**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549**

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** **

**FORM 10-Q**

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**(MarkOne)**

**x****                                  ****QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the quarterly period endedSeptember 30, 2006**

**OR**

**o****                                     ****TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

**Forthe transition period from _____________to ______________.**

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** **

**Commission File Number  0-28494**

**MILLENNIUMPHARMACEUTICALS, INC.**(Exact name of registrant as specified in its charter)

| **Delaware**                       |   | **04-3177038**       |
|------------------------------------|--------|----------------------|
| (State or other  jurisdiction      |   | (I.R.S. Employer     |
| of incorporation  or organization) |   | Identification  No.) |

 

**40 Landsdowne Street, Cambridge,Massachusetts  02139** (Address of principalexecutive offices) (zip code)

**(617) 679-7000** (Registrant’stelephone number, including area code)

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Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes  x      No  o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large acceleratedfiler  x          Acceleratedfiler  o          Non-acceleratedfiler

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

 Yes  o     No  x

Number of shares of the registrant’s Common Stock, $0.001 par value,outstanding on October 26, 2006:   316,027,315

 

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**MILLENNIUMPHARMACEUTICALS, INC.**

**FORM 10-Q**

**FORTHE QUARTER ENDED SEPTEMBER 30, 2006**

**TABLEOF CONTENTS**
|                  |       |                                                                                                              |       |       |       |
|------------------|------------|-------------------------------------------------------------------------------------------------------------------|------------|------------|------------|
| ** **       | ** ** | ** **                                                                                                        | ** ** | ** ** | ** ** |
| **PART I**  | ** ** | **FINANCIAL INFORMATION**                                                                                         |       |       |       |
| ** **       | ** ** | ** **                                                                                                        | ** ** | ** ** | ** ** |
| Item 1.          |       | Condensed  Consolidated Financial Statements                                                                      |       |       |       |
|             |       |                                                                                                              |       |       |       |
|             |       | Condensed  Consolidated Balance Sheets as of September 30, 2006 and December 31,  2005                       |       | 3          |       |
|             |       |                                                                                                              |       |       |       |
|             |       | Condensed  Consolidated Statements of Operations for the three and nine months ended  September 30, 2006 and 2005 |       | 4          |       |
|             |       |                                                                                                              |       |       |       |
|             |       | Condensed  Consolidated Statements of Cash Flows for the nine months ended September 30,  2006 and 2005           |       | 5          |       |
|             |       |                                                                                                              |       |       |       |
|             |       | Notes to  Condensed Consolidated Financial Statements                                                             |       | 6          |       |
|             |       |                                                                                                              |       |       |       |
| Item 2.          |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                       |       | 18         |       |
|             |       |                                                                                                              |       |       |       |
|             |       | Risk Factors  That May Affect Results                                                                        |       | 32         |       |
|             |       |                                                                                                              |       |       |       |
| Item 3.          |       | Quantitative  and Qualitative Disclosures about Market Risk                                                       |       | 45         |       |
|             |       |                                                                                                              |       |       |       |
| Item 4.          |       | Controls and  Procedures                                                                                          |       | 45         |       |
|             |       |                                                                                                              |       |       |       |
| **PART II** | ** ** | **OTHER INFORMATION**                                                                                             |       |       |       |
| ** **       | ** ** | ** **                                                                                                        | ** ** | ** ** | ** ** |
| Item 6.          |       | Exhibits                                                                                                          |       | 46         |       |
|             |       |                                                                                                              |       |       |       |
|             |       | Signatures                                                                                                        |       | 47         |       |
|             |       |                                                                                                              |       |       |       |
|             |       | Exhibit Index                                                                                                |       | 48         |       |

 

*Thefollowing Millennium trademarks are used in this Quarterly Report onForm 10-Q:* Millennium®, the Millennium “M” logo anddesign (registered), Millennium PharmaceuticalsTM, VELCADE® (bortezomib) forInjection, and INTEGRILIN® (eptifibatide) Injection. All are covered byregistrations or pending applications for registration in the U.S. Patent andTrademark Office and many other countries. ReoPro® (abciximab) is a trademarkof Eli Lilly & Company, Aggrastat® (tirofiban) is a trademark ofMerck & Co., Inc., Thalomid® (thalidomide) and Revlimid®(lenalidomide) are trademarks of Celgene Corporation and Angiomax® (bivalirudin)is a trademark of The Medicines Company.*  Other trademarks used in this QuarterlyReport on Form 10-Q are the property of their respective owners.*

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**PART I   FINANCIALINFORMATION**

**Item 1.  Condensed Consolidated Financial Statements**

**Millennium Pharmaceuticals, Inc. Condensed Consolidated Balance Sheets**
| ** **                                                                                                                                                            | ** ** | **September 30,   2006** | ** ** | **December 31,   2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                                                                            | ** ** | **(unaudited)**                    | ** ** | ** **                        | ** ** |
| **(in thousands, except per share  amounts)**                                                                                                                         | ** ** | ** **                         | ** ** | ** **                        | ** ** |
| **Assets**                                                                                                                                                            | ** ** | ** **                         | ** ** | ** **                        | ** ** |
| Current assets:                                                                                                                                                       |       |                               |       |                              |       |
| Cash and cash  equivalents                                                                                                                                            |       | $                                  | 31,337     |                              | $          | 5,029 |   |
| Marketable securities                                                                                                                                                 |       | 604,273                            |       | 640,559                           |       |
| Accounts receivable,  net of allowances of $521 in 2006 and $2,504 in 2005                                                                                            |       | 66,096                             |       | 64,338                            |       |
| Inventory                                                                                                                                                             |       | 13,592                             |       | 15,824                            |       |
| Prepaid expenses and  other current assets                                                                                                                            |       | 8,786                              |       | 15,346                            |       |
| Total current  assets                                                                                                                                                 |       | 724,084                            |       | 741,096                           |       |
| Property and equipment,  net                                                                                                                                          |       | 161,586                            |       | 183,059                           |       |
| Restricted cash                                                                                                                                                       |       | 7,434                              |       | 8,486                             |       |
| Other assets                                                                                                                                                          |       | 18,881                             |       | 16,716                            |       |
| Goodwill                                                                                                                                                              |       | 1,213,162                          |       | 1,210,926                         |       |
| Developed technology,  net                                                                                                                                            |       | 280,240                            |       | 305,337                           |       |
| Intangible assets, net                                                                                                                                                |       | 61,647                             |       | 62,012                            |       |
| Total assets                                                                                                                                                          |       | $                                  | 2,467,034  |                              | $          | 2,527,632 |   |
|                                                                                                                                                                  |       |                               |       |                              |       |
| **Liabilities and Stockholders’  Equity**                                                                                                                        | ** ** | ** **                         | ** ** | ** **                        | ** ** |
| Current liabilities:                                                                                                                                                  |       |                               |       |                              |       |
| Accounts payable                                                                                                                                                      |       | $                                  | 14,907     |                              | $          | 31,137 |   |
| Accrued expenses                                                                                                                                                      |       | 55,657                             |       | 60,325                            |       |
| Current portion of  restructuring                                                                                                                                     |       | 30,563                             |       | 35,362                            |       |
| Current portion of  deferred revenue                                                                                                                                  |       | 13,729                             |       | 27,745                            |       |
| Current portion of  capital lease obligations                                                                                                                         |       | 1,173                              |       | 4,136                             |       |
| Current portion of  long-term debt                                                                                                                                    |       | 99,571                             |       | 5,890                             |       |
| Total current  liabilities                                                                                                                                            |       | 215,600                            |       | 164,595                           |       |
| Other long-term  liabilities                                                                                                                                          |       | 769                                |       | 48                                |       |
| Restructuring, net of  current portion                                                                                                                                |       | 48,739                             |       | 69,541                            |       |
| Deferred revenue, net  of current portion                                                                                                                             |       | 13,048                             |       | 15,973                            |       |
| Capital lease  obligations, net of current portion                                                                                                                    |       | 75,343                             |       | 76,226                            |       |
| Long-term debt                                                                                                                                                        |       | —                             |       | 99,571                            |       |
|                                                                                                                                                                  |       |                               |       |                              |       |
| Commitments and  contingencies                                                                                                                                        |       |                               |       |                              |       |
|                                                                                                                                                                  |       |                               |       |                              |       |
| **Stockholders’ Equity:**                                                                                                                                        | ** ** | ** **                         | ** ** | ** **                        | ** ** |
| Preferred Stock, $0.001  par value; 5,000 shares authorized, none issued                                                                                              |       | —                             |       | —                            |       |
| Common Stock, $0.001  par value; 500,000 shares authorized: 315,889 shares at September 30, 2006  and 311,121 shares at December 31, 2005 issued and outstanding |       | 316                                |       | 311                               |       |
| Additional paid-in  capital                                                                                                                                           |       | 4,635,019                          |       | 4,582,204                         |       |
| Deferred compensation                                                                                                                                                 |       | —                             |       | (4,219                            | )          |
| Accumulated other  comprehensive loss                                                                                                                                 |       | (2,537                             | )          | (9,580                            | )          |
| Accumulated deficit                                                                                                                                                   |       | (2,519,263                         | )          | (2,467,038                        | )          |
| Total  stockholders’ equity                                                                                                                                      |       | 2,113,535                          |       | 2,101,678                         |       |
| Total liabilities and  stockholders’ equity                                                                                                                      |       | $                                  | 2,467,034  |                              | $          | 2,527,632 |   |

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.

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**Millennium Pharmaceuticals, Inc.Condensed Consolidated Statements of Operations(unaudited)**
| ** **                                                           | ** ** | **Three Months Ended   September 30,** | ** ** | **Nine Months Ended   September 30,** | ** ** |
|----------------------------------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                           | ** ** | **2006**                                                   | ** ** | **2005**                                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
| **(in  thousands, except per share amounts)**                        | ** ** | ** **                                                 | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                 |       |                                                       |       |                                                      |       |   |   |   |   |
| Revenues:                                                            |       |                                                       |       |                                                      |       |   |   |   |   |
| Net product sales                                                    |       | $                                                          | 53,161     |                                                      | $          | 50,942 |   | $ | 165,320 |   | $ | 139,629 |   |
| Co-promotion revenue                                                 |       | —                                                     |       | 33,037                                                    |       | — |   | 123,524 |   |
| Revenue under strategic alliances                                    |       | 17,196                                                     |       | 105,186                                                   |       | 82,990 |   | 160,368 |   |
| Royalties                                                            |       | 33,737                                                     |       | 12,514                                                    |       | 98,382 |   | 12,514 |   |
| Total revenues                                                       |       | 104,094                                                    |       | 201,679                                                   |       | 346,692 |   | 436,035 |   |
|                                                                 |       |                                                       |       |                                                      |       |   |   |   |   |
| Costs and  expenses:                                                 |       |                                                       |       |                                                      |       |   |   |   |   |
| Cost of sales (excludes amortization of acquired  intangible assets) |       | 6,730                                                      |       | 89,020                                                    |       | 36,660 |   | 120,281 |   |
| Research and development (Note 1)                                    |       | 73,436                                                     |       | 80,632                                                    |       | 235,343 |   | 253,725 |   |
| Selling, general and administrative (Note 1)                         |       | 34,365                                                     |       | 40,623                                                    |       | 107,221 |   | 144,320 |   |
| Restructuring                                                        |       | 1,352                                                      |       | 58,791                                                    |       | 5,737 |   | 62,897 |   |
| Amortization of intangibles                                          |       | 8,488                                                      |       | 8,500                                                     |       | 25,462 |   | 25,500 |   |
| Total costs and expenses                                             |       | 124,371                                                    |       | 277,566                                                   |       | 410,423 |   | 606,723 |   |
|                                                                 |       |                                                       |       |                                                      |       |   |   |   |   |
| Loss from operations                                                 |       | (20,277                                                    | )          | (75,887                                                   | )          | (63,731 | ) | (170,688 | ) |
|                                                                 |       |                                                       |       |                                                      |       |   |   |   |   |
| Other income  (expense):                                             |       |                                                       |       |                                                      |       |   |   |   |   |
| Investment income, net                                               |       | 5,635                                                      |       | 4,902                                                     |       | 16,037 |   | 24,081 |   |
| Interest expense                                                     |       | (2,478                                                     | )          | (2,820                                                    | )          | (7,934 | ) | (7,723 | ) |
| Other income                                                         |       | 3,403                                                      |       | —                                                    |       | 3,403 |   | — |   |
| Net loss                                                             |       | $                                                          | (13,717    | )                                                         | $          | (73,805 | ) | $ | (52,225 | ) | $ | (154,330 | ) |
|                                                                 |       |                                                       |       |                                                      |       |   |   |   |   |
| *Amounts  per common share:*                                         |       |                                                       |       |                                                      |       |   |   |   |   |
|                                                                 |       |                                                       |       |                                                      |       |   |   |   |   |
| Net loss per  share, basic and diluted                               |       | $                                                          | (0.04      | )                                                         | $          | (0.24 | ) | $ | (0.17 | ) | $ | (0.50 | ) |
|                                                                 |       |                                                       |       |                                                      |       |   |   |   |   |
| Weighted average  shares, basic and diluted                          |       | 314,228                                                    |       | 308,848                                                   |       | 313,132 |   | 307,675 |   |

 

Note 1:  Upon adoption of SFAS No. 123 (revised 2004),“Share Based Payments,” (“SFAS No. 123R”) on January 1, 2006, the Company beganrecording stock-based compensation expense in its condensed consolidatedstatements of operations.  No stock-basedcompensation expense was recognized under SFAS No. 123R in any priorperiods.  See Note 6 to the condensedconsolidated financial statements for further discussion.  Stock-based compensation expense is allocatedin the condensed consolidated statements of operations expense lines asfollows:
| ** **                           | ** ** | **Three Months Ended   September 30,** | ** ** | **Nine Months Ended   September 30,** | ** ** |
|--------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                                   | ** ** | **2005**                                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
| **(in  thousands)**                  | ** ** | ** **                                                 | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                 |       |                                                       |       |                                                      |       |   |   |   |   |
| Research and  development            |       | $                                                          | 5,603      |                                                      | $          | — |   | $ | 17,935 |   | $ | — |   |
| Selling, general  and administrative |       | 4,642                                                      |       | —                                                    |       | 14,291 |   | — |   |
| Total                                |       | $                                                          | 10,245     |                                                      | $          | — |   | $ | 32,226 |   | $ | — |   |

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.

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**Millennium Pharmaceuticals, Inc Condensed Consolidated Statements ofCash Flows (unaudited)**

** **
| ** **                                                                                         | ** ** | **Nine Months Ended   September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                                                         | ** ** | **2006**                                                  | ** ** | **2005** | ** ** |
| **(in  thousands)**                                                                                | ** ** | ** **                                                | ** ** | ** ** | ** ** |
| **Cash  Flows from Operating Activities:**                                                         | ** ** | ** **                                                | ** ** | ** ** | ** ** |
| Net loss                                                                                           |       | $                                                         | (52,225    | ) | $ | (154,330 | ) |
| Adjustments to  reconcile net loss to cash used in operating activities:                           |       |                                                      |       |   |   |
| Depreciation and amortization                                                                      |       | 48,027                                                    |       | 58,456 |   |
| Non-cash restructuring charges                                                                     |       | 4,869                                                     |       | 1,255 |   |
| Amortization and write-off of deferred financing  costs                                            |       | 322                                                       |       | 340 |   |
| Realized loss on securities, net                                                                   |       | 4,725                                                     |       | 2,249 |   |
| Realized gain on sale of investment in TransForm Pharmaceuticals                                   |       | —                                                    |       | (10,465 | ) |
| Realized gain on sale of assets to Gene Logic, Inc.                                                |       | (3,403                                                    | )          | — |   |
| 401K match stock compensation                                                                      |       | 3,881                                                     |       | 4,325 |   |
| Stock-based compensation expense under SFAS No. 123R                                               |       | 32,226                                                    |       | — |   |
| Stock-based compensation expense under APB No. 25                                                  |       | —                                                    |       | 266 |   |
| Changes in  operating assets and liabilities:                                                      |       |                                                      |       |   |   |
| Accounts receivable                                                                                |       | (1,758                                                    | )          | 9,502 |   |
| Inventory                                                                                          |       | 2,232                                                     |       | 80,338 |   |
| Prepaid expenses and other current assets                                                          |       | 3,157                                                     |       | 561 |   |
| Restricted cash and other assets                                                                   |       | (2,395                                                    | )          | (5,611 | ) |
| Accounts payable and accrued expenses                                                              |       | (44,063                                                   | )          | (6,813 | ) |
| Advance from Schering-Plough                                                                       |       | —                                                    |       | (49,250 | ) |
| Deferred revenue                                                                                   |       | (16,941                                                   | )          | 24,494 |   |
| Other long-term liabilities                                                                        |       | 721                                                       |       | — |   |
| Net cash used in  operating activities                                                             |       | (20,625                                                   | )          | (44,683 | ) |
|                                                                                               |       |                                                      |       |   |   |
| **Cash  Flows from Investing Activities:**                                                         | ** ** | ** **                                                | ** ** | ** ** | ** ** |
| Investments in  marketable securities                                                              |       | (254,857                                                  | )          | (261,710 | ) |
| Proceeds from  sales and maturities of marketable securities                                       |       | 296,130                                                   |       | 347,611 |   |
| Proceeds from  sale of investment in TransForm Pharmaceuticals                                     |       | —                                                    |       | 10,585 |   |
| Proceeds from  the sale of assets to Gene Logic, Inc.                                              |       | 3,403                                                     |       | — |   |
| Purchases of  property and equipment                                                               |       | (6,960                                                    | )          | (8,561 | ) |
| Other investing  activities                                                                        |       | (2,003                                                    | )          | (5,282 | ) |
| Net cash  provided by investing activities                                                         |       | 35,713                                                    |       | 82,643 |   |
|                                                                                               |       |                                                      |       |   |   |
| **Cash  Flows from Financing Activities:**                                                         | ** ** | ** **                                                | ** ** | ** ** | ** ** |
| Net proceeds  from employee stock purchases                                                        |       | 20,932                                                    |       | 17,043 |   |
| Repayment of  long-term debt                                                                       |       | (5,890                                                    | )          | — |   |
| Principal  payments on capital leases                                                              |       | (3,846                                                    | )          | (8,951 | ) |
| Net cash  provided by financing activities                                                         |       | 11,196                                                    |       | 8,092 |   |
|                                                                                               |       |                                                      |       |   |   |
| Increase in cash  and cash equivalents                                                             |       | 26,284                                                    |       | 46,052 |   |
| Effects of  exchange rate changes on cash and cash equivalents                                     |       | 24                                                        |       | (76 | ) |
| Cash and cash  equivalents, beginning of period                                                    |       | 5,029                                                     |       | 14,436 |   |
| Cash and cash  equivalents, end of period                                                          |       | $                                                         | 31,337     |   | $ | 60,412 |   |
| ** **                                                                                         | ** ** | ** **                                                | ** ** | ** ** | ** ** |
| **Supplemental  Cash Flow Information:**                                                           | ** ** | ** **                                                | ** ** | ** ** | ** ** |
| Cash paid for  interest                                                                            |       | $                                                         | 8,811      |   | $ | 8,916 |   |
| **Supplemental  Disclosure of Noncash Investing Activities:**                                      | ** ** | ** **                                                | ** ** | ** ** | ** ** |
| Receipt of  shares of SGX Pharmaceuticals, Inc. common stock in exchange for note  receivable |       | $                                                         | 6,000      |   | $ | — |   |
| Issuance of restricted  stock under APB No. 25                                                     |       | $                                                         | —     |   | $ | 4,784 |   |

