**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D. C. 20549**

**FORM 10-K**

**ANNUAL REPORT PURSUANT TO SECTION 13 OR15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

**Forthe fiscal year ended December 31, 2004**

**CommissionFile Number:  0-19131**

**MEDIMMUNE, INC.**

(Exact name of registrantas specified in its charter)

| Delaware                                                         | **52-1555759**                        |
|------------------------------------------------------------------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) | (I.R.S. Employer  Identification No.) |

 

**One MedImmune WayGaithersburg, Maryland 20878**

(Address of principalexecutive office)(Zip Code)

**Registrant’s telephone number,including area code:** (301) 398-0000

**Securities Registered pursuant to Section 12(b) ofthe Act:** None

**Securities Registered pursuant to Section 12(g) ofthe Act:**

**CommonStock, $.01 par value**(Title of Class)

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

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K x.

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

Aggregate market value ofthe 249,022,698 shares of voting and non-voting common equity held bynon-affiliates of the registrant, based on the closing price on June 30,2004, was $5.8 billion. Common Stock outstanding as of February 25, 2005:248,727,739 shares.

Documents Incorporated byReference: Portions of the registrant’s definitive proxy statement for theannual meeting of stockholders to be held May 19, 2005 (Part III).

 

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**MEDIMMUNE, INC.FORM 10-KTABLE OF CONTENTS**
| ** **         |                                                                                                                                 | **PAGE** |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------|----------|
| PART I        |                                                                                                                            |     |   |   |
| Item 1.            | Business                                                                                                                        |     | 2 |   |
| Item 2.            | Properties                                                                                                                      |     | 21 |   |
| Item 3.            | Legal  Proceedings                                                                                                              |     | 22 |   |
| Item 4.            | Submission  of Matters to a Vote of Security Holders                                                                            |     | 22 |   |
| PART II       |                                                                                                                            |     |   |   |
| Item 5.            | Market  for MedImmune’s Common Stock, Related Shareholder Matters and Issuer  Purchases of Equity Securities               |     | 23 |   |
| Item 6.            | Selected  Consolidated Financial Data                                                                                           |     | 24 |   |
| Item 7.            | Management’s  Discussion and Analysis of Financial Condition and Results of Operations       |     | 26 |   |
| Item 7A.           | Quantitative  and Qualitative Disclosures about Market Risk                                                                     |     | 44 |   |
| Item  8.           | Report  of Independent Registered Public Accounting Firm                                                                        |     | 47 |   |
|               | Consolidated Financial Statements  and Supplementary Data                                                                       |     | 49 |   |
| Item 9.            | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure                  |     | 84 |   |
| Item 9A.           | Controls  and Procedures                                                                                                        |     | 84 |   |
| Item 9B.           | Other  Information                                                                                                         |     | 84 |   |
| PART III      |                                                                                                                            |     |   |   |
| Item 10.           | Directors  and Executive Officers of MedImmune                                                                                  |     | 85 |   |
| Item 11.           | Executive  Compensation                                                                                                         |     | 85 |   |
| Item 12.           | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                 |     | 85 |   |
| Item 13.           | Certain  Relationships and Related Transactions                                                                                 |     | 85 |   |
| Item 14.           | Principal  Accounting Fees and Services .                                                                                       |     | 85 |   |
| PART IV       |                                                                                                                            |     |   |   |
| Item 15.           | Exhibits  and Financial Statement Schedule                                                                                      |     | 86 |   |
| SIGNATURES         |                                                                                                                            | 87       |   |
| Schedule II        |                                                                                                                            | S-1      |   |
| Exhibit Index |                                                                                                                            | E-1      |   |
| Exhibits           | (Attached  to this Report on Form 10-K)                                                                                    |
|                    |                                                                                                                                 |          |  |  |  |

 

MedImmune, Synagis, CytoGam, Ethyol, FluMist,NeuTrexin, RespiGam and Vitaxin are registered trademarks of the Company. Numaxis a trademark of the Company. Accuspray is a trademark of Becton Dickinson. BiTEis a trademark of Micromet AG.

 

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**FORWARD-LOOKINGSTATEMENTS**

*The statements in this annual report that are notdescriptions of historical facts may be forward-looking statements. Thosestatements involve substantial risks and uncertainties. You can identify thosestatements by the fact that they contain words such as “anticipate,” “believe,”“estimate,” “expect,” “intend,” “project” or other terms of similar meaning. Thosestatements reflect management’s current beliefs, but are based on numerousassumptions, over which MedImmune may have little or no controland that may not develop as MedImmune expects. Consequently, actual results maydiffer materially from those projected in the forward-looking statements. Amongthe factors that could cause actual results to differ materially are the risks,uncertainties and other matters discussed below under Item 1. Business, “RiskFactors,” and elsewhere in this report. MedImmune cautions that RSV disease andinfluenza, two diseases targeted by the Company’s products, occur primarilyduring the winter months; MedImmune believes its operating results will reflectthat seasonality for the foreseeable future. MedImmune is also developingseveral products for potential future marketing. There can be no assurance thatsuch development efforts will succeed, that such products will receive requiredregulatory clearance or that, even if such regulatory clearance is received,such products will ultimately achieve commercial success. Unless otherwiseindicated, the information in this annual report is as of December 31,2004. This annual report will not be updated as a result of new information orfuture events.*

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**PART I**

**ITEM 1.**                BUSINESS

MedImmune is committed toadvancing science to develop better medicines that help people live healthier,longer and more satisfying lives. It currently focuses its efforts on the areasof infectious disease, oncology and immunology. MedImmune markets fourproducts: Synagis (palivizumab) and FluMist(Influenza Virus Vaccine Live, Intranasal)to help prevent two common respiratory infectious diseases; Ethyol (amifostine)to help reduce undesired side effects of certain anti-cancer chemo- andradiotherapies; and Cytogam (cytomegalovirus immune globulin intravenous(human)) to help preventcytomegalovirus (CMV) disease associated with solid organ transplantation.

Founded in 1988 andheadquartered in Gaithersburg, Maryland, MedImmune operates facilities in theUnited States and Europe to manufacture and distribute one or more componentsof each of its products. MedImmune also hasclinical, research and development staff in the U.S., through which it isdeveloping a pipeline of product candidates for potential commercialization. Inaddition to its internal efforts, the Company has established clinical,research, development, manufacturing and commercialization collaborations withother companies and organizations.

**Products**

**Synagis**

Synagis is a humanizedmonoclonal antibody (“MAb”) approved for marketing in 1998 by the U.S. Food andDrug Administration (the “FDA”) for the prevention of serious lower respiratorytract disease caused by respiratory syncytial virus (“RSV”) in pediatricpatients at high risk of acquiring RSV disease. RSV is the most common cause oflower respiratory tract infections in infants and children worldwide. Healthychildren and individuals with adequate immune systems often acquire a benignchest cold when infected with RSV. In contrast, high-risk infants, includingchildren born prematurely or with chronic lung disease, also known asbronchopulmonary dysplasia (“BPD”), and children with certain heart diseasespresent at birth (hemodynamically significant congenital heart disease (“CHD”))are at increased risk for acquiring severe RSV disease (pneumonia andbronchiolitis), often requiring hospitalization.

Synagis is administered byintramuscular injection once per month during anticipated periods of RSVprevalence in the community, which is typically during the winter months in theNorthern Hemisphere. As such, the sales of Synagis reflect this seasonality andoccur primarily in the first and fourth quarters of the calendar year. In theU.S., Synagis is co-promoted by MedImmune and the Ross Products Division ofAbbott Laboratories (“Abbott”).

Outside the U.S., AbbottInternational (“AI”), an affiliate of Abbott, exclusively distributes Synagis. Synagiswas originally approved by the European Medicines Agency (“EMEA”)in September 1999 for the prevention of serious lower respiratory tractdisease caused by RSV, and in Japan in 2002. The indication for congenitalheart disease infants was approved by the EMEA in October, 2003. As of December 31,2004, 61 countries outside the U.S. had approved Synagis for marketing.

In 2004, the FDA approvedMedImmune’s supplemental Biological License Application (“BLA”) for a newliquid formulation of Synagis to be used in the United States. The liquidformulation is a product improvement over the current lyophilized (freeze-dried) version that theCompany believes will enhance the convenience for physicians in administeringthe drug. The Company expects to switch to this new formulation of Synagis inthe U.S. during the 2005/2006 RSV season.

In2004, 2003 and 2002, the Company reported $942 million, $849 million, and $672million, respectively, in worldwide net product sales from Synagis representing 84%, 86%, and 85% ofthe Company’s total net product sales in each of these three years.

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**Ethyol**

Ethyol is used to helpprevent certain unwanted side effects of specific types of chemo- andradiotherapies that are used to treat cancer. In the U.S., Ethyol was initiallyapproved by the FDA in 1995 to reduce the cumulative renal (kidney) toxicityassociated with repeated administration of cisplatin (a common chemotherapyagent) to patients with advanced ovarian cancer.

In 1999, the FDA approved the use of Ethyol for thereduction of the incidence of moderate-to-severe dry mouth (xerostomia) inpatients undergoing post-operative radiation treatment for head and neckcancer, when a significant portion of the parotid glands are located in theradiation treatment field. Xerostomia, both acute and chronic, is adebilitating condition in which saliva production is reduced due to damagecaused to the salivary glands by therapeutic radiation. Patients withxerostomia are at increased risk of oral infection, dental cavities and loss ofteeth, and often have difficulty chewing, swallowing and speaking.

In 1996, the FDA approved the Company’s supplementalnew drug application under the FDA’s Accelerated Approval Regulations toinclude treatment of patients with non-small cell lung cancer (“NSCLC”). Productsapproved under the Accelerated Approval Regulations require further adequateand well-controlled studies to verify and describe clinical benefit. TheCompany completed a post-licensure clinical trial in 2001 designed to show that Ethyolhelped protect against cisplatin-induced renal toxicity in patients with NSCLC.In accordance with the Accelerated Approval Requirements, the Company submittedthe data to the FDA for review in 2002. Early in 2003, the Company met with theFDA to discuss the FDA’s belief****thatthe study did not meet the Accelerated Approval requirement, as well as the FDA’srequest that another trial be conducted. The Company has submitted arecommendation to the FDA and is awaiting a response. If no agreement can bereached on the design of such a study, there can be no assurances that the FDAwill not withdraw approval of Ethyol for the NSCLC indication. MedImmune doesnot believe that the withdrawal of this indication, should the FDA decide to doso, will meaningfully impact the market potential for Ethyol.

MedImmune is the sole marketer of Ethyol in the U.S.,and outside the U.S. the Company has various distribution and marketingarrangements for Ethyol, primarily with affiliates of Schering-PloughCorporation (“Schering”). This product has been approved for marketing in 64countries worldwide, including the United States.

In 2004, 2003 and 2002,MedImmune reported worldwide net product sales for Ethyol of $92 million, $100million, and $81 million, respectively, whichrepresented 8%, 10% and 10% of the Company’s total net product sales in each of these three years.

**FluMist**

FluMist is a vaccine approved for marketing in June 2003by the FDA for the prevention of disease caused by influenza A and B viruses inhealthy children and adolescents, 5-17 years of age, and healthy adults,18-49 years of age. FluMist is delivered as a nasal mist and is a live,attenuated vaccine, meaning that it uses live viruses that have been modifiedand weakened to remove their disease-causing attributes but still stimulate theimmune system and help prevent theflu. Each year in the U.S., the influenza virus infects an estimated 17 millionto 50 million people, many of whom are otherwise healthy children and adults. Vaccinationagainst the influenza virus in the Northern Hemisphere typically commences in October andmay last through the peak of the season, which usually occurs in February.

In 2004, the U.S. Centers for Disease Control and Prevention’s (the “CDC”) AdvisoryCommittee on Immunization Practices (the “ACIP”) announced that FluMistwill be included in the federal government’s Vaccines for Children (the “VFC”)program as an alternative to the injectable flu vaccine beginning in the 

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2005/2006 influenza season.As a result, healthy children ages 5 to 18 years who meet the eligibilityrequirements of the VFC program may receive FluMist at no cost next season.

In 2004, MedImmunereported $54 million in revenues for FluMist, or about 5%of the company’s total revenues. This amount was composed of $21 million inproduct sales of FluMist during the fourth quarter of 2004 for the 2004/2005influenza season, and $33 million in revenues related to vaccine sold for the2003/2004 influenza season that were not reported as revenue until the firsthalf of 2004. The Company did not record any product sales-related revenue forFluMist in 2003 due to the uncertainty associated with returns and discounts inthe vaccine’s launch season that was not determinable until the first half of2004. In 2003, MedImmune reported $46 million in revenues for FluMist, or about4% of the company’s total revenues. This amount was derived solely frommilestone and reimbursement payments from Wyeth, the Company’s former collaboration partner forFluMist.

**Other Products**

The Company alsosold three additional products in 2004, 2003 and 2002 reporting $41 million,$43 million, and $38 million in combined worldwide net product sales for eachyear, respectively. These amounts represent less than 5% of the Company’s totalreported net product sales in 2004, 2003 and 2002.

·       **CytoGam****—**an intravenousimmune globulin product enriched in antibodies against CMV, a herpesvirus. Itis indicated for the prevention of CMV disease associated with solid organtransplantation.

·       **NeuTrexin (trimetrexate glucuronate for injection)—**alipid-soluble analog of methotrexate, approved for use with concurrentleucovorin administration as an alterative therapy for the treatment ofmoderate-to-severe  *Pneumocystis carinii* pneumonia in immunocompromisedpatients, such as AIDS patients.

·       **RespiGam (respiratory syncytial virus immune globulin intravenous(human))****—**anintravenous immune globulin enriched in neutralizing antibodies against RSV,indicated for the prevention of serious RSV disease in children less than 24month of age with BPD or a history of premature birth (i.e., born at 35 weeksor less gestation). RespiGam, the Company’s first anti-RSV product, has beenreplaced in the marketplace by Synagis, and is no longer manufactured ormarketed.

***Product Candidates***

A significant portion of MedImmune’s operating expensesare related to the research and development of investigational-stage productcandidates. Research and development expenses were $327 million in 2004, $156million in 2003 and $148 million in 2002. MedImmune currently focuses itsresearch and development efforts in the therapeutic areas of infectiousdiseases, immunology and oncology. Any of these programs could become moresignificant to the Company in the future, but there can be no assurance thatany of the new programs under review will generate viable marketable products. Assuch, the Company continually evaluates all product candidates and may, fromtime to time, discontinue the development of any given program and focus itsattention and resources elsewhere. For example, in 2004 the Company discontinuedits preclinical research relating to technology targeting the enzyme HumanAspartyl (Asparaginyl) Beta-Hydroxylase (HAAH) and PC-cell-derived growthfactor (PCDGF). The Company may choose to address new opportunities for futuregrowth in a number of ways including, but not limited to, internal discoveryand development of new products, in-licensing of products and technologies,and/or acquisition of companies with products and/or technologies. Any of theseactivities may require substantial research and development efforts andexpenditure of significant amounts of capital.

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Thefollowing table summarizes the Company’s current product candidate programs andeach is described in greater detail below:
| **Infectious  Disease**             | ** ** | ** **         | ** ** | **Immunology**              | ** ** | ** ** | ** ** | **Oncology** | ** ** | ** ** |
|-------------------------------------|------------|--------------------|------------|-----------------------------|------------|------------|------------|--------------|------------|------------|
| Numax                               |       | Anti-IL-9  MAb     |       | Ethyol                      |
| CAIV-T                              |       | Anti-HMGB-1 MAb    |       | Vitaxin                     |
| Human Papillomavirus vaccine        |       | Anti-IFN-alpha MAb |       | Siplizumab                  |
| Epstein-Barr Virus vaccine          |       | Anti-IFNAR MAb     |       | MT-103                      |
| *S. pneumoniae*vaccine              |       | Anti-chitinase MAb |       | Anti-EphA2 MAb and  vaccine |
| PIV-3/RSV/hMPV combination vaccines |       | Anti-TIRC-7 MAb    | * *   | *Listeria*-EphA2  MAb       |
| hMPV program                        |       |               |       | Anti-EphA4 MAb              |

 

**Infectious Disease**

·       **Numax****—**MedImmunehas been developing a second-generation anti-RSV MAb, Numax, that appears to bemore potent in preclinical studies than Synagis in reducing RSV replication inboth the lower and upper respiratory tract when given at the same dose. In2004, MedImmune moved forward in a number of clinical trials with Numax,including the initiation of a pivotal Phase 3 trial to evaluate the MAb’spotential to prevent serious RSV in high-risk infants. The trial is designed toassess if the increased potency seen in preclinical studies can be translatedinto better efficacy against lower respiratory tract illness in high-riskchildren and to assess the effect of Numax on upper respiratory tract disease,such as otitis media. The Company also completed a Phase 1 study in healthyadult volunteers, finished dosing and follow-up in a Phase 1 safety study inchildren hospitalized with RSV, made progress in a Phase 1/2 trial in high-riskinfants, and initiated a Phase 3 feasibility study in full-term Native Americaninfants. Recently accumulated epidemiological data indicate that the risksassociated with RSV disease for otherwise healthy, full-term Native Americaninfants is similar to those commonly associated with children considered to beat high-risk to the virus. In February 2005, the Company and AI amendedthe international distribution agreement to include the exclusive distributionof Numax, if and to the extent approved for marketing by regulatory authoritiesoutside of the United States. Under the terms of the amended agreement, AI willbe working to secure regulatory approval of Numax outside of the United Statesand, upon receipt of such approval, will distribute and market Numax outside ofthe United States.

·       **CAIV-T (cold adapted intranasal influenza vaccine—trivalent)****—**CAIV-T is MedImmune’s next generation, refrigerator-stableversion of FluMist. In 2004, MedImmune initiated two new studies, including apivotal Phase 3 study designed to compare CAIV-T with the injectable flu shot,and a bridging study designed to establish that CAIV-T is equivalent to thecurrently marketed frozen formulation, FluMist. The pivotal study enrolled8,492 children between the ages of 6 months through 59 months at 249 sites in16 countries in the Northern Hemisphere. The bridging study enrolled 981healthy participants between the ages of 5 and 49 years old.

·       **Human Papillomavirus (“HPV”) vaccine****—**Since 1997, MedImmune and GlaxoSmithKline (“GSK”) have beenco-developing a vaccine against HPV to prevent cervical cancer under a researchcollaboration. There are over 75 different types of HPV associated with avariety of clinical disorders, ranging from benign lesions to potentiallylethal cancers. Two strains of HPV (HPV-16 and -18) are generallybelieved to cause most cervical cancers. The MedImmune/GSK vaccine candidateuses virus-like particle technology to produce a structurally identical,non-infectious form of the virus. Final data from a Phase 2 clinical trial withthe HPV vaccine were presented by GSK in February 2004 at TheInternational Papillomavirus Conference and were published in *The Lancet* in 2004. In 2004, GSK initiateda global Phase 3 clinical program expected to involve 28,000 women designed toevaluate the safety and efficacy of the vaccine in preventing cervical cancer. In2005, MedImmune amended its agreement with GSK, permittingMerck & Co., Inc. (“Merck”), who also has an HPV vaccine in Phase3 development, to sublicense rights to our patents. As a result, we may 

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receive certain milestonepayments and royalties on future development and sales from both vaccines,should they be approved.

·       **Epstein-Barr Virus (“EBV”) vaccine****—**MedImmunehas rights to a vaccine against certain subunits of EBV, a herpesvirus that isthe leading cause of infectious mononucleosis. This vaccine is based upon themajor envelope glycoprotein that mediates viral absorption and penetration, andis a major target for the production of neutralizing antibodies stimulated bynatural EBV infection. The vaccine is being developed with GSK under aworldwide collaboration, excluding North Korea and South Korea. Data from a2002 GSK study in Europe showed that the formulations were both well toleratedand highly immunogenic. A Phase 1 trial in patients with cystic fibrosisawaiting lung transplants and a Phase 1 trial in patients awaiting kidney orliver transplants continued in 2004. The vaccine is currently in Phase 2 development.

·       ***Streptococcus pneumoniae*****vaccine****—**In 2000,MedImmune granted a worldwide exclusive license to a *Streptococcus pneumonia**e* vaccine toGSK. *Streptococcus pneumoniae* isa major cause of pneumonia, middle-ear infections and meningitis worldwide, especiallyin very young children and in the elderly. During 2004, GSK continued theclinical development efforts with this vaccine in a Phase 1 study that wasstarted in 2003.

·       **Parainfluenza virus type 3 (“PIV-3”)/RSV/human metapneumovirus (“hMPV”)combination vaccines****—**Substantialpreclinical research has been conducted toward the goal of combining previouslyindependent vaccine programs against RSV and PIV-3. The Company has alsobegun efforts to include****hMPV in apotential combined vaccine program, which, if successful, could be used toprevent disease against some combination of these three viruses. Additionalpreclinical research and process development to further evaluate the safety andefficacy of live, attenuated intranasal vaccine candidates targetingcombinations of PIV-3 with either RSV or hMPV were conducted during 2004.Preliminary data from a preclinical study showing MedImmune’s lead RSV/PIV-3candidate vaccine elicited protective immune responses to RSV and PIV-3were published in the *Journal of Virology*in 2004. In January 2005, MedImmune filed an investigational new drug (“IND”)application to begin clinical studies of its RSV/PIV-3 candidate vaccine.The Company plans to advance the RSV/PIV-3 vaccine program into theclinic before moving ahead with an hMPV/PIV-3 vaccine candidate.

·       **hMPV program****—**hMPV is arespiratory virus with a high incidence of infection in children under the ageof five. Early epidemiological studies indicate that outbreaks of hMPV occur ona seasonal basis, with clinical symptoms that are similar to RSV, ranging frommild respiratory problems to severe cough, bronchiolitis, and pneumonia. Thevery youngest children infected with hMPV often require hospitalization andmechanical ventilation. MedImmune has enrolled approximately 530 high-riskchildren into an preclinical epidemiology study designed to evaluate theprevalence of hMPV lower respiratory tract disease. Hospitalized children withlower respiratory tract disease will be evaluated virologically for hMPV, aswell as RSV and PIV.

**Immunology**

·       **Anti-interleukin-9 (“IL-9”)****—**IL-9 is a naturally occurring cytokine implicated inthe pathogenesis of asthma and may contribute to other types of chronicobstructive pulmonary disease and cystic fibrosis. Data from preclinical studiesin models of asthma suggest that IL-9 neutralizing monoclonal antibodiesmay help reduce airway hyper-reactivity, mucous production and inflammation. During2004, MedImmune initiated a Phase 1 single-dose trial with an anti-IL-9monoclonal antibody in healthy adult volunteers. The Company is evaluating thismolecule as a potential new treatment for symptomatic, moderate-to-severepersistent asthma.

·       **Anti-High Mobility Group Box Chromosomal Protein 1 (“HMGB-1”)MAb—**HMGB-1 is a late-acting cytokine believed to be involvedin the tissue damage associated with a range of inflammatory illnesses, such asrheumatoid arthritis, sepsis and acute lung injury. Preclinical studies to datehave suggested that blocking HMGB-1 may help protect against injuryassociated with many 

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chronic and acuteinflammatory diseases, and may reduce sepsis-related deaths. In 2003, MedImmuneentered into an agreement with Critical Therapeutics, Inc. to co-developbiological products targeting HMGB-1 to treat severe inflammatorydiseases. In 2004, MedImmune continued its preclinical testing of anti-HMGB-1antibodies.

·       **Anti-Interferon alpha and anti-Type 1 InterferonReceptor MAb****—**During 2004, MedImmune announced a collaboration withMedarex, Inc. todevelop antibodies targeting interferon-alpha and the type 1 interferonreceptor 1. The collaboration will initially focus on two antibodies, MDX-1103and MDX-1333, that are in preclinical development by Medarex for thetreatment of autoimmune diseases, such as systemic lupus erythematosus.

·       **Anti-Chitinase MAb****—**During2004, MedImmune acquired the rights from Yale University to a family ofproteins known as chitinases that may be important therapeutic targets in anumber of inflammatory, oncology and other diseases. Preclinical data from theCompany’s collaborators at Yale was published in *Science* in 2004.

·       **Anti-TIRC-7 MAb****—**During 2004,MedImmune acquired new technology from GenPat77 Pharmacogenetics AG targetingTIRC-7, a molecule that appears to be implicated in immune regulation,and therefore may be useful in the treatment of rheumatoid arthritis, multiplesclerosis and other immunological diseases.

**Oncology**

·       **Ethyol****—**During 2004,MedImmune continued enrollment in two clinical studies to possibly expand theuse of Ethyol in new indications. The first trial is a Phase 2 study usingsubcutaneous administration of Ethyol to evaluate its ability to reduce theincidence or severity of radiation-induced esophagitis and pneumonitis inpatients with NSCLC. The second trial is a Phase 1/2 clinical study evaluatingthe effectiveness of Ethyol in preventing toxicity associated with doseescalation of chemotherapy in elderly patients with newly diagnosed, previouslyuntreated, acute myelogenous leukemia, the most common type of leukemiareported in adults.

·       **Vitaxin****—**Vitaxinfunctions by blocking the function of alpha-v beta-3 integrin,which is frequently found on newly-forming blood vessels and certain tumorcells (for example, melanoma, prostate cancer, and tumors with bone metastases).During 2004, MedImmune fully enrolled a Phase 2 trial in patients withmetastatic melanoma and continued to track the patients through the plannedanalysis of data from the study. The study evaluated objective response ratesand progression-free survival. MedImmune continued enrollment under an amendedprotocol in a second Phase 2 trial in patients with hormone refractory prostatecancer. In 2004, MedImmune discontinued its efforts with Vitaxin in rheumatoidarthritis and psoriasis based on preliminary data suggesting a lack of clinicalbenefit in these inflammatory diseases.

·       **Siplizumab****—**Siplizumabis a humanized MAb that targets CD2, a molecule expressed on certain whiteblood cells, and appears to have the effect of depleting T-cells and naturalkiller (“NK”) cells. These properties suggest that siplizumab could provide atreatment for patients with T-cell lymphoproliferative disorders. Animalstudies of T-cell leukemia have indicated that siplizumab can help increasesurvival. In 2004, a Phase 1 trial was initiated at the National CancerInstitute to examine the clinical safety of siplizumab in individuals withT-cell lymphoma and leukemia. In 2005, MedImmune anticipates starting anotherPhase 1 trial in patients with CD2-positive lymphoproliferative disease.

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·       **MT-103****—**InJune 2003, MedImmune licensed the North American rights from Micromet AGto MT-103, a bi-specific T-cell engager (BiTETM) molecule that binds toB-cell lymphomas expressing the CD19 surface molecule. With its second bindingarm, MT-103 recruits and activates T-cells to kill the cancerous B-cells.The Phase 1 dose-escalation trial involving continuous infusion of MT-103in patients with non-Hodgkin’s lymphoma is ongoing in Europe. MedImmune is alsoevaluating the broader application of Micromet’s BiTE technology to othertargets of interest.

·       **Anti-EphA2 MAbs and vaccines****—**EphA2 is normally expressed at very low levels on normalepithelial cells, but many different cancers over-express EphA2, includingmetastatic melanoma, breast, prostate, colon, lung, ovarian and esophagealcarcinomas. Further, when over-expressed, EphA2 appears to promote metastases. Basedon its studies to date, MedImmune believes that targeting EphA2 in animalmodels may selectively inhibit the growth and survival of malignant cells,without altering the function or survival of corresponding normal cells. In April of2004, MedImmune licensed the worldwide rights to the *Listeria* vaccine technologies from Cerus Corporation totarget EphA2-expressing tumors. In 2004, the Company continued its preclinicaltesting in these areas, applying monoclonal antibody and vaccine researchagainst EphA2.

·       **Anti-EphA4 MAbs****—**MedImmunehas identified EphA4 as a potential new target on certain cancer cells.Preclinical studies indicate that high levels of EphA4 are found on manydifferent cancers, including breast and pancreatic carcinomas, and thattargeted intervention against EphA4 may decrease the proliferation andmetastatic behavior of these malignant cells. In 2004, MedImmune continued itspreclinical testing of EphA4 antibodies.

***Collaborations, Alliances and Investments***

To build, advance and promote its product portfolio,MedImmune often seeks to augment its own internal programs and capabilitieswith collaborative projects with a number of outside partners. For its marketedproducts, the Company has established certain license agreements, co-promotionarrangements, manufacturing, supply and co-development alliances withpharmaceutical and other biotechnology companies, academic institutions and governmentlaboratories to which the Company currently pays royalties. For moreinformation on these collaborations, please see Note 15, “CollaborativeArrangements” to MedImmune’s Consolidated Financial Statements. Similarly, forproduct candidates now in development, the Company has secured licenses tocertain intellectual property and entered into strategic alliances with outsideparties for various aspects of research, development, manufacturing andcommercialization, pursuant to which the Company will owe future royalties ifthe product candidates are licensed and commercialized.

The Company also believes that investing in earlystage biotechnology companies allows the Company to benefit from otherinnovations in the industry. Accordingly, the Company has established a whollyowned venture capital subsidiary, MedImmune Ventures, Inc., which makesminority interest investments in biotechnology companies that the Companybelieves have promising technology. Occasionally, the Company will make theseinvestments in connection with strategic alliances as it has done with CriticalTherapeutics, Inc., Micromet AG and GenPat77 Pharmacogenetics AG. In 2004,the Company also invested in: Arriva Pharmaceuticals, Inc., abiopharmaceutical company focused on the discovery and development of novelprotease inhibitors for the treatment of human diseases; CellectiveTherapeutics, Inc., a company developing B-cell directed monoclonalantibody therapies for autoimmune disorders and B-cell cancers; InotekPharmaceuticals Corporation, a company focused on the discovery, research anddevelopment of novel pharmaceutical technologies with potential applications incritical care, surgery, trauma, transplantation and autoimmune diseases;Receptor BioLogix, Inc., a seed stage biopharmaceutical company developinga potential treatment for breast cancer; and Vanda Pharmaceuticals, Inc.,a drug development company that repositions compounds that either failed inPhase 

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2 or 3 due toundifferentiated efficacy or were discontinued due to low research anddevelopment prioritization at larger pharmaceutical firms.

As of February 25,2005, MedImmune Ventures has invested approximately $77 million of the $100million it was originally funded in 2002, and in February 2005, the Boardof Directors voted to increase its funding by an additional $100 million.

***Sales and Marketing***

The Company has developed an extensive sales andmarketing organization that focuses on target healthcare providers, managedhealthcare organizations, specialty distribution companies, chain pharmacies,government purchasers and payers. Approximately 70 sales and managed carerepresentatives cover approximately 650 hospitals, managed care organizations,and clinics in the U.S., which specialize in pediatric/neonatal care or transplantationfor the promotion of Synagis, FluMist and CytoGam. Approximately 170 biotechsales specialists cover approximately 12,000 pediatric practices in the U.S.for the promotion and detailing of Synagis and FluMist. In addition,approximately 60 oncology/immunology specialists are devoted to the sales andmarketing of Ethyol to oncologists practicing in cancer treatment centers,large hospitals and private medical practices. In total, the Company nowemploys approximately 420 sales and marketing personnel in the United States.

For the promotion of Synagis in the U.S., the Companyhas a co-promotion agreement with Abbott. Through its 500 salesrepresentatives, Abbott details Synagis to approximately 27,000 office-basedpediatricians and 6,000 birth hospitals.

In the U.S., the Company also relies upon specialtydistributors and wholesalers to deliver Synagis to its customers, includingphysicians, hospitals and pharmacies. During 2003, MedImmune launched theSynagis Distribution Network (“SDN”), which significantly reduced the number ofdistributors and wholesalers involved in the distribution of Synagis to ensurehigh-quality and consistent services for patients. In 2004, the SDN was notaltered significantly from its original structure in 2003. There are arelatively small number of specialty distributors who provide such services. Therecan be no assurances that these distributors will adequately provide theirservices to either the end users or to the Company, nor can there be anyguarantee that these service providers remain solvent.

As discussed in Note 4, “Segment,Geographic and Product Information,” of the Company’s Consolidated FinancialStatements, the Company has three major customers who individually providedover 15% of its total revenue during 2004. Note 4 also contains informationconcerning the geographic areas in which the Company operates. The Companyfaces risks related to foreign currency exchange rates, as discussed under thecaption “Risk Factors**—**Changes inforeign currency exchange rates or interest rates could result in losses.”

***Manufacturing and Supply***

MedImmune operates commercialmanufacturing facilities and distribution facilities in the U.S. and Europe. Inaddition, the Company has entered into manufacturing, supply andpurchase agreements with other companies to provide certain portions of itsproduction capacity for all of its marketed products and to produce clinicalsupplies for its development-stage products. Certain materials necessary forthe Company’s commercial manufacturing of its products are proprietary productsof other companies, and in some cases, such proprietary products arespecifically cited in the Company’s drug application with the FDA such thatthey must be obtained from that specific, sole source. In addition, certainmaterials necessary for the Company’s commercial manufacturing of its productsare only available through one approved single source supplier though it isavailable from more than one supplier. The Company currently attempts to managethe risk associated with such sole-sourced and single-sourced materials byactive inventory management and, where feasible, alternate source development. MedImmunemonitors 

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the financial condition ofits suppliers, their ability to supply the Company’s needs and the marketconditions for these raw materials. Also, certain materials required in thecommercial manufacturing of the Company’s products are derived from biologicalsources. The Company maintains screening procedures with respect to certainbiological sources, where appropriate, and is investigating alternatives tothem.

**Synagis****—**The primary manufacturing facility forSynagis bulk drug substance is the Company’s Frederick, Md. manufacturingcenter (“FMC”). The FMC is a biologics facility with cell culture productionand associated downstream processing equipment for recombinant products. Fillingand packaging of the lyophilized formulation of Synagis bulk produced at theFMC is performed by Boehringer Ingelheim Pharma GmbH & Co. KG (“BI”).  Filling of the liquid formulation of Synagisbulk produced at the FMC is performed by Sicor Pharmaceuticals, Inc. andpackaging is performed by Cardinal Health PTS, LLC.

Supplemental supply of Synagis for the U.S. market ismanufactured by BI under a manufacturing and supply agreement. BI also fillsand packages Synagis produced at its German facility. As the sole supplier ofSynagis for all territories outside the U.S. and supplemental supplier for theU.S. market, BI is responsible for obtaining and maintaining licensure andapproval for making the product at its facility from all appropriate regulatoryauthorities including the FDA. The Company plans to continue to rely upon BIfor production of additional quantities of Synagis to meet expected worldwidedemand for the product.

**Ethyol****—**All bulk drug substance for Ethyol isproduced by a contract manufacturer. In 2004, filling and finishing of allproduct was completed at the Company’s manufacturing facility in Nijmegen, theNetherlands. To backup its own filling and finishing capabilities, the Companyhas an agreement with Ben Venue Laboratories, Inc, a subsidiary of BI, to filland finish Ethyol for sale in the United States.

**FluMist****—**FluMist is produced at several facilitieseither owned or leased by the Company. The master virus seeds are prepared atthe Company’s Mountain View, California facility. The bulk monovalents anddiluent are produced at leased facilities in Speke, the United Kingdom. Blendingof FluMist into its trivalent formulation and filling of the final vaccine intothe AccuSpray applicators, the non-invasive nasal spray delivery systemdeveloped and supplied by Becton Dickinson, takes place at the Company’sPhiladelphia, Pennsylvania facilities. In addition to these manufacturingfacilities, the Company owns a distribution facility in Louisville, Kentuckyfrom which FluMist is distributed to physicians, pharmacies and governmentagencies.

***Patents, Licenses and Proprietary Rights***

The products and productcandidates currently being developed or considered for development by theCompany are in the area of biotechnology, an area in which there are extensivepatent filings. The Company relies on patent protection against use of itsproprietary products and technologies by competitors. The patent positions ofbiotechnology firms generally are highly uncertain and involve complex legaland factual questions. To date, no consistent policy has emerged regarding thebreadth of claims allowed in biotechnology patents. Accordingly, there can beno assurance that patent applications owned or licensed by the Company willresult in patents being issued or that, if issued, such patents will affordmeaningful protection against competitors with similar technology. The Companycurrently owns or in-licenses significant intellectual property related to itsproducts or product candidates and owns or in-licenses additional applicationsfor patents currently pending. A list of the U.S. patents the Company owns orin-licenses is filed as an exhibit hereto as Exhibit 99.1 and isincorporated by reference into this document.

***Government Regulation***

The research, development,manufacture and sale of the Company’s products are subject to numerous complexlaws and statutes as well as regulations promulgated by the applicablegovernmental authorities, principally the FDA in the U.S. and similarauthorities in other countries. While there is considerable time 

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andexpense associated with complying with these requirements, knowledge of andexperience with these matters also yields benefits to the Company. For example,the more knowledgable the Company is about these matters, the more the Companyis able to design its research, development and manufacturing strategies in amanner that is calculated to obtain regulatory approval to market its productsin the applicable countries. Moreover, the complexity of these matters can havethe effect of delaying or limiting the number of competing products that cansuccessfully be brought to market. In addition, certain regulatory approvalpathways, for example, orphan drug designation in the U.S. for marketingproducts applicable to rare diseases or small populations, can also have theeffect of limiting the number of competing products available in the market.

***Competition***

The biotechnology and pharmaceutical industries arecharacterized by rapidly evolving technology and intense competition. TheCompany’s competitors include pharmaceutical, chemical and biotechnologycompanies, many of which have financial, technical and marketing resourcessignificantly greater than those of the Company. In addition, many specializedbiotechnology companies have formed collaborations with large, establishedcompanies to support research, development and commercialization of productsthat may be competitive with those of the Company. Academic institutions,governmental agencies and other public and private research organizations arealso conducting research activities and seeking patent protection and maycommercialize products on their own or through joint venture arrangements.

The Company expects its products to compete primarilyon the basis of product efficacy, safety, patient convenience, reliability andpatent position. In addition, the first product to reach the market in atherapeutic or preventive area is often at a significant competitive advantagerelative to later entrants to the market. The Company’s competitive positionwill also depend on its ability to attract and retain qualified scientific andother personnel, develop effective proprietary products, implement product andmarketing plans, obtain patent protection and secure adequate capitalresources.

