**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, DC 20549**

 

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**FORM 10-Q**

 

**(MarkOne)**

 

| **ý** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|------------|---------------------------------------------------------------------------------------------------------|

 

**For The Quarterly Period Ended September 30,2005**

 

**or**

| **o** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|-------|----------------------------------------------------------------------------------------------------------|

 

**For the Transition Period from               to               **

 

**Commission File Number 000-50439**

 

**NitroMed, Inc.**

(Exact Name of Registrant as Specified in Its Charter)

 
| **Delaware**                                     | ** ** | **22-3159793**      |
|--------------------------------------------------|------------|---------------------|
| (State or Other Jurisdiction of                  |       | (I.R.S. Employer    |
| Incorporation or Organization)                   |       | Identification No.) |
|                                             |       |                |
| **125 Spring Street, Lexington,  Massachusetts** | ** ** | **02421**           |
| (Address of Principal Executive Offices)         |       | (Zip Code)          |

 

Registrant’s telephone number, including area code: **(781) 266-4000**

 

Former Name, FormerAddress and Formal Fiscal Year, if Changed Since Last Report

 

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 preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days.   Yes ý  No o

 

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  Yes o  No ý

 

As of November 1, 2005,the registrant had 30,480,097 shares of Common Stock, $0.01 par value pershare, outstanding.

 

 

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NITROMED, INC.

 

FORM 10-Q

 

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005

 

**TABLE OF CONTENTS**

 
| PART I.       | FINANCIAL INFORMATION                                                                                      |   |
|--------------------|------------------------------------------------------------------------------------------------------------|--------|
| Item 1.            | Financial Statements                                                                                       |   |
|               | Balance Sheets as of September 30,  2005 and December 31, 2004 (unaudited)                       |   |
|               | Statements of Operations for  the three and nine months ended September 30, 2005 and 2004 (unaudited) |   |
|               | Statements of Cash Flows for  the nine months ended September 30, 2005 and 2004 (unaudited)           |   |
|               | Notes To Unaudited Financial  Statements                                                                   |   |
| Item 2.            | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                |   |
| Item 3.            | Quantitative and Qualitative  Disclosures About Market Risk                                                |   |
| Item 4.            | Controls and Procedures                                                                                    |   |
| PART II.      | OTHER INFORMATION                                                                                          |   |
| Item 6.            | Exhibits                                                                                                   |   |
| SIGNATURES         |                                                                                                       |
| EXHIBIT INDEX |                                                                                                       |

 

2

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**PART I.  FINANCIALINFORMATION**

 

**Item1.****           FinancialStatements (unaudited)**

 

**NITROMED,INC.**

**BALANCESHEETS(in thousands, except par value amounts)**

 
| ** **                                                                                                                                                                     | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                     | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| **Assets**                                                                                                                                                                     |       |                         |       |                        |       |
| Current assets:                                                                                                                                                                |       |                         |       |                        |       |
| Cash and cash equivalents                                                                                                                                                      |       | $                            | 12,241     |                        | $          | 35,882 |   |
| Marketable securities                                                                                                                                                          |       | 75,769                       |       | 106,485                     |       |
| Accounts receivable, net                                                                                                                                                       |       | 12,873                       |       | 19                          |       |
| Inventories                                                                                                                                                                    |       | 5,137                        |       | —                      |       |
| Prepaid expenses and other current assets                                                                                                                                      |       | 1,355                        |       | 3,197                       |       |
| Total current assets                                                                                                                                                           |       | 107,375                      |       | 145,583                     |       |
| Property and equipment, net                                                                                                                                                    |       | 3,193                        |       | 2,963                       |       |
| Other assets                                                                                                                                                                   |       | 801                          |       | 811                         |       |
|                                                                                                                                                                           |       |                         |       |                        |       |
| Total assets                                                                                                                                                                   |       | $                            | 111,369    |                        | $          | 149,357 |   |
|                                                                                                                                                                           |       |                         |       |                        |       |
| **Liabilities and Stockholders’ Equity**                                                                                                                                  |       |                         |       |                        |       |
| Current liabilities:                                                                                                                                                           |       |                         |       |                        |       |
| Accounts payable                                                                                                                                                               |       | $                            | 6,971      |                        | $          | 2,662 |   |
| Accrued expenses                                                                                                                                                               |       | 9,005                        |       | 8,091                       |       |
| Deferred revenue                                                                                                                                                               |       | 12,782                       |       | 1,592                       |       |
| Current portion of long-term debt                                                                                                                                              |       | 6,667                        |       | —                      |       |
|                                                                                                                                                                           |       |                         |       |                        |       |
| Total current liabilities                                                                                                                                                      |       | 35,425                       |       | 12,345                      |       |
|                                                                                                                                                                           |       |                         |       |                        |       |
| Long-term debt                                                                                                                                                                 |       | 11,732                       |       | —                      |       |
|                                                                                                                                                                           |       |                         |       |                        |       |
| Commitments and contingencies (Note 10)                                                                                                                                        |       |                         |       |                        |       |
| Stockholders’ equity:                                                                                                                                                     |       |                         |       |                        |       |
| Preferred stock, $0.01 par value; 5,000 shares  authorized; no shares issued or outstanding                                                                                    |       | —                       |       | —                      |       |
| Common stock, $0.01 par value; 65,000 shares  authorized; 30,479 and 30,124 shares issued and outstanding at September 30,  2005 and December 31, 2004, respectively |       | 305                          |       | 301                         |       |
| Additional paid-in capital                                                                                                                                                     |       | 276,390                      |       | 275,727                     |       |
| Deferred stock-based compensation                                                                                                                                              |       | (1,429                       | )          | (2,095                      | )          |
| Accumulated deficit                                                                                                                                                            |       | (210,904                     | )          | (136,619                    | )          |
| Accumulated other comprehensive loss                                                                                                                                           |       | (150                         | )          | (302                        | )          |
| Total stockholders’ equity                                                                                                                                                |       | 64,212                       |       | 137,012                     |       |
|                                                                                                                                                                           |       |                         |       |                        |       |
| Total liabilities and stockholders’ equity                                                                                                                                |       | $                            | 111,369    |                        | $          | 149,357 |   |

 

See accompanying notes.

 

3

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**NITROMED,INC.**

**STATEMENTSOF OPERATIONS(in thousands, except per share amounts) (unaudited)**

** **
| ** **                                                            | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                            | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues:                                                             |       |                                       |       |                                      |       |   |   |   |   |
| Product sales                                                         |       | $                                          | 1,117      |                                      | $          | — |   | $ | 1,117 |   | $ | — |   |
| Research and development                                              |       | 398                                        |       | 2,332                                     |       | 1,194 |   | 6,994 |   |
| Total revenues                                                        |       | 1,515                                      |       | 2,332                                     |       | 2,311 |   | 6,994 |   |
|                                                                  |       |                                       |       |                                      |       |   |   |   |   |
| Cost and operating expenses:                                          |       |                                       |       |                                      |       |   |   |   |   |
| Cost of product sales                                                 |       | 2,877                                      |       | —                                    |       | 2,877 |   | — |   |
| Research and development                                              |       | 7,393                                      |       | 8,118                                     |       | 23,391 |   | 18,831 |   |
| Sales, general and administrative                                     |       | 23,614                                     |       | 5,355                                     |       | 52,161 |   | 9,152 |   |
| Total cost and operating expenses                                     |       | 33,884                                     |       | 13,473                                    |       | 78,429 |   | 27,983 |   |
| Loss from operations                                                  |       | (32,369                                    | )          | (11,141                                   | )          | (76,118 | ) | (20,989 | ) |
| Non-operating income:                                                 |       |                                       |       |                                      |       |   |   |   |   |
| Interest expense                                                      |       | (479                                       | )          | —                                    |       | (495 | ) | (1 | ) |
| Interest income                                                       |       | 776                                        |       | 340                                       |       | 2,328 |   | 933 |   |
|                                                                  |       | 297                                        |       | 340                                       |       | 1,833 |   | 932 |   |
|                                                                  |       |                                       |       |                                      |       |   |   |   |   |
| Net loss                                                              |       | $                                          | (32,072    | )                                         | $          | (10,801 | ) | $ | (74,285 | ) | $ | (20,057 | ) |
|                                                                  |       |                                       |       |                                      |       |   |   |   |   |
| Basic and diluted net loss per common share                           |       | $                                          | (1.05      | )                                         | $          | (0.41 | ) | $ | (2.45 | ) | $ | (0.78 | ) |
| Shares used in computing basic and diluted net loss  per common share |       | 30,421                                     |       | 26,187                                    |       | 30,311 |   | 25,829 |   |

 

See accompanying notes.

 

4

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**NITROMED,INC.**

**STATEMENTSOF CASH FLOWS(in thousands) (unaudited)**

 
| ** **                                                                   | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                   | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
| **Operating activities**                                                     |       |                                      |       |   |   |
| Net loss                                                                     |       | $                                         | (74,285    | ) | $ | (20,057 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities: |       |                                      |       |   |   |
| Depreciation and amortization                                                |       | 663                                       |       | 265 |   |
| Stock-based compensation expense                                             |       | 440                                       |       | 1,799 |   |
| Changes in operating assets and liabilities:                                 |       |                                      |       |   |   |
| Accounts receivable                                                          |       | (12,854                                   | )          | (35 | ) |
| Inventories                                                                  |       | (5,137                                    | )          | — |   |
| Prepaid expenses and other current assets                                    |       | 1,842                                     |       | 369 |   |
| Deferred revenue                                                             |       | 11,190                                    |       | (5,194 | ) |
| Accounts payable and accrued expenses                                        |       | 5,223                                     |       | 5,256 |   |
| Net cash used in operating activities                                        |       | (72,918                                   | )          | (17,597 | ) |
| **Investing activities**                                                     |       |                                      |       |   |   |
| Purchases of property and equipment                                          |       | (893                                      | )          | (2,179 | ) |
| Purchases of marketable securities                                           |       | (97,531                                   | )          | (72,241 | ) |
| Sales of marketable securities                                               |       | 128,399                                   |       | 35,073 |   |
| Other assets                                                                 |       | 10                                        |       | (708 | ) |
| Net cash provided by (used in) investing activities                          |       | 29,985                                    |       | (40,055 | ) |
| **Financing activities**                                                     |       |                                      |       |   |   |
| Proceeds from long-term debt                                                 |       | 20,000                                    |       | — |   |
| Principal payments on long-term debt                                         |       | (1,601                                    | )          | (22 | ) |
| Proceeds from employee stock plans                                           |       | 893                                       |       | 696 |   |
| Net cash provided by financing activities                                    |       | 19,292                                    |       | 674 |   |
| Net decrease in cash and cash equivalents                                    |       | (23,641                                   | )          | (56,978 | ) |
| Cash and cash equivalents at beginning of period                             |       | 35,882                                    |       | 67,614 |   |
| Cash and cash equivalents at end of period                                   |       | $                                         | 12,241     |   | $ | 10,636 |   |

 

See accompanying notes.

 

5

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**NITROMED,INC.**

**NOTESTO UNAUDITED FINANCIAL STATEMENTSSEPTEMBER 30, 2005**

** **

### **(1)**                                 Basis of Presentation

 

The accompanyingunaudited financial statements of NitroMed, Inc. (“NitroMed” or the “Company”)have been prepared in accordance with accounting principles generally acceptedin the United States (“GAAP”) for interim financial information and with theinstructions to Form 10-Q and Article 10 of Regulation S-X.Accordingly, they do not include all of the information and footnotes requiredby GAAP for complete financial statements. In the opinion of management, alladjustments (consisting of normal recurring accruals) considered necessary forthe fair presentation of the results for the interim periods have beenincluded. The preparation of financial statements in conformity with GAAPrequires management to make estimates and assumptions that affect the amountsreported in the financial statements and accompanying notes. Interim resultsare not necessarily indicative of results to be expected for the entire fiscalyear ending December 31, 2005. These unaudited financial statements shouldbe read in conjunction with the Company’s latest annual audited financialstatements and related notes thereto included in the Company’s Annual Report onForm 10-K, which was filed with the Securities and Exchange Commission (“SEC”)on March 10, 2005.

 

Certainprior period amounts have been reclassified to conform to the current periodpresentation.

 

### **(2)**                                 Revenues

 

TheCompany’s principal source of revenue during the third quarter of 2005 was thesale of BiDil®(isosorbide dinitrate/hydralazine HCI), the Company’s product for the treatmentof heart failure in self-identified black patients. BiDil was launched andbegan shipping in the third quarter. Other sources of revenue includecollaboration revenue which is being recognized ratably over the research anddevelopment collaboration term. The Company expects that revenues derived fromits current collaboration agreements will continue to decrease in future periods,and product revenues will continue to increase based on anticipated increasedvolume of prescriptions of BiDil.

 

*ProductSales/Deferred Revenue*

 

TheCompany follows the provisions of Staff Accounting Bulletin No. 104, “RevenueRecognition” and recognizes revenue from product sales upon delivery of productto wholesalers, when persuasive evidence of an arrangement exists, the fee isfixed or determinable, title to product and associated risk of loss has passedto the wholesaler and collectibility of the related receivable is reasonablyassured. All revenues from product sales are recorded net of applicableallowances for sales returns, rebates, chargebacks and discounts. Forarrangements where the risk of loss has not passed to wholesalers or pharmacies,the Company defers the recognition of revenue by recording deferred revenueuntil such time that risk of loss has passed. Also, the cost of product salesassociated with amounts recorded as deferred revenue are recorded in consignedinventory until such time as risk of loss has passed.

 

*SalesRebates, Discounts and Incentives*

 

TheCompany’s product sales are subject to various rebates, discounts andincentives that are customary in the pharmaceutical industry.

 

Duringthe third quarter of 2005, the Company offered certain product stockingincentives to a number of pharmacy customers. These incentives included unitswith guaranteed sales provisions. As a result of these provisions, risk of lossof these units has not passed to the customer. Accordingly, the Company hasdeferred all revenue related to these units until such time as the unit isprovided to a patient with a prescription. As of September 30, 2005, theremaining balance of deferred revenue related to these units was approximately$12.1 million.

 

Duringthe third quarter of 2005, the Company offered certain incentives to a numberof pharmacy customers. These incentives included placement and advertisingassistance in the approximate amount of $328,000. As a result of theseincentives the Company recorded a reduction to revenue of approximately$164,000 for the three months ended September 30, 2005. The remainder ofthese incentives will be recognized as a reduction to revenue as earned.

 

Beginningin the third quarter of 2005, the Company initiated a voucher program wherebyit offered an incentive to patients in the form of a free 30-day trial ofBiDil. The Company has accounted for this program in accordance with EmergingIssues Task Force Issue No. 01-09, “Accounting for Consideration Given bya Vendor to a Customer” (EITF No. 

 

6

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01-09). These initialvoucher incentives had an expiration date of September 30, 2005, at whichtime the Company recorded the actual amount of reimbursement claims for thevouchers distributed during the third quarter of 2005. As a result of thisprogram the Company recorded a reduction to revenue of approximately $252,000for the three months ended September 30, 2005. The Company expects tocontinue to offer voucher incentives in future periods.