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

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**Millennium Pharmaceuticals, Inc.Notes to Condensed Consolidated Financial Statements**

**1.   Basis of Presentation**

The accompanyingcondensed consolidated financial statements have been prepared in accordancewith generally accepted accounting principles for interim financial informationand with the instructions to Form 10-Q and Article 10 of RegulationS-X. Accordingly, they do not include all of the information and footnotesrequired by generally accepted accounting principles for complete financialstatements. In the opinion of management, all adjustments, consisting of normalrecurring accruals and revisions of estimates, considered necessary for a fairpresentation of the accompanying condensed consolidated financial statementshave been included. Interim results for the three and nine months endedSeptember 30, 2006 are not necessarily indicative of the results that may beexpected for the year ending December 31, 2006. For further information,refer to the consolidated financial statements and accompanying footnotesincluded in the Company’s Annual Report on Form 10-K for the fiscal yearended December 31, 2005, which was filed with the Securities and ExchangeCommission (“SEC”) on March 8, 2006.

The informationpresented in the condensed consolidated financial statements and relatedfootnotes at September 30, 2006, and for the three and nine months endedSeptember 30, 2006 and 2005, is unaudited and the condensed consolidatedbalance sheet amounts and related footnotes at December 31, 2005, have beenderived from audited financial statements.

**2.   Summary of SignificantAccounting Policies**

**Reclassifications**

Certain prior yearamounts of the condensed consolidated statements of cash flows have beenreclassified to conform to the current year presentation. This reclassificationhas no impact on previously reported net loss or net increase in cash and cashequivalents.

Certain prior yearamounts included in accrued expenses of the condensed consolidated balancesheets have been reclassified to accounts payable to conform to the currentyear presentation. This reclassification has no impact on previously reportednet loss or current liabilities.

**Cash Equivalents, MarketableSecurities and Other Investments**

Cash equivalentsconsist principally of money market funds and corporate bonds with maturitiesof three months or less at the date of purchase. Marketable securities consistprimarily of investment-grade corporate bonds, asset-backed debt securities andU.S. government agency debt securities. Other investments represent ownershipin private companies in which the Company holds less than a 20 percentownership position and does not otherwise exercise significant influence. TheCompany carries such investments at cost unless significant influence can beexercised over the investee, in which case such securities are recorded usingthe equity method. As a matter of policy, the Company monitors theseinvestments in private companies on a quarterly basis and determines whetherany impairment in their value would require a charge to current earnings, basedon the implied value from any recent rounds of financing completed by theinvestee, market prices of comparable public companies and general marketconditions. These other investments are included in other assets at September30, 2006 and December 31, 2005.

Managementdetermines the appropriate classification of marketable securities at the timeof purchase and reevaluates such designation at each balance sheet date.Marketable securities at September 30, 2006 and December 31, 2005 areclassified as “available-for-sale.” Available-for-sale securities are carriedat fair value, with the unrealized gains and losses reported in a separatecomponent of stockholders’ equity. The cost of debt securities in this categoryis adjusted for amortization of premiums and accretion of discounts tomaturity. Such amortization and accretion are included in investment income.Realized gains and losses and declines in value judged to beother-than-temporary on available-for-sale securities and other investments areincluded in investment income. The cost of securities sold is based on thespecific identification method. Interest and dividends on securities classifiedas available-for-sale are included in investment income.

During the three months endedSeptember 30, 2006, the Company did not record significant realized gains onmarketable securities and recorded realized losses on marketable securities andother investments of $1.7 million. During the three months ended September 30, 2005, the Company did notrecord any realized gains on marketable securities and recorded realized losseson marketable securities and other investments of $0.9 million.

During the nine months ended September 30, 2006, the Company did notrecord significant realized gains on marketable securities and recordedrealized losses on marketable securities and other investments of $4.7million.  During the nine

6

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monthsended September 30, 2005, the Company recorded realized gains on marketablesecurities of $0.1 million and realized losses on marketable securitiesand other investments of $2.4 million.

During the ninemonths ended September 30, 2005, the Company recorded a realized gain ofapproximately $10.5 million from the sale of its cost method investment inTransForm Pharmaceuticals, Inc. (“TransForm”). In October 2006, the Company received approximately $2.9 million uponthe final settlement of the escrowed portion of the sale proceeds and expectsto record a realized gain in the fourth quarter of 2006 for this amount.  TransForm, a company specializing in thediscovery of formulations and novel crystalline forms of drug molecules, wasacquired by Johnson & Johnson in a cash-for-stock transaction that closedin April 2005.

**Segment Information**

Statement ofFinancial Accounting Standards (“SFAS”) No. 131, “Disclosures aboutSegments of an Enterprise and Related Information” (“SFAS No. 131”),establishes standards for the way that public business enterprises reportinformation about operating segments in their financial statements. SFASNo. 131 also establishes standards for related disclosures about productsand services, geographic areas, and major customers.

The Companyoperates in one business segment, which focuses on the research, developmentand commercialization of therapeutic products. All of the Company’s productsales are currently related to sales of VELCADE® (bortezomib) for Injection.All of the Company’s co-promotion revenue reported in prior periods was relatedto sales and development of INTEGRILIN® (eptifibatide) Injection throughAugust 31, 2005. The remainder of the Company’s total revenue is relatedto its strategic alliances and royalties.

Revenues fromOrtho Biotech Products, L.P. (“Ortho Biotech”), a member of theJohnson & Johnson Family Of Companies, including license fees,milestones, distribution fees on sales outside of the United States and expensereimbursement accounted for approximately 14 percent and five percent of totalrevenues for the three months ended September 30, 2006 and 2005, respectively,and 17 percent and 11 percent of total revenues for the nine months endedSeptember 30, 2006 and 2005, respectively.

Revenues fromSchering-Plough Ltd. and Schering Corporation (collectively “SGP”),including license fees, royalties on sales of INTEGRILIN in the United Statesand other territories and manufacturing-related reimbursement and excludingco-promotion revenue recorded through September 1, 2005, accounted forapproximately 28 percent and 46 percent of total revenues for the three monthsended September 30, 2006 and 2005, respectively, and 30 percent and 21 percentof total revenues for the nine months ended September 30, 2006 and 2005,respectively.

There were noother significant customers under strategic alliances and royalties in thethree and nine months ended September 30, 2006 and 2005.

**Information Concerning Market andSource of Supply Concentration**

INTEGRILIN hasreceived regulatory approvals in the United States, the countries of theEuropean Union and a number of other countries for various indications. TheCompany and SGP co-promoted INTEGRILIN in the United States and shared anyprofits and losses through August 31, 2005. In September 2005, SGPacquired the exclusive development and commercialization rights to INTEGRILINin the United States from the Company. The Company continues to manage thesupply chain for INTEGRILIN at the expense of SGP for products sold in the SGPterritories. In the European Union, GlaxoSmithKline plc (“GSK”) exclusivelymarkets INTEGRILIN.

The Company relieson third-party contract manufacturers for the clinical and commercialproduction of INTEGRILIN. The Company has three approved manufacturers thatprovide eptifibatide, the active pharmaceutical ingredient (“API”) necessary tomake INTEGRILIN for both clinical trials and commercial supply. Solvay, SocieteAnonyme (“Solvay”), one of the current manufacturers, owns the processtechnology used by it and one other manufacturer for the production of the API. The Company entered into an agreementwith Solvay in January 2003 for an initial term of four years and one-yearrenewal periods thereafter. In June 2006, the Company received FDA approval ofits own alternative process technology utilized by the third manufacturer forthe production of eptifibatide for approval in the United States and iscurrently seeking approval in Europe and other countries, as required.  As of July 1, 2006, SGP began to purchase themajority of its API directly from the manufacturer.  The Company has two manufacturers thatcurrently perform fill/finish services for INTEGRILIN and a new

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packaging supplier forthe United States. The FDA or other regulatory agencies must approve theprocesses or the facilities that may be used for the manufacture of the Company’smarketed products.  Materials in processat these alternative suppliers are included in inventory.

The Company alsorelies on third-party contract manufacturers for the manufacturing, fill/finishand packaging of VELCADE for both commercial purposes and for ongoing clinicaltrials. The Company has established long-term supply relationships for theproduction of commercial supplies of VELCADE. The Company works with one manufacturer under a long-term supplyagreement to complete fill/finish for VELCADE. The Company is currently qualifying a second fill/finish supplier inorder to mitigate its risk of VELCADE supply interruption.  Materials in process at these alternativesuppliers are included in inventory.

During 2004, theCompany began distributing VELCADE in the United States through a sole-sourceopen access distribution model where the Company sells directly to anindependent third party who in turn distributes to the wholesaler base.  In April 2006, the Company’s distributoradded a second distribution site to its network in order to improve access tothe product for physicians in the western United States.

**Inventory**

Inventory consistsof currently marketed products, including VELCADE and INTEGRILIN and, from timeto time, product candidates awaiting regulatory approval, which are capitalizedbased upon management’s judgment of probable near term commercialization. TheCompany assesses the probability of commercialization based upon severalfactors including estimated launch date, time to manufacture and shelf life. AtSeptember 30, 2006 and December 31, 2005, inventory does not includeamounts for products that have not been approved for sale.

Inventories arestated at the lower of cost (first in, first out) or market. Inventories arereviewed periodically for slow-moving or obsolete status based on salesactivity, both projected and historical.

Inventory consistsof the following (in thousands):

 
| ** **      | ** ** | **September 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|-----------------|------------|----------------------------------|------------|---------------------------------|------------|
| Raw materials   |       | $                                | 5,838      |                            | $          | 7,632 |   |
| Work in process |       | 7,188                            |       | 7,370                           |       |
| Finished goods  |       | 566                              |       | 822                             |       |
|            |       | $                                | 13,592     |                            | $          | 15,824 |   |

 

**Goodwill and Intangible Assets**

Intangible assetsconsist of specifically identified intangible assets. Goodwill is the excess ofany purchase price over the estimated fair market value of net tangible assetsacquired not allocated to specific intangible assets.

Intangible assetsconsist of the following (in thousands):
| ** **                                                           | ** ** | **September 30, 2006**      | ** ** | **December 31, 2005**     | ** ** |
|----------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                           | ** ** | **Gross Carrying   Amount** | ** ** | **Accumulated   Amortization** | ** ** | **Gross Carrying   Amount** | ** ** | **Accumulated   Amortization** | ** ** |
| Developed  technology                                                |       | $                                     | 435,000    |                                | $          | (154,760 | ) | $ | 435,000 |   | $ | (129,663 | ) |
| Core technology                                                      |       | $                                     | 18,712     |                                | $          | (18,712 | ) | $ | 18,712 |   | $ | (18,712 | ) |
| Other                                                                |       | 17,060                                |       | (14,413                             | )          | 17,060 |   | (14,048 | ) |
| Total amortizable intangible assets, excluding  developed technology |       | 35,772                                |       | (33,125                             | )          | 35,772 |   | (32,760 | ) |
| Total  indefinite-lived trademark                                    |       | 59,000                                |       | —                              |       | 59,000 |   | — |   |
| Total intangible  assets, excluding developed technology             |       | $                                     | 94,772     |                                | $          | (33,125 | ) | $ | 94,772 |   | $ | (32,760 | ) |

 

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Amortization ofintangibles is computed using the straight-line method over the useful lives ofthe respective assets as follows:
| Developed  technology |   | 13  years     |   |
|-----------------------|--------|---------------|--------|
| Core technology       |   | 4  years      |   |
| Other                 |   | 2 to 12 years |   |

 

Amortizationexpense was approximately $8.5 million in each of the three months endedSeptember 30, 2006 and 2005. Amortization expense was approximately $25.5million in each of the nine months ended September 30, 2006 and 2005.  The Company expects to incur amortizationexpense of approximately $34.0 million for each of the next five years.

As required bySFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill andindefinite lived intangible assets are not amortized but are reviewed annuallyfor impairment, or more frequently if impairment indicators arise. Separableintangible assets that are not deemed to have an indefinite life are amortizedover their useful lives and reviewed for impairment when events or changes incircumstances suggest that the assets may not be recoverable. The Company testsfor goodwill impairment annually, on October 1, and whenever events orchanges in circumstances suggest that the carrying amount may not berecoverable.

On October 1,2006, the Company performed its annual goodwill impairment test and determinedthat no impairment existed on that date. The Company continually monitorsbusiness and market conditions, including the restructured relationship withSGP, to assess whether an impairment indicator exists. If the Company were todetermine that an impairment indicator exists, it would be required to performan impairment test, which might result in a material impairment charge to thestatement of operations.

Goodwill as ofSeptember 30, 2006 and December 31, 2005 consists of the excess purchase priceover the estimated fair value of net tangible and intangible assets primarilyrelated to the Company’s acquisitions of COR Therapeutics, Inc.,LeukoSite, Inc. (“LeukoSite”) and Cambridge Discovery Chemistry, LTD. Thecarrying value may be adjusted as a result of the continued settlement of contingentconsideration arising from the LeukoSite acquisition.

**Revenue Recognition**

The Companyrecognizes revenue from the sale of its products, its co-promotioncollaboration through August 31, 2005, strategic alliances and royalties.The Company’s revenue arrangements with multiple elements are divided intoseparate units of accounting if specified criteria are met, including whetherthe delivered element has stand-alone value to the customer and whether thereis objective and reliable evidence of the fair value of the undelivered items.The consideration received is allocated among the separate units based on theirrespective fair values, and the applicable revenue recognition criteria areapplied to each of the separate units. Advance payments received in excess ofamounts earned are classified as deferred revenue until earned.

*Net product sales*

The Companyrecords product sales of VELCADE when delivery has occurred, title hastransferred, collection is reasonably assured and the Company has no furtherobligations. Allowances are recorded as a reduction to product sales forestimated returns and discounts at the time of sale. Costs incurred by theCompany for shipping and handling are recorded in cost of sales.

*Co-promotion revenue*

ThroughAugust 31, 2005, co-promotion revenue included the Company’s share ofprofits from the sale of INTEGRILIN in co-promotion territories by SGP. Alsoincluded in co-promotion revenue were reimbursements from SGP of the Company’smanufacturing-related costs, development costs, advertising and promotionalexpenses associated with the sale of INTEGRILIN within co-promotion territoriesand royalties from SGP on sales of INTEGRILIN outside of the co-promotionterritory other than Europe. The Company recognized revenue when SGP shippedINTEGRILIN to wholesalers and recorded it net of allowances, if any. TheCompany deferred specified manufacturing-related expenses until the time SGPshipped related product to its customers inside and outside of co-promotionterritories and outside of Europe.

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BeginningSeptember 1, 2005 as a result of the Company’s transition from aco-promotion to a royalty arrangement for INTEGRILIN in the United States, theCompany no longer reports co-promotion revenue.

*Revenue under strategic alliances*

The Company recognizesrevenue under strategic alliances from nonrefundable license payments,milestone payments, reimbursement of research and development costs andreimbursement of manufacturing-related costs. Nonrefundable upfront fees forwhich no further performance obligations exist are recognized as revenue on theearlier of when payments are received or collection is assured.

Nonrefundableupfront licensing fees and guaranteed, time-based payments that requirecontinuing involvement in the form of research and development, manufacturingor other commercialization efforts by the Company are recognized as revenue:

·                    ratably overthe development period if development risk is significant;

·                    ratably overthe manufacturing period or estimated product useful life if development riskhas been substantially eliminated; or

·                    based upon thelevel of research services performed during the period of the researchcontract.

Milestone paymentsare recognized as revenue when the performance obligations, as defined in thecontract, are achieved. Performance obligations typically consist ofsignificant milestones in the development life cycle of the related technologyor product candidate, such as initiation of clinical trials, filing forapproval with regulatory agencies and approvals by regulatory agencies.

Reimbursements ofresearch and development costs are recognized as revenue as the related costsare incurred.