The Company believes that Synagis is the only productcurrently available for the prevention of RSV disease. However, the Company isaware of one product, ribavirin, which is indicated for the treatment of RSVdisease in the U.S. The existence of this product, or other products or treatmentsof which the Company is not aware, or products or treatments that may bedeveloped in the future, may adversely affect the marketability of productsdeveloped by the Company.

In relation to influenza vaccines, in the past, theCompany has been aware of two main manufacturers of trivalent inactivated influenzavaccines (“TIV”). From these two manufacturers, approximately 80 million dosesof these inactivated vaccines have traditionally been sold annually in theUnited States. The Company is also aware that Merck has licensed a Russian livevirus intranasal vaccine, currently available in Russia, and that ID BiomedicalCorporation is developing an intranasal, inactivated flu vaccine that theCompany understands is in the early stages of clinical testing. The 2004/2005influenza season was impacted by a significant market reduction in the numberof TIV doses available in the U.S. to approximately 50 million doses due tocontamination problems experienced by one of the principal TIV manufacturers. Inan effort to prevent future shortages, the FDA is considering allowing othermanufacturers of TIV into the U.S. market. If the FDA decides to allowadditional manufacturers into the market, it will create additional competitionin the influenza vaccine market. Any of the products listed here, as well asother products of which the Company is not aware, may adversely affect themarketability of FluMist.

Many companies, including well-known pharmaceuticalcompanies, are marketing anticancer drugs and drugs to ameliorate or treat theside effects of cancer therapies. These companies, and many others, are alsoseeking to develop new drugs and technologies for various cancer applications. Manyof these drugs, products and technologies are, or in the future may be,competitive with the Company’s oncology 

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products. In the U.S., theCompany believes that Sanofi-Aventis holds the largest share of thechemotherapy market in terms of both approved products and annual sales. To theCompany’s knowledge, other companies maintaining a significant active oncologymarketing and sales presence include Amgen, Inc., AstraZeneca,Bristol-Myers Squibb Company, Chiron Corporation, Eli Lilly and Company,Genentech, GSK, Hoffmann-La Roche, Inc., Johnson & Johnson,Pfizer, and Schering-Plough Corporation. Many of these companies have greaterfinancial, technical, manufacturing, marketing and other resources than theCompany and may be better equipped than the Company to develop, market andmanufacture these therapies. No assurance can be given that the oncology drugsdeveloped by the Company will be able to compete successfully against therapiesalready established in the marketplace or against new therapies that may resultfrom advances in biotechnology or other fields that may render the Company’soncology drugs less competitive or obsolete. In addition, the Company’soncology drugs may become subject to generic competition in the future.

On June 29, 2004, theCompany received a Paragraph IV certification for Ethyol from a genericchallenger (Sun Pharmaceutical Industries, Ltd.). The Company evaluated alloptions available to it including filing a lawsuit against the generic companyunder the Hatch-Waxman Act. On August 10, 2004, MedImmune filed a patentinfringement case against Sun Pharmaceutical in the U.S. District Court for theDistrict of Maryland. For additional information see Note 17, “LegalProceedings,” of the Company’s Consolidated Financial Statements.

***Officers and KeyEmployees of the Company***
| **Name**                      | ** ** | ** ** | ** ** | **Age**                                                            | ** ** | **Position** | ** ** | **Since** |
|-------------------------------|------------|------------|------------|--------------------------------------------------------------------|------------|--------------|------------|-----------|
| Wayne T. Hockmeyer,  Ph.D.    |       | 60         |       | Chairman of the Board;  President, MedImmune Ventures, Inc.   |       | 1988         |
| David M. Mott                 |       | 39         |       | Chief Executive  Officer, President and Vice Chairman of the Board |       | 1992         |
| James F. Young, Ph.D.         |       | 52         |       | President,  Research and Development                               |       | 1989         |
| Armando Anido, R.Ph.          |       | 47         |       | Executive Vice  President, Sales and Marketing                     |       | 1999         |
| Edward M. Connor, M.D.        |       | 52         |       | Executive Vice  President and Chief Medical Officer                |       | 1999         |
| Peter A. Kiener, D.Phil.      |       | 52         |       | Senior Vice  President, Research                                   |       | 2005         |
| Bernardus N. Machielse,  Drs. |       | 44         |       | Senior Vice  President, Operations                                 |       | 2003         |
| Edward T. Mathers             |       | 44         |       | Senior Vice President,  Corporate Development                      |       | 2005         |
| Linda J. Peters               |       | 39         |       | Senior Vice President,  Regulatory Affairs                         |       | 2005         |
| Gail Folena-Wasserman, Ph.D.  |       | 50         |       | Senior Vice President,  Development                                |       | 2002         |
| Lota S. Zoth, C.P.A.          |       | 45         |       | Senior Vice President  and Chief Financial Officer                 |       | 2004         |

 

**Wayne T. Hockmeyer, Ph.D.—**foundedMedImmune, Inc. in April 1988 as President and Chief ExecutiveOfficer and was elected to serve on the Board of Directors in May 1988. Dr. Hockmeyerbecame Chairman of the Board of Directors in May 1993. He relinquished hisposition as Chief Executive Officer in October 2000 and now serves as theChairman of the Board of Directors and President of MedImmune Ventures, Inc.Dr. Hockmeyer earned his bachelor’s degree from Purdue University and hisPh.D. from the University of Florida in 1972. In 2002, Dr. Hockmeyer wasawarded a doctor of science honoris causa from Purdue University. Dr. Hockmeyeris a member of the Maryland Economic Development Commission. He is also amember of the Board of Directors of Advancis Pharmaceutical Corp., CellectiveTherapeutics, GenVec, Inc., Idenix Pharmaceuticals, Inc., Tercica, Inc.,TolerRx Inc., and Vanda Pharmaceuticals, Inc.

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**David M. Mott****—**Mr. Mott was appointed Chief Executive Officer andVice Chairman in October 2000 and was also appointed President in February 2004.He joined the Company in April 1992 as Vice President with responsibilityfor business development, strategic planning and investor relations. In 1994, Mr. Mottassumed additional responsibility for the medical and regulatory groups, and inMarch 1995 was appointed Executive Vice President and Chief FinancialOfficer. In November 1995, Mr. Mott was appointed to the position ofPresident and Chief Operating Officer and was elected to the Board ofDirectors. In October 1998, Mr. Mott was appointed Vice Chairman.Mr. Mott is Chairman of the Board of Directors of Conceptis Technologies,a member of the board of the Biotechnology Industry Organization (BIO), andalso serves on the Board of Trustees of St. James School and on the Board ofGovernors of Beauvoir, the National Cathedral Elementary School. He holds abachelor of arts degree from Dartmouth College.

**James F. Young, Ph.D.****—**Dr. Young was promoted to the position of President,Research and Development, in December 2000. Dr. Young joinedMedImmune in 1989 as Vice President, Research and Development. In 1995, he waspromoted to Senior Vice President and in 1999 he was promoted to Executive VicePresident, Research and Development. Dr. Young received his doctorate inmicrobiology and immunology from Baylor College of Medicine in Houston, Texas,and bachelor of science degrees in biology and general science from VillanovaUniversity. Dr. Young is a member of the Board of Directors of ArrivaPharmaceuticals, Inc., and Iomai Corporation.

**ArmandoAnido, R.Ph.****—**Mr. Anidowas promoted to Executive Vice President, Sales & Marketing in February 2005.He joined the Company in 1999 as Senior Vice President, Sales and Marketing andwas appointed to Senior Vice President, Commercial Operations in February 2004.Prior to joining the Company, Mr. Anido was Vice President of CNSMarketing at Glaxo Wellcome, Inc. from 1996 to 1999. Prior to this time, Mr. Anidoserved in various positions at Lederle Laboratories from 1989 to 1995,culminating in his service as the Vice President of Anti-Infectives Marketing.Mr. Anido is a registered pharmacist, and holds a bachelor of science inpharmacy and a master of business administration degree from West VirginiaUniversity. Mr. Anido is a member of the Board of Directors of Adolor, Inc.

**Edward M. Connor, M.D.****—**Dr. Edward Connor was promoted to Executive Vice President,Chief Medical Officer in September 2004. He joined the Company in 1994 asthe Director of Clinical Studies and was promoted in 1995 to Vice President ofClinical Development, in 1999 to Senior Vice President, Clinical Development,and in February 2004 to Senior Vice President, Chief Medical Officer.Dr. Connor holds a bachelor’s degree in biology from Villanova Universityand a medical degree from University of Pennsylvania School of Medicine. He isboard certified in pediatrics and is a consultant in pediatric infectiousdiseases.

**Peter A. Kiener, D.Phil.—**Dr. Kienerwas promoted to Senior Vice President, Research, in February 2005. Hejoined MedImmune in 2001 and was named Vice President, Research, in 2003. Priorto joining MedImmune, Dr. Kiener spent 18 years with Bristol-Myers Squibb’s(BMS) Pharmaceutical Research Division, finally holding the position of Director,Immunology, Inflammation, Pulmonary and Oncology Drug Discovery. Previously, Dr. Kienerworked in academia at the University of North Texas/Texas College ofOsteopathic Medicine’s Department of Anatomy, the Department of Biochemistry atthe University of Massachusetts (Amherst), and at the Medical Research Councilat Sir William Dunn School of Pathology, University of Oxford in the UnitedKingdom. Dr. Kiener holds a bachelor of science degree with honors inchemistry from Lancaster University, Lancaster, UK, and a doctorate ofphilosophy in biochemistry from the Sir William Dunn School of Pathology.

**Bernardus N. Machielse, Drs.—**Drs. BenMachielse was appointed Senior Vice President, Operations, in January 2005.Drs. Machielse joined MedImmune in May 1999 as Vice President,Quality and was named Senior Vice President, Quality, in September 2003. Priorto joining MedImmune, Drs. Machielse was Vice President of Quality Controland Quality Assurance for Xoma Corporation of 

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Berkeley, California. Healso spent several years in various manufacturing and quality positions atCentocor BV of the Netherlands. Drs. Machielse holds a bachelor of sciencedegree in medical biology and a master of science degree in biochemistry fromthe University of Utrecht, The Netherlands.

**Edward T. Mathers—**Mr. Matherswas named Senior Vice President, Corporate Development, in February 2005. Hejoined MedImmune as Vice President, Corporate Development, in 2002. Prior toMedImmune, Mr. Mathers was Vice President of Marketing and Corporate Licensingand Acquisitions at Inhale Therapeutic Systems. Previously, he held a number ofincreasingly responsible positions in sales and marketing at Glaxo Wellcome, Inc.(GlaxoSmithKline). Mr. Mathers started his career at Ortho PharmaceuticalsCorporation (a division of Johnson & Johnson). He holds a bachelor’sdegree in chemistry from North Carolina State University.

**Linda J. Peters****—**Ms. Peters joined MedImmune as Senior Vice President, RegulatoryAffairs, in February 2005. Prior to joining MedImmune, Ms. Peters was Vice President of Global RegulatoryAffairs for Baxter Healthcare’s BioScience and Renal businesses. Previously sheserved as Director of Regulatory Affairs at Takeda Pharmaceuticals NorthAmerica and held positions of increasing responsibility at TAP Pharmaceuticals.Ms. Peters earned her bachelor of science and master of science degrees inanimal science from Southern Illinois University, and a master of businessadministration degree from the J.L. Kellogg School of Management atNorthwestern University.

**GailFolena-Wasserman, Ph.D****—**Dr. Wassermanwas promoted to Senior Vice President, Development in February 2002. Shejoined MedImmune in 1991 as Director, Development, and was promoted to Vice President,Development, in October 1995. Prior to joining the Company, she worked atSmithKline Beecham Pharmaceuticals. Dr. Folena-Wasserman holds a bachelor’sdegree in biology and chemistry from Montclair State University in New Jersey,and received a master’s degree in biochemistry and a doctorate in chemistryfrom The Pennsylvania State University.

**Lota S. Zoth,C.P.A.****—**Ms. Zothwas promoted to Senior Vice President and Chief Financial Officer in April 2004.From January 2004 through April 2004, Ms. Zoth was acting asChief Financial Officer in addition to her role as Vice President andController, a position she held since joining the Company in August 2002. Priorto joining MedImmune, Ms. Zoth was Senior Vice President and CorporateController for PSINet, Inc, who filed a petition for bankruptcy on May 31,2001. Between 1998 and 2000, Ms. Zoth was Vice President, Corporate Controllerand Chief Accounting Officer of Sodexho Marriott Services, Inc. Prior toSodexho Marriott, Ms. Zoth was Vice President, Financial Analysis, forMarriott International, Inc.’s food and management services division.Ms. Zoth is a CPA, and holds a bachelor of business administration inaccounting from Texas Tech University.

***Employees***

The Company considers relations with its employees tobe good. As of December 31, 2004, the Company had 1,823 full-timepermanent employees and 153 full-time temporary employees.

Approximately 80 of theCompany’s employees in the United Kingdom are members of a labor union, withwhich the Company renegotiates employment terms annually. There can be noguarantee that the annual negotiations will lead to an outcome that isfavorable to the Company. If negotiations were to break down between theCompany and the union, there can be no guarantee that the Company would be ableto manufacture an adequate supply of FluMist.

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***Risk Factors***

The Company’s business faces many risks. The risks describedbelow may not be the only risks the Company faces.Additional risks that the Company does not yet know of or that the Company currently believes areimmaterial may also impair the Company’s business operations. If any of the events orcircumstances described in the following risks actually occur, the Company’s business, financial condition or results ofoperations could suffer, and the trading price of the Company’s common stock could decline. You should considerthe following risks, together with all of the other information in this AnnualReport on Form 10-K, before deciding to invest in the Company’s securities.

**The Company’srevenues are largely dependent on sales of Synagis.**

Sales of Synagis accounted for approximately 84% ofthe Company’s total product sales in 2004 and the Company’s revenues willcontinue to be largely dependent on sales of Synagis for the foreseeable future.Any perceived or actual event or series of events that have a negative effecton sales of Synagis will have a detrimental impact on the Company. Events whichwould affect sales of Synagis include, but are not limited to, any productliability claims (whether supported or not), any manufacturing or supplydelays, any sudden loss of inventory, any inability to satisfy product demand,any unsuccessful sales or marketing strategies and any change in thereimbursement rate for Synagis by private or public insurance carriers orprograms.

In addition, Synagis is a biological product regulatedand approved for marketing in the U.S. by the FDA and any adverse change in themarketing approval or label for Synagis required by the FDA will have adetrimental impact on the Company. The Company has also created an exclusivenetwork for distribution of Synagis in the U.S., which will have the effect ofpreventing certain entities from obtaining Synagis and may have the effect ofchanging the reimbursement rate for Synagis by private or public insurancecarriers or programs, any of which could result in reduced sales.

Outside of the U.S., AI isresponsible for the distribution and commercialization of Synagis as well asobtaining and maintaining regulatory approval for commercialization. Accordingly,sales of Synagis outside of the U.S. are not within the Company’s directcontrol and any negative impact on AI’s sales of Synagis could affect theCompany’s revenues related to those sales. In addition, actions of AI relatedto the regulatory approval or commercialization of Synagis could negativelyimpact the Company’s sales of Synagis in the U.S.

**Theseasonal nature of a significant portion of Company’s business causessignificant fluctuations in quarterly operating results.**

Sales of two of theCompany’s products, Synagis and FluMist, are seasonal in nature. Synagis salesoccur primarily in the first and fourth quarters of the calendar year andFluMist sales occur primarily in the fourth quarter of the calendar year. Thishigh concentration of product sales in a portion of the year causesquarter-to-quarter operating results to vary widely and would exaggerate theadverse consequences on the Company’s revenues of any manufacturing or supplydelays, any sudden loss of inventory, any inability to satisfy product demand,the inability to estimate the impact of returns and rebates, or of anyunsuccessful sales or marketing strategies during the applicable sales season. Furthermore,the Company’s current product base limits its ability to offset in the secondand third quarters any lower-than-expected sales of Synagis during the firstand fourth quarters.

**TheCompany may not be able to successfully commercialize FluMist.**

There can be no assurancethat FluMist will achieve commercial success. There are a number of factorswhich make the commercialization of FluMist difficult. These factors include,but are not limited to, significant competition in the marketplace by otherinfluenza virus vaccines, the higher cost of 

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manufacturingFluMist relative to competing vaccines, perceived or actual risks related tothe use of a live virus vaccine, lack of acceptance by the targeted patientpopulation of the need for vaccination against influenza, lack of reimbursementcoverage by private or public insurance carriers or programs, lack of productaccessibility by potential consumers, an inability to develop alternativechannels for sales, such as pharmacies, due to state or federal regulations orfor other reasons and difficult storage requirements for the transport andstorage of the product. Furthermore, commercialization is dependent uponsuccessful manufacturing of the product, which may be adversely affected if theCompany is unable to perform the complex annual update of the FluMistformulation for new influenza strains, if there are problems or difficulties inthe complex manufacturing process or if there is a sudden loss of inventory. Therecan also be no assurance that the Company could successfully manufacture aquadravalent vaccine, should such a vaccine ever be required. There can be noassurance that the Company’s cost of goods will not exceed its revenues forthis product. If the Company is unable to successfully commercialize FluMist,the anticipated benefits of the termination of the collaboration with Wyeth orthe acquisition of Aviron may not be realized, and the Company’s results ofoperations would be negatively impacted by impairment charges for thewrite-down of manufacturing and intangible assets related to FluMist.

**TheCompany may not be able to bring its product candidates to market.**

Research and developmentactivities are costly and may not be successful, and there can be no assurancethat any of the Company’s product candidates, even if they are in or approvedto enter Phase 3 clinical trials, will be approved for marketing by the FDA orthe equivalent regulatory agency of any other country. A significant portion ofthe Company’s annual operating budget is spent on research, development andclinical activities. Currently, numerous products are being developed that maynever reach clinical trials, achieve success in the clinic, be submitted to theappropriate regulatory authorities for approval, or be approved for marketingor manufacturing by the appropriate regulatory authorities. There can also beno assurance that the Company will be able to generate additional productcandidates for its pipeline, either through internal research and development,or through the in-licensing or acquisition of products or technology. Even if aproduct candidate is approved for marketing by the applicable regulatoryagency, there can be no assurance that the Company will be able to successfullymanufacture the product on a commercial scale or effectively commercialize theproduct.

**Asignificant portion of the Company’s business is dependent on third parties.**

The Company licenses asignificant portion of the technology necessary for its business from thirdparties and relies on third parties for a significant portion of the clinicaldevelopment, supply of components, manufacturing, distribution, and promotionof the Company’s products. The actions of these third parties are outside ofthe Company’s control and the failure of these third parties to act inaccordance with their obligations to the Company would have a material adverseeffect on the Company’s business. Even if the Company is legally entitled todamages for a failure of a third party to fulfill its obligations to theCompany, there can be no assurance that such damages will adequately compensatethe Company for indirect or consequential losses such as the damage to aproduct brand or the Company’s reputation. If a third party does not fulfill itsobligations to the Company, the Company may have to incur substantialadditional costs, which could have a material adverse effect on the Company’sbusiness.

**Defendingproduct liability claims could be costly and divert focus from the Company’sbusiness operations and product recalls may be necessary.**

The Company’s productscontain biologically active agents that can have the effect of altering thephysiology of the person using the product. Accordingly, as a developer,tester, manufacturer, marketer and seller of biological products, the Companymay be subject to product liability claims that may be costly to defendregardless of whether the claims have merit and may require removal of anapproved product 

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from themarket. If a claim were to be successful, there is no guarantee that the amountof the claim would not exceed the limit of the Company’s insurance coverage. Further,a successful claim could reduce revenues related to the product, result in theFDA taking regulatory action (including suspension of product sales for anindefinite period) or result in significant negative publicity for the Companyor damage to the product brand. Any of these occurrences could have a materialadverse effect on the Company’s business and could result in a clinical trialinterruption or cancellation. Additionally, product recalls may be necessaryeither in connection with product liability claims or for other reasons. Anysuch recall would adversely affect sales of that product.

**TheCompany may not be able to meet the market demand for its products.**

The Company generally doesnot have or contract for redundant supply, production, packaging or otherresources to manufacture its products. As a result, the Company is at risk forbusiness interruption if there is any disruption in the manufacturing chain. Difficultiesor delays in the Company’s or the Company’s contractors’ manufacturing ofexisting or new products could increase the Company’s costs, cause the Companyto lose revenue or market share and damage the Company’s reputation. Inaddition, because the Company’s various manufacturing processes and those ofits contractors are highly complex and are subject to a lengthy FDA approvalprocess, alternative qualified production capacity may not be available on atimely basis or at all.

**TheCompany may lose product due to difficulties in the manufacturing process.**

The Company’smanufacturing operations expose it to a variety of significant risks,including: product defects; contamination of product or product loss; environmentalproblems resulting from our production process; sudden loss of inventory andthe inability to manufacture products at a cost that is competitive with thirdparty manufacturing operations. Furthermore, the Company collaborates and hasarrangements with other companies related to the manufacture of its productsand, accordingly, certain aspects of the manufacturing process are not withinthe Company’s direct control. In addition, MedImmune has not produced FluMistfor commercial use for a sustained period and may encounter additionalunforeseeable risks as the Company develops additional commercial manufacturingexperience with this product. In addition, the Company’s facilities in theUnited Kingdom are unionized and may be subject to manufacturing interruptionsdue to labor action.

**Contaminationof our raw materials could adversely affect the Company.**

As with otherbiotechnology companies, the manufacture of our products requires raw materialsobtained from a variety of sources including but not limited to animal productsor by-products. If these raw materials contain contaminants that are notremoved by our approved purification processes, it could result in a materialadverse effect on our product sales, financial condition and results ofoperations and might negatively impact our ability to manufacture thoseproducts for an indefinite period of time, regardless of whether suchcontamination has any proven effect on the safety or efficacy of the product.

**Reimbursementby government and third-party payers is critical for the success of the Company’sproducts.**

The cost to individualconsumers for purchase of the Company’s products can be significant. Accordingly,sales of Company products are dependent to a large extent on the insurancereimbursement available for the Company’s products. Actions by government andthird-party payers to contain or reduce the costs of health care by limitingreimbursement, changing reimbursement calculation methodologies, increasingprocedural hurdles to obtain reimbursement or by other means may have amaterial adverse effect on sales of the Company products. In addition, therehave been numerous proposals in the U.S., 

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both atthe state and federal level, as well as in other countries that would, ifadopted, affect the reimbursement of the Company’s products and have a materialadverse effect on the Company’s business.

**TheCompany relies upon a limited number of pharmaceutical wholesalers anddistributors that could impact the ability to sell the Company’s products.**

The Company relies largelyupon specialty pharmaceutical distributors and wholesalers to deliver itscurrently marketed products to the end users, including physicians, hospitals,and pharmacies. There can be no assurance that these distributors andwholesalers will adequately fulfill the market demand for the Company’sproducts, nor can there be any guarantee that these service providers willremain solvent. Given the high concentration of sales to certain pharmaceuticaldistributors and wholesalers, the Company could experience a significant lossif one of its top customers were to declare bankruptcy or otherwise becomeunable to pay its obligations to MedImmune.

**Obtainingand maintaining regulatory approvals to develop, manufacture and market theCompany’s products is costly and time consuming.**

The development,manufacturing and marketing of all of the Company’s products are subject toregulatory approval by the FDA in the U.S., as well as similar authorities inother countries. The approval process for each product is lengthy and subjectto numerous delays, which are generally not in the Company’s control. There canbe no assurance that any product candidate will be approved for marketing and,if approved, such approval may be limited in scope in such a manner that wouldharm the product’s potential for market success. Even after a product isapproved for marketing, it is still subject to continuing regulation. Forexample, if new adverse event information about a product becomes availablefrom broader use in the market or from additional testing, the Company may berequired by applicable authorities to recall the product or notify health careproviders of additional risks associated with use of the product. In addition,even if the Company has complied with all applicable laws and regulations, theapplicable regulatory authorities have the authority to and may revoke or limitapprovals or licenses without consulting or obtaining the consent of theCompany. If the Company fails to comply with applicable requirements, it may besubject to: fines; seizure of products; total or partial suspension ofproduction; refusal by the applicable authority to approve product licenseapplications; restrictions on the Company’s ability to enter into supplycontracts; and criminal prosecution. If the Company is unable to obtainapprovals on a timely basis or at all, if the scope of approval is more limitedthan expected by the Company or if the Company is unable to maintain approvals,its ability to successfully market products and to generate revenues will beimpaired.

**Patentprotection for the Company’s products may be inadequate or costly to enforce.**

The Company may not beable to obtain effective patent protection for its products in development. Thereare extensive patent filings in the biotechnology industry and the patentposition of biotechnology companies generally is highly uncertain and involvescomplex legal and factual questions. There can be no assurance that the Company’spatent applications will result in patents being issued or that, if issued,such patents will afford protection against competitors with similar technology.Litigation may be necessary to enforce MedImmune’s intellectual property rights.Any such litigation will involve substantial cost and significant diversion ofthe Company’s attention and resources and there can be no assurance that any ofthe Company’s litigation matters will result in an outcome that is beneficialto the Company. The Company is also aware that regulatory authorities,including the FDA, are considering whether an abbreviated approval process forso-called “generic” or “follow-on” biological products is appropriate. TheCompany is uncertain as to when, or if, any such process may be adopted or howsuch a process would relate to the Company’s intellectual property rights, butany such process could have a material impact on the prospects of the Company’sproducts.

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**Ifthe Company fails to obtain and maintain any required intellectual propertylicenses from third parties, its product development and marketing efforts willbe limited.**

Patents have been and willbe issued to third parties, and patent applications have been filed by thirdparties, that claim one or more inventions used in the development, manufactureor use of the Company’s products or product candidates. These patents(including any patents issuing from pending patent applications), if valid andenforceable, would preclude the Company’s ability to manufacture, use or sellthese products unless the Company obtains a license from the applicable thirdparty. These third parties are not generally required to provide the Companywith a license and, as such, obtaining any such licenses may not be possible orcould be costly and impose significant royalty burdens on the Company. Therecan be no assurance that a license will be available on terms acceptable theCompany or at all, which could have a material adverse effect on the Company’sbusiness. In addition, there can be no assurance that the Company will be ableto obtain an exclusive license to any such patent, and as a result, the thirdparties or their sublicencees may be able to produce products that compete withthose of the Company. Litigation may be necessary to challenge the intellectualproperty rights of third parties and would involve significant cost andsignificant diversion of management’s time and resources. There can be noassurance that any such litigation will result in an outcome that is beneficialto the Company.

**Technologicaldevelopments by competitors may render the Company’s products obsolete.**

If competitors were todevelop superior products or technologies, the Company’s products ortechnologies could be rendered noncompetitive or obsolete. Developments in thebiotechnology and pharmaceutical industries are expected to continue at a rapidpace. Success depends upon achieving and maintaining a competitive position inthe development of products and technologies. Competition from otherbiotechnology and pharmaceutical companies can be intense. Many competitorshave substantially greater research and development capabilities, marketing,financial and managerial resources and experience in the industry. If acompetitor develops a better product or technology, the Company’s products ortechnologies could be rendered obsolete, resulting in decreased product salesand a material adverse effect to the Company’s business. Even if a competitorcreates a product that is not technologically superior, the Company’s productsmay not be able to compete with such products, decreasing the Company’s sales.

**TheCompany is subject to numerous complex laws and regulations and compliance withthese laws and regulations is costly and time consuming.**

U.S. federal governmententities, most significantly the FDA, the U.S. Securities and ExchangeCommission, the Internal Revenue Service, the Occupational Safety and HealthAdministration, the Environmental Protection Agency, the Centers for Medicareand Medicaid Services and the U.S. Department of Veteran’s Affairs, as well asregulatory authorities in each state and other countries have each beenempowered to administer certain laws and regulations applicable to the Company.Many of the laws and regulations administered by these agencies are complex andcompliance requires substantial time, effort and consultation with outsideadvisors by the Company. Because of this complexity, there can be no assurancethat the Company’s efforts will be sufficient to ensure compliance or to ensurethat it is in technical compliance with all such laws and regulations at anygiven time. In addition, the Company is subject to audit, investigation andlitigation by each of these entities to ensure compliance, each of which canalso be time consuming, costly, divert the attention of senior management andhave a significant impact on the Company’s business, even if the Company isfound to have been in compliance or the extent of the Company’s non-complianceis deemed immaterial. If the Company is found to not be in compliance with anyof these laws and regulations, the Company and, in some cases its officers, maybe subject to fines, penalties, criminal sanctions and other liability, any ofwhich could have a material adverse effect on the Company’s business.

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**TheCompany cannot control the use of its products.**

The product labeling foreach of the Company’s products is approved by the FDA and other similarregulatory authorities in other countries and marketed only for certain medicalindications, but treating health care practitioners, particularly in theoncology field, are not generally required to restrict prescriptions to theapproved label. These practices make it likely that the Company’s products arebeing used for unapproved uses and may subject the Company to regulatoryscrutiny, sanctions or product liability, any of which could have a materialadverse effect on the Company’s business.

**TheCompany may not be able to hire or retain highly qualified personnel ormaintain key relationships.**

The success of the Company’sbusiness depends, in large part, on its continued ability to attract and retainhighly qualified scientific, manufacturing and sales and marketing personnel,as well as senior management such as Mr. David M. Mott, the Company’sChief Executive Officer, President and Vice Chairman and Dr. James F.Young, the Company’s President, Research and Development. In addition, theCompany relies on its ability to develop and maintain important relationshipswith leading research institutions and key distributors. Competition for thesetypes of personnel and relationships is intense among pharmaceutical,biopharmaceutical and biotechnology companies, and the Company’s inability toattract or retain such employees and relationships could have a material effecton its business. The Company does not maintain or intend to purchase “key man”life insurance on any of its personnel and, accordingly, the Company’s businessmay be subject to disruption upon the sudden or unexpected loss of a keyemployee.

**Ifthe Company fails to manage its growth properly, the business will suffer.**

The Company has expandedsignificantly in recent years due to both acquisition and internal growth. Toaccommodate its rapid growth and compete effectively, the Company will need tocontinue to improve its management, operational and financial informationsystems and controls, generate more revenue to cover a higher level ofoperating expenses, continue to attract and retain new employees, accuratelyanticipate demand for products manufactured and maintain adequate manufacturingcapacity. This rapid growth and increased scope of operations present risks notpreviously encountered and could result in substantial unanticipated costs andtime delays in product manufacture and development, which could materially andadversely affect the business.

**Fluctuationsin MedImmune’s common stock price over time could cause stockholders to loseinvestment value.**

The market price ofMedImmune’s common stock has fluctuated significantly over time, and it islikely that the price will fluctuate in the future. During 2004, the dailyclosing price of MedImmune common stock on the Nasdaq stock market ranged froma high of $28.42 to a low of $21.40. Investors and analysts have been, and willcontinue to be, interested in the Company’s reported earnings, as well as howthe Company performs compared to their expectations. Announcements by theCompany or others regarding operating results, existing and futurecollaborations, results of clinical trials, scientific discoveries, commercialproducts, patents or proprietary rights or regulatory actions may have asignificant effect on the market price of the Company’s common stock. Inaddition, the stock market has experienced extreme price and volumefluctuations that have particularly affected the market price for manybiotechnology companies and that have often been unrelated to the operatingperformance of these companies. These broad market fluctuations may adverselyaffect the market price of MedImmune common stock.

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**Changesin foreign currency exchange rates or interest rates could result in losses.**

The Company has enteredinto a supplemental manufacturing contract denominated in Euros. Fluctuationsin the Euro—U.S. Dollar exchange rate would lead to changes in the U.S. Dollarcost of manufacturing. To reduce the risk of unpredictable changes in thesecosts, the Company may, from time to time, enter into forward foreign exchangecontracts. However, due to the variability of timing and amount of paymentsunder this contract, the forward foreign exchange contracts may not mitigatethe potential adverse impact on the Company’s financial results. In addition,expenditures relating to the Company’s manufacturing operations in the UnitedKingdom and the Netherlands are paid in local currency. MedImmune has nothedged its expenditures relating to these manufacturing operations, andtherefore foreign currency exchange rate fluctuations may result in increasesor decreases in the amount of expenditures recorded. Additionally, certain ofthe Company’s distribution agreements outside the U.S. provide for it to bepaid based upon sales in local currency. As a result, changes in foreigncurrency exchange rates could adversely affect the amount the Company expectsto collect under these agreements.

***InvestorInformation***

MedImmune files annual,quarterly and current reports, proxy statements and other information with theSecurities and Exchange Commission (“SEC”). You can inspect, read and copythese reports, proxy statements and other information at the SEC’s PublicReference Room at 450 Fifth Street, N.W., Washington, D.C. 20549.

You can also obtain copiesof these materials at prescribed rates by writing to the Public Reference Section ofthe SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. You can obtaininformation on the operation of the public reference facilities by calling theSEC at 1-800-SEC-0330. The SEC also maintains a web site *(www.sec.gov)* that makes available reports, proxy statementsand other information regarding issuers that file electronically with it.

MedImmune makes availablefree of charge on or through its internet website its annual reports on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-Kand all amendments to those reports as soon as reasonable practicable aftersuch material is electronically filed with or furnished to the SEC. MedImmune’sinternet address is *www.medimmune.com.*The information on MedImmune’s website is not incorporated by reference intothis report.

**ITEM 2.**                PROPERTIES

The Company’s principal executive and administrativeoffices and research and development facilities are located in Gaithersburg,Maryland. During March 2004, the Company took occupancy of its newheadquarters facility, a complex totaling 219,000 square feet consisting of aresearch and development facility and administrative offices on approximately22.8 acres of land. The Company owns the facility and land, which will alsoserve as the site for the Company’s pilot plant, which will total 90,000 squarefeet and is currently under construction, and additional administrative spacetotaling 142,000 square feet which is scheduled to break ground during thesecond quarter of 2005. The Company continues to occupy facilities consistingof approximately 119,000 square feet in Gaithersburg, which are leased until2006. The Company subleases a small portion of these facilities.

The Company also owns 56,000 square feet ofadministrative and warehouse space and a 91,000 square foot biologics facilityin Frederick, Maryland. The biologics facility includes a cell cultureproduction area used to manufacture Synagis and development-stage projects. UntilDecember 2002, this facility was also used for the manufacture of immuneglobulins and by-products from human plasma. In addition, in Nijmegen, theNetherlands, the Company owns a 21,000 square foot manufacturing facility on 

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36,000 square feet of landand leases approximately 12,600 square feet of warehouse space. This lease runsthrough December 2010.

MedImmune operates a number of facilities related toresearch and development, manufacture and distribution of FluMist and CAIV-T,including: 104,000 square feet of office and laboratory space in Mountain View,California, which is leased through October 2008 with two options toextend for successive three-year periods; approximately 55,000 square feet ofspace in Philadelphia, Pennsylvania, pursuant to a lease agreement through December 2007,with an option to extend for two terms of three years; approximately 72,000square feet of office, laboratory and warehouse space in Bensalem, Pennsylvania,pursuant to a lease agreement through June 2008; approximately 72,000square feet of office, laboratory and manufacturing space in Santa Clara,California, pursuant to a lease agreement through January 2019, with anoption to renew for seven years; a fully owned 86,000 square foot distributionfacility in Louisville, Kentucky on 19 acres; an 8,900 square footmanufacturing facility in Speke, the United Kingdom, pursuant to a subleaseexpiring in June 2006; and 94,000 square feet of manufacturing and laboratoryspace on approximately eight acres of land in Speke pursuant to a leaseagreement through 2024.

The Company believes thatits current facilities and anticipated additions are adequate to meet itsresearch and development, commercial production, and administrative needs forthe foreseeable future.

**ITEM 3.**                LEGAL PROCEEDINGS

Information with respectto legal proceedings is included in Note 17 of Item 8 Consolidated FinancialStatements and Supplementary Data and is incorporated herein by reference.

**ITEM 4.**                SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS

Not Applicable

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**PART II**

**ITEM 5.**                MARKET FORMEDIMMUNE’S COMMON STOCK, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OFEQUITY SECURITIES

The Company’s common stock trades on theNasdaq National Market under the symbol “MEDI.” As ofFebruary 25, 2005, the Company had 2,018 common stockholders of record. Thisfigure does not represent the actual number of beneficial owners of commonstock because shares are generally held in “street name” by securities dealersand others for the benefit of individual owners who may vote the shares.

Thefollowing table shows the range of high and low prices and year-end closingprices for the common stock for the two most recent fiscal years.
| ** **     | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------|------------|----------|------------|----------|------------|
| ** **     | ** ** | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
| First Quarter  |       | $        | 26.41      |     | $          | 20.77 |   | $ | 34.60 |   | $ | 26.80 |   |
| Second Quarter |       | 25.95    |       | 22.91    |       | 42.09 |   | 31.52 |   |
| Third Quarter  |       | 25.15    |       | 21.70    |       | 40.88 |   | 31.69 |   |
| Fourth Quarter |       | 28.70    |       | 23.62    |       | 35.00 |   | 22.79 |   |
| Year End Close |       | $        | 27.11      |     |       |   | $ | 25.38 |   |   |   |
|                |            |          |            |          |            |  |  |  |  |  |  |  |  |

 

The Company has neverdeclared or paid any cash dividends on its common stock and does not anticipatepaying any cash dividends in the foreseeable future. The Company currentlyintends to retain any earnings to fund future growth, product development, investments, collaborations andoperations.