 

Alarge portion of the Company’s product sales are made to pharmaceuticalwholesalers for further distribution through pharmacies to patients, who areconsumers of the product. All revenues from product sales are recorded net ofapplicable allowances for returns, wholesaler chargebacks and cash discounts.The Company estimates wholesaler chargebacks, cash discounts and other rebatesby considering the following factors: current contract prices and terms,estimated customer and wholesaler inventory levels and current averagechargeback rates. The information used to estimate product returns includes theremaining shelf life and the product life cycle stage as well as historicalinformation based on product return allowances for similar or competingproducts in the same distribution channel. Also, the Company will obtain andevaluate product return data from distributors, and based on this evaluation,estimate return rates. The reserves are reviewed at each reporting period andadjusted to reflect data available at that time. The Company has accruedapproximately $34,000 in sales return reserves as of September 30, 2005.To the extent the Company’s estimates of contractual allowances, rebates andsales returns are different from actuals, the Company adjusts the reserve whichimpacts the amount of product sales revenue recognized in the period of theadjustment. The Company has not received any significant returns through September 30,2005.

 

### **(3)**                                 Inventories

 

Inventoriesare stated at the lower of cost or market, with cost determined on a first-in,first-out basis.  Inventories consisted of the following:

 
| **(in thousands)**   | ** ** | **September 30,  2005** | ** ** |
|----------------------|------------|------------------------------|------------|
| Raw materials        |       | $                            | 2,765      |   |
| Finished goods       |       | 2,001                        |       |
| Consigned  inventory |       | 371                          |       |
|                 |       | $                            | 5,137      |   |

 

### **During the nine month period ending September 30,2005, the Company purchased and capitalized inventories to be used for samplesand commercial sales related to the then-anticipated July 2005 productlaunch of BiDil. BiDil currently has a twelve month shelf life. On a quarterlybasis, the Company analyzes its inventory levels and writes down inventory thathas become un-saleable, inventory that has a cost basis in excess of itsexpected net realizable value and inventory that is in excess of expectedrequirements of product revenues. Expired inventory will be disposed of, andthe related costs will be written off. During the three months ended September 30, 2005, the Companyrecorded an inventory impairment charge of $2.6 million to cost of salesrelated to commercial product and patient samples that will expire by April 2006.**

 

### **(4)**                                 Stock-BasedCompensation

 

The Company has electedto account for its stock-based compensation plans under the intrinsic valuemethod pursuant to Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees*,and related interpretations, rather than the alternative fair value accountingprovided under Statement of Financial Accounting Standards No. 123, *Accounting for Stock-Based Compensation* (“SFAS 123”).In accordance with Emerging Issues Task Force (“EITF”) 96-18, *Accounting for Equity Instruments that are Issued toOther than Employees for Acquiring, or in Connection with Selling, Goods orServices*, the Company records stock-based compensation expense equalto the fair value of the option granted to non-employees over the vestingperiod, which is generally the period of service.

 

For the years ended December 31,2003 and December 31, 2002, the Company granted 431,250 and 241,000options, respectively, to employees at exercise prices below the fair value ofthe Company’s common stock. The Company recorded deferred stock-basedcompensation related to these grants of $3,317,000 and $566,000 in 2003 and2002, respectively. These amounts are being recognized ratably over the vestingperiod of four years. Included in the results of operations for the three-monthperiods ended September 30, 2005 and 2004 is stock-based compensationexpense of $222,000 and $290,000, respectively. Included in the results ofoperations for the nine-month periods ended September 30, 2005 and 2004 isstock-based compensation expense of $666,000 and $806,000, respectively.

 

TheCompany also has additional stock-based awards that are accounted for asvariable awards and are re-measured at each reporting period. Included in theresults of operations for the three-month periods ended September 30, 2005and 

 

7

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2004 is reduction instock-based compensation expense of $6,000 and an increase in expense of $986,000,respectively. Included in the results of operations for the nine-month periodsended September 30, 2005 and 2004 is a reduction in stock-basedcompensation expense of $226,000 and an increase in expense of $993,000,respectively.

 

Forpurposes of pro forma disclosures, the estimated fair value of stock options isamortized over the stock option’s vesting period. Had compensation expense forthe Company’s stock-based compensation plans been determined based on the fairvalue at the grant dates for awards under those plans consistent with themethod of SFAS 123, the Company’s net loss and net loss per share wouldhave been as follows:

 
| ** **                                                                                  | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| **(in thousands, except per share amounts)**                                                | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net loss as reported                                                                        |       | $                                          | (32,072    | )                                         | $          | (10,801 | ) | $ | (74,285 | ) | $ | (20,057 | ) |
| Add: Stock-based employee compensation expense  included in reported net loss               |       | 197                                        |       | 691                                       |       | 498 |   | 1,200 |   |
| Deduct: Stock-based employee compensation expense  determined under fair value based method |       | (1,729                                     | )          | (690                                      | )          | (4,359 | ) | (1,616 | ) |
| Pro forma net loss                                                                          |       | $                                          | (33,604    | )                                         | $          | (10,800 | ) | $ | (78,146 | ) | $ | (20,473 | ) |
|                                                                                        |       |                                       |       |                                      |       |   |   |   |   |
| Basic and diluted net loss per share                                                        |       |                                       |       |                                      |       |   |   |   |   |
| As reported                                                                                 |       | $                                          | (1.05      | )                                         | $          | (0.41 | ) | $ | (2.45 | ) | $ | (0.78 | ) |
| Pro forma                                                                                   |       | $                                          | (1.10      | )                                         | $          | (0.41 | ) | $ | (2.58 | ) | $ | (0.79 | ) |

 

### **(5)**                                 Comprehensive Loss

 

Components ofcomprehensive loss include net loss and certain transactions that havegenerally been reported in the statement of stockholders’ equity. Comprehensiveloss is comprised solely of net loss and unrealized gains and losses fromavailable-for-sale marketable securities. Comprehensive loss for the threemonths ended September 30, 2005 and 2004 was $31,999,000 and $10,632,000,respectively. Comprehensive loss for the nine months ended September 30,2005 and 2004 was $74,133,000 and $20,277,000, respectively.

 

### **(6)**                                 Net Loss Per Share

 

Basic net loss per shareis computed by dividing net loss available to common stockholders by theweighted average number of shares of common stock outstanding during theperiod. Diluted net loss per share is computed by dividing net loss availableto common stockholders by the weighted average number of shares of common stockand the dilutive potential common stock equivalents then outstanding. Potentialcommon stock equivalents consist of stock options and warrants. Since theCompany has a net loss for all periods presented, the effect of all potentiallydilutive securities is antidilutive. Accordingly, basic and diluted net lossper share are the same.

 

The following table setsforth the computation of basic and diluted net loss per share for therespective periods.

 
| ** **                                                         | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| **(in thousands, except per share amounts)**                       | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| *Basic and Diluted:*                                               |       |                                       |       |                                      |       |   |   |   |   |
| Net loss                                                           |       | $                                          | (32,072    | )                                         | $          | (10,801 | ) | $ | (74,245 | ) | $ | (20,057 | ) |
|                                                               |       |                                       |       |                                      |       |   |   |   |   |
| Weighted average common shares used to compute net  loss per share |       | 30,421                                     |       | 26,187                                    |       | 30,311 |   | 25,829 |   |
| Basic and diluted net loss per share                               |       | $                                          | (1.05      | )                                         | $          | (0.41 | ) | $ | (2.45 | ) | $ | (0.78 | ) |

 

### **As of September 30, 2005 and 2004, options to purchase3,811,615 and 3,173,307 shares of common stock, respectively, and warrants topurchase 1,319 and 132,609 shares of common stock, respectively, were notincluded in the computation of diluted net loss per share since their inclusionwould be antidilutive.**

 

8

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### **(7)**                                 Single SourceSuppliers

 

### **The Company currently obtains one of the key activepharmaceutical ingredients for its commercial requirements for BiDil from asingle source. The disruption or termination of the supply of the commercialrequirement for BiDil or a significant increase in the cost of the key activepharmaceutical ingredient from this single source could have a material adverseeffect on the Company’s business, financial position and results of operations.**

 

### **(8)**                                 Concentration ofCredit Risk

 

SFAS No. 105,“Disclosure of Information about Financial Instruments with Off-Balance-SheetRisk and Financial Instruments with Concentrations of Credit Risk,” requiresdisclosure of any significant off-balance-sheet and credit risk concentrations.The Company has no off-balance-sheet or concentrations of credit risk such asforeign exchange contracts, options contracts or other foreign hedgingarrangements. The Company maintains its cash and cash equivalents andinvestment balances with several nonaffiliated institutions.

 

Thefollowing table summarizes the number of customers that individually comprisegreater than 10% of total revenues and their respective percentage of theCompany’s total revenues:

 
| ** **                                 | ** ** | **Number of  Significant  Customers** | ** ** | **Percentage of Total Revenues by Customer** | ** ** |
|--------------------------------------------|------------|--------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                 | ** ** | ** **                                 | **A**      | ** **                                   | **B**      | ** ** | **C** | ** ** | **D** | ** ** | **E** | ** ** |
| Three months ended September 30, 2005 |       | 2                                          |       | 16                                           | %          | 26 | % | — |   | — |   | — |   |
|                                       |       |                                       |       |                                         |       |   |   |   |   |   |   |   |   |
| Nine months ended September 30, 2005  |       | 2                                          |       | 11                                           | %          | 52 | % | — |   | — |   | — |   |

 

Thefollowing table summarizes the number of customers that individually comprisegreater than 10% of total accounts receivable and their respective percentageof the Company’s total accounts receivable:

 
| ** **               | ** ** | **Number of  Significant  Customers** | ** ** | **Percentage of Total Accounts Receivable by Customer** | ** ** |
|--------------------------|------------|--------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **               | ** ** | ** **                                 | **A**      | ** **                                                                            | **B**      | ** ** | **C** | ** ** | **D** | ** ** | **E** | ** ** |
| As of:                   |       |                                       |       |                                                                                  |       |   |   |   |   |   |   |   |   |
| September 30,  2005 |       | 2                                          |       | 43                                                                                    | %          | 20 | % | — |   | — |   | — |   |
| December 31,  2004  |       | —                                     |       | —                                                                                |       | — |   | — |   | — |   | — |   |

 

Todate, the Company has not written off any significant accounts receivable.

 

### **(9)**                                 Long Term Debt

 

### **On June 28, 2005, the Company borrowed (i) $10.0million from Oxford Finance Corporation (“Oxford”), and (ii) $10.0 millionfrom General Electric Capital Corporation (“GECC”) pursuant to the terms ofPromissory Notes (“the Notes”). The Notes bear interest at a fixed rate of9.95% per annum and are payable in 36 consecutive monthly installments ofprincipal and accrued interest, beginning on July 1, 2005. Also on June 28,2005, the Company entered into Master Security Agreements with both Oxford andGECC (“the Agreements”). Under terms of these Agreements, the Companygranted to both Oxford and GECC a security interest in and against all of theproperty of the Company and in and against all additions, attachments,accessories and accessions to such property, all substitutions, replacements orexchanges, and all insurance and/or other proceeds (“the Collateral”). TheCollateral comprises all of the Company’s personal property and fixturesincluding, but not limited to, all inventory, equipment, fixtures, accounts,deposit accounts, documents, investment property, instruments, generalintangibles, chattel paper and any and all proceeds (but excluding intellectualproperty). The Collateral does not include any intellectual property orproducts (or interests in any intellectual property or products (including anyroyalties)) acquired, whether by purchase, license or otherwise, on or afterthe execution of the Agreements (collectively, “New Property”), nor do theAgreements limit any indebtedness secured by any New Property provided thatdebt or non-cash equity (e.g., stock) is used to acquire NewProperty. In the event that the Company uses cash to purchase New Property,Oxford’s and GECC’s existing liens will extend to such New Property. TheAgreements also contain a Material Adverse Change clause with both Oxford andGECC. Under this clause, if Oxford or GECC reasonably determine that theCompany’s**

### ** **

### **9**

### ****

### ** **

### **ability to repay the Notes has been materially impaired,the Company would be considered in default. As of September 30, 2005 theCompany was in compliance with this clause.**

 

### **(10)**                          Commitments and Contingencies

 

In connectionwith seeking to obtain the approval of BiDil from the U.S. Food and DrugAdministration (“FDA”), the Company contracted with a consulting firm forservices related to the regulatory approval process for BiDil. The agreementprovides for payment of legal consulting fees when the Company received writtenFDA approval of BiDil. In addition, the agreement requires the Company to payroyalties to such consulting firm on sales of BiDil. The royalty term ends sixmonths after the date of market introduction of an FDA-approved generic versionof BiDil. During the third quarter the Company entered into a separateconsulting agreement with this consulting firm following the approval by theFDA of BiDil. During the year ended December 31, 2004, the Company recordedcharges of approximately $1.9 million pertaining to the legal consultingfees related to these agreements. Such charges included only the legalconsulting fee obligations and not the royalty or expense obligations. For thethree months ended September 30, 2005 and 2004, the Company recorded $0.3million and $1.5 million, respectively, pertaining to fees related to theseagreements. For the nine months ended September 30, 2005 and 2004, theCompany recorded $0.9 million and $1.5 million, respectively, pertaining tofees related to these agreements. On June 23, 2005, the Company receivedwritten FDA approval of BiDil. In July 2005, the Company paid $2.4 millionpursuant to the terms of these agreements.

 

Anacademic institution has asserted that patents and patent applications whichrelate to the nitric oxide stent program may require a license from suchinstitution. It is the opinion of the Company’s management and outside legalcounsel that the disputed intellectual property has been validly licensed to,or is validly owned by, the Company. Accordingly, the accompanying financialstatements do not include any provision related to this claim.

 

On July 20, 2004, the Market RegulationDepartment of the National Association of Securities Dealers, Inc. (“NASD”)advised the Company that it initiated a review of trading activity in theCompany’s common stock surrounding the Company’s July 19, 2004announcement that it had halted its phase III clinical trial of BiDil due tothe significant survival benefit seen with BiDil. The NASD is reviewing, amongother things, information on relationships between the Company’s officers,directors and service providers and individuals and institutions that may havetraded in the Company’s common stock prior to the July 19, 2004announcement. The Company has cooperated with this review and has identifiedcertain persons on the list provided to the Company by the NASD as having arelationship with the Company’s chief executive officer and others at theCompany. The Company has established a special committee of its board ofdirectors to oversee the Company’s response to this review. The Company ispresently unable to predict the outcome of this matter or the timing of itsresolution.

 

On October 3,2004, the Company entered into an agreement with Publicis Selling Solutions, Inc.(“Publicis”), a contract sales organization, pursuant to which, on the Company’sbehalf, Publicis has employed and trained a specialized cardiovascular salesforce of approximately 195 sales representatives to sell BiDil to the Company’starget prescriber markets.  The agreementis for a term of 24 months beginning January 31, 2005, with the Companyhaving the option to continue the agreement beyond this term. Estimated yearone costs are $30,964,000, excluding one-time start-up costs of $3,108,000, andyear two costs are projected at $32,494,000. The Company has the right toterminate this agreement upon 90 days written notice to Publicis.  If the Company terminates this agreementduring months one through twelve of the term of the agreement, the Company isrequired to pay a termination fee in the amount of $1.0 million. If the Companyterminates this agreement during months thirteen through eighteen, thetermination fee will be $750,000. If the Company terminates the agreement aftermonth eighteen, no termination fee will be assessed. For the three months endedSeptember 30, 2005, $8.3 million has been paid, and $8.3 million has beenexpensed related to this agreement. For the nine months ended September 30,2005, $20.8 million has been paid, and $21.6 million has been expensed relatedto this agreement.

