                 |   | (1,050                         | )        | (683 | ) |
|                                                                         |   |                           |     |   |   |
| Net cash provided by financing activities                                    |   | 2,293                          |     | 42,017 |   |
|                                                                         |   |                           |     |   |   |
| Effect of exchange rate changes on cash and cash  equivalents                |   | 474                            |     | — |   |
|                                                                         |   |                           |     |   |   |
| Net change in cash and cash equivalents                                      |   | (11,312                        | )        | 30,524 |   |
| Cash and cash equivalents at beginning of period                             |   | 28,271                         |     | 31,349 |   |
|                                                                         |   |                           |     |   |   |
| Cash and cash equivalents at end of period                                   |   | $                              | 16,959   |   | $ | 61,873 |   |
|                                                                         |   |                           |     |   |   |
| **Supplemental cash flow  information:**                                     |   |                           |     |   |   |
| Cash paid during the period for interest                                     |   | $                              | 129      |   | $ | 125 |   |
|                                                                         |   |                           |     |   |   |
| **Supplemental disclosure of  non-cash investing activities:**               |   |                           |     |   |   |
| Common stock and stock options issued in Biosearch  merger                   |   | $                              | 236,089  |   | $ | — |   |

 

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

 

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**NOTES TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS**

 

**1.  Basis ofPresentation**

 

Theaccompanying interim financial statements are unaudited and have been preparedin accordance with accounting principles generally accepted in the UnitedStates of America for interim financial information and with the instructionsto Form 10-Q.  Accordingly, certaininformation and footnote disclosures normally included in annual financialstatements have been condensed or omitted. The year-end condensed consolidatedbalance sheet data was derived from audited financial statements but does notinclude all disclosures required by accounting principles generally accepted inthe United States of America.  Theinterim financial statements, in the opinion of management, reflect alladjustments (including normal recurring adjustments) necessary for a fairpresentation of the results for the interim periods ended June 30, 2003 and2002.

 

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

 

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

 

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

 

Basic net loss per share is computed using the weighted-average numberof shares of common stock outstanding. Diluted net loss per share does notdiffer from basic net loss per share since potential shares of common stock areanti-dilutive for all periods presented and therefore are excluded from thecalculation of diluted net loss per share. The following potentially dilutiveshares of common stock were excluded from the computation of net loss per sharebecause their effect was anti-dilutive (in thousands):

 
|                                           |   | **June 30,** |   |
|------------------------------------------------|--------|--------------|--------|
|                                           |   | **2003**     |   | **2002** |   |
|                                           |   |         |   |   |   |
| Shares issuable upon exercise of stock options |   | 8,797        |   | 3,516 |   |
| Shares issuable upon exercise of warrants      |   | 195          |   | 344 |   |
| Shares subject to repurchase                   |   | —       |   | 3 |   |
|                                           |   | 8,992        |   | 3,863 |   |

 

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

 

OnFebruary 28, 2003, Vicuron Pharmaceuticals Inc, or the Company, acquired all ofthe outstanding shares of Biosearch Italia S.p.A., a publicly listed company inItaly.  In connection with the acquisition,the Company issued 1.77 shares of its common stock for each outstanding shareof Biosearch stock, or approximately 21.4 million shares.  The Company also issued options coveringapproximately 4.3 million common shares, including options issued to replaceoptions that were held by Biosearch employees and consultants at the date ofthe acquisition.

 

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

 

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America and Europe) as well as anenhanced product portfolio for collaborations in Asia. The North Americanrights to the Company’s lead antibiotic product candidate, dalbavancin, hadbeen previously licensed from Biosearch and by acquiring the global rights theCompany will eliminate royalties and manufacturing fees in North America,acquire the full potential of dalbavancin in Europe and enhance the Company’scommercialization effectiveness for its lead antifungal drug, anidulafungin,in  Europe. As a result, the Companybelieves all of these benefits will increase its margin and profitabilityprospects for dalbavancin and anidulafungin upon regulatory approval in NorthAmerica and Europe. The Company also believes that European approval can now beobtained with only a modest increase in the clinical development expensesalready planned for its North American filings.

 

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

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

 

Thefair value of the Vicuron shares used in determining the purchase price was$10.97 per share based on the average closing price of Vicuron’s stock from thetwo days before through two days after July 31, 2002, the date of the publicannouncement of the merger. The fair value of the options to acquire Vicuronshares was determined using the Black-Scholes option pricing model assuming amarket price of $10.30, an exercise price of $10.62, an expected average lifeof four years, a weighted average interest rate of 3.90%; volatility of 104%,and no expected dividends.

 

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

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

 

The Company recorded anon-cash charge to operations in the first quarter of 2003 of $94.5 million foracquired in-process research and development. The valuation of in-process research and development represents theestimated fair value relating to incomplete research and development projectswhich, at the time of the acquisition, had no alternative future use and forwhich technological feasibility had not been established.  The valuationof the acquired in-process research and development was based on the result ofa valuation using the income approach and applying the percentage completion torisk-adjust the discount rates associated with the in-process projects.  The two significant in-process projectsrelate primarily to the development of a novel antibiotic to treat Gram-positivebacteria, ramoplanin, and a novel second-generation glycopeptide agent,dalbavancin.

 

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Bothsignificant in-process projects are still undergoing clinical trials and havenot received regulatory approval. The primary risk in completing the projectsis the successful completion of the clinical testing and regulatory approvalprocess. This process is time and research intensive and new drugs facesignificant challenges before they can be brought to the market. Any delay inthe approval process could have significant consequences including increasedcosts thus jeopardizing the economic returns expected to be realized, delay inthe rollout of the product with potential lower revenues due to competing productsreaching the market and potential loss of credibility to the company’sscientific team.

 

Current assets include $90.3 million in marketable securities.

 

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

 

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

 

Asa result of the Company’s merger with Biosearch, the Company acquiredadditional long-term debt relating to a loan agreement entered into byBiosearch in November 2000 with the Ministero Istruzione Università Ricerca, or MIUR, to fund certainresearch projects undertaken by Biosearch. This loan matures in January 2011, and at June 30, 2003, the amountoutstanding under this loan was $1.2 million.

 

In addition, in March 2003,the Company received proceeds of $2.8 million from a loan facility entered intoby Biosearch in July 2002 with the Basilicata Region of Italy for theconstruction of the Company’s manufacturing plant in Pisticci.  Under the loan agreement, the Company has atotal loan facility of $8.6 million (at exchange rates prevailing at June 30,2003) of which the Company has drawn down $2.9 million.  The loan matures in 2012.

 

Biosearch has historicallyfunded a portion of its operations through research grants and loan subsidiesawarded by Italian and EU authorities. Under applicable law, any transfer ofthose grants and subsidies (including transfer by merger) requires writtenapproval from the Italian bank authorized to make the disbursement on behalf ofthe government and from the appropriate Italian or EU authorities. Inconnection with the merger, the Company is in the process of applying forpermission to transfer Biosearch’s grants and subsidies to itself.  However, as the merger has recently beencompleted, the Italian and EU authorities have not as yet reached an officialdecision on whether to approve the transfer requests. If the transfers are notapproved, the Company might be required to repay some or all of the grants andsubsidies received by Biosearch prior to the merger, in the aggregate amount ofup to approximately $2.0 million as of June 30, 2003 and the Company mayforfeit grants and subsidies awarded to Biosearch but not yet disbursed as of June30, 2003 by the authorized bank, in the aggregate amount of up to approximately$1.2 million as of June 30, 2003 (each estimate based on exchange ratesprevailing at June 30, 2003).