*Royalties*

Beginning onSeptember 1, 2005, in connection with the closing of the Company’s amendedcollaboration agreement with SGP, as discussed in Note 4, the Company began torecord royalty income. Royalties are recognized as revenue when earned.Royalties may include:

·                    royaltiesearned on sales of INTEGRILIN in the United States and other territories aroundthe world, as provided by SGP;

·                    royalties, ordistribution fees, earned on international sales of VELCADE, as provided byOrtho Biotech;

·                    royaltiesearned on sales of INTEGRILIN in Europe, as provided by GSK; and

·                    otherroyalties.

**Advertising and Promotional Expenses**

Advertising andpromotional expenses are expensed as incurred. During the three months endedSeptember 30, 2006 and 2005, advertising and promotional expenses were$3.7 million and $6.7 million, respectively.  During the nine months ended September 30,2006 and 2005, advertising and promotional expenses were $14.3 million and$28.8 million, respectively. The three and nine months ended September 30, 2005include advertising and promotional expenses related to INTEGRILIN.

**Net Loss Per Common Share**

Basic net loss percommon share is computed using the weighted-average number of common sharesoutstanding during the period, excluding restricted stock that has been issuedbut is not yet vested. Diluted net loss per share is based upon the weightedaverage number of common shares outstanding during the period, plus additionalweighted average common equivalent shares outstanding during the period whenthe effect is not anti-dilutive. Common equivalent shares result from theassumed exercise of outstanding stock options and warrants (the proceeds ofwhich are then assumed to have been used to repurchase outstanding stock usingthe treasury stock method), the assumed conversion of convertible notes and thevesting of unvested restricted shares of common stock. Options and warrants topurchase shares of common stock and unvested restricted 

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shares that were not included in the calculation ofdiluted shares because the effect of including the options, warrants andunvested restricted shares would have been anti-dilutive were 1.9 million and1.5 million for the three and nine months ended September 30, 2006,respectively, and 2.1 million and 1.9 million for the three and nine monthsended September 30, 2005, respectively.

**Comprehensive Loss**

Comprehensive lossis comprised of net loss, change in unrealized gains and losses on marketablesecurities and cumulative foreign currency translation adjustments. Thefollowing table displays comprehensive loss (in thousands):
| ** **                                       | ** ** | **Three Months Ended   September 30,** | ** ** | **Nine Months Ended   September 30,** | ** ** |
|--------------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                       | ** ** | **2006**                                                   | ** ** | **2005**                                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net loss                                         |       | $                                                          | (13,717    | )                                                         | $          | (73,805 | ) | $ | (52,225 | ) | $ | (154,330 | ) |
| Unrealized gain  (loss) on marketable securities |       | 4,584                                                      |       | (2,781                                                    | )          | 8,270 |   | (4,132 | ) |
| Cumulative  translation adjustments              |       | (565                                                       | )          | 269                                                       |       | (1,227 | ) | 409 |   |
| Comprehensive  loss                              |       | $                                                          | (9,698     | )                                                         | $          | (76,317 | ) | $ | (45,182 | ) | $ | (158,053 | ) |

 

The components ofaccumulated other comprehensive loss were as follows (in thousands):
| ** **                                | ** ** | **September 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Unrealized loss  on marketable securities |       | $                                | (1,471     | )                               | $          | (9,741 | ) |
| Cumulative  translation adjustments       |       | (1,066                           | )          | 161                             |       |
| Accumulated other  comprehensive loss     |       | $                                | (2,537     | )                               | $          | (9,580 | ) |

 

**Stock-Based Compensation Expense**

As discussed morefully in Note 6, the Company adopted SFAS No. 123 (revised 2004), “ShareBased Payment,” (“SFAS 123R”), effective January 1, 2006. SFAS 123Rrequires the recognition of the fair value of stock-based compensation in itsstatements of operations. Stock-based compensation expense primarily relates tostock options, restricted stock and stock issued under the Company’s employeestock purchase plans.

Prior toJanuary 1, 2006, the Company followed Accounting Principles Board OpinionNo. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and relatedinterpretations, in accounting for its stock-based compensation plans. UnderAPB 25, when the exercise price of the employee stock options equals the marketprice of the underlying stock on the date of grant, no compensation expense wasrecognized. The Company elected the modified prospective transition method foradopting SFAS 123R. Under this method, the provisions of SFAS 123R apply to allawards granted or modified after the date of adoption. In addition, theunrecognized expense of awards not yet vested at the date of adoption, determinedunder the original provisions of SFAS 123, “Accounting for Stock-BasedCompensation” (“SFAS 123”), is being recognized in the Company’s statements ofoperations in the periods after the date of adoption. For stock options grantedprior to January 1, 2006, the Company calculated stock-based compensationexpense on a straight-line basis over the requisite service period for eachseparately vesting portion of the award as if the award was, in substance,multiple awards.  For restricted stockgranted prior to January 1, 2006, the Company calculated stock-basedcompensation expense on a straight-line basis over the requisite service periodof the entire award.

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SFAS 123R requiresthe presentation of pro forma information for periods prior to adoption as ifthe Company had accounted for all stock-based employee compensation expenseunder the fair value method of that statement. For purposes of this pro formadisclosure, the estimated fair value of the stock options at the date of thegrant is amortized to expense on a straight-line basis over the requisiteservice period for each separately vesting portion of the award as if the awardwas, in substance, multiple awards.  TheCompany accounted for forfeitures as they occurred. The following tableillustrates the effect on net loss and loss per share for the three and ninemonths ended September 30, 2005, as if the Company had applied the fair valuerecognition provisions of SFAS 123R to stock-based employee compensationexpense (in thousands, except per share amounts):
| ** **                                                                                                        | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                        | ** ** | **September 30,  2005**     | ** ** | **September 30,  2005**    | ** ** |
| Net loss                                                                                                          |       | $                                | (73,805    | )                               | $          | (154,330 | ) |
| Add: Stock-based  employee compensation expense as reported in the Statement of Operations                        |       | 550                              |       | 550                             |       |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method for all awards |       | (12,653                          | )          | (46,664                         | )          |
| Pro forma net  loss                                                                                               |       | $                                | (85,908    | )                               | $          | (200,444 | ) |
|                                                                                                              |       |                             |       |                            |       |
| Amounts per  common share:                                                                                        |       |                             |       |                            |       |
| Basic and  diluted — as reported                                                                             |       | $                                | (0.24      | )                               | $          | (0.50 | ) |
| Basic and diluted — pro  forma                                                                               |       | $                                | (0.28      | )                               | $          | (0.65 | ) |

 

**Accounting Pronouncements**

In May 2005,the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFASNo. 154”), which replaces Accounting Principles Board OpinionsNo. 20, “Accounting Changes” and SFAS No. 3, “Reporting AccountingChanges in Interim Financial Statements — an Amendment of APB OpinionNo. 28.”  SFAS No. 154 provides guidance on the accounting forand reporting of accounting changes and error corrections. It establishesretrospective application, or the earliest practicable dates, as the requiredmethod for reporting a change in accounting principle and restatement withrespect to the reporting of a correction of an error. SFAS No. 154 iseffective for accounting changes and corrections of errors made in fiscal yearsbeginning after December 15, 2005. Although the Company will continue toevaluate the application of SFAS No. 154, the adoption did not have amaterial impact on the Company’s results of operations, financial position or cashflows.

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting forUncertainty in Income Taxes - an Interpretation of FASB Statement No. 109” (the“Interpretation”). The Interpretation clarifies the accounting for uncertaintyin income taxes recognized in an enterprise’s financial statements inaccordance with FASB Statement No. 109, Accountingfor Income Taxes. The Interpretationprescribes a recognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation alsoprovides guidance on derecognition,classification, interest and penalties, accounting in interim periods,disclosure and transition. The Interpretation is effective for fiscal yearsbeginning after December 15, 2006.  TheCompany has not completed its evaluation of the Interpretation, but does not currently believe that adoption willhave a material impact on its results of operations, financial position or cash flows.

**3.    Restructuring**

*2005 Strategy Refinement*

InOctober 2005, the Company announced its 2005 restructuring plan in supportof a refined strategy focused on advancing key growth assets, includingVELCADE, the Company’s development pipeline of novel oncology and inflammationmolecules and the Company’s oncology-focused discovery organization. Inconnection with the strategy refinement, the Company substantially reduced itseffort in inflammation discovery and reduced overall headcount, including eliminatingINTEGRILIN sales and marketing positions, positions in inflammation discoveryand various other business support groups.

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The Companyrecorded net restructuring charges of $0.8 million and $1.1 million during thethree and nine months ended September 30, 2006, respectively, under the 2005restructuring plan.  The restructuringcharges primarily related to additional facility related costs associated withvacated buildings and employee termination benefits as a result of theheadcount reductions within inflammation discovery and business supportgroups.  Included in “Other” is thewrite-off of deferred rent recorded in accordance with SFAS No. 13, “Accountingfor Leases,” upon vacating the facilities. The nine months ended September 30, 2006 included an offsetting creditof approximately $7.8 million resulting from the earlier than anticipatedsublease of one of the vacated buildings at a higher rate per square foot thanthe Company had originally estimated.

These costs areincluded in restructuring in the statements of operations and in current andlong-term liabilities on the balance sheet at September 30, 2006. The followingtable displays the restructuring activity and liability balances (inthousands):
| ** **             | ** ** | **Balance at**   | ** ** | ** **  | ** ** | ** **   | ** ** | ** **     | ** ** | ** ** | ** ** | **Balance at**    | ** ** |
|------------------------|------------|-----------------------|------------|-------------|------------|--------------|------------|----------------|------------|------------|------------|------------------------|------------|
| ** **             | ** ** | **December 31,** | ** ** | ** **  | ** ** | ** **   | ** ** | **Asset**      | ** ** | ** ** | ** ** | **September 30,** | ** ** |
| ** **             | ** ** | **2005**              | ** ** | **Charges** | ** ** | **Payments** | ** ** | **Impairment** | ** ** | **Other**  | ** ** | **2006**               | ** ** |
| Termination benefits   |       | $                     | 4,367      |        | $          | 283          |       | $              | (4,377     | )          | $          | —                 |       | $ | — |   | $ | 273 |   |
| Facilities             |       | 24,812                |       | (4,179      | )          | (5,309       | )          | —         |       | 252        |       | 15,576                 |       |
| Asset impairment       |       | —                |       | 4,869       |       | —       |       | (4,869         | )          | —     |       | —                 |       |
| Contract termination   |       | 37                    |       | 37          |       | (74          | )          | —         |       | —     |       | —                 |       |
| Other associated costs |       | 16                    |       | 46          |       | (38          | )          | —         |       | —     |       | 24                     |       |
| Total                  |       | $                     | 29,232     |        | $          | 1,056        |       | $              | (9,798     | )          | $          | (4,869                 | )          | $ | 252 |   | $ | 15,873 |   |

 

*2003 Restructuring Plan*

InDecember 2002 and June 2003, the Company realigned its resources tobecome a commercially-focused biopharmaceutical company. The Companydiscontinued specified discovery research efforts, reduced overall headcount,primarily in its discovery group, and consolidated its research and developmentfacilities. The Company recorded restructuring charges of $0.6 million and $4.7million during the three and nine months ended September 30, 2006, respectively,under the 2003 restructuring plan.  Therestructuring charges primarily related to adjustments to the Company’soriginal estimates of the remaining rental obligations for a vacated facilitybased upon the Company’s inability to secure subtenants in the time and mannerincluded in its earlier estimates.

The followingtable displays the restructuring activity and liability balances (inthousands):
| ** **              | ** ** | **Balance at**   | ** ** | ** **  | ** ** | ** **   | ** ** | **Balance at**    | ** ** |
|-------------------------|------------|-----------------------|------------|-------------|------------|--------------|------------|------------------------|------------|
| ** **              | ** ** | **December 31,** | ** ** | ** **  | ** ** | ** **   | ** ** | **September 30,** | ** ** |
| ** **              | ** ** | **2005**              | ** ** | **Charges** | ** ** | **Payments** | ** ** | **2006**               | ** ** |
| Facilities              |       | $                     | 75,671     |        | $          | 4,674        |       | $                      | (16,916    | ) | $ | 63,429 |   |
| Other associated  costs |       | —                |       | 7           |       | (7           | )          | —                 |       |
| Total                   |       | $                     | 75,671     |        | $          | 4,681        |       | $                      | (16,923    | ) | $ | 63,429 |   |

 

The Companyaccounts for its restructuring charges in accordance with SFAS No. 146, “Accountingfor Costs Associated with Exit or Disposal Activities” (“SFAS No. 146”).SFAS No. 146 requires that a liability for a cost associated with an exitor disposal activity be recognized and measured initially at its fair value inthe period in which the liability is incurred, except for one-time terminationbenefits that meet specified requirements. Costs of termination benefits relateto severance packages, out-placement services and career counseling foremployees affected by restructuring.

In accordance withSFAS No. 146, the Company’s facilities related expenses and liabilities inboth the 2005 and 2003 restructuring plans include estimates of the remainingrental obligations, net of estimated sublease income, for facilities theCompany no longer occupies. The Company validates its estimates and assumptionswith independent third parties having relevant expertise in the real estatemarket. The Company reviews its estimates and assumptions on a regular basis,until the outcome is finalized, and makes whatever modifications are necessary,based on the Company’s best judgment, to reflect any changed circumstances.

The projectedtiming of payments of the remaining restructuring liabilities under both the2005 and the 2003 restructuring plans at September 30, 2006 is approximately$30.6 million due through September 30, 2007 and $48.7 million due thereafter 

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through 2022. The actual amount and timing of thepayment of the remaining accrued liability is primarily dependent upon theultimate terms of any potential subleases or lease restructuring related tofacilities.

The Companycontinues to evaluate its strategic alternatives, including facilityconsolidation, and as a result, significant additional restructuring chargescould occur in future periods.

**4.****              Revenue andStrategic Alliances**

The Company hasentered into research, development, technology transfer and commercializationarrangements with major pharmaceutical and biotechnology companies relating toa broad range of therapeutic products. These alliances provide the Company withthe opportunity to receive various combinations of license fees, researchfunding, co-promotion revenue, distribution fees and may provide additionalpayments contingent upon its achievement of research and regulatory milestonesand royalties and/or profit shares if the Company’s collaborations aresuccessful in developing and commercializing products.

*Product Alliances*

OnSeptember 1, 2005, the Company transferred to SGP the exclusivedevelopment and commercialization rights to INTEGRILIN in the United States. Inexchange for these rights, SGP paid the Company approximately $35.5 million ina nonrefundable upfront payment that the Company is recognizing as revenueratably over the Company’s period of involvement in managing the INTEGRILINsupply chain. In addition, SGP is obligated to pay the Company royalties onproduct sales of INTEGRILIN over the lifetime of the product, with thepotential of receiving royalties beyond the 2014 patent expiration date.

As ofSeptember 1, 2005, the Company no longer records co-promotion revenue. TheCompany now records royalties on sales of INTEGRILIN in the United States andother territories, as earned on a quarterly basis over the life of theINTEGRILIN product. In each of 2006 and 2007, minimum royalties are set atapproximately $85.4 million. There are no guaranteed minimum royalty paymentsbeyond 2007.

Upon closing, SGPassumed development obligations relating to INTEGRILIN. The Company continuesto manage the supply chain for INTEGRILIN at the expense of SGP for productssold in the United States and other areas outside of the European Union.

InJanuary 2005, the Company repaid SGP approximately $49.3 million foradvances SGP had made for inventory purchases in prior years.

During the ninemonths ended September 30, 2006 and 2005, the Company recognized $15.0 millionand $20.0 million, respectively, of milestone payments under its alliance withOrtho Biotech relating to VELCADE and the achievement of agreed-upon saleslevels of VELCADE.

**5.****              Convertible Debt**

The Company hadthe following convertible notes outstanding at September 30, 2006, for a totalof $99.6 million, all of which is included in current liabilities:

·                        $83.3million of principal of 5.5% convertible subordinated notes dueJanuary 15, 2007, that are convertible into the Company’s common stock atany time prior to maturity at a price equal to $42.07 per share (the “5.5%notes”); and

·                        $16.3million of principal of 5.0% convertible subordinated notes due March 1,2007, that are convertible into the Company’s common stock at any time prior tomaturity at a price equal to $34.21 per share (the “5.0% notes”).

Under the terms ofthese notes, the Company is required to make semi-annual interest payments onthe outstanding principal balance of the 5.0% notes on March 1 and September 1of each year and of the 5.5% notes on January 15 and July 15 of eachyear. All required interest payments to date have been made.

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In accordance withthe payment terms, the Company paid off the $5.9 million principal balance onits 4.5% convertible senior notes during the nine months ended September 30,2006.

**6.****              Stock Option Plans**

As discussed inNote 2, the Company adopted SFAS 123R effective January 1, 2006. SFAS 123Rrequires the recognition of the fair value of stock-based compensation in itsstatements of operations. Stock-based compensation expense primarily relates tostock options, restricted stock and stock issued under the Company’s employeestock purchase plans. Stock options are granted to employees at exercise pricesequal to the fair market value of the Company’s stock at the dates of grant.Generally, options have a contractual term of ten years and vest monthly over afour-year period from grant date, although certain options have been, and mayin the future, be granted with shorter vesting periods. Options granted toconsultants and other nonemployees generally vest over the period of service tothe Company. Awards of restricted stock are granted to officers and certainemployees and generally fully vest four years from the grant date, althoughcertain awards have been, and may in the future, be granted with shortervesting periods. The Company recognizes stock-based compensation expense equalto the fair value of stock options on a straight-line basis over the requisiteservice period for each separately vesting portion of the award as if the awardwas, in substance, multiple awards. Restricted stock awards are recorded ascompensation cost, based on the market value on the date of the grant, on astraight-line basis over the requisite service period for each separatelyvesting portion of the award as if the award was, in substance, multipleawards.  The Company provides newly issued shares to satisfy stock optionexercises, the issuance of restricted stock and stock issued under the Company’semployee stock purchase plans.