 

On February 16,2005, the Company engaged Schwarz Pharma Manufacturing, Inc. (“SchwarzPharma”) under a five-year exclusive manufacturing and supply agreement solelyfor the three times daily immediate release dosage formulation of BiDil. Underthe supply agreement, the Company has the right to engage a backupmanufacturer. In connection with this supply agreement, the Company placedbinding purchase orders in the amount of $1.5 million for production of BiDilfinished goods during the fourth quarter of 2005. On June 29, 2005, theCompany and Schwarz Pharma executed a Quality Agreement that delineated currentGood Manufacturing Practice, or cGMP, responsibilities between the two parties.

 

TheCompany orders bulk materials from the same suppliers that were used for theclinical trial batches of BiDil: hydralazine from Flavine, the U.S.representative of Sumitomo, and isosorbide dinitrate from Dottikon, and has themdelivered directly to Schwarz Pharma for manufacturing. In connection with theCompany’s procurement of hydralazine from 

 

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Flavine, the Companyplaced an irrevocable purchase order for $3,150,000 in November 2004,$787,500 of which was paid prior to December 31, 2004, $616,000 of whichwas paid during the first quarter of 2005, and $928,000 of which was paidduring the second quarter of 2005. The remaining obligation was paid during thethird quarter of 2005, upon the receipt of the final shipment of hydralazineunder this purchase order.

 

On June 23,2005, the Company engaged Cardinal Health PTS, LLC (“Cardinal Health”), under athree-year exclusive agreement for the commercial distribution of BiDil. Estimatedyear one costs are $290,000, excluding one-time program implementation fees of$40,000, and year two costs are projected at $450,000. The Company has theright to terminate this agreement upon 120 days written notice to CardinalHealth and would be required to pay Cardinal Health the lesser of (1) thefixed fees for the remainder of the initial term of the agreement, or (2) thefixed fees for a period of twelve months, upon termination.

 

**Item2.****           Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

**Overview**

 

We are a pharmaceuticalcompany that discovers, develops and seeks to commercialize proprietarypharmaceuticals. We have devoted substantially all of our efforts towards theresearch and development of our product candidates. Since our inception, wehave mainly funded our operations through the sale of equity securities, debtfinancings, license fees, research and development funding and milestonepayments from our collaborative partners. We have never been profitable andhave incurred an accumulated deficit of $210.9 million as of September 30,2005.

 

In June 23,2005, the U.S. Food and Drug Administration, or FDA, approved our product,BiDil, for the treatment of heart failure in self-identified black patients.BiDil is an orally administered fixed dose combination of isosorbide dinitrateand hydralazine. We launched BiDil in July 2005 and generated productsales of $1.1 million during the third quarter of 2005. BiDil is indicated toimprove survival, prolong time to first hospitalization for heart failure andimprove patient-reported functional status, as an adjunct to current standardheart failure therapy in self-identified black patients. There is littleexperience in patients with New York Heart Association class IV heart failure.Most patients in the clinical trial supporting effectiveness, referred to asthe African American Heart Failure Trial (“A-HeFT”), received, in addition toBiDil or placebo, a loop diuretic, an angiotensin converting enzyme inhibitoror an angiotensin receptor blocker, and a beta blocker and many also received acardiac glycoside or an aldosterone antagonist.

 

Weexpect that research, development and commercialization expenses relating toour product candidates and to enhancing our core technologies will continue toincrease in the near term and may vary significantly from our currentestimates. We currently estimate that our operating expenses related toresearch and development, and sales, general and administrative for the yearended December 31, 2005, will be in the range of $100.0 million to $115.0million.  We also estimate that sales,general and administrative costs will increase significantly in connection withthe launch of BiDil that took place in the third quarter of 2005. We currentlyestimate that our existing cash, cash equivalents and marketable securitieswill be sufficient to fund our operating plan, including increased operatingexpenses in support of the launch of BiDil, for at least the next ten months.

 

In thenear-term, a key driver of our success will be our ability to successfullylaunch BiDil and achieve market penetration of BiDil. We will need to generatesignificant revenues to achieve profitability. At the present time we areunable to estimate the level of revenues that we will realize from the sales ofBiDil or the commercialization of other product candidates that we maysuccessfully commercialize. We are therefore unable to estimate when we willachieve profitability, if at all.

 

On July 20,2004, the Market Regulation Department of the National Association ofSecurities Dealers, Inc., or NASD, advised us that it initiated a reviewof trading activity in our common stock surrounding our July 19, 2004announcement that we had halted our phase III clinical trial of BiDil due tothe significant survival benefit seen with BiDil. The NASD is reviewing, amongother things, information on relationships between our officers, directors andservice providers and individuals and institutions that may have traded in ourcommon stock prior to the July 19, 2004 announcement. We have cooperatedwith this review and have identified certain persons on the list provided to usby the NASD as having a relationship with our chief executive officer andothers at NitroMed. We have established a special committee of our board ofdirectors to oversee our response to this review.

 

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**FinancialOperations Overview**

 

*Revenue.* Our first commercial product, BiDil, was launched in July 2005, andgenerated product sales of $1.1 million in the third quarter of 2005. Prior tothe launch of BiDil all of our revenue had been derived from license fees,research and development payments and milestone payments that we have receivedfrom our corporate collaborators. In future years, we will seek to generaterevenue from a combination of product sales, up-front fees, milestone androyalty payments in connection with collaborative or strategic relationships,as well as royalties resulting from the license of our intellectual property.We expect that any collaborative revenue we generate will fluctuate fromquarter to quarter as a result of the timing and amount of research anddevelopment, milestone and other payments received under our collaborative orstrategic relationships and related continuing obligations, as well as thetiming and amount of revenue we recognize for the sale of our products, to theextent any are successfully commercialized.

 

*Research and Development.*  Research and development expense consists ofexpenses incurred in identifying, developing and testing product candidates.These expenses consist primarily of salaries and related expenses forpersonnel, fees paid to professional service providers for independentmonitoring and analysis of our clinical trials, costs of contract research andmanufacturing, costs of facilities and BiDil medical support costs.

 

Thefollowing summarizes our primary research and development programs. We have notprovided program costs because prior to 2000 we did not track and accumulatecost information by research program.

 

*•**                  BiDil.* From May 2001to July 2004, we enrolled 1,050 patients at 169 clinical sites in theUnited States in our phase III clinical trial for BiDil. We halted the trial inJuly 2004 due to a significant survival benefit in the preliminary datafor patients taking BiDil. The FDA approved BiDil on June 23, 2005, and welaunched BiDil in July 2005. We estimate that the total cost for the BiDiltrial will be at least $42.0 million.

 

*•**                  Nitric Oxide-EnhancingCardiovascular Compounds.* We are using our know-how and expertise in nitricoxide to develop new chemical entities, or drugs, that are nitricoxide-enhanced versions of existing cardiovascular medicines. These studies areat a pre-clinical stage of testing, and it remains speculative whether theaddition of nitric oxide will result in an improved clinical profile of thesecardiovascular medicines. The many uncertainties involved with the developmentof successful new products will exist until a new product candidatesuccessfully passes all preclinical safety testing as well as clinicalevaluation. A new and novel nitric oxide-enhanced cardiovascular medicine willtake several years and involve a significant and largely unknown sum ofexpenditures. The success of achieving a new nitric oxide-enhancedcardiovascular medicine is important as it is needed to fill our pipeline.Failure to produce and successfully commercialize a new product in a timelyfashion may have a material adverse effect on our business, financial positionand results of operations.

 

*•**                  Nitric OxideStents.* We are currently working with Boston Scientific Corporation, orBoston Scientific, to develop stents enhanced with a bio-compatible polymerthat is capable of releasing nitric oxide. This program is in pre-clinicaldevelopment. In accordance with the terms of our agreement with BostonScientific, its obligation to fund research under the program ends in December 2005.We expect that additional expenditures will be required to conduct pre-clinicaltesting and, if such pre-clinical testing is successful, to apply for andconduct clinical trials. Because this program is in pre-clinical development,the successful development of products based upon this program is highlyuncertain. As such, we are unable to estimate the cost to complete the researchand development phase, nor are we able to estimate the timing of bringingproduct candidates to market and, therefore, when material cash inflows frommilestones and royalties could commence. Our failure, or our partner’s failure,to commercialize products based upon this program on a timely basis could havea material adverse effect on our business, financial position and results ofoperations.

 

*•**                  NitricOxide-Enhancing COX-2 Inhibitors.* From December 2002 until November 2004,we had a collaboration with Merck Frosst Canada & Co., a wholly-ownedsubsidiary of Merck & Co., or Merck, to screen proprietary nitricoxide-enhanced COX-2 inhibitors in advance of clinical testing as analgesic andanti-inflammatory agents and in other specified disease areas. These agents areintended to be second-generation COX-2 inhibitors. On September 30, 2004,Merck halted the phase II trial of our lead candidate in nitric oxide-enhancingCOX-2 inhibitors. In November 2004, we agreed with Merck to terminate thecollaboration agreement. We retain all rights to our technology in the field ofnitric oxide-enhancing COX-2 inhibitors and may seek collaborations with otherpotential partners to utilize the full value, if any, of this technology in thedevelopment of new analgesic and anti-inflammatory agents. Significantadditional expenditures will be required to conduct pre-clinical testing and toapply for, and conduct, clinical trials. Because these agents are in pre-clinicaldevelopment, their successful 

 

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developmentis highly uncertain. As such, we are not able to estimate the cost to completethe research and development phase, nor are we able to estimate the timing ofbringing potential candidates to market and, therefore, when material cashinflows from milestones and royalties could commence. Our failure, or anyfuture partner’s failure, to commercialize these product candidates underdevelopment on a timely basis could have a material adverse effect on ourbusiness, financial condition and results of operations.

 

*•**                  Other DiscoveryResearch.* We are also currently utilizing our nitric oxide expertise todevelop products for additional medical conditions, and we are also currentlyworking on the development of a sustained release version of BiDil. Our effortsin these areas consist primarily of discovery-stage research primarily directedto establishing our intellectual property position. We expect that additional expenditureswill be required to conduct pre-clinical testing and, if such pre-clinicaltesting is successful, to apply for, and conduct, clinical trials for any suchprograms. Because these programs are in pre-clinical development, thesuccessful development of products based upon these programs is highlyuncertain. As such, we are not able to estimate the cost to complete researchand development, nor are we able to estimate the timing of bringing productcandidates to market and, therefore, when material cash inflows from productsales, milestones and royalties could commence.

 

*Sales, General and Administrative.*  Sales, general and administrative expenseconsists primarily of salaries and other related costs for personnel in salesand marketing, executive, finance, investor relations, accounting, businessdevelopment and human resource functions. Other costs include facility costsnot otherwise included in research and development expense; costs for publicrelations, advertising and promotion services; professional fees for legal andaccounting services; and costs related to our third party contract salesagreement with Publicis Selling Solutions, Inc., or Publicis.

 

Wehave incurred, and expect to continue to incur, increased sales, general andadministrative expense for investor relations and other activities associatedwith operating as a public company. We expect to continue to incur increasedinternal and external business development costs to support our various productdevelopment efforts, which can vary from period to period. During the remainderof 2005, we also anticipate incurring significant increased expenses inconnection with the commercial launch of BiDil.

 

*Non-Operating Income.*  Interest income includes interest earned onour cash, cash equivalents and marketable securities, and interest expenseassociated with our long-term debt.

 

*Boston Scientific Collaboration.*  In November 2001, we entered into adevelopment and license agreement with Boston Scientific to developcardiovascular stents enhanced with nitric oxide-releasing compounds. Wegranted Boston Scientific an exclusive worldwide license to develop andcommercialize products for restenosis incorporating two nitric oxide-releasingcompounds. In consideration of this license, Boston Scientific made an upfrontnon-refundable license payment of $1.5 million, which is being recognizedover the estimated time period of our contractual obligation to provideresearch and development services. In the event that specified research,development and commercialization milestones are achieved, Boston Scientific isobligated to make milestone payments to us. Boston Scientific is also obligatedto pay royalties to us on the sale of any products resulting from thecollaboration. In December 2003, we agreed to extend the research anddevelopment collaboration through December 2005 and received an additional$3.0 million, which is being recognized ratably over the research anddevelopment collaboration term. Boston Scientific made a $3.5 millionequity investment in our stock in 2001 and made an additional $500,000 equityinvestment in our stock in August 2003.

 

*Merck Collaboration.*  From December 2002 until November 2004,we were party to an exclusive, worldwide research, collaboration and licensingagreement that granted Merck marketing and sales rights for nitricoxide-enhancing COX-2 inhibitors. The research portion of the agreement was forthree years. In 2003, we received an upfront non-refundable license payment of$10.0 million and two payments, each of $5.0 million, for achievingthe first two milestones. The license fee revenue and the revenue from thefirst $5.0 million milestone payment were being recognized over thecontractual term of the research and development program, which was expected toend on December 31, 2005. The revenue from the second $5.0 millionpayment was recognized in the fourth quarter of 2003, the period in which Merckachieved the milestone. On September 30, 2004, Merck halted the phase IItrial of our lead candidate in nitric oxide-enhancing COX-2 inhibitors. Thislead nitric oxide candidate is composed of a derivative of rofecoxib. Rofecoxibis the active ingredient in Vioxx, a COX-2 inhibitor which Merck voluntarilywithdrew from worldwide markets on September 30, 2004. In November 2004,we agreed with Merck to terminate the collaboration agreement. Merck paid us alump sum of $1.8 million, representing the full amount of the researchfunding owed to us for 2005, however, we will not receive any commercializationmilestones or royalty payments from Merck. As a result of the termination ofthis agreement, we accelerated the recognition of deferred license revenue of$5.3 million in the fourth quarter of 2004, and we recognized the lump sumpayment of $1.8 million as revenue in the fourth quarter of 2004. Noresearch and development fees were recognized as revenue during the three andnine month 

 

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periods ended September 30,2005. During the three and nine month periods ended September 30, 2004, wereceived $0.6 million and $1.8 million, respectively, in research anddevelopment fees from Merck, all of which has been recognized as revenue forthe three and nine months, respectively.

 

**Resultsof Operations**

 

***ThreeMonths Ended September 30, 2005 and 2004***

 

*Revenue.*  Total revenue for the three months ended September 30,2005 was approximately $1.5 million compared to approximately $2.3 millionfor the three months ended September 30, 2004.

 

Product sales wereapproximately $1.1 million for the three month period ended September 30,2005, due to the commercial launch of BiDil in July 2005. There were noproduct sales for the three month period ended September 30, 2004.

 

Research and developmentrevenues decreased 83% to approximately $0.4 million for the three month periodended September 30, 2005, from approximately $2.3 million for the threemonth period ended September 30, 2004, primarily due to the termination ofthe Merck agreement in November 2004.

 

*Costof Product Sale*s.  Costof product sales were approximately $2.9 million for the three month periodended September 30, 2005. There were no cost of product sales for thethree month period ended September 30, 2004. Cost of product sales for thethree month period ended September 30, 2005 includes an impairment chargeof commercial trade product and patient sample inventory of $2.6 million.