 

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

 

6

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** **
|                    |   | **Six Months  Ended June 30,** |    |
|-------------------------|--------|--------------------------------|---------|
|                    |   | **2003**                       |    | **2002** |   |
|                    |   |                           |    |   |   |
| Revenues                |   | $                              | 5,409   |   | $ | 4,809 |   |
|                    |   |                           |    |   |   |
| Net loss                |   | $                              | (44,539 | ) | $ | (27,740 | ) |
|                    |   |                           |    |   |   |
| Net loss per share:     |   |                           |    |   |   |
| Basic and diluted       |   | $                              | (0.93   | ) | $ | (0.60 | ) |
|                    |   |                           |    |   |   |
| Weighted average shares |   | 47,692                         |    | 45,874 |   |

 

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

 

**4.  Stock Options – Fair Value Disclosures**

 

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

 
|                                                                                                    |   | **Three Months Ended June 30,**           |        | **Six Months Ended June 30,** |   |
|---------------------------------------------------------------------------------------------------------|--------|-------------------------------------------|-------------|-------------------------------|--------|
|                                                                                                    |   | **2003**                                  |        | **2002**                      |   | **2003** |   | **2002** |   |
|                                                                                                    |   | **(in thousands, except per share data)** |        |
|                                                                                                    |   |                                      |        |                          |   |   |   |   |   |   |   |   |   |
| Net Loss, as reported                                                                                   |   | $                                         | (25,852     | )                             | $      | (12,240 | ) | $ | (133,052 | ) | $ | (22,643 | ) |
|                                                                                                    |   |                                      |        |                          |   |   |   |   |   |
| Add: stock-based employee compensation  expense included in net loss                                    |   | 261                                       |        | 620                           |   | 572 |   | 1,302 |   |
|                                                                                                    |   |                                      |        |                          |   |   |   |   |   |
| Less: total stock-based employee  compensation, determined under fair value based method for all awards |   | (4,716                                    | )           | (2,288                        | )      | (7,062 | ) | (3,940 | ) |
|                                                                                                    |   |                                      |        |                          |   |   |   |   |   |
| Net loss pro forma                                                                                      |   | $                                         | (30,307     | )                             | $      | (13,908 | ) | $ | (139,542 | ) | $ | (25,281 | ) |
|                                                                                                    |   |                                      |        |                          |   |   |   |   |   |
| Basic and diluted net loss per share: As  reported                                                      |   | $                                         |  (0.54 | )                             | $      | (0.47 | ) | $ | (3.25 | ) | $ | (0.92 | ) |
|                                                                                                    |   |                                      |        |                          |   |   |   |   |   |
| Pro forma                                                                                               |   | $                                         | (0.64       | )                             | $      | (0.53 | ) | $ | (3.41 | ) | $ | (1.03 | ) |
|                                                                                                         |        |                                           |             |                               |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**5.  Comprehensive Loss**

** **

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

 
|                                    |   | **Three Months Ended June 30,** |    | **Six Months Ended June 30,** |   |
|-----------------------------------------|--------|---------------------------------|---------|-------------------------------|--------|
|                                    |   | **2003**                        |    | **2002**                      |   | **2003** |   | **2002** |   |
|                                    |   |                            |    |                          |   |   |   |   |   |
| Net loss                                |   | $                               | (25,852 | )                             | $      | (12,240 | ) | $ | (133,052 | ) | $ | (22,643 | ) |
|                                    |   |                            |    |                          |   |   |   |   |   |
| Foreign currency translation adjustment |   | 8,614                           |    | —                        |   | 8,363 |   | — |   |
|                                    |   |                            |    |                          |   |   |   |   |   |
| Unrealized gain (loss) on investments   |   | 19                              |    | 30                            |   | (10 | ) | (56 | ) |
|                                    |   |                            |    |                          |   |   |   |   |   |
| Other comprehensive loss                |   | 8,633                           |    | 30                            |   | 8,353 |   | (56 | ) |
|                                    |   |                            |    |                          |   |   |   |   |   |
| Comprehensive loss                      |   | $                               | (17,219 | )                             | $      | (12,210 | ) | $ | (124,699 | ) | $ | (22,699 | ) |
|                                         |        |                                 |         |                               |        |  |  |  |  |  |  |  |  |  |

 

**6. Recent Accounting Pronouncements**

 

InNovember 2002, the Emerging Issues Task Force ("EITF") reached aconsensus on Issue No. 00-21, ‘‘Revenue Arrangements with MultipleDeliverables.’’ EITF Issue No. 00-21 provides guidance on how to account forarrangements that

 

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

 

In January 2003, the FinancialAccounting Standards Board ("FASB") issued FASB Interpretation (‘‘FIN’’) No. 46, ‘‘Consolidation ofVariable Interest Entities, an Interpretation of ARB No. 51.’’ FIN No. 46requires certain variable interest entities to be consolidated by the primarybeneficiary of the entity if the equity investors in the entity do not have thecharacteristics of a controlling financial interest or do not have sufficientequity at risk for the entity to finance its activities without additionalsubordinated financial support from other parties. FIN No. 46 is effective immediatelyfor 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 orannual period beginning after June 15, 2003. The Company believes that theadoption of this standard will have no material impact on its financialstatements.

 

In May 2003,the FASB issued SFAS No. 150, "Accounting for CertainFinancial Instruments with Characteristics of Both Liabilities and Equity"("SFAS No. 150").  TheStatement establishes standards for how certain financial instruments withcharacteristics of both liabilities and equity must be classified andmeasured.  SFAS No. 150 requires that afinancial instrument that is within its scope be classified as a liability, oran asset in some circumstances.  Many ofthose instruments were previously classified as equity.  The Statement is effective for financialinstruments entered into or modified after May 31, 2003 and is otherwiseeffective at the beginning of the first interim period beginning after June 15,2003.  The Company does not have anyfinancial instruments with characteristics of both liabilities and equity.

 

**7.****             ****Subsequent Event**

 

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

 

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

 

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

 

**Overview**

 

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

 

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

 

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

 

OnFebruary 28, 2003, we acquired all of the outstanding shares of BiosearchItalia S.p.A., a publicly listed company in Italy.  We issued 1.77 shares of our common stock for each outstandingshare of Biosearch stock, or approximately 21.4 million shares.  We also issued options covering approximately4.3 million common shares, including options issued to replace or assumeoptions that were held by Biosearch employees and consultants at the time ofthe acquisition.

 

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

 

OnJuly 17, 2003, we sold 6,000,000 shares of our common stock at $13.85 pershare in a public offering.  We receivednet proceeds of $77.8 million.

 

Sincewe began our operations in May 1995, we have not generated any revenues fromproduct sales.  In April 2003, we fileda New Drug Application, or NDA, for our lead antifungal product candidate,anidulafungin, for the treatment of esophageal candidiasis which was acceptedfor review by the FDA in June 2003. Anidulafungin is also currently being studied in a Phase III clinical trialfor invasive candidiasis/candidemia in up to 300 patients and has alsocompleted enrollment in a 30 patient Phase III clinical trial for aspergillosisin combination with a liposomal amphotericin formulation.  Our lead antibiotic product candidate, dalbavancin,is in Phase III clinical trials for both complicated and uncomplicated skin andsoft tissue infections, each clinical trial with approximately 550 patients,and is in a Phase II clinical trial for catheter-related bloodstream infectionswith up to 90 patients.  We also havetwo further product candidates: ramoplanin which is being developed by GenomeTherapeutics, our licensee in North America, which is in a Phase III clinicaltrial for the reduction of vancomycin-resistant *enterococci* (VRE) bloodstream infections in patients at riskand a Phase II clinical trial for the treatment of *Clostridium difficle*-associated diarrhea, and VIC-Acne, anovel antibiotic for which we have completed a Phase I clinical trial.  We also have several lead compounds inpreclinical studies.

 

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Our revenues in the near term are expected to consist primarily ofcollaborative research payments, license fees and milestone payments to bereceived from our collaborators.  Someof these payments are dependent on achievement of specified milestones. If ourdevelopment efforts result in clinical success, regulatory approval andsuccessful commercialization of our product candidates, we will generaterevenues from sales of these product candidates and from receipt of royaltieson sales of these product candidates.

 

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

 

Sinceour inception, we have incurred significant losses. As of June 30, 2003, we hadan accumulated deficit of $285.7 million including the $94.5 million write-offof acquired in-process research and development resulting from our merger withBiosearch.  Biosearch has also incurrednet losses since its inception in 1996 and had an accumulated deficit of $54.8million as at February 28, 2003.  Weanticipate incurring additional losses, which may increase, for the foreseeablefuture, including at least through December 31, 2004.

 

We have a limited history of operations. We anticipate that ourquarterly results of operations will fluctuate for the foreseeable future dueto several factors, including payments made or received pursuant to licensingor collaboration agreements, progress of our research and development efforts,and the timing and outcome of regulatory approvals. Our limited operating historymakes predictions of future operations difficult or impossible.

 

**Major Research and Development Projects**

 

Our ongoing clinical trials of anidulafungin and dalbavancin are ourtwo most significant research and development projects, comprising 36% and 22%,respectively, of our total research and development expenditure since January1, 2001.

# ** **

# **Anidulafungin**

 

Anidulafunginis our lead antifungal product candidate. We in-licensed anidulafugin from Eli Lilly pursuant to the May 1999agreement described below.  In April2003, we filed an NDA for anidulafungin for the treatment of esophagealcandidiasis.  In addition, as of June30, 2003, the intravenous formulation of anidulafungin is in:

 

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

•                  Phase III clinical trial for the treatment ofinvasive candidiasis/candidemia.

 

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

 

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

 

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

 

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

 

•                  29% for the six months ended June 30, 2003compared to 44% for the six months ended June 30, 2002;

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

•                  32% in the aggregate from the inception of ourcompany through June 30, 2003.

 

Our development administration overhead costs areincluded in total research and development expense for each period, but are notallocated to our various projects.