**IssuerPurchases of Equity Securities(1)**
| **Period**                                            | ** ** | ** ** | ** ** | **Total  Number of  Shares  Purchased** | ** ** | **Average  Price Paid  per Share** | ** ** | **Total Number of  Shares Purchased  as Part of Publicly  Announced Plans** | ** ** | **Approximate Dollar  Value that May Yet  Be Purchased  Under the Plans** | ** ** |
|-------------------------------------------------------|------------|------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------|------------|
| October 1,  2004 through October 31, 2004   |       | 45,000     |       |                                         | $          | 24.49                                        |       |                                                                                                           |       | 45,000                                                                                                       |       |   |   | $ | 254,079,000 |   |   |
| November 1,  2004 through November 30, 2004 |       | 150,000    |       |                                         | $          | 26.66                                        |       |                                                                                                           |       | 150,000                                                                                                      |       |   |   | $ | 250,079,000 |   |   |
| December 1, 2004  through December 31, 2004 |       | 371,800    |       |                                         | $          | 26.65                                        |       |                                                                                                           |       | 371,800                                                                                                      |       |   |   | $ | 240,169,000 |   |   |

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(1)          TheCompany’s Board of Directors has authorized the repurchase of up to $500million of MedImmune common stock on the open market or in privately negotiatedtransactions during the period from July2003 through June 2006.

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**ITEM 6.**                SELECTEDCONSOLIDATED FINANCIAL DATA

*(in millions, except per share data)*
| ** **                                                                    | ** ** | **2004(1)** | ** ** | **2003** | ** ** | **2002(2),(3)** | ** ** | **2001(3)** | ** ** | **2000(3)** | ** ** |
|-------------------------------------------------------------------------------|------------|-------------|------------|----------|------------|-----------------|------------|-------------|------------|-------------|------------|
| **RESULTS FOR THE YEAR**                                       |       |        |       |     |       |            |       |        |       |        |       |
| Total revenues                                                                |       | $           | 1,141.1    |     | $          | 1,054.4         |       | 852.7       |       | $           | 620.7      |   | $ | 542.0 |   |
| Gross profit                                                                  |       | 757.6       |       | 702.8    |       | 589.1           |       | 442.8       |       | 369.9       |       |
| (Loss) earnings before cumulative effect of a change  in accounting principle |       | (3.8        | )          | 183.2    |       | (1,098.0        | )          | 149.0       |       | 145.0       |       |
| Net (loss) earnings                                                           |       | (3.8        | )          | 183.2    |       | (1,098.0        | )          | 149.0       |       | 111.2       |       |
| Basic (loss)  earnings per share:                                             |       |        |       |     |       |            |       |        |       |        |       |
| (Loss) earnings before cumulative effect of a change  in accounting principle |       | (0.02       | )          | 0.73     |       | (4.40           | )          | 0.70        |       | 0.69        |       |
| Net (loss) earnings                                                           |       | (0.02       | )          | 0.73     |       | (4.40           | )          | 0.70        |       | 0.53        |       |
| Diluted (loss) earnings  per share:                                           |       |        |       |     |       |            |       |        |       |        |       |
| (Loss) earnings before cumulative effect of a change  in accounting principle |       | (0.02       | )          | 0.72     |       | (4.40           | )          | 0.68        |       | 0.66        |       |
| Net (loss) earnings                                                           |       | (0.02       | )          | 0.72     |       | (4.40           | )          | 0.68        |       | 0.50        |       |
| **YEAR  END POSITION**                                                        |       |        |       |     |       |            |       |        |       |        |       |
| Cash and  marketable securities                                               |       | $           | 1,706.1    |     | $          | 1,900.1         |       | $           | 1,423.1    |        | $          | 777.7 |   | $ | 526.3 |   |
| Total assets                                                                  |       | 2,564.4     |       | 2,794.6  |       | 2,188.3         |       | 1,236.9     |       | 1,016.6     |       |
| Long-term debt                                                                |       | 507.1       |       | 682.1    |       | 218.4           |       | 9.5         |       | 10.3        |       |
| Shareholders’  equity                                                    |       | 1,674.6     |       | 1,699.2  |       | 1,677.2         |       | 1,044.3     |       | 843.6       |       |
|                                                                               |            |             |            |          |            |                 |            |             |            |             |            |  |  |  |  |  |

 

**PRO FORMA RESULTS**

Thefollowing data represents the Company’s pro forma financial results assuming retroactiveadoption of the change in accounting principle (SAB 101):
| ** **          | ** ** | **2000(3)** | ** ** |
|---------------------|------------|-------------|------------|
| Total revenues      |       | $           | 542.0      |   |
| Net earnings        |       | 145.0       |       |
| Earnings per  share |       |        |       |
| Basic               |       | 0.69        |       |
| Diluted             |       | 0.66        |       |
|                     |            |             |            |  |

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(1)           Includescharges related to the dissolution of the collaboration with Wyeth andreacquisition of full rights to the influenza vaccines franchise.

(2)             Includesa charge for acquired in-process research and development (IPR&D), inconnection with the Company’s acquisition of Aviron on January 10, 2002.

(3)          Certainprior year amounts have been reclassified to conform to the current yearpresentation.

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**QUARTERLY FINANCIAL DATA (UNAUDITED)**

*(in millions,except per share data)*

***2004 Quarter Ended***
| ** **                      | ** ** | **Dec. 31** | ** ** | **Sept. 30** | ** ** | **June 30** | ** ** | **Mar. 31** | ** ** |
|---------------------------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| Net product sales               |       | $                | 457.8      |              | $          | 92.3             |       | $                | 90.7       |   |   | $ | 483.2 |   |   |
| Gross profit                    |       | 327.3            |       | 51.9              |       | 53.4             |       |             | 325.0      |   |   |
| Net earnings  (loss)            |       | 50.5             |       | (65.0             | )          | (100.3           | )          |             | 111.0      |   |   |
| Net earnings  (loss) per share: |       |             |       |              |       |             |       |             |       |   |   |
| Basic                           |       | $                | 0.20       |              | $          | (0.26            | )          | $                | (0.40      | ) |   | $ | 0.45 |   |   |
| Diluted(2)                      |       | $                | 0.20       |              | $          | (0.26            | )          | $                | (0.40      | ) |   | $ | 0.43 |   |   |

 

***2003 Quarter Ended***
| ** **                      | ** ** | **Dec. 31(1)** | ** ** | **Sept. 30(1)** | ** ** | **June 30(1)** | ** ** | **Mar. 31(**1) | ** ** |
|---------------------------------|------------|---------------------|------------|----------------------|------------|---------------------|------------|---------------------|------------|
| Net product sales               |       |                | $          | 398.6                |       |                |       | $                   | 82.3       |   |   |   | $ | 80.6 |   |   |   | $ | 431.1 |   |   |
| Gross profit                    |       |                | 266.3      |                 |       |                | 51.8       |                |       |   | 56.9 |   |   |   | 327.8 |   |   |
| Net earnings  (loss)            |       |                | 76.6       |                 |       |                | (16.4      | )                   |       |   | 13.5 |   |   |   | 109.5 |   |   |
| Net earnings  (loss) per share: |       |                |       |                 |       |                |       |                |       |   |   |   |   |   |   |   |   |
| Basic                           |       |                | $          | 0.31                 |       |                |       | $                   | (0.07      | ) |   |   | $ | 0.05 |   |   |   | $ | 0.44 |   |   |
| Diluted(2)                      |       |                | $          | 0.30                 |       |                |       | $                   | (0.07      | ) |   |   | $ | 0.05 |   |   |   | $ | 0.43 |   |   |

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(1)          Certain amounts havebeen reclassified to conform to the current presentation.

(2)          Inaccordance with EITF No. 04-8, “The Effect of ContingentlyConvertible Debt on Diluted Earnings per Share,” which became effective during2004, our 1% Convertible Notes are now included in diluted earnings per shareusing the if-converted method, regardless if the market price trigger has beenmet, unless the effect is anti-dilutive. As required, prior period dilutedearnings per share have been restated for comparative purposes. The table belowpresents a reconciliation of historical and restated diluted earnings per sharefor those quarters in which the 1% Notes were dilutive:
| ** **                               | ** ** | **Net Income   (numerator)** | ** ** | **Weighted  Average Shares  (denominator)** | ** ** | **Per Share  Amount** | ** ** |
|------------------------------------------|------------|----------------------------------------|------------|--------------------------------------------------|------------|----------------------------|------------|
| **Quarter  ended March 31, 2004**   |       |                                   |       |                                             |       |                       |       |   |   |   |   |   |   |
| Historical diluted earnings              |       |                                   | $          | 111.0                                            |       |                       |       | 250.9 |   |   |   | $ | 0.44 |   |   |
| Assuming conversion of 1% Notes          |       |                                   | 1.2        |                                             |       |                       | 7.3        |   |   |   | — |   |   |
| Restated diluted earnings                |       |                                   | $          | 112.2                                            |       |                       |       | 258.2 |   |   |   | $ | 0.43 |   |   |
| **Quarter ended December 31, 2003** |       |                                   |       |                                             |       |                       |       |   |   |   |   |   |   |
| Historical diluted earnings              |       |                                   | $          | 76.6                                             |       |                       |       | 251.2 |   |   |   | $ | 0.30 |   |   |
| Assuming conversion of 1% Notes          |       |                                   | 1.4        |                                             |       |                       | 7.3        |   |   |   | — |   |   |
| Restated diluted  earnings               |       |                                   | $          | 78.0                                             |       |                       |       | 258.6 |   |   |   | $ | 0.30 |   |   |

 

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**ITEM 7.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

*This Management’s Discussion and Analysis of FinancialCondition and Results of Operations contains forward-looking statementsregarding future events and our future results that are based on currentexpectations, estimates, forecasts, and the beliefs, assumptions and judgmentsof our management. Readers are cautioned that these forward-looking statementsare only predictions and are subject to risks and uncertainties that aredifficult to predict. Readers are referred to the “Forward-Looking Statements”and “Risk Factors” sections in Part I, Item 1 of this document.*

**INTRODUCTION**

MedImmune is committed toadvancing science to develop better medicines that help people live healthier,longer and more satisfying lives. MedImmune currently focuses its efforts onusing biotechnology to produce innovative products for prevention and treatmentin the therapeutic areas of infectious disease, autoimmune disease and cancer. MedImmune’sscientific expertise is largely in the areas of monoclonal antibodies andvaccines. MedImmune markets four products, Synagis, FluMist, Ethyol and CytoGamand has a diverse pipeline of development-stage products. In January 2002,we acquired Aviron, a California-based vaccine company (“the Acquisition”).

**OVERVIEW**

During 2004, product sales surpassed $1 billion forthe first time in corporate history, increasing 13% as compared to 2003,reflecting growth in Synagis sales and recognition of FluMist product salesrevenues related to the 2003/2004 and 2004/2005 flu seasons. We recorded a netloss of $0.02 per share in 2004 compared to diluted net earnings per share of$0.72 in 2003. The decline in net income was primarily attributable to chargesincurred in 2004 for the reacquisition of the influenza vaccines franchise fromWyeth, and increased research and development spending due to higher levels ofclinical activity. Our 2003 earnings also included milestones and otherpayments we received from Wyeth for FDA approval of FluMist and achievement ofother goals totaling $45.9 million.

Following the disappointing launch of FluMist in 2003,we completed a thorough assessment of: (1) the approved product, FluMist; (2) thelive attenuated, nasally delivered influenza technology and subsequent products(collectively, the “influenza vaccines franchise”); and (3) the influenzamarket. Based on this assessment, we maintain our belief that FluMist is asignificant advance in the prevention of influenza disease, and reiterated ourcommitment to the future of vaccine and related technology. Notwithstandingthis commitment, we do not expect the vaccine to be a meaningful contributor torevenue growth before 2007, when we hope to launch CAIV-T, therefrigerator-stable version of FluMist, in the United States.  From 2004 to 2006, we expect to focus ourefforts on developing FluMist into a superior influenza vaccine preferred bypediatricians, with particular attention toward developing CAIV-T (now in Phase3 development) and seeking approval to extend the indicated population toinclude individuals below the age of five years and above the age of 49 years.

Toward this goal, in April 2004, we entered intoagreements with Wyeth to dissolve our collaboration for the influenza vaccinesfranchise. As a result of the dissolution and in exchange for an upfront fee,future milestones and royalties, we reacquired the full rights to thistechnology. We also assumed full responsibility for the manufacturing,marketing, and selling of FluMist and any subsequent related products. During2004, we substantially completed the transition of all research, development,clinical, regulatory, and sales and marketing activities related to theinfluenza vaccines franchise from Wyeth to us.

For the 2004/2005 flu season, we introduced asubstantially lower price structure for FluMist and refocused our sellingefforts on the same pediatricians who are our Synagis customers. In early October 2004,regulatory actions in the United Kingdom caused a significant portion of theinjectable 

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influenza vaccine supplyfor the U.S. to be withheld from the market. Subsequently, we increased thequantity of filled FluMist doses for the 2004/2005 season to approximatelythree million, of which approximately 1.7 million doses were sold through December 31,2004.

We continued developing our product candidates during2004 with the advancement of three programs into Phase 3 development, includingNumax, CAIV-T, and our human papillomavirus vaccine partnered with GSK. Wecontinued to advance our oncology program for Vitaxin, with Phase 2 trialscurrently being conducted in melanoma and prostate cancer. During 2004, wedecided to terminate Phase 2 testing of Vitaxin in patients withrheumatoid arthritis and psoriasis, based on preliminary data suggesting lackof clinical benefit in these inflammatory diseases. We also received approvalfor a supplemental biologics license application for a liquid formulation ofSynagis in July 2004.

As we look to the future, we intend to continuecommercializing our core products, advance our product candidates in theclinic, and develop our pipeline through our own internal discovery anddevelopment efforts and by gaining access to new technologies throughacquisition and in-licensing arrangements. Our product development objectivesinclude targeting a total of eight new INDs by the end of 2006. We anticipatethat we will have four product candidates in Phase 3 studies by the end of2005, and will be attempting to introduce at least three new products to marketby 2009.

Our cash and marketable securities at December 31,2004 were $1.7 billion as compared to $1.9 billion at December 31, 2003. Inaddition to our research and development activities, we utilized cash during2004 for two significant transactions: the redemption and payment of theremaining 51⁄4% Convertible Subordinated Notes and the payments associated withthe reacquisition and transition of the influenza vaccines franchise fromWyeth.

We have the following expectations for 2005:

*Productsales****—***For2005, we expect product sales to grow by approximately 10 percent, driven byworldwide reported revenues from Synagis that are expected to top the $1billion mark for the first time. We expect that the product mix on a percentagebasis in 2005 will be comparable to that in 2004. Owing to the fact that forthe foreseeable future Synagis is expected to continue to comprise a majorityof our product sales, we believe our revenues and operating results willreflect the seasonality of that product’s use to prevent RSV disease, whichoccurs primarily during the winter months. As noted above, we do not expectFluMist to be a meaningful contributor to revenue growth before 2007, when wehope to launch in the United States an improved formulation of this influenzavaccine with a label including a broader age indication. As such, we expectonly a modest increase in sales of FluMist in 2005 compared to 2004.

*Grossmargin****—***Excludinggross margins on FluMist, we expect that our annual gross margin percentage for2005 will be consistent with our historical rate. We anticipate that FluMistwill continue to exert downward pressure on gross margins until we successfullylaunch an improved formulation with a broader label. We expect that grossmargins may vary significantly from quarter to quarter, based on the productmix and reflecting the seasonality of Synagis and FluMist.

*Researchand development expense****—***We expect research and development expensesto increase in 2005 compared to 2004, and comprise approximately 25 to 30percent of product sales. This is largely due to the initiation of severalPhase 3 trials for Numax and CAIV-T during the fourth quarter of 2004, whichwill continue throughout 2005.

Throughout 2005, webelieve our financial position will remain strong with cash flow fromoperations funding capital expansion, strategic investments, research anddevelopment expenditures, and repurchases of common stock.

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**DISSOLUTIONOF THE COLLABORATION WITH WYETH**

In April 2004, we entered into agreements todissolve the collaboration with Wyeth for FluMist, CAIV-T and all relatedtechnology. As a result of the dissolution and in exchange for an upfront feeand future milestones and sales-related royalties, MedImmune reacquired theinfluenza vaccines franchise, and assumed full responsibility for themanufacturing, marketing and sale of FluMist and any subsequent related product.As part of the dissolution, we acquired Wyeth’s distribution facility inLouisville, Kentucky. Wyeth has provided bulk manufacturing materials,transferred clinical trial data, as well as provided manufacturing supportservices, during a transition that was substantially completed during 2004. Inconnection with the dissolution of the collaboration, we made payments during2004 totaling $79.9 million under the terms of the agreement, representing: (1) thefinal reconciliation of the amounts owed between parties related to the2003/2004 influenza season; (2) the settlement of commercialization anddevelopment expenses owed between parties through the date of the agreement; (3) thepurchase of the distribution center; (4) the transfer of other assets fromWyeth; and (5) the payment of milestones for achieving certain goals fortransition activities. An additional $4.1 million due to Wyeth as of December 31,2004 for technology transfer and transition activities is included in accruedexpenses on our consolidated balance sheet.

The notable impacts of the transaction during 2004 areas follows:

**Revenue****—**Beginning with the 2004/2005 flu seasonand beyond, all FluMist product sales are recorded as the sales price to ourdistributor less customary sales allowances. We no longer receive anyreimbursement from Wyeth for development and commercialization costs, nor do wereceive milestone payments.

**Researchand Development****—**Ourresearch and development charges increased significantly in 2004 compared to2003 as we completed the transition of research and development activities fromWyeth and increased our resources and infrastructure to assume fullresponsibility for the continued development and regulatory approval of theinfluenza vaccine franchise.

**Impairmentof Intangible Asset****—**Inconjunction with the Acquisition in 2002, we recorded an intangible asset onour balance sheet that represented the fair value, as determined by anindependent valuation, of the original collaborative agreement with Wyeth forthe development, manufacture, distribution, marketing, promotion and sale ofFluMist. As a result of the dissolution of our original collaboration withWyeth, we recorded a permanent impairment charge of $73.0 million during thesecond quarter of 2004 to write off the remaining unamortized cost of theintangible asset.

**AcquiredIn-Process Research and Development (IPR&D)****—**We recorded charges for IPR&D of $29.2million during 2004, representing the relative fair value of purchasedin-process technologies at the purchase date, as determined by an independentvaluation. A portion of the charges that occurred in 2004 relate to milestonepayments to Wyeth for the achievement of certain contractual deliverables. Seefurther explanation of the calculation of the IPR&D charge in the CriticalAccounting Estimates section.

**Income Taxes****—**Our effective tax rate for 2004 was  approximately 59%, as compared to our 2003effective rate of approximately 37%, reflecting the impact of the portion ofIPR&D expensed during the second quarter that is not deductible for taxpurposes. Excluding the impact of the dissolution of the Wyeth agreements, the2004 effective tax rate was approximately 33%. See further discussion of incometaxes in the Critical Accounting Estimates section.

**NEW ACCOUNTINGSTANDARDS**

In January 2003, theFinancial Accounting Standards Board (“FASB”) issued FIN No. 46, “Consolidationof Variable Interest Entities, an interpretation of Accounting ResearchBulletin No. 51.” FIN No. 46 requires certain variable interestentities to be consolidated by the primary beneficiary of the 

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entityif the equity investors in the entity do not have the characteristics of acontrolling financial interest or do not have sufficient equity at risk for theentity to finance its activities without additional subordinated financialsupport from other parties. We have adopted FIN No. 46 and determined thatwe do not currently hold interests in any entities that are subject to theconsolidation provisions of this interpretation.

In December 2004, theFASB issued Statement of Financial Accounting Standards (“SFAS”) No.123R, arevision of SFAS 123, “Accounting for Stock-based Compensation.”  SFAS 123R requires public companies torecognize expense associated with share-based compensation arrangements,including employee stock options, using a fair value-based option pricingmodel, and eliminates the alternative to use Accounting Principles BoardOpinion 25’s intrinsic value method of accounting for share-based payments. Inaccordance with the new pronouncement, we plan to begin recognizing the expenseassociated with share-based payments, as determined using a fair value-basedmethod, in our statements of operations beginning on July 1, 2005. Weexpect that adoption of the expense provisions of the Statement will have amaterial impact on our results of operations. The standard allows threealternative transition methods for public companies: modified prospectiveapplication without restatement of prior interim periods in the year ofadoption; modified retrospective application with restatement of prior interimperiods in the year of adoption; and modified retrospective application withrestatement of prior financial statements to include the same amounts that werepreviously included in pro forma disclosures. We have not determined whichtransition method we will adopt.

During July 2004, theFASB’s Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 02-14,“Whether an Investor Should Apply the Equity Method of Accounting toInvestments Other Than Common Stock.” EITF 02-14 requires investors to apply the equity method of accountingto investments that are in-substance common stock, defined as an investment inan entity that has risk and reward characteristics that are substantiallysimilar to the entity’s common stock. The EITF is effective for reportingperiods beginning after September 15, 2004. During the third quarter of2004, we early adopted EITF 02-14, with an immaterial impact to ourconsolidated financial position and results of operations.

During September 2004,the EITF reached a consensus on Issue No. 04-8, “The Effect ofContingently Convertible Debt on Diluted Earnings Per Share.”  EITF 04-8 requires that allcontingently convertible debt instruments be included in diluted earnings pershare using the if-converted method, regardless if the market price trigger (orother contingent feature) has been met. The EITF is effective for reportingperiods ending after December 15, 2004 and requires that prior periodearnings per share amounts presented for comparative purposes be restated. Underthe provisions of EITF 04-8, our 1% Convertible Senior Notes (the “1%Notes”), which represent 7.3 million potential shares of common stock, will beincluded in the calculation of diluted earnings per share using theif-converted method regardless if the contingent requirements have been met forconversion to common stock. We adopted EITF 04-8 during the fourthquarter of 2004, and determined that there is not a material impact on priorperiods’ earnings per share calculations.

In December 2004, theFASB issued SFAS 151, “Inventory Costs**—**An Amendmentof ARB No. 43, Chapter 4.”  SFAS 151amends the guidance in ARB No. 43, Chapter 4 to require that idle facilityexpense, freight, handling costs and wasted material (spoilage) be recognizedas current-period charges regardless of whether they meet the criterion of “soabnormal”. In addition, the Statement requires that allocation of fixedproduction overheads to the costs of conversion be based on the normal capacityof the production facilities. We will adopt SFAS 151 for inventory costs incurredbeginning January 1, 2006 as required by the Standard. We expect thatadoption of the Standard will have an immaterial impact on our consolidatedfinancial position and results of operations.

**CRITICAL ACCOUNTING ESTIMATES**

The preparation of consolidated financial statementsrequires management to make estimates and judgments with respect to theselection and application of accounting policies that affect the reported 

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amounts of assets,liabilities, revenues and expenses, and the disclosures of contingent assetsand liabilities. We consider an accounting estimate to be critical if theaccounting estimate requires us to make assumptions about matters that werehighly uncertain at the time the accounting estimate was made, and if changes inthe estimate that are reasonably likely to occur from period to period, or useof different estimates that we reasonably could have used in the currentperiod, would have a material impact on our financial condition or results ofoperations. We believe the following critical accounting estimates have thegreatest impact on the preparation of our consolidated financial statements. Managementhas discussed the development of and selection of these critical accountingestimates with the Audit Committee of our Board of Directors. In addition,there are other items within our financial statements that require estimation,but are not deemed critical as defined above. Changes in estimates used inthese and other items could have a material impact on our financial statements.

**In-ProcessResearch and Development****—**When we enter into significant agreements for access tolate-stage technology or product candidates, we generally perform a valuationof the transaction to determine the fair value of the acquired in-processtechnologies at the acquisition date, calculated as the sum ofprobability-adjusted commercial scenarios, or income approach.  This method is usually based upon management’sestimates of the probability of FDA and/or other regulatory body approval andcommercial success for the product candidate, which can include the estimatedimpact of key factors, including the size of the indicated population, price,volume, timing of regulatory approval and any potential failure tocommercialize the product.

During 2004, we recorded a charge of $29.2 million foracquired IPR&D in conjunction with our reacquisition of influenza vaccinefranchise rights from Wyeth in May 2004. The charge represents theestimated relative fair value, as of the purchase date, of the acquiredin-process technologies and certain IPR&D projects, primarily CAIV-T,calculated utilizing the income approach. CAIV-T is not expected to have thelogistical and distribution issues associated with the frozen formulation andis expected to have an expanded label. We do not believe that there will be anyalternative future use for the in-process technologies that were expensed as ofthe reacquisition date. In valuing the purchased in-process technologies, weestimated cash inflows based on extensive market research performed on the U.S.marketplace and cash outflows for product costs, milestones and royalties to bepaid over a 10-year period assuming approval and U.S. launch in the2007/2008 timeframe using probability-of-success-adjusted scenarios and adiscount rate of 11.3%. Based on current information, management believes thatthe projections underlying the analysis are reasonable; however, the actualcash inflows or outflows cannot be predicted with certainty. To achieve theseprojections, we are required to complete certain Phase 3 clinical trials overthe next several years. The estimated total cost of these worldwide Phase 3clinical trials, which is dependent upon several factors including the ultimatedesign of the trials, the number of patients to be enrolled, and the number ofsites needed to complete enrollment, is estimated to range between $110 millionand $160 million.

As with all biotechnology products, the probability ofcommercial success for any one research and development project is highlyuncertain. If we fail to successfully complete the clinical trials or if CAIV-Tis not approved by the FDA as a safe and effective vaccine for our targetedpopulations, the launch may be delayed or terminated, resulting in a diminishedor no return on the purchase price of the Acquisition,  payments made to Wyeth in connection withdissolution of the collaboration and development costs incurred to date. Inaddition, as of December 31, 2004, none of the existing manufacturingfacilities involved in the production of CAIV-T have been licensed tomanufacture CAIV-T by any regulatory agency, nor has CAIV-T been manufacturedon a sustained commercial scale. There can be no assurance that thesefacilities can achieve licensure by the FDA or any other regulatory agency, norcan there be any assurances that if licensed, commercial scale production couldbe achieved or sustained. If we fail to obtain FDA approval for the marketingand manufacture of CAIV-T, we will not achieve the currently anticipated returnon any investment we have made or will make in CAIV-T.

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During the first quarter of 2002, we recorded a chargeof $1,179.3 million for acquired IPR&D in conjunction with the Acquisition.FluMist, the leading product candidate at the time, was considered to be a “late-stage”product candidate, and as such, we used the methodology described above tovalue the amount of the purchased IPR&D at the transaction date. FluMistwas approved in June 2003 and launched in September 2003.

As a result of multiple factors, which were unforeseenat the time of the Acquisition, FluMist did not achieve the level of initialcommercial success that we had projected for the first season. After a thoroughanalysis of the product subsequent to the first season, we are focused onattempting to change the formulation from frozen to refrigerator-stable and toexpand the label to 6 months through 64 years of age. As such, we do notpresently believe that the FluMist product will be a meaningful contributor torevenue growth before 2007, when we hope to launch CAIV-T. Had we known at thetime of the Acquisition that we would have a more narrow indication (the June 2003approval was for healthy people from 5 years to 49 years of age) than expectedor that our sales volumes would be much lower than expected, the value assignedto the purchased IPR&D would likely have been approximately half of theoriginal valuation.

**RevenueRecognition****—**We recognizerevenue from product sales when there is persuasive evidence that anarrangement exists, delivery has occurred, the price is fixed or determinableand collectibility is reasonably assured.

We receive royalties from licensees, based onthird-party sales of licensed products or technologies. Royalties are recordedas earned in accordance with the contract terms when third-party results can bereliably measured and collectibility is reasonably assured.

Revenue from certain guaranteed payments where wecontinue involvement through a development collaboration or an obligation tosupply product is recognized ratably over the development or supply period.

We may record deferred revenues related to milestonepayments and other up front payments. Deferred revenue for manufacturingobligations is recognized as product is delivered. Deferred revenue associatedwith performance milestones is recognized based upon the achievement of themilestones, as defined in the respective agreements, as long as the milestonesare substantive and at risk. Revenue under research and development costreimbursement contracts is recognized as the related costs are incurred.

**Inventory****—**We capitalize inventory costs associated with certainproducts prior to regulatory approval and product launch, based on management’sjudgment of probable future commercial use and net realizable value. We couldbe required to permanently write down previously capitalized costs related topre-approval or pre-launch inventory upon a change in such judgment, due to adenial or delay of approval by regulatory bodies, a delay in commercialization,or other potential factors. Conversely, our gross margins may be favorablyimpacted if some or all of the inventory previously written down becomesavailable and is used for commercial sale.

We capitalize inventory costs associated with marketedproducts based on management’s judgment of probable future commercial use andnet realizable value. We could be required to permanently write down previouslycapitalized costs related to commercial inventory due to quality issues orother potential factors. Conversely, our gross margins may be favorablyimpacted if some or all of the inventory previously written down is recoveredthrough further processing or receipt of specification waiver from regulatoryagencies, and becomes available and is used for commercial sale.

We are required to state all inventory at lower ofcost or market. In assessing the ultimate realization of inventories, we arerequired to make judgments as to multiple factors affecting our inventories andcompare these with current or committed inventory levels. In the highlyregulated industry in which we operate, raw materials, work-in-process andfinished goods inventories have expiration dates that must be factored into ourjudgments about the recoverability of inventory costs. Additionally, if ourestimate of a 

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product’s pricing is suchthat we may not fully recover the cost of inventory, we must consider that inour judgments as well. In the context of reflecting inventory at the lower ofcost or market, we will record permanent inventory write-downs as soon as aneed for such a write-down is determined. Such write-downs in inventory arepermanent in nature, and will not be reversed in future periods.

The valuation of FluMist inventories continues torequire a significant amount of judgment for multiple reasons. Specifically,the manufacturing process is complex, in part due to the required annual updateof the formulation for recommended influenza strains, and there can be noguarantee that we will be able to continue to successfully manufacture theproduct. Prior to approval in June 2003, all FluMist inventories wereconsidered pre-approval and pre-launch inventories. Subsequent to approval, allFluMist inventories were considered to be inventory available for commercialsale.

The annual FluMist production cycle begins in October ofthe year prior to the influenza season in which the product will be consumed. Forexample, the production cycle for the 2004/2005 season began in October 2003.The production cycle begins by preparing the master viral working seeds andreadying the manufacturing facilities for the bulk monovalent production,blending three monovalent strains into a trivalent vaccine, filling intointranasal sprayers, packaging sprayers into multi-dose packs and distributingthe frozen product. Our raw materials have expiration dates (dates by whichthey must be used in the production process) that range from 24 months to 60months. Our semi-processed raw materials and work-in-process inventory havemultiple components, each having different expiration dates that range fromnine to 24 months. Each season’s finished FluMist product has an approved shelflife ranging from three months to nine months.

For all inventory components on hand as of December 31,2004, we reviewed the following assumptions to determine the amount of anynecessary reserves:  expected productionlevels and estimated cost per dose; sales volume projections that are subjectto variability; the expected price to be received for the product andanticipated distribution costs; and current information about the influenzastrains recommended by the Centers for Disease Control and Prevention for eachseason’s vaccine. The methodology used to calculate adjustments required tovalue our FluMist inventories as of December 31, 2004 at net realizablevalue was consistent with the methodology used for the valuations from approvalin June 2003 through and as of December 31, 2004.

The December 31, 2003 valuation of FluMistinventories considered the disappointing sales results of our initial launch ofFluMist, which became available in late 2003, and our revised sales estimatesof FluMist for both the 2003/2004 and 2004/2005 flu seasons. As a result, werevised our sales volume estimates and decreased the estimated price expectedto be received per dose for the 2004/2005 flu season. In addition, we decreasedour estimated production levels based on our anticipated decrease in salesvolumes, which increased the per unit cost to produce FluMist. Using theseassumptions, we compared the amount of expected FluMist sales with the expectedproduction cost to estimate the net realizable value of FluMist inventories tobe produced throughout the season. Sales and production estimates for the 2004/2005season incorporated into the inventory valuations performed as of December 31,2003 and the first half of 2004 were generally consistent. The valuation as of September 30,2004 incorporated management’s estimates of sales and production levels thatwere adjusted to take into account anticipated increased demand due to theshortage of injectable influenza vaccine in the U.S. for the 2004/2005 season. Thevaluation of inventory as of December 31, 2004 is based on sales volumeand price estimates for the 2005/2006 season that are largely based on ouractual experience for the 2004/2005 season.

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Thetable below summarizes the activity within the components of FluMistinventories (in millions):
| ** **                                                              | ** ** | **Gross  Inventory** | ** ** | ** Reserves ** | ** ** | **Net  Inventory** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------|------------|--------------------------|------------|--------------------|------------|
| ***FluMist  Details***                                                  |       |                 |       |                     |       |               |       |   |   |   |   |   |   |
| As of  December 31, 2003                                           |       |                 | $          | 122.1                    |       |               |       | $ | (85.8 | ) |   |   | $ | 36.3 |   |   |
| Raw materials,  net                                                     |       |                 | 5.0        |                     |       |               | 0.5        |   |   |   | 5.5 |   |   |
| Production, net                                                         |       |                 | 62.0       |                     |       |               | (47.4      | ) |   |   | 14.6 |   |   |
| Disposals and  scrap                                                    |       |                 | (85.6      | )                        |       |               | 77.9       |   |   |   | (7.7 | ) |   |
| Cost of goods  sold recognized on 2003/2004 inventory during Q1 of 2004 |       |                 | (34.2      | )                        |       |               | 5.0        |   |   |   | (29.2 | ) |   |
| Cost of goods  sold recognized on 2004/2005 inventory during Q4 of 2004 |       |                 | (18.6      | )                        |       |               | 14.1       |   |   |   | (4.5 | ) |   |
| As of December 31,  2004                                           |       |                 | $          | 50.7                     |       |               |       | $ | (35.7 | ) |   |   | $ | 15.0 |   |   |

 

Because finished FluMist product has an approved shelflife ranging from three to nine months, all finished product produced for aparticular flu season must be sold within that season. Thus, if our actualsales fall below our projections, we will be required to write off anyremaining inventory balance at the end of the flu season.

For our other products, weperiodically assess our inventory balances to determine whether net realizablevalue is below recorded cost. Factors we consider include expected salesvolume, production capacity and expiration dates. We plan to replace thecurrent lyophilized formulation of Synagis with the newly approved liquidformulation during the 2005/2006 RSV season pending final FDA approval of themanufacturing facilities and processes. As of December 31, 2004, weanalyzed inventory quantities, including pending future commitments, andprojected sales levels of the current formulation of Synagis in connection withthis conversion plan. Based on our review, we recorded a permanent inventorywrite-down for excess inventories of $5.5 million. No other significantinventory adjustments were recorded during 2004.

**SalesAllowances and Other Sales Related Estimates—**

*Reductions to GrossProduct Sales*

We recordallowances for discounts, returns, chargebacks and rebates due to governmentpurchasers as a reduction to gross product sales. The timing of actualdiscounts, returns, and chargebacks taken, and rebates paid to governmentpurchasers can lag the sale of the product by up to several months. As such, asignificant amount of judgment is required when estimating the impact of salesallowances on gross sales for a reporting period. The assumptions used indeveloping our estimates of sales reserves include the following key factors:

·       historicaltrends for discounts, returns, rebate claims, or other claims;

·       ourcurrent contracts with customers and current discount programs;

·       actualperformance of customers against contractual volume targets tied to discounts;

·       proportionof gross sales ultimately used by Medicaid patients;

·       stateMedicaid policies and reimbursement practices; and

·       accuracyof reporting by our customers of end-user product sales by state.

We update these factors for any known changes in factsor circumstances as soon as the changes are known. If our historical trends arenot indicative of the future, or our actual sales are materially different 

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from the projectedamounts, or if our assessments prove to be materially different than actualoccurrence, our results could be affected. The estimation process fordetermining reserves for sales allowances inherently results in adjustmentseach year. Additionally, because of the varying lags and the seasonal nature ofour largest product, Synagis, our sales discounts, returns, chargebacks andrebates fluctuate throughout the year. If our estimate of the percentage ofgross sales to be recorded for sales allowances for Synagis were to increase by1%, our revenues for the 2003/2004 Synagis sales season (which runs from July 2003to June 2004) would have been reduced by approximately $9 million. Adecrease of 1% in the sales allowances for Synagis during the same period wouldhave increased our revenues by approximately $9 million.

We estimate the amount of rebates due to governmentpurchasers quarterly based on historical experience, along with updates, andbased on our best estimate of the proportion of sales that will be subject tothis reimbursement, largely comprised of Medicaid payments to state governments.During the first quarter of 2003, we lowered our estimate of rebates due togovernment purchasers to reflect favorable historical experience and a changein our estimate of the proportion of the sales that are subject toreimbursement. During the fourth quarter of 2003, we became aware of efforts byseveral states to collect rebates for product administered in certain settingsfor which reimbursement was not sought in the past. After analyzing thesituation, we determined that the new facts and circumstances warranted anincrease in our estimate of rebates due to government purchasers. As such, werecorded additional reserves for rebates due to government purchasers ofapproximately $13.7 million during the fourth quarter of 2003, and increasedour estimate of the proportion of current sales that will be subject toreimbursement, given the change in circumstance. For the years ended December 31,2004, 2003 and 2002, allowances for discounts, returns, chargebacks and rebatesdue to government purchasers resulted in a net reduction to gross product salesof approximately 10%, 9% and 9%, respectively. The increase in 2004 isattributable to FluMist sales, which experience higher discount and returnrates than our other products, and higher levels of Medicaid reportingcompliance for reimbursement.

Allowances for discounts,returns, and chargebacks, which are netted against accounts receivable, totaled$14.5 million and $9.0 million at December 31, 2004 and 2003, respectively.Allowances for government reimbursements were $52.5 million and $42.4 millionas of December 31, 2004 and 2003, respectively, and are included inaccrued expenses in the accompanying balance sheets.

*Selling, Generaland Administrative Expenses*

We estimate our co-promotion expense and salescommissions by applying an estimated rate that is based upon an estimate ofprojected sales for the season to our actual sales for the period. We decreasedco-promotion expense by $2.0 million in 2003 and increased co-promotion expenseby $2.1 million in 2002, resulting from the final reconciliation of net salesfor the 2002/2003 and 2001/2002 contract years. No significant adjustments toco-promotion expense were made during 2004.