 

*Researchand Development.* Research and development expense for the three months ended September 30,2005 was approximately $7.4 million compared to approximately $8.1 millionfor the three months ended September 30, 2004. The $0.7 million, or 9%decrease in research and development expenses was primarily due to decreases inclinical trial expense as a result of the early halting of the African AmericanHeart Failure Trial (“A-HeFT”) in the third quarter of 2004, offset partiallyby increases in medical support costs in the third quarter of 2005 associatedwith obtaining FDA approval and supporting the launch of BiDil.

 

The following tablesummarizes the primary components of our research and development expense forour principal research and development programs for the three month periodsended September 30, 2005 and 2004.

 
| ** **                                      | ** ** | **Three Months Ended  September 30,** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                      | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| **Research and Development Program**            |       |                                       |       |   |   |
|                                            |       |                                       |       |   |   |
| BiDil                                           |       | $                                          | 3.8        |   | $ | 5.7 |   |
| Nitric oxide-enhancing cardiovascular compounds |       | 1.6                                        |       | — |   |
| Nitric oxide enhanced stents                    |       | 0.5                                        |       | 0.9 |   |
| Nitric oxide-enhancing COX-2 inhibitors         |       | —                                     |       | 1.0 |   |
| Other discovery research                        |       | 1.5                                        |       | 0.5 |   |
| Total research and development expense          |       | $                                          | 7.4        |   | $ | 8.1 |   |

 

*Sales,General and Administrative.* Sales, general and administrative expense for the three months ended September 30,2005 was approximately $23.6 million compared to approximately $5.4 million forthe three months ended September 30, 2004. The $18.3 million, or 341% increase in sales, general and administrativeexpense was primarily due to $18.1 million for the launch of BiDil, includingcosts related to the contract sales force agreement with Publicis, hiring ofsales and marketing management personnel, public relations services andadvertising and promotion services.

 

*Non-OperatingIncome.*  Non-operatingincome for the three months ended September 30, 2005 was approximately$297,000 compared to approximately $340,000 for the three months ended September 30,2004. The $43,000 or 13% decrease was primarily due to $479,000 in interestexpense incurred on long-term debt for the three months ended September 30,2005, partially offset by higher fund balances available for investment as aresult of the closing of our follow-on offering of common stock in December 2004.

 

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***NineMonths Ended September 30, 2005 and 2004***

 

*Revenue.*  Total revenue for the nine months ended September 30,2005 was approximately $2.3 million compared to approximately $7.0 millionfor the nine months ended September 30, 2004.

 

Product sales wereapproximately $1.1 million for the nine month period ended September 30,2005, due to the commercial launch of BiDil in July 2005. There were noproduct sales for the nine month period ended September 30, 2004.

 

Research and developmentrevenues decreased 83% to approximately $1.2 million for the nine month periodended September 30, 2005, from approximately $7.0 million for the ninemonth period ended September 30, 2004, primarily due to the termination ofthe Merck agreement in November 2004.

 

*Costof Product Sale*s.  Costof product sales were approximately $2.9 million for the nine month periodended September 30, 2005. There were no cost of product sales for the ninemonth period ended September 30, 2004. Cost of product sales for the threemonth period ended September 30, 2005 includes an impairment charge ofcommercial trade product and patient sample inventory of $2.6 million.

 

*Researchand Development.* Research and development expense for the nine months ended September 30,2005 was approximately $23.4 million compared to approximately $18.8 millionfor the nine months ended September 30, 2004. The $4.6 million, or 24%increase in research and development expense was primarily due to increasedmedical support costs in the third quarter of 2005 associated with obtainingFDA approval and supporting the launch of BiDil, offset partially by decreasesin clinical trial expense as a result of the early halting of the AfricanAmerican Heart Failure Trial (“A-HeFT”) in the third quarter of 2004.

 

The following tablesummarizes the primary components of our research and development expense forour principal research and development programs for the nine month periodsended September 30, 2005 and 2004.

 
| ** **                                      | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                      | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
| **Research and Development Program**            |       |                                      |       |   |   |
|                                            |       |                                      |       |   |   |
| BiDil                                           |       | $                                         | 14.4       |   | $ | 13.4 |   |
| Nitric oxide-enhancing cardiovascular compounds |       | 4.3                                       |       | — |   |
| Nitric oxide enhanced stents                    |       | 1.5                                       |       | 1.8 |   |
| Nitric oxide-enhancing COX-2 inhibitors         |       | —                                    |       | 2.2 |   |
| Other discovery research                        |       | 3.2                                       |       | 1.4 |   |
| Total research and development expense          |       | $                                         | 23.4       |   | $ | 18.8 |   |

 

*Sales,General and Administrative.* Sales, general and administrative expense for the nine months ended September 30,2005 was approximately $52.2 million compared to approximately $9.2 million forthe nine months ended September 30, 2004. The $43.0 million, or 467% increase in sales, general and administrativeexpenses was primarily due to $40.4 million for the launch of BiDil, includingcosts related to the contract sales force agreement with Publicis, hiring ofsales and marketing management personnel, public relations services and advertisingand promotion services.

 

*Non-OperatingIncome.*  Non-operatingincome for the nine months ended September 30, 2005 was approximately $1.8million compared to approximately $0.9 million for the nine months ended September 30,2004. The $0.9 million, or 100% increase was primarily due to higher fundbalances available for investment as a result of the closing of our follow-onoffering of common stock in December 2004, partially offset by $495,000 ininterest expense incurred on long-term debt for the nine months ended September 30,2005.

 

**Liquidityand Capital Resources**

 

We have primarilyfinanced our operations since inception through the sale of equity, debt andpayments from collaborative partners for licenses, research and development andachievement of milestones. As of September 30, 2005, we have received netproceeds of $242.8 million from the issuance of equity securities, primarily asthe result of the sale of $99.1 million of our redeemable convertible preferredstock, net proceeds of $60.1 million from our initial public offering in November 2003and net proceeds of $81.8 million from our follow-on public offering in December 2004.At September 30, 2005, we had $88.0 million in cash, cash equivalents andmarketable securities.

 

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On June 28, 2005, weborrowed (i) $10.0 million from Oxford Finance Corporation, or Oxford, and(ii) $10.0 million from General Electric Capital Corporation, or GECC,pursuant to the terms of promissory notes made by us with both Oxford and GECC,respectively.  The notes bear interest at a fixed rate of 9.95% per annumand are payable in 36 consecutive monthly installments of principal and accruedinterest, beginning July 1, 2005. The notes are secured by a securityinterest in all our personal property and fixtures with the exception of anyintellectual property or products acquired, whether by purchase, license orotherwise, on or after the execution of the notes. The agreements that weentered into with each of Oxford and GECC in connection with the notes alsocontain a material adverse change clause with both Oxford and GECC. Under thisclause, if Oxford or GECC reasonably determine that our ability to repay thenotes has been materially impaired, we would be considered in default. As of September 30,2005, we were in compliance with this clause.

 

On August 3,2005, we filed a registration statement utilizing a “shelf” registrationprocess with the Securities and Exchange Commission, or SEC. Under this shelfprocess, we may sell from time to time, in one or more offerings of commonstock and debt securities up to a total dollar amount of $250 million. Thisshelf registration is more fully detailed in a Registration Statement on Form S-3we filed with the SEC on August 3, 2005.

 

During the nine monthsended September 30, 2005, operating activities used cash of approximately$72.9 million, driven by a net loss of $74.3 million, an increase in accountsreceivable of $12.9 million, and an increase in inventory of $5.1 million, offsetby an increase in deferred revenue of $11.2 million, an increase in accountspayable and accrued expenses of $5.2 million, and an increase in prepaidexpenses and other current assets of $1.8 million.

 

During the nine monthsended September 30, 2005, investing activities provided cash of $30.0million due to net sales of marketable securities of $30.9 million, offset bypurchases of property and equipment of $0.9 million due to the purchases ofcomputers and lab equipment. We expect to invest approximately $1.5 to$2.0 million in capital expenditures for 2005, principally related to thepurchase of laboratory equipment and computer equipment to support headcountgrowth.

 

During the nine monthsended September 30, 2005, financing activities provided cash of $19.3million due to proceeds from $20.0 million in long-term debt and $0.9 millionin proceeds from stock plans, offset by $1.6 million in principal payments onlong-term debt.

 

*Contractual Obligations*

 

Thefollowing table summarizes our contractual obligations at September 30,2005, and the effects such obligations are expected to have on our liquidityand cash flows in future periods.

 
| **Contractual Obligations**                | ** ** | **Total**  | ** ** | **Less than  one year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  five years** | ** ** |
|--------------------------------------------|------------|------------|------------|-------------------------|------------|---------------|------------|---------------|------------|---------------------------|------------|
|                                       |       |       |       |                    |       |          |       |          |       |                      |       |
| Operating lease obligation                 |       | $          | 13,919,000 |                    | $          | 1,089,000     |       | $             | 3,010,000  |                      | $          | 3,208,000 |   | $ | 6,612,000 |   |
| Purchase obligations (1)                   |       | 43,850,000 |       | 33,019,000              |       | 10,831,000    |       | —        |       | —                    |       |
| Long term debt                             |       | 21,128,000 |       | 7,675,000               |       | 13,453,000    |       | —        |       | —                    |       |
| Consulting and license payment obligations |       | 398,000    |       | 398,000                 |       | —        |       | —        |       | —                    |       |
| Total contractual cash obligations         |       | $          | 79,295,000 |                    | $          | 42,181,000    |       | $             | 27,294,000 |                      | $          | 3,208,000 |   | $ | 6,612,000 |   |

 

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(1) OnOctober 3, 2004, we entered into an agreement with Publicis, a contractsales organization, pursuant to which, on our behalf, Publicis has employed andtrained a specialized cardiovascular sales force of approximately 195 salesrepresentatives to sell BiDil to our target prescriber markets. The agreementis for a term of 24 months, with our option to continue the agreement beyondthis term. We have the right to terminate this agreement upon 90 days writtennotice to Publicis. If we terminate this agreement during months one througheighteen of the term of the agreement, we will be required to pay a terminationfee. If we terminate the agreement after month eighteen, no termination feewill be assessed. On July 14, 2005, we placed binding purchase orders inthe approximate amount of $1.5 million with Schwarz Pharma Manufacturing, Inc.for production of BiDil finished goods during the fourth quarters of 2005.

 

Webelieve that our existing cash, cash equivalents and marketable securities willbe sufficient to fund our operating plan, including increased operatingexpenses in support of the launch of BiDil, for at least the next ten months.However, we may require significant additional funds earlier than we currentlyexpect.

 

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We mayseek additional funding through collaborative arrangements and public orprivate financings. Additional funding may not be available to us on acceptableterms or at all. In addition, the terms of any financing may adversely affectthe holdings or the rights of our stockholders. For example, if we raiseadditional funds by issuing equity securities or convertible debt securities,further dilution to our existing stockholders may result. If we are unable toobtain funding on a timely basis, we may be required to significantly curtailone or more of our research or development programs. We also could be requiredto seek funds through arrangements with collaborators or others that mayrequire us to relinquish rights to some of our technologies, product candidatesor products which we would otherwise pursue on our own.

 

Evenif we are able to raise additional funds in a timely manner, our future capitalrequirements may vary from what we expect and will depend on many factors,including the following:

 

•                                          thecosts of launching BiDil;

 

•                                          therevenues generated from the sales of BiDil;

 

•                                          thetiming, receipt, and amount of royalties, milestone and other payments, if any,from collaborators;

 

•                                          thetiming, receipt, and amount of sales and royalties, if any, from our productcandidates;

 

•                                          theresources required to successfully complete our clinical trials;

 

•                                          thetime and costs involved in obtaining regulatory approvals;

 

•                                          continuedprogress in our research and development programs, as well as the magnitude ofthese programs;

 

•                                          thecost of manufacturing, distribution, marketing and sales activities;

 

•                                          thecosts involved in preparing, filing, prosecuting, maintaining and enforcingpatent claims;

 

•                                            thecost of obtaining and maintaining licenses to use patented technologies; and

 

•                                            ourability to establish and maintain additional collaborative arrangements.

 

**CriticalAccounting Policies and Estimates**

 

Ourdiscussion and analysis of our financial condition and results of operationsare based on our financial statements, which have been prepared in accordancewith accounting principles generally accepted in the United States. Thepreparation of these financial statements requires us to make estimates andjudgments that affect the reported amounts of assets and liabilities and thedisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting periods. On an on-going basis, we evaluate our estimates andjudgments, including those related to revenue and related reserves, accountsreceivable, inventories, accrued expenses and the factors used to determine thefair value assigned to our stock options. We base our estimates on historicalexperience, known trends and events and various other factors that are believedto be reasonable under the circumstances, the results of which form the basisfor making judgments about the carrying values of assets and liabilities thatare not readily apparent from other sources. Actual results may differ fromthese estimates under different assumptions or conditions.

 

Webelieve the following critical accounting policies affect our more significantjudgments and estimates used in the preparation of our financial statements:

 

*Revenue.* Our principal source of revenueis the sale of BiDil, which began shipping in the third quarter of 2005. Othersources of revenue to date include license fees, research and developmentpayments and milestone payments that we have received from our corporatecollaborators.

 

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*Product Sales/Deferred Revenue.*We followthe provisions of Staff Accounting Bulletin No. 104, “Revenue Recognition”and recognize revenue from product sales upon delivery of product towholesalers or pharmacies, when persuasive evidence of an arrangement exists, thefee is fixed or determinable, title to product and associated risk of loss haspassed to the wholesaler and collectibility of the related receivable isreasonably assured. All revenues from product sales are recorded net ofapplicable allowances for sales returns, rebates, chargebacks, and discounts.For arrangements where the risk of loss has not passed to wholesalers orpharmacies, we defer the recognition of revenue by recording deferred revenueuntil such time that risk of loss has passed. Also, the cost of BiDilassociated with amounts recorded as deferred revenue are recorded in inventoryuntil such time as risk of loss has passed.

 

*Sales Rebates, Discounts and Incentives.*Ourproduct sales are subject to various rebates, discounts and incentives that arecustomary in the pharmaceutical industry.

 

Duringthe third quarter of 2005, we offered certain product stocking incentives to anumber of wholesalers and pharmacy customers. These incentives included unitswith guaranteed sales provisions and extended payment terms. As a result ofthese provisions, risk of loss of these units has not passed to the customer.Accordingly, we have deferred all revenue related to these units until suchtime as the unit is provided to a patient with a prescription. As of September 30,2005, the remaining balance of deferred revenue related to these units wasapproximately $12.1 million.

 

Duringthe third quarter of 2005, we offered certain incentives to a number ofpharmacy customers. These incentives included placement and advertisingassistance in the approximate amount of $328,000. As a result of theseincentives we recorded a reduction to revenue of approximately $164,000 for thethree months ended September 30, 2005. The remainder of these incentiveswill be recognized as a reduction to revenue as earned.