 

The goal of our anidulafungin project is to obtainmarketing approval from the U.S. Food and Drug Administration, or FDA, andanalogous international agencies; and we will consider the projectsubstantially complete if we obtain those approvals even though subsequent tothat time we might incur additional expenses in conducting additional clinicaltrials and follow-up studies.  To obtainthe first of such approvals, we filed an NDA with the FDA in April 2003 for thetreatment of esophageal candidiasis which was accepted by the FDA for review inJune 2003.  Material cash inflowsrelating to our anidulafungin project will not commence until after marketingapprovals are obtained, and then only if anidulafungin finds acceptance in themarketplace.  To date, we have notreceived any revenues from product sales of anidulafungin.  Because of the many risks and uncertaintiesrelating to the completion of clinical trials, receipt of marketing approvalsand acceptance in the marketplace, we cannot predict when material cash inflowsfrom our anidulafungin project will commence, if ever.

 

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

 

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

 

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

 

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

 

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

 

**Dalbavancin**

 

Dalbavancinis our lead antibiotic product candidate. As of  June 30, 2003, dalbavancinis in:

 

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

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

 

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

 

•                  23% for the six months ended June 30, 2003compared to 19% for the six months ended June 30, 2002;

•                  23% for the year 2002 compared to 21% for theyear 2001 and 6% for the year 2000; and

•                  17% in the aggregate from the inception of ourcompany through June 30, 2003.

 

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

 

Thegoal of our dalbavancin project is to obtain marketing approval from the FDAand analogous international agencies. We will consider the project substantially complete if we obtain thoseapprovals even though subsequent to that time we might incur additionalexpenses in conducting additional clinical trials and follow-up studies.  Before we can obtain such marketingapprovals, we will need to complete pivotal Phase III clinical trials withsatisfactory results and submit a NDA to the FDA.  In any case, we would not expect to file a NDA for dalbavancinuntil the second half of 2004, at the earliest.  We are unable to estimate the costs to completion for ourdalbavancin project due to the risks surrounding the clinical trial process,including the risk that we may repeat, revise or expand the scope of ourongoing clinical trials or conduct additional clinical trials to securemarketing approvals and the additional risks listed under the caption “RiskFactors - Risk Related to Our Business.” If clinical trials for our products are unsuccessful or delayed, we willbe 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 dalbavancinproject will not commence until after marketing approvals are obtained, andthen only if dalbavancin finds acceptance in the marketplace.  Because of the many risks and uncertaintiesrelating to the completion of clinical trials, receipt of marketing approvalsand acceptance in the marketplace, we cannot predict when material cash inflowsfrom our dalbavancin project will commence, if ever.

 

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

 

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

 

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

 

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

 

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

 

We face many risks that could prevent or delay the completion of ouranidulafugin and dalbavancin projects, including those listed under thecaption, “Risk Factors – Risks Related to Operating in Our Industry.”

# ** **

# **Development Administration**

 

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

 

•                  16% for the six months ended June 30, 2003compared to 14% for the six months ended June 30, 2002;

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

•                  14% in the aggregate from the inception of ourcompany through June 30, 2003.

 

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

# ** **

# **Other Research and Development Projects**

 

Theremaining 42% of our total research and development expenses since January 1,2001 include 3% relating to non-cash stock compensation expense.  The remaining 39% were generated by variouspre-clinical studies and drug discovery programs, including our collaborationswith Pfizer and Novartis described below.

 

*Oxazolidinones collaboration with Pfizer.*  InMarch 1999, we entered into a collaboration agreement with PharmaciaCorporation, now Pfizer, pursuant to which we are collaborating to discover,synthesize and develop second and third generation oxazolidinone productcandidates.  In connection with thecollaboration, Pfizer made an equity investment in us of $3.8 million and paidus research support and license fee payments. Under the terms of the agreement and in consideration for our researchobligations, we are entitled to receive funding from Pfizer to support some ofour full-time researchers.  If specifiedmilestones are achieved, Pfizer is obligated to pay us additional payments ofup to $14.0 million for each compound, a portion of which may be creditedagainst future royalty payments to which we are entitled on the worldwide salesof any drug developed and commercialized from the collaboration.  In October 2000, Pfizer increased itsfunding for this collaboration by 30%, and in June 2001, we received amilestone payment for the initiation of clinical development of one of thecompounds.  In July 2002, we agreed withPfizer by amendment to extend the collaboration by an additional three years,through March 2005.  Through June 30,2003, Pfizer has made aggregate payments to us under this collaborationagreement (excluding equity investments) of $15.7 million.

 

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

 

•                  4% for the six months ended June 30, 2003compared to 7% for the six months ended June 30, 2002;

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

•                  8% in the aggregate from January 1, 1999through June 30, 2003.

 

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

 

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

 

*Deformylase inhibitors collaboration with Novartis.*** **In March 1999,we entered into a collaboration agreement with Novartis Pharma AG pursuant towhich we are collaborating to discover and develop novel deformylaseinhibitors.  In connection with thecollaboration, Novartis made an initial equity investment in us of $3.0million.  We have also received a numberof milestone payments from Novartis and are entitled to receive additionalpayments of up to $2.25 million for each compound, plus up to $13.0 million forour compounds or up to $7.25 million for Novartis compounds upon theachievement of specified milestones. Novartis may deduct a portion of these milestone payments from theroyalties it will be obligated to pay us on the worldwide sales of any drugdeveloped and commercialized from this collaboration.  As a result of progress achieved by the collaboration, in July2002 we agreed with Novartis by amendment to extend the collaboration by anadditional year, through March 2003.  InFebruary 2003, we further agreed with Novartis by amendment to extend thecollaboration by an additional two years through March 2005.  Through June 30, 2003, Novartis has madeaggregate payments to us under this agreement (excluding equity investments) of$11.1 million.

 

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

 

•                  3% for the six months ended June 30, 2003compared to 5% for the six months ended June 30, 2002;

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

•                  7% in the aggregate from January 1, 1999through June 30, 2003.

 

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

 

In addition to the work on deformylase inhibitors, under thecollaboration agreement we have been delivering to Novartis a series of screeningassays based on novel anti-bacterial targets. For each screen that Novartis accepts as validated, we receive amilestone payment.  In August 2001 andJanuary 2002, Novartis paid us our fourth and fifth milestone payments,respectively, as a result of our delivery of our fourth and fifth target-basedscreens, which we expect will be used in Novartis’ high-throughput screeninglaboratory to identify new anti-infectives and upon which we will be eligiblefor milestones and royalties.

 

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

 

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•                  we would notreceive any further milestone payments or any royalty revenue from thecollaborations; and

•                  while we do notrely on any particular external development collaboration to produce marketableproducts (and, ultimately, royalty revenues), the failure of all our externaldevelopment collaborations would increase the likelihood that we would need toobtain additional financing for our internal research and development efforts.

# ** **

# **Deferred Stock Compensation**

 

We have recorded deferred stock compensation expense in connection withthe grant of stock options to employees and consultants. Deferred stockcompensation for options granted to employees is the difference between thefair value for financial reporting purposes of our common stock on the date suchoptions were granted and their exercise price. Deferred stock compensation foroptions granted to consultants has been determined in accordance with Statementof Financial Accounting Standards No. 123, “Accounting for Stock BasedCompensation,” as the fair value of the equity instruments issued. Deferredstock compensation for options granted to consultants is periodicallyremeasured as the underlying options vest in accordance with EITF No. 96-18,“Accounting for Equity Instruments that are Issued to Other Than Employees forAcquiring, or in Conjunction with Selling Goods or Services.”

 

We recorded deferred stock compensation of $670,000 and $52,000 in thesix months ended June 30, 2003 and 2002, respectively.  These amounts were recorded as a componentof stockholders’ equity and are being amortized as charges to operations overthe vesting periods of the options.  Werecorded amortization of deferred stock compensation of $845,000 and $1.3million in the six months ended June 30, 2003 and 2002, respectively.

 

**Results of Operations**

 

**Three Months Ended June 30, 2003Compared to Three Months Ended June 30, 2002**

# ** **

# **Revenues**

 

Revenues were $2.3 million and $1.5 million in the three months endedJune 30, 2003 and 2002.  Revenues in2003 consisted of $1.5 million of collaborative research and development feesfrom Pfizer and Novartis and $0.8 million of collaborative research anddevelopment and grant revenue from our research operations in Italy.  Revenues in 2002 also consisted primarily ofcollaborative research and development fees from Pfizer and Novartis.

# ** **

# **Research and Development Expenses**

 

Research and development expenses were $25.2 million and $12.1 millionin the three months ended June 30, 2003 and 2002, respectively.  The increase in expenditure is partly due tothe fact that the 2003 number includes a $6.0 million payment to Eli Lilly forthe anidulafungin milestone payment, $4.3 million for Italian research costsresulting from our merger with Biosearch and an increase in our development team expenditures resulting in increasedexpenditures.