We estimate the level of bad debts as a percentage ofgross trade accounts receivable balances outstanding at the end of the period,based upon our assessment of the concentration of credit risk, the financialcondition and environment of our customers, and the level of credit insurance,if any, we obtain on our customers’ balances. Because of the seasonal nature ofour largest product, Synagis, our accounts receivable balances fluctuatesignificantly. Accordingly, our allowance for doubtful accounts also fluctuates.Our accounts receivable balances tend to be highest at the end of December andMarch, while the September balances are somewhat lower as our sellingseason is just beginning, and the June balances are significantly lower,reflecting the close-out of the prior season. For the years ended December 31,2004 and 2003, we recorded $2.0 million and $3.8 million in reductions to baddebt expense, largely based on our current assessment of the factors above. Baddebt expense is classified as selling, general and administrative expense inour consolidated statements of operations.

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**IncomeTaxes****—**Werecord valuation allowances to reduce our deferred tax assets to the amountsthat are anticipated to be realized. We consider future taxable income andongoing tax planning strategies in assessing the need for valuation allowances.In general, should we determine that we are able to realize more than therecorded amounts of net deferred tax assets in the future, our net income willincrease in the period such determination was made. Likewise, should wedetermine that we would not be able to realize all or part of the net deferredtax asset in the future, our net income would decrease in the period suchdetermination was made. Reversals of valuation allowance related to acquireddeferred tax assets, however, would first be applied against goodwill and otherintangibles before impacting net income. A tax reserve is recorded when wecannot assert that it is probable that a tax position claimed on a return willbe sustained upon challenge by the tax authority. Any change in the balance ofa tax reserve during the year is treated as an adjustment to current year taxexpense.

During 2004, we reached a state tax settlement thatenabled us to release a tax contingency reserve of $1.5 million, resulting in abenefit to our consolidated statement of operations. In addition, our U.K.subsidiary recognized income in 2004 for U.K. tax purposes, which enabled us torelease a valuation allowance for net operating losses of approximately $2.4million, resulting in a favorable impact to the consolidated statement ofoperations.

**Goodwilland Intangible Assets****—**Wehave recorded and valued significant intangible assets that we acquired as aresult of the Acquisition. We engaged independent valuation experts whoreviewed our critical assumptions and assisted us in determining a value forthe identifiable intangibles. Of the $129.4 million of acquired intangibleassets, $90.0 million was assigned to the worldwide collaborative agreementwith Wyeth for the development, manufacture, distribution, marketing,promotion, and sale of FluMist. We estimated the fair value of the Wyethagreement using the sum of the probability-adjusted scenarios under the incomeapproach. In applying this method, we relied on revenue assumptions,profitability assumptions and anticipated approval dates. The remaining $39.0million was assigned to a contract manufacturing agreement with Evans VaccinesLimited. We estimated the fair value of the Evans agreement using the costapproach, which is based on the theory that a prudent investor would pay nomore for an asset than the amount for which the asset could be replaced. In ouranalysis, we reduced replacement cost for such factors as physicaldeterioration and functional or economic obsolescence. We review intangibleassets for impairment when an event that could result in an impairment occurs. Asa result of the dissolution of the collaboration with Wyeth during 2004, werecorded a permanent impairment loss of $73.0 million that represented theremaining unamortized cost of the related intangible asset. As of December 31,2004, there was no further impairment of our intangible assets, of which $13.1million remains unamortized.

During 2004 and 2003, we made adjustments to goodwillrecorded in the Acquisition of $11.2 million and ($2.4) million, respectively,reflecting adjustments to deferred tax assets relating to the resolution ofincome tax related uncertainties. We review goodwill for impairment at leastannually (during the fourth quarter) and during interim periods if an eventthat could result in an impairment occurs. As of December 31, 2004, wehave not identified any impairment of goodwill, of which $24.8 million remainson the consolidated balance sheet.

**Investmentsin Debt and Equity Securities—**Our short-term and long-terminvestments are subject to adjustment for other-than-temporary impairments.Impairment charges are recognized in the consolidated statements of operationswhen a decline in the fair value of an investment falls below its cost valueand is judged to be other than temporary. We consider various factors in determiningwhether an impairment charge is required, including: the length of time andextent to which the fair value has been less than the cost basis; the financialcondition and near-term prospects of the issuer; fundamental changes to thebusiness prospects of the issuer; share prices of subsequent offerings; and ourintent and ability to hold the investment for a period of time sufficient toallow for any anticipated recovery in market value. During 2004, 2003 and 2002,we recorded impairment losses of $13.7 million, $1.7 million and $14.0 million,

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respectively,based on the duration and magnitude of the declines in the fair value ofcertain of our investments, as well as the financial condition and near-termprospects of the investee companies.

**RESULTS OF OPERATIONS**

**Comparison of 2004 to 2003**

**Revenues—ProductSales**
| ** **     | ** ** | **2004**               | ** ** | **2003**   | ** ** | **Growth** | ** ** |
|----------------|------------|------------------------|------------|------------|------------|------------|------------|
| ** **     | ** ** | **(In Millions)** | ** ** | ** ** | ** ** |
| Synagis        |       | $                      | 942.3      |       | $          | 849.3      |       |   | 11 | % |   |
| Ethyol         |       | 92.4                   |       | 100.2      |       |       | (8         | )% |   |
| FluMist        |       | 48.0                   |       | —     |       |       | n/a        |   |   |
| Other Products |       | 41.3                   |       | 43.1       |       |       | (4         | )% |   |
|           |       | $                      | 1,124.0    |       | $          | 992.6      |       |   | 13 | % |   |

 

During 2004, product sales grew 13% to $1.1 billion ascompared to $1.0 billion during 2003, primarily due to an 11% increase in salesof Synagis to $942.3 million. Of the overall 13% increase in product sales,approximately five percentage points were due to the recognition of FluMistproduct sales for the first time in 2004. Domestic price increases accountedfor five growth points, and an additional two percentage points were due toincreases in domestic sales volume, but were largely negated by higher salesallowances that reduced sales by two percentage points. International salesadded three points of growth.

***Synagis******—***Synagis accountedfor approximately 84% and 86% of our product sales for 2004 and 2003,respectively. We achieved a 7% increase in domestic Synagis sales to $833.6million for 2004, up from $777.1 million in 2003. Of the 7% growth year overyear, five percentage points resulted from price increases and four percentagepoints were due to higher sales volumes, which were partially offset by highersales allowances that caused a reduction of two percentage points. Our reportedinternational sales of Synagis increased to $108.7 million in 2004 compared to$72.2 million in 2003, largely due to a 33% increase in units sold to AbbottInternational (“AI”), our exclusive distributor of Synagis outside of theUnited States. We believe this growth is primarily due to increased productdemand by our end users, including physicians, hospitals, and pharmacies. Also contributing to international sales growthwas an increase in the sales price caused by a change in the mix of countriesto which we sell Synagis internationally that favorably impacted the averagesales price, and the favorable currency translation impact of a weakened U.S.dollar. We record Synagis international product sales based on AI’s sales priceto customers, as contractually defined.

***Ethyol******—***Ethyol accounted forapproximately 8% and 10% of our product sales for 2004 and 2003, respectively. WorldwideEthyol sales declined 8% to $92.4 million in 2004, as compared to $100.2million in 2003. Domestic sales of Ethyol declined 6% from prior year, drivenby an eight percentage point decline due to volume and an additional fourpoints due to an increase in sales allowances, offset by six growth points dueto price increases. We believe that the lower domestic sales volumes for 2004are largely due to the depletion of wholesaler inventories from December 31,2003 levels to accommodate end-user demand and the impact, which we believe istemporary, of the adoption of a relatively new form of radiation treatment inthe head and neck cancer market. International sales of Etyhol declined overthe prior year, primarily due to a 58% decrease in unit volume to ourinternational distribution partner, Schering. We record Ethyol internationalproduct sales based on a percentage of Schering’s end-user sales, ascontractually defined.

***FluMist******—***Our 2004 product sales of FluMistamounted to $48.0 million, including product sales for the 2004/2005 flu seasonof $20.9 million, representing estimated net doses of approximately 1.7 million.

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2004 sales also includetransfer price revenues of $27.1 million for product shipped to Wyeth, ourformer partner, during 2003 related to the 2003/2004 season. At December 31,2003, we concluded that the variables associated with FluMist product revenueswere not determinable, largely due to low sales volume and the lack of returnshistory and comparable rebate redemption rates for the new product. As aresult, no product revenues were recognized during 2003 associated with the 4.1million doses that were shipped to Wyeth during 2003.

***Other Products******—***Sales of otherproducts include sales of CytoGam, RespiGam, NeuTrexin and by-products thatresult from the CytoGam manufacturing process and amounted to $41.3 million in2004 as compared to $43.1 million in 2003. The slight decrease is primarily dueto the decline in sales of RespiGam, which has been replaced in the marketplaceby our second-generation RSV product, Synagis, and is no longer manufactured.

**Revenues—Other Revenues**

Other revenues of $17.1million for 2004 are lower than 2003 other revenues of $61.8 million largelydue to decreased revenues under collaborative agreements. During 2004, werecognized $7.5 million of milestone revenue under our internationaldistribution agreement with AI upon the achievement of end-user sales ofSynagis outside the U.S. in excess of $150 million in a single RSV season. Otherrevenues in 2004 also include contractual payments received from Wyeth prior todissolution of our collaboration, including royalties related to the 2003/2004influenza season, supply goal payments, and corporate funding for clinicaldevelopment and sales and marketing programs. During 2003, we recognized $45.9million of revenues under the collaboration with Wyeth related to milestonepayments, supply goal payments, and funding for clinical development andmarketing programs. Also during 2003, we recognized $7.5 million of milestonerevenue for achieving in excess of $100 million in end-user sales of Synagisoutside the U.S. during a single RSV season.

**Cost of Sales**

Cost of sales for 2004increased 26% to**$366.4 millionfrom $289.8 million for 2003. Gross margins on product sales were 67% for 2004,down four percentage points from gross margins of 71% for 2003. Gross marginsfor all products, excluding FluMist, aggregated to 75% of product sales forboth 2004 and 2003. The negative impact of FluMist on gross margins was less in2003 than 2004 largely due to the shift in costs of FluMist manufacturing thatare included in inventory and cost of goods sold during 2004, but were expensedas other operating costs during the first quarter of 2003, prior to FDAapproval of the product.

**Research and Development Expenses**

Total research and development expenses more thandoubled during 2004 to $327.3 million from $156.3 million in 2003. Research anddevelopment expenses, as reported in the accompanying statements of operations,include both our ongoing expenses of drug discovery and development efforts, aswell as costs related to the technology transfer and transition activitiesassociated with reacquisition of the influenza vaccines franchise from Wyethduring 2004. The technology transfer and transition costs, totalingapproximately $27.8 million, are largely amounts paid to Wyeth for collectionand analysis of data from five late-stage CAIV-T studies conducted by Wyethover the last several years, including assistance in documenting study reports,closing and locking databases for clinical trials, and transition of clinicalstudy results to our clinical databases. The costs also include payments forthe maintenance of the CAIV-T development facility and production of CAIV-Tclinical trial material, as well as assistance with internal technologytransfer of manufacturing operations for CAIV-T.

The increase in our ongoing expenses of drug discovery and developmentefforts is related to a large number of new and ongoing clinical andpreclinical studies, particularly for Numax, CAIV-T and Vitaxin, 

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as well as costs associated with the expansion of infrastructure tosupport these studies. During November 2004, we advanced the Numax program intoPhase 3 clinical trials, with a pivotal head-to-head trial with Synagis, and asecond trial designed to assess whether Numax can reduce the incidence of RSVhospitalization in Native American infants. We are also completing a Phase 1/2 trialwith Numax. During October, we initiated a Phase 3 trial that will compareCAIV-T to the traditional injectible flu vaccine in children from 6 months to59 months of age, and a Phase 3 bridging study designed to compare CAIV-T withfrozen FluMist. We also progressed with two ongoing Phase 2 trials for Vitaxintargeting melanoma and prostate cancer, while we discontinued two trials forVitaxin targeting rheumatoid arthritis and psoriasis based on preliminary datasuggesting lack of clinical benefit in these inflammatory diseases. Also during2004, we began a Phase 1 clinical trial with an anti-interleukin-9 (IL-9)monoclonal antibody to evaluate the molecule as a potential treatment forsymptomatic, moderate to severe persistent asthma. During 2004, we also made a$15.0 million payment to Medarex, Inc. as part of a new collaboration toco-develop antibodies targeting interferon-alpha and the type 1 interferonreceptor for the treatment of autoimmune diseases.

Wehave several programs in clinical and pre-clinical development, but a summaryof our more significant current internal research and development efforts is asfollows:
| **Product  Candidates** | ** ** | ** **                                                                                                    | ** ** | **Description** | ** ** | **Stage of  Development** |
|-------------------------|------------|---------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|---------------------------|
| Numax                   |       | Second-generation  anti-RSV monoclonal antibody                                                               |       | Phase  3        |
| CAIV-T                  |       | Refrigerator-stable version of intranasal influenza  vaccine, live                                            |       | Phase 3         |
| Vitaxin                 |       | Monoclonal antibody for the treatment of melanoma  and prostate cancer                                        |       | Phase 2         |
| FluMist                 |       | Intranasally delivered virus vaccine to prevent  influenza infection                                          |       | Phase 4         |
| Ethyol                  |       | Subcutaneous  administration in non-small cell lung cancer patients-reduction of  esophogitis and pneumonitis |       | Phase  2        |

 

**Selling,General and Administrative Expenses**

Selling, general andadministrative (“SG&A”) expenses increased 17% to $400.2 million in 2004compared to $340.9 million in 2003. The increase is largely attributable to costs associated with expandingthe pediatric commercial organization, increased co-promotion expense, andincreased marketing activities and professional services. Excluding the amountsincurred during 2004 for Wyeth-related transition activities and the favorableimpact in both years of adjustments to the bad debt provision based uponchanges in our assessment of credit risk,SG&A expense as a percentage of product sales was 36% and 35% in 2004 and2003, respectively.

**Other Operating Expenses**

Other operating expenses,which reflect manufacturing start-up costs and other manufacturing relatedcosts, decreased to $8.6 million in 2004 from $26.1 million in 2003. Thedecrease is due to the shift in the costs of FluMist manufacturing that are ininventory and cost of goods sold this year, but were expensed as otheroperating costs in the prior year prior to the June 2003 approval of FluMist. Otheroperating expenses in both periods also include excess capacity chargesassociated with the plasma production portion of the Frederick Manufacturing Center.

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**Impairment of Intangible Asset**

As a result of enteringinto agreements to dissolve the collaboration with Wyeth during April 2004, werecorded a permanent impairment loss of $73.0 million that represented theremaining unamortized cost originally recorded for the original collaborationwith Wyeth.

**Acquired IPR&D**

We recorded a charge of$29.2 million for acquired IPR&D for 2004 in conjunction with ourreacquisition of the influenza vaccines franchise from Wyeth. The chargerepresents the relative fair value of purchased in-process technologies at theacquisition date, calculated utilizing the income approach, of certainIPR&D projects, primarily CAIV-T. See further discussion of IPR&D inthe Critical Accounting Estimates section of this Management’s Discussion andAnalysis.

**Interest Income and Expense**

We earned interest incomeof $65.5 million for 2004, compared to $56.8 million in 2003, reflecting higheraverage investment balances and higher average rates. Interest expense for2004, net of amounts capitalized, was $8.4 million, down from $10.3 million in2003. The decline is due to the retirement of the 51⁄4% convertible subordinatednotes in March 2004, partially offset by a decrease in the amount of interestcost capitalized in 2004 versus the prior period, due to the completion ofseveral large construction projects in 2004, including the new R&D facilityand corporate headquarters in Maryland.

**(Loss) Gain on Investment Activities**

We incurred a $2.7 millionloss on investment activities for 2004, compared to a gain of $3.4 million in2003. The 2004 loss consists of impairment write-downs of $13.7 million due tothe decline in fair value of certain of our investments in private companiesbelow their cost basis that were determined to be other-than-temporary,partially offset by net realized gains on sales of common stock and otherinvestments totaling $11.0 million. During 2003, we recognized gains on thesale of common stock and other investments of $5.9 million, partially offset byimpairment write-downs and charges to record our portion of our minorityinvestees’ operating results as required by the equity method of accounting.

**Income Taxes**

We recorded an income tax benefit of $5.4 million for2004, resulting in an effective tax rate of 59%. Comparatively, we recordedincome tax expense of $108.0 million for 2003, which resulted in an effectivetax rate of 37%.

The year-over-year changein our estimated effective tax rate is due in part due to $6.9 million ofnon-deductible charges for IPR&D during the second quarter of 2004. Oureffective tax rate in 2004 was also favorably impacted by the increase incredits available for research and development activities, including creditsearned for orphan drug status of certain research and experimentationactivities, corresponding to the overall growth in research and experimentationactivity over 2003. These credits will vary from year to year depending on our activitiesand the enactment of tax legislation. Also during 2004, we reached a state tax settlement andour U.K. subsidiary recognized income for U.K. tax purposes, enabling us torelease valuation allowance and tax contingency reserves, resulting in afavorable impact to the consolidated statement of operations. 

**Net (Loss) Earnings**

We reported a net loss for 2004 of $3.8 million, or$0.02 per share compared to net earnings for 2003 of $183.2 million or $0.72per diluted share.

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Shares used in computing loss per share for 2004 were248.6 million, while shares used for computing basic and diluted earnings pershare for 2003 were 250.1 million and 257.2 million, respectively. The decreasein share count is primarily attributable to our stock repurchase program thatwe implemented in July 2003.

We do not believeinflation had a material effect on our financial statements. 

**Comparison of 2003 to 2002**

**Revenues—ProductSales**
| ** **     | ** ** | **2003**               | ** ** | **2002**   | ** ** | **Growth** | ** ** |
|----------------|------------|------------------------|------------|------------|------------|------------|------------|
| ** **     | ** ** | **(In Millions)** | ** ** | ** ** | ** ** |
| Synagis        |       | $                      | 849.3      |       | $          | 671.7      |       |   | 26 | % |   |
| Ethyol         |       | 100.2                  |       | 81.2       |       |       | 23         | % |   |
| FluMist        |       | —                 |       | —     |       |       | —     |   |   |
| Other Products |       | 43.1                   |       | 38.0       |       |       | 13         | % |   |
|           |       | $                      | 992.6      |       | $          | 790.9      |       |   | 25 | % |   |

 

Product sales grew 25% in 2003 to $992.6 million ascompared to $790.9 million in 2002, primarily due to increased sales ofSynagis. Of the overall increase in product sales, approximately 16 points ofthe 25 percentage points were due to an increase in domestic sales volumes,while price increases, net of increases in sales allowances contributed fivepoints to sales growth. The remaining four points of growth were due to anincrease in our international sales.

***Synagis******—***Synagis accountedfor approximately 86% and 85% of our 2003 and 2002 product sales, respectively.We achieved a 21% increase in domestic Synagis sales to $777.1 million in 2003,up from $641.3 million in 2002. This growth was largely due to increased salesvolume in the U.S., which resulted in a 16% increase in domestic units sold. Alsoaiding growth was a price increase that took effect in June 2003, partiallyoffset by an increase in sales allowances, which are accounted for as areduction of product sales. Our reported international sales of Synagis to AImore than doubled to $72.2 million in 2003 compared to $30.4 million in 2002,driven primarily by a more than two-fold increase in unit volumes over 2002levels. The increase in unit volume was offset by a decrease in the realizedper unit sales price recognized upon delivery of product to AI under the termsof our international distribution agreement.

***Ethyol******—***Ethyol accounted forapproximately 10% of our product sales in both 2003 and 2002. Domestic Ethyolsales increased 25% to $94.4 million in 2003, up from $75.5 million in 2002. This25% increase was the result of a 15% increase in domestic units sold in 2003compared to 2002 and a price increase which occurred in August 2003. Our 2003international sales of Ethyol to our distribution partner, Schering, wereconsistent with 2002 sales of $5.7 million.

***FluMist******—***During 2003, wereceived payments totaling $51.9 million upon the shipment of 4.1 million dosesof FluMist to Wyeth, our former partner who was contractually responsible fordistributing the product to third parties. The final selling price for thedoses shipped to Wyeth was largely dependent on Wyeth’s net sales to end users.As of December 31, 2003, we concluded that the variables associated with the producttransfer price were not determinable, largely due to low sales volume and thelack of returns history and comparable redemption rates for rebates for FluMistin its launch season. As a result, we did not recognize the revenue associatedwith the 4.1 million doses shipped to Wyeth during 2003. Product sales forthese shipments were recognized during the first quarter of 2004, once theinfluenza season was substantially over and Wyeth’s ultimate net sales to endusers were determinable.

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***Other Products******—***Sales of otherproducts in 2003, which include sales of CytoGam, NeuTrexin, RespiGam, andby-products that result from the CytoGam manufacturing process, increased $5.1million, or 13% compared to 2002. The increase was largely due to a 10% increasein our sales of CytoGam.

**Revenues—Other Revenues**

Other revenues for 2003 remained consistent with 2002at $61.8 million. Other revenues in 2003 were largely comprised of contractualpayments received from Wyeth under our collaborative agreement for FluMist. Thepayments, which amounted to $45.9 million, related to milestone payments,supply goal payments, and funding for clinical development and marketingprograms. We also received $7.5 million in 2003 from AI for achieving amilestone related to international sales levels of Synagis and we recorded $3.1million in revenue under other collaborative agreements. Other revenues in 2002were comprised largely of $32.7 million in payments from Wyeth for compensationof 2002 FluMist manufacturing costs and funding for clinical development andmarketing programs. In 2002, we also received $17.2 million from the sale ofexcess production capacity to a third party and $8.7 million in revenuerecorded under other collaborative agreements.

We have accounted formajor collaborative agreements entered into before January 1, 2002 usingthe contingency-adjusted performance model and have deferred a portion of theup front and milestone payments received. Based on current estimates, we expectto record the remaining revenues from our collaboration with affiliates ofSchering-Plough Corporation of $0.8 million ratably over 2004 and 2005.

**Cost of Sales**

Cost of sales for 2003increased 44% to $289.8 million from $201.8 million for 2002, mainly due toincreases in product sales volumes and inventory valuation adjustments forFluMist of $37.5 million. Gross margins on product sales for 2003 were 71%,down three percentage points from 2002, largely due to the valuationadjustments for FluMist inventory. Partially offsetting this decrease werelower costs for CytoGam, and a favorable impact of a value-added tax refund fortransfers of Synagis manufactured in Europe.

**Research and Development Expenses**

Research and development expenses of $156.3 million in2003 increased 6% from $148.0 million in 2002. The increase was due largely topayments made in 2003 associated with gaining access to new data andtechnologies, net of a decrease in clinical trials expense and a decrease instock compensation expense for unvested stock options assumed in theAcquisition and in retention payments and stock compensation expense foracceleration of stock options for certain of Aviron’s executives. During 2003,we made a $10.0 million payment to Critical Therapeutics, Inc. as part ofa new collaboration to co-develop biologic products to treat severe inflammatorydiseases. Additionally in 2003, we initiated four Phase 2 studies for Vitaxinand agreed to pay $10.0 million for data from the completed international Phase3 studies for a liquid formulation of FluMist.

In 2002, we completedseveral clinical trials, including Phase 2 clinical trials with siplizumab, andthe Phase 3 Synagis clinical trial in congenital heart disease patients thatled to approval of an expanded indication by the FDA in September 2003.

**Selling,General and Administrative Expenses**

SG&A expensesincreased 14% to $340.9 million in 2003 compared to $299.6 million for the 2002period, largely due to increased co-promotion expense, reflective of theincrease in Synagis sales. As a percentage of product sales, SG&A expensedecreased to 34% of product sales in the 2003 period from 38% in the 2002period, due to product sales growing at a faster rate than expenses.

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**Other Operating Expenses**

Other operating expenses, whichreflect manufacturing start-up costs and other manufacturing-related costs,were $26.1 million in 2003 compared to $100.0 million in 2002. The decrease inother operating expenses was principally due to the shift in the costs ofFluMist manufacturing that are capitalized in inventory and expensed as cost ofgoods sold beginning in the second quarter of 2003, but were expensed as otheroperating costs in the prior year. Additionally, 2002 other operating expensesincluded impairment charges of $12.9 million relating to the write-off ofcertain plasma manufacturing assets, as we outsourced production of CytoGamduring 2002. We also experienced decreases in stock compensation expense forunvested stock options assumed in the Acquisition and in retention payments andstock compensation expense for acceleration of stock options for certain ofAviron’s executives.

**In-Process Research and Development**

We incurred charges of$1,179.3 million in the first quarter of 2002 for the write-off of purchased in-processresearch and development in conjunction with the Acquisition. The write-offrepresented the fair value of purchased in-process technologies at theacquisition date, calculated as the sum of probability-adjustedcommercial scenarios. This method was based upon management’s estimates of theprobability of FDA approval and commercial success for FluMist.

**Interest Income and Expense**

We earned interest incomeof $56.8 million for 2003, compared to $49.4 million in 2002, reflecting highercash balances available for investment, partially offset by a decrease ininterest rates, which lowered the overall portfolio yield. Interest expense for2003, net of amounts capitalized, was $10.3 million, up from $9.1 million for2002, principally due to interest expense generated by the 1% Notes issued in July 2003.

**Gain (Loss) on Investment Activities**

We incurred a gain oninvestment activities of $3.4 million for 2003, compared to a loss of $14.1million for 2002. The 2003 gain consisted of gains on the sale of our publiclytraded equity investments, net of declines in fair value of other investmentsthat were judged to be other than temporary. Investment losses in 2002consisted primarily of impairment charges on investments related to declines infair value that were judged to be other than temporary.

**Income Taxes**

We recorded income taxexpense of $108.0 million for the year ended December 31, 2003, based onan effective tax rate of 37.1%. We recorded income tax expense of $48.2 millionfor the year ended December 31, 2002. Excluding items not deductible fortax purposes, principally the write-off of purchased in-process research anddevelopment, the resulting effective tax rate for 2002 was 37.2%.

**Net Earnings (Loss)**

Net earnings for 2003 were $183.2 million, or $0.73per share basic and $0.72 per share diluted, compared to a net loss for 2002 of$1.1 billion or $4.40 per share. Shares used in computing basic and dilutedearnings per share in 2003 were 250.1 and 257.2, respectively. Shares used incomputing net loss per share for 2002 were 249.6 million.

We do not believeinflation had a material effect on our financial statements.

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**LIQUIDITY AND CAPITAL RESOURCES**

**Sources and Uses of Cash**

Our capital requirements have been funded fromoperations, cash and investments on hand, and issuance of common stock andconvertible debt. Cash and marketable securities were $1.7 billion at December 31,2004 as compared to $1.9 billion at December 31, 2003, a decrease of$194.0 million. This decrease in cash and marketable securities is primarilydue to the combined impact of the retirement of the 51⁄4% convertiblesubordinated notes in March 2004 and payments made to Wyeth in conjunctionwith our reaquisition of full rights to the influenza vaccines franchise. Workingcapital decreased to $330.0 million at December 31, 2004 from $712.0million at December 31, 2003, also due to the retirement of the 51⁄4% Notesand the payments made to Wyeth, as well as a shift in our fixed incomeportfolio mix to longer-term maturities.

***OperatingActivities******—***Net cash provided by operating activitiesdecreased to $144.7 million in the year ended December 31, 2004 ascompared to $357.5 million in the comparable 2003 period, primarily the resultof the decrease in net earnings in 2004, excluding the noncash charge for theimpairment of an intangible asset, and the final settlement of advances fromWyeth and payments made to Wyeth for technology transfer and transitionactivities related to the dissolution of our collaboration.

***InvestingActivities******—***Cash used for investing activities during2004 was $300.9 million, as compared to $238.3 million in 2003. Cash used forinvesting activities in 2004 included net additions to our investment portfolioof $162.0 million; capital expenditures of $79.8 million, primarily for theconstruction of our new R&D facility and corporate headquarters inGaithersburg, Maryland, the expansion of our FluMist manufacturing facilitiesin Speke, England, and construction of our new pilot plant in Gaithersburg,Maryland, which began in 2004; $34.8 million paid to Wyeth for certainin-process technologies and IPR&D projects, primarily CAIV-T, and thedistribution facility in Louisville; and minority interest investments instrategic partners totaling $24.3 million through our venture capitalsubsidiary.

***FinancingActivities******—***Financing activities in 2004 used $187.9million in cash, as compared to cash generated of $266.2 million in 2003. During2004, we used $172.7 million in cash to repurchase and retire the balance ofthe 51⁄4% Notes, and an additional $30.0 million to repurchase shares of ourcommon stock as authorized under our share repurchase program. Approximately$19.5 million was received upon the issuance of common stock relating primarilyto the exercise of employee stock options in 2004, compared to $44.4 millionreceived in 2003. During 2003, we received net cash proceeds of $489.4 millionin connection with the issuance of the 1% Notes, which was partially offset bytreasury stock repurchases of $229.8 million.

Our primary source of liquidity is operating cash flow.Management continues to believe that such internally generated cash flow aswell as its existing funds will be adequate to service its existing debt andother cash requirements. We expend cash to finance our research and developmentand clinical trial programs; to obtain access to new technologies through collaborativeresearch and development agreements with strategic partners, through ourventure capital subsidiary, or through other means; to fund capital projects;and to finance the production of inventories. In February 2005, our Boardof Directors increased the approved funding for our venture capital subsidiaryfrom $100 million to $200 million. During 2004, we received a BBB rating on ouroutstanding indebtedness by Standard & Poor’s. This rating isconsidered to be investment grade and we believe the rating will contribute toour ability to access capital markets, should we desire or need to do so. Wemay raise additional capital in the future to take advantage of favorableconditions in the market or in connection with our development activities.

Our Board of Directors has authorized the repurchaseof up to $500 million of the Company’s common stock during the period from July2003 through June 2006 in the open market or in privately negotiatedtransactions, pursuant to terms management deems appropriate and at such timesit may 

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designate. During 2004, werepurchased 1.2 million shares of our common stock under the stock repurchaseprogram at a total cost of $30.0 million, or an average cost of $24.33 pershare. During 2003, we repurchased 6.2 million shares at a total cost of $229.8million, or an average cost of $36.83 per share. From January 1, 2005through February 25, 2005, we purchased an additional 0.6 million sharesfor approximately $15.0 million, or an average cost of $24.63 per share. We areholding repurchased shares as treasury shares and are using them for generalcorporate purposes, including but not limited to acquisition-relatedtransactions and for issuance upon exercise of outstanding stock options.

In 2005, we will continue construction of the FluMistmanufacturing facilities in Speke, the United Kingdom, and our new pilot plantin Gaithersburg, Maryland, and will break ground on additional administrativeoffices at the headquarters site in Gaithersburg, Maryland. We expect ourcapital expenditures to approximate $150 million in 2005. We anticipate theseprojects will be funded from cash generated from operations and investments onhand.

***Contractual Obligations and Commitments******—***The following tablesummarizes our contractual obligations and commitments as of December 31,2004 that we anticipate will require significant cash outlays in the future (inmillions):
| **Contractual Obligations**               | ** ** | ** ** | ** ** | **Total** | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **Beyond** | ** ** |
|------------------------------------------------|------------|------------|------------|-----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|------------|------------|
| Long-term debt                                 |       | $          | 507.1      |      | $          | 0.9      |       | $        | 1.0        |     | $          | 1.1      |       | $        | 0.6        |       | $          | 0.4 |   | $ | 503.1 | (1) |
| Facilities leases                              |       | 51.8       |       | 7.8       |       | 6.4      |       | 4.7      |       | 3.0      |       | 2.4      |       | 27.5     |       |
| Purchase  obligations                          |       | 171.5      |       | 44.2      |       | 21.8     |       | 18.9     |       | 17.3     |       | 17.3     |       | 52.0     |       |
| Obligations to  Evans(2)                       |       | 22.9       |       | 3.9       |       | 19.0     |       | —   |       | —   |       | —   |       | —   |       |
| Total contractual obligations                  |       | $          | 753.3      |      | $          | 56.8     |       | $        | 48.2       |     | $          | 24.7     |       | $        | 20.9       |       | $          | 20.1 |   | $ | 582.6 |   |
| *Other  Commercial Commitments*                |       |       |       |      |       |     |       |     |       |     |       |     |       |     |       |
| Standby letters of credit(3)                   |       | $          | 2.6        |      | $          | 2.6      |       | $        | —     |     | $          | —   |       | $        | —     |       | $          | — |   | $ | — |   |
| Obligations under  Collaborative Agreements(4) |       | 23.4       |       | 11.7      |       | 4.7      |       | 1.8      |       | 1.0      |       | 0.4      |       | 3.8      |       |
| Total other commercial commitments             |       | $          | 26.0       |      | $          | 14.3     |       | $        | 4.7        |     | $          | 1.8      |       | $        | 1.0        |       | $          | 0.4 |   | $ | 3.8 |   |

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(1)   The 1%Notes can be put to MedImmune by the holders for cash in 2006.

(2)          Represents amounts dueto Evans Vaccines Limited pursuant to a sublease arranagement.

(3)          We have guaranteedperformance under certain agreements related to our construction projects. Theundiscounted maximum potential amount of future payments that we could berequired to make under such guarantees, in the aggregate, is approximately $2.6million.

(4)          Weparticipate in a number of research and development collaborations to developand market certain technologies and products. The amounts indicated asobligations under collaborative agreements represent committed fundingobligations to our collaborative partners under our various developmentprograms. The amounts do not include developmental and sales milestone paymentstotaling $600 million or royalties on potential future product sales related tothese collaborations since the amount, timing, and likelihood of the paymentsis unknown as they are dependent on the occurrence of future events that may ormay not occur.

**ITEM 7A.   QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

The following discussion about our risk-managementactivities includes “forward-looking statements” that involve risks anduncertainties. Actual results could differ materially from those projected inthe forward-looking statements.

Our primary market risks as of December 31, 2004are our exposures to loss resulting from changes in interest rates, foreigncurrency exchange rates and equity prices.

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As of December 31, 2004, our excess cash balancesare primarily invested in marketable debt securities with investment gradecredit ratings. Substantially all of our cash and cash equivalents and short-termand long-term investments are held in custody by three major U.S. financialinstitutions. Deposits held with banks may exceed the amount of insuranceprovided on such deposits. Generally, these deposits may be redeemed upondemand and, therefore, bear minimal risk. Our investments consist principallyof U.S. government and agency securities and corporate notes and bonds. Thematurities range from one month to seven years. Our investment guidelines areintended to limit the amount of investment exposure as to issuer, maturity, andinvestment type. The fair value of these investments is sensitive to changes ininterest rates. Further, interest income earned on variable rate debtsecurities is exposed to changes in the general level of interest rates.

Thefollowing table presents principal cash flows and weighted average interestrates by expected maturity dates for each class of debt security with similarcharacteristics (in millions):
| ** **                    | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **Total** | ** ** | **Fair  Value** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|-----------|------------|-----------------|------------|
| U.S. Gov’t and  Agencies |       | $        | —     |     | $          | 187.4    |       | $        | 15.0       |     | $          | 26.9     |       | $        | 50.0       |      | $          | 10.0            |       | $ | 27.5 |   | $ | 316.8 |   | $ | 323.5 |   |
| Interest Rate                 |       | —   |       | 3.9      | %          | 4.8      | %          | 4.5      | %          | 4.1      | %          | 4.2      | %          | 4.9      | %          |      |       |            |       |
| Corp. Notes and Bonds         |       | $        | 118.6      |     | $          | 240.2    |       | $        | 198.5      |     | $          | 279.7    |       | $        | 225.6      |      | $          | 19.8            |       | $ | 41.4 |   | $ | 1,123.8 |   | $ | 1,178.4 |   |
| Interest Rate                 |       | 7.0      | %          | 6.1      | %          | 5.6      | %          | 4.0      | %          | 5.5      | %          | 4.9      | %          | 5.6      | %          |      |       |            |       |

 

We are exposed to equity price risks and risk ofimpairment related to our minority interest investments. MedImmune Ventures, Inc.,the Company’s wholly-owned venture capital subsidiary, manages the Company’scurrent portfolio of minority interest investments and endeavors to makeadditional investments in public or private biotechnology companies focused ondiscovering and developing human therapeutics. The Company has approved fundingto MedImmune Ventures for up to $200 million in investments, of which $77million has been invested as of February 25, 2005. MedImmune Ventures willinvest primarily in areas of strategic interest to the Company, includinginfectious disease, immunology and oncology. The cost basis of MedImmuneVentures’ investment holdings, net of impairment writedowns, was $47.9 millionas of December 31, 2004.

Our minority interest investments are subject toadjustment for other-than-temporary impairments. We recognize impairmentcharges in the consolidated statements of operations when a decline in the fairvalue of an investment falls below its cost value and is judged to be otherthan temporary. We consider various factors in determining whether we shouldrecognize an impairment charge, including: the length of time and extent towhich the fair value has been less than our cost basis; the financial conditionand near-term prospects of the issuer; fundamental changes to thebusiness prospects of the investee; share prices of subsequent offerings; andour intent and ability to hold the investment for a period of time sufficientto allow for any anticipated recovery in market value. During 2004, 2003 and2002, the Company recorded impairment losses of $13.7 million, $1.7 million and$14.0 million, respectively, based on the duration and magnitude of thedeclines in fair value, as well as the financial condition and near-termprospects of the investee companies. We expect the volatility in the fair valueof our minority investments to continue and, thus, the value assigned to theinvestments could change significantly from period to period.

As of December 31, 2004, MedImmune Ventures’portfolio included approximately 3.9 million shares of common stock of twopublicly traded companies with a cost basis of $20.0 million and fair value of$32.9 million. During 2004 and 2003, MedImmune Ventures liquidated its equityholdings in two public companies over a period of approximately one year, inaccordance with our investment strategy, resulting in realized gains of $9.7million and $5.7 million, respectively.