 

Beginningin the third quarter of 2005, we initiated a voucher program whereby we offeredan incentive to patients in the form of a free 30-day trial of BiDil. We haveaccounted for this program in accordance with Emerging Issues Task Force Issue No. 01-09,“Accounting for Consideration Given by a Vendor to a Customer” (EITF No. 01-09).These initial voucher incentives had an expiration date of September 30,2005 at which time we recorded the actual amount of reimbursement claims forthe vouchers distributed during the third quarter of 2005. As a result of thisprogram we recorded a reduction to revenue of approximately $252,000 for thethree months ended September 30, 2005. We expect to continue to offervoucher incentives in future periods.

 

Alarge portion of our product sales are made to pharmaceutical wholesalers forfurther distribution through pharmacies to patients, who are consumers of theproduct. All revenues from product sales are recorded net of applicableallowances for returns, wholesaler chargebacks and cash discounts. We estimatewholesaler chargebacks, cash discounts and other rebates by considering thefollowing factors: current contract prices and terms, estimated customer andwholesaler inventory levels and current average chargeback rates. Theinformation used to estimate product returns includes the remaining shelf lifeand the product life cycle stage as well as historical information based onproduct return allowances for similar or competing products in the samedistribution channel. Also, we will obtain and evaluate product return datafrom distributors, and based on this evaluation, estimate return rates. Thereserves are reviewed at each reporting period and adjusted to reflect dataavailable at that time. We have accrued approximately $34,000 in sales returnreserves as of September 30, 2005. To the extent that our estimates ofcontractual allowances, rebates and sales returns are different from actuals,we will adjust the reserve which impacts the amount of product sales revenuerecognized in the period of the adjustment. We have not received anysignificant returns through September 30, 2005.

 

*Collaboration Revenue.*We record revenueon an accrual basis as it is earned and when amounts are consideredcollectible. Revenues received in advance of performance obligations or incases where we have a continuing obligation to perform services are deferredand recognized over the contractual or estimated performance period. Revenuesfrom milestone payments that represent the culmination of a separate earningsprocess are recorded when the milestone is achieved. Contract revenues arerecorded as the services are performed. When we are required to defer revenue,the period over which such revenue should be recognized is subject to estimatesby management and may change over the course of the collaborative agreement. Infuture periods, we expect revenues derived from collaboration agreements willcontinue to decrease, and product revenues will continue to increase based onanticipated increased volume of prescriptions of BiDil.

 

*Inventories*.  We review our estimates of the net realizablevalue of our inventories at each reporting period. Our estimate of the netrealizable value of our inventories is subject to judgment andestimation. The actual net realizable value of our inventories could varysignificantly from our estimates and could have a material effect on ourfinancial condition and results of operations in any reportingperiod. BiDil currently has a twelve month shelf life.****On a quarterly basis, we analyze ourinventory levels and write down inventory that has become un-saleable,inventory that has a cost basis in excess of its 

 

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expected net realizablevalue and inventory that is in excess of expected requirements of productrevenues. Expired inventory will be disposed of, and the related costs will bewritten off.  For the three months ended September 30,2005, we recorded an impairment charge of $2.6 million to cost of sales relatedto commercial trade and patient sample product that will expire by April 2006.

 

*Accrued Expenses.*  As part of the process of preparing financialstatements, we are required to estimate accrued expenses. This process involvesidentifying services which have been performed on our behalf, and estimatingthe level of service performed and the associated cost incurred for suchservice as of each balance sheet date in our financial statements. Examples ofestimated expenses we accrue include contract service fees such as amounts paidto our third party contract sales organization, Publicis, clinical monitors,data management organizations and investigators in conjunction with clinicaltrials, fees paid to contract manufacturers in conjunction with the productionof clinical materials, marketing, advertising, consulting fees and professionalservice fees, such as lawyers and accountants. In connection with such servicefees, our estimates are most affected by our understanding of the status andtiming of services provided relative to the actual levels of services incurredby such service providers. The majority of our service providers invoice usmonthly in arrears for services performed. In the event that we do not identifycertain costs which have begun to be incurred, or we over or under estimate thelevel of services performed or the costs of such services, our reportedexpenses for such period would be too low or too high. The date on whichcertain services commence, the level of services performed on or before a givendate and the cost of such services are often determined based on subjectivejudgments. We make these judgments based upon the facts and circumstances knownto us in accordance with generally accepted accounting principles.

 

*Stock-Based Compensation.*  We have elected to follow AccountingPrinciples Board, or APB, Opinion No. 25, “Accounting for Stock Issued toEmployees,” or APB 25, and related interpretations, in accounting for ourstock-based compensation plans, rather than the alternative fair value methodprovided for under Statement of Financial Accounting Standards No. 123, “Accountingfor Stock-Based Compensation,” or SFAS 123. In 2003 and 2002, certaingrants of stock options were made at exercise prices less than the fair valueof our common stock and, as a result, we recorded deferred stock-basedcompensation expense. We account for transactions in which services arereceived from non-employees in exchange for equity instruments based on thefair value of such services received or of the equity instruments issued,whichever is more reliably measured, in accordance with SFAS 123 and theEmerging Issues Task Force, or EITF, Issue 96-18, “Accounting for EquityInstruments that Are Issued to Other than Employees for Acquiring, or inConjunction with Selling, Goods or Services,” or EITF 96-18.

 

Accountingfor equity instruments granted or sold by us under APB 25, SFAS 123 andEITF 96-18 requires fair value estimates of the equity instrument granted orsold. If our estimates of the fair value of these equity instruments are toohigh or too low, our expenses may be over or under stated. For equityinstruments granted or sold in exchange for the receipt of goods or services,we estimate the fair value of the equity instruments based upon considerationof factors which we deem to be relevant at that time. Because shares of ourcommon stock were not publicly traded prior to the commencement of our publicoffering on November 5, 2003, market factors historically considered invaluing stock and stock option grants include comparative values of publiccompanies discounted for the risk and limited liquidity provided for in theshares we had issued, pricing of private sales of our redeemable convertiblepreferred stock, prior valuations of stock grants and the effect of events thatoccurred between the time of such grants, economic trends, and the comparativerights and preferences of the security being granted compared to the rights andpreferences of our other outstanding equity.

 

Priorto our initial public offering, the fair value of our common stock wasdetermined by our board of directors contemporaneously with the grant. In theabsence of a public trading market for our common stock, our board of directorsconsidered numerous objective and subjective factors in determining the fairvalue of our common stock. At the time of option grants and other stockissuances, our board of directors considered the liquidation preferences,dividend rights, voting control and anti-dilution protection attributable toour then-outstanding redeemable convertible preferred stock, the status ofprivate and public financial markets, valuations of comparable private andpublic companies, the likelihood of achieving a liquidity event such as an initialpublic offering, our existing financial resources, our anticipated continuingoperating losses and increased spending levels required to complete ourclinical trials, dilution to common stockholders from anticipated futurefinancings and a general assessment of future business risks.

 

**Inflation**

 

Webelieve the effects of inflation generally do not have a material adverseimpact on our operations or financial condition.

 

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**Off-BalanceSheet Arrangements**

 

We do not have anymaterial off-balance sheet arrangements.

 

**Forward-Looking Statements**

 

This Quarterly Report onForm 10-Q includes forward-looking statements within the meaning ofSection 21E of the Securities Exchange Act of 1934, as amended, which werefer to as the Exchange Act. For this purpose, any statements contained hereinregarding our strategy, future operations, financial position, future revenues,projected costs, prospects, plans and objectives of management, other thanstatements of historical facts, are forward-looking statements. The words“anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,”“projects,” “will,” “would” and similar expressions are intended to identifyforward-looking statements, although not all forward-looking statements containthese identifying words. We cannot guarantee that we actually will achieve theplans, intentions or expectations disclosed in our forward-looking statements.There are a number of important factors that could cause actual results orevents to differ materially from those disclosed in the forward-lookingstatements we make. These important factors include the risk factors set forthbelow under the caption “Factors That May Affect Future Results.” Although wemay elect to update forward-looking statements in the future, we specificallydisclaim any obligation to do so, even if our estimates change, and readersshould not rely on those forward-looking statements as representing our viewsas of any date subsequent to the date of this quarterly report.

 

**Factors That MayAffect Future Results**

** **

**Risks Relating toour Business**

 

**Because we have ahistory of losses and our future profitability is uncertain, our common stockis a highly speculative investment.**

 

We have experiencedsignificant operating losses since our inception in 1992. For the three monthsand nine months ended September 30, 2005, we had a net loss of$32.1 million and $74.3 million, respectively. As of September 30, 2005,we had an accumulated deficit of approximately $210.9 million. We expectthat we will continue to incur substantial losses and that our cumulativelosses will increase as our research, development and commercialization effortsexpand. We expect that the losses that we incur will fluctuate from quarter toquarter and that these fluctuations may be substantial. We received approvalfor BiDil from the FDA on June 23, 2005, and launched commercial sales of BiDilin July 2005. All of our other product candidates are in research orpre-clinical development and will require significant additional testing priorto submission of any regulatory applications and, as such, are not expected tobe commercially available for many years, if at all.

 

A large portion of ourexpenses is fixed, including expenses related to facilities, equipment andpersonnel. We have spent significant amounts to launch BiDil in July 2005, fundresearch, development and commercialization of our product candidates and toenhance our core technologies. As a result, we expect that our operatingexpenses will continue to increase significantly in the near term and,consequently, we will need to generate significant revenue to achieveprofitability. At the present time we are unable to estimate the level ofrevenues that we will realize from the commercialization of BiDil or any of ourother product candidates. We are therefore unable to estimate when we willachieve profitability, if at all. Even if we do achieve profitability, we maynot be able to sustain or increase profitability on a quarterly or annualbasis. Our failure to become and remain profitable could depress the marketprice of our common stock and could impair our ability to raise capital, expandour business, diversify our product offerings or continue our operations.

 

**Ourbusiness is substantially dependent on the commercial success of BiDil.**

 

On June 23, 2005, the FDAapproved BiDil for the treatment of heart failure in self-identified blackpatients. We launched BiDil in July 2005. BiDil is currently our onlycommercial product, and we expect it will account for substantially all of ourrevenues for the next several years. We face a number of significant risksrelating to our ability to successfully commercialize BiDil, including thevarious factors discussed throughout this section titled “Factors That MayAffect Future Results.” If we fail to successfully commercialize BiDil, ournear-term ability to generate product revenue, our reputation and our abilityto raise additional capital will be materially impaired, and the value of aninvestment in our stock will decline.

 

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**Wewill require substantial additional funds and, if additional capital is notavailable, we may need to limit, scale back or cease our operations.**

 

We have used and willcontinue to require substantial funds to conduct research and development,including pre-clinical testing and clinical trials of our product candidates,and to market and manufacture any products that are approved for commercialsale including our lead product, BiDil, which the FDA approved in June 2005 andwe launched in July 2005. We expect that we will incur significant expensesduring 2005 and beyond relating to manufacturing, sales and marketing of BiDil.Moreover, we may incur significant additional expenditures to conductpre-clinical testing of our early-stage development programs. Because thesuccessful development of these programs is uncertain, we are unable toestimate the actual funds we will require to complete research and developmentof our product candidates and commercialization of our products. We believethat our existing cash, cash equivalents and marketable securities will besufficient to fund our current operating plan including increased operatingexpenses in support of the launch of BiDil for at least the next ten months.

 

However, our futurecapital requirements, and the period in which we expect our current cash tosupport our operations, may vary from what we expect due to a number of factors,including the following:

 

•  the cost of launching and successfullycommercializing BiDil;

 

•  the timing and costs of obtaining regulatoryapprovals for our other product candidates;

 

•  the timing, receipt and amount of milestoneand other payments, if any, from collaborators;

 

•  the timing, receipt and amount of sales androyalties, if any, from our product candidates;

 

•  the resources required to successfullycomplete our clinical trials;

 

•  continued progress in our research anddevelopment programs, as well as the magnitude of these programs;

 

•  the effect of competing technological andmarket developments;

 

•  the costs involved in preparing, filing,prosecuting, maintaining and enforcing patent claims;

 

•  the costs related to acquiring and/orin-licensing new technologies; and

 

•  our ability to establish and maintainadditional collaborative arrangements.

 

We may be required toseek additional funding in the future and may do so through collaborativearrangements and public or private financings. Additional financing may not beavailable to us on acceptable terms, or at all. In addition, the terms of thefinancing may adversely affect the holdings or the rights of our stockholders.For example, if we raise additional funds by issuing equity securities, furtherdilution to our then-existing stockholders will result. If we are unable toobtain funding on a timely basis, we may be required to significantly curtailone or more of our research or development programs. We also could be requiredto seek funds through arrangements with collaborators or others that mayrequire us to relinquish rights to some of our technologies, product candidatesor products which we would otherwise pursue on our own.

 

**Ifwe do not successfully market and sell BiDil or our other product candidates,either directly or through third parties, our future revenue will be limited.**

 

We currently have limitedsales, marketing and distribution experience. We have launched the commercialsales of BiDil in North America ourselves, using a contract sales force, and,in the future, we may also seek to market other products ourselves which arenot already subject to marketing agreements and where we believe the targetphysician market can be effectively reached by the sales force we haveestablished directly or by contract. In order to develop or contract for salesand marketing capabilities, we will have to invest significant amounts of moneyand management resources. For BiDil and any other product candidates for whichwe decide to perform the sales, marketing and distribution functions ourselvesor through a third party, we could face a number of additional risks,including:

 

•  we may not beable to attract, build and retain or contract for a significant and qualifiedmarketing or sales force;

 

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•  the cost of establishing or contracting for amarketing and sales force may not be justifiable in light of the revenuesgenerated by any particular product or combination of products; and

 

•  our direct sales and marketing efforts maynot be successful.

 

For potential futureproducts with larger target physician markets, we plan to rely significantly onsales, marketing and distribution arrangements with third parties. For example,we plan to rely on our existing collaborator for the commercialization ofstents enhanced with nitric oxide-releasing compounds if development issuccessful and such products are approved by the FDA. We may have to enter intoadditional marketing arrangements in the future. We may not be able tosuccessfully enter into sales, marketing and/or distribution agreements withany other third parties in the future, on terms which are favorable to us, ifat all. In addition, we may have limited or no control over the sales,marketing and distribution activities of these third parties. Our futurerevenues for any products for which we rely on third-party sales, marketing anddistribution support will depend heavily on the success of the efforts of thesethird parties.

 

**Ifour third-party contract sales organization does not devote sufficientresources to our BiDil project, our ability to achieve near-term revenue couldbe harmed.**

 

We have entered into anagreement with Publicis, a contract sales organization, pursuant to which, onour behalf, Publicis has employed and trained a specialty sales force ofapproximately 195 sales representatives to sell BiDil to our target prescribermarkets. Under separate agreements, Publicis has recruited, hired and trainedeight account executives that will assist us in gaining formulary access forBiDil and has hired ten medical science liaisons to report into our MedicalAffairs group. Our near-term revenue for BiDil will depend heavily upon thesuccess and efforts of Publicis. If Publicis does not devote the resources,time and training required to establish and manage an effective and qualifiedsales force, our ability to achieve revenue from sales of BiDil will be harmed.