# ** **

# **General and Administrative Expenses**

 

Generaland administrative expenses were $3.6 million and $2.0 million in the threemonths ended June 30, 2003 and 2002, respectively.  General and administrative expenses include amortization ofnon-cash stock compensation of $227,000 and $417,000 in the three months endedJune 30, 2003 and 2002, respectively. Other general and administrative expenses were $3.4 million for thesecond quarter of 2003 compared to $1.6 million for the second quarter of2002.  The increase in expenses in thesecond quarter of 2003 resulted from our operations in Italy of $1.1 millionplus additional costs related to legal fees, insurance and salaries.

 

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**Other Income (Expense)**

 

Netother income (expense) was $671,000 and $374,000 in the three months ended June30, 2003 and 2002, respectively.  Theincreased income in the second quarter of 2003 from our Italian investments of$588,000 was partially offset by a reduction in our US interest income as aresult of lower returns on investments during the 2003 period.

 

**Six Months Ended June 30, 2003Compared to Six Months Ended June 30, 2002**

# ** **

# **Revenues**

 

Revenues were $4.0 million and $3.3 million in the six months endedJune 30, 2003 and 2002.  Revenues in2003 consisted of $3.0 million of collaborative research and development feesfrom Pfizer and Novartis and $1.0 million of collaborative research anddevelopment and grant revenue from our research operations in Italy.  Revenues in 2002 consisted primarily ofcollaborative research and development fees from Pfizer and Novartis.

# ** **

# **Research and Development Expenses**

 

Research and development expenses were $37.8 million and $22.1 millionin the six months ended June 30, 2003 and 2002, respectively.  The increase in expenditure is partly due tothe fact that the 2003 number includes a $6.0 million payment to Eli Lilly forthe anidulafungin milestone payment, $4.7 million for Italian research costsresulting from our merger with Biosearch and also an increase in ourdevelopment team expenditures resulting in increased expenditures.

 

# **General and Administrative Expenses**

 

Generaland administrative expenses were $5.7 million and $4.5 million in the sixmonths ended June 30, 2003 and 2002, respectively.  General and administrative expenses include amortization ofnon-cash stock compensation of $511,000 and $872,000 in the six months endedJune 30, 2003 and 2002, respectively. Other general and administrative expenses were $5.2 million for thefirst half of 2003 compared to $3.6 million for the second half of  2002. The increase in expenses in the second half of 2003 resulted from ouroperations in Italy of $1.5 million.

 

**Acquired In-Process Research and Development**

 

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

 

**Other Income (Expense)**

 

Netother income (expense) was $1.1 million and $657,000 in the six months endedJune 30, 2003 and 2002, respectively. The increased income in the second quarter of 2003 from our Italianinvestments was partially offset by a reduction in our United States interestincome as a result of lower returns on investments during the 2003 period.

# ** **

# **Liquidity and Capital Resources**

 

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

 

We have also received payments for collaborative research, contractservices and milestone payments, as well as license fees from ourcollaborators, including Sepracor. Of these payments, $1.4 million constitutesdeferred revenue as of June 30, 2003.

 

Wealso have a $6.0 million term loan and a fully drawn down $2.0 millionequipment note with a commercial bank. Proceeds from the loan were used to repay Sepracor for leaseholdimprovements to our facilities and for general corporate purposes. Proceedsfrom draw downs on the equipment note were used to finance capital expenditure.The terms of the term loan were renegotiated in January 2003 and the finalpayment on the loan is now due on December 31, 2004. The final note balance isalso payable on December 31, 2004. Also, in January 2003, the term loan wasamended to include a three-year equipment note for $1.5 million that we areable to draw down on through December 31, 2003.  The principal of this note is payable in equal installmentsbeginning on March 31, 2004 with the final payment due on December 31,2005.  To date, we have not drawn downon this note.

 

Asa result of our merger with Biosearch, we acquired additional long-term debtrelating to a loan agreement entered into by Biosearch in November 2000 withMIUR to fund certain research projects undertaken by Biosearch.  This loan matures in January 2011 and atJune 30, 2003, the amount outstanding under this loan is $1.2 million.

 

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

 

Cashused in operations was $35.9 million and $20.1 million in the six months endedJune 30, 2003 and 2002, respectively.  The net loss for the first half of 2003 of $133.1  million was reduced for non-cash charges foracquired in-process research and development of $94.5 million resulting from ourmerger with Biosearch and non-cash charges for depreciation and amortization andamortization of non-cash stock compensation expense of $2.9 million.  Prepaid expenses and other current assetsdecreased by $2.3 million primarily due to acquisition costs paid in 2002relating to the Biosearch merger which was only completed in 2003.  Accounts payable increased by $2.0 millionprimarily due to the increase in our Italian accounts

 

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payable balances in June2003.  In the first half of 2002, thenet loss of $22.6 million was offset by non-cash charges relating todepreciation and amortization of non-cash stock compensation expense of $1.9million.

 

Cashprovided by investing activities was $21.9 million and $8.6 million in the sixmonths ended June 30, 2003 and 2002, respectively.  The principal source of cash in both periods resulted from thenet sale of marketable securities to fund operating losses and the mix of ourinvestment portfolio of cash and cash equivalents and marketablesecurities.  The increase in capitalexpenditure of $7.9 million in 2003 is primarily due to the construction of ourmanufacturing plant in Pisticci, Italy.

 

Cash provided by  financingactivities was $2.3 million and $42.0 in the six months ended June 30, 2003 and2002, respectively.  In the first sixmonths of 2003, we received proceeds of $2.8 million from our loan facility inItaly for the construction of our manufacturing plant.  The $42.2 million in the first six months of2002 was primarily due to the completion of a private placement of shares ofcommon stock to selected institutional investors.

 

AtJune 30, 2003, our cash and cash equivalents and unrestricted marketablesecurities totaled $117.1 million compared to $62.3 million at December 31,2002.

 

We expect to have negativecash flow from operations for the foreseeable future. We expect to incurincreasing research and development, and general and administrative expenses,including expenses relating to clinical development, additions to personnel,production and commercialization efforts and the integration of our operationswith those of Biosearch.  Our futurecapital requirements will depend on a number of factors, including our successin developing markets for our products, payments received or made under collaborationagreements, the timing and outcome of regulatory approvals, the need to acquirelicenses to new products or compounds, the status of competitive products andthe availability of other financing.  Webelieve our existing cash and cash equivalents and marketable securities atJune 30, 2003 will be sufficient to fund our operating expenses, debtrepayments and capital requirements for between the next 18 to 24 months.

 

**Recent Accounting Pronouncements**

 

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

 

In January 2003, the FASBissued FIN No. 46, ‘‘Consolidation of Variable Interest Entities, anInterpretation of ARB No. 51.’’ FIN No. 46 requires certain variable interestentities to be consolidated by the primary beneficiary of the entity if theequity investors in the entity do not have the characteristics of a controllingfinancial interest or do not have sufficient equity at risk for the entity tofinance its activities without additional subordinated financial support fromother parties. FIN No. 46 is effective immediately for all new variableinterest entities created or acquired after January 31, 2003. For variableinterest entities created or acquired prior to February 1, 2003, the provisionsof FIN No. 46 must be applied for the first interim or annual period beginningafter June 15, 2003. The Company believes that the adoption of this standardwill have no material impact on its financial statements.

 

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**RISKFACTORS**

 

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

 

**Risks Related to Our Business**

** **

**Our abilityto become profitable is heavily dependent upon our obtaining FDA approval ofanidulafungin and dalbavancin, our two lead product candidates, and marketingthem successfully.**

** **

In order tobecome profitable, we anticipate that we will need to obtain FDA marketingapproval for anidulafungin and dalbavancin and then commercialize themsuccessfully.  In April 2003, we filed aNDA with the FDA seeking approval to market anidulafungin for the treatment ofesophageal candidiasis.  Dalbavancin isin Phase III clinical trials for the treatment of both complicated anduncomplicated skin and soft tissue infections and in a Phase II trial forcatheter-related bloodstream infections. We expect to complete the Phase III trials in the first half of 2004 andfile a NDA for dalbavancin in the second half of 2004.  Factors that could negatively affect ordelay our receipt of FDA approval of one or both of these drugs include:

 

•      arefusal by the FDA to approve our NDAs for these drugs or a request foradditional information or data.

 

•      delaysin completing clinical trials for dalbavancin; and

 

•      negativeor inconclusive results of our ongoing clinical trials of dalbavancin.

 

Our success isalso dependent upon successful commercialization of these two productcandidates.  Successfulcommercialization requires acceptance of anidulafungin and dalbavancin byhospital-based physicians, patients and other medical decision makers.