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The remainder of MedImmune Ventures’ portfolio as of December 31,2004 consists primarily of minority interest investments in privately heldbiotechnology companies. The investments are maintained on the cost or equitymethod of accounting, according to the facts and circumstances of theindividual investment. For investments carried on the equity method, theCompany records its proportionate share of the investees’ gains or losses on aquarterly basis, which was immaterial during 2004, 2003 and 2002. As of December 31,2004, the investments had a cost basis of $27.9 million, net of permanentwritedowns.

During July 2003, we issued $500 million ofconvertible notes due 2023. These notes bear interest at 1.0% per annum payablesemi-annually in arrears. Beginning with the six-month interest periodcommencing July 15, 2006, if the average trading price of these notesduring specified periods equals or exceeds 120% of the principal amount of suchnotes, we will pay contingent interest equal to 0.175% per six-month period ofthe average trading price per $1,000 of the principal amount during suchperiods. As a result, if the market value of these notes appreciatessignificantly in the future, we could be obligated to pay amounts of contingentinterest beginning in 2006. The estimated fair value of the notes at December 31,2004, based on quoted market prices, was $481.1 million.

Our remaining outstanding indebtedness of $7.1 millionat December 31, 2004 is in the form of notes that bear interest primarilyat fixed rates. The estimated fair value of the remaining long-term debt at December 31,2004, based on quoted market prices or discounted cash flows at currentlyavailable borrowing rates, was $7.5 million. Maturities for all long-term debtfor the next five years are as follows: 2005, $0.9 million; 2006, $1.0 million;2007, $1.1 million; 2008, $0.6 million; and 2009, $0.4 million.

Expenditures relating to our manufacturing operationsin the United Kingdom and the Netherlands are paid in local currency. We havenot hedged our expenditures relating to these manufacturing operations;therefore, foreign currency exchange rate fluctuations may result in increasesor decreases in the amount of expenditures recorded. Additionally, certain ofour distribution agreements outside the United States provide for us to be paidbased upon sales in local currency. As a result, changes in foreign currencyexchange rates could adversely affect the amount we expect to collect underthese agreements.

We have entered into a supplemental manufacturingcontract with Boehringer Ingelheim Pharma GmbH & Co. KG (“BI”)denominated in Euros for the supplemental manufacturing of Synagis. Fluctuationsin the Euro to U.S. Dollar exchange rate may lead to changes in our U.S. Dollarcost of manufacturing. To reduce the risk of unpredictable changes in thesecosts, the Company may, from time to time, enter into forward foreign exchangecontracts. As of December 31, 2004, the Company did not have any openforeign exchange forward contracts. Currently, we have firm commitments with BIfor planned production and fill/finish through 2012 for approximately 108million Euros ($147.5 million using the exchange rate as ofDecember 31, 2004).

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**ITEM 8.**                CONSOLIDATEDFINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

**Reportof Independent Registered Public Accounting Firm**

To****the Board ofDirectors andShareholders of MedImmune, Inc.:

We have completed anintegrated audit of MedImmune Inc.’s 2004 consolidated financial statements andof its internal control over financial reporting as of December 31, 2004and audits of its 2003 and 2002 consolidated financial statements in accordancewith the standards of the Public Company Accounting Oversight Board (UnitedStates). Our opinions, based on our audits, are presented below.

*Consolidated financial statements and financial statementschedule*

In our opinion, the consolidated financial statements listed inthe index appearing under Item 15(a)(1) presentfairly, in all material respects, the financial position of MedImmune, Inc.and its subsidiaries at December 31, 2004 and 2003, and the results oftheir operations and their cash flows for each of the three years in the periodended December 31, 2004 in conformity with accounting principles generallyaccepted in the United States of America. Inaddition, in our opinion, the financial statement schedule listed in the indexappearing under Item 15(a)(2) presents fairly, in all materialrespects, the information set forth therein when read in conjunction with therelated consolidated financial statements. These financial statementsand financial statement schedule are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements and financial statement schedule based on our audits. We conductedour audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board(United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit of financial statements includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

*Internal controlover financial reporting*

Also, in our opinion, management’s assessment,included in Management’s Report on Internal Control over Financial Reportingappearing under Item 9A, that the Company maintained effective internal controlover financial reporting as of December 31, 2004 based oncriteria established in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission (COSO), is fairly stated, in all material respects, basedon those criteria. Furthermore, in our opinion, the Company maintained, in allmaterial respects, effective internal control over financial reporting as of December 31, 2004,based on criteria established in *Internal Control—IntegratedFramework* issued by the COSO. The Company’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting. Our responsibility is to express opinions on management’s assessmentand on the effectiveness of the Company’s internal control over financialreporting based on our audit. We conducted our audit of internal control overfinancial reporting in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects. An audit of internal control over financial reporting includesobtaining an understanding of internal control over financial reporting,evaluating management’s assessment, testing and evaluating the design andoperating effectiveness of internal control, and performing such otherprocedures as we consider necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinions.

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A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (i) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (ii) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (iii) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.
| PricewaterhouseCoopers LLP |
|----------------------------|
| McLean, Virginia           |
| March 7, 2005         |

 

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**MedImmune, Inc.**Consolidated Balance Sheets(in millions)
| ** **                                                                                                                          | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                                                                          | ** ** | **2004**              | ** ** | **2003**              | ** ** |
| ASSETS:                                                                                                                             |       |                  |       |                  |       |   |   |   |   |
| Cash and cash  equivalents                                                                                                          |       |                  | $          | 171.3                 |       |   |   | $ | 515.5 |   |   |
| Marketable securities                                                                                                               |       |                  | 172.6      |                  |       |   | 272.7 |   |   |
| Trade receivables, net                                                                                                              |       |                  | 203.3      |                  |       |   | 161.2 |   |   |
| Inventory, net                                                                                                                      |       |                  | 64.1       |                  |       |   | 91.7 |   |   |
| Deferred tax assets                                                                                                                 |       |                  | 50.6       |                  |       |   | 29.3 |   |   |
| Other current assets                                                                                                                |       |                  | 31.9       |                  |       |   | 32.3 |   |   |
| Total Current Assets                                                                                                                |       |                  | 693.8      |                  |       |   | 1,102.7 |   |   |
| Marketable securities                                                                                                               |       |                  | 1,362.2    |                  |       |   | 1,111.9 |   |   |
| Property and equipment,  net                                                                                                        |       |                  | 310.9      |                  |       |   | 273.6 |   |   |
| Deferred tax assets, net                                                                                                            |       |                  | 127.3      |                  |       |   | 151.3 |   |   |
| Intangible assets, net                                                                                                              |       |                  | 13.1       |                  |       |   | 96.7 |   |   |
| Goodwill                                                                                                                            |       |                  | 24.8       |                  |       |   | 13.6 |   |   |
| Other assets                                                                                                                        |       |                  | 32.3       |                  |       |   | 44.8 |   |   |
| Total Assets                                                                                                                        |       |                  | $          | 2,564.4               |       |   |   | $ | 2,794.6 |   |   |
| LIABILITIES AND SHAREHOLDERS’ EQUITY:                                                                                          |       |                  |       |                  |       |   |   |   |   |
| Accounts payable                                                                                                                    |       |                  | $          | 15.1                  |       |   |   | $ | 22.1 |   |   |
| Accrued expenses                                                                                                                    |       |                  | 251.4      |                  |       |   | 218.0 |   |   |
| Product royalties  payable                                                                                                          |       |                  | 85.9       |                  |       |   | 81.8 |   |   |
| Advances from Wyeth                                                                                                                 |       |                  | —     |                  |       |   | 51.9 |   |   |
| Other current  liabilities                                                                                                          |       |                  | 11.4       |                  |       |   | 16.9 |   |   |
| Total Current  Liabilities                                                                                                          |       |                  | 363.8      |                  |       |   | 390.7 |   |   |
| Long-term debt                                                                                                                      |       |                  | 506.2      |                  |       |   | 681.2 |   |   |
| Other liabilities                                                                                                                   |       |                  | 19.8       |                  |       |   | 23.5 |   |   |
| Total Liabilities                                                                                                                   |       |                  | 889.8      |                  |       |   | 1,095.4 |   |   |
| Commitments and Contingencies                                                                                                       |       |                  |       |                  |       |   |   |   |   |
| SHAREHOLDERS’ EQUITY:                                                                                                          |       |                  |       |                  |       |   |   |   |   |
| Preferred stock, $.01  par value; authorized 5.5 shares; none issued or outstanding                                                 |       |                  | —     |                  |       |   | —- |   |   |
| Common stock, $.01 par  value; authorized 420.0 shares; issued 255.4 at December 31, 2004 and  254.3 at December 31, 2003 |       |                  | 2.6        |                  |       |   | 2.5 |   |   |
| Paid-in capital                                                                                                                     |       |                  | 2,690.0    |                  |       |   | 2,673.1 |   |   |
| Deferred compensation                                                                                                               |       |                  | (0.1       | )                     |       |   | (1.4 | ) |   |
| Accumulated deficit                                                                                                                 |       |                  | (788.5     | )                     |       |   | (772.9 | ) |   |
| Accumulated other  comprehensive income                                                                                             |       |                  | 11.1       |                  |       |   | 27.7 |   |   |
|                                                                                                                                |       |                  | 1,915.1    |                  |       |   | 1,929.0 |   |   |
| Less: Treasury stock at  cost; 6.9 shares as of December 31, 2004 and 6.2 shares at  December 31, 2003                    |       |                  | (240.5     | )                     |       |   | (229.8 | ) |   |
| Total Shareholders’  Equity                                                                                                    |       |                  | 1,674.6    |                  |       |   | 1,699.2 |   |   |
| Total Liabilities and Shareholders’ Equity                                                                                     |       |                  | $          | 2,564.4               |       |   |   | $ | 2,794.6 |   |   |

 

The accompanying notes are an integral part of these financial statements.

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**MedImmune, Inc.Consolidated Statements ofOperations(in millions, except per share data)**
| ** **                                                      | ** ** | **For the year ended December 31,** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                      | ** ** | **2004**                                                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| **Revenues**                                                    | ** ** | ** **                                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Product sales                                                   |       | $                                                            | 1,124.0    |   | $ | 992.6 |   | $ | 790.9 |   |
| Other revenue                                                   |       | 17.1                                                         |       | 61.8 |   | 61.8 |   |
| Total revenues                                                  |       | 1,141.1                                                      |       | 1,054.4 |   | 852.7 |   |
| **Costs and Expenses**                                          |       |                                                         |       |   |   |   |   |
| Cost of sales                                                   |       | 366.4                                                        |       | 289.8 |   | 201.8 |   |
| Research and development                                        |       | 327.3                                                        |       | 156.3 |   | 148.0 |   |
| Selling, general, and  administrative                           |       | 400.2                                                        |       | 340.9 |   | 299.6 |   |
| Other operating expenses                                        |       | 8.6                                                          |       | 26.1 |   | 100.0 |   |
| Impairment of intangible asset                                  |       | 73.0                                                         |       | — |   | — |   |
| Acquired in-process research  and development                   |       | 29.2                                                         |       | — |   | 1,179.3 |   |
| Total expenses                                                  |       | 1,204.7                                                      |       | 813.1 |   | 1,928.7 |   |
| Operating (loss) income                                         |       | (63.6                                                        | )          | 241.3 |   | (1,076.0 | ) |
| Interest income                                                 |       | 65.5                                                         |       | 56.8 |   | 49.4 |   |
| Interest expense                                                |       | (8.4                                                         | )          | (10.3 | ) | (9.1 | ) |
| (Loss) gain on investment activities                            |       | (2.7                                                         | )          | 3.4 |   | (14.1 | ) |
| (Loss) earnings before income  taxes                            |       | (9.2                                                         | )          | 291.2 |   | (1,049.8 | ) |
| (Benefit) provision for income taxes                            |       | (5.4                                                         | )          | 108.0 |   | 48.2 |   |
| **Net (loss) earnings**                                         |       | $                                                            | (3.8       | ) | $ | 183.2 |   | $ | (1,098.0 | ) |
| **Basic (loss) earnings per share**                             |       | $                                                            | (0.02      | ) | $ | 0.73 |   | $ | (4.40 | ) |
| Shares used in calculation of  basic (loss) earnings per share  |       | 248.6                                                        |       | 250.1 |   | 249.6 |   |
| **Diluted (loss) earnings per  share**                          |       | $                                                            | (0.02      | ) | $ | 0.72 |   | $ | (4.40 | ) |
| Shares used in calculation of diluted (loss) earnings per share |       | 248.6                                                        |       | 257.2 |   | 249.6 |   |

 

The accompanying notes are an integral part of these financial statements.

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**MedImmune, Inc.Consolidated Statements ofCash Flows(in millions)**
| ** **                                                                                  | ** ** | **For the year ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2004**                                                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES                                                        |       |                                                         |       |   |   |   |   |
| Net (loss)  earnings                                                                        |       | $                                                            | (3.8       | ) | $ | 183.2 |   | $ | (1,098.0 | ) |
| Adjustments to reconcile  net (loss) earnings to net cash provided by operating activities: |       |                                                         |       |   |   |   |   |
| Impairment of  intangible asset                                                             |       | 73.0                                                         |       | — |   | — |   |
| Write-down of  acquired in-process research and development                                 |       | 29.2                                                         |       | — |   | 1,179.3 |   |
| Deferred taxes                                                                              |       | 9.5                                                          |       | 87.0 |   | 50.8 |   |
| Deferred revenue                                                                            |       | (0.4                                                         | )          | (6.0 | ) | (7.1 | ) |
| Depreciation and  amortization                                                              |       | 41.1                                                         |       | 37.7 |   | 36.8 |   |
| Advances from  Wyeth                                                                        |       | (51.9                                                        | )          | 51.9 |   | — |   |
| Amortization of  premium (discount) on marketable securities                                |       | 14.2                                                         |       | 14.8 |   | 9.8 |   |
| Amortization of  deferred compensation                                                      |       | 1.1                                                          |       | 4.0 |   | 19.2 |   |
| Realized (gain)  loss on investments                                                        |       | 2.7                                                          |       | (3.4 | ) | 14.1 |   |
| Impairment of  long-lived assets                                                            |       | —                                                       |       | — |   | 14.1 |   |
| Increase in sales  allowances                                                               |       | 13.5                                                         |       | 10.9 |   | 17.4 |   |
| Losses on  write-downs of inventory                                                         |       | 70.9                                                         |       | 59.0 |   | 48.6 |   |
| Other                                                                                       |       | 1.4                                                          |       | (0.1 | ) | (6.1 | ) |
| Increase (decrease) in  cash due to changes in assets and liabilities:                      |       |                                                         |       |   |   |   |   |
| Trade receivables                                                                           |       | (45.6                                                        | )          | (36.7 | ) | 3.9 |   |
| Inventory                                                                                   |       | (43.1                                                        | )          | (86.6 | ) | (47.9 | ) |
| Other assets                                                                                |       | (2.9                                                         | )          | (14.7 | ) | (2.2 | ) |
| Accounts payable  and accrued expenses                                                      |       | 33.3                                                         |       | 45.3 |   | 4.6 |   |
| Product royalties  payable                                                                  |       | 4.1                                                          |       | 7.8 |   | 26.3 |   |
| Other liabilities                                                                           |       | (1.6                                                         | )          | 3.4 |   | (0.1 | ) |
| Net cash provided  by operating activities                                                  |       | 144.7                                                        |       | 357.5 |   | 263.5 |   |
| CASH FLOWS FROM INVESTING ACTIVITIES                                                        |       |                                                         |       |   |   |   |   |
| Investments in  securities available for sale                                               |       | (652.9                                                       | )          | (659.9 | ) | (1,008.9 | ) |
| Maturities of  securities available for sale                                                |       | 182.9                                                        |       | 345.6 |   | 467.2 |   |
| Proceeds from  sales of securities available for sale                                       |       | 308.0                                                        |       | 219.3 |   | 137.4 |   |
| Net cash acquired  in acquisition of Aviron                                                 |       | —                                                       |       | — |   | 146.9 |   |
| Capital  expenditures                                                                       |       | (79.8                                                        | )          | (112.9 | ) | (80.9 | ) |
| Purchase of assets  from Wyeth                                                              |       | (34.8                                                        | )          | — |   | — |   |
| Investments in  strategic alliances                                                         |       | (24.3                                                        | )          | (30.4 | ) | (8.7 | ) |
| Net cash used in  investing activities                                                      |       | (300.9                                                       | )          | (238.3 | ) | (347.0 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES                                                        |       |                                                         |       |   |   |   |   |
| Proceeds from  issuance of common stock                                                     |       | 19.5                                                         |       | 44.4 |   | 46.7 |   |
| Share repurchases                                                                           |       | (30.0                                                        | )          | (229.8 | ) | — |   |
| Proceeds of 1%  Notes, net of issuance costs                                                |       | —                                                       |       | 489.4 |   | — |   |
| Debt prepayments                                                                            |       | (172.7                                                       | )          | (33.1 | ) | — |   |
| Repayments on  long-term obligations                                                        |       | (4.7                                                         | )          | (4.7 | ) | (4.7 | ) |
| Net cash (used in)  provided by financing activities                                        |       | (187.9                                                       | )          | 266.2 |   | 42.0 |   |
| Effect of exchange  rate changes on cash                                                    |       | (0.1                                                         | )          | — |   | 0.3 |   |
| Net increase  (decrease) in cash and cash equivalents                                       |       | (344.2                                                       | )          | 385.4 |   | (41.2 | ) |
| Cash and cash  equivalents at beginning of year                                             |       | 515.5                                                        |       | 130.1 |   | 171.3 |   |
| Cash and cash  equivalents at end of year                                                   |       | $                                                            | 171.3      |   | $ | 515.5 |   | $ | 130.1 |   |
| Supplemental cash flow data:                                                                |       |                                                         |       |   |   |   |   |
| Cash paid during  the year for interest, net of amounts capitalized                         |       | $                                                            | 9.7        |   | $ | 8.4 |   | $ | 11.0 |   |
| Cash paid  (received) during the year for income tax payments (refunds)                     |       | $                                                            | 3.1        |   | $ | 32.7 |   | $ | (2.3 | ) |

 

The accompanying notes are an integral part of these financial statements

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**Supplementalschedule of noncash investing and financing activities:**

During January 2002, the Company acquired 100% ofthe outstanding capital stock of Aviron through an exchange offer and mergertransaction. The Company exchanged approximately 34.0 million of its commonshares for all of the outstanding shares of Aviron common stock and assumedAviron’s outstanding options and warrants, for which approximately 7.0 millionadditional shares of the Company’s common stock were issuable. The estimated fairvalue of the net assets acquired was $1,635.1 million, and included $1,179.3million of acquired research and development assets that were charged tocurrent period results at the date of acquisition and $211.4 million of 51⁄4%  notes due in 2008.

The accompanying notes are an integral part of these financial statements

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**MedImmune, Inc. Consolidated Statements of Shareholders’ Equity (in millions)**
| ** **                                                                                                                              | ** ** | **Common Stock,  $.01 par** | ** ** | **Paid-in** | ** ** | **Deferred ** | ** ** | **Accumulated**  Earnings | ** ** | **Accumulated**  Other  Comprehensive | ** ** | **Treasury Stock** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------|------------|--------------------|------------|---------------------------|------------|---------------------------------------|------------|-------------------------|------------|------------|------------|
| ** **                                                                                                                              | ** ** | **Shares**                            | ** ** | **Amount**  | ** ** | **Capital**        | ** ** | **Compensation**          | ** ** | **(Deficit)**                         | ** ** | **Income (Loss)**  | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Total** | ** ** |
| **Balance,  December 31, 2001**                                                                                                    |       | 214.5                                 |       |        | $          | 2.2                |       |                      | $          | 891.6                                 |       |                    | —     |       |       |   | $ | 141.9 |   |   |   | $ | 8.6 |   |   |   | — |   |   | — |   | $ | 1,044.3 |   |
| Net loss                                                                                                                                |       | —                                |       |        | —     |               |       | —                    |       |                                  | —     |                    |       |       | (1,098.0   | ) |   |   | — |   |   |   | — |   |   | — |   | (1,098.0 | ) |
| Change in foreign currency translation  adjustment.                                                                                |       | —                                |       |        | —     |               |       | —                    |       |                                  | —     |                    |       |       | —     |   |   |   | 0.8 |   |   |   | — |   |   | — |   | 0.8 |   |
| Change in unrealized gain on investments, net  of tax                                                                              |       | —                                |       |        | —     |               |       | —                    |       |                                  | —     |                    |       |       | —     |   |   |   | 15.1 |   |   |   | — |   |   | — |   | 15.1 |   |
| Unrealized gain on hedged inventory purchases, net of  tax                                                          |       | —                                |       |        | —     |               |       | —                    |       |                                  | —     |                    |       |       | —     |   |   |   | 0.1 |   |   |   | — |   |   | — |   | 0.1 |   |
| Comprehensive loss                                                                                                                      |       |                                  |       |        |       |               |       |                      |       |                                  |       |                    |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   | (1,082.0 | ) |
| Common stock options  exercised                                                                                                         |       | 2.7                                   |       |        | —     |               |       | 42.7                      |       |                                  | —     |                    |       |       | —     |   |   |   | — |   |   |   | — |   |   | — |   | 42.7 |   |
| Issuance of common stock under the employee  stock purchase  plan                                                             |       | 0.2                                   |       |        | —     |               |       | 4.0                       |       |                                  | —     |                    |       |       | —     |   |   |   | — |   |   |   | — |   |   | — |   | 4.0 |   |
| Tax benefit associated with the exercise of  stock options.                                                                        |       | —                                |       |        | —     |               |       | 14.7                      |       |                                  | —     |                    |       |       | —     |   |   |   | — |   |   |   | — |   |   | — |   | 14.7 |   |
| Shares issued related to the acquisition of  Aviron                                                                                |       | 33.9                                  |       |        | 0.3        |               |       | 1,664.4                   |       |                                  | (39.4      | )                       |       |       | —     |   |   |   | — |   |   |   | — |   |   | — |   | 1,625.3 |   |
| Amortization of deferred compensation for  the vesting of  stock                                                              |       | —                                |       |        | —     |               |       | —                    |       |                                  | 19.2       |                    |       |       | —     |   |   |   | — |   |   |   | — |   |   | — |   | 19.2 |   |
| Reversal of deferred compensation for cancellation  of stock                                                                       |       | —                                |       |        | —     |               |       | (4.4                      | )          |                                  | 4.4        |                    |       |       | —     |   |   |   | — |   |   |   | — |   |   | — |   | — |   |
| Decrease in restructuring liability for amortization  of deferred  compensation for the  vesting of  stock options  |       | —                                |       |        | —     |               |       | —                    |       |                                  | 9.0        |                    |       |       | —     |   |   |   | — |   |   |   | — |   |   | — |   | 9.0 |   |
| **Balance, December 31, 2002**                                                                                                     |       | 251.3                                 |       |        | 2.5        |               |       | 2,613.0                   |       |                                  | (6.8       | )                       |       |       | (956.1     | ) |   |   | 24.6 |   |   |   | — |   |   | — |   | 1,677.2 |   |
| Net earnings                                                                                                                            |       | —                                |       |        | —     |               |       | —                    |       |                                  | —     |                    |       |       | 183.2      |   |   |   | — |   |   |   | — |   |   | — |   | 183.2 |   |
| Change in foreign currency translation  adjustment                                                                                 |       | —                                |       |        | —     |               |       | —                    |       |                                  | —     |                    |       |       | —     |   |   |   | 1.6 |   |   |   | — |   |   | — |   | 1.6 |   |
| Change in unrealized gain/loss on investments, net  of tax                                                                         |       | —                                |       |        | —     |               |       | —                    |       |                                  | —     |                    |       |       | —     |   |   |   | 3.7 |   |   |   | — |   |   | — |   | 3.7 |   |
| Change in unrealized gain/loss on cash flow  hedges, net of  tax                                                    |       | —                                |       |        | —     |               |       | —                    |       |                                  | —     |                    |       |       | —     |   |   |   | (2.2 | ) |   |   | — |   |   | — |   | (2.2 | ) |
| Comprehensive income                                                                                                                    |       |                                  |       |        |       |               |       |                      |       |                                  |       |                    |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   | 186.3 |   |
| Common stock options  exercised                                                                                                         |       | 2.8                                   |       |        | —     |               |       | 39.9                      |       |                                  | —     |                    |       |       | —     |   |   |   | — |   |   |   | — |   |   | — |   | 39.9 |   |
| Issuance of common stock under the employee  stock purchase  plan                                                             |       | 0.2                                   |       |        | —     |               |       | 4.8                       |       |                                  | —     |                    |       |       | —     |   |   |   | — |   |   |   | — |   |   | — |   | 4.8 |   |
| Repurchases of common stock                                                                                                        |       | —                                |       |        | —     |               |       | —                    |       |                                  | —     |                    |       |       | —     |   |   |   | — |   |   |   | (6.2 | ) |   | (229.8 | ) | (229.8 | ) |
| Tax benefit associated with the exercise of  stock options.                                                                        |       | —                                |       |        | —     |               |       | 16.1                      |       |                                  | —     |                    |       |       | —     |   |   |   | — |   |   |   | — |   |   | — |   | 16.1 |   |
| Amortization of deferred compensation for  the vesting of  stock options                                                      |       | —                                |       |        | —     |               |       | —                    |       |                                  | 4.7        |                    |       |       | —     |   |   |   | — |   |   |   | — |   |   | — |   | 4.7 |   |
| Reversal of deferred compensation for cancellation  of stock options                                                               |       | —                                |       |        | —     |               |       | (0.7                      | )          |                                  | 0.7        |                    |       |       | —     |   |   |   | — |   |   |   | — |   |   | — |   | — |   |
|                                                                                                                                         |            |                                       |            |             |            |                    |            |                           |            |                                       |            |                         |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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**MedImmune, Inc. Consolidated Statements of Shareholders’ Equity (Continued) (in millions)**

 
| ** **                                                                               | ** ** | **Common Stock,  $.01 par** | ** ** | **Paid-in** | ** ** | **Deferred ** | ** ** | **Accumulated**  Earnings | ** ** | **Accumulated**  Other  Comprehensive | ** ** | **Treasury Stock** | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------|------------|--------------------|------------|---------------------------|------------|---------------------------------------|------------|-------------------------|------------|------------|------------|
| ** **                                                                               | ** ** | **Shares**                            | ** ** | **Amount**  | ** ** | **Capital**        | ** ** | **Compensation**          | ** ** | **(Deficit)**                         | ** ** | **Income (Loss)**  | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Total** | ** ** |
| **Balance,  December 31, 2003**                                                     |       | 254.3                                 |       |        | 2.5        |               |       | 2,673.1                   |       |                                  | (1.4       | )                       |       |       | (772.9     | ) |   |   | 27.7 |   |   |   | (6.2 | ) |   | (229.8 | ) | 1,699.2 |   |
| Net loss                                                                                 |       | —                                |       |        | —     |               |       | —                    |       |                                  | —     |                    |       |       | (3.8       | ) |   |   | — |   |   |   | — |   |   | — |   | (3.8 | ) |
| Change in foreign currency translation  adjustment                                  |       | —                                |       |        | —     |               |       | —                    |       |                                  | —     |                    |       |       | —     |   |   |   | 0.5 |   |   |   | — |   |   | — |   | 0.5 |   |
| Change in unrealized gain/loss on investments, net  of tax                          |       | —                                |       |        | —     |               |       | —                    |       |                                  | —     |                    |       |       | —     |   |   |   | (19.2 | ) |   |   | — |   |   | — |   | (19.2 | ) |
| Change in unrealized gain/loss on cash flow hedges, net of  tax |       | —                                |       |        | —     |               |       | —                    |       |                                  | —     |                    |       |       | —     |   |   |   | 2.1 |   |   |   | — |   |   | — |   | 2.1 |   |
| Comprehensive loss                                                                       |       |                                  |       |        |       |               |       |                      |       |                                  |       |                    |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   | (20.4 | ) |
| Common stock options and warrants  exercised                                        |       | 0.9                                   |       |        | 0.1        |               |       | 7.3                       |       |                                  | —     |                    |       |       | (11.8      | ) |   |   | — |   |   |   | 0.5 |   |   | 19.3 |   | 14.9 |   |
| Issuance of common stock under the employee  stock purchase  plan              |       | 0.2                                   |       |        | —     |               |       | 4.6                       |       |                                  | —     |                    |       |       | —     |   |   |   | — |   |   |   | — |   |   | — |   | 4.6 |   |
| Repurchases of common stock                                                         |       | —                                |       |        | —     |               |       | —                    |       |                                  | —     |                    |       |       | —     |   |   |   | — |   |   |   | (1.2 | ) |   | (30.0 | ) | (30.0 | ) |
| Tax benefit associated with the exercise of  stock options                          |       | —                                |       |        | —     |               |       | 5.2                       |       |                                  | —     |                    |       |       | —     |   |   |   | — |   |   |   | — |   |   | — |   | 5.2 |   |
| Amortization of deferred compensation for  the vesting of  stock options       |       | —                                |       |        | —     |               |       | —                    |       |                                  | 1.1        |                    |       |       | —     |   |   |   | — |   |   |   | — |   |   | — |   | 1.1 |   |
| Reversal of deferred compensation for cancellation  of stock options                |       | —                                |       |        | —     |               |       | (0.2                      | )          |                                  | 0.2        |                    |       |       | —     |   |   |   | — |   |   |   | — |   |   | — |   | — |   |
| **Balance,  December, 31 2004**                                                          |       | 255.4                                 |       |        | $          | 2.6                |       |                      | $          | 2,690.0                               |       |                    | $          | (0.1       | )          |   |   | $ | (788.5 | ) |   |   | $ | 11.1 |   |   |   | (6.9 | ) |   | $ | (240.5 | ) | $ | 1,674.6 |   |
|                                                                                          |            |                                       |            |             |            |                    |            |                           |            |                                       |            |                         |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The accompanying notes are an integral part of these financial statements

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**MedImmune, Inc.Notes to Consolidated Financial Statements**

***1.   ORGANIZATION***

MedImmune, Inc.,a Delaware corporation (together with its subsidiaries, the “Company”), is abiotechnology company headquartered in Gaithersburg, Maryland. TheCompany is committed to advancing science to develop better medicines that helppeople live healthier, longer and more satisfying lives. The Company currentlyfocuses its efforts on using biotechnology to produce innovative products forprevention and treatment in the therapeutic areas of infectious disease,oncology and immunology. The Company’s scientific expertise is largely in theareas of monoclonal antibodies and vaccines. The Company markets four products,Synagis, FluMist, Ethyol and CytoGam and has a diverse pipeline ofdevelopment-stage products. In January 2002, the Company acquired Aviron,a California-based vaccine company (“the Acquisition”).

***2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES***

Significant accounting policies applied in thepreparation of these financial statements are as follows:

**Basisof Presentation****—**Theconsolidated financial statements include the accounts of the Company and itswholly owned subsidiaries. All significant intercompany accounts andtransactions have been eliminated.

**Seasonality****—**The Company’s largest revenue-generatingproduct, Synagis, is used to prevent RSV disease in high-risk infants. RSV ismost prevalent in the winter months in the northern hemisphere. Because of theseasonal nature of RSV, limited sales, if any, of Synagis are expected duringthe second and third quarters of any calendar year, causing results to varysignificantly from quarter to quarter. Sales of Synagis comprised approximately84%, 86% and 85% of total product sales for the years ended December 31,2004, 2003 and 2002, respectively.

FluMist is a nasally delivered live attenuated vaccineused to help prevent influenza in healthy individuals age 5 to 49, which ismost prevalent in the fall and winter months. The majority of FluMist sales areexpected to occur between October and January because of the seasonalnature of influenza, causing results to vary significantly from quarter toquarter.

**Cash,Cash Equivalents and Marketable Securities****—**The Company considers all highly liquidinstruments purchased with a maturity of three months or less at date ofpurchase to be cash equivalents. The majority of the Company’s cash equivalentsconsist of money market mutual funds, commercial paper, and U.S. government andagency securities. Investments in marketable securities consist principally ofU.S. government and agency securities and corporate notes and bonds. Investmentswith maturities of three to twelve months from the balance sheet date areconsidered current assets, while those with maturities in excess of one yearare considered non-current assets. The securities are held for an unspecifiedperiod of time and may be sold to meet liquidity needs and therefore areclassified as available-for-sale. Accordingly, the Company records theseinvestments at fair value, with unrealized gains and losses on investmentsreported as a component of other comprehensive income, net of tax.

Substantially all of the Company’s cash and cashequivalents, and short-term and long-term investments are held in custody bythree major U.S. financial institutions. Deposits held with banks may exceedthe amount of insurance provided on such deposits. Generally, these depositsmay be redeemed upon demand and, therefore, bear minimal risk. The Company’sshort-term and long-term investments generally consist of marketable securitieswith investment grade credit ratings and deposits with major banks. The Company’sinvestment guidelines are intended to limit the amount of investment exposureas 

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to issuer, maturity, andinvestment type. Maturities generally range from one month to seven years. Thefair values of these investments are sensitive to changes in interest rates andthe credit-worthiness of the security issuers. Further, interest income earnedon variable rate debt securities is exposed to changes in the general level ofinterest rates.

The Company’s short-term and long-term investments aresubject to adjustment for other-than-temporary impairments. Impairment chargesare recognized in the consolidated statements of operations when a decline inthe fair value of an investment falls below its cost value and is judged to beother than temporary. Various factors are considered in determining whether animpairment charge is required, including: the length of time and extent towhich the fair value has been less than the cost basis; the financial conditionand near-term prospects of the issuer; fundamental changes to the businessprospects of the issuer; share prices of subsequent offerings; and the Company’sintent and ability to hold the investment for a period of time sufficient toallow for any anticipated recovery in market value.

**MinorityInterest Investments****—**TheCompany’s wholly-owned venture capital subsidiary, MedImmune Ventures, Inc.,manages the Company’s portfolio of minority interest investments and makesadditional investments in public or private biotechnology companies focused ondiscovering and developing human therapeutics. The Company’s minority interestinvestments are accounted for under the risk and rewards model or the votinginterest model, depending on the facts and circumstances of the individualinvestments. Currently, the Company does not have investments that are subjectto consolidation under the risks and rewards model.

The Company’s minority interest investments inpublicly traded companies are categorized as available-for-sale securities. Dueto the highly volatile share prices of these investments, the investments aresubject to unrealized holding gains or losses. The Company’s minority interestinvestments in private companies are maintained on the cost or equity method ofaccounting, depending upon the facts and circumstances of the individualinvestments. For investments carried on the equity method, the Company’sproportionate share of the investees’ gains or losses is recorded on aquarterly basis.

The Company’s minority interest investments aresubject to adjustment for other-than-temporary impairments.

**FairValue of Financial Instruments****—**The carrying amount of financialinstruments, including cash and cash equivalents, trade receivables, contractsreceivable, other current assets, accounts payable and accrued expenses,approximate fair value as of December 31, 2004 and 2003 due to the shortmaturities of these instruments.

**Concentrationof Credit Risk****—**TheCompany sells its products primarily to a limited number of pharmaceuticalwholesalers and distributors without requiring collateral. The Companyperiodically assesses the financial strength of these customers and establishesallowances for anticipated losses when necessary. As of December 31, 2004,trade accounts receivable included four customers that each accounted for 23%,18%, 13% and 13% of gross trade accounts receivable, respectively. As of December 31,2003, trade accounts receivable included four customers that each accounted for27%, 16%, 15% and 12% of gross trade accounts receivable, respectively.

**Inventory****—**Inventories are stated at the lower ofcost or market, determined using the first-in, first-out method. The Companyevaluates inventories available for commercial sale separately from inventoriesrelated to product candidates (“pre-approval inventories”) that have not yetbeen approved.

In the lower of cost or market evaluation forinventories available for commercial sale, market value is defined as the lowerof replacement cost or estimated net realizable value, based upon management’sestimates about future demand and market conditions. When the Companydetermines that inventories for commercial sale have expired, exist inexcessive quantities, or will not generate sufficient revenues to cover 

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costs of production anddistribution, the Company measures the amount of the permanent write down asthe difference between the historical cost of the inventory and its estimatedmarket value.

The Company may capitalize pre-approval inventories ifmanagement believes that 1) commercial approval by the FDA is probable, such aswould be evidenced by a favorable recommendation for approval regarding thesafety and efficacy of the product candidate by the FDA or one of its advisorybodies (or other regulatory body with authority to grant marketing approval fordrugs and biological products for international sale), and 2) it is probablethat its manufacturing facilities will be approved by the FDA (or otherregulatory body) for the production of inventory as determined by the natureand scope of any unresolved issues and the remediation required.

In the lower of cost or market evaluation forpre-approval inventories, market value is defined as the lower of replacementcost or estimated net realizable value, based upon management’s estimates aboutfuture demand and market conditions, including probability of market acceptanceof the product. When the Company determines that pre-approval inventories willnot have a sufficient shelf life to be sold commercially, or if sold, will notgenerate sufficient revenues to cover costs of production and distribution, theCompany measures the amount of permanent write down as the difference betweenthe historical cost and its estimated probable future market value.

As of December 31, 2004, the Company does nothave pre-approval inventories.

**ProductSales****—**TheCompany recognizes revenue on product sales when persuasive evidence of anarrangement exists, delivery has occurred, the sales price is fixed ordeterminable, and collectibility is probable. These criteria are generally metupon shipment of product or receipt of product by customers, depending on thecontractual terms of the arrangement.

In certain of the Company’s international distributionagreements, a portion of the compensation received by the Company from itspartner is variable based, in part, on the end-user sales price. When all ofthe other revenue criteria have been met, the Company recognizes revenue to theextent that the customer has an obligation to pay, the customer has limited orno control over the end-user sales price and, accordingly, any subsequentadjustments to the recorded revenue are not expected to be significant. Subsequentadjustments to recorded revenue that result from variances between amountspreviously invoiced and the total sales price received are recorded as anadjustment to product sales in the quarter in which they become known.