As a result of theadoption of SFAS 123R, the Company’s net loss for the three and nine monthsended September 30, 2006 is $10.2 million, or $0.03 per share, and $32.2million, or $0.11 per share, respectively, greater than if it had continued toaccount for shared-based compensation under APB 25.

In connection withthe adoption of SFAS 123R, the Company reassessed the valuation methodology forstock options and the related input assumptions. The assessment of the valuationmethodology resulted in the continued use of the Black-Scholes model. In thefourth quarter of 2005, the Company considered implied volatilities ofcurrently traded options to provide an estimate of volatility based uponcurrent trading activity. After considering other factors such as its stage ofdevelopment, the length of time the Company has been public and the impact ofhaving a marketed product, the Company concluded that a blended volatility ratebased upon the most recent three-year and four-year periods of historicalperformance, as well as the implied volatilities of currently traded options,better reflects the expected volatility of its stock going forward. The Companyuses historical data to estimate option exercise and employee terminationbehavior, adjusted for known trends, to arrive at the estimated expected lifeof an option. Upon adoption of SFAS 123R, the Company validated its estimatesand assumptions with an independent third party having the relevant expertisein valuation methodologies. The Company updates these assumptions on aquarterly basis to reflect recent historical data.  The risk-free interest rate for periodswithin the contractual life of the option is based on the U.S. Treasury yieldcurve in effect at the time of grant. The following table summarizes theweighted-average assumptions the Company used in its fair value calculations atthe date of grant:

 
| ** **               | ** ** | **Stock Options**           | ** ** | **Stock Purchase Plan** | ** ** |
|--------------------------|------------|----------------------------------|------------|-----------------------------------|------------|
| ** **               | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**   | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
| ** **               | ** ** | **September 30,**           | ** ** | **September 30,**            | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **               | ** ** | **2006**                         | ** ** | **2005**                          | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Expected life  (years)   |       | 3.7                              |       | 5.5                               |       | 3.7 |   | 5.32 |   | 0.5 |   | 0.5 |   | 0.5 |   | 0.5 |   |
| Risk-free  interest rate |       | 4.79                             | %          | 4.06                              | %          | 4.77 | % | 4.09 | % | 5.06 | % | 3.65 | % | 4.33 | % | 3.46 | % |
| Volatility               |       | 45                               | %          | 60                                | %          | 45 | % | 60 | % | 45 | % | 60 | % | 53 | % | 60 | % |

 

The Company hasnever declared cash dividends on any of its capital stock and does not expectdo so in the foreseeable future.

SFAS 123R requiresthe application of an estimated forfeiture rate to current period expense torecognize compensation expense only for those awards expected to vest. TheCompany estimates forfeitures based upon historical data, adjusted for knowntrends, and will adjust its estimate of forfeitures if actual forfeitures differ,or are expected to differ from such estimates. Subsequent changes in estimatedforfeitures will be recognized through a cumulative catch-up adjustment in theperiod of change and will also impact the amount of stock-based compensationexpense in future periods.

InDecember 2002, the Company’s Board of Directors reduced the number ofshares authorized for issuance under some of the Company’s older plans andacquired plans so that the Company cannot issue new options under those plans.Additionally, at that time, the Board of Directors amended some of the Company’soption plans to provide for full vesting of 

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options issued under the plans to optionholders whoterminate their employment for good reason or are terminated without causewithin the period one month before and one year after a change of control.

The 2000 IncentiveStock Plan (the “2000 Plan”) allows for the granting of incentive andnonstatutory stock options, restricted stock awards and other stock-basedawards, including the grant of shares based upon specified conditions, thegrant of securities convertible into common stock and the grant of stockappreciation rights. The number of stock option shares authorized is equal to5% of the number of shares outstanding on April 12, 2000 plus an annualincrease to be made on January 1, 2001, 2002, and 2003 equal to 5% of thenumber of shares outstanding or a lesser amount determined by the Board ofDirectors. At September 30, 2006, a total of 39,670,714 shares of common stockhave been reserved for the exercise of options outstanding and are availablefor future grant under the 2000 Plan.

The followingtable presents the combined option activity of the Company’s stock plans forthe nine months ended September 30, 2006:
| ** **                                        | ** ** | **Shares of   Common Stock   Attributable to   Options** | ** ** | **Weighted-Average   Exercise Price   of Options** | ** ** | **Weighted-Average   Remaining  Contractual Term   (in years)** | ** ** | **Aggregate   Intrinsic Value   (in thousands)** | ** ** |
|---------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| Outstanding at  January 1, 2006              |       | 34,949,289                                                                             |       | $                                                                      | 16.56      |                                                                                |       |                                                                 |       |   |
| Granted                                           |       | 3,564,845                                                                              |       | 10.18                                                                  |       |                                                                                |       |                                                                 |       |
| Exercised                                         |       | (2,804,185                                                                             | )          | 6.68                                                                   |       |                                                                                |       |                                                                 |       |
| Forfeited or  expired                             |       | (6,013,451                                                                             | )          | 20.52                                                                  |       |                                                                                |       |                                                                 |       |
| Outstanding at  September 30, 2006                |       | 29,696,498                                                                             |       | $                                                                      | 15.93      |                                                                                | 6.75       |                                                                 | $          | 20,729 |   |
| Vested or  expected to vest at September 30, 2006 |       | 28,809,971                                                                             |       | $                                                                      | 16.09      |                                                                                | 0.27       |                                                                 | $          | 20,364 |   |
| Exercisable at  September 30, 2006                |       | 19,774,351                                                                             |       | $                                                                      | 18.70      |                                                                                | 5.85       |                                                                 | $          | 13,651 |   |

 

Theweighted-average grant-date fair value of options granted during the threemonths ended September 30, 2006 and 2005 was $3.90 and $5.61, respectively, andduring the nine months ended September 30, 2006 and 2005 was $3.92 and $5.01,respectively. The intrinsic value of options exercised during the three monthsended September 30, 2006 and 2005 amounted to approximately $1.9 millionand $5.8 million, respectively, and during the nine months ended September30, 2006 and 2005 amounted to approximately $9.4 million and $7.6 million,respectively. As of September 30, 2006, the total remaining unrecognizedcompensation cost related to nonvested stock option awards amounted toapproximately $22.2 million, including estimated forfeitures, which willbe recognized over the weighted-average remaining requisite service period ofapproximately one and one half years.

A summary of thestatus of nonvested shares of restricted stock as of September 30, 2006, andchanges during the nine months then ended, is presented below:
| ** **                         | ** ** | **Shares** | ** ** | **Weighted-Average   Grant Date Fair Value** | ** ** |
|------------------------------------|------------|------------|------------|------------------------------------------------------------------|------------|
| Nonvested at  January 1, 2006 |       | 480,000    |       | $                                                                | 9.97       |   |
| Granted                            |       | 1,391,730  |       | 10.44                                                            |       |
| Vested                             |       | (40,000    | )          | 9.80                                                             |       |
| Forfeited                          |       | (103,875   | )          | 10.50                                                            |       |
| Nonvested at September  30, 2006   |       | 1,727,855  |       | $                                                                | 10.32      |   |

 

As of September30, 2006, the total remaining unrecognized compensation cost related tononvested restricted stock awards amounted to approximately $9.7 million,including estimated forfeitures, which will be recognized over theweighted-average remaining requisite service period of approximately one andthree quarter years. The total fair value of shares vested during the ninemonths ended September 30, 2006 was $0.4 million.

**7.****              Subsequent Events**

In September 2006, the Company entered into a support agreement toacquire the outstanding stock of AnorMED, Inc. Subsequent to executing the support agreement, AnorMED received a morefavorable acquisition offer from Genzyme Corporation and terminated the initialsupport agreement with the Company.  As aresult of the termination of the support 

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agreement, the Company received a $19.5 milliontermination fee from AnorMED in October 2006, which will be recorded as otherincome in the fourth quarter of 2006.

In October 2006,the Company received approximately $2.9 million upon the final settlement ofthe escrowed portion of the sale proceeds of its cost method investment inTransForm and expects to record a realized gain in the fourth quarter of 2006for this amount.  TransForm, a companyspecializing in the discovery of formulations and novel crystalline forms ofdrug molecules, was acquired by Johnson & Johnson in a cash-for-stocktransaction that closed in April 2005.

In October 2006,the Company announced a program to further align resources with its currentpriorities of advancing VELCADE and accelerating the clinical pipeline bylowering investment in discovery and supporting areas.  As part of its program, the Company plans toreduce in-house research and development technologies and headcount in areaswhere the work can now be outsourced. The Company plans to decrease headcount by approximately 14 percent,resulting in an employee body of just under 1,000 employees.

In October 2006, the Company and Ortho Biotech Inc. (“OBI”) announced atwo-year agreement to jointly promote VELCADE in the U.S.  Under the terms of the agreement, beginningin the first quarter of 2007, OBI will jointly promote VELCADE to U.S.-basedphysicians who treat multiple myeloma patients who have received at least oneprior therapy.  The Company will pay aproportion of the VELCADE-related costs for the OBI sales force, and OBI willbe entitled to receive a commission should sales associated with the increasedpromotional effort exceed pre-specified targets. Both parties are able toterminate the agreement under certain circumstances and subject to fees.  The Company will continue to be responsiblefor manufacturing and distribution of VELCADE in the U.S. The Company believesthis collaboration, with the well-established OBI oncology group, willhelp realize the full potential of the product. The current agreement betweenthe Company and Ortho Biotech for the promotion of VELCADE outside the U.Sremains unchanged.

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**Item2.         Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

Our management’sdiscussion and analysis of our financial condition and results of ouroperations include the identification of certain trends and other statementsthat may predict or anticipate future business or financial results that aresubject to important factors that could cause our actual results to differmaterially from those indicated. See “Risk Factors That May AffectResults.”

**Overview**

 We believe we are a leading biopharmaceuticalcompany focused on discovering, developing and commercializing innovativeproducts in disease areas with unmet medical needs. We currently marketVELCADE, the market leader for the treatment of relapsed multiple myeloma. Wehave a development pipeline of clinical and preclinical product candidates inour therapeutic focus areas of cancer and inflammation, and we have anoncology-focused discovery organization. Strategic business relationships are akey component of our business.

On October 26, 2006, we announced a program to further alignresources with our current corporate priorities of advancing VELCADE andaccelerating the clinical pipeline by lowering investment in discovery andsupporting areas.  As part of our program,we plan to reduce in-house research and development technologies and headcountin areas where the work can now be outsourced effectively and to scale backinfrastructure supporting these activities. Overall, we plan to decrease headcount by approximately 14 percent,resulting in an employee body of just under 1,000 employees.  We expect total restructuring charges in2006, under all restructuring initiatives, to be within the range of $25million and $30 million.  The need oropportunity for further facilities consolidation is still being evaluated andthe total future restructuring charges for facility consolidation are dependentupon the nature and timing of the final decisions we make.  As we continue to evaluate strategicalternatives, including potential facilities consolidation in connection withour programs, significant restructuring charges could occur in future periods.

In October 2006,we announced a two-year agreement with Ortho Biotech Inc., or OBI, to jointlypromote VELCADE in the U.S.  Under theterms of the agreement, beginning in the first quarter of 2007, OBI willjointly promote VELCADE to U.S.-based physicians who treat multiple myelomapatients who have received at least one prior therapy.  We will pay a proportion of theVELCADE-related costs for the OBI sales force, and OBI will be entitled toreceive a commission should sales associated with the increased effort exceedpre-specified targets. Both parties areable to terminate the agreement under certain circumstances and subject to fees.  We will continue to be responsible formanufacturing and distribution of VELCADE in the U.S. We believe thiscollaboration, with the well-established OBI oncology group, will help us torealize the full potential of the product. Our current agreement with Ortho Biotech Products, L.P., or OrthoBiotech, a member of the Johnson Family Of Companies and an affiliate of OBI,for the promotion of VELCADE outside the U.S. remains unchanged.

OnSeptember 1, 2005, SGP obtained the exclusive U.S. development andcommercialization rights for INTEGRILIN from us and paid us a nonrefundableupfront payment of approximately $35.5 million. We receive royalties on netproduct sales of INTEGRILIN in the United States from SGP, as earned on aquarterly basis over the life of the INTEGRILIN product, with the potential ofreceiving royalties beyond the 2014 patent expiration date. In 2006 and 2007,minimum royalty payments for each year are set at approximately $85.4 million.Beyond 2007, we will receive royalties based on a predetermined royalty rate;however, there are no guaranteed minimum royalty payments beyond 2007. Inaddition, we continue to manage the supply of product for INTEGRILIN at theexpense of SGP for products sold in the SGP territories. The payments receivedas a result of managing the supply chain are recorded as strategic alliancerevenue.

Our restructuredrelationship with SGP has been and we expect it to continue to be at leastfinancially equivalent to the former co-promotion arrangement, taking intoaccount the expected future revenues and anticipated costs savings.Strategically, our goal in restructuring the relationship was to increase thenear term certainty of revenues from INTEGRILIN through the guaranteed minimumroyalties for 2006 and 2007, while eliminating the need to further invest ourresources into INTEGRILIN sales and marketing and development activities.  In addition, the restructured relationshipallows us to focus on our key growth assets, including VELCADE, the pipelineand our oncology-focused discovery organization.

Our overallbusiness strategy is to build a portfolio of innovative, new medicines based onour understanding of particular molecular pathways that affect theestablishment and progression of specific diseases. These molecular pathwaysinclude the related effects of proteins on cellular performance, reproductionand death. We plan to develop and commercialize many of our products on ourown, but will seek development and commercial collaborators on favorable termsor when we believe that doing so would be advantageous to us. For example, wegenerally intend to enter into sales and marketing alliances with majorpharmaceutical companies for products in disease areas that require large salesforces or for markets outside of the United States.

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In the near term,we expect to focus our commercial activities in cancer where we plan to buildon our commercial and regulatory experience with VELCADE. We are working toobtain approval of VELCADE for the initial treatment of multiple myeloma andfor the treatment of additional cancer types in the United States and,elsewhere through Ortho Biotech. We believe that these additional uses ofVELCADE would lead to significant expansion of our cancer business. Ininflammatory disease, we are advancing novel product candidates in clinicaldevelopment as potential treatments for serious and widely prevalentconditions.

In the thirdquarter of 2006, we brought forward from discovery to development MLN6095, a smallmolecule inhibitor of a target that plays a role in inflammatory disease.   Also in the third quarter of 2006, weprogressed MLN8237 to development candidate status, the sixth Millenniumdiscovered molecule to progress to the development pipeline in three years.MLN8237 is a small molecule inhibitor of the Aurora A kinase and is a backupmolecule to MLN8054, which is currently being evaluated in two phase I clinicaltrials in a broad range of solid tumors.

In the long term,we expect to bring new products to market on a regular basis from our pipelineof discovery and development-stage programs and continue to evaluateopportunities to supplement our pipeline through in-licensing and acquisitions.If we are successful, we would use the revenues from this expanding portfolioof marketed products to broaden the scope of our operations.

**VELCADE®(bortezomib) for Injection**

VELCADE, the firstof a new class of medicines called proteasome inhibitors, was the firsttreatment in more than a decade to be approved in the United States forpatients with multiple myeloma. We received accelerated approval from the Foodand Drug Administration, or FDA, on May 13, 2003 to market VELCADE for thetreatment of multiple myeloma patients who have received at least two prior therapiesand have demonstrated disease progression on their most recent therapy,commonly referred to as third line and beyond. This approval was subject to thecompletion of and submission of data from the phase III APEX clinical trial.

InMarch 2005, we received approval from the FDA of our supplemental New DrugApplication, or sNDA, for VELCADE for the treatment of patients with multiplemyeloma who have received at least one prior therapy, commonly referred to assecond line therapy. This regulatory decision also marked the completion of theconfirmatory trial commitment that was necessary for transition fromaccelerated approval to full approval.

InApril 2004, the European Commission granted Marketing Authorization forVELCADE in Europe for the treatment of multiple myeloma patients who havereceived at least two prior therapies and have demonstrated disease progressionon their most recent therapy. Under this Authorization, a single license wasgranted to Millennium for marketing VELCADE in the 15 member states of theEuropean Union, plus Norway and Iceland. VELCADE was also approved formarketing in the ten accession member countries when those countries officiallyjoined the European Union on May 1, 2004. VELCADE has also been approvedin a number of other countries, including countries within Latin America andSouth-East Asia, bringing the total number of approved countries to more than75.

InApril 2005, our collaborator, Ortho Biotech, received approval from theEuropean Commission for VELCADE as a monotherapy for multiple myeloma patientswho have received at least one prior therapy and who have already undergone orare unsuitable for bone marrow transplantation.

In October 2006,our collaborator, Ortho Biotech, received approval for marketing VELCADE inJapan for relapsed or refractory multiple myeloma in patients who have receivedat least one prior therapy.

The FDA grantedVELCADE fast track designation for relapsed and refractory mantle celllymphoma, an aggressive form of non-Hodgkin’s lymphoma, in November 2004,due to the high unmet medical need of these patients and based on the strengthof data for VELCADE in its clinical trials. This designation allows the FDA toaccept on a rolling basis portions of a marketing application for review prior tothe submission of a final document.  InJune 2006, based on final data from a Phase II trial, we filed a sNDA forVELCADE in the treatment of relapsed or refractory mantle cell lymphoma.  The FDA granted priority review designationto our sNDA in August 2006.  We expect toreceive a decision on our sNDA by or on December 9, 2006.

In April 2006, weinitiated a phase III trial of VELCADE in combination with rituximab in therelapsed follicular non-Hodgkin’s lymphoma setting.  Phase III trials are also ongoing in frontline multiple myeloma.