 

Our successwill further depend upon our ability to protect our intellectual property andproducts.  We rely on a combination ofpatent, trade secret and regulatory protections to protect us from competitorswith similar technologies. With regard to anidulafungin, we rely on patentscovering the compound, methods of production and methods of use to protect thisproduct 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 aspatents and know-how to protect this product candidate from genericcompetition.  However, in each casethere can be no assurances that we will obtain protection for any specifiedduration.

 

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

 

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

 

•                  Pre-clinical testing and clinical trials areprotracted, expensive and uncertain processes. It might take us and ourcollaborators several years to complete the testing process, and failure canoccur at any stage of the process. Success in pre-clinical testing and earlyclinical trials does not ensure that later clinical trials will be successful.

 

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

 

•                  Our product candidates, even if found to besafe and effective, might be difficult to develop into commercially viabledrugs or to manufacture on a large scale or might be uneconomical to marketcommercially.

 

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

 

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

 

•                  Even if our product candidates aresuccessfully developed and effectively marketed, the size of their potentialmarket might change such that our sales revenue is less than initiallycontemplated.  In any such case, wemight never generate sufficient or sustainable revenues to enable us to becomeprofitable.

 

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

 

We have incurred net lossessince our inception in 1995. As of June 30, 2003, our accumulated deficit was$285.7 million including the $94.5 million write-off of acquired in-processresearch and development resulting from our merger with Biosearch. Ouraccumulated deficit results from our net losses of $1.1 million in 1995; $4.8million in 1996; $6.7 million in 1997 (including $0.4 million in accretion ofdividends on preferred stock); $15.1 million in 1998 (including $2.5 million inaccretion of dividends on preferred stock); $67.4 million in 1999 (includingdeemed dividends of $35.1 million and $3.1 million in accretion of dividends onpreferred stock); $18.8 million in 2000 (including $3.5 million in accretion ofdividends on preferred stock); $32.8 million in 2001; $48.8 million in 2002;and $133.1 million in the six months ended June 30, 2003 (including a $94.5million write-off of acquired in-process research and development resultingfrom our merger with Biosearch). 

 

Our losses to date haveresulted principally from:

 

•                  research and development costs relating tothe in-licensing and development of our product candidates, which representedapproximately 58% of our aggregate operating expenses from our inceptionthrough June 30, 2003; 

 

•      write-offof in-process research and development expenses relating to our merger withBiosearch, which represented approximately 30% of our aggregate operatingexpenses from our inception through June 30, 2003; and

 

•                  general and administrative costs relating toour operations, which represented approximately 12% of our aggregate operatingexpenses from our inception through June 30, 2003.

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On February 28, 2003 wemerged with Biosearch, which also has incurred net losses since its inceptionin 1996. Biosearch’s net losses were $23.6 million for 2000, $9.8 million for2001 and $9.0 million for 2002 and $5.4 million from January 1, 2003 throughthe acquisition date of February 28, 2003. At February 28, 2003, Biosearch had an accumulated deficit of $54.8million.  Biosearch’s losses resultedprincipally from:

 

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

 

•                  general and administrative costs relating toBiosearch’s operations, representing 25% of Biosearch’s aggregate operatingexpenses from January 1, 2000 through February 28, 2003; 

 

however these expenses werepartially offset by amortization of negative goodwill, less losses on tradingsecurities in the net amount of (4%) of Biosearch’s aggregate operatingexpenses from January 1, 2000 through February 28, 2003.

 

We expect to incur substantial and increasing losses for theforeseeable future as a result of increases in our research and developmentcosts, including costs associated with conducting pre-clinical testing andclinical trials, and charges related to purchases of technology and otherassets. We expect that our operating losses will fluctuate significantly fromquarter to quarter as a result of  thetiming of receipt of regulatory approval of anidulafungin and our other productcandidates, the success of our commercialization efforts following regulatoryapproval, increases or decreases in our research and development efforts, theexecution or termination of collaborative arrangements, the initiation, successor failure of clinical trials, or other factors. Our company’s chances forachieving profitability will depend on numerous factors, including success in:

 

•                  receiving regulatory approvals for ourproduct candidates;

•                  developing and testing new productcandidates;

•                  licensing rights to our product candidates tothird parties;

•                  qualifying for and receiving grants andsubsidies;

•                  manufacturing products;

•                  marketing products; and

•                  competing with products from other companies.

 

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

 

 

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

** **

The biotechnology andpharmaceutical industries are highly competitive and subject to significant andrapid technological change as researchers learn more about diseases and developnew technologies for treatment.  Ourcompetitors in the United States and elsewhere are numerous and include, amongothers, major multinational pharmaceutical and chemical companies, specializedbiotechnology companies and universities, and other research institutions.Specifically:

 

•      if anidulafungin receives FDA andinternational marketing approval, it will face competition from commerciallyavailable drugs such as anaphotericin B, fluconazole, itraconazole, andpotentially from caspofungin, which was the first to receive FDA approval of anew class of antifungal agents called echinocandins (which includesanidulafungin). One of our competitors initially obtained approval only for thenarrow indication of aspergillosis salvage therapy, but has recently expandedits scope to include other serious fungal infections;

 

•      if dalbavancin receives FDA andinternational marketing approval, it will face competition from commerciallyavailable drugs such as vancomycin, teicoplanin, linezolid andquinupristin/dalfopristin, and drug candidates in clinical development such asdaptomycin, which is currently being reviewed by the FDA; and

 

•      if ramoplanin receives FDA andinternational marketing approval, it will face competition from commerciallyavailable drugs such as oral vancomycin as well as drugs focused on thetreatment (as opposed to prevention) of bloodstream vancomycin-resistantenterocci infections in hospitalized patients, such as linezolid andquinupristin/dalfopristin.

 

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

 

Many of our potentialcompetitors, either alone or together with their collaborators, havesubstantially greater financial resources and larger research and developmentand marketing teams than we do. In addition, many of these competitors, eitheralone or together with their collaborators, have significantly greater experiencethan we do in developing, manufacturing and marketing products. As a result,these competitors' products might come to market sooner or might prove to bemore effective, to be less expensive, to have fewer side effects or to beeasier to administer than ours.  In anysuch case, sales of our eventual products would likely suffer and we mightnever recoup the significant investments we are making to develop these productcandidates.

** **

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

 

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

 

•                  slower than expected rate of hospital andpatient recruitment;

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

•                  unforeseen safety issues;

•                  lack of efficiency during the clinicaltrials;

•                  inability to adequately follow patients aftertreatment;

•                  governmental or regulatory delays; or

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

 

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

 

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

 

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

 

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

 

As of June 30, 2003, we had35 full-time clinical development employees. We expect to continue to rely onthird parties, including our collaborators, clinical research organizations andoutside consultants, to assist us in managing and monitoring clinical trials.If these third parties fail to perform satisfactorily under the terms of ouragreements with them, clinical trials for our product candidates might bedelayed or unsuccessful. Furthermore, the FDA and/or other regulatory agenciesof the EU, might inspect some of our clinical investigational sites, ourcollaborators’ records and our facilities and files to determine if theclinical trials were conducted according to good clinical practices. If the FDAdetermines that our clinical trials were not in compliance with applicablerequirements, we might be required to repeat the clinical trials.

 

 

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**If our third-partymanufacturers do not produce our product candidates on a timely basis, clinicaltrials and commercialization of our product candidates could be delayed.**

 

We currently do not havemanufacturing facilities capable of manufacturing products in quantitiesnecessary for large-scale trials or marketing. The Aventis plant in Brindisi,Italy, and the Chemsyn Laboratories plant in the United States will be ourinitial manufacturing sites for dalbavancin and anidulafungin, respectively.Subsequently we intend to manufacture products in our own manufacturing plantin Pisticci, Italy, which is currently under construction. To the extent thatour manufacturing capabilities are insufficient to produce all of the necessaryactive ingredients for our current and future product candidates, we anticipatethat we might need to rely on third parties to manufacture some or all of theseactive ingredients. However, there are a limited number of facilities in whichour product candidates can be produced, and third-party manufacturers havelimited experience in manufacturing anidulafungin, dalbavancin, ramoplanin andVIC-Acne in quantities sufficient for conducting clinical trials or forcommercialization.  Difficulties areoften encountered in manufacturing new products, including problems involvingproduction yields, quality control and assurance, shortage of qualifiedpersonnel, compliance with FDA and other regulations, production costs, anddevelopment of advanced manufacturing techniques and process controls. Any contractmanufacturermight notperform as agreed or might not remain in the contract manufacturing businessfor the time we require to successfully develop, produce and market our productcandidates. If any of our contract manufacturers fails to perform satisfactorilyunder its agreements with us, such as by failing to deliver the requiredquantities of our product candidates for clinical use on a timely basis and atcommercially reasonable prices, and if we do not find a replacementmanufacturer or develop our own manufacturing capabilities, clinical trialsinvolving our product candidates, or commercialization of our products, couldbe delayed.