Product sales are recordednet of allowances for estimated chargebacks, returns, discounts, and governmentrebates. Both in the U.S. and elsewhere, sales of pharmaceutical productsdepend on the availability of reimbursement to the consumer from third-partypayers, such as government and private insurance plans. The Company estimates theportion of its sales that will be covered by government insurance and recordsallowances at a level that management believes is sufficient to cover estimatedrequirements for reimbursements. Allowances for discounts, returns, andchargebacks, which are netted against accounts receivable, totaled $14.5million and $9.0 million at December 31, 2004 and 2003, respectively. Allowancesfor government reimbursements were $52.5 million and $42.4 million as of December 31,2004 and 2003, respectively, and are included in accrued expenses in theaccompanying balance sheets.

**Other Revenues—**

***Contract Revenues******—***For contractsexecuted or acquired after January 1, 2002, the Company changed itsaccounting method for contract revenues to use the milestone payment method whenall milestones to be received under contractual arrangements are determined tobe substantive, at-risk and the culmination of an earnings process. Substantivemilestones are payments that are conditioned upon an event requiringsubstantive effort, when the amount of the milestone is reasonable relative tothe time, effort and risk 

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involved in achieving themilestone and when the milestones are reasonable relative to each other and theamount of any up front payment. If all of these criteria are not met, then theCompany will use the contingency-adjusted performance model. The change inaccounting principle was made to more closely reflect the essence of theCompany’s contractual obligations with collaborative partners. Also, the new method is prevalent in theindustry in which the Company operates. The effect on net loss and net loss pershare for the year ended December 31, 2002 (the year of adoption) was notmaterial.

For contracts executed prior to January 1, 2002,contract revenues are recognized during each period in accordance with thecontingency-adjusted performance model. Revenue from non-refundable up frontlicense fees, milestones, or other payments where the Company continuesinvolvement through a development collaboration is recognized on a straight-linebasis over the development period, unless there are specific output measuresthat indicate a different basis is more appropriate. A portion of the up frontand milestone payments received under collaborative agreements with AbbottInternational, ALZA, GSK, and Schering were deferred and are being recognizedover the period of fulfillment of the contractual obligations. As of December 31,2004 and December 31, 2003, the remaining balance of deferred revenue withrespect to amounts received under these agreements was $0.4 million and $0.8million, respectively.

***MiscellaneousRevenues******—***Other revenues include licensing fees, grantincome, royalty income, corporate funding, and reimbursement of expenses underresearch and other collaborative agreements. These revenues are recognized whenthe payments are received or when collection is assured and only when nofurther performance obligations exist.

**Royalty Expense****—**Product royalty expense is recognized as acost of sales concurrently with the recognition of product revenue, net ofallowances for estimated chargebacks, returns, discounts, and governmentrebates, based on a contractually stipulated royalty percentage. Anyadjustments to royalty expense that result from adjustments to contractuallydefined net sales are recorded as an adjustment to expense in the quarter theybecome known.

**Research and Development Expenses**—

Research and development expenses include salaries,benefits and other headcount related costs for personnel performing researchand development activities, clinical trial and related clinical manufacturingcosts, contract and other outside service fees, and facilities and overheadcosts.

***Licensing Fees******—***In the normal courseof business, the Company enters into collaborative research and development andin-licensing agreements to acquire access to technology. These collaborativeagreements usually require the Company to pay up front fees and milestonepayments, some of which are significant. Up front payments and milestonesrelated to early stage technology are expensed as incurred. The agreements mayalso require that the Company provide funding to its partners for researchprograms. These costs are expensed as incurred.

***Other******—***The Company accruesestimated costs for clinical and preclinical studies performed worldwide bycontract research organizations or by internal staff based on the total of thecosts incurred through the balance sheet date. The Company monitors theprogress of the trials and their related activities to the extent possible, andadjusts the accruals accordingly.

**Selling,General and Administrative Expenses—**

***Co-promotionExpenses*****—**Co-promotionexpense in connection with the Company’s agreement with the Ross Products Division of Abbott Laboratories (“Abbott”) toco-promote Synagis in the U.S. is recognized as general and administrativeexpense concurrently with the recognition of product revenue, net of allowancesfor estimated chargebacks, returns, discounts, and government rebates, and iscalculated based on a contractually stipulated co-promotion percentage. Anyadjustments to co-promotion expense that 

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result from variancesbetween estimated and actual net sales are recorded as an adjustment to expensein the quarter they become known.

***Allowances forDoubtful Accounts*****—**TheCompany estimates the allowances for doubtful accounts as a percentage of grosstrade accounts receivable balances outstanding at the end of the period, basedupon an assessment of the concentration of credit risk, the financial conditionand environment of its customers, and the level of credit insurance obtained oncustomer balances, if any. Because of the seasonal nature of the Company’slargest product, Synagis, the accounts receivable balances fluctuatesignificantly. Accordingly, the allowance for doubtful accounts also fluctuates.Allowances for doubtful accounts, which are netted against accounts receivable,totaled $1.8 million and $3.8 million at December 31, 2004 and 2003,respectively.

***Advertising Expense*****—**The Company expenses production costs of advertising asincurred. Advertising costs for television time and space in publications aredeferred until the first advertisement occurs. Advertising expense for theyears ended December 31, 2004, 2003 and 2002 was $8.0 million, $8.1million and $7.4 million, respectively.

**Property and Equipment****—**Property and equipment are stated at cost.Interest cost incurred during the period of construction of plant and equipmentis capitalized until the asset is placed in service, after FDA licensure of thefacility is obtained. Depreciation and amortization expense commence when theasset is placed in service for its intended purpose. Depreciation andamortization is computed using the straight-line method based upon thefollowing estimated useful lives:
| ** **                                         | ** ** | **Years** | ** ** |
|----------------------------------------------------|------------|-----------|------------|
| Building and  improvements                         |       | 15-30     |       |
| Manufacturing,  laboratory, and facility equipment |       | 5-15      |       |
| Office furniture,  computers and equipment         |       | 3-7       |       |

 

Amortization of leasehold improvements is computed onthe straight-line method based on the shorter of the estimated useful life ofthe improvement or the term of the lease. Depreciation and amortization expensefor the years ended December 31, 2004, 2003 and 2002 was $30.4 million,$24.0 million and $20.7 million, respectively. Upon the disposition of assets,the costs and related accumulated depreciation are removed from the accountsand any resulting gain or loss is included in the statements of operations. Repairsand maintenance costs are expensed as incurred and were $8.5 million, $6.8million and $7.0 million for the years ended December 31, 2004, 2003 and2002, respectively.

The Company evaluates property and equipment forimpairment whenever events or changes in circumstances indicate that thecarrying amount may not be recoverable. The Company considers historicalperformance and anticipated future results in its evaluation of the potentialimpairment. Accordingly, when the indicators of impairment are present, theCompany evaluates the carrying value of these assets in relation to theoperating performance of the business and future undiscounted cash flowsexpected to result from the use of these assets. Impairment losses arerecognized when both the fair value and the sum of the expected future cashflows are less than the assets’ carrying value.

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**Intangible Assets****—**The Company’s intangible assets aredefinite-lived assets stated at amortized cost. The Company reviews itsintangible assets for impairment whenever events or changes in circumstancesindicate that the carrying amount of an asset may not be recoverable andcontinually evaluates the reasonableness of the remaining useful lives of theseassets. Intangible assets at December 31 are comprised of the following(in millions):
| ** **                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|
| Worldwide  collaborative agreement with Wyeth |       | $        | —     |     | $          | 90.0 |   |
| Agreement with  Evans                         |       | 39.0     |       | 39.0     |       |
| Other intangible  assets                      |       | 0.4      |       | 0.4      |       |
|                                          |       | 39.4     |       | 129.4    |       |
| Less accumulated  amortization                |       | (26.3    | )          | (32.7    | )          |
|                                          |       | $        | 13.1       |     | $          | 96.7 |   |

 

Amortization of intangible assets is computed on thestraight-line method based on the estimated useful lives of the assets. Amortizationfor the years ended December 31, 2004, 2003 and 2002 was $10.6 million,$16.6 million and $16.1 million, respectively. The estimated aggregateremaining amortization for the next years is as follows: 2005—$8.7 million; and2006—$4.4 million.

In April 2004, the Company entered intoagreements to dissolve its worldwide collaborative agreement with Wyeth (seeNote 15). As a result, the Company recorded a permanent impairment loss of$73.0 million to write off the remaining unamortized cost of the intangibleasset.

**Goodwill****—**Goodwill represents the excess cost of theAcquisition over the net of the amounts assigned to assets acquired andliabilities assumed. Goodwill is not amortized, but is evaluated for impairmentannually or whenever events or changes in circumstances suggest that thecarrying amount may not be recoverable. During 2004 and 2003, the Companyrecorded adjustments to goodwill totalling $11.2 million and ($2.4) million,respectively, reflecting adjustments to deferred tax assets relating to theresolution of income tax related uncertainties.

**DerivativeInstruments****—**Derivativeinstruments are recorded on the balance sheet at fair value. Changes in fairvalue of derivatives are recorded each period in current earnings or othercomprehensive income, depending on whether a derivative is designated as partof a hedge transaction and, if so, depending on the type of hedge transaction. Forforeign currency cash-flow hedge transactions in which the Company is hedgingthe variability of cash flows related to inventory purchases, changes in thefair value of the derivative instruments are reported in other comprehensiveincome. The gains and losses on these derivatives that are reported in othercomprehensive income are reclassified as earnings or losses in the periods inwhich the related inventory is sold. The ineffective portion, if any, of allhedges or gains or losses on cash-flow hedges related to inventory transactionsthat subsequently become not probable of occurring are recognized in thecurrent period.

The Company is obligated to make certain payments toforeign suppliers in local currency. To hedge the effect of fluctuating foreigncurrencies in its financial statements, the Company may enter into foreignforward exchange contracts. Gains or losses associated with the forwardcontracts are computed as the difference between the foreign currency contractamount at the spot rate on the balance sheet date and the forward rate on thecontract date. As of December 31, 2004 and December 31, 2003, theCompany had no outstanding forward contracts. As of December 31, 2002, theCompany had outstanding forward Euro contracts for the purchase of 1.1 millionEuros, all expiring within one year, with a fair value of $0.3 million. Duringthe year ended December 31, 2002, net unrealized gains on forward exchangecontracts, net of tax, of $0.6 million, were reclassified to earnings duringthe year as the related inventory was sold. During the year endedDecember 31, 2002, the Company reclassified a gain of $0.2 million tocurrent period earnings for hedge ineffectiveness related to forward exchangecontracts.

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During 2003, the Company made plans to liquidate itsholdings in certain equity securities in its portfolio, over a period ofapproximately one year. To hedge the risk of market fluctuations, the Companyentered into equity derivative contracts which were designated as cash flowhedges. As of December 31, 2003, the unrealized gain on the marketableequity securities related to this hedge was $13.2 million while the net fairvalue of the derivative contracts was a liability of $3.5 million, resulting ina net unrealized gain on the hedging transaction. These contracts were settledduring 2004, and the Company recognized a net gain of $9.7 million on the saleof the equity securities, which is included in gain on investment activities inthe accompanying statement of operations.

**IncomeTaxes****—**Deferredincome taxes are recognized for the differences between the tax bases of assetsand liabilities and their financial reporting amounts at each year end based onenacted tax laws and statutory tax rates applicable to the periods in which thedifferences are expected to affect taxable income. Valuation allowances areestablished when necessary to reduce deferred tax assets to the amount expectedto be realized and are reversed at such time that realization is believed to bemore likely than not. Future reversals of valuation allowances on acquireddeferred tax assets will first be applied against goodwill and otherintangibles before recognition of a benefit in the consolidated statement ofoperations. Income tax expense is the tax payable for the period and the changeduring the period in deferred tax assets and liabilities, exclusive of amountsrelated to the exercise of stock options which benefit is recognized directlyas an increase in shareholders’ equity.

**EarningsPer Share****—**Basicearnings per share is computed based on the weighted average number of commonshares outstanding during the period. Diluted earnings per share is computedbased on the weighted average shares outstanding adjusted for all dilutivepotential common shares. The dilutive impact, if any, of common stockequivalents outstanding during the period, including outstanding stock optionsand warrants, is measured by the treasury stock method. The dilutive impact, ifany, of the Company’s 51¤4%Notes, which were redeemed in March 2004, is measured using theif-converted method. Historically, the Company’s 1% Notes were consideredcontingent convertible securities, meaning they were eligible for conversion tocommon stock only if certain requirements were met, and had been excluded fromthe diluted earnings per share calculations due to these contingencies.Beginning in the fourth quarter of 2004, EITF No. 04-8, “The Effect ofContingently Convertible Debt on Diluted Earnings per Share,” requirescontingently convertible debt instruments, such as the Company’s 1% Notes, tobe included in diluted earnings per share using the if-converted method,regardless of whether the market price trigger has been met. Diluted earningsper share computations for 2003 have been recomputed as required by this newguidance (Note 12) and the effect is immaterial. Potential common shares arenot included in the computation of diluted earnings per share if they areantidilutive.

**ComprehensiveIncome****—**Comprehensiveincome is comprised of net earnings and other comprehensive income, whichincludes certain changes in equity that are excluded from net earnings, such astranslation adjustments, unrealized holding gains and losses onavailable-for-sale marketable securities, and unrealized gains and losses onhedging instruments. During 2004 and 2003, reclassification adjustments forrealized gains on available-for-sale marketable securities, net of tax, were$6.7 million and $3.6 million, respectively. Reclassification adjustments during2002 were immaterial.

**Stock-basedCompensation****—**Compensationcosts attributable to stock option and similar plans are recognized based onany excess of the quoted market price of the stock on the date of grant overthe amount the employee is required to pay to acquire the stock, in accordancewith the intrinsic-value method under Accounting Principles Board Opinion No. 25,“Accounting for Stock Issued to Employees” (“Opinion 25”). Such amount, if any,is accrued over the related vesting period, as appropriate.

In accordance with SFAS 123R, “Share-Based Payment” (“SFAS 123R”), which was issued by theFinancial Accounting Standards Board (“FASB”) during December 2004 (seediscussion of New Accounting Standards below), the Company plans to beginrecognizing the expense associated with its 

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stock option and similarplans, as determined using a fair value-based method, in its statement ofoperations beginning on July 1, 2005.

Thefollowing table illustrates the effect on net earnings and earnings per shareif the Company had applied the fair value recognition provisions to stock-basedemployee compensation (in millions, except per share data):
| ** **                                                                                                                                                                                                                                                                                                                                          | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net earnings  (loss), as reported                                                                                                                                                                                                                                                                                                                   |       | $        | (3.8       | )        | $          | 183.2    |       | $ | (1,098.0 | ) |
| Add: stock-based  employee compensation expense included in historical results for the vesting  of stock options assumed in conjunction with the Acquisition, calculated in  accordance with FIN 44, “Accounting for Certain Transactions Involving  Stock Compensation-an Interpretation of Opinion 25”, net of related tax  effect |       | 0.7      |       | 2.5      |       | 12.1     |       |
| Deduct:  stock-based employee compensation expense determined under the fair  value based method for all awards, net of related tax effect                                                                                                                                                                                                     |       | (63.1    | )          | (87.5    | )          | (96.3    | )          |
| Pro forma net earnings  (loss)                                                                                                                                                                                                                                                                                                                      |       | $        | (66.2      | )        | $          | 98.2     |       | $ | (1,182.2 | ) |

 
| Basic earnings  (loss) per share, as reported   |   | $ | (0.02 | ) | $ | 0.73 |   | $ | (4.40 | ) |
|-------------------------------------------------|--------|---|-------|---|---|------|--------|---|-------|---|
| Basic earnings  (loss) per share, pro forma     |   | $ | (0.27 | ) | $ | 0.39 |   | $ | (4.74 | ) |
| Diluted earnings  (loss) per share, as reported |   | $ | (0.02 | ) | $ | 0.72 |   | $ | (4.40 | ) |
| Diluted earnings (loss)  per share, pro forma   |   | $ | (0.27 | ) | $ | 0.39 |   | $ | (4.74 | ) |

 

Thepro forma expense related to the stock options is recognized over the vestingperiod, generally three to five years. The fair value of each option grant wasestimated using the Black-Scholes option pricing model with the followingweighted average assumptions for each year:
| ** **                           | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Risk-free  interest rate             |       | 3.42     | %          | 3.27     | %          | 4.16     | %          |
| Expected life of  options—years |       | 5        |       | 5        |       | 6        |       |
| Expected stock  price volatility     |       | 49       | %          | 51       | %          | 53       | %          |
| Expected dividend yield              |       | N/A      |       | N/A      |       | N/A      |       |

 

To better estimate the future expected stock pricevolatility, during 2002 the Company changed its method of calculatinghistorical volatility from using daily stock price observations to usingmonthly observations over the expected life of the options.

The weighted average fair value of options grantedduring 2004, 2003, and 2002 was $11.20, $16.55, and $20.56, respectively.

**DefinedContribution Plans****—**TheCompany sponsors a defined contribution plan under Section 401(k) ofthe Internal Revenue Code covering substantially all full-time U.S. employees. Employeecontributions are voluntary and are determined on an individual basis subjectto the maximum allowable under federal tax regulations. Participants are alwaysfully vested in their contributions. The Company also makes employercontributions, which primarily vest pro ratably over three years of service. During2004, 2003 and 2002, the Company contributed approximately $3.2 million, $2.4million and $1.9 million, respectively, in cash to the plan. The Company alsosponsors various defined contribution savings plans covering its full-timenon-U.S. employees.

**Reclassifications****—**Certain prior year amounts have beenreclassified to conform to the current presentation.

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**Useof Estimates****—**Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities, and disclosure of contingent assets and liabilities at thefinancial statement date and the reported amounts of revenues and expensesduring the reporting period. Actual results could differ from those estimates.

**NewAccounting Standards****—**InJanuary 2003, the FASB issued FIN No. 46, “Consolidation of VariableInterest Entities, an interpretation of Accounting Research Bulletin No. 51.”FIN No. 46 requires certain variable interest entities to be consolidatedby the primary beneficiary of the entity if the equity investors in the entitydo not have the characteristics of a controlling financial interest or do nothave sufficient equity at risk for the entity to finance its activities withoutadditional subordinated financial support from other parties. The Company hasadopted FIN No. 46 and has determined that it does not currently holdinterests in any entities that are subject to the consolidation provisions ofthis interpretation.

In December 2004, the FASB issued SFAS 123R, arevision of SFAS 123, “Accounting for Stock-based Compensation.” SFAS 123Rrequires public companies to recognize expense associated with share-basedcompensation arrangements, including employee stock options, using a fairvalue-based option pricing model, and eliminates the alternative to use Opinion25’s intrinsic value method of accounting for share-based payments. Inaccordance with the new pronouncement, the Company plans to begin recognizingthe expense associated with its share-based payments, as determined using afair value-based method, in its statement of operations beginning on July 1,2005. Adoption of the expense provisions of the statement are expected to havea material impact on the Company’s results of operations. The standard allowsthree alternative transition methods for public companies: modified prospectiveapplication without restatement of prior interim periods in the year ofadoption; modified retrospective application with restatement of prior interimperiods in the year of adoption; and modified retrospective application withrestatement of prior financial statements to include the same amounts that werepreviously included in pro forma disclosures. The Company has not determinedwhich transition method it will adopt.

During July 2004, the FASB’s Emerging Issues TaskForce (“EITF”) reached a consensus on Issue No. 02-14, “Whether anInvestor Should Apply the Equity Method of Accounting to Investments Other ThanCommon Stock.” EITF 02-14 requires investors to apply the equity method ofaccounting to investments that are in-substance common stock, defined as aninvestment in an entity that has risk and reward characteristics that aresubstantially similar to the entity’s common stock. The EITF is effective forreporting periods beginning after September 15, 2004. During the thirdquarter of 2004, the Company early adopted EITF 02-14, with an immaterialimpact to the Company’s consolidated financial position and results ofoperations.

During September 2004, the EITF reached aconsensus on Issue No. 04-8, “The Effect of Contingently Convertible Debton Diluted Earnings Per Share.” EITF 04-8 requires that all contingentlyconvertible debt instruments be included in diluted earnings per share usingthe if-converted method, regardless if the market price trigger (or othercontingent feature) has been met. The EITF is effective for reporting periodsending after December 15, 2004 and requires that prior period earnings pershare amounts presented for comparative purposes be restated. Under theprovisions of EITF 04-8, the Company’s 1% Convertible Senior Notes (the “1%Notes”), which represent 7.3 million potential shares of common stock, will beincluded in the calculation of diluted earnings per share using theif-converted method regardless if the contingent requirements have been met forconversion to common stock. The Company adopted EITF 04-8 during the fourthquarter of 2004, and has recomputed diluted earnings per share for priorperiods as required by the new guidance (Note 12). The impact is immaterial.

In December 2004, theFASB issued SFAS 151, “Inventory Costs—An Amendment of ARB No. 43, Chapter4.” SFAS 151 amends the guidance in ARB No. 43, Chapter 4 to require thatidle facility expense, freight, handling costs and wasted material (spoilage)be recognized as current-period charges regardless 

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ofwhether they meet the criterion of “so abnormal”. In addition, the Statementrequires that allocation of fixed production overheads to the costs ofconversion be based on the normal capacity of the production facilities. TheCompany will adopt SFAS 151 for inventory costs incurred beginning January 1,2006 as required by the Standard. The Company expects that adoption of theStandard will have an immaterial impact on the Company’s consolidated financialposition and results of operations.

***3.   ACQUISITION***

On January 10, 2002, the Company completed theAcquisition through an exchange offer and merger transaction. Through theAcquisition, the Company obtained a new product, FluMist. The Acquisition wasaccounted for as a purchase and, accordingly, the results of Aviron’soperations were included with the Company’s operations beginning January 10,2002.

Under the terms of the Acquisition, the Companyexchanged approximately 34.0 million of its common shares for 100% of the outstandingcommon stock of Aviron. Additionally, the Company assumed Aviron’s outstandingoptions and warrants.

The Company’s aggregate purchase consideration wasapproximately $1.6 billion, as follows (in millions):
| Common stock                                                                                 |   | $     | 1,497.3 |   |
|----------------------------------------------------------------------------------------------|--------|-------|---------|--------|
| Assumption of  Aviron’s options and warrants,  less intrinsic value of unvested portion |   | 128.0 |    |
| Transaction costs                                                                            |   | 9.8   |    |
|                                                                                         |   | $     | 1,635.1 |   |

 

The value of common shares issued was $44.10 pershare, based on the closing market price of the Company’s common stock on November 30,2001, the last business day prior to the signing of the merger agreement. Thefair value of options and warrants assumed in the transaction was estimatedusing the Black-Scholes option pricing model.

Thefollowing table summarizes the final estimated fair values (in millions) of theassets acquired and liabilities assumed in accordance with the acquisition.
| Assets:                              |   |    |    |
|--------------------------------------|--------|---------|---------|
| Cash and  marketable securities      |   | $       | 417.5   |   |
| Other current  assets                |   | 24.9    |    |
| Other assets                         |   | 45.8    |    |
| Deferred tax  assets                 |   | 118.8   |    |
| Intangible assets                    |   | 129.4   |    |
| In-process  research and development |   | 1,179.3 |    |
| Goodwill                             |   | 24.8    |    |
| Total assets                         |   | $       | 1,940.5 |   |
| Liabilities:                         |   |    |    |
| Current  liabilities                 |   | $       | 49.2    |   |
| Restructuring  liability             |   | 15.8    |    |
| Long-term debt                       |   | 211.4   |    |
| Long-term  obligations               |   | 28.5    |    |
| Other liabilities                    |   | 0.5     |    |
| Total liabilities                    |   | 305.4   |    |
| Net assets  acquired                 |   | $       | 1,635.1 |   |

 

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***Intangible Assets******—***Of the $129.4million of acquired intangible assets, $90.0 million was assigned to theworldwide collaborative agreement with Wyeth for the development, manufacture,distribution, marketing, promotion, and sale of FluMist, which is subject toamortization over its estimated useful life of approximately 11 years. TheCompany estimated the fair value of the Wyeth agreement using the sum of theprobability-adjusted scenarios under the income approach. In applying thismethod, the Company relied on revenue assumptions, profitability assumptionsand anticipated approval dates. As part of the dissolution of the agreementwith Wyeth in 2004, the Company wrote-off the remaining unamortized cost ofthis intangible asset (Note 2). The remaining $39.0 million was assigned to thecontract manufacturing agreement with Evans Vaccines Limited, which is subjectto amortization over its estimated useful life of approximately four years. TheCompany estimated the fair value of the Evans agreement using the costapproach, which is based on the theory that a prudent investor would pay nomore for an asset than the amount for which the asset could be replaced. In itsanalysis, the Company reduced replacement cost for such factors as physicaldeterioration and functional or economic obsolescence.

***In-Process Researchand Development******—***Approximately $1,179.3 million of thepurchase price was allocated to acquired research and development assets thatwere written off at the date of acquisition as a separate component of theCompany’s results of operations. The amount represents the fair value ofpurchased in-process technology for projects, principally FluMist, which, as ofthe date of the acquisition, had not yet reached technological feasibility andhad no alternative future use.

***Goodwill******—***Approximately $24.8million in goodwill was recognized in the final allocation of the purchaseprice, none of which is expected to be deductible for tax purposes. During 2004and 2003, the Company recorded adjustments to goodwill totaling $11.2 millionand ($2.4) million, respectively, reflecting adjustments to deferred tax assetsrelative to the resolution of income tax related uncertainties (Note 2). The Companyperformed its annual impairment analysis during the fourth quarter of 2004, anddetermined that the goodwill was not impaired.

***RestructuringLiability******—***Included in the final allocation ofacquisition cost was a restructuring liability of $15.8 million for estimatedcosts associated with the Company’s restructuring plan. The restructuring planwas originally formulated and announced to employees in December 2001, toconsolidate and restructure certain functions, including the involuntarytermination of eight executives and 52 other employees of Aviron from variousfunctions and levels.

During 2004, 2003 and2002, the Company incurred restructuring costs of $0.3 million, $0.7 millionand $14.8 million, respectively.

***4.   SEGMENT, GEOGRAPHIC AND PRODUCT INFORMATION***

The Company is organized along functional lines ofresponsibility as opposed to a product, divisional or regional organizationalstructure. The Company’s chief operating decision makers make decisions andassess the Company’s performance on a consolidated level. As such, theoperations of the Company comprise one operating segment.

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TheCompany sells its products primarily to a limited number of pharmaceuticalwholesalers and distributors. Synagis is distributed by about a dozen U.S.specialty distributors. Customers individually accounting for at least tenpercent of the Company’s product sales during the past three years are asfollows:
| ** **                    | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Amerisource—Bergen Corp. |       |     | 25         | %        |       |     | 29         | % |   |   | 27 | % |   |
| Cardinal  Health, Inc.   |       |     | 15         | %        |       |     | 18         | % |   |   | 17 | % |   |
| McKesson HBOC, Inc.      |       |     | 18         | %        |       |     | 12         | % |   |   | 13 | % |   |
| Caremark Rx, Inc.(1)     |       |     | 6          | %        |       |     | 10         | % |   |   | 11 | % |   |
| Total % of product sales      |       |     | 64         | %        |       |     | 69         | % |   |   | 68 | % |   |

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(1)   During2004, Caremark became an indirect customer, purchasing through one of theCompany’s wholesalers.

TheCompany has contractual agreements with Abbott International, an affiliate ofAbbott, for distribution of Synagis outside of the U.S., and with affiliates ofSchering Plough Corporation for international distribution of Ethyol. TheCompany also relies on a limited number of distributor agents/affiliates tosell CytoGam and NeuTrexin internationally. The breakdown of product sales bygeographic region is as follows (in millions):
| ** **                     | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|----------|------------|
| United States                  |       | $        | 1,008.7    |     | $          | 911.3    |       | $ | 752.9 |   |
| All other                      |       | 115.3    |       | 81.3     |       | 38.0     |       |
| Total product  sales           |       | $        | 1,124.0    |     | 992.6      |     | 790.9      |   |
| Other revenue,  primarily U.S. |       | 17.1     |       | 61.8     |       | 61.8     |       |
| Total revenues                 |       | $        | 1,141.1    |     | $          | 1,054.4  |       | $ | 852.7 |   |

 

Other revenue of $17.1 million, $61.8 million, and$61.8 million in 2004, 2003, 2002, respectively, consists mainly of U.S.distribution, licensing and milestone revenues, corporate funding, and contractmanufacturing revenues.

Thebreakdown of long-lived assets by geographic region is as follows (inmillions):
| ** **              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|----------|------------|
| United States           |       | $        | 253.1      |     | $          | 222.5    |       | $ | 161.0 |   |
| All other               |       | 57.8     |       | 51.1     |       | 23.0     |       |
| Total long-lived assets |       | $        | 310.9      |     | $          | 273.6    |       | $ | 184.0 |   |

 

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***5.   CASH, CASH EQUIVALENTS AND INVESTMENTS INDEBT AND EQUITY SECURITIES***

Investmentsin cash, cash equivalents and marketable securities are comprised of thefollowing (in millions):
| ** **                          | ** ** | ** **            | ** ** | ** **                 | ** ** | ** **                   | ** ** | ** **                    | ** ** | **Fair Value at Balance Sheet Date** | ** ** |
|-------------------------------------|------------|-----------------------|------------|----------------------------|------------|------------------------------|------------|-------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                          | ** ** | **Principal  Amount** | ** ** | **Cost/  Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Cash and  Cash  Equivalents**                          | ** ** | **Short-Term  Marketable  Securities** | ** ** | **Long-Term  Marketable  Securities** | ** ** |
| *December 31, 2004:*           |       |                  |       |                       |       |                         |       |                          |       |                                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and Money  Market Mutual Funds |       | $                     | 38.6       |                       | $          | 38.6                         |       |                          | $          | —                                                        |       |   |   | $ | — |   |   |   | $ | 38.6 |   |   |   | $ | — |   |   |   | $ | — |   |   |
| Commercial Paper                    |       | 62.0                  |       | 61.9                       |       |                         | —     |                          |       |                                                          | —     |   |   |   | 61.9 |   |   |   | — |   |   |   | — |   |   |
| U.S. Government  and Agencies  |       | 384.8                 |       | 389.7                      |       |                         | 1.3        |                          |       |                                                          | (2.8       | ) |   |   | 67.8 |   |   |   | — |   |   |   | 320.4 |   |   |
| Corporate Notes  and Bonds     |       | 1,126.8               |       | 1,180.3                    |       |                         | 11.6       |                          |       |                                                          | (7.4       | ) |   |   | 3.0 |   |   |   | 139.7 |   |   |   | 1,041.8 |   |   |
| Equity Securities                   |       | 20.0                  |       | 20.0                       |       |                         | 12.9       |                          |       |                                                          | —     |   |   |   | — |   |   |   | 32.9 |   |   |   | — |   |   |
| Total                               |       | $                     | 1,632.2    |                       | $          | 1,690.5                      |       |                          | $          | 25.8                                                          |       |   |   | $ | (10.2 | ) |   |   | $ | 171.3 |   |   |   | $ | 172.6 |   |   |   | $ | 1,362.2 |   |   |
| *December 31,  2003:*          |       |                  |       |                       |       |                         |       |                          |       |                                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and Money  Market Mutual Funds |       | $                     | 117.5      |                       | $          | 117.5                        |       |                          | $          | —                                                        |       |   |   | $ | — |   |   |   | $ | 117.5 |   |   |   | $ | — |   |   |   | $ | — |   |   |
| Commercial Paper                    |       | 285.6                 |       | 285.4                      |       |                         | —     |                          |       |                                                          | —     |   |   |   | 285.4 |   |   |   | — |   |   |   | — |   |   |
| U.S. Government  and Agencies  |       | 200.6                 |       | 204.3                      |       |                         | 2.1        |                          |       |                                                          | —     |   |   |   | 112.6 |   |   |   | 21.4 |   |   |   | 72.4 |   |   |
| Corporate Notes  and Bonds     |       | 1,190.5               |       | 1,245.5                    |       |                         | 33.2       |                          |       |                                                          | (3.6       | ) |   |   | — |   |   |   | 235.6 |   |   |   | 1,039.5 |   |   |
| Equity Securities                   |       | 2.5                   |       | 2.5                        |       |                         | 13.2       |                          |       |                                                          | —     |   |   |   | — |   |   |   | 15.7 |   |   |   | — |   |   |
| Total                               |       | $                     | 1,796.7    |                       | $          | 1,855.2                      |       |                          | $          | 48.5                                                          |       |   |   | $ | (3.6 | ) |   |   | $ | 515.5 |   |   |   | $ | 272.7 |   |   |   | $ | 1,111.9 |   |   |

 

Theamortized cost and fair market value of the Company’s investments in cash, cashequivalents and marketable securities at December 31, 2004, by contractualmaturities are (in millions):
| ** **                                | ** ** | **Cost/  Amortized  Cost** | ** ** | **Fair  Value** | ** ** |
|-------------------------------------------|------------|----------------------------|------------|-----------------|------------|
| Equity securities                         |       | $                          | 20.0       |            | $          | 32.9 |   |
| Due in one year  or less                  |       | 293.2                      |       | 294.3           |       |
| Due after one  year through two years     |       | 440.7                      |       | 443.1           |       |
| Due after two  years through five years   |       | 832.2                      |       | 831.7           |       |
| Due after five  years through seven years |       | 104.4                      |       | 104.1           |       |
| Total                                     |       | $                          | 1,690.5    |            | $          | 1,706.1 |   |

 

Proceeds from sales of marketable securities totaled$308.0 million, $219.3 and $137.4 million in 2004, 2003 and 2002, respectively.Gross gains****recognized on sales ofsecurities in 2004, 2003 and 2002 were $11.2 million, $5.9 million and $0.9million, respectively, as determined by specific identification. Gross lossesrecognized on sales of securities were immaterial during 2004, 2003 and 2002,as determined by specific identification.

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Thefollowing table shows the gross unrealized losses and fair value of the Company’sinvestments in marketable securities with unrealized losses that are not deemedto be other-than-temporarily impaired, aggregated by investment category andlength of time that individual securities have been in a continuous unrealizedloss position, at December 31, 2004 (in millions):
| ** **                    | ** ** | **Less Than 12 Months** | ** ** | **12 Months or Greater** | ** ** | **Total**       | ** ** |
|-------------------------------|------------|----------------------------------------|------------|-----------------------------------------|------------|-----------------|------------|
| ** **                    | ** ** | **Fair  Value**                        | ** ** | **Unrealized  Losses**                  | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** |
| U.S. Government  and Agencies |       | $                                      | 242.6      |                                    |       | $               | 2.8        |   |   | $ | 5.0 |   |   | $ | — |   |   | $ | 247.6 |   |   | $ | 2.8 |   |   |
| Corporate Notes  and Bonds    |       | 367.6                                  |       |                                    | 3.5        |            |       | 188.8 |   |   | 3.9 |   |   | 556.4 |   |   | 7.4 |   |   |
| Total                         |       | $                                      | 610.2      |                                    |       | $               | 6.3        |   |   | $ | 193.8 |   |   | $ | 3.9 |   |   | $ | 804.0 |   |   | $ | 10.2 |   |   |

 

The Company reviewed these investments for potentialother-than-temporary impairment. Based on the credit worthiness of the issuersand the Company’s ability and intent to hold the investments until maturity,the Company determined that the unrealized losses are not other-than-temporary.

The cost basis of the Company’s minority interestinvestments in privately held companies was $27.9 million and $36.7 million asof December 31, 2004 and 2003, respectively, and is included in otherassets in the accompanying consolidated balance sheets. The fair value of theseinvestments is not readily determinable, and the cost basis was not adjustedbecause there were no identified events or changes in circumstances that wouldhave a significant adverse effect on the fair value of the investments.

During 2004, 2003 and2002, the Company recorded impairment losses of $13.7 million, $1.7 million and$14.0 million, respectively, based on the duration and magnitude of thedeclines in fair value, as well as the financial condition and near-termprospects of the investee companies.

***6.   INVENTORY***

Inventory,net of valuation reserves, at December 31, is comprised of the following(in millions):
| ** **      | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------|------------|----------|------------|----------|------------|
| Raw materials   |       | $        | 16.5       |     | $          | 11.6 |   |
| Work in process |       | 38.3     |       | 39.3     |       |
| Finished goods  |       | 9.3      |       | 40.8     |       |
|            |       | $        | 64.1       |     | $          | 91.7 |   |

 

The Company recorded permanent inventory write downstotaling $57.9 million and $37.5 million in cost of goods sold to reflect totalFluMist inventories at net realizable value during 2004 and 2003, respectively.The Company recorded permanent inventory write downs totaling $19.6 million and$47.5 million in other operating expenses to reflect Flumist inventories at netrealizable value during 2003 and 2002, respectively.

The Company plans to replace the current lyophilizedformulation of Synagis with the liquid formulation during the 2005/2006 RSVseason pending final regulatory authority approval of the manufacturingfacilities and processes. As of December 31, 2004, the Company recorded apermanent inventory write-down for excess inventories of $5.5 million in costof goods sold based on an analysis of inventory quantities, including pendingfuture commitments, and projected sales levels of the current formulation ofSynagis in connection with this conversion plan.

The Company recorded other permanent inventory writedowns totaling $7.5 million, $1.9 million and $1.1 million in cost of goodssold during 2004, 2003, and 2002, respectively.

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***7.   PROPERTY AND EQUIPMENT***

Propertyand equipment, stated at cost at December 31, is comprised of thefollowing (in millions):
| ** **                                          | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|
| Land and land  improvements                         |       | $        | 30.2       |     | $          | 27.9 |   |
| Buildings and  building improvements                |       | 123.1    |       | 55.2     |       |
| Leasehold  improvements                             |       | 55.5     |       | 36.2     |       |
| Laboratory,  manufacturing and facilities equipment |       | 70.7     |       | 57.0     |       |
| Office furniture,  computers and equipment          |       | 52.4     |       | 40.4     |       |
| Construction in  progress                           |       | 83.7     |       | 135.6    |       |
|                                                |       | 415.6    |       | 352.3    |       |
| Less accumulated  depreciation and amortization     |       | (104.7   | )          | (78.7    | )          |
|                                                |       | $        | 310.9      |     | $          | 273.6 |   |

 

As of December 31, 2004, construction in progressincludes $15.9 million of engineering and construction costs and otherprofessional fees related to the pilot plant facility located in Gaithersburg,Maryland, and $62.0 million of engineering, construction and equipment costsrelated to the Company’s manufacturing facilities in Pennsylvania and Speke,the United Kingdom. As of December 31, 2003, construction in progressprimarily included costs related to the first phase of the headquarters andresearch and development facility, which was completed in March 2004, andcosts associated with the projects in Pennsylvania and the United Kingdom.