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**OurAlliances**

***Ortho Biotech Collaboration***

In June 2003,we entered into an agreement with Ortho Biotech to collaborate on thecommercialization of and through the agreement with Johnson & JohnsonPharmaceutical Research & Development, L.L.C., or JJPRD, continueclinical development of VELCADE. Under the terms of the agreement, we retainall commercialization rights to VELCADE in the United States. Ortho Biotech andits affiliate, Janssen-Cilag, have agreed to commercialize VELCADE outside ofthe United States and Janssen Pharmaceutical K.K. is responsible for Japan. Wereceive distribution fees from Ortho Biotech and its affiliates from sales ofVELCADE outside of the United States. We retain an option to co-promote VELCADEwith Ortho Biotech at a future date in specified European countries.  In October 2006, we earned an $8.0 millionmilestone payment under this arrangement as a result of the approval of VELCADEfor marketing in Japan for relapsed or refractory multiple myeloma in patientswho have received at least one prior therapy. Additionally, we anticipate recognizing a $25.0 million milestonepayment in strategic alliance revenue in the fourth quarter of 2006 under thisarrangement based upon the achievement of sales of VELCADE outside of theUnited States reaching a pre-specified threshold.

We are engagedwith JJPRD in an extensive global program for further clinical development ofVELCADE with the purpose of maximizing the commercial potential of VELCADE.This program is investigating the potential of VELCADE to treat multiple formsof solid and hematological tumors, including continued clinical development ofVELCADE for multiple myeloma. JJPRD was responsible for 40% of the jointdevelopment costs through 2005 and is responsible for 45% of those costs in2006 and beyond. In addition, we may receive payments from Ortho Biotech forachieving clinical-development milestones, regulatory milestones outside of theUnited States or milestones based on agreed-upon sales levels of VELCADE.

In October 2006,we announced a two-year agreement with OBI to jointly promote VELCADE in theU.S.  Under the terms of the agreement,beginning in the first quarter of 2007, OBI will jointly promote VELCADE toU.S.-based physicians who treat multiple myeloma patients who have received atleast one prior therapy.  We will pay aproportion of the VELCADE-related costs for the OBI sales force, and OBI willbe entitled to receive a commission should sales associated with the increasedpromotional effort exceed pre-specified targets. Both parties are able to terminate the agreement under certaincircumstances and subject to fees. We will continue to be responsible for commercialization, manufacturingand distribution of VELCADE in the U.S. We believe this collaboration, with thewell-established OBI oncology group, will help us to realize the full potentialof the product.  Our current agreementwith Ortho Biotech for the promotion of VELCADE outside the U.S. remainsunchanged.

***INTEGRILIN® (eptifibatide) Injection***

ThroughAugust 31, 2005, we co-promoted INTEGRILIN in the United States incollaboration with SGP and shared profits and losses. As of September 1,2005, SGP markets INTEGRILIN in the United States and specified other areasoutside of the European Union. GlaxoSmithKline plc, or GSK, markets INTEGRILINin the European Union under a license from us.

***SGP Collaboration***

InApril 1995, COR Therapeutics, Inc., or COR, entered into acollaboration agreement with SGP to jointly develop and commercializeINTEGRILIN on a worldwide basis. We acquired COR in February 2002.

Under our originalagreement with SGP, we generally shared any profits or losses from sales in theUnited States with SGP based on the amount of promotional efforts that eachparty contributed. Since the United States launch of INTEGRILIN inJune 1998, we shared promotional efforts in the United States equally withSGP, except for costs associated with marketing programs specific to us.

AfterSeptember 1, 2005, under our amended collaboration agreement with SGP, webegan receiving royalties on sales of INTEGRILIN in the United States. SGPcontinues to pay us royalties on sales of INTEGRILIN in specified territoriesoutside of the European Union and reimburses us for manufacturing-relatedcosts.

***GSK License Agreement***

In June 2004,we reacquired the rights to market INTEGRILIN in Europe from SGP andconcurrently entered into a license agreement granting GSK exclusive marketingrights to INTEGRILIN in Europe. In January 2005, the transition of theINTEGRILIN marketing authorizations for the European Union from SGP to GSK wascompleted, and GSK began selling INTEGRILIN in the countries of the EuropeanUnion. GSK also markets INTEGRILIN in other European countries where it has receivedapproval of the transfer from SGP to GSK of the relevant marketingauthorizations. Under the terms of the 

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agreement, we have received license fees and areentitled to future royalties from GSK on INTEGRILIN sales in Europe subject tothe achievement of specified objectives.

Under the licenseagreement with GSK, decisions regarding the ongoing marketing of INTEGRILIN aregenerally subject to the oversight of a joint steering committee with equalmembership from GSK and us. However, GSK has significant final decision-makingauthority with respect to European marketing issues. Our agreement with GSKcontinues until the later of December 31, 2014, or as long as GSKcontinues to commercialize INTEGRILIN in any European country.

**CriticalAccounting Policies and Significant Judgments and Estimates**

Our management’sdiscussion and analysis of our financial condition and results of operationsare based on our condensed consolidated financial statements, which have beenprepared in accordance with generally accepted accounting principles. Thepreparation of these financial statements requires us to make estimates andassumptions that affect the reported amounts of assets and liabilities and thedisclosure of contingent assets and liabilities at the date of the financialstatements as well as the reported revenues and expenses during the reportingperiods. On an ongoing basis, we evaluate our estimates and judgments,including those related to revenue recognition, inventory, intangible assets,goodwill and stock-based compensation expense. We base our estimates onhistorical experience and on various other factors that we believe areappropriate under the circumstances, the results of which form the basis formaking judgments about the carrying value of assets and liabilities that arenot readily apparent from other sources. Actual results may differ from theseestimates under different assumptions or conditions.

               While our significant accounting policies are more fully described inNote 2 to our consolidated financial statements included in ourForm 10-K, filed with the SEC on March 8, 2006, we believe thefollowing accounting policies are most critical to aid in fully understandingand evaluating our reported financial results.

***Revenue***

We recognize revenuefrom the sale of our products, our co-promotion collaboration throughAugust 31, 2005, our strategic alliances and from royalties based on netsales of licensed products. We divide our revenue arrangements with multipleelements into separate units of accounting if specified criteria are met,including whether the delivered element has stand-alone value to the customerand whether there is objective and reliable evidence of the fair value of theundelivered items. We allocate the consideration we receive among the separateunits based on their respective fair values, and we apply the applicablerevenue recognition criteria to each of the separate units. We classify advancepayments received in excess of amounts earned as deferred revenue until earned.

We recognizerevenue from the sale of VELCADE in the United States when delivery hasoccurred and title has transferred. During the fourth quarter of 2004, we began distributing VELCADE througha sole-source open access distribution model in which we sell directly to anindependent third party who in turn distributes to the wholesaler base.  In April 2006, our sole-source distributoradded a second distribution site to its network in order to improve access tothe product for physicians in the western United States.  Under our agreement with our sole-sourcedistributor, inventory levels are contractually limited to no more than threeweeks.  VELCADE product inventory levelsheld by the sole-source distributor and wholesalers may fluctuate from time totime within our desired range of one to two weeks of inventory in thedistribution channel.  For example,during the second quarter of 2006, inventory levels rose by less than a week tothe higher end of our one to two week desired range.

We recordallowances as a reduction to product sales for product returns, chargebacks anddiscounts at the time of sale. As VELCADE is a fairly new product, we estimateproduct returns based on historical return patterns as they become available.VELCADE returns are expected to be generally low because the shelf life for theproduct is 18 months in the United States and we expect wholesalers not tostock significant inventory due to the expense of the product. Additionally, weconsider several factors in our estimation process including our internal salesforecasts, inventory levels as provided by wholesalers and third party marketresearch data.   As we continuallymonitor actual product returns and inventory levels in the domestic distributionchannel, we have reduced and may, from time to time in the future, reduce ourproduct returns estimate. Doing so would result in increased product sales atthe time the return estimate is changed. If circumstances change or conditionsbecome more competitive in the market for therapeutic products that addressmultiple myeloma, we may take actions to increase our product returnestimates.  Doing so would result in anincremental reduction of product sales at the time the return estimate ischanged. Our accruals for rebates, chargebacks, and other discounts wereimmaterial at September 30, 2006.

ThroughAugust 31, 2005, we recognized co-promotion revenue based on SGP’sreported shipments of INTEGRILIN to wholesalers. Co-promotion revenue includedour share of the profits from the sales of INTEGRILIN and reimbursements of 

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our manufacturing-related costs, development costs andadvertising and promotional expenses. We communicated with SGP to calculate ourshare of the profits from the sales of INTEGRILIN on a monthly basis. Thecalculation included estimates of the amount of advertising and promotionalexpenses and other costs incurred on a monthly basis. Adjustments to ourestimates were based upon actual information that we received subsequent to ourreporting deadlines. Our estimates were adjusted on a monthly basis andhistorically the adjustments were not significant due to frequent communicationwith SGP.

We recognizenonrefundable upfront licensing fees and guaranteed, time-based payments thatrequire continuing involvement in the form of research and development,manufacturing or other commercialization efforts by us as strategic alliancerevenue:

·         ratably over thedevelopment period if development risk is significant;

·         ratably over themanufacturing period or estimated product useful life if development risk hasbeen substantially eliminated; or

·         based upon the level ofresearch services performed during the period of the research contract.

When the period ofdeferral cannot be specifically identified from the contract, management estimatesthe period based upon other critical factors contained within the contract. Wecontinually review these estimates which could result in a change in thedeferral period and might impact the timing and the amount of revenuerecognized.

Milestone paymentsare recognized as strategic alliance revenue when the performance obligations,as defined in the contract, are achieved. Performance obligations typicallyconsist of significant milestones in the development life cycle of the relatedtechnology, such as initiation of clinical trials, filing for approval withregulatory agencies and approvals by regulatory agencies. Reimbursements ofresearch and development costs are recognized as strategic alliance revenue asthe related costs are incurred.

We are entitled toreceive royalty payments under license agreements with a number of thirdparties that sell products based on technology we have developed or to which wehave rights. These license agreements provide for the payment of royalties tous based on sales of the licensed product and we record royalty revenues basedon estimates of sales from interim data provided by licensees. BeginningSeptember 1, 2005, upon closing the amended collaboration agreement withSGP, we began recording royalty revenues as a separate line item in ourstatement of operations. For all of our royalty arrangements, we perform ananalysis of historical royalties we have been paid, adjusted for any changes infacts and circumstances, as appropriate. Differences between actual royalty revenuesand estimated royalty revenues are adjusted for in the period which they becomeknown, typically the following quarter. These adjustments have not been and wedo not expect them to be significant. To the extent we do not have sufficientability to accurately estimate royalty revenue, we record royalties on a cashbasis.

***Inventory***

Inventory consistsof currently marketed products and, from time to time, product candidatesawaiting regulatory approval, which are capitalized based upon management’s judgmentof probable near-term commercialization. We assess the probability ofcommercialization based upon several factors including estimated launch date,time to manufacture and shelf life. At September 30, 2006 and December 31,2005, inventory does not include amounts for products that had not beenapproved for sale.

VELCADEinventories primarily represent raw materials used in production, work inprocess and finished goods inventory on hand, valued at cost. INTEGRILINinventories include raw materials used in production and work in process,valued at cost, to supply GSK and limited amounts of work in process, valued atcost, to supply SGP. Inventories are reviewed periodically for slow-moving orobsolete status based on sales activity, both projected and historical. Ourcurrent sales projections provide for full utilization of the inventorybalance. If product sales levels differ from projections or a launch of a newproduct is delayed, inventory may not be fully utilized and could be subject toimpairment, at which point we would adjust inventory to its net realizablevalue.

***Intangible Assets***

We have acquiredsignificant intangible assets that we value and record. Those assets that donot yet have regulatory approval and for which there are no alternative usesare expensed as acquired in-process research and development, and those thatare specifically identified and have alternative future uses are capitalized.We use a discounted cash flow model to value intangible assets at acquisition.The discounted cash flow model requires assumptions about the timing and amountof future 

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cash inflows and outflows, risk, the cost of capital,and terminal values. Each of these factors can significantly affect the valueof the intangible asset. We engage independent valuation experts who review ourcritical assumptions for significant acquisitions of intangibles. We reviewintangible assets for impairment on a periodic basis using an undiscounted netcash flows approach when impairment indicators arise. If the undiscounted cashflows of an intangible asset are less than the carrying value of an intangibleasset, the intangible asset is written down to the discounted cash flow value.Where cash flows cannot be identified for an individual asset, the review isapplied at the lowest group level for which cash flows are identifiable.

***Goodwill***

On October 1,2006, we performed our annual goodwill impairment test and determined that noimpairment existed on that date. However, since the date of acquisition of COR,which generated a significant amount of goodwill, we have experienced asignificant decline in market capitalization due to a decline in stock price.We continually monitor business and market conditions, including therestructured relationship with SGP, to assess whether an impairment indicatorexists. If we were to determine that an impairment indicator exists, we wouldbe required to perform an impairment test which could result in a material impairmentcharge to our statement of operations.

***Stock-Based Compensation Expense***

We adoptedStatement of Financial Accounting Standards, or SFAS, No. 123 (revised2004), “Share Based Payment,” (SFAS 123R), effective January 1, 2006 underthe modified prospective method. SFAS 123R requires the recognition of the fairvalue of stock-based compensation expense in our operations, and accordinglythe adoption of SFAS No. 123R fair value method has had and will continueto have a significant impact on our results of operations, although it willhave no impact on our overall financial position. Option valuation modelsrequire the input of highly subjective assumptions, including stock pricevolatility and expected term of an option. In the fourth quarter of 2005, weconsidered implied volatilities of currently traded options to provide anestimate of volatility based upon current trading activity. After consideringother such factors as our stage of development, the length of time we have beenpublic and the impact of having a marketed product, we believe a blendedvolatility rate based upon the most recent three-year and four-year periods ofhistorical performance, as well as the implied volatilities of currently tradedoptions, better reflects the expected volatility of our stock going forward.Changes in market price directly affect volatility and could cause futurestock-based compensation expense to vary significantly in future reportingperiods.

We use historicaldata to estimate option exercise and employee termination behavior, adjustedfor known trends, to arrive at the estimated expected life of an option. Uponadoption of SFAS 123R, we validated our estimates and assumptions used in theBlack-Scholes model with an independent third party having the relevantexpertise in valuation methodologies. We update these assumptions on aquarterly basis to reflect recent historical data.  Additionally, we are required to estimateforfeiture rates to estimate the number of shares that will vest in a period towhich the fair value is applied.   We will continually monitoremployee exercise behavior and may further adjust the estimated term andforfeiture rates in future periods. Increasing the estimated life would resultin an increase in the fair value to be recognized over the requisite serviceperiod, generally the vesting period. Estimated forfeitures will be adjusted toactual forfeitures upon the vest date of the cancelled options as a cumulativecatch up adjustment on a quarterly basis. Doing so could cause future expensesto vary at each reporting period.

We estimatestock-based compensation expense to be in the range of $40 million to $50million in 2006, dependent upon market price, assumptions used in estimatingthe fair value as discussed above and the levels of share-based paymentsgranted in 2006. In March 2006, we revised our annual merit compensationprogram to include the availability of both stock options and restricted stockto certain employees. For the three and nine months ended September 30, 2006,we recognized total stock-based compensation expense under SFAS 123R of $10.2million and $32.2 million, respectively. As of September 30, 2006, the total remaining unrecognized compensationcost related to nonvested stock option awards and nonvested restricted stockawards amounted to approximately $22.2 million and $9.7 million,including estimated forfeitures, respectively, which will be amortized over theweighted-average remaining requisite service periods of approximately one andone half years and one and three quarter years, respectively.

During the secondquarter of 2006, we received a telephone inquiry from the SEC regarding whetherstock options we awarded with a stated grant date of September 26, 2001were, in fact, granted on that date. We were one of more than 30 companiesdiscussed in a May 2006 third party report concerning the timing of stockoption grants from 1997 through 2002. With respect to us, the report referencedoption grants dated September 26, 2001. During the second quarter of 2006,we initiated a review of our September 26, 2001 grants, as well as otherhistorical grants. We completed this review during the third quarter of 2006and met with the SEC to discuss our findings. We reported to the SEC that ourreview did not uncover any evidence of fraud with respect to theSeptember 26, 2001 options grants or the other historical option grants thatwe reviewed. Additionally, we reported to the SEC our conclusion that anyadditional compensation expense resulting from the grants we reviewed wasimmaterial. The SEC staff advised us at our meeting that they would communicatewith us after they had evaluated the results of our review and thedocumentation we provided. If the SEC reaches a different conclusion anddetermines that any of our option grants were incorrectly granted or accountedfor, we may be required to record compensation expense relating to thosegrants.

**AccountingPronouncements**

In May 2005,the Financial Accounting Standards Board issued SFAS No. 154, “AccountingChanges and Error Corrections,” or SFAS No. 154 which replaces AccountingPrinciples Board Opinions No. 20, “Accounting Changes” and SFASNo. 3, “Reporting Accounting Changes in Interim Financial Statements — anAmendment of APB Opinion No. 28.”  SFAS No. 154 providesguidance on the accounting for and reporting of accounting changes and errorcorrections. It establishes retrospective application, or the earliestpracticable dates, as the required method for reporting a change in accountingprinciple and restatement with respect to the reporting of a correction of anerror. SFAS No. 154 is effective for 

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accounting changes and corrections of errors made infiscal years beginning after December 15, 2005. Although we continue toevaluate the application of SFAS No. 154, the adoption did not have amaterial impact on our results of operations, financial position or cash flows.

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting forUncertainty in Income Taxes - anInterpretation of FASB Statement No. 109,”or the Interpretation. TheInterpretation clarifies the accounting for uncertainty in income taxesrecognized in an enterprise’s financial statements in accordance with FASBStatement No. 109, Accounting forIncome Taxes. The Interpretation prescribes a recognition threshold andmeasurement attribute for thefinancial statement recognition and measurement of a tax position taken or expected to be taken in a taxreturn. This Interpretation also provides guidance on derecognition, classification, interest andpenalties, accounting in interim periods, disclosure and transition. TheInterpretation is effective for fiscal years beginning after December 15,2006.  Although we have not completed ourevaluation of the Interpretation, we do not currently believe that adoptionwill have a material impact on our results of operations, financial position orcash flows.