 

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

 

We intend to sell a portionof our future products, including anidulafungin and dalbavancin, through ourown sales force. At present, however, we have no sales and marketinginfrastructure and we lack any experience in direct marketing, sales anddistribution. Our future profitability will depend in part on our ability todevelop 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 qualifiedsalespeople or be able to build an efficient and effective sales and marketingforce. To the extent that we enter into marketing and sales arrangements withother companies, our revenues will depend on the efforts of others. Theseefforts might not be successful. If we are unable to enter into third-partyarrangements, then we must substantially expand our marketing and sales forcein order to achieve commercial success for certain products, and to competewith other companies that have experienced and well-funded marketing and salesoperations.

 

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

** **

An importantcomponent of our business strategy is to in-license drug compounds discoveredby other pharmaceutical and biotechnology companies or academic researchlaboratories, in order to develop them ourselves.  Currently we in-license anidulafungin from Eli Lilly.  Anidulafungin is our lead antifungal productcandidate and one of our four product candidates in clinical development.  Under our license arrangement with EliLilly, we acquired exclusive worldwide rights to anidulafungin.  This license arrangement will terminate on acountry-by-country basis upon the later of the expiration of all productpatents in the country or 10 years from the date of the first commercial saleof anidulafungin in the country. Competition for new promising compounds can be intense.  If we are not able to identify futurein-licensing opportunities and enter into future licensing arrangements onacceptable terms, our future product portfolio and potential profitabilitycould be harmed.  

 

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

** **

We haveentered into collaboration arrangements with third parties to develop productcandidates.  Additional collaborationsmight be necessary in order for us to fund our research and developmentactivities and third-party manufacturing arrangements, to seek and obtainregulatory approvals and to successfully commercialize our existing and futureproduct candidates.  If we do notmaintain our existing collaborative arrangements or do not enter intoadditional collaborative arrangements, the number of product candidates fromwhich we could receive future revenues would decline.  In addition, our dependence on collaborative arrangements withthird parties subjects us to a number of risks, including the following:

 

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

 

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•       Our collaborators might also not performtheir obligations as expected.  Businesscombinations or significant changes in a collaborator's business strategy mightadversely affect a collaborator's willingness or ability to complete itsobligations to us.

 

•      Moreover, we could become involved indisputes with our collaborators which could lead to delays in, or thetermination of, our development programs with them, as well as time-consumingand expensive litigation or arbitration.

 

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

 

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

 

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

* *

Even if weobtain regulatory approval to market products in the future, we might not gainmarket acceptance among physicians, patients, healthcare payors and the medicalcommunity.  The degree of marketacceptance of any pharmaceutical product that we might develop will depend on anumber of factors, including:

 

•      demonstrationsof clinical efficacy and safety;

 

•      cost-effectiveness;

 

•      potentialadvantages over alternative therapies, including fewer side effects or easieradministration;

 

•      reimbursementpolicies of government and third-party payors; and

 

•      theeffectiveness of our marketing and distribution capabilities.

 

Physicianswill not recommend therapies using any of our future products until clinicaldata or other factors demonstrate their safety and efficacy as compared toother drugs or treatments.  Even if theclinical safety and efficacy of therapies using any of our future products isestablished, physicians might elect not to recommend the therapies for a numberof other reasons, including the possibility that the mode of administration ofour future product might not be effective for their patients' indications andlocations.  For example, many antibioticor antifungal products are typically administered by infusion or injection,which requires substantial cost and inconvenience to patients and might not bepractical in non-hospital settings. 

 

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

 

**If we areunable to attract and retain skilled employees and consultants, we will beunable to develop and commercialize our product candidates.**

* *

We are highlydependent on our skilled management and scientific staff.  In order to pursue our product development,marketing and commercialization plans, we might need to hire additionalpersonnel with experience in clinical testing, government regulation,manufacturing, marketing and finance. We might not be able to attract and retain personnel on acceptable termsgiven the intense competition for such personnel among high technologyenterprises, including biotechnology, pharmaceutical and healthcare companies,universities and non-profit research institutions.  Most of our management and scientific staff do not haveemployment contracts.  If we lose asignificant number of these persons, or are unable to attract and retainqualified personnel, our business, financial condition and results ofoperations might be harmed.  We do notmaintain key person life insurance on any of our personnel.

 

In addition,we rely on consultants and members of our scientific and clinical advisoryboards to assist us in formulating research and development strategies.  All of these consultants and the members ofour scientific and clinical advisory boards are employed by others, and they mighthave commitments to, or advisory or consulting agreements with, others thatmight limit their availability to us. If we lose the services of theseadvisors, our achievement of our development objectives might be impeded, andour business, financial condition and results of operations might beharmed.  Finally, except for workperformed specifically for and at our direction, the inventions or processesdiscovered by our scientific and clinical advisory board members and otherconsultants will not become our intellectual property, but will be theintellectual property of the individuals or their institutions. If we desireaccess to these inventions, we will be required to obtain appropriate licensesfrom the owners.  We face the risk thatwe might not be able to obtain such licenses on favorable terms or at all.

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

** **

We expect thatsubstantially all of our revenues for the forseeable future will result frompayments under collaborative arrangements, with some European grant and subsidyrevenue.  To date, collaborativepayments have taken the form of up-front payments, reimbursement for researchand development expenses and milestone payments.  Milestone payments to our company under collaborativearrangements are subject to significant fluctuation in both timing and amount.  As a result, comparisons of our revenues andresults of operations between periods might not produce meaningful indicationsof our progress toward commercializing one or more product candidates.  Moreover, the historical revenues of Vicuronand Biosearch on a stand-alone basis might not be indicative of our future performanceor of our ability to continue to achieve additional milestones and to receiveadditional milestone payments from our collaborators.

* *

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

 

We expect to incurincreasing research and development, general and administrative and sales andmarketing expenses over the next several years. Based on our current plans andassumptions, we estimate that our cash and liquid assets at June 30, 2003 willbe sufficient to fund our operating losses for the next 18 to 24 months.  However, if our plans change and/or ourassumptions are inaccurate, we might need to seek capital sooner thananticipated. Some of our more significant plans and assumptions relate to:

 

•      receiptof regulatory approval for anidulafungin and commencement of a marketingcampaign for anidulafungin;

•                  payments received or made under possiblefuture collaborative agreements;

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

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

•                  costs associated with developing marketingand sales capabilities; and

•                  the rate of market acceptance of any futureproducts.

 

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

 

We might seekto raise funds from a traditional lender or through public or private debt orequity offerings. To the extent we raise additional capital through the sale ofequity or convertible debt securities, the securities could be sold at adiscount to prevailing market price and the issuance of those securities could resultin dilution to our stockholders. Moreover, the incurrence of debt financingcould result in a substantial portion of our operating cash flow beingdedicated to the payment of principal and interest on such indebtedness, and wemight be subject to restrictive covenants as a result of such debt financing.This could render us more vulnerable to competitive pressures and economicdownturns and could impose restrictions on our operations.  If adequate funds are not available from anyof 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 developmentprograms or otherwise significantly curtail operations. In addition, we mightbe required to obtain funds by entering into arrangements with collaborators onunattractive terms or relinquish rights to certain technologies or drugcandidates that we would not otherwise relinquish in order to continueindependent operations.

 

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

 

We recently merged withBiosearch and, if appropriate opportunities become available, we might attemptto acquire additional products, product candidates or businesses that we believeare a strategic fit with our business. Currently, however, we are not a partyto any acquisition agreements. If we pursue any transaction of that sort, theprocess of negotiating the acquisition and integrating an acquired product,product candidate or business might result in operating difficulties andexpenditures and might require significant management attention that wouldotherwise be available for ongoing development of our business, whether or notany such transaction is ever consummated. Moreover, we might never realize theanticipated benefits of any acquisition. Future acquisitions could result inpotentially dilutive issuances of equity securities, the incurrence of debt,contingent liabilities and/or impairment expenses related to goodwill andimpairment or amortization expenses related to other intangible assets, whichcould harm our financial condition.

 

 

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

 

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

 

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

 

We have eight directors onour board. In connection with the merger with Biosearch, we amended our bylawsin a manner that is intended, among other things, to maintain an even balanceof legacy Versicor directors and legacy Biosearch directors on the board forthree years from the date of the completion of the merger. If we decide to addadditional directors to the board during that three-year period, our bylawseffectively require us to add an even number of directors (with one-half of theadditional directors proposed by the four legacy Versicor directors and theother half proposed by the four legacy Biosearch directors) in order tomaintain an equal number of legacy Versicor and Biosearch directors on theboard. Our bylaws might make it more difficult for us to comply with Nasdaq’srecently proposed director-independence rule. 

 

In order for a majority ofour directors to be independent, we would need to (a) ask up to three of ournon-independent directors to resign followed by appointment of three newindependent directors and/or (b) increase the size of our board by adding up tosix additional independent directors. If the proposed rules are adopted intheir current form, our board will also need to appoint an independent directoras chairman of the audit committee. Any increase in the size of our board orchange in its membership might give rise to inefficiencies, which might causesome board actions to be delayed.