 

**Physicians,payors and patients may not be receptive to BiDil or our other productcandidates, if approved, which could prevent us from achieving and maintainingprofitability.**

 

BiDil and the otherproduct candidates that we are currently developing are based upon technologiesor therapeutic approaches that are not otherwise in the marketplace. We plan tomarket BiDil only in the U.S. Key participants in the U.S. pharmaceuticalmarketplace, such as physicians, payors and patients, may not accept a productintended to improve therapeutic results based on ethnicity. As a result, it maybe more difficult for us to convince the medical community, third-party payorsand patients to accept and use BiDil. Our business is substantially dependenton market acceptance of BiDil.

 

Other factors that webelieve will materially affect market acceptance of BiDil and our other productcandidates include:

 

• the timing of our receipt of any marketing approvals outside the U.S.,the terms of any non-U.S. approval (including labeling requirements and/orlimitations), and the countries in which approvals are obtained, if any;

 

• the safety, efficacy and ease of administration and our other productcandidates;

 

• the ability to produce BiDil and our other product candidates at acompetitive price;

 

• the success of our promotional programs; and

 

•  the availability of government andthird-party payor reimbursement.

 

**If BiDilis not commercially successful, the value of inventory we have purchased may bematerially adversely affected.**

 

We are currentlypurchasing raw materials and commercial quantities of BiDil finished product tosupport BiDil after its July 2005 launch. If we fail to successfully commercialize BiDil, our inventories could bematerially impaired and their value diminished, and we could forfeitsignificant expenditures already incurred. Moreover, our business and operating results could be materially andadversely affected as a result of inaccurate forecasting of inventory levelsbecause our current forecasting is based upon our estimate of expected customerorders following BiDil’s July 2005 product launch.

 

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** **

**Theapplication of our nitric oxide technology is unproven in humans and, as aresult, we may not be able to successfully develop and commercialize anyproducts based upon this technology.**

 

A component of ourstrategy is to seek to improve existing medicines with our proprietary nitricoxide technology. Our product candidates include nitric oxide enhancements ofexisting drugs. Thus, we are modifying compounds whose chemical andpharmacological profiles are well-documented and understood. However, many ofour potential product candidates are new molecules with chemical andpharmacological profiles that differ from that of the existing drugs. Thesecompounds may not demonstrate in patients the chemical and pharmacologicalproperties shown in laboratory studies, and they may interact with humanbiological systems in unforeseen, ineffective or harmful ways. In addition, itis possible that existing drugs or newly-discovered drugs may not benefit fromthe application of our nitric oxide technology. If we are not able tosuccessfully develop and commercialize drugs based upon our technology, we willnot generate revenue based on these drugs, and the value of our stock willdecline.

 

**Ifour clinical trials for any product candidates we advance into clinical testingare not successful, we may not be able to successfully develop andcommercialize these product candidates.**

 

In order to obtainregulatory approvals for the commercial sale of our product candidates, we orour collaborators will be required to complete extensive clinical trials inhumans to demonstrate the safety and efficacy of our product candidates. We maynot be able to obtain authority from the FDA or other regulatory agencies tocommence or complete these clinical trials. If permitted, such clinical testingmay not prove that our product candidates are sufficiently safe and effectiveto permit us to obtain marketing approvals from regulatory authorities.Moreover, positive results demonstrated in pre-clinical studies and clinicaltrials that we complete may not be indicative of results obtained in futureclinical trials. Furthermore, we, one of our collaborators, institutionalreview boards or regulatory agencies may suspend clinical trials at any time ifit is believed that the patients participating in such trials are being exposedto unacceptable health risks. Adverse or inconclusive clinical trial resultsconcerning any of our product candidates could require us to conduct additionalclinical trials, result in increased costs and significantly delay the filingfor marketing approval for those product candidates with the FDA or result in afiling for a narrower indication than was originally sought or result in adecision to discontinue development of those product candidates.

 

The successful completionof our clinical trials will depend on, among other things, the rate of patientenrollment. Patient enrollment is a function of many factors, including thesize of the patient population, the nature of the clinical protocol, theavailability of alternative treatments, the proximity of patients to clinicalsites and the eligibility criteria for the study. We may be unable to enrollthe number of patients we need to complete a trial on a timely basis. Moreover,delays in planned patient enrollment for clinical trials may cause us to incurincreased costs and delay commercialization.

 

We have relied onacademic institutions or clinical research organizations to supervise or monitorsome or all aspects of our African American Heart Failure Trial, and we expectto rely on academic institutions and clinical research organizations for otherproduct candidates we advance into clinical testing. Accordingly, we have lesscontrol over the timing and other aspects of these clinical trials than if weconducted them entirely on our own.

 

As a result of thesefactors, we or third parties on whom we rely may not successfully begin orcomplete our clinical trials in the time periods we have forecasted, if at all.Moreover, if we incur costs and delays in our programs or if we do notsuccessfully develop and commercialize our products, our stock price coulddecline.

 

**Ifwe and our partners do not obtain and maintain the regulatory approvals requiredto market and sell our product candidates, then our business will beunsuccessful, and the market price of our stock will substantially decline.**

 

We and our partners will not beable to market any of our product candidates in the United States, Europe or inany other country without marketing approval from the FDA or equivalent foreignregulatory agency.  The processof obtaining FDA approval of pharmaceutical products is costly and timeconsuming. Any new pharmaceutical product must undergo rigorous preclinical andclinical testing and an extensive regulatory approval process mandated by theFDA. Such regulatory review includes the determination of manufacturingcapability and product performance.  Theapproval process is affected by such factors as:

 

•             theseverity of the disease;

 

•             thequality of submission;

 

•             theclinical efficacy and safety; 

 

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•             thestrength of the chemistry and manufacturing control of the process;

 

•             themanufacturing facility compliance;

 

•             theavailability of alternative treatments;

 

•             therisks and benefits demonstrated in clinical trials; and

 

•             thepatent status and marketing exclusivity rights of certain innovative products.

 

Theregulatory process to obtain market approval for a new drug or medical devicetakes many years and requires expenditures of substantial resources.  We have had only limited experience inpreparing applications and obtaining regulatory approvals.

 

There can be no assurance that the pharmaceutical productscurrently in development, or those product candidates acquired or in-licensedby us, will be approved by the FDA. In addition, there can be no assurance thatall necessary approvals will be granted for future product candidates or thatFDA review or actions will not involve delays caused by the FDA’s request foradditional information or testing that could adversely affect the time tomarket and sale of the product candidates. 

 

Ifwe do not receive required regulatory approval or clearance to market any ofour product candidates, we will not be able to develop and commercialize theseproduct candidates, which will affect our ability to achieve profitability andcause the value of our common stock to substantially decline. 

 

**Evenif we obtain regulatory approvals, our marketed products, including BiDil, willbe subject to ongoing regulatory review. If we fail to comply with continuingUnited States and foreign regulations, we could lose our approvals to marketour products and our business would be seriously harmed.**

 

Even after approval, any products we develop will besubject to ongoing regulatory review and restrictions, including the review ofclinical results which are reported after our products are made commerciallyavailable and restrictions on the indications for which we can market theproduct. The FDA can propose to withdraw our approval if new clinical data orexperience show that the new product is not safe for use under the approvedconditions of use.  We or the FDA mayneed to send important information about our products to healthcareproviders.  The marketing claims we arepermitted to make in labeling or advertising regarding our marketed productsare limited to those specified in any FDA approval. For example, because BiDilis specifically approved for labeling for self-identified black patients, wemay not promote BiDil for use in other patient populations.  For our prescription drugs, we must submitcopies of our advertisements and promotional labeling, including, for example,professional journal advertisements, website pages, professional directmailers, direct-to-consumer advertisements, convention booth panels andhandouts, to the FDA at the time of initial publication or dissemination.  If the FDA believes these materials orstatements made by sales representatives or other company officials promote ourproducts for unapproved indications, the FDA could allege our promotionalactivities misbrand our products. Specifically, the FDA could issue an untitled letter or warning letter,which requests, among other things,  thatwe cease such promotional activities, including disseminating theadvertisements and promotional labeling, and that we issue correctiveadvertisements and labeling, including sending letters to healthcare providers. The FDA also could take enforcementaction including seizure of allegedly misbranded product, or injunction or seekcriminal prosecution against the company and its officers or employees.  If we repeatedly or deliberately failed tosubmit such advertisements and labeling to the agency, the FDA could withdrawour approvals.  The FDA also monitorsmanufacturers’ support of continuing medical education, or CME, programs wherethe programs involve the manufacturers’ or a competitor’s products to ensurethat manufacturers do not influence the CME content as a means of promotingtheir products for off label uses.  

 

In addition, themanufacturer and manufacturing facilities we use to produce any of our productcandidates will be subject to periodic review and inspection by the FDA. Wewill be required to report any serious and unexpected adverse experiences andcertain quality problems with our products and make other periodic reports tothe FDA. The discovery of any previously unknown problems with the product, manufactureror facility may result in restrictions on the product or manufacturer orfacility, including withdrawal of the product from the market. Certain changesto an approved product, including the way it is manufactured or promoted, oftenrequire prior FDA approval before the product as modified may be marketed. Ifwe fail to comply with applicable continuing regulatory requirements, we may besubject to fines, untitled letters, warning letters, civil penalties,suspension or withdrawal of regulatory approvals, product recalls and seizures,injunctions, operating restrictions and/or criminal prosecutions and penalties.

 

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**Ifwe, our third-party manufacturers or our service providers fail to comply withapplicable laws and regulations, we or they could be subject to enforcementactions, which could affect our ability to market and sell our products andharm our reputation.**

 

If we or our third-partymanufacturers or service providers fail to comply with applicable federal,state or foreign laws or regulations, we could be subject to enforcementactions which could affect our ability to develop, market and sell our productssuccessfully and could harm our reputation and lead to fewer acceptances of ourproducts by the market. These enforcement actions include:

 

•  product seizures;

 

•  voluntary or mandatory recalls;

 

•  patient or physician notifications, includingletters to healthcare professionals and corrective advertising;

 

•  withdrawal of product approvals;

 

•  restrictions on, or prohibitions against,marketing our products;

 

•  fines;

 

•  restrictions on importation of our products;

 

•  injunctions;

 

•  debarments;

 

•  civil and criminal penalties; and

 

•  suspension of review of, or refusal to approve,pending applications.

 

**Ifthe third-party manufacturer of BiDil encounters delays or difficulties inproduction, we may not be able to meet demand for the product, and we may losepotential revenue.**

 

We do notmanufacture BiDil and have no plans to do so. We have engaged Schwarz PharmaManufacturing, under a five-year exclusive manufacture and supply agreementsolely for the three times daily immediate release dosage formulation of BiDil.Under the supply agreement, we have the right to engage a backup manufacturer.The terms of the supply agreement provide that it may be terminated by eitherus or Schwarz Pharma under specified circumstances, including a material breachof the supply agreement by either party, the occurrence of a payment default byus, our material impairment of the manufacturing licenses we have granted toSchwarz Pharma or a failure of Schwarz Pharma to supply conforming products. Inaddition, either party may terminate the supply agreement in the event the FDAtakes any action, the result of which is to permanently prohibit themanufacture, sale or use of the product. If we are unable to maintain acommercially reasonable manufacturing agreement for the production of BiDilwith Schwarz Pharma, we may not be able to successfully commercialize BiDil andour stock price will decline.

 

Furthermore, SchwarzPharma may encounter difficulties in production. These problems may include:

 

•  difficulties with production costs andyields;

 

•  quality control and assurance;

 

•  difficulties obtaining ingredients for ourproducts;

 

•  shortages of qualified personnel;

 

•  compliance with strictly enforced federal,state and foreign regulations; and

 

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•  lack of capital funding.

 

The number of third-partymanufacturers with the manufacturing and regulatory expertise and facilitiesnecessary to manufacture finished products for us on a commercial scale islimited, and it would take a significant amount of time to arrange, qualify,and receive necessary regulatory approval for alternative arrangements. We maynot be able to contract for manufacturing on acceptable terms, if at all.

 

Any of these factorscould increase our costs and result in our being unable to effectivelycommercialize BiDil. Furthermore, if Schwarz Pharma or any other third-partymanufacturer of BiDil fails to deliver the required commercial quantities offinished product on a timely basis and at commercially reasonable prices, wemay be unable to meet the demand for our product, and we may lose potentialrevenues.

 

**Thedevelopment and commercialization of our product candidates may be terminatedor delayed, and the cost of development and commercialization may increase, ifthird parties on whom we rely to manufacture our products do not fulfill theirobligations.**

 

We do not manufacture anyof our other product candidates and have no current plans to develop anycapacity to do so in the future. In order to continue to develop products,apply for regulatory approvals and commercialize our products, we plan to relyon third parties for the production of clinical and commercial quantities ofour product candidates. Contract manufacturers are subject to ongoing periodic,unannounced inspection by the FDA and corresponding state and foreign agenciesor their designees to ensure strict compliance with current Good ManufacturingPractices, or cGMP, and other governmental regulations and correspondingforeign standards. The cGMP requirements govern quality control of themanufacturing process and documentation policies and procedures.  Other than through contract, we do not havecontrol over compliance by our contract manufacturers with these regulationsand standards. Our present or future contract manufacturers may not be able tocomply with cGMPs and other FDA requirements or similar regulatory requirementsoutside the United States. Failure of contract manufacturers to comply withapplicable regulations could result in sanctions being imposed on us in somecases, including fines, injunctions, failure of regulatory authorities to grantmarketing approval of our product candidates, delays, suspension or withdrawalof approvals, seizures or recalls of product candidates, operatingrestrictions, and criminal prosecutions, any of which could significantly andadversely affect our business. We will depend upon these third parties toperform their obligations in a timely manner and in accordance with applicablelaws and regulations. To the extent that third-party manufacturers with whom wecontract fail to perform their obligations in accordance with applicable lawsand regulations, we may be adversely affected in a number of ways, including:

 

•  we may not be able to initiate or continueclinical trials of our product candidates;

 

•  we may be delayed in submitting applicationsfor regulatory approvals for our product candidates;

 

•  we may be required to cease distributionand/or recall some or all batches of our products; and

 

•  we may not be able to meet commercial demandsfor our products or achieve profitability.

 

**Werely on a single source supplier for one of the two active ingredients inBiDil, and the loss of this supplier could prevent us from selling BiDil, whichwould materially harm our business.**

 

We rely on Sumitomo forour supply of hydralazine, one of the two active ingredients in BiDil. Sumitomois currently the only supplier of hydralazine worldwide. We do not have anyagreement with Sumitomo regarding the supply of hydralazine. If Sumitomo stopsmanufacturing or is unable to manufacture hydralazine, or if we are unable toprocure hydralazine from Sumitomo on commercially favorable terms, we may beunable to continue to sell BiDil on commercially viable terms, if at all.Furthermore, because Sumitomo is currently the sole supplier of hydralazine,Sumitomo has unilateral control over the price of hydralazine. Any increase inthe price for hydralazine may reduce our gross margins.