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**Resultsof Operations**
| ** **                                                           | ** ** | **Three Months Ended  September 30,** | ** ** | **Increase/   (Decrease)   Percentage   Change** | ** ** | **Nine months Ended  September 30,** | ** ** | **Increase/   (Decrease)   Percentage   Change** | ** ** |
|----------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                                           | ** ** | **2006**                                             | ** ** | **2005**                                                        | ** ** | **2006/2005**                                       | ** ** | **2006**                                                        | ** ** | **2005** | ** ** | **2006/2005** | ** ** |
| **(in thousands, except per share  amounts)**                        | ** ** | ** **                                           | ** ** | ** **                                                      | ** ** | ** **                                          | ** ** | ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues:                                                            |       |                                                 |       |                                                            |       |                                                |       |                                                            |       |   |   |   |   |
| Net product  sales                                                   |       | $                                                    | 53,161     |                                                            | $          | 50,942                                              |       | 4                                                               | %          | $ | 165,320 |   | $ | 139,629 |   | 18 | % |
| Co-promotion  revenue                                                |       | —                                               |       | 33,037                                                          |       | (100                                                | )          | —                                                          |       | 123,524 |   | (100 | ) |
| Revenue under  strategic alliances                                   |       | 17,196                                               |       | 105,186                                                         |       | (84                                                 | )          | 82,990                                                          |       | 160,368 |   | (48 | ) |
| Royalties                                                            |       | 33,737                                               |       | 12,514                                                          |       | 170                                                 |       | 98,382                                                          |       | 12,514 |   | 686 |   |
| Total revenues                                                       |       | 104,094                                              |       | 201,679                                                         |       | (48                                                 | )          | 346,692                                                         |       | 436,035 |   | (20 | ) |
|                                                                 |       |                                                 |       |                                                            |       |                                                |       |                                                            |       |   |   |   |   |
| Costs and expenses:                                                  |       |                                                 |       |                                                            |       |                                                |       |                                                            |       |   |   |   |   |
| Cost of sales  (excludes amortization of acquired intangible assets) |       | 6,730                                                |       | 89,020                                                          |       | (92                                                 | )          | 36,660                                                          |       | 120,281 |   | (70 | ) |
| Research and  development (Note 1)                                   |       | 73,436                                               |       | 80,632                                                          |       | (9                                                  | )          | 235,343                                                         |       | 253,725 |   | (7 | ) |
| Selling, general  and administrative (Note 1)                        |       | 34,365                                               |       | 40,623                                                          |       | (15                                                 | )          | 107,221                                                         |       | 144,320 |   | (26 | ) |
| Restructuring                                                        |       | 1,352                                                |       | 58,791                                                          |       | (98                                                 | )          | 5,737                                                           |       | 62,897 |   | (91 | ) |
| Amortization of  intangibles                                         |       | 8,488                                                |       | 8,500                                                           |       | —                                              |       | 25,462                                                          |       | 25,500 |   | — |   |
| Total costs and  expenses                                            |       | 124,371                                              |       | 277,566                                                         |       | (55                                                 | )          | 410,423                                                         |       | 606,723 |   | (32 | ) |
|                                                                 |       |                                                 |       |                                                            |       |                                                |       |                                                            |       |   |   |   |   |
| Loss from operations                                                 |       | (20,277                                              | )          | (75,887                                                         | )          | (73                                                 | )          | (63,731                                                         | )          | (170,688 | ) | (63 | ) |
|                                                                 |       |                                                 |       |                                                            |       |                                                |       |                                                            |       |   |   |   |   |
| Other income (expense):                                              |       |                                                 |       |                                                            |       |                                                |       |                                                            |       |   |   |   |   |
| Investment  income, net                                              |       | 5,635                                                |       | 4,902                                                           |       | 15                                                  |       | 16,037                                                          |       | 24,081 |   | (33 | ) |
| Interest expense                                                     |       | (2,478                                               | )          | (2,820                                                          | )          | (12                                                 | )          | (7,934                                                          | )          | (7,723 | ) | 3 |   |
| Other income                                                         |       | 3,403                                                |       | —                                                          |       | —                                              |       | 3,403                                                           |       | — |   | — |   |
| Net loss                                                             |       | $                                                    | (13,717    | )                                                               | $          | (73,805                                             | )          | (81                                                             | )%         | $ | (52,225 | ) | $ | (154,330 | ) | (66 | )% |
|                                                                 |       |                                                 |       |                                                            |       |                                                |       |                                                            |       |   |   |   |   |
| *Amounts per common share:*                                          | * *   | * *                                             | * *   | * *                                                        | * *   | * *                                            | * *   | * *                                                        | * *   | * * | * * | * * | * * |
| Net loss per share,  basic and diluted                               |       | $                                                    | (0.04      | )                                                               | $          | (0,24                                               | )          |                                                            |       | $ | (0.17 | ) | $ | (0.50 | ) |   |   |
|                                                                 |       |                                                 |       |                                                            |       |                                                |       |                                                            |       |   |   |   |   |
| Weighted average shares, basic and diluted                           |       | 314,228                                              |       | 308,848                                                         |       |                                                |       | 313,132                                                         |       | 307,675 |   |   |   |

 

Note 1:  Upon adoption of SFAS No. 123R on January 1,2006, the Company began recording stock-based compensation expense in itsconsolidated statements of operations. No stock-based compensation expense was recognized under SFAS No. 123Rin any prior periods.  See Note 6 of ourcondensed consolidated financial statements for further discussion.  Stock-based compensation expense is allocatedin the condensed consolidated statements of operations expense lines asfollows:
| ** **                           | ** ** | **Three Months Ended   September 30,** | ** ** | **Nine Months Ended   September 30,** | ** ** |
|--------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                                   | ** ** | **2005**                                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
| **(in  thousands)**                  | ** ** | ** **                                                 | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                 |       |                                                       |       |                                                      |       |   |   |   |   |
| Research and  development            |       | $                                                          | 5,603      |                                                      | $          | — |   | $ | 17,935 |   | $ | — |   |
| Selling, general  and administrative |       | 4,642                                                      |       | —                                                    |       | 14,291 |   | — |   |
| Total                                |       | $                                                          | 10,245     |                                                      | $          | — |   | $ | 32,226 |   | $ | — |   |

 

***Revenues***

Total revenuesdecreased 48% to $104.1 million during the three months ended September30, 2006, or the 2006 Three Month Period, and 20% to $346.7 million during thenine months ended September 30, 2006, or the 2006 Nine Month Period, from thecomparable periods in 2005.  The decreasewas primarily related to lower revenue from our collaborators as a result ofthe one-time sale of existing INTEGRLIN inventory to SGP during the thirdquarter of 2005 which did not occur in 2006, the restructured relationship withSGP and lower license fee revenue recognized from GSK.  These decreases were partially offset 

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by increased royalty revenue recognized from OrthoBiotech on sales of VELCADE outside of the United States. Revenue from our collaboratorsincludes revenue under strategic alliances, royalties, and in 2005,co-promotion revenue.  Partiallyoffsetting the decrease in collaborator revenue was higher net product sales ofVELCADE.

Net product salesof VELCADE increased 4% to $53.2 million in the 2006 Three Month Period and 18%to $165.3 million in the 2006 Nine Month Period from the comparable periods in2005.  The increase in the 2006 ThreeMonth Period was primarily attributable to price increases offset by a slightdecrease in demand.  The increase in the2006 Nine Month Period was primarily attributable to growth in product demandas a result of increased penetration in the second line treatment setting ofmultiple myeloma patients, an increase in the number of cycles used on averagefor responding patients, and price increases during the period.  Reserves for product returns, chargebacks anddiscounts represented approximately 5% to 7% of gross product sales for allperiods presented. Net product sales from VELCADE represented approximately 51%and 25% of our total revenues in the 2006 Three Month Period and the threemonths ended September 30, 2005, or the 2005 Three Month Period, respectively,and 48% and 32% of our total revenues in the 2006 Nine Month Period and thenine months ended September 30, 2005, or the 2005 Nine Month Period,respectively.

As ofSeptember 1, 2005, we no longer report co-promotion revenue due to ourrestructured relationship with SGP. Co-promotion revenue representedapproximately 16% of our total revenues in the 2005 Three Month Period and 28%of our total revenues in the 2005 Nine Month Period.

Revenue understrategic alliances decreased 84% to $17.2 million in the 2006 Three MonthPeriod and 48% to $82.9 million in the 2006 Nine Month Period from the comparableperiods in 2005.  The decrease in the2006 Three Month Period was primarily due to the one-time sale of existingINTEGRILN inventory to SGP in the 2005 Three Month Period as well as lowerlicense fee revenue recognized from GSK. The decrease in the 2006 Nine Month Period was primarily due to theone-time sale of existing INTEGRILIN inventory to SGP.  Revenue is earned from the restructured SGPrelationship, which generates revenue from the management of the INTEGRILINsupply chain on behalf of SGP in the form of license fees and reimbursement ofmanufacturing-related expenses.  On July1, 2006, SGP began purchasing the majority of the active pharmaceuticalingredient necessary to manufacture INTEGRILIN resulting in lower reimbursementof manufacturing-related expenses during the 2006 Three Month Period and weexpect lower reimbursement of manufacturing-related expenses in future periods.

We expect revenueunder strategic alliances to fluctuate in future periods depending on the levelof revenues earned for ongoing development efforts, the level of milestonesachieved and the number of alliances we may enter into in the future with otherbiopharmaceutical companies.

As mentionedabove, we began recording royalty revenue starting September 1, 2005. Royaltyrevenue may include royalties earned upon sales of INTEGRILIN in the UnitedStates and other territories around the world as provided by SGP, royaltiesearned upon sales of INTEGRILIN in Europe as provided by GSK, distribution feesearned upon sales outside of the United States of VELCADE as provided by OrthoBiotech and any royalties earned under certain of our early discoveryalliances.  We recorded $33.7 million and$98.4 million of royalty revenue during the 2006 Three and Nine Month Periods,respectively, and $12.5 million during each of the 2005 Three and Nine MonthPeriods, all of which primarily included royalties from SGP and Ortho Biotech.

***Cost of Sales***

Cost of salesdecreased 92% to $6.7 million in the 2006 Three Month Period and 70% to $36.7 millionin the 2006 Nine Month Period from the comparable periods in 2005. Cost ofsales includes manufacturing-related expenses associated with the sales ofVELCADE as well as costs associated with managing the INTEGRILIN supply chainon behalf of SGP.  The decrease wasprimarily a result of the one-time sale of existing INTEGRILIN inventory to SGPin the 2005 Three Month Period.  Thisdecrease was partially offset by increased cost of sales associated with higherVELCADE sales.

***Research and Development***

Research anddevelopment expenses decreased 9% to $73.4 million in the 2006 Three MonthPeriod and 7% to $235.3 million in the 2006 Nine Month Period from thecomparable periods in 2005.  The decreasein both periods was primarily a result of cost reductions associated with our2005 strategy refinement and restructuring efforts combined with decreasedspending in our discovery organization partially offset by the addition ofstock-based compensation expense of approximately $5.6 million and $17.9million in the 2006 Three and Nine Month Periods, respectively, related to theadoption of SFAS 123R on January 1, 2006.

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In addition to ourongoing clinical trials of VELCADE, we have a number of drug candidates inclinical and late preclinical development. In January 2006, as part of ourportfolio review process and based on the evaluation of clinical data in thecontext of additional opportunities in the pipeline, we decided to discontinuedevelopment of MLN2704 in its current form as well as MLN1202 in rheumatoid arthritis.  The following chart summarizes the applicabledisease indication and the clinical or preclinical trial status of our drugcandidates.

 
| **Product Description**                                                                                          | ** **   | **Disease Indication**                                      | ** **   | **Current Trial Status**                                                                       |
|------------------------------------------------------------------------------------------------------------------|--------------|-------------------------------------------------------------|--------------|------------------------------------------------------------------------------------------------|
| ***Cancer***                                                                                                     | *** *** | *** ***                                                | *** *** | *** ***                                                                                   |
| MLN518 is a small molecule inhibitor of the Receptor  Tyrosine Kinase, or RTK, including FLT-3, PDGF-R and c-KIT |         | Acute myeloid leukemia  Glioma(1)

Renal(1)  Prostate(1)    |         | phase I/phase II  phase I planned for 2006  phase I planned for 2006  phase I planned for 2006 |
| MLN8054 is a small molecule inhibitor of AuroraA  kinases                                                        |         | Advanced malignancies                                       |         | phase I                                                                                        |
| MLN8237 is a small molecule inhibitor of Aurora A  kinases                                                       |         | Advanced malignancies                                       |         | preclinical                                                                                    |
|                                                                                                             |         |                                                        |         |                                                                                           |
| ***Inflammatory Diseases***                                                                                      | *** *** | *** ***                                                | *** *** | *** ***                                                                                   |
| MLN0002 is a humanized monoclonal antibody directed  against the alpha4beta7 receptor                            |         | Crohn’s disease  Ulcerative colitis                    |         | preclinical with prior phase II data  preclinical with prior phase II data                     |
| MLN1202 is a humanized monoclonal antibody directed  against CCR2                                                |         | Multiple sclerosis  Atherosclerosis                         |         | phase IIa  phase II                                                                            |
| MLN3897 is a small molecule CCR1 inhibitor                                                                       |         | Chronic inflammatory diseases such as rheumatoid  arthritis |         | phase I with phase IIa planned for 2006                                                        |
| MLN3701 is a small molecule CCR1 inhibitor, backup  to MLN3897                                                   |         | Chronic inflammatory diseases such as rheumatoid arthritis  |         | phase I                                                                                        |
| MLN0415 is a small molecule inhibitor of IKKbeta                                                                 |         | Chronic inflammatory diseases such as rheumatoid  arthritis |         | phase I                                                                                        |
| MLN6095 is a small molecule CrTh2 receptor  antagonist                                                           |         | Inflammatory diseases                                       |         | preclinical                                                                                    |

----

(1)Trials planned to be conducted through CancerTherapy Evaluation Program, a division of the National Cancer Institute.

Completion ofclinical trials may take several years or more and the length of time can varysubstantially according to the type, complexity, novelty and intended use of aproduct candidate. The types of costs incurred during a clinical trial varydepending upon the type of product candidate and the nature of the study.

We estimate thatclinical trials in our areas of focus are typically completed over the followingtimelines:
| **Clinical  Phase** | ** ** | **Objective**                                                                                     | ** ** | **Estimated Completion Period** |
|---------------------|------------|---------------------------------------------------------------------------------------------------|------------|---------------------------------|
| phase I             |       | Establish safety in humans, study how the drug  works, metabolizes and interacts with other drugs |       | 1-2 years                       |
| phase II            |       | Evaluate efficacy, optimal dosages and expanded  evidence of safety                               |       | 2-3 years                       |
| phase III           |       | Confirm efficacy and safety of the product                                                        |       | 2-4 years                       |

 

Upon successfulcompletion of phase III clinical trials, and in some cases phase II, of aproduct candidate, we intend to submit the results to the FDA to support regulatoryapproval. However, we cannot be certain that any of our product candidates willprove to be safe or effective, will receive regulatory approvals, or will besuccessfully commercialized. Our clinical trials might prove that our productcandidates may not be effective in treating the disease or have undesirable orunintended side effects, toxicities or other characteristics that require us tocease further development of the product candidate. The cost to take a productcandidate through clinical trials is dependent upon, among other things, thedisease indications, the timing, the size and dosing schedule of each clinicaltrial, the number of patients enrolled in each trial and the speed at whichpatients are enrolled and treated. We could incur increased product developmentcosts if we experience delays in clinical trial enrollment, delays in theevaluation of clinical trial results or delays in regulatory approvals.

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Some products thatare likely to result from our research and development projects are based onnew technologies and new therapeutic approaches that have not been extensivelytested in humans. The regulatory requirements governing these types of productsmay be more rigorous than for conventional products. As a result, it isdifficult to estimate the nature and length of the efforts to complete suchprojects as we may experience a longer regulatory process in connection withany products that we develop based upon these new technologies or therapeuticapproaches. In addition, ultimate approval for commercial manufacturing andmarketing of our products is dependent on the FDA or applicable approval bodyin the country for which approval is being sought, adding further uncertaintyto estimated costs and completion dates. Significant delays could allow ourcompetitors to bring products to market before we do and impair our ability tocommercialize our product candidates.

Due to thevariability in the length of time necessary to develop a product, theuncertainties related to the estimated cost of the projects and ultimateability to obtain governmental approval for commercialization, accurate andmeaningful estimates of the ultimate cost to bring our product candidates tomarket are not available.

We budget andmonitor our research and development costs by type or category, rather than byproject on a comprehensive or fully allocated basis. Significant categories ofcosts include personnel, clinical, third party research and developmentservices and laboratory supplies. In addition, a significant portion of ourresearch and development expenses is not tracked by project as it benefitsmultiple projects or our technology platform. Consequently, fully loadedresearch and development cost summaries by project are not available.

Given theuncertainties related to development, we are currently unable to reliablyestimate when, if ever, our product candidates will generate revenue and cashflows. We do not expect to receive net cash inflows from any of our majorresearch and development projects until a product candidate becomes aprofitable commercial product.