 

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

 

Biosearch and its subsidiaryhistorically funded a portion of their operations through research grants andloan subsidies awarded by Italian and EU authorities. Under applicable law, anytransfer of those grants and subsidies (including transfer by merger) requireswritten approval from the Italian bank authorized to make the disbursement onbehalf of the government and from the appropriate Italian or EU authorities. Inconnection with the merger, we applied for permission to transfer Biosearch’s grantsand subsidies to our Italian branch. Although the merger has recently beencompleted, the Italian and EU authorities have not as yet reached an officialdecision on whether to approve our transfer requests.  If the transfers are approved, we intend to apply for furtherpermission to contribute the grants and subsidies to Vicuron PharmaceuticalsItaly S.r.l., our wholly-owned subsidiary in Italy. We face the risk that oneor both of the transfers might not be approved, in which case we might be requiredto repay some or all of the grants and subsidies received by Biosearch prior tothe merger, in the aggregate amount of up to approximately $1.9 million as ofJune 30, 2003, and we may forfeit grants and subsidies awarded to Biosearch butnot yet disbursed as of June 30, 2003 by the authorized bank, in the aggregateamount of up to approximately $1.2 million as of June 30, 2003 (each estimatebased on exchange rates then prevailing). Regardless of whether or not we arerequired to repay those grants, we anticipate that our Italian subsidiary willbe eligible to apply for new research grants and subsidies from both theItalian and EU authorities. However, grants and subsidies are awarded in thediscretion of those authorities and we face the risk that our Italiansubsidiary might not qualify or be approved for any additional grants orsubsidies in the future.

 

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

 

Our operations must complywith applicable laws of and rules of the United States (including Californialaw, Delaware corporate law and the rules and regulations of the SEC and theNasdaq National Market), the EU legal system and the Republic of Italy (includingthe rules and regulations of the Commissione Nazionale per le Società e laBorsa, or CONSOB, and Borsa Italiana, which collectively regulate companieslisted on Italy’s public markets such as the Nuovo Mercato). Conducting ouroperations in a manner designed to comply with all applicable laws and ruleswill require us to allocate additional time and resources to regulatorycompliance matters. For example:

 

•              issuingeach material announcement in both English and Italian might causeadministrative challenges;

 

•              submitting filings and applications withregulatory and governmental authorities in the U.S., Italy and the EU, andapproving translations of each significant document into the other language, ifnecessary, would be time-consuming and expensive and might distract ourexecutives from their primary focus of managing our business, and languagetranslations themselves might lead to inaccuracies;

 

•                  under Italian employment law, our relationswith our employees in Italy are governed by collective bargaining agreementsnegotiated at the national level (and over which we have no control), whichreduce the methods customarily available in the United States to motivateand/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 someclinical trial data, from our Italian offices to our U.S. offices; and 

 

•              tariffs, customs, duties, importrestrictions, tax effects and other trade barriers might delay or increase thecost of relocating personnel and, if marketing approvals are obtained,commercial quantities of our products between nations.

 

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

 

As a result of the recentlycompleted merger, we are exposed to risks associated with foreign currencytransactions insofar as we might desire to use dollars to make contractpayments denominated in euros or vice versa. As the net positions of ourunhedged foreign currency transactions fluctuates, our earnings might benegatively affected. In addition, we are exposed to risks associated with thetranslation of euro-denominated financial results and balances and cash flowsinto U.S. dollars. Although our reporting currency remains the U.S. dollar, aportion of our consolidated revenues and costs now arise in euros, which werestate in dollars for purposes of financial reporting.  In addition, the reported carrying value ofour euro-denominated assets and liabilities will be affected by fluctuations inthe value of the U.S. dollar as compared to the euro. Accordingly, changes inthe value of the U.S. dollar relative to the euro might have an adverse effecton our reported results of operations and financial condition, and fluctuationsin exchange rates might introduce additional volatility in our reported resultsand accounts from period to period.

 

**All of ourItalian subsidiary's contract parties have the right to terminate theircontracts with us for a limited period after June 30, 2003.**

** **

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

 

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**Risks Related to Operating in Our Industry**

 

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

 

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

 

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

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

•                  diminish anycompetitive advantage that we or our collaborators might attain from earlymarket introduction of a new product; and

•                  delay or eliminate our receipt of revenues orroyalties.

 

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

 

•                  imposed delays in clinical trials orcommercialization;

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

•                  product recalls or seizures;

•                  suspension of production;

•                  withdrawals of previously issued marketingapprovals; and

•                  fines, civil penalties and criminalprosecutions.

 

We choose to develop someproprietary product candidates ourselves and to out-license other productcandidates to third parties for collaborative development. The licensing orcollaboration agreement will generally specify which party is responsible fordirecting the clinical trial process and seeking regulatory approvals. Regardlessof whether the process is directed by us or by our collaborators, in each casewe face the risk that our clinical trials might be unsuccessful, and that theFDA will not grant us marketing approval. We might also encounter delays orrejections based upon future changes in government regulation, legislation orFDA policy during the period of product development, clinical trials and FDAregulatory review. If we do not obtain required governmental approvals, we willbe precluded from marketing the candidate for which approval was sought. Ifregulatory clearance for marketing a future product is granted, this clearancewill be limited to those disease states and conditions for which the product isdemonstrated through clinical trials to be safe and effective.

 

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

 

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

 

Manufacturing facilities arerequired to comply with the FDA's Good Manufacturing Practice regulations. Evenfacilities outside the United States such as the manufacturing plant we areconstructing in Italy, must comply with these regulations if the manufacturedproducts will be sold in the United States. Good Manufacturing Practiceregulations include requirements relating to quality control and quality assuranceas well as to maintenance of records and documentation. Manufacturingfacilities are subject to inspection by the FDA. These facilities must beapproved before we can use them in commercial manufacturing of our products.Comparable Good Manufacturing Practice regulations also apply in the EU, Italyand other foreign countries. Our contract manufacturers and our manufacturingsubsidiary might not be able to comply with the applicable Good ManufacturingPractice requirements and other FDA or other EU, Italian or foreign regulatoryagencies’ regulatory requirements.

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** **

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

** **

**       **Our success depends in part on our ability toprotect our intellectual property from unauthorized use by third parties, whichwe will be able to do only to the extent that our intellectual property iscovered by valid and enforceable patents or is effectively maintained as atrade secret. We have rights relating to 33 issued U.S. patents, 15 U.S. patentapplications, 447 foreign patents and 50 foreign patent applications. Of thesepatents and patent applications:

 

•      our non-Biosearch patent portfolio(including the Novartis collaboration patent applications mentioned below) asof July 14, 2003 includes five U.S. patents, 12 U.S. patent applications andseven foreign patent applications; and 

 

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

 

Ourcollaborations involve the following patents:

 

•     our license agreement with Eli Lilly withrespect to anidulafungin covers 15 U.S. patents, 10 U.S. patent applications,79 foreign patents and 120 foreign patent applications;

•      our collaborative agreement with Novartiscovers two U.S. patent applications; and

•      our collaborative agreement with Pfizer(as successor to Pharmacia) with respect to the development of oxazolidinonescovers four U.S. patents, six U.S. patent applications, two Canadian patentapplications and one foreign patent application.

 

The patent position ofbiopharmaceutical companies involves complex legal and factual questions and,therefore, we cannot predict with certainty whether they will be enforceable.We have in the past and might in the future receive office actions or othernotices from U.S. or foreign patent authorities seeking to limit or otherwisequalify some patent claims. Patents, if issued, might be challenged,invalidated or circumvented. Thus, any patents that we own or license fromthird parties might not provide any protection against competitors. Our pendingpatent applications, those we might file in the future, or those we mightlicense from third parties, might not result in patents being issued. Also, weperiodically review our U.S. and foreign patent filings to determine whethertheir maintenance is commercially justified. As a result, we may determine fromtime to time to abandon certain patent applications or allow certain patents tolapse. Moreover, patent rights might not provide us with adequate proprietaryprotection or competitive advantages against competitors with similartechnologies. The laws of many foreign countries do not protect intellectualproperty rights to the same extent as do the laws of the United States.

 

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

** **

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

 

Our successdepends in part on our ability to operate without infringing upon theintellectual property rights of others. Research has been conducted formany 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 largernumber of still-pending patent applications. U.S. patent applications, whichare not foreign filed can be maintained in secrecy until issuance. U.S. patentapplications which are also intended for foreign filing usually publish 18 monthsafter 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 patentliterature frequently occurs substantially later than the date on which theunderlying discoveries were made. Our commercial success will dependsignificantly on an ability to operate without infringing the patents and otherintellectual property rights of third parties. However, our technologies mightinfringe the patents or violate other intellectual property rights of thirdparties without our knowledge. In the event an infringement claim is broughtagainst us, we might be required to pay legal and other expenses to defend sucha claim and, if our defense is unsuccessful, we might be prevented frompursuing product development and commercialization and might be subject todamage awards.