 

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**Thetermination of our collaboration agreement with Merck, resulting from Merck’srecent decision to withdraw its COX-2 inhibitor, Vioxx, from worldwide markets, has resulted in the lossof potential milestone and royalty-based revenue from the collaboration and mayindicate that the development of nitric oxide-enhancing COX-2 inhibitors is notviable.**

 

In December 2002, weentered into an exclusive, worldwide research, collaboration and licensingagreement with Merck pursuant to which we granted Merck marketing and salesrights to our technology for nitric oxide-enhancing COX-2 inhibitors. OnSeptember 30, 2004, Merck halted the phase II trial of our lead candidatein nitric oxide-enhancing COX-2 inhibitors. We and Merck terminated ourcollaboration agreement during November 2004, which will result in the loss ofany potential milestone or royalty revenue from the sale of products that mayhave resulted from the collaboration as well as any research and developmentfunding that we may have received beyond the end of the initial research termin December 2005. In April 2005, the FDA imposed several restrictions onthe labeling and sale of non-steroidal anti-inflammatory drugs, including COX-2inhibitors. If the FDA imposes additional regulatory burdens for the approvalof new COX-2 inhibitors, if COX-2 inhibitors continue to pose safety concerns,or if the market for COX-2 inhibitors contracts, then we may lose anyinvestment made in the development of, and any potential revenue that may haveresulted from, the development, sale or licensing of nitric oxide-enhancing COX-2inhibitors.

 

**Wecurrently depend on a collaborative partner for a portion of our revenues andto develop and commercialize nitric oxide enhancing stents based upon ourtechnologies, and we may enter into additional collaborations with thirdparties to develop and commercialize other product candidates based upon ourtechnologies. These collaborations may not be successful.**

 

We are relying on BostonScientific to fund the development of and to commercialize nitricoxide-enhancing stents using our technology to prevent the re-closure ofarteries, or restenosis, following balloon angioplasty, a treatment to widenblocked arteries. All of our $16.5 million of revenues for 2004 and $1.2million of revenues for the nine months ended September 30, 2005 were derivedfrom licensing, research and development and milestone payments paid to us byBoston Scientific and from our collaboration with Merck, which we and Merckterminated in November 2004.

 

Our agreement with BostonScientific provides us research and development funding for our nitricoxide-enhancing stent program through December 2005, and additional paymentsdue to us under the collaboration agreement are generally based on theachievement of specific development and commercialization milestones that may notbe met. The agreement with Boston Scientific can be terminated at any time upon30 days’ prior written notice. We are also entitled to royalty paymentsthat are based on the sales of products developed and marketed through thecollaboration. These future royalty payments may not materialize or may be lessthan expected if the related product candidates are not successfully developedor marketed, or if we or our collaborator is forced to license intellectualproperty from third parties. The loss of the Boston Scientific collaborationcould decrease our revenues. We intend to enter into collaborative agreementswith other parties in the future relating to other product candidates, and weare likely to have similar risks with regard to any such future collaboration.

 

In addition, our existingcollaboration and any future collaborative arrangements that we seek to enterinto with third parties may not be scientifically or commercially successful.Factors that may affect the success of our collaborations include thefollowing:

 

• our collaborators may be pursuing alternative technologies or developingalternative product candidates, either on their own or in collaboration withothers, that may be competitive with the product candidate on which they arecollaborating with us and which could affect their commitment to ourcollaboration;

 

• reductions in marketing or sales efforts or a discontinuation ofmarketing or sales of our products by our collaborators would reduce ourrevenues which would be based on a percentage of net sales by the collaborator;

 

• our collaborators may terminate their collaborations with us, whichcould make it difficult for us to attract new collaborators or adversely affecthow we are perceived in the business and financial communities; and

 

• our collaborators may pursue higher-priority programs or change thefocus of their development programs, which could affect the collaborators’commitment to us.

 

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** **

**Ourfailure to successfully acquire, develop and market additional drug candidatesor approved drugs would impair our ability to grow.**

 

As part of our strategy,we intend to acquire, develop and market additional drugs and drug candidatesfor cardiovascular diseases. The success of this strategy depends upon ourability to identify, select and acquire appropriate pharmaceutical drugcandidates and drugs.

 

Any drug candidate welicense or acquire may require additional development efforts prior tocommercial sale, including extensive clinical testing and approval by the FDAand applicable foreign regulatory authorities. All drug candidates are prone tothe risks of failure inherent in pharmaceutical product development, includingthe possibility that the drug candidate will not be shown to be sufficientlysafe and effective for approval by regulatory authorities. In addition, wecannot guarantee that any drugs that we develop or acquire that are approvedwill be manufactured or produced economically, successfully commercialized orwidely accepted in the marketplace.

 

Proposing, negotiatingand implementing an economically viable acquisition of a drug or drug candidateis a lengthy and complex process. Other companies, including those withsubstantially greater financial, marketing and sales resources, may competewith us for the acquisition of product candidates and approved products. We maynot be able to acquire the rights to additional drug candidates and approveddrugs on terms that we find acceptable, if at all.

 

**If theestimates we make and the assumptions on which we rely in preparing ourfinancial statements prove inaccurate, our actual results may varysignificantly.**

 

Our financial statements have been prepared inaccordance with accounting principles generally accepted in the United States.The preparation of these financial statements requires us to make estimates andjudgments that affect the reported amounts of our assets, liabilities, revenuesand expenses, the amounts of charges taken by us and related disclosure. Suchestimates and judgments include revenue recognition, the carrying value of ouraccounts receivables, inventory and assets, our estimates of accrued expensesand our estimates of the fair value of equity instruments granted or sold byus. We base our estimates and judgments on historical experience and on variousother assumptions that we believe to be reasonable under the circumstances.However, these estimates and judgments, or the assumptions underlying them, mayprove to be incorrect. Accordingly, our actual financial results may varysignificantly from the estimates contained in our financial statements.  For a further discussion of the estimates andjudgments that we make and the critical accounting policies that affect these estimatesand judgments, see “Management’s Discussion and Analysis of Financial Conditionand Results of Operations - Critical Accounting Policies and Estimates” above.

 

**We face costs and risks associatedwith compliance with Section 404 of the Sarbanes-Oxley Act***.*

 

We are evaluating ourinternal control systems in order to allow our management to report on, and ourindependent registered public accounting firm to attest to, our internalcontrols over financial reporting, as required by Section 404 of theSarbanes-Oxley Act. As a result, we are incurring additional expenses and adiversion of management’s time. While we currently anticipate completion oftesting and evaluation of our internal controls over financial reporting withrespect to the requirements of Section 404 of the Sarbanes-Oxley Act in atimely fashion, there can be no assurance that we will be able to accomplishthis. If we are not able to implement the requirements of Section 404 in atimely manner or with adequate compliance, we might be subject to investigationby regulatory authorities. Any such action could adversely affect our financialresults and/or the market price of our common stock.

 

**RisksRelating to our Intellectual Property Rights**

 

**Ourpatent protection for BiDil, which is a combination of two generic drugs, islimited, and we may be subject to generic substitution or competition andresulting pricing pressure.**

 

We have no composition ofmatter patent covering BiDil, which we launched in the U.S. in July 2005 forthe treatment of heart failure in self-identified black patients as an adjunctto standard therapy. BiDil is a fixed-dose combination of two generic drugs,isosorbide dinitrate and hydralazine, which are approved and separatelymarketed, in dosages similar to those we include in BiDil, for indicationsother than heart failure, at prices below the prices we are charging for BiDil.We have three issued method-of-use patents, one of which covers the use of thecombination of isosorbide dinitrate and hydralazine to reduce the incidence ofmortality associated with chronic congestive heart failure, expiring in 2007,and the others covering the treatment of heart failure in black patients,expiring in 2020. As a practical matter, we may not be able to enforce thesemethod-of-use patents to prevent physicians from prescribing isosorbidedinitrate and hydralazine separately for the treatment of heart failure inblack patients, even though neither drug is approved for such use.  We also may not be

 

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able to enforce these method-of-use patents to prevent hospitals andpharmacies from supplying such patients with these generic drugs separately inlieu of BiDil. 

 

Other factors may alsoadversely affect our patent protection for BiDil. The combination therapy ofisosorbide dinitrate and hydralazine for use in heart failure was developedthrough lengthy, publicly-sponsored clinical trials conducted during the 1980s,prior to the filing of the patent application that resulted in the 2007 patent.The U.S. Patent and Trademark Office, or U.S. patent office, consideredpublished reports on these clinical trials and concluded that they did notconstitute prior art that would prevent the issuance of the 2007 patent. TheU.S. patent office also considered the question of whether the 2007 patentconstituted prior art with respect to the 2020 patents, and determined that theclaims of the 2020 patents were non-obvious and patentable. A court consideringthe validity of the 2007 or 2020 patents with respect to questions of prior artmight be presented with other alleged prior art or might reach conclusionsdifferent from those reached by the U.S. patent office. If the 2007 or 2020patents were to be invalidated or if physicians were to prescribe isosorbidedinitrate and hydralazine separately for heart failure in black patients, ourBiDil revenue could be significantly reduced, we could fail to recover the costof developing BiDil and BiDil might not be a viable commercial product.

 

**Ifwe are not able to obtain and enforce patent protection for our discoveries,our ability to develop and commercialize our product candidates will be harmed,and we may not be able to operate our business profitably.**

 

Our success depends, inpart, on our ability to protect proprietary methods and technologies that wedevelop under the patent and other intellectual property laws of the UnitedStates and other countries, in order to prevent others from using ourinventions and proprietary information. Because certain United States patentapplications are confidential until patents issue, such as applications filedprior to November 29, 2000, or applications filed after such date whichwill not be filed in foreign countries, third parties may have filed patentapplications for technology covered by our pending patent applications withoutour being aware of those applications, and our patent applications may not havepriority over patent applications of others.

 

Our strategy depends onour ability to rapidly identify and seek patent protection for our discoveries.This process is expensive and time consuming, and we may not be able to fileand prosecute all necessary or desirable patent applications at a reasonablecost or in a timely manner. Despite our efforts to protect our proprietaryrights, unauthorized parties may be able to obtain and use information that weregard as proprietary. The mere issuance of a patent does not guarantee that itis valid or enforceable, so even if we obtain patents, they may not be valid orenforceable against third parties.

 

The issued patents andpatent applications for our product candidates and nitric oxide technologyinclude claims with respect to both the composition of specific drugs orcompounds and specific methods of using these drugs or compounds in therapeuticareas. In some cases, like BiDil, our only patent protection is with respect tothe method of using a drug or compound, and we do not have patent claimscovering the underlying composition of the drug or compound. Method-of-usepatents may provide less protection for our product candidates and productsbecause it may be more difficult to prove direct infringement against apharmaceutical manufacturer or distributor once they have gained approval foran alternative indication. In addition, if any other company gains FDA approvalfor an indication separate from the one we are pursuing and markets a drug thatwe expect to market under the protection of a method-of-use patent, physicianswill be able to prescribe that drug for use in the indication for which we haveobtained approval, even though the drug is not approved for such indication. Asa practical matter, we may not be able to enforce our method-of-use patentsagainst physicians prescribing drugs for such off-label use. Off-label use andany resulting off-label sales could make it more difficult to obtain the pricewe would otherwise wish to achieve for, or to successfully commercialize, ourproducts. In addition, in those situations where we have only method-of-usepatent coverage for a product candidate, it may be more difficult to find apharmaceutical company partner to license or support development of our productcandidate.

 

Our pending patentapplications may not result in issued patents. The patent position ofpharmaceutical or biotechnology companies, including ours, is generallyuncertain and involves complex legal and factual considerations. The standardswhich the U.S. patent office and its foreign counterparts use to grant patentsare not always applied predictably or uniformly and can change. There is alsono uniform, worldwide policy regarding the subject matter and scope of claimsgranted or allowable in pharmaceutical or biotechnology patents. Accordingly,we do not know the degree of future protection for our proprietary rights orthe breadth of claims allowed in any patents issued to us or to others.

 

We also rely on tradesecrets, know-how and technology, which are not protected by patents, tomaintain our competitive position. If any trade secret, know-how or othertechnology not protected by a patent were to be disclosed to or independentlydeveloped by a competitor, our business and financial condition could bematerially adversely affected.

 

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**Ifwe become involved in patent litigation or other proceedings to enforce ourpatent rights, we would incur substantial costs and expenses, substantialliability for damages and/or be required to stop our product development andcommercialization efforts.**

 

A third party may sue usfor infringing on its patent rights. Likewise, we may need to resort tolitigation to enforce a patent issued to us or to determine the scope andvalidity of third-party proprietary rights. The cost to us of any litigation orother proceeding relating to intellectual property rights, even if resolved inour favor, could be substantial, and the litigation would divert ourmanagement’s efforts. Some of our competitors may be able to sustain the costsof complex patent litigation more effectively than we can because they havesubstantially greater resources. In addition, our strategy of providing nitricoxide-enhancing versions of existing products could lead to more patentlitigation as the markets for these existing products are very large andcompetitive. Uncertainties resulting from the initiation and continuation ofany litigation could limit our ability to continue our operations.

 

For example, we havefiled an opposition in the European Patent Office, or EPO, to revoke NicOxS.A.’s European Patent No. 904 110, which we refer to as EP ‘110. Thispatent is directed to the use of organic compounds containing a nitrate groupor inorganic compounds containing a nitric oxide group to reduce the toxicitycaused by certain drugs, including non-steroidal anti-inflammatory drugs, orNSAID’s. The basis for our opposition, in part, is that the claims in EP ‘110are anticipated and therefore invalid if they are construed to cover a singlecompound chemically linked to a nitrate moiety. While we believe that theclaims in EP ‘110 will be invalidated, or be narrowed, we cannot predict withcertainty the outcome of the opposition. If the EPO finds that there are validclaims in EP ‘110 that cover compounds chemically linked to nitrates, we may beadversely affected in our ability to market our product candidates for reducinggastrointestinal toxicity without first obtaining a license from NicOx, whichmay not be available on favorable terms, if at all.

 

If any parties are ableto successfully claim that our creation or use of proprietary technologiesinfringes upon their intellectual property rights, we might be forced to paydamages, potentially including treble damages, if we are found to havewillfully infringed on such parties’ patent rights. In addition to any damageswe might have to pay, a court could require us to stop the infringing activityor obtain a license on unfavorable terms. Moreover, any legal action against usor our partners claiming damages and seeking to enjoin commercial activitiesrelating to the affected products and processes could, in addition tosubjecting us to potential liability for damages, require us or our partners toobtain a license in order to continue to manufacture or market the affectedproducts and processes. Any license required under any patent may not be madeavailable on commercially-acceptable terms, if at all. In addition, somelicenses may be non-exclusive, and therefore our competitors may have access tothe same technology licensed to us. If we fail to obtain a required license orare unable to design around a patent, we may be unable to effectively marketsome of our technology and product candidates, which could limit our ability togenerate revenues or achieve profitability and possibly prevent us fromgenerating revenue sufficient to sustain our operations. In addition, a numberof our collaborations provide that royalties payable to us for licenses to ourintellectual property may be offset by amounts paid by our collaborationpartners to third parties who have competing or superior intellectual propertypositions in the relevant fields, which could result in significant reductionsin our revenues from products developed through collaborations.

 

**Wein-license a significant portion of our principal proprietary technologies, andif we fail to comply with our obligations under any of the related agreements,we could lose license rights that are necessary to developing BiDil and ourother product candidates.**

 

We are a party to anumber of licenses that give us rights to third-party intellectual propertythat is necessary for our business. In particular, we have obtained theexclusive right to develop and commercialize BiDil pursuant to a licenseagreement with Dr. Jay N. Cohn and some of our intellectual propertyrights relating to nitric oxide compounds have been obtained pursuant tolicense agreements with the Brigham and Women’s Hospital and Boston University.We expect to enter into additional licenses in the future. These licensesimpose various development, commercialization, funding, royalty, diligence, andother obligations on us. If we breach these obligations, the licensor may havethe right to terminate the license or render the license non-exclusive, whichwould result in us being unable to develop, manufacture and sell products thatare covered by the licensed technology.