***Selling, General and Administrative***

Selling, generaland administrative expenses decreased 15% to $34.4 million in the 2006 ThreeMonth Period and 26% to $107.2 million in the 2006 Nine Month Period from thecomparable periods in 2005.  The decreasein both periods was primarily the result of reduced sales and marketingexpenses associated with the transfer of the U.S. commercialization rights toINTEGRILIN to SGP as of September 1, 2005 combined with cost reductionsassociated with our 2005 strategy refinement and restructuring effortspartially offset by the addition of stock-based compensation expense ofapproximately $4.6 million and $14.3 million in the 2006 Three and Nine MonthPeriods, respectively, related to the adoption of SFAS 123R on January 1,2006.

***Restructuring***

During the fourthquarter of 2005, we announced a 2005 strategy refinement focused on advancingkey growth assets, including VELCADE, our clinical and preclinical pipeline ofoncology and inflammation molecules and our oncology-focused discoveryorganization. As part of our refined strategy, we took a series of steps,building on our restructured relationship with SGP, which together have reducedresearch and development and selling, general and administrative expenses in2006. We expect these cost reductions to continue throughout the remainder of2006. We reduced the size of our company from approximately 1,500 employees atthe end of 2004 to approximately 1,100 at the end of 2005, by managingattrition, eliminating INTEGRILIN sales and marketing positions, and reducingthe number of positions in inflammation discovery and in business supportgroups.

InDecember 2002 and June 2003, we took steps as part of our 2003restructuring plan to focus our resources on drug development andcommercialization. Our restructuring plan included consolidation of researchand development facilities, overall headcount reduction and streamlining ofdiscovery and development projects.

In accordance withSFAS No. 146, “Accounting for Costs Associated with Exit or DisposalActivities,” our facilities related expenses and liabilities under both the2003 and 2005 restructuring plans included estimates of the remaining rentalobligations, net of estimated sublease income, for facilities we no longeroccupy. We validated our estimates and assumptions with independent thirdparties having relevant expertise in the real estate market. We review ourestimates and assumptions on a regular basis until the outcome is finalized,and make whatever modifications we believe necessary, based on our bestjudgment, to reflect any changed circumstances. It is possible that suchestimates could change in the future resulting in additional adjustments, andthe effect of any such adjustments could be material.

During the 2006Three and Nine Month Periods, we recorded a total of $1.4 million and $5.7million, respectively, in restructuring charges under the 2005 strategyrefinement and our 2003 restructuring plan. We recorded net restructuring charges of $0.8 million and $1.1 millionduring the 2006 Three and Nine Month Periods, respectively, under the 2005 

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restructuring plan. The restructuring charges primarily related to additional facilityrelated costs associated with vacated buildings and employee terminationbenefits as a result of the headcount reductions within inflammation discoveryand business support groups.  The 2006Nine Month Period included an offsetting credit of approximately $7.8 millionresulting from the earlier than anticipated sublease of one of the vacatedbuildings at a higher rate per square foot than we had originallyestimated.  We recorded restructuringcharges of $0.6 million and $4.7 million during the 2006 Three and Nine MonthPeriods, respectively, under the 2003 restructuring plan.  The restructuring charges primarily relatedto adjustments to our original estimates of the remaining rental obligationsfor a vacated facility based upon our inability to secure subtenants in thetime and manner included in our earlier estimates.  As we continue to evaluate strategicalternatives, including potential facilities consolidation in connection withthe restructuring announced on October 26, 2006, significant additional restructuringcharges could occur in future periods.

***Amortization of Intangibles***

Amortization ofintangible assets of $8.5 million in the 2006 Three Month Period and $25.5million in the 2006 Nine Month Period was relatively unchanged from thecomparable periods in 2005. Amortization in 2006 and 2005 primarily related tospecifically identified intangible assets from the COR acquisition. We willcontinue to amortize the specifically identified intangible assets from our CORacquisition through 2015. We expect to incur amortization expense of approximately$34.0 million for each of the next five years.

***Investment Income***

Investment incomeincreased 15% to $5.6 million in the 2006 Three Month Period and decreased 33%to $16.0 million in the 2006 Nine Month Period from the comparable periods in2005.  The increase in the 2006 ThreeMonth Period was primarily a result of more favorable market conditionsresulting in higher yields.  The decreasein the 2006 Nine Month Period was primarily attributable to the realized gainof approximately $10.5 million recognized upon the sale of our cost methodinvestment in TransForm Pharmaceuticals, Inc. in April 2005, partially offsetby more favorable market conditions resulting in higher yields.

***Interest Expense***

Interest expensedecreased 12% to $2.5 million in the 2006 Three Month Period and increased 3%to $7.9 million in the 2006 Nine Month Period from the comparable periods in2005.  The decrease in the 2006 ThreeMonth Period was primarily attributable to decreased capital lease buyoutsresulting in lower related interest expense as well as lower expense on lowercapital lease balances.  The increase inthe 2006 Nine Month Period was primarily attributable to increased capitallease buyouts resulting in higher related interest expense offset by lower expenseon lower capital lease balances.

***Other Income***

Other income inthe 2006 Three and Nine Month Periods is attributable to a deferred gainrecognized as a result of the sale of assets to Gene Logic, Inc.

**Liquidityand Capital Resources**

We require cash tofund our operating expenses, to make capital expenditures, acquisitions andinvestments and to pay debt service, including principal and interest andcapital lease payments. We have also made strategic purchases of debt andequity securities of some of our alliance collaborators in accordance with ourBoard of Directors’ approved policies and our business needs. These investmentswere generally in smaller companies. We have and may in the future lose moneyin these investments and our ability to liquidate these investments is in somecases very limited. We may also owe our partners milestone payments androyalties. We also have committed to fund development costs incurred by some ofour collaborators.

We have funded ourcash requirements primarily through the following:

·         our co-promotionrelationship with SGP for the sale of INTEGRILIN through August 31, 2005;

·         product sales of VELCADE;

·         payments from ourstrategic collaborators, including equity investments, license fees, milestonepayments and research funding;

·         royalty payments relatedto the sales of our products; and

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·         equity and debtfinancings in the public markets.

In the future, weexpect to continue to fund our cash requirements from some or all of thesesources as well as from sales of other products, subject to receivingregulatory approval. We are entitled to additional committed research anddevelopment funding under some of our strategic alliances. We believe the keyfactors that could affect our internal and external sources of cash are:

·         revenues and margins fromsales of VELCADE, INTEGRILIN and other products and services for which we mayobtain marketing approval in the future or which are sold by companies that mayowe us royalty, milestone, distribution or other payments on account of suchproducts;

·         the success of ourclinical and preclinical development programs;

·         our ability to enter intoadditional strategic collaborations and to maintain existing and newcollaborations as well as the success of such collaborations; and

·         the receptivity of thecapital markets to financings by biopharmaceutical companies generally and tofinancings by our company specifically.

As of September30, 2006 we had $635.6 million in cash, cash equivalents and marketablesecurities. This excludes $7.4 million of interest-bearing marketablesecurities classified as restricted cash on our balance sheet as of September30, 2006, which primarily serve as collateral for letters of credit securingleased facilities. As of September 30, 2006 we had $99.6 million ofoutstanding convertible debt, all of which is included in current liabilities.

Our significantcapital resources are as follows:
| **(in thousands)**                           | ** ** | **September 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Cash, cash  equivalents and marketable securities |       | $                                | 635,610    |                            | $          | 645,588 |   |
| Working capital                                   |       | 508,484                          |       | 576,501                         |       |
| Long-term debt, net of  current portion           |       | —                           |       | 99,571                          |       |
|                                                   |            |                                  |            |                                 |            |  |  |

 n
| ** **                                                     | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                     | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| Cash provided by  (used in):                                   |       |                                                    |       |   |   |
| Operating activities                                           |       | $                                                       | (20,625    | ) | $ | (44,683 | ) |
| Investing activities                                           |       | 35,713                                                  |       | 82,643 |   |
| Financing activities                                           |       | 11,196                                                  |       | 8,092 |   |
| Capital  expenditures (included in investing activities above) |       | (6,960                                                  | )          | (8,561 | ) |
|                                                           |       |                                                    |       |   |   |
|                                                                |            |                                                         |            |  |  |  |  |

 

***Cash Flows***

The principal useof cash in operating activities in both 2006 and 2005 was to fund our net loss.In January 2005, we paid SGP approximately $49.3 million for advances SGPhad made to COR for inventory purchases in prior years. Cash flows fromoperations can vary significantly due to various factors including changes inaccounts receivable, as well as changes in accounts payable and accruedexpenses. The average collection period of our accounts receivable can vary andis dependent on various factors, including the type of revenue and the paymentterms related to those revenues.

Investingactivities provided cash of $35.7 million in the 2006 Nine Month Periodand $82.6 million in the comparable period in 2005. The principal source offunds in both 2006 and 2005 was the proceeds from sales and maturities ofmarketable securities.  In July 2006, werecorded proceeds of approximately $3.4 million upon the recognition of adeferred gain from the sale of assets to Gene Logic, Inc.  In April 2005, we recorded proceeds ofapproximately $10.6 million upon the sale of our cost method investment inTransForm.

Financingactivities provided cash of $11.2 million in the 2006 Nine Month Periodand $8.1 million in the comparable period in 2005. The principal source offunds was from the purchases of common stock by our employees.  We used $5.9 million in 2006 to pay off our 4.5%convertible senior notes in accordance with the payment terms.  We also used $3.8 million and $8.9 million infinancing activities in 2006 and 2005, respectively, to make principal paymentson our capital leases.

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We believe thatour existing cash and cash equivalents and the anticipated cash receipts fromour product sales, current strategic alliances and royalties will be sufficientto support our expected operations, fund our debt service and capital leaseobligations and fund our capital commitments for at least the next severalyears.

***Contractual Obligations***

As noted above andin accordance with the payment terms, we paid off the $5.9 million principalbalance on our 4.5% convertible senior notes during the 2006 Nine Month Period.

There have been noadditional significant changes to our contractual obligations and commercialcommitments included in our Form 10-K as of December 31, 2005.

As of September30, 2006, we did not have any financing arrangements that were not reflected inour balance sheet.

***SubsequentEvents***

In October 2006,we announced a two-year agreement with OBI to jointly promote VELCADE in theU.S.  Under the terms of the agreement,beginning in the first quarter of 2007, OBI will jointly promote VELCADE toU.S.-based physicians who treat multiple myeloma patients who have received atleast one prior therapy.  We will pay aproportion of the VELCADE-related costs for the OBI sales force and OBI will beentitled to receive a commission should sales associated with the increasedpromotional effort exceed pre-specified targets. Both parties are able to terminate the agreement under certaincircumstances and subject to fees. We will continue to be responsible for manufacturing and distribution ofVELCADE in the U.S. We believe this collaboration, with the well-establishedOBI oncology group, will help us realize the full potential of theproduct.  Our current agreement withOrtho Biotech for the promotion of VELCADE outside the U.S. remains unchanged.

In October 2006,we received approximately $2.9 million upon the final settlement of theescrowed portion of the sale proceeds of our cost method investment inTransForm and we expect to record a realized gain in the fourth quarter of 2006for this amount.  TransForm, a companyspecializing in the discovery of formulations and novel crystalline forms ofdrug molecules, was acquired by Johnson & Johnson in a cash-for-stocktransaction that closed in April 2005.

In September 2006,we entered into a support agreement to acquire the outstanding stock ofAnorMED, Inc.  Subsequent to executingthe support agreement, AnorMED received a more favorable acquisition offer fromGenzyme Corporation and terminated our initial support agreement.  As a result of the termination of the supportagreement, we received a $19.5 million termination fee from AnorMED in October2006, which will be recorded as other income in the fourth quarter of 2006.

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**RISKFACTORS THAT MAY AFFECT RESULTS**

This Quarterly Report on Form 10-Q and certainother communications made by us contain forward-looking statements, includingstatements about our growth and future operating results, discovery anddevelopment of products, strategic alliances and intellectual property. Forthis purpose, any statement that is not a statement of historical fact shouldbe considered a forward-looking statement. We often use the words “believe,” “anticipate,”“plan,” “expect,” “intend,” “may,” “will” and similar expressions to helpidentify forward-looking statements.

We cannot assure investors that our assumptions andexpectations will prove to have been correct. Important factors could cause ouractual results to differ materially from those indicated or implied byforward-looking statements. Such factors that could cause or contribute to suchdifferences include those factors discussed below. We undertake no intention orobligation to update or revise any forward-looking statements, whether as aresult of new information, future events or otherwise.

**Regulatory Risks**

**Our businessmay be harmed if we do not obtain approval to market VELCADE for additionaltherapeutic**** uses.**

An important part of our strategy to grow our business isto market VELCADE for additional indications. To do so, we will need tosuccessfully conduct clinical trials and then apply for and obtain theappropriate regulatory approvals. If we are unsuccessful in our clinicaltrials, or we experience a delay in obtaining or are unable to obtainauthorizations for expanded uses of VELCADE, our revenues may not grow asexpected and our business and operating results will be harmed.

**We may not beable to obtain approval in additional countries to market VELCADE.**

VELCADE is currently approved for marketing in the UnitedStates and more than 75 other countries including the countries of the EuropeanUnion. If we are not able to obtain approval to market VELCADE in additionalcountries, we will lose the opportunity to sell in those countries and will notbe able to earn potential milestone payments under our agreement with OrthoBiotech or collect potential distribution fees on sales of VELCADE by OrthoBiotech in those countries.

**We may not beable to obtain marketing approval for products resulting from our developmentefforts.**

The products that we are developing require research anddevelopment, extensive preclinical studies and clinical trials and regulatoryapproval prior to any commercial sales. This process is expensive and lengthy,and can often take a number of years. In some cases, the length of time that ittakes for us to achieve various regulatory approval milestones affects thepayments that we are eligible to receive under our strategic allianceagreements.

We may need to successfully address a number oftechnological challenges in order to complete development of our products.Moreover, these products may not be effective in treating any disease or mayprove to have undesirable or unintended side effects, toxicities or other characteristicsthat may preclude our obtaining regulatory approval or prevent or limitcommercial use. For example, in January 2006, as part of our portfolioreview process, based on the evaluation of clinical data in the context ofadditional opportunities in the pipeline, we decided to discontinue developmentof MLN2704 in its current form as well as MLN1202 in rheumatoid arthritis.

Failure to gain approval for the products we are developingcould have a material adverse impact on our business.

**If we fail tocomply with regulatory requirements, or if we experience unanticipated problemswith our approved products, our products could be subject to restrictions orwithdrawal from the market.**

Any product for which we obtain marketing approval, alongwith the manufacturing processes, post-approval clinical data and promotionalactivities for such product, is subject to continual review and periodicinspections by the U.S. Food and Drug Administration, or FDA, and otherregulatory bodies. Later discovery of previously unknown problems or safetyissues with our products or manufacturing processes, or failure to comply withregulatory requirements, may result in restrictions on such products ormanufacturing processes, withdrawal of the products from the market, theimposition of civil or criminal penalties or a refusal by the FDA and otherregulatory bodies to approve pending applications for marketing approval of newdrugs or supplements to approved applications. As with any recently approvedtherapeutic product, we expect that our knowledge of the safety profile forVELCADE will expand after wider usage, and the possibility exists of patientsreceiving VELCADE treatment experiencing unexpected or more frequently thanexpected serious adverse events, which could have a material adverse effect onour business.

We are a party to collaborations that transferresponsibility for specified regulatory requirements, such as filing and 

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maintenanceof marketing authorizations and safety reporting, to our collaborators. If ourcollaborators do not fulfill these regulatory obligations, products, includingVELCADE or INTEGRILIN, could be withdrawn from the market, which would have amaterial adverse effect on our business.

**Some of ourproducts may be based on new technologies**,**which may affect our ability or the time we requireto obtain necessary regulatory approvals.**

Products that result from our research and developmentprograms may be based on new technologies, such as proteasome inhibition, andnew therapeutic approaches that have not been extensively tested in humans. Theregulatory requirements governing these types of products may be more rigorousthan for conventional products. As a result, we may experience a longerregulatory process in connection with any products that we develop based onthese new technologies or new therapeutic approaches.

**Risks Relating to Our Business, Strategyand Industry**

**Our revenuesover the next several years will be materially dependent on the commercialsuccess of VELCADE and INTEGRILIN.**

VELCADE was approved by the FDA in May 2003 andcommercially launched in the United States shortly after that date. Marketingof VELCADE outside the United States commenced in April 2004. INTEGRILINhas been on the market in the United States since June 1998. Marketing ofINTEGRILIN outside the United States commenced in mid-1999.

Our business plan contemplates obtaining marketingauthorization to sell VELCADE in many countries for the treatment of allpatients with multiple myeloma and both in the United States and abroad forother indications. We will be adversely affected if VELCADE does not receivesuch approvals.

We will not achieve our business plan, and we may be forcedto scale back our operations and research and development programs, if we donot obtain regulatory approval to sell VELCADE in additional countries or foradditional therapeutic uses or the sales of VELCADE or INTEGRILIN do not meetour expectations.

**We facesubstantial competition, and others may discover, develop or commercializeproducts before or more successfully than we do.**

The fields of biotechnology and pharmaceuticals are highlycompetitive. Many of our competitors are substantially larger than we are, andthese competitors have substantially greater capital resources, research anddevelopment staffs and facilities than we have. Furthermore, many of ourcompetitors are more experienced than we are in drug research, discovery,development and commercialization, obtaining regulatory approvals and productmanufacturing and marketing. As a result, our competitors may discover, developand commercialize pharmaceutical products before or in a shorter timeframe thanwe do. In addition, our competitors may discover, develop and commercializeproducts that make the products that we or our collaborators have developed orare seeking to develop and commercialize non-competitive or obsolete.