 

Our successalso depends in part on our ability to prevent others from infringing ourintellectual property rights. The biotechnology and pharmaceuticalindustries have been characterized by extensive litigation regarding patentsand other intellectual property rights. The defense and prosecution ofintellectual property legal actions, U.S. Patent and Trademark Officeinterference proceedings and related legal and administrative proceedings inthe United States and internationally involve complex legal and factualquestions. As a result, such proceedings are costly and time-consuming topursue and their outcome is uncertain. Litigation might be necessary to:

 

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•                  enforce patents that we own or license;

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

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

 

If we becomeinvolved in any litigation, interference or other administrative proceedings,we will incur substantial expense and the efforts of our technical andmanagement personnel will be significantly diverted. An adverse determinationmight 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, ifany, in the event of an adverse determination in a judicial or administrativeproceeding or if we fail to obtain necessary licenses. Costs associated withthese arrangements might be substantial and might include ongoing royalties.Furthermore, we might not be able to obtain the necessary licenses onsatisfactory terms, if at all.

 

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

 

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

 

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

 

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

 

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**RisksRelated to the Securities Markets**

 

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

 

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

 

•                  the results of our clinical trials and thoseof our competitors, and any significant delays or unexpected complications inour clinical trials;

•                  decisions by regulatory authorities withrespect to our development efforts and product candidates;

•                  public concern regarding the safety andefficacy of drugs we develop;

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

•                  announcements of scientific innovations by usor our competitors;

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

•                  conditions or trends in the biotechnology andpharmaceutical industries;

•                  announcements by us of significantacquisitions, strategic collaborations, joint ventures or capital commitments;

•                  additions or departures of key personnel;

•                  general economic conditions;

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

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

•                  future sales of equity or debt securities byus;

•                  new regulatory legislation adopted in theUnited States or abroad;

•                  sales of our common stock by our directors,officers or significant stockholders.

 

In addition, the stockmarket in general, and the Nasdaq National Market, the Nuovo Mercato and themarket for biotechnology and pharmaceutical stocks in particular, haveexperienced significant price and volume fluctuations. Over the 52-week periodending July 31, 2003, the market price of Vicuron common stock as reported onthe Nasdaq National Market ranged from a high of $15.28 to a low of $7.85 and ouraverage daily trading volume was 200,132 shares. Volatility in the market pricefor particular companies has often been unrelated or disproportionate to theoperating performance of those companies. These broad market and industryfactors might seriously harm the market price of our common stock, regardlessof our operating performance. In addition, securities class action litigationhas often been initiated following periods of volatility in the market price ofa company’s securities. A securities class action suit against us could resultin substantial costs, potential liabilities and the diversion of management’sattention and resources.

 

**We haveimplemented anti-takeover provisions that could discourage or prevent atakeover, even if an acquisition would be beneficial to our stockholders.**

 

Provisions of our restatedcertificate of incorporation, our amended and restated bylaws and ourshareholder rights plan, commonly known as a "poison pill", increasethe likelihood that any third party would need to negotiate with our boardprior to initiating a takeover proposal for our company and could have theeffect of delaying or preventing a change of control of our company. Forexample, our board of directors, without further stockholder approval, mayissue preferred stock (or, in the face of a potential acquiror's increasedownership, rights to purchase our common stock for a nominal price) that coulddelay or prevent a change of control, as well as reduce the voting power ofholders of our common stock. In addition, some of our stockholders have enteredinto a stockholders agreement in which they have agreed, for a period of threeyears following completion of the merger, to vote as recommended by the boardon some issues. These provisions could delay or prevent an attempt to replaceor remove our management. The foregoing factors could also limit the price thatinvestors or an acquiror might be willing to pay in the future for shares ofour common stock.

 

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**ITEM3****: Quantitativeand Qualitative Disclosures about Market Risk**

# ** **

# **Interest Rates**

# ** **

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

# ** **

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

 

|                      |   | **2003** |   | **2004** |   | **2005** |   | **2006** |   |
|---------------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|
|                      |   |     |   |     |   |     |   |     |   |
| Cash and cash equivalents |   | $        | 16,959 |     | $      | —   |   | $        | — |   | $ | — |   |
| Average interest rate     |   | 1.02     | %      | —   |   | —   |   | —   |   |
|                      |   |     |   |     |   |     |   |     |   |
| Marketable securities     |   | $        | 95,861 |     | $      | 6,381    |   | $        | 110    |   | $ | 353 |   |
| Average interest rate     |   | 2.44     | %      | 2.78     | %      | 2.70     | %      | 4.0      | %      |

 

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

# ** **

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

# ** **

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

# ** **

# **Inflation**

# ** **

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

# ** **

# **Exchange Rates**

# ** **

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

 

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**ITEM 4****.  CONTROLS AND PROCEDURES**

 

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

 

As of June 30, 2003, we carried out an evaluation, underthe supervision and with the participation of our management, including ourPresident and Chief Executive Officer along with our Chief Financial Officer,of the effectiveness of the design and operation of our disclosure controls andprocedures pursuant to Exchange Act Rule 13a-14. Based upon the foregoing, ourPresident and Chief Executive Officer along with our Chief Financial Officerconcluded that our disclosure controls and procedures are effective in timelyalerting them to material information relating to our company required to beincluded in our Exchange Act reports. There have been no significant changes inour internal controls or in other factors which could significantly affectinternal controls subsequent to June 30, 2003.

 

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**PART II****– OTHER INFORMATION**

 

**ITEM 1.  LEGAL PROCEEDINGS**

 

Weare not a party to any significant legal proceedings.

 

# **ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS**

 

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

 

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

 

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

 

On July 17, 2003, we sold 6,000,000 shares of commonstock 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**

 

The Annual Meeting of Stockholders of Vicuron Pharmaceuticals, Inc. washeld on June 20, 2003 at the Radisson Valley Forge Hotel for the purposes ofacting upon the following matters:

 

1.                               Theelection of three directors to the Board of Directors to hold office until the2006 Annual Meeting of Stockholders or until their successors are duly electedand qualified.

 

|                     |   | **For**    |   | **Withhold** |   |
|--------------------------|--------|------------|--------|--------------|--------|
|                     |   |       |   |         |   |
| Costantino Ambrosio      |   | 30,507,026 |   | 705,229      |   |
| Ubaldo Livolsi, Ph.D.    |   | 27,775,114 |   | 3,437,141    |   |
| David V. Milligan, Ph.D. |   | 30,507,026 |   | 705,229      |   |

 

2.                               Toratify the appointment of PricewaterhouseCoopers LLP as independent auditorsfor the fiscal year ending December 31, 2003.

 

| **For**    |   | **Against** |   | **Abstain** |   |
|------------|--------|-------------|--------|-------------|--------|
|       |   |        |   |        |   |
| 30,864,445 |   | 342,645     |   | 5,165       |   |

 

# **ITEM 5.  OTHER INFORMATION**

 

None.

 

# **ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K**

 

***Exhibits***

 

Theexhibits listed on the Exhibit List, which appears below following thesignature page, are included or incorporated by reference in this QuarterlyReport.

 

***Reports on Form8-K***

 

On May 19, 2003, we fileda Current Report on Form 8-K with the SEC, announcing our earnings for thefirst quarter of 2003.

 

On June 6, 2003, we fileda Current Report on Form 8-K with the SEC, containing audited BiosearchItalia financial statements as of December 31, 2002 and 2001 and for thethree-year period ended December 31, 2002.

 

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**SIGNATURES**

 

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

 

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

 

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**EXHIBITINDEX**

 

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

 

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

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

 

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| 4.7    |   | Registration Rights  Agreement dated as of April 8, 2002, by and between Vicuron Pharmaceuticals  Inc. and the Purchasers listed on Schedule A attached thereto (previously  attached as Exhibit 4.1 to Vicuron’s current report on Form 8-K, which was  filed with the SEC on April 10, 2002 and is incorporated 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. (4)                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                        |
| 10.1   |   | Form of Indemnity Agreement  (4)                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                        |
| 31.1   |   | Certification of George F.  Horner III under Section 302 of the Sarbanes-Oxley act of 2002 (4)                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                        |
| 31.2   |   | Certification of Dov A.  Goldstein, M.D. under Section 302 of the Sarbanes-Oxley act of 2002 (4)                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                        |
| 32.1   |   | Certification under  Section 906 of the Sarbanes-Oxley Act of 2002 (4)                                                                                                                                                                                                                                                                      |

 

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

 

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

 

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

 

(4)Filed herewith.

 

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