Effective November 2002, the Company outsourcedthe process of converting human plasma to the critical intermediate used inCytoGam production to a third party manufacturer. Prior to that date, theprocess was performed at the Company’s Frederick, Maryland manufacturingfacility (FMC). Accordingly, the Company recorded a $12.9 million impairmentcharge, recorded in other operating expenses, during the fourth quarter of 2002for the write-off of certain plasma manufacturing assets.

Interest costs capitalizedin connection with the Company’s construction activities totaled $1.6 million,$2.9 million and $0.9 million in 2004, 2003 and 2002, respectively.

***8.***   ACCRUEDEXPENSES

Accruedexpenses at December 31, are comprised of the following (in millions):
| ** **                                     | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|
| Co-promotion  expenses                         |       | $        | 85.6       |     | $          | 73.0 |   |
| Rebates due to  government purchasers          |       | 52.5     |       | 42.4     |       |
| Research and  development expenses             |       | 8.2      |       | 27.5     |       |
| Sales and  marketing costs                     |       | 25.1     |       | 19.2     |       |
| Property and  equipment                        |       | 4.0      |       | 18.3     |       |
| Bonuses                                        |       | 13.3     |       | 9.8      |       |
| Clinical trial  costs                          |       | 40.5     |       | 8.2      |       |
| Other (sum of all  items less than $5 million) |       | 22.2     |       | 19.6     |       |
|                                           |       | $        | 251.4      |     | $          | 218.0 |   |

 

***9.***   FACILITIESLEASES

The Company leases warehouse, laboratory andadministrative space under numerous operating leases. Under the leases, theCompany is obligated to pay a basic monthly rent as well as utilities and its 

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proportionate share oftaxes, assessments, insurance and maintenance costs. Rent expense for the yearsended December 31, 2004, 2003 and 2002 was $9.2 million, $9.3 million and$9.0 million, respectively.

TheCompany’s future minimum lease payments under operating leases are as follows(in millions):
| **Year Ending December 31,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------|------------|------------|------------|
| 2005                                        |       | 7.8        |       |
| 2006                                        |       | 6.4        |       |
| 2007                                        |       | 4.7        |       |
| 2008                                        |       | 3.0        |       |
| 2009                                        |       | 2.4        |       |
| Thereafter                                  |       | 27.5       |       |
|                                        |       | $          | 51.8       |       |
|                                             |            |            |            |            |            |  |

 

***10.***   LONG-TERMDEBT

Long-termdebt at December 31, is comprised of the following (in millions):
| ** **                                                                                                                                                     | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| 1% Convertible  Senior Notes, due 2023                                                                                                                         |       | $        | 500.0      |     | $          | 500.0 |   |
| 51⁄4% Convertible  Subordinated Notes, due 2008                                                                                                             |       | —   |       | 174.1    |       |
| 4% notes due to  Maryland Department of Business and Economic Development, due 2016                                                                            |       | 4.8      |       | 5.1      |       |
| 7.53% note due to  Maryland Industrial Development Finance Authority, due 2007 (collectively  with the 4% notes referred to as the “Maryland Notes”) |       | 2.1      |       | 2.6      |       |
| Note due to  Cooperative Rabobank, B.A., due 2009, variable interest rate                                                                                      |       | 0.2      |       | 0.3      |       |
|                                                                                                                                                           |       | $        | 507.1      |     | $          | 682.1 |   |
| Less current  portion included in other current liabilities                                                                                                    |       | (0.9     | )          | (0.9     | )          |
|                                                                                                                                                           |       | $        | 506.2      |     | $          | 681.2 |   |

 

Maturities of the Company’s long-term debt for thenext five years are as follows:  2005—$0.9million; 2006—$1.0million; 2007—$1.1million; 2008—$0.6million; 2009—$0.4million.

***1% ConvertibleSenior Notes******—***During July 2003, the Company issued$500 million aggregate principal amount of convertible senior notes due 2023 ina private placement. These notes bear interest at 1% per annum payablesemi-annually in arrears on January 15 and July 15 of each year. BeginningJuly 2006, the Company will pay contingent interest on these notes duringa six-month interest period if the average trading price of these notes equalsor exceeds 120% of the principal amount of the notes. Under certaincircumstances, these notes will be convertible into the Company’s common stockat an initial conversion price of approximately $68.18 per share. On or after July 15,2006, the Company may at its option redeem all or a portion of these notes forcash at a redemption price equal to 100% of the principal amount of the 1%Notes to be redeemed, plus any accrued and unpaid interest; contingentinterest, if any; and liquidated damages, if any. In addition, on each of July 15,2006, July 15, 2009, July 15, 2013 and July 15, 2019, holdersmay require the Company to purchase all or a portion of their 1% Notes for cashat 100% of the principal amount of the 1% Notes to be purchased, plus anyaccrued and unpaid interest; contingent interest, if any; and liquidateddamages, if any. The estimated fair value of the 1% Notes as of December 31,2004 and 2003 was $481.1 million and $475.0 million, respectively, based onquoted market prices.

***ConvertibleSubordinated Notes******—***Following the Acquisition, Avironremained obligated for its outstanding indebtedness, which included $200.0million aggregate principal amount of the 51⁄4% Notes. Approximately $211.4million of the acquisition cost was allocated to the 51⁄4% Notes, which represented

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the fair value as of theacquisition date, based on quoted market prices. During 2003, the Companyretired approximately $32.4 million principal amount of the 51⁄4% Notes forapproximately $33.1 million. The retirement resulted in a net ordinary gain of$0.5 million reflecting the accelerated amortization of premium. The estimatedfair value of the 51⁄4% Notes as of December 31, 2003 was $173.4 millionbased on quoted market prices. In March 2004, the Company redeemed theremaining outstanding $168.6 million principal amount for approximately $172.7million. The redemption resulted in a net ordinary gain of $1.0 million,reflecting the accelerated amortization of bond premium net of a 3% callpremium. Gains on retirements of debt are included in interest expense in the consolidatedstatements of operations.

***CollateralizedLoans******—***The Maryland Notes are collateralized by theland, buildings and building fixtures of the FMC. The agreements include aprovision for early retirement of the notes by the Company. Pursuant to theterms of the agreements, the Company is required to meet certain financial andnon-financial covenants including maintaining minimum cash balances and networth ratios. The Company maintains a $0.4 million compensating balance relatedto the Maryland Notes, which is included in other assets.

The mortgage loan withCooperative Rabobank B.A. is held by the Company’s subsidiary, MedImmune PharmaB.V.,  and is collateralized by the landand buildings of its manufacturing facility in Nijmegen, the Netherlands andguaranteed by the Company. Proceeds from the loan were used to partially fundthe purchase of additional equipment for the facility. The mortgage loan, forwhich principal payments began in March 1995, has a 15-year term and bearsinterest at a quarterly variable rate. The interest rate as of December 31,2004 and December 31, 2003 was 5.05% and 5.05%, respectively. Theestimated fair values of the Company’s collateralized loans at December 31,2004 and 2003 based on quoted market prices or discounted cash flows usingcurrently available borrowing rates, were $7.5 million and $8.4 million,respectively compared to the carrying values of $7.1 million and  $8.0 million, respectively.

***11.   SHAREHOLDERS’ EQUITY***

Pursuant to the terms of the Stockholder Rights Planadopted by the Company’s Board of Directors, common stock purchase rights (“Rights”)were distributed as a dividend at the rate of one Right for each share ofcommon stock of the Company held by stockholders of record as of the close ofbusiness on July 21, 1997. The Rights will be exercisable only if a personor group acquires beneficial ownership of 20% or more of the Company’s commonstock or commences a tender or exchange offer upon consummation of which such aperson or group would beneficially own 20% or more of the Company’s stock. TheRights will expire on July 9, 2007.

In May 2003, the Company’s shareholders approvedan amendment to the Company’s Restated Certificate of Incorporation to increasethe authorized number of shares of common stock from 320.0 million to 420.0million.

The Company’s Board ofDirectors has authorized the repurchase of up to $500 million of the Company’scommon stock during the period from July 2003 through June 2006 on theopen market or in privately negotiated transactions, pursuant to termsmanagement deems appropriate and at such times it may designate. During 2004,the Company repurchased approximately 1.2 million shares at a cost of $30.0million, or an average cost of $24.33 per share. In 2003, the Companyrepurchased 6.2 million shares at a cost of $229.8 million, or an average costof $36.83 per share. The Company will hold repurchased shares as treasuryshares and intends to use them for general corporate purposes, including butnot limited to acquisition-related transactions and for issuance upon exerciseof outstanding stock options. During 2004, the Company re-issued 0.5 millionshares from treasury upon the exercise of stock options by employees anddirectors. From January 1, 2005 through February 25, 2005, theCompany purchased an additional 0.6 million shares under the program at a totalcost of $15.0 million or an average price of $24.63 per share.

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***12.***   EARNINGSPER SHARE

Thefollowing is a reconciliation of the numerators and denominators of the dilutedEPS computation for the years ended December 31, 2004, 2003 and 2002.
| ** **                                                | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-----------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Numerator (in  millions):                                 |       |     |       |     |       |     |       |
| Net income (loss) for basic EPS                           |       | $        | (3.8       | )        | $          | 183.2    |       | $ | (1,098.0 | ) |
| Adjustments for interest expense on 1% Notes, net of  tax |       | —   |       | 2.1      |       | —   |       |
| (Loss) income for diluted EPS                             |       | $        | (3.8       | )        | $          | 185.3    |       | $ | (1,098.0 | ) |

 
| ** **                              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Denominator (in  millions):             |       |     |       |     |       |     |       |
| Weighted average shares for basic EPS   |       | 248.6    |       | 250.1    |       | 249.6    |       |
| Effect of dilutive securities:          |       |     |       |     |       |     |       |
| Stock options and warrants              |       | —   |       | 3.7      |       | —   |       |
| 1% Notes                                |       | —   |       | 3.4      |       | —   |       |
| Weighted average shares for diluted EPS |       | 248.6    |       | 257.2    |       | 249.6    |       |
| Basic (loss) earnings per share         |       | $        | (0.02      | )        | $          | 0.73     |       | $ | (4.40 | ) |
| Diluted (loss) earnings  per share      |       | $        | (0.02      | )        | $          | 0.72     |       | $ | (4.40 | ) |

 

The Company incurred a net loss for 2004 and 2002 andaccordingly, did not assume exercise or conversion of any of the Company’soutstanding stock options, warrants, or convertible notes during the periodsbecause to do so would be anti-dilutive. As a result, options and warrants topurchase 30.9 million and 29.0 million shares of common stock were outstandingat December 31, 2004 and 2002, respectively, but were excluded from the calculationof diluted earnings per share. The Company’s 1% Notes, which were issued during2003 and represent 7.3 million potential shares of common stock issuable uponconversion, were excluded from the diluted earnings per share calculation in2004 because they were anti-dilutive.

If option exercise pricesare greater than the average market price of the Company’s common stock for theperiod presented, the effect of including such options in the earnings pershare calculation is anti-dilutive. Options to purchase 14.8 millionshares of common stock at prices ranging from $32.38 to $83.25 per share wereoutstanding at December 31, 2003 but were not included in the computationof diluted earnings per share because the exercise price of the optionsexceeded the average market price.

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***13.***   COMMONSTOCK EQUIVALENTS

TheCompany grants stock incentive awards under certain of the following plans. Atthe Company’s annual meeting in May 2004, the Company’s shareholdersapproved the establishment of the 2004 Stock Incentive Plan, (the “2004 Plan”)to be used as the primary plan for employee awards. A total of 13,000,000shares of common stock have been reserved for issuance under the 2004 Plan. Ofthis amount, a total of 6,000,000 shares were previously approved by thestockholders for issuance under the 1999 Plan and were effectively transferredinto the 2004 Plan.
| **Plan**                    | ** ** | ** **                                                                                                                                                                              | ** ** | **Description**   | ** ** | **Shares  Authorized for  Option Grants** |
|----------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-------------------------------------------|
| ** **                       | ** ** | ** **                                                                                                                                                                              | ** ** | **(in millions)** |
| 1991 Plan                        |       | Provides option incentives to employees, consultants  and advisors of the Company                                                                                                       |       | 33.0              |       |
| 1999 Plan                        |       | Provides option incentives to employees, consultants  and advisors of the Company                                                                                                       |       | 25.3              |       |
| 2003 Non-Employee Directors Plan |       | Provides option incentives to non-employee directors                                                                                                                                    |       | 0.8               |       |
| 2004 Plan                        |       | Provides option, stock appreciation rights,  restricted stock, stock units and/or stock incentive awards to employees,  non-employee directors, consultants and advisors of the Company |       | 13.0              |       |

 

Thefollowing compensation plans, for which there are options outstanding but nofuture grants will be made, were acquired by the Company in connection with itsacquisitions of U.S. Bioscience, Inc. and Aviron (“Acquired Plans”):
| **Plan**                                     | ** ** | ** **                                                                                                                                                                                          | ** ** | **Description** |
|----------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
| Non-Executive  Plan                          |       | Provided  option incentives to employees who were not officers or directors of U.S.  Bioscience, Inc., consultants and advisors of the company                                                 |
| Non-Employee  Directors Plan                 |       | Provided  option incentives to elected non-employee directors of U.S.  Bioscience, Inc.                                                                                                        |
| 1996 Equity  Incentive Plan                  |       | Provided  incentive and nonstatutory stock options to employees and consultants of  Aviron                                                                                                          |
| 1999 Non-Officer Equity  Incentive Plan |       | Provided nonstatutory  stock options, stock bonuses, rights to purchase restricted stock, and stock  appreciation rights to consultants and employees who were not officers or  directors of Aviron |

 

Options under all plans normally vest over a three tofive year period and have a maximum term of 10 years. The Company has reserveda total of 14.7 million shares of common stock for issuance under these plansas of December 31, 2004.

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Relatedstock option activity is as follows (shares in millions):
| ** **                       | ** ** | **1991, 1999 and  2004 Plans** | ** ** | **Non-Employee  Directors Plans**   | ** ** | **Acquired Plans** | ** ** |
|----------------------------------|------------|-----------------------------------------------|------------|------------------------------------------|------------|-------------------------|------------|
| ** **                       | ** ** | **Shares**                                    | ** ** | ** Price per   share(1)** | ** ** | **Shares**              | ** ** | ** Price per   share(1)** | ** ** | **Shares** | ** ** | ** Price per   share(1)** | ** ** |
| Outstanding,  Dec. 31, 2001 |       |                                          | 20.2       |                                     |       |                    | $          | 32.17 |   |   |   | 0.7 |   |   |   | $ | 29.22 |   |   |   | — |   |   |   | $ | — |   |   |
| Acquisition                      |       |                                          | —     |                                     |       |                    | —     |   |   |   | — |   |   |   | — |   |   |   | 6.5 |   |   |   | 27.25 |   |   |
| Granted                          |       |                                          | 5.9        |                                     |       |                    | 36.74      |   |   |   | 0.2 |   |   |   | 28.90 |   |   |   | — |   |   |   | — |   |   |
| Exercised                        |       |                                          | (0.8       | )                                        |       |                    | 6.75       |   |   |   | — |   |   |   | — |   |   |   | (1.9 | ) |   |   | 21.07 |   |   |
| Canceled                         |       |                                          | (1.2       | )                                        |       |                    | 44.97      |   |   |   | — |   |   |   | — |   |   |   | (1.0 | ) |   |   | 37.19 |   |   |
| Outstanding, Dec. 31, 2002  |       |                                          | 24.1       |                                     |       |                    | 33.45      |   |   |   | 0.9 |   |   |   | 29.53 |   |   |   | 3.6 |   |   |   | 28.17 |   |   |
| Granted                          |       |                                          | 5.4        |                                     |       |                    | 30.18      |   |   |   | 0.2 |   |   |   | 35.87 |   |   |   | — |   |   |   | — |   |   |
| Exercised                        |       |                                          | (2.0       | )                                        |       |                    | 11.61      |   |   |   | (0.1 | ) |   |   | 2.02 |   |   |   | (0.7 | ) |   |   | 21.30 |   |   |
| Canceled                         |       |                                          | (1.4       | )                                        |       |                    | 41.33      |   |   |   | — |   |   |   | — |   |   |   | (0.3 | ) |   |   | 33.98 |   |   |
| Outstanding, Dec. 31, 2003  |       |                                          | 26.1       |                                     |       |                    | 34.00      |   |   |   | 1.0 |   |   |   | 30.52 |   |   |   | 2.6 |   |   |   | 29.82 |   |   |
| Granted                          |       |                                          | 4.9        |                                     |       |                    | 23.93      |   |   |   | 0.2 |   |   |   | 23.17 |   |   |   | — |   |   |   |   |   |   |
| Exercised                        |       |                                          | (1.0       | )                                        |       |                    | 9.21       |   |   |   | (0.2 | ) |   |   | 1.31 |   |   |   | (0.2 | ) |   |   | 20.86 |   |   |
| Canceled                         |       |                                          | (2.5       | )                                        |       |                    | 35.51      |   |   |   | — |   |   |   | — |   |   |   | (0.3 | ) |   |   | 32.63 |   |   |
| Outstanding,  Dec. 31, 2004 |       |                                          | 27.5       |                                     |       |                    | $          | 33.12 |   |   |   | 1.0 |   |   |   | $ | 33.12 |   |   |   | 2.1 |   |   |   | $ | 30.48 |   |   |

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(1)          Price per share is theweighted average exercise price.

Additionalinformation related to the plans as of December 31, 2004 is as follows(shares in millions):
| ** **                              | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|-----------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| **Range of  exercise prices** | ** ** | ** **                   | ** ** | **Options  outstanding**     | ** ** | **Wtd Avg  remaining  contractual  life (yrs)** | ** ** | **Wtd Avg   Ex. Price ** | ** ** | **Options  Exercisable** | ** ** | **Wtd Avg   Ex. Price ** | ** ** |
|   $0.01-$10.00                |       |                         | 2.3        |                         |       |   | 2.4 |   |   |   | $ | 5.44 |   |   |   | 2.3 |   |   |   | $ | 5.44 |   |   |
| $10.01-$20.00                           |       |                         | 2.5        |                         |       |   | 3.7 |   |   |   | $ | 18.07 |   |   |   | 2.4 |   |   |   | $ | 18.06 |   |   |
| $20.01-$30.00                           |       |                         | 11.9       |                         |       |   | 7.6 |   |   |   | $ | 26.01 |   |   |   | 5.0 |   |   |   | $ | 26.48 |   |   |
| $30.01-$40.00                           |       |                         | 5.5        |                         |       |   | 6.1 |   |   |   | $ | 36.46 |   |   |   | 4.4 |   |   |   | $ | 36.91 |   |   |
| $40.01-$50.00                           |       |                         | 4.0        |                         |       |   | 6.1 |   |   |   | $ | 42.44 |   |   |   | 3.1 |   |   |   | $ | 42.55 |   |   |
| $50.01-$60.00                           |       |                         | 0.6        |                         |       |   | 4.6 |   |   |   | $ | 56.58 |   |   |   | 0.5 |   |   |   | $ | 56.58 |   |   |
| $60.01-$70.00                           |       |                         | 3.4        |                         |       |   | 4.5 |   |   |   | $ | 60.96 |   |   |   | 3.3 |   |   |   | $ | 60.92 |   |   |
| $70.01-$80.00                           |       |                         | 0.4        |                         |       |   | 5.6 |   |   |   | $ | 72.26 |   |   |   | 0.3 |   |   |   | $ | 72.32 |   |   |
|                                    |       |                         | 30.6       |                         |       |   | 6.0 |   |   |   | $ | 32.94 |   |   |   | 21.3 |   |   |   | $ | 34.46 |   |   |
|                                         |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

In June 2001, the Company introduced an employeestock purchase plan (“ESPP”) under which 3.0 million shares of common stockwere reserved for issuance. Eligible employees may purchase a limited number ofshares of the Company’s common stock at 85% of the market value at plan-defineddates. Employees purchased 226,595 shares, 206,176 shares and 163,345 shares,for $4.6 million, $4.8 million and $4.0 million, during 2004, 2003 and 2002respectively, under the plan.

 

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In connection with the Acquisition, the Company assumedwarrants to purchase common stock, of which the following are outstanding as ofDecember 31, 2004:

| ** ** | **Shares (in 000’s)** | ** ** | **Exercise Price** | ** ** | **Expiration** | ** ** |
|------------|--------------------------------------|------------|-------------------------|------------|----------------|------------|
|       |                                 | 234.1      |                    |       |           | $          | 9.30 |   |   | February 2007 |   |
|       |                                 | 46.8       |                    |       |           | $          | 9.30 |   |   | March 2008 |   |
|       |                                 | 5.1        |                    |       |           | $          | 55.13 |   |   | June 2008 |   |
|       |                                 | 286.0      |                    |       |           |       |   |   |   |   |

 

***14.***   INCOME TAXES

Thecomponents of the provision for income taxes are as follows (in millions):
| ** **                      | ** ** | **Year ended December 31,** | ** ** |
|---------------------------------|------------|--------------------------------------------|------------|
| ** **                      | ** ** | **2004**                                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| Current:                        |       |                                       |       |   |   |   |   |
| Federal                         |       | $                                          | (10.9      | ) | $ | 33.0 |   | $ | (1.9 | ) |
| State                           |       | (4.3                                       | )          | 7.4 |   | — |   |
| Foreign                         |       | 0.2                                        |       | 0.2 |   | 0.1 |   |
| Total current (benefit) expense |       | (15.0                                      | )          | 40.6 |   | (1.8 | ) |
| Deferred:                       |       |                                       |       |   |   |   |   |
| Federal                         |       | 4.8                                        |       | 83.1 |   | 48.7 |   |
| State                           |       | 4.8                                        |       | (15.7 | ) | 1.3 |   |
| Foreign                         |       | —                                     |       | — |   | — |   |
| Total deferred expense          |       | 9.6                                        |       | 67.4 |   | 50.0 |   |
| Total tax (benefit)  expense    |       | $                                          | (5.4       | ) | $ | 108.0 |   | $ | 48.2 |   |

 

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Deferredincome taxes reflect the net tax effects of the temporary differences betweenthe carrying amounts of assets and liabilities for financial reporting purposesand the amounts used for income tax purposes. Significant components of theCompany’s deferred tax assets and liabilities at December 31, are asfollows (in millions):
| ** **                                                | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax assets:                                      |       |     |       |     |       |
| U.S. net operating loss carryforwards                     |       | $        | 77.4       |     | $          | 126.4 |   |
| U.K. net operating loss carryforwards                     |       | 6.8      |       | 9.3      |       |
| U.S. general business credit carryforwards                |       | 56.2     |       | 32.4     |       |
| Accrued co-promotional expenses not currently  deductible |       | 23.1     |       | 24.9     |       |
| Difference in book and tax basis of fixed assets          |       | 19.3     |       | 13.2     |       |
| Accounts receivable allowances and reserves               |       | 14.7     |       | 16.8     |       |
| Allowance for government rebates                          |       | 14.1     |       | 9.9      |       |
| Deferred compensation                                     |       | 6.3      |       | 6.8      |       |
| Other accrued expenses not currently deductible           |       | 6.6      |       | 4.2      |       |
| State research and development credits                    |       | 13.1     |       | 2.3      |       |
| Deferred revenue                                          |       | 0.1      |       | 8.4      |       |
| Prepaid and long term debt                                |       | —   |       | 4.3      |       |
| California capitalized research expenses                  |       | 1.3      |       | 2.4      |       |
| Other                                                     |       | 8.0      |       | 7.8      |       |
| Total deferred tax assets                                 |       | $        | 247.0      |     | $          | 269.1 |   |
| Deferred tax  liabilities:                                |       |     |       |     |       |
| Unrealized gains on investments                           |       | $        | (6.0       | )        | $          | (15.0 | ) |
| Acquired intangibles                                      |       | —   |       | (27.8    | )          |
| Contingent interest                                       |       | (8.3     | )          | (2.8     | )          |
| Total deferred tax liabilities                            |       | $        | (14.3      | )        | $          | (45.6 | ) |
| U.S. valuation allowance                                  |       | $        | (48.0      | )        | $          | (33.6 | ) |
| U.K. valuation  allowance                                 |       | (6.8     | )          | (9.3     | )          |
| Total valuation allowance                                 |       | $        | (54.8      | )        | $          | (42.9 | ) |
| Net deferred tax  assets                                  |       | $        | 177.9      |     | $          | 180.6 |   |

 

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Theprovision (benefit) for income taxes varies from the income taxes providedbased on the federal statutory rate (35%) as follows:
| ** **                                                                       | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                       | ** ** | **2004**                                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                       | ** ** | **Amount**                                 | ** ** | **Tax Rate** | ** ** | **Amount** | ** ** | **Tax Rate** | ** ** | **Amount** | ** ** | **Tax Rate** | ** ** |
| ** **                                                                       | ** ** | **(In Millions)**                     | ** ** |
| U.S.                                                                             |       | $                                          | (17.7      | ) |   |   |   |   | $ | 292.4 |   |   |   |   |   | $ | (1,035.7 | ) |   |   |   |   |
| International                                                                    |       | 8.5                                        |       |   |   |   |   | (1.2 | ) |   |   |   |   | (14.1 | ) |   |   |   |   |
| (Loss) earnings  before taxes on income:                                         |       | $                                          | (9.2       | ) |   |   |   |   | $ | 291.2 |   |   |   |   |   | $ | (1,049.8 | ) |   |   |   |   |
| Tax at U.S. federal statutory income tax rate                                    |       | $                                          | (3.2       | ) |   | (35.0 | )% |   | $ | 101.9 |   |   | 35.0 | % |   | $ | (367.4 | ) |   | (35.0 | )% |   |
| State taxes, net  of federal tax  benefit                                        |       | (2.3                                       | )          |   | (25.5 | )% |   | (0.6 | ) |   | (0.2 | )% |   | 2.6 |   |   | 0.3 | % |   |
| State research  and development credits                                          |       | (10.8                                      | )          |   | (117.5 | )% |   | — |   |   | 0.0 | % |   | — |   |   | 0.0 | % |   |
| Change in  valuation allowance related to state research and development credits |       | 9.5                                        |       |   | 103.1 | % |   | — |   |   | 0.0 | % |   | — |   |   | 0.0 | % |   |
| Other changes in  valuation allowance                                       |       | 2.4                                        |       |   | 26.4 | % |   | 10.8 |   |   | 3.7 | % |   | 2.1 |   |   | 0.2 | % |   |
| Release of tax  reserve related to state tax settlement                          |       | (1.5                                       | )          |   | (15.8 | )% |   | — |   |   | 0.0 | % |   | — |   |   | 0.0 | % |   |
| Nondeductible  IPR&D                                                         |       | 2.4                                        |       |   | 26.4 | % |   | — |   |   | 0.0 | % |   | 412.8 |   |   | 39.3 | % |   |
| U.S. general  business credits                                                   |       | (3.6                                       | )          |   | (38.7 | )% |   | (2.4 | ) |   | (0.8 | )% |   | (4.0 | ) |   | (0.4 | )% |   |
| Foreign rates  other than 35%                                                    |       | (0.4                                       | )          |   | (4.3 | )% |   | — |   |   | 0.0 | % |   | 0.7 |   |   | 0.1 | % |   |
| Meals and  entertainment                                                         |       | 0.8                                        |       |   | 8.7 | % |   | 0.6 |   |   | 0.2 | % |   | 0.6 |   |   | 0.0 | % |   |
| Unearned  compensation                                                           |       | 0.5                                        |       |   | 5.1 | % |   | — |   |   | 0.0 | % |   | — |   |   | 0.0 | % |   |
| Nondeductible  costs associated with orphan drug credit                          |       | 0.4                                        |       |   | 4.7 | % |   | — |   |   | 0.0 | % |   | — |   |   | 0.0 | % |   |
| Other                                                                            |       | 0.4                                        |       |   | 3.8 | % |   | (2.3 | ) |   | (0.8 | )% |   | 0.8 |   |   | 0.1 | % |   |
| Total                                                                            |       | $                                          | (5.4       | ) |   | (58.6 | )% |   | $ | 108.0 |   |   | 37.1 | % |   | $ | 48.2 |   |   | 4.6 | % |   |

 

At December 31, 2004the Company had consolidated net operating loss carryforwards for U.S. incometax purposes of approximately $173.5 million expiring between 2020 and 2022. Asof December 31, 2004, the Company had foreign net operating losscarryforwards of $22.8 million for U.K. income tax purposes that can be carriedforward indefinitely. The Company also has U.S. general business creditcarryforwards comprised of federal research and experimentation and orphan drugcredit carryforwards of approximately $65.9 million at December 31, 2004expiring through 2024. The timing and manner in which the Company will utilizeU.S. net operating loss and general business credit carryforwards in any year,or in total, will be limited by provisions of the Internal Revenue CodeSections 382 and 383, regarding changes in ownership of the Company.

During 2004 and 2003, theCompany recognized certain tax benefits related to stock option plans in theamount of $5.2 million and $16.1, respectively. Such benefits were recorded asa reduction of income taxes payable and an increase in additionalpaid-in-capital. During 2004 and 2003, certain adjustments were made to thedeferred tax asset that arose upon the Acquisition, resulting in correspondingadjustments to goodwill. During 2004, uncertainties related to the book and taxbasis differences in acquired fixed assets were resolved, resulting in an $11.2million reduction in the deferred tax asset related to the Acquisition and acorresponding increase in goodwill.

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The change in the valuation allowance was a netincrease of $11.9 million and $10.6 million in 2004 and 2003, respectively. Thevaluation allowance changes in 2004 and 2003 are primarily comprised of adjustmentsfor the Company’s state net operating losses and state tax credits. Inaddition, $2.4 million of valuation allowance was released in 2004 to reflectthe partial utilization of net operating losses by the Company’s U.K.subsidiary. Since there can be no assurance that the Company will generate U.K.taxable income in the future, the Company has provided a full valuationallowance against remaining U.K. net operating losses. Management is uncertainof the realization of the tax benefit associated with a portion of the deferredtax assets attributable to the state net operating losses, and the generalbusiness credits which were generated by U.S. Bioscience, Inc. and Aviron priorto their acquisition by the Company. Accordingly, a full valuation allowanceremains for some of these deferred tax assets at December 31, 2004 and2003.

The Company is currently evaluating the impact of theAmerican Jobs Creation Act of 2004 on its operations and effective tax rate. Inparticular, the Company is evaluating the law’s provisions relating to aphased-in special deduction associated with pre-tax income from domesticproduction activities. This special deduction is 3% of qualifying income foryears 2004 and 2005, 6% in years 2006 through 2009 and 9% thereafter. It isunclear as to whether the Company will be eligible for the special deduction in2005 because the Company has net operating loss carryforwards that will likelyoffset any taxable income.

The Company has studied the impact of the one-timefavorable foreign dividend provisions recently enacted as part of the AmericanJobs Creation Act of 2004. After considering the impact of this legislation onthe Company’s position, the Company has determined that it continues to be theCompany’s intention to indefinitely reinvest undistributed foreign earnings. Accordingly,no deferred tax liability has been recorded in connection therewith. It is notpracticable for the Company to determine the amount of the unrecognizeddeferred tax liability for temporary differences related to investments inforeign subsidiaries that are essentially permanent in duration.

The state of Maryland passed legislation during 2004disallowing intercompany royalties and interest deductions. The Company reacheda settlement with the state of Maryland on these transactions which resulted inthe Company releasing a reserve of $1.5 million previously recorded in incometaxes payable.

The Company is currently under audit by the CaliforniaFranchise Tax Board. The Company has established appropriate reserves for itemsthat could potentially be challenged by the California Franchise Tax Board uponaudit. Therefore, management believes the ultimate resolution of thisexamination will not result in a material adverse effect to the Company’sfinancial position or results of operations.

The Company hasestablished adequate contingency reserves related to income taxes in accordancewith SFAS 5. These reserves predominantly relate to research andexperimentation credits and transaction costs. These reserves were recordedagainst correlating deferred tax assets. The Company follows Internal RevenueService guidelines in calculating research and experimentation credits anddeductibility of transaction costs; however, the guidelines for both aresubject to interpretation. These reserves will be released when the statute oflimitations expire or upon audit by the Internal Revenue Service.

***15.***   COLLABORATIVEARRANGEMENTS

The Company has enteredinto research, development and license agreements with various federal andacademic laboratories and other institutions to further develop its productsand technology and to perform clinical trials. Under these agreements, theCompany is obligated to provide funding and milestone payments of approximately$12 million in 2005, and $23 million in the aggregate. In addition, the Companyis also contingently committed for development and sales-related milestonepayments totaling $600 million as well as royalties on potential future productsales under these agreements. The amount, timing and likelihood of thesepayments is unknown as they are dependent on the occurrence of future 

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events that may ormay not occur, such as the granting by the FDA of a license for productmarketing in the U.S.

**AbbottLaboratories****—**TheCompany has entered into a co-promotion agreement with Abbott for promotion ofSynagis in the U.S. and a distribution agreement with Abbott International (“AI”),an affiliate of Abbott, to distribute Synagis outside of the United States. Underthe terms of the co-promotion agreement, the Company is required to pay Abbottan increasing percentage of net domestic sales based on achieving certain salesthresholds over the annual contract year. Under the terms of the distributionagreement, the Company manufactures and sells Synagis to AI at a price based onend-user sales. The Company recognized $7.5 million in other revenues in eachof 2004 and 2003 upon the achievement of certain sales goals under thedistribution agreement. In February 2005, the Company and AI amended theinternational distribution agreement to include the exclusive distribution ofNumax, if and to the extent approved for marketing by regulatory authoritiesoutside of the United States. Under the terms of the amended agreement, AI willbe working to secure regulatory approval of Numax outside of the United Statesand, upon receipt of such approval, will distribute and market Numax outside ofthe United States.

**ALZACorporation****—**InOctober 2001, the Company reacquired the domestic marketing rights toEthyol from ALZA Corporation. Beginning April 1, 2002, the Company paysALZA a declining royalty for nine years, based on sales of Ethyol in the UnitedStates.

**EvansVaccines Limited****—**The Company manufactures key components ofFluMist, specifically the bulk monovalents and diluents, at a facility inSpeke, the United Kingdom, pursuant to a sublease arrangement with EvansVaccines Limited, a division of Chiron. The manufacturing areas on the existingsite are subleased through June 2006. In connection with the agreements,the Company made an initial payment of $15.0 million and additional payments of$3.9 million each in September 2001, 2002, 2003, and 2004. The Company isobligated to make one additional annual payment of $3.9 million in September 2005,which is included in other current liabilities in the accompanying consolidatedbalance sheet as of December 31, 2004. The Company is also obligated tomake additional payments of $19 million, less accrued interest, which will bepaid over the term of the agreement based on net sales of FluMist, with theunpaid balance, if any, due January 2006, and are included in otherliabilities in the accompanying consolidated balance sheets.

**GlaxoSmithKline(GSK)****—**TheCompany and GSK are developing a vaccine against human papillomavirus (“HPV”)to prevent cervical cancer under a strategic alliance. Under the terms of the1997 agreement, the companies will collaborate on research and developmentactivities. The Company conducted Phase 1 and Phase 2 clinical trials andmanufactures clinical material for the studies. GSK is responsible for thefinal development of the product, as well as regulatory, manufacturing, and marketingactivities. In exchange for exclusive worldwide rights to the Company’s HPVtechnology, GSK agreed to provide the Company with an up front payment, equityinvestment and research funding (substantially all received and recognizedprior to 2002), as well as potential developmental and sales milestones androyalties on any product sales.

In February 2005, the Company amended itsagreement with GSK for the development of the HPV vaccine. Under the amendedagreement, the Company mayalso receive certain milestone payments and royalties on future development andsales of an investigational HPV vaccine now in Phase 3 development by Merck &Co., Inc (Merck).

In 2000, the Company granted a worldwide, exclusivelicense to its *Streptococcus pneumoniae*vaccine technology to GSK in exchange for an up front payment of $10 millionand future milestones totaling more than $20 million, plus royalties on anyproduct sales. Under the terms of the agreement, GSK is responsible for allclinical development, manufacturing and sales and marketing activities for the *S. pneumoniae* vaccine.

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The Company has rights to a vaccine against certainsubunits of Epstein-Barr virus (“EBV”), a herpes virus that is the leadingcause of infectious mononucleosis. The vaccine is being developed by GSK undera worldwide collaborative agreement, excluding North Korea and South Korea.Under the agreement, the Company could receive future milestone payments, androyalties from GSK based on any net product sales.

**Schering-PloughCorporation****—**The****Company has entered into a collaborationarrangement with affiliates of Schering-Plough Corporation (“Schering”), fordistribution of Ethyol in countries comprising the European Union, the EuropeanFree Trade Association and other countries outside of the U.S.

The Company also entered into licensing agreements forEthyol and NeuTrexin with affiliates of Schering for several territoriesoutside the United States. The licensees are required to pay the Companycompensation based on their net sales of the products, and the Company sellsthe products to the licensees at an agreed upon price.

**Wyeth—**In April 2004, theCompany entered into agreements to dissolve the collaboration with Wyeth forFluMist and to reacquire rights to an investigational second-generation liquidformulation, CAIV-T (Cold Adapted Influenza Vaccine—Trivalent), and all relatedtechnology. As a result of the dissolution and in exchange for an upfront feeand future milestones and sales-related royalties, MedImmune reacquired theinfluenza vaccines franchise, and has assumed full responsibility for themanufacturing, marketing, and sale of FluMist and any subsequent relatedproducts. During a transition period that was substantially completed as of December 31,2004, Wyeth provided bulk manufacturing materials and transferred clinicaltrial data, as well as provided manufacturing support services.