 

**RisksRelating to our Industry**

 

**Weface significant competition, which may result in others discovering,developing or commercializing products before or more successfully than we do.**

 

The pharmaceutical andmedical device industries are highly competitive and characterized by rapid andsignificant technological change. Our principal competitors in the markets wehave targeted, including cardiovascular disease, are large,

 

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multinational pharmaceutical and medical device companies that havesubstantially greater financial and other resources than we do and areconducting extensive research and development activities on technologies andproduct candidates similar to or competitive with ours. Many of our competitors are more experienced than we are in pharmaceutical and medicaldevice development and commercialization,obtaining regulatory approvals and product marketing and manufacturing.  As a result, they may:  

 

•             developand commercialize products that render our products obsolete or non-competitiveor that block or delay approval of our products as a result of patent or non-patentexclusivity;

 

•             developproduct candidates and market products that are less expensive or moreeffective than our future products;

 

•             commercializecompeting products before we or our partners can launch any products developedfrom our product candidates;

 

•             initiate orwithstand substantial price competition more successfully than we can;

 

•             have greatersuccess in recruiting skilled scientific workers from the limited pool ofavailable talent; and

 

•             moreeffectively negotiate third-party licenses and strategic relationships; andtake advantage of product acquisition or other opportunities more readily thanwe can.

 

There are a number ofcompanies currently marketing and selling products to treat heart failure inthe general population that will compete with BiDil. These includeGlaxoSmithKline, plc, which currently markets Coreg®, Merck &Co., Inc., which currently markets Vasotec®, Pfizer, Inc., which currently markets Inspra®, and Astra Zeneca, plc, whichcurrently markets Toprol XL®.

 

We also face competitionfrom other pharmaceutical companies seeking to develop drugs using nitric oxidetechnology. For example, we are aware of at least seven companies working inthe area of nitric oxide based therapeutics. These companies are: AngiogenixInc., GB Therapeutics, NicOx S.A., OxoN Medica, RenoPharm, Vasopharm BIOTECHGmbH, and Nitrox LLC.

 

**Wemay be exposed to product liability claims and may not be able to obtain ormaintain adequate product liability insurance.**

 

Our business exposes usto the risk of product liability claims that is inherent in the manufacturing,testing, and marketing of human therapeutic products. Our clinical trialliability and commercial product liability insurance is subject to deductiblesand coverage limitations. We may not be able to obtain or maintain insurance onacceptable terms, or at all. Moreover, any insurance that we do obtain may notprovide adequate protection against potential liabilities.

 

**Ifthird-party payors do not reimburse customers for BiDil or any of our productcandidates that are approved for marketing, they might not be used orpurchased, and our revenues and profits might be adversely affected.**

 

Our revenues and profitsdepend heavily upon the availability of coverage and reimbursement for the useof BiDil and any of our other product candidates that maybe approved formarketing, from third-party healthcare and state and federal government payors,both in the United States and in foreign markets. Reimbursement by athird-party payor may depend upon a number of factors, including thethird-party payor’s determination that use of a product is:

 

•  safe, effective and medically necessary;

 

•  appropriate for the specific patient;

 

•  cost-effective; and

 

•  neither experimental nor investigational.

 

Since reimbursementapproval for a product is required from third-party and government payors,seeking this approval, particularly when seeking approval for a preferred formof reimbursement over other competitive products, is a time-consuming andcostly process. Third-party payors may require cost-benefit analysis data fromus in order to

 

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demonstrate the cost-effectiveness of any product we might bring tomarket. For any individual third-party payor, we may not be able to providedata sufficient to gain reimbursement on a similar or preferred basis tocompetitive products or at all. Once reimbursement at an agreed level isapproved by a third-party payor, we may lose that reimbursement entirely, or wemay lose the similar or better reimbursement we receive compared to competitiveproducts. As reimbursement is often approved for a period of time, this risk isgreater at the end of the time period, if any, for which the reimbursement wasapproved. In addition, legislative or regulatory efforts to control or reducehealthcare costs or reform government healthcare programs could result in lowerprices or rejection of our products. Changes in coverage and reimbursementpolicies or healthcare cost containment initiatives that limit or restrictreimbursement for our products may cause our revenue to decline.

 

**We could be negativelyimpacted by the application or enforcement of federal and state fraud and abuselaws, including anti-kickback laws and other federal and state anti-referrallaws.**

 

We are subject to various federal and state laws pertaining tohealthcare fraud and abuse, including anti-kickback laws and physicianself-referral laws. Violations of these laws are punishable by criminal andcivil sanctions, including, in some instances, imprisonment and exclusion fromparticipation in federal and state healthcare programs, including the Medicare,Medicaid and Veterans Administration health programs. Because of thefar-reaching nature of these laws, we may be required to alter or discontinueone or more of our practices to be in compliance with these laws. Healthcarefraud and abuse regulations are complex, and even minor irregularities canpotentially give rise to claims that a statute or prohibition has beenviolated. Any violations of these laws, or any action against us for violationof these laws, even if we successfully defend against it, could result in amaterial adverse effect on our business, financial condition and results ofoperations. If there is a change in law, regulation or administrative orjudicial interpretations, we may have to change or discontinue our business practicesor our existing business practices could be challenged as unlawful, which couldhave a material adverse effect on our business, financial condition and resultsof operations. In addition, we could become subject to false claims litigationunder federal statutes, which can lead to treble damages based on thereimbursements by federal health care programs, civil money penalties(including penalties levied on a per false claim basis), restitution, criminalfines and imprisonment, and exclusion from participation in Medicare, Medicaidand other federal and state healthcare programs. These false claims statutesinclude the False Claims Act, which allows any person to bring suit on behalfof the federal government alleging the submission of false or fraudulentclaims, or causing to present such false or fraudulent claims, under federalprograms or contracts claims or other violations of the statute and to share inany amounts paid by the entity to the government in fines or settlement. Thesesuits against biotechnology companies have increased significantly in recentyears and have increased the risk that a healthcare company will have to defenda false claim action, pay fines or restitution, or be excluded from theMedicare, Medicaid or other federal and state healthcare programs as a resultof an investigation arising out of such action. We cannot assure you that wewill not become subject to such litigation or, if we are not successful indefending against such actions, that such actions will not have a materialadverse effect on our business, financial condition and results of operations.In addition, we cannot assure you that the costs of defending claims orallegations under the False Claims Act will not have a material adverse effecton our business, financial condition and results of operations.

 

**RisksRelating to our Common Stock**

 

**Ourstock price is subject to fluctuation, which may cause an investment in ourstock to suffer a decline in value.**

 

The market price of ourcommon stock may fluctuate significantly in response to factors that are beyondour control. The stock market in general has recently experienced extreme priceand volume fluctuations. The market prices of securities of pharmaceutical,biotechnology and other life sciences companies have been extremely volatile,and have experienced fluctuations that often have been unrelated ordisproportionate to the operating performance of these companies. For example,our stock price could be adversely affected if product candidates by othersthat utilize nitric oxide technology are not successful in clinical testing,fail to achieve regulatory approval or are not accepted in the marketplace,even though these failures may not be related to BiDil, our product candidatesor technology. These broad market fluctuations could result in extremefluctuations in the price of our common stock, which could cause a decline inthe value of our common stock.

 

**Wemay incur significant costs and suffer management distraction and reputationaldamage from class action litigation and regulatory or government investigationsand actions due to trading in our common stock.**

 

Our stock price has been,and is likely to continue to be, volatile. Our stock price may fluctuate formany reasons, including as a result of public announcements regarding thecommercialization of BiDil, the progress of our development and marketingefforts, the addition or departure of key personnel, variations in ourquarterly operating results and changes in market valuations of pharmaceutical,biotechnology or other life sciences companies. When the market price of acompany’s stock is volatile, holders of that company’s stock may bringsecurities class action litigation against the company that issued

 

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the stock. If any of our stockholders were to bring a lawsuit of thistype against us, even if the lawsuit was without merit, we could incursubstantial costs defending the lawsuit.

 

On July 20, 2004,the Market Regulation Department of the NASD advised us that it initiated areview of trading activity in our common stock surrounding our July 19,2004 announcement that we had halted our phase III clinical trial of BiDil dueto the significant survival benefit seen with BiDil. The NASD is reviewing,among other things, information on relationships between our officers,directors and service providers and individuals and institutions that may havetraded in our common stock prior to the July 19, 2004 announcement. Wehave cooperated with this review and have identified certain persons on thelist provided to us by the NASD as having a relationship with our chiefexecutive officer and others at NitroMed. We have established a specialcommittee of our board of directors to oversee our response to this review.

 

The SEC or othersecurities regulators may investigate trading activity of insiders and othersaround events that result in stock price volatility, such as our July 19,2004 announcement, and we may incur substantial costs in connection with anysuch government investigation or related action. A stockholder lawsuit, SEC orother investigation or action could also damage our reputation or that of ourofficers or directors and divert their time and attention away from ourmanagement.

 

**Substantiallyall of our outstanding common stock may be sold into the market at any time.This could cause the market price of our common stock to drop significantly.**

 

Sales of a substantialnumber of shares of our common stock in the public market could occur at anytime. These sales, or the perception in the market that the holders of a largenumber of shares intend to sell shares, could reduce the market price of ourcommon stock. As of September 30, 2005, we had outstanding 30,479,472 shares ofcommon stock. Substantially all of these shares may also be resold in thepublic market at any time. In addition, we have a significant number of sharesthat are subject to outstanding options. The exercise of these options and thesubsequent sale of the underlying common stock could cause a further decline inour stock price. These sales also might make it difficult for us to sell equitysecurities in the future at a time and at a price that we deem appropriate.

 

**Insidershave substantial control over us and could delay or prevent a change incorporate control.**

 

As of September 30, 2005,our directors, executive officers and principal stockholders, together withtheir affiliates, own, in the aggregate, approximately 47% of our outstandingcommon stock. As a result, these stockholders, if acting together, may have theability to determine the outcome of matters submitted to our stockholders forapproval, including the election and removal of directors and any merger,consolidation or sale of all or substantially all of our assets. In addition,these persons, if acting together, will have the ability to control themanagement and affairs of our company. Accordingly, this concentration ofownership may harm the market price of our common stock by:

 

•  delaying, deferring or preventing a change incontrol of our company;

 

•  impeding a merger, consolidation, takeover orother business combination involving our company; or

 

• discouraging a potential acquirer from making a tender offer orotherwise attempting to obtain control of our company.

 

**Provisionsin our charter documents and under Delaware law may prevent or frustrateattempts by stockholders to change current management and hinder efforts toacquire a controlling interest in our company.**

 

Provisions of ourrestated certificate of incorporation and bylaws may discourage, delay orprevent a merger, acquisition or other change in control that stockholders mayconsider favorable, including transactions in which stockholders mightotherwise receive a premium for their shares. These provisions may prevent orfrustrate attempts by stockholders to replace or remove our current management.These provisions include:

 

• a prohibition on stockholder action through written consent;

 

• a requirement that special meetings of stockholders be called only by amajority of the board of directors, the chairman of the board or the chiefexecutive officer;

 

• advance notice requirements for stockholder proposals and nominations;

 

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• limitations on the ability of stockholders to amend, alter or repeal ourcertificate of incorporation or bylaws; and

 

• the authority of the board of directors to issue preferred stock withsuch terms as the board of directors may determine.

 

In addition,Section 203 of the Delaware General Corporation Law prohibits apublicly-held Delaware corporation from engaging in a business combination withan interested stockholder, generally defined as a person or entity whichtogether with its affiliates owns or within the last three years has owned 15%of our voting stock, for a period of three years after the date of thetransaction in which the person became an interested stockholder, unless thebusiness combination is approved in a prescribed manner. Accordingly,Section 203 may discourage, delay or prevent a change in control of our company.

 

**Item 3.****           Quantitativeand Qualitative Disclosures About Market Risk**

 

We are exposed to marketrisk related to changes in interest rates. Our current investment policy is tomaintain an investment portfolio consisting mainly of U.S. money market andhigh-grade corporate and U.S. government-related securities, directly orthrough managed funds, with average contractual maturities of less than twoyears. Our cash is deposited in and invested through highly rated financialinstitutions in North America. Our marketable securities are subject tointerest rate risk and will fall in value if market interest rates increase. Ifmarket interest rates were to increase immediately and uniformly by 10% from levelsat September 30, 2005, we estimate that the fair value of our investmentportfolio would decline by an immaterial amount. We have the ability to holdour fixed income investments until maturity, and therefore we do not expect ouroperating results or cash flows to be affected to any significant degree by theeffect of a change in market interest rates on our investments.

 

**Item 4.****           Controlsand Procedures**

 

Our management, with theparticipation of our chief executive officer and chief financial officer, evaluatedthe effectiveness of our disclosure controls and procedures as ofSeptember 30, 2005. The term “disclosure controls and procedures,” asdefined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, meanscontrols and other procedures of a company that are designed to ensure thatinformation required to be disclosed by a company in the reports that it filesor submits under the Exchange Act is recorded, processed, summarized andreported, within the time periods specified in the SEC’s rules and forms.Disclosure controls and procedures include, without limitation, controls andprocedures designed to ensure that information required to be disclosed by acompany in the reports that it files or submits under the Exchange Act isaccumulated and communicated to the company’s management, including itsprincipal executive and principal financial officers, as appropriate to allowtimely decisions regarding required disclosure. Management recognizes that anycontrols and procedures, no matter how well designed and operated, can provideonly reasonable assurance of achieving their objectives, and managementnecessarily applies its judgment in evaluating the cost-benefit relationship ofpossible controls and procedures. Based on the evaluation of our disclosurecontrols and procedures as of September 30, 2005, our chief executive officerand chief financial officer concluded that, as of such date, our disclosurecontrols and procedures were effective at the reasonable assurance level.

 

No change in our internalcontrol over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)under the Exchange Act) occurred during the fiscal quarter ended September 30,2005, that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

**PART II.  OTHER INFORMATION**

 

**Item 6.****           Exhibits**

 

See the Exhibit Index onthe page immediately preceding the exhibits for a list of exhibits filed aspart of this Quarterly Report on Form 10-Q, which Exhibit Index is incorporatedherein by this reference.

 

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|                    | NITROMED, INC. |
|-------------------------|----------------|
|                    |           |
|                    |           |
| Date: November  3, 2005 | By:            | /s/ LAWRENCE E.  BLOCH, M.D., J.D. |
|                    |           | Lawrence E.  Bloch, M.D., J.D. |
|                    |           | Chief Financial  Officer, Chief Business Officer, Treasurer |
|                    |           | and Secretary *(Principal Financial Officer)* |

 

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**EXHIBITINDEX**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                         |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                    |
| 31.1                |       | Certification of the Chief Executive Officer  pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of  1934, as amended              |
| 31.2                |       | Certification of the Chief Financial Officer  pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of  1934, as amended              |
| 32.1                |       | Certification of the Chief Executive Officer  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |
| 32.2                |       | Certification of the Chief Financial Officer  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |

 

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