During 2004, the Company made cash payments totaling$79.9 million under the terms of the agreement, representing (1) the finalreconciliation of the amounts owed between parties related to the 2003/2004influenza season, (2) the settlement of commercialization and developmentexpenses owed between parties through the date of the agreement, (3) thepurchase of Wyeth’s distribution facility in Louisville, Kentucky, (4) thetransfer of other assets from Wyeth and (5) the payment of certainmilestones for achieving certain goals for transition activities. Additionalamounts of $4.1 million due to Wyeth as of December 31, 2004 for technologytransfer and transition activities, but not yet paid, are included in accruedexpenses on the Company’s consolidated balance sheet. The transaction wasaccounted for as a purchase of assets, and the purchase price was allocated toeach of the components based on their relative fair values as determined by anindependent valuation.

In connection with the transaction, the Companyrecorded charges for in-process research and development of $29.2 millionduring 2004, as well as a permanent impairment charge of $73.0 million to writeoff the remaining unamortized cost of the Wyeth intangible asset originallyrecorded for the collaboration (see Note 2).

Under the terms of the former collaboration, duringthe 2003/2004 influenza season, Wyeth distributed FluMist and recorded allproduct sales, and the Company received payments from Wyeth in the form ofproduct transfer payments, supply goal payments and royalties. The Companyshipped approximately 4.1 million doses of FluMist to Wyeth during 2003, butdid not recognize any sales-related revenue in 2003 due to the lack ofcertainty associated with returns and discounts in the vaccine’s launch season.During 2003, the Company received $8.4 million in reimbursements from Wyeth formarketing expenses and $37.5 million in milestone revenues upon FDA approval ofFluMist and the achievement of certain other goals, which are included in otherrevenues. During 2003, the Company agreed to pay $10 million to Wyeth for thepurchase and use of clinical trial data from Wyeth’s international CAIV-Ttrials, which is included in research and development expense.

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***16.***   COMMITMENTSAND CONTINGENCIES

**Manufacturing, Supply andPurchase Agreements****—**TheCompany has entered into manufacturing, supply and purchase agreements toprovide production capability for CytoGam, and to provide a supply of humanplasma for production of the product. The Company has an agreement with BioLifePlasma Services and is committed to purchase $5.3 million of source plasma in2005. The Company paid BioLife $4.1 million, $4.1 million and $0.9 million in2004, 2003, and 2002, respectively. No assurance can be given that an adequatesupply of plasma will be available from the Company’s suppliers. Prior to November 2002,human plasma for CytoGam was converted to an intermediate (Fraction II+IIIpaste) at the FMC facility. Effective November 2002, the Companycontracted Precision Pharma Services to manufacture all of the Company’sFraction II+III paste. The Company has a commercial agreement with PrecisionPharma Services through June 2006 and is committed for $1.2 million offractionation services pursuant to the production of II + III, subject toproduction yield adjustments. The Company paid Precision Pharma Services $0.7million, $2.4 million and $0.1 million in 2004, 2003 and 2002, respectively. Theintermediate material is then supplied to the manufacturer of the bulk product,Massachusetts Biologic Laboratories (“MBL”). Pursuant to the agreements withMBL, the Company paid $5.9 million, $8.1 million and $3.2 million in 2004, 2003and 2002 for production and process development. The Company has a commercialagreement with MBL for planned production of CytoGam through June 2006 for$9.3 million, subject to production level adjustments. If MBL, which holds thesole product and establishment licenses from the FDA for the manufacture ofCytoGam, is unable to satisfy the Company’s requirements for CytoGam on atimely basis or is prevented for any reason from manufacturing CytoGam, theCompany may be unable to secure an alternative manufacturer without undue andmaterially adverse operational disruption and increased cost.

In December 1997, the Company entered into anagreement with Boehringer Ingelheim Pharma GmbH & Co. KG (“BI”) toprovide supplemental manufacturing of Synagis, which is denominated in Euros. TheCompany paid $30.3 million in 2004, $18.1 million in 2003 and $6.7 million in2002 related to production and scale-up of production as part of an additionalagreement. The Company has firm commitments with BI for planned production andfill/finish through 2012 for approximately 108 million Euros($147.5 million using the exchange rate as of December 31, 2004). Shouldthe manufacturer be unable to supply Synagis to the Company for any reason,there can be no assurance that the Company will be able to secure an alternatemanufacturer in a timely basis or without increased cost.

In December 2002, the Company entered into anagreement with Sicor Pharmaceuticals, Inc. to provide for the filling ofSynagis product manufactured at the FMC facility. The Company has a firmcommitment with Sicor for approximately $3.3 million in 2005. During 2005, theCompany entered into an agreement with Cardinal Health PTS, LLC to label andpackage Synagis filled by Sicor. The Company has a firm commitment withCardinal for approximately $0.2 million in 2005. The Company has a production agreement with Cardinal Health 406, Inc.to perform secondary production (i.e., assembly, labeling and packaging) ofFluMist. As part of this agreement, the Company is obligated to pay annualnon-refundable minimum payments for each contract year, if the price for unitsinvoiced to the Company during a production year totals less than the minimumpayment. Payments of $1.1 million were made for each of 2004, 2003 and 2002. Futureminimum payments totaling $4.7 million are committed through December 31,2007. Should the actual level of future production exceed the contract minimum,then actual payments will be correspondingly higher.

In August 1998, the Company signed a worldwide multi-year supply agreement withBecton Dickinson for the supply of its AccuSpray non-invasive nasal spraydelivery system for administration of FluMist. The Company has the right toterminate the agreement effective July 1, 2005 with no financial penalties.The Company paid Becton Dickinson $6.0 million, $2.4 million and $5.2 millionin 2004, 2003 and 2002, respectively.

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The Company has guaranteedperformance under certain agreements related to its construction projects. Theundiscounted maximum potential amount of future payments that the Company couldbe required to make under such guarantees, in the aggregate, is approximately$2.6 million.

***17.   LEGAL PROCEEDINGS***

On September 16, 2002, Celltech R&D Limited (“Celltech”)commenced a legal proceeding against the Company in the U.K. High Court ofJustice, Chancery Division, Patents Court, based on a license agreement dated January 19,1998. Celltech sought payment of a 2% royalty based on net sales of Synagissold or manufactured in Germany, with interest and certain costs, includingattorney fees. This matter was tried before the High Court of Justice from March 31to April 7, 2004. The Company received a ruling from the U.K. High Courtof Justice on May 19, 2004, in which the Court found in the Company’sfavor and dismissed Celltech’s lawsuit against the Company. Celltech has filedan appeal with the U.K. Court of Appeal. The Company expects the appeal to beheard in April 2005.

In January 2004, the Company filed a declaratoryjudgment action in the United States District Court for the District ofColumbia against Celltech R&D Ltd. concerning U.S. Patent No. 6,632,927B2 (the “Adair 927 Patent”) alleging patent invalidity and non-infringementwith regard to Synagis. The Adair 927 Patent was issued on October 14,2003. On March 12, 2004 Celltech moved to dismiss the non-infringementportion of the Company’s complaint, asserting that the courts of England hadexclusive jurisdiction over the non-infringement claim pursuant to a January 19,1998 license agreement. That motion was granted in November, 2004. On March 22,2004 Celltech filed an action in the U.K. High Court of Justice, ChanceryDivision, Patents Court against the Company based on the Adair 927 Patentseeking payment of a 2% royalty based on net sales of Synagis made or sold inthe U.S. pursuant to the 1998 license agreement. The trial of Celltech’s actionin the U.K. High Court of Justice will begin in March 2005. If themanufacture or sale of Synagis or any of the Company’s other products isultimately found to be covered by any valid claim of the Adair 927 Patentand/or any other Celltech patent that is the subject of the January 19,1998 license agreement, the Company’s total royalty obligation would equal 2%of the net sales of the products that are so covered. As of December 31,2004, the Company estimates the range of possible loss from $0 to $25 million,exclusive of any potential offsets and royalty obligations going forward. Todate, the Company has not made any royalty payments to Celltech under the January 19,1998 license agreement.

In April 2002, the Company filed a suit againstCentocor, Inc. (“Centocor”) in the United States District Court for theDistrict of Maryland. That action was amended in January 2003 to add theTrustees of Columbia University in the City of New York (“Columbia”) and theBoard of Trustees of the Leland Stanford Junior University (“Stanford” andtogether with Columbia, the “Universities”) as the owners of the patent. TheCompany currently pays Centocor a royalty for sales of Synagis made or sold inthe United States pursuant to a patent Sublicense Agreement between the parties(the “Sublicense Agreement”). In the litigation, the Company has been seeking adeclaratory judgment that it has no obligation to continue paying royalties toCentocor on the basis that the patent is invalid, unenforceable and does notcover Synagis. Centocor and the Universities moved on March 22, 2004 todismiss this suit for lack of subject matter jurisdiction. The Court grantedCentocor and the Universities’ motion on June 17, 2004. The Company hasfiled an appeal with the United States Court of Appeals for the FederalCircuit, and briefing has been completed before that court. Oral argument isscheduled in April 2005.

In April 2003, the Company filed a suit againstGenentech, Inc. (“Genentech”), Celltech R&D Ltd. and City of HopeNational Medical Center (“City of Hope”) in the United States District Courtfor the Central District of California. The Company currently pays Genentech aroyalty for sales of Synagis made or sold in the United States pursuant to apatent license agreement between the parties covering United States Patent No. 6,331,415B1(the “Cabilly Patent”). In the complaint, the Company has alleged that theCabilly Patent was obtained as a result of a collusive agreement betweenGenentech and Celltech that 

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violates federal andCalifornia antitrust laws as well as California’s unfair business practices act.Additionally, the Company has alleged that the Cabilly Patent is invalid andunenforceable under federal patent law and is not infringed by Synagis. In December 2003,the Court granted Celltech and Genentech’s motion to dismiss the antitrustclaims, and denied MedImmune’s motion to amend its complaint in January 2004.In March 2004, the Company appealed from the dismissal of the antitrustclaims to the United States Court of Appeals for the Federal Circuit. On April 23,2004 the Court dismissed the remaining claims in the case for lack of subjectmatter jurisdiction. The Company has filed a second appeal of that dismissal tothe United States Court of Appeals for the Federal Circuit, which hasconsolidated it with the first appeal. Briefing in both appeals has beencompleted and oral argument was held in February, 2005 and the Company isawaiting a decision.

In January 2003, a lawsuit was filed by theCounty of Suffolk, New York (“Suffolk”) in the United States District Court, EasternDistrict of New York, naming the Company along with approximately 25 otherpharmaceutical and biotechnology companies as defendants. In August 2003,the County of Westchester, New York (“Westchester”) filed and served a similarsuit against the Company and approximately 25 other pharmaceutical andbiotechnology companies. Likewise, in September 2003, the County ofRockland, New  York (“Rockland”) alsofiled and served a similar suit against the Company and approximately 25 otherpharmaceutical and biotechnology companies. On August 4, 2004, the City ofNew York (“New York”) also filed and served a similar suit against the Companyand approximately 60 other pharmaceutical and biotechnology companies. Suffolk,Westchester and Rockland (collectively, the “Counties”) and New York allegethat the defendants manipulated the “average wholesale price” (“AWP”) causingthe Counties and New York to pay artificially inflated prices for covered drugs.In addition, the Counties and New York argue that the defendants (including theCompany) did not accurately report the “best price” under the Medicaid program.The plaintiffs seek declaratory and injunctive relief, disgorgement of profits,treble and punitive damages suffered as a result of defendants’ alleged unlawfulpractices related prescription medication paid for by Medicaid. All four ofthese cases have been consolidated (for pre-trial purposes) and transferred tothe United States Court for the District of Massachusetts as *In re* Pharmaceutical Industry Average WholesalePrice Litigation (AWP Multidistrict Litigation). A motion to dismiss thecomplaint against the Company relative to Suffolk has been argued before theCourt and a decision is pending. On September 30, 2004 the Court issued aruling on a consolidated Motion to Dismiss filed by the Defendants in theSuffolk Action, and dismissed certain claims of the Suffolk Complaint. TheCompany is still awaiting a ruling from the Court on its individual motion todismiss. In addition, amended complaints have been filed in January 2005by New York City, Rockland and Westchester. The Company is also aware thatComplaints have been filed by the New York Counties of Onandaga and Nassauagainst numerous U.S. companies including the Company, although thosecomplaints have not been served on the Company. Likewise, in January 2005a complaint was filed by the State of Alabama against more than 70 companiesincluding the Company, accusing all defendants of improper AWP and AMPsubmissions and further alleging fraudulent misrepresentation, unjustenrichment, and wantonness.

On April 16, 2004, an abbreviated new drugapplication (“ANDA”) was submitted to the United States Food and DrugAdministration for a generic version of Ethyol (amifostine). The applicationwas submitted by Sun Pharmaceutical Industries Limited (“Sun”). By letter datedJune 29, 2004, Sun notified the Company that Sun had submitted its ANDA tothe FDA. In the notice, Sun notified the Company that as part of its ANDA Sunhad filed certification on the type described in Section 505(j)(2)(A)(vii)(IV) ofthe Federal Food, Drug and Cosmetic Act, 21 U.S.C. § 335(j)(2)(A)(vii)(IV) withrespect to certain patents owned by the Company.   On  August 10,2004, the Company filed an action in the United States District Court for theDistrict of Maryland for patent infringement against Sun, arising out of thefiling by Sun of the ANDA with the FDA seeking approval to manufacture and sellthe generic version of Ethyol prior to the expiration of various US patents. TheCompany intends to vigorously enforce its patents.

83

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The Company is alsoinvolved in other legal proceedings arising in the ordinary course of itsbusiness. After consultation with its legal counsel, the Company believes thatit has meritorious defenses to the claims against the Company referred to aboveand is determined to defend its position vigorously. While it is impossible topredict with certainty the eventual outcome of these proceedings, the Companybelieves they are unlikely to have a material adverse effect on its financialposition, but could possibly have a material adverse effect on its results ofoperations for a particular period. There can be no assurance that the Companywill be successful in any of the litigations to which it is a party. In its ordinarycourse of business, the Company has provided indemnification to various partiesfor certain product liability claims and claims that the Company’s productswere not manufactured in accordance with applicable federal standards. Whilethe Company is not aware of any current claims under these provisions, therecan be no assurance that such claims will not arise in the future or that theeffect of such claims will not be material to the Company.

**ITEM9.**                        CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

**ITEM 9A.   CONTROLS AND PROCEDURES**

**ConclusionRegarding the Effectiveness of Disclosure Controls and Procedures**

Under the supervision andwith the participation of our management, including our principal executiveofficer and principal financial officer, we conducted an evaluation of ourdisclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgatedunder the Securities Exchange Act of 1934, as amended (the Exchange Act). Basedon this evaluation, our principal executive officer and our principal financialofficer concluded that our disclosure controls and procedures were effective asof the end of the period covered by this annual report.

**Management’sReport on Internal Control over Financial Reporting**

Our management is responsible for establishing andmaintaining adequate internal control over financial reporting, as such term isdefined in Exchange Act Rule 13a-15(f). Under the supervision andwith the participation of our management, including our principal executiveofficer and principal financial officer, we conducted an evaluation of theeffectiveness of our internal control over financial reporting based on theframework in Internal Control—Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission. Based on our evaluationunder the framework in Internal Control—Integrated Framework, our managementconcluded that our internal control over financial reporting was effective asof December 31, 2004.

Our management’sassessment of the effectiveness of our internal control over financialreporting as of December 31, 2004 has been audited byPricewaterhouseCoopers LLP, an independent registered public accounting firm,as stated in their report which is included herein.

**ITEM 9B.   OTHER INFORMATION**

None.

84

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**PART III**

**ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OFMEDIMMUNE**

Information with respectto directors is included in the Company’s Proxy Statement to be filed pursuantto Regulation 14A (the “Proxy Statement”) under the caption “Election ofDirectors,” and such information is incorporated herein by reference. Set forthin Part I, Item 1, are the names and ages as of February 25, 2005,the positions and offices held by, and a brief account of the businessexperience during the past five years, of each executive officer. All directorshold office until election and qualification of their successors, typicallyfollowing elections at the next annual meeting of shareholders. Officers andkey employees are elected to serve, subject to the discretion of the Board ofDirectors, until their successors are appointed.

**ITEM 11.   EXECUTIVE COMPENSATION**

The section entitled “ExecutiveCompensation” and the information set forth under the caption “Election ofDirectors—Director Compensation” included in the Proxy Statement areincorporated herein by reference.

**ITEM12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**AND RELATED STOCKHOLDER MATTERS

The common stockinformation in the section entitled “Principal Shareholders” of the ProxyStatement is incorporated herein by reference.

**ITEM 13.   CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS**

The section entitled “CertainRelationships and Related Party Transactions” of the Proxy Statement isincorporated herein by reference.

**ITEM 14.   PRINCIPAL ACCOUNTING FEES AND SERVICES**

The information required by this item is incorporatedby this item is incorporated by reference to the applicable information in the2005 Proxy Statement under the caption “Appointment of Independent Auditors.”

85

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**PART IV**

**ITEM 15.   EXHIBITS AND FINANCIAL STATEMENTSCHEDULE**

The followingdocuments or the portions thereof indicated are filed as a part of this report.

a)     Documentsfiled as part of the Report

1.      FinancialStatements and Supplemental Data

a.                  Report of Independent Registered Public AccountingFirm

b.                 ConsolidatedBalance Sheets at December 31, 2004 and 2003

c.                  ConsolidatedStatements of Operations for the years ended December 31, 2004, 2003, and2002

d.                 ConsolidatedStatements of Cash Flows for the years ended December 31, 2004, 2003, and2002

e.                  Consolidated Statements of Shareholders’ Equity forthe years ended December 31, 2004, 2003, and 2002

f.                 Notes to Consolidated Financial Statements

g.                  Management’sReport on Internal Control over Financial Reporting

2.      SupplementalFinancial Statement Schedule

a.                  Schedule II—Valuation and QualifyingAccounts, Page S-1

b)     EXHIBITS

Those exhibits required to be filed by Item 601 ofRegulation S-K are listed in the Exhibit Index beginning on page E-1and such listing is incorporated by reference.

86

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.
|                          | MEDIMMUNE, INC.                                                    |
|--------------------------|--------------------------------------------------------------------|
| Date: March 7, 2005 | /s/ DAVID M. MOTT                                                  |   |
|                     |  David M. Mott                                                |
|                     |  *Chief Executive Officer,  President and Vice Chairman* |
|                     | * Principal Executive Officer*                                |
| Date: March 7, 2005 | /s/ LOTA S. ZOTH                                                   |   |
|                     |  Lota S. Zoth                                                 |
|                     | * Senior Vice President and Chief Financial  Officer*         |
|                     |  *Principal Financial  Officer*                               |
| Date: March 7, 2005 | /s/ MARK E. SPRING                                                 |   |
|                     |  Mark E. Spring                                               |
|                     |  *Vice President, Finance  and Controller*                    |
|                     |  *Principal Accounting  Officer*                              |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons in the capacities and on the datesindicated.
| Date: March 7, 2005 | /s/ WAYNE T.  HOCKMEYER                    |   |
|--------------------------|--------------------------------------------|--------|
|                     |  Wayne T. Hockmeyer, *Chairman*       |
| Date: March 7, 2005 | /s/ DAVID BALTIMORE                        |   |
|                     |  David Baltimore, *Director*          |
| Date: March 7, 2005 | /s/ M. JAMES BARRETT                       |   |
|                     |  M. James Barrett, *Director*         |
| Date: March 7, 2005 | /s/ MELVIN D. BOOTH                        |   |
|                     |  Melvin D. Booth, *Director*          |
| Date: March 7, 2005 | /s/ JAMES H. CAVANAUGH                     |   |
|                     |  James H. Cavanaugh, *Director*       |
| Date: March 7, 2005 | /s/ BARBARA HACKMAN FRANKLIN               |   |
|                     |  Barbara Hackman Franklin, *Director* |
| Date: March 7, 2005 | /s/ GORDON S. MACKLIN                      |   |
|                     |  Gordon S. Macklin, *Director*        |
| Date: March 7, 2005 | /s/ ELIZABETH WYATT                        |   |
|                     |  Elizabeth Wyatt, *Director*          |

 

87

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**SCHEDULEII**

**MedImmune, Inc.Valuation and Qualifying Accounts(in millions)**
| **Description**                            | ** ** | ** ** | ** ** | **Balance at  beginning of  period** | ** ** | **Additions  charged to  costs and  expenses** | ** ** | **Additions  charged  to asset  accounts(1)** | ** ** | **Deductions(2)** | ** ** | **Balance  at end  of  period** | ** ** |
|--------------------------------------------|------------|------------|------------|------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------|------------|-------------------|------------|------------------------------------------------|------------|
| For the year ended  December 31, 2004 |       |       |       |                                           |       |                                                     |       |                                               |       |              |       |                                           |       |   |   |   |   |   |   |   |   |
| Sales Allowances                           |       |       | $          | 9.0                                            |       |                                                     |       | $                                                  | 64.4       |              |       |                                           | —     |   |   |   | $ | (58.9 | ) |   |   | $ | 14.5 |   |   |
| Allowance for  Doubtful Accounts           |       |       | 3.8        |                                           |       |                                                     | 6.1        |                                               |       |              | —     |                                           |       |   | (8.1 | ) |   |   | 1.8 |   |   |
| Inventory Reserve                          |       |       | 88.1       |                                           |       |                                                     | 70.9       |                                               |       |              | —     |                                           |       |   | (109.7 | ) |   |   | 49.3 |   |   |
| Physical Asset  Reserve                    |       |       | 0.3        |                                           |       |                                                     | —     |                                               |       |              | —     |                                           |       |   | — |   |   |   | 0.3 |   |   |
| Tax Valuation  Allowance(3)                |       |       | 42.9       |                                           |       |                                                     | —     |                                               |       |              | 14.3       |                                           |       |   | (2.4 | ) |   |   | 54.8 |   |   |
|                                       |       |       | $          | 144.1                                          |       |                                                     |       | $                                                  | 141.4      |              |       |                                           | $          | 14.3 |   |   |   | $ | (179.1 | ) |   |   | $ | 120.7 |   |   |
| For the year  ended December 31, 2003 |       |       |       |                                           |       |                                                     |       |                                               |       |              |       |                                           |       |   |   |   |   |   |   |   |   |
| Sales Allowances                           |       |       | $          | 10.6                                           |       |                                                     |       | $                                                  | 42.4       |              |       |                                           | —     |   |   |   | $ | (44.0 | ) |   |   | $ | 9.0 |   |   |
| Allowance for  Doubtful Accounts           |       |       | 7.5        |                                           |       |                                                     | 14.5       |                                               |       |              | —     |                                           |       |   | (18.2 | ) |   |   | 3.8 |   |   |
| Inventory Reserve                          |       |       | 51.1       |                                           |       |                                                     | 59.0       |                                               |       |              | —     |                                           |       |   | (22.0 | ) |   |   | 88.1 |   |   |
| Physical Asset  Reserve                    |       |       | 0.3        |                                           |       |                                                     | —     |                                               |       |              | —     |                                           |       |   | — |   |   |   | 0.3 |   |   |
| Tax Valuation  Allowance(3)                |       |       | 32.3       |                                           |       |                                                     | —     |                                               |       |              | 10.6       |                                           |       |   | — |   |   |   | 42.9 |   |   |
|                                       |       |       | $          | 101.8                                          |       |                                                     |       | $                                                  | 115.9      |              |       |                                           | $          | 10.6 |   |   |   | $ | (84.2 | ) |   |   | $ | 144.1 |   |   |
| For the year  ended December 31, 2002 |       |       |       |                                           |       |                                                     |       |                                               |       |              |       |                                           |       |   |   |   |   |   |   |   |   |
| Sales Allowances                           |       |       | $          | 8.6                                            |       |                                                     |       | $                                                  | 39.0       |              |       |                                           | —     |   |   |   | $ | (37.0 | ) |   |   | $ | 10.6 |   |   |
| Allowance for  Doubtful Accounts           |       |       | 2.5        |                                           |       |                                                     | 7.2        |                                               |       |              | —     |                                           |       |   | (2.2 | ) |   |   | 7.5 |   |   |
| Inventory Reserve                          |       |       | 9.1        |                                           |       |                                                     | 48.6       |                                               |       |              | —     |                                           |       |   | (6.6 | ) |   |   | 51.1 |   |   |
| Physical Asset  Reserve                    |       |       | 2.4        |                                           |       |                                                     | —     |                                               |       |              | —     |                                           |       |   | (2.1 | ) |   |   | 0.3 |   |   |
| Tax Valuation  Allowance(3)                |       |       | 14.5       |                                           |       |                                                     | —     |                                               |       |              | 17.8       |                                           |       |   | — |   |   |   | 32.3 |   |   |
|                                       |       |       | $          | 37.1                                           |       |                                                     |       | $                                                  | 94.8       |              |       |                                           | $          | 17.8 |   |   |   | $ | (47.9 | ) |   |   | $ | 101.8 |   |   |

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(1)          Include amounts chargedto deferred tax assets and amounts charged to goodwill in connection with theAcquisition.

(2)          Deductions includereversals of costs and expenses for adjustments to previously recordedallowances resulting from changes in estimates.

(3)          A portion of the Company’sdeferred tax assets recognized relate to state and foreign net operating lossand credit carryforwards. Because the Company operates in multiple state andforeign jurisdictions, it considers the need for a valuation allowance on astate-by-state and country-by-country basis. Management believesthat the Company may not be able to utilize the loss carryforwards in thefuture because the Company has a history of pre-tax losses in that jurisdictionor the losses may expire in the near future.

S-1

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**EXHIBIT INDEX**
| ****Exhibit | ** ** | ** **                                                                                                                                                                                                                                                                                                                                            | ** ** | **Description** |
|-------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
| 3.1         |       | Restated Certificate of Incorporation, as restated  as of February 25, 2004, incorporated by reference to Exhibit 3.1  to the Company’s Annual Report on Form 10-K for the year ended  December 31, 2003.                                                                                                                    |
| 3.2         |       | By-Laws, as amended and  restated as of February 25, 2004, incorporated by reference to  Exhibit 3.2 to the Company’s Annual Report on Form 10-K for  the year ended December 31, 2003.                                                                                                                                 |
| 4.1         |       | Amended and Restated  Rights Agreement, dated as of October 31, 1998, by and between the  Company and American Stock Transfer and Trust Company, as Rights Agent,  incorporated by reference to Exhibit 99.2 to the Company’s Registration  Statement on Form 8-A/A, filed on December 1, 1998.                              |
| 4.2         |       | Certificate of Designations  of Series B Junior Preferred Stock, incorporated by reference to  Exhibit 4.2 to the Company’s Annual Report on Form 10-K for  the year ended December 31, 2001.                                                                                                                           |
| 4.3         |       | Indenture, dated  July 15, 2003, by and between the Company and The Bank of New York,  incorporated by reference to Exhibit 4.7 to the Company’s Registration  Statement on Form S-3 (File No. 333-108710), filed  on September 11, 2003.                                                                          |
| 4.4         |       | Registration Rights  Agreement, dated July 15, 2003, by and among the Company, Merrill Lynch,  Pierce, Fenner & Smith Incorporated and UBS Securities LLC,  incorporated by reference to Exhibit 4.8 to the Company’s Registration  Statement on Form S-3 (File No. 333-108710), filed on  September 11, 2003. |
| 4.5         |       | Form of Senior  Convertible Note due 2023, incorporated by reference to Exhibit 4.9 of  the Company’s Registration Statement on Form S-3 (File  No. 333-108710), filed on September 11, 2003.                                                                                                                      |
| 10.1(1)     |       | Patent License  Agreement, dated July 17, 1997, by and between Protein Design Labs and  the Company, incorporated by reference to Exhibit 10.73 to the Company’s  Quarterly Report on Form 10-Q for the quarter ended  September 30, 1997.                                                                                   |
| 10.2(1)     |       | License Agreement, dated  June 4, 1997, between Genentech, Inc. and the Company, incorporated  by reference to Exhibit 10.180 to the Company’s Annual Report on  Form 10-K for the year ended December 31, 2002.                                                                                                        |
| 10.3(1)     |       | License for Winter  Patent, dated August 13, 1997, by and between Medical Research Council  and the Company, incorporated by reference to Exhibit 10.181 to the  Company’s Annual Report on Form 10-K for the year ended  December 31, 2002.                                                                                 |
| 10.4(1)     |       | License Agreement, dated  as of December 1, 1997, by and between the University of Iowa Research  Foundation and the Company, incorporated by reference to Exhibit 10.183  to the Company’s Annual Report on Form 10-K for the year ended  December 31, 2002.                                                                |
| 10.5(1)     |       | Sublicense Agreement,  dated as of September 15, 2000, by and between Centocor, Inc. and  the Company, incorporated by reference to Exhibit 10.174 to the  Company’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2002.                                                                           |
| 10.6(2)     |       | Amended and Restated  Distribution Agreement, dated as of February 23, 2005, by and between  the Company and Abbott International LLC.*                                                                                                                                                                                                          |

E-1

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| 10.7(1)  |   | Manufacturing Agreement,  dated November 27, 1997, between the Company and Dr. Karl Thomae  GmbH, incorporated by reference to Exhibit 10.78 to the Company’s Annual  Report on Form 10-K for the year ended December 31, 1997.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|----------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.8     |   | Amended and  Restated License Agreement, effective as of May 1, 1993, by and between  MedImmune Oncology, Inc. (“MedImmune Oncology”), a wholly owned  subsidiary of the Company formerly known as U.S. Bioscience, Inc.  (“USB”), and Southern Research Institute, incorporated by reference to  Exhibit 10.8 to the USB Annual Report on Form 10-K for the  year ended December 31, 1993.                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.9(1)  |   | Amifostine  Manufacturing and Supply Agreement, dated as of January 1, 2001, by and  between MedImmune Oncology and PPG Industries, Inc., incorporated by  reference to Exhibit 10.20 to the Company’s Annual Report on  Form 10-K/A for the year ended December 31, 2003, filed on  December 21, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.10(1) |   | Terms and Conditions for  the Manufacture of Products by Ben Venue Laboratories, Inc., dated as of  October 17, 2003, incorporated by reference to Exhibit 10.21 to the  Company’s Annual Report on Form 10-K/A for the year ended  December 31, 2003, filed on December 21, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.11(1) |   | Materials Transfer and  Intellectual Property Agreement, dated February 24, 1995, by and between  MedImmune Vaccines, Inc. (“MedImmune Vaccines”), a wholly owned  subsidiary of the Company formerly known as Aviron (“Aviron”), and the  Regents of the University of Michigan, incorporated by reference to  Exhibit 10.3 to Aviron’s Registration Statement on Form S-1  (File No. 333-05209), filed on June 5, 1996, as amended by  that certain Letter Amendment, dated as of February 24, 1999,  incorporated by reference to Exhibit 10.24 to Aviron’s Quarterly Report  on Form 10-Q for the quarter ended March 31, 1999, as further  amended by the letter dated March 4, 1996 exercising MedImmune Vaccines  option to include Japan as part of the Territory (as defined in the  agreement)*. |
| 10.12(1) |   | Agreement Relating to  the Sharing and Provision of Certain Services, by and between Evans Vaccines  Limited and MedImmune UK Limited, a wholly owned subsidiary of MedImmune  Vaccines formerly known as Aviron UK Limited, incorporated by reference to  Exhibit 10.45 to Aviron’s Annual Report on Form 10-K for the  year ended December 31, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.13(1) |   | Amended and Restated Contract  Manufacture Agreement, dated October 11, 2000, by and between Evans  Vaccines Limited and MedImmune Vaccines, incorporated by reference to  Exhibit 10.47 to Aviron’s Annual Report on Form 10-K for the  year ended December 31, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.14(1) |   | Know How License  Agreement, dated October 11, 2000, by and between Evans Vaccines Limited  and MedImmune UK Limited, incorporated by reference to Exhibit 10.48 to  Aviron’s Annual Report on Form 10-K for the year ended  December 31, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.15(1) |   | Underlease of Plot 6  Boulevard Industry Park Halewood Merseyside, dated February 17, 2000, by  and between MPEC Boulevard Limited (as Landlord), Medeva Pharma Limited (as  Tenant) and Medeva PLC (as Guarantor), as subsequently assigned to MedImmune  Vaccines, incorporated by reference to Exhibit 10.43 to Aviron’s Annual  Report on Form 10-K for the year ended December 31, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.16+   |   | Employment Agreement,  dated as of October 1, 2003, by and between Wayne T. Hockmeyer, Ph.D.  and the Company, incorporated by reference to Exhibit 10.50 to the  Company’s Annual Report on Form 10-K for the year ended  December 31, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.17+   |   | Employment Agreement,  dated August 15, 2002, by and between David M. Mott and the Company  dated August 15, 2002, incorporated by reference to Exhibit 10.189  filed with the Company’s Annual Report on Form 10-K for the year  ended December 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |

E-2

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| 10.18+ |   | Part-Time Employment  Agreement, dated December 31, 2003, by and between Melvin D. Booth and  the Company, incorporated by reference to Exhibit 10.53 to the Company’s  Annual Report on Form 10-K for the year ended December 31,  2003, as amended by that certain Amendment No. 1 to Part-Time Employment  Agreement, dated as of December 21, 2004*.         |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.19+ |   | Employment  Agreement, dated August 15, 2002, by and between James F. Young and the  Company, incorporated by reference to Exhibit 10.191 to the Company’s  Annual Report on Form 10-K for the year ended December 31,  2002.                                                                                                                                              |
| 10.20+ |   | Employment Agreement,  dated August 15, 2002, by and between Armando Anido and the Company, incorporated  by reference to Exhibit 10.192 to the Company’s Annual Report on  Form 10-K for the year ended December 31, 2002.                                                                                                                                                |
| 10.21+ |   | Employment Agreement,  dated August 15, 2002, by and between Edward M. Connor and the Company,  incorporated by reference to Exhibit 10.193 to the Company’s Annual  Report on Form 10-K for the year ended December 31, 2002.                                                                                                                                             |
| 10.22+ |   | 2004 Stock Incentive  Plan, incorporated by reference to Exhibit A to the Company’s Definitive  Proxy Statement filed on April 4, 2004.                                                                                                                                                                                                                                              |
| 10.23+ |   | Form of Stock  Option Agreement generally used for stock option grants to Mr. Mott,  Dr. Hockmeyer or Dr. Young under the 2004 Stock Incentive Plan.*                                                                                                                                                                                                                           |
| 10.24+ |   | Form of Stock  Option Agreement generally used for stock option grants to executive officers  (other than Mr. Mott, Dr. Hockmeyer or Dr. Young) under the  2004 Stock Incentive Plan.*                                                                                                                                                                                          |
| 10.25+ |   | 2003 Non-Employee  Directors Stock Option Plan, incorporated by reference to Exhibit A to  the Company’s Definitive Proxy Statement, filed on April 17, 2003.                                                                                                                                                                                                                        |
| 10.26+ |   | Form of Stock  Option Agreement generally used for grants to directors under the 2003 Non-Employee  Directors Stock Option Plan.*                                                                                                                                                                                                                                                              |
| 10.27+ |   | 1999 Stock Option Plan,  incorporated by reference to Exhibit 4.1 to the Company’s Registration  Statement on Form S-8 (File No. 333-79241), filed on  May 25, 1999, as amended to increase the number of shares subject to  such plan as described in the Company’s Registration Statement on Form S-8  (File No. 333-105578), filed on May 27, 2003. |
| 10.28^ |   | Aviron 1999 Non-Officer  Equity Incentive Plan, as amended as of September 24, 2001, incorporated  by reference to Exhibit 4.1 to Aviron’s Registration Statement on  Form S-8 (File No. 333-72120), filed on  October 23, 2001.                                                                                                                                 |
| 10.29^ |   | USB Non-Executive Stock  Option Plan, as amended as of April 24, 1997, incorporated by reference  to Exhibit 4.2 to the USB’s Registration Statement on Form S-8  (File No. 333-26735), filed on May 9, 1997.                                                                                                                                                         |
| 10.30+ |   | 1993 Non-Employee  Director Stock Option Plan, incorporated by reference to Exhibit 4.3 to  the Company’s Registration Statement on Form S-8 (File  No. 333-28481), filed on June 4, 1997.                                                                                                                                                                                 |
| 10.31+ |   | 1991 Stock Option Plan,  as amended as of May 16, 1997, incorporated by reference to  Exhibit 4.2 to the Company’s Registration Statement on Form S-8  (File No. 333-28527), filed on June 4, 1997.                                                                                                                                                                   |
| 10.32+ |   | 2001 Employee Stock  Purchase Plan, incorporated by reference to Exhibit 4.1 to the Company’s  Registration Statement on Form S-8 (File No. 333-59272),  filed on April 20, 2001.                                                                                                                                                                                          |
| 10.33+ |   | Summary of Non-Employee  Director Compensation*                                                                                                                                                                                                                                                                                                                                                     |
| 21     |   | Subsidiaries of  MedImmune, Inc.*                                                                                                                                                                                                                                                                                                                                                              |
| 23.1   |   | Consent of  PricewaterhouseCoopers LLP*                                                                                                                                                                                                                                                                                                                                                             |

E-3

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| 31.1 |   | Certification pursuant  to 18 United States Code Section 1350, as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.* |
|------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.2 |   | Certification pursuant  to 18 United States Code Section 1350, as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.* |
| 32.1 |   | Certification pursuant to 18 United States Code  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.* |
| 99.1 |   | Patent Table.*                                                                                                                                   |

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Notes:

*                    Filedherewith.

+                Managementcontract or compensatory plan or arrangement.

^              Compensatory planadopted without approval of stockholders assumed by the Company in connectionwith an acquisition. The Company does not intend to make any new grants undersuch plans.

(1)          Confidential treatmenthas been granted by the SEC. The copy filed as an exhibit omits the informationsubject to the confidentiality grant.

(2)          Confidential treatmenthas been requested. The copy filed as an exhibit omits the information subjectto the confidentiality request.

E-4

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