With respect to VELCADE, we face competition from CelgeneCorporation’s Thalomid and Revlimid. In May 2006, the FDA approved the use ofThalomid for the treatment of newly diagnosed multiple myeloma. Revlimid wasapproved by the FDA in December 2005 for the treatment of a subset ofpatients with transfusion-dependent anemia and in June 2006 for relapsed orrefractory multiple myeloma. We also face competition for VELCADE fromtraditional chemotherapy treatments, and there are other potentiallycompetitive therapies for VELCADE, including other proteasome inhibitors, thatare in late-stage clinical development for the treatment of multiple myeloma.In addition, multiple myeloma therapies in development may reduce the number ofpatients available for VELCADE treatment through enrollment of these patientsin clinical trials of these potentially competing products.

Due to the incidence and severity of cardiovasculardiseases, the market for therapeutic products that address these diseases islarge, and we expect the already intense competition in this field to increase.The most significant competitors for SGP and GlaxoSmithKline plc, or GSK, inmarketing INTEGRILIN are major pharmaceutical companies and biotechnologycompanies. The two products that compete directly with INTEGRILIN in theGP IIb-IIIa inhibitor market segment are ReoPro® (abciximab), whichis produced by Johnson & Johnson and sold by Johnson &Johnson and Eli Lilly and Company, and Aggrastat® (tirofiban HCl), whichis produced and sold by Merck & Co., Inc. outside of the UnitedStates and by Guilford Pharmaceuticals, Inc. in the United States.

Other competitive factors that could negatively affectINTEGRILIN include:

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·             expanded use of heparinreplacement therapies, such as Angiomax® (bivalirudin), which is produced andsold by The Medicines Company;

·             changing treatment practicesfor percutaneous coronary intervention and acute coronary syndrome based on newtechnologies, including the use of drug-coated stents;

·             increased use of anotherclass of anti-platelet drugs known as ADP inhibitors in patients whose symptomsmake them potential candidates for treatment with INTEGRILIN; and

·             SGP’s inability to completeclinical trials and develop data to promote increased use of INTEGRILIN in itscurrent indications as well as in new indications.

·             result in limitations on theproposed uses of our products.

**Sales ofINTEGRILIN and possibly VELCADE in particular reporting periods may be affectedby fluctuations in inventory, allowances and buying patterns.**

A significant portion of INTEGRILIN domestic pharmaceuticalsales is made by SGP to major drug wholesalers. These sales are affected byfluctuations in the buying patterns of these wholesalers and the correspondingchanges in inventory levels maintained by them. Inventory levels held by thesewholesalers may fluctuate significantly from quarter to quarter. If thesewholesalers build inventory levels excessively in any quarter, sales to thewholesalers in future quarters may unexpectedly decrease notwithstanding steadyprescriber demand. Because SGP commercializes INTEGRILIN and manages productdistribution, we have limited insight into or control over factors affectingchanges in distributor inventory levels. If SGP does not appropriatelymanage this distribution, SGP may not realize sales goals for the product andcould reduce the royalty revenue we recognize and thus adversely affect ourbusiness.

We distribute VELCADE in the U.S. through a sole-sourcedistribution model, where we sell directly to a third party who in turndistributes to the wholesaler base. Our VELCADE product inventory levels mayfluctuate from time to time depending on the consistency of the distributionlogistics of this arrangement and the buying patterns of these wholesalers.

Additionally, we make provisions at the time of sale ofVELCADE for discounts, rebates, product returns and other allowances based onhistorical experience updated for changes in facts and circumstances, asappropriate. To the extent these allowances are incorrect, we may need toadjust our estimates, which could have a material impact on the timing andactual amount of revenue we are able to recognize from these sales.

**Because ourresearch and development projects are based on new technologies and newtherapeutic approaches that have not been extensively tested in humans, it ispossible that our discovery process will not result in commercial products.**

The process of discovering drugs based upon genomics andother new technologies is new and evolving rapidly. We focus a portion of ourresearch on diseases that may be linked to a number of genes working incombination or to novel targets. Both we and the general scientific and medicalcommunities have only a limited understanding of the role that genes play inthese diseases. To date, we have not commercialized any products discoveredthrough our genomics research, and we may not be successful in doing so in thefuture. In addition, relatively few products based on gene discoveries havebeen developed and commercialized by others. Rapid technological development byus or others may result in compounds, products or processes becoming obsoletebefore we recover our development expenses. Further, manufacturing costs orproducts based on these new technologies may make products uneconomical tocommercialize.

**If our clinicaltrials are unsuccessful, or if they experience significant delays, our abilityto commercialize products will be impaired.**

We must provide the FDA and foreign regulatory authoritieswith preclinical and clinical data demonstrating that our products are safe andeffective before they can be approved for commercial sale. Clinicaldevelopment, including preclinical testing, is a long, expensive and uncertainprocess. It may take us several years to complete our testing, and failure canoccur at any stage of testing. Interim results of preclinical or clinicalstudies do not necessarily predict their final results, and acceptable resultsin early studies might not be seen in later studies. Any preclinical orclinical test may fail to produce results satisfactory to the FDA. Preclinicaland clinical data can be interpreted in different ways, which could delay,limit or prevent regulatory approval. Negative or inconclusive results from apreclinical study or clinical trial, adverse medical events during a clinicaltrial or safety issues resulting from products of the same class of drug couldcause a preclinical study or clinical trial to be 

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repeated ora program to be terminated, even if other studies or trials relating to theprogram are successful. For example, in December 2003**,**wedecided to stop further accrual to a phase II trial examining VELCADE incolorectal cancer because interim findings produced results that did not meetthe pre-specified efficacy criteria for continuation of study accrual.

We may not complete our planned preclinical or clinicaltrials on schedule or at all. We may not be able to confirm the safety andefficacy of our potential drugs in long-term clinical trials, which may resultin a delay or failure to commercialize our products. We may have difficultyobtaining a sufficient number of appropriate patients or clinical support toconduct our clinical trials as planned. A number of additional events coulddelay the completion of our clinical trials, including conditions imposed on usby the FDA or foreign regulatory authorities regarding the scope or design ofour clinical trials, lower than anticipated retention rates for patients in ourclinical trials, insufficient supply or deficient quality of our productcandidates or other materials necessary to conduct our clinical trials or the failureof our third party contractors to comply with regulatory requirements orotherwise meet their contractual obligations to us in a timely manner. As aresult, we may have to expend substantial additional funds to obtain access toresources or delay or modify our plans significantly. Our product developmentcosts will increase if we experience delays in testing or approvals.Significant clinical trial delays could allow our competitors to bring productsto market before we do and impair our ability to commercialize our products orpotential products.

**If thirdparties on which we rely for clinical trials do not perform as contractuallyrequired or as we expect, we may not be able to obtain regulatory approval foror commercialize our product candidates.**

We depend on independent clinical investigators and, insome cases, contract research organizations and other third party serviceproviders to conduct the clinical trials of our product candidates and expectto continue to do so. We rely heavily on these parties for successful executionof our clinical trials, but we do not control many aspects of their activities.Nonetheless, we are responsible for confirming that each of our clinical trialsis conducted in accordance with the general investigational plan and protocol.Our reliance on these third parties that we do not control does not relieve usof our responsibility to comply with the regulations and standards of the FDArelating to good clinical practices. Third parties may not complete activitieson schedule or may not conduct our clinical trials in accordance withregulatory requirements or the applicable trials plans and protocols. Thefailure of these third parties to carry out their obligations could delay orprevent the development, approval and commercialization of our productcandidates or result in enforcement action against us.

**Because many ofthe products that we are developing are based on new technologies andtherapeutic approaches, the market may not be receptive to these products upontheir introduction.**

The commercial success of any of our products for which wemay obtain marketing approval from the FDA or other regulatory authorities willdepend upon their acceptance by the medical community and third party payors asclinically useful, cost-effective and safe. Many of the products that we aredeveloping are based upon new technologies or therapeutic approaches. As aresult, it may be more difficult for us to achieve market acceptance of ourproducts, particularly the first products that we introduce to the market basedon new technologies and therapeutic approaches. Our efforts to educate themedical community on these potentially unique approaches may require greaterresources than would be typically required for products based on conventionaltechnologies or therapeutic approaches. The safety, efficacy, convenience andcost-effectiveness of our products as compared to competitive products willalso affect market acceptance.

**Because of thehigh demand for talented personnel within our industry, we could experiencedifficulties in recruiting employees necessary for our success and growth.**

Because competition for talented employees within ourindustry is fierce, we may not be successful in hiring, retaining or promptlyreplacing key management, sales, marketing and technical personnel. Any failureto expeditiously fill our needs for key personnel could have a material adverseeffect on our business.

**Our strategy ofgenerating growth through license arrangements and acquisitions may not besuccessful.**

An important element of ourbusiness strategy is to acquire additional therapeutic agents that are in phaseII or phase III clinical development through license arrangements oracquisitions of other companies.  Although we are actively  reviewingand in discussions with  third parties with respect to such transactions,we may be unable to license or acquire suitable products or product candidatesfrom third parties for a number of reasons. In particular, the licensing andacquisition of pharmaceutical and biological products is a competitive area. Anumber of other companies are also pursuing strategies to license or acquireproducts within our therapeutic focus areas of cancer and inflammation. Theseother companies may have a competitive advantage over us due to their size,cash resources and greater drug research, discovery and development andcommercialization capabilities.

Other factors that may prevent usfrom licensing or otherwise acquiring suitable products and product candidatesinclude 

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the following:

·             we may be unable to licenseor acquire the relevant technology on terms that would allow us to make anappropriate return on the product;

·             companies that perceive usto be their competitor may be unwilling to assign or license their product rightsto us; or

·             we may be unable to identifysuitable products or product candidates within our areas of focus.

In addition, we expect competitionfor licensing and acquisition candidates in the biotechnology andpharmaceutical fields to increase, which may mean fewer suitable opportunitiesfor us as well as higher prices. If we are unable to successfully obtain rightsto suitable products and product candidates, our business, financial conditionand prospects for growth could suffer.

If wefail to successfully manage any acquisitions, our ability todevelop our product candidates and expand our product candidate pipeline may beharmed.

Following any future acquisitions,our failure to adequately address the financial, operational or legal risks ofthese transactions could harm our business. Financial aspects of thesetransactions that could alter our financial position, reported operatingresults or stock price include:

·             use of cash resources;

·             higher than anticipatedacquisition costs and expenses;

·             potentially dilutiveissuances of equity securities;

·             the incurrence of debt andcontingent liabilities, impairment losses or restructuring charges;

·             large write-offs anddifficulties in assessing the relative percentages of in-process research anddevelopment expense that can be immediately written off as compared to theamount that must be amortized over the appropriate life of the asset; and

·             amortization expensesrelated to other intangible assets.

Operational risks that could harmour existing operations or prevent realization of anticipated benefits fromthese transactions include:

·             challenges associated withmanaging an increasingly diversified business;

·             disruption of our ongoingbusiness;

·             difficulty and expense inassimilating the operations, products, technology, information systems orpersonnel of the acquired company;

·             diversion of management’stime and attention from other business concerns;

·             inability to maintainuniform standards, controls, procedures and policies;

·             the assumption of known andunknown liabilities of the acquired company, including intellectual propertyclaims; and

·             subsequent loss of keypersonnel.

If we are unable to successfullymanage our acquisitions, our ability to develop new products and continue toexpand our product pipeline may be limited.

**Risks Relating to Our Financial Resultsand Need for Financing**

**We haveincurred substantial losses and expect to continue to incur losses. We will notbe successful unless we reverse this trend.**

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We have incurred net losses of $13.7 million for the threemonths ended September 30, 2006 and $73.8 million for the three months endedSeptember 30, 2005. We have incurred net losses of $52.2 million for the ninemonths ended September 30, 2006 and $154.3 million for the nine months endedSeptember 30, 2005, net losses of $198.2 million for the year endedDecember 31, 2005, $252.3 million for the year ended December 31,2004 and $483.7 million for the year ended December 31, 2003. We expect tocontinue to incur substantial operating losses in future periods. Prior to ouracquisition of COR Therapeutics, Inc., or COR, in February 2002, substantiallyall of our revenues resulted from payments from collaborators, and not from thesale of products.  As of September 30,2006, we had an accumulated deficit of $2.5 billion.

We expect to continue to incur significant expenses inconnection with our research and development programs and commercializationactivities. As a result, we will need to generate significant revenues to helpfund these costs and achieve positive net income. Our ability to achievepositive net income would be adversely impacted if our acquired intangibleassets and goodwill, primarily resulting from our acquisition of COR, becameimpaired as a result of reduced market capitalization or product failures orwithdrawals. We cannot be certain whether or when we will become profitablebecause of the significant uncertainties with respect to our ability tosuccessfully develop products and generate revenues from the sale of approvedproducts and from existing and potential future strategic alliances.

**We may needadditional financing, which may be difficult to obtain. Our failure to obtainnecessary financing or doing so on unattractive terms could adversely affectour business and operations.**

We will require substantial funds to conduct research anddevelopment, including preclinical testing and clinical trials of our potentialproducts. We will also require substantial funds to meet our obligations to ourcollaborators, manufacture and market products that are approved for commercialsale, including VELCADE, and meet our debt service obligations. We may alsorequire additional financing to execute on product in-licensing or acquisitionopportunities. Additional financing may not be available when we need it or maynot be available on favorable terms.

If we are unable to obtain adequate funding on a timelybasis, we may have to delay or curtail our research and development programs,our product commercialization activities or our in-licensing or acquisitionactivities. We could be required to seek funds through arrangements withcollaborators or others that may require us to relinquish rights to specifiedtechnologies, product candidates or products which we would otherwise pursue onour own.

**Ourindebtedness and debt service obligations may adversely affect our cash flowand otherwise negatively affect our operations.**

At September 30, 2006, we had approximately $99.6 millionof outstanding convertible debt that matures in 2007 and $76.5 million ofcapital lease obligations. During each of the last five years, our earningswere insufficient to cover our fixed charges. We will be required to makeinterest payments on our currently outstanding convertible notes totalingapproximately $2.7 million over the next year.

We may in the future incur additional indebtedness,including long-term debt, credit lines and property and equipment financings tofinance capital expenditures. We intend to satisfy our current and future debtservice obligations from cash generated by our operations, our existing cashand investments and, in the case of principal payments at maturity, funds fromexternal sources. We may not have sufficient funds and we may be unable toarrange for additional financing to satisfy our principal or interest paymentobligations when those obligations become due. Funds from external sources maynot be available on acceptable terms, or at all.

Our indebtedness could have significant additional negativeconsequences, including:

·             increasing our vulnerabilityto general adverse economic and industry conditions;

·             limiting our ability toobtain additional financing;

·             requiring the dedication ofa substantial portion of our cash flow from operations to service ourindebtedness, thereby reducing the amount of our expected cash flow availablefor other purposes, including capital expenditures and research anddevelopment;

·             limiting our flexibility inplanning for, or reacting to, changes in our business and the industry in whichwe compete; and

·             placing us at a possiblecompetitive disadvantage to less leveraged competitors and competitors thathave better access 

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to capital resources.

**If we do notachieve the anticipated benefits of our restructuring efforts, or if the costsof our restructuring efforts exceed anticipated levels, our business could beharmed.**

We recorded restructuringcharges of $1.4 million for the three months ended September 30, 2006 and $58.8million for the three months ended September 30, 2005. We recorded restructuringcharges of $5.7 million for the nine months ended September 30, 2006 and $62.9million for the nine months ended September 30, 2005, restructuring charges of$77.1 million for the year ended December 31, 2005, $38.0 million forthe year ended December 31, 2004 and $191.0 million for the year endedDecember 31, 2003. Costs associated with our restructuring effortsinclude reducing personnel and infrastructure resulting from the restructuredrelationship with Schering-Plough for INTEGRILIN® (eptifibatide) Injection and reducing our in-house researchand development technologies and expertise in areas where the work can now beoutsourced cost effectively.  As a result of theseefforts, we expect to reduce total research and development and selling,general and administration expenses as compared to prior years. We may notachieve our estimated expense reductions anticipated from the restructuringsbecause such savings are difficult to predict and speculative in nature.

**We received an informal inquiry from the SEC regarding stockoptions we granted in September 2001. If the SEC does not agree with ourconclusion regarding the accounting for such options and determines that wehave incorrectly accounted for certain historical stock option grants, and ifthe associated expense not previously recorded is material, we likely would berequired to restate certain historical financial statements and could becomesubject to litigation.**

      During the second quarter of 2006, we received a telephone inquiry from the SECregarding whether stock options we awarded with a stated grant date ofSeptember 26, 2001 were, in fact, granted on that date. We were one of over 30public companies discussed in a May 2006 third party report concerning thetiming of stock option grants from 1997 through 2002. With respect to us, thereport referenced option grants we made in September 2001. In September 2006,we met with the SEC to discuss the findings of our review of the September 2001option grants and other of our historical option grants.  We reported tothe SEC that our review did not uncover any evidence of fraud with respect tothe September 2001 option grants or the other historical option grants that wereviewed.  Additionally, we reported to the SEC our conclusion that any additionalcompensation expense resulting from our review of the September 2001 optiongrants and other historical option grants was immaterial.  We cannotexpress any view as to how the SEC may assess the information we provided as tothe September 2001 option grants and other historical option grants.  Tothe extent that the SEC’s inquiry continues, it remains possible that the SECmay identify material issues relating to additional stock option grants. If itis determined that any of our option grants were incorrectly granted oraccounted for, we may be required to record compensation expense relating tothose grants, and, if the expense is material, we likely would be required torestate certain of our historical financial statements. Additionally, we couldbecome subject to an enforcement proceeding or other litigation. The effects ofsuch a restatement or litigation could be material.

**Risks Relating to Collaborators**

**We dependsignificantly on our collaborators to work with us to commercialize and developproducts including VELCADE and INTEGRILIN.**

Outside of the United States, we commercialize VELCADEthrough an alliance with Ortho Biotech. In October 2006, we announced a twoyear agreement with Ortho Biotech to jointly promote VELCADE in the UnitedStates.  On September 1, 2005, wetransferred exclusive U.S. commercialization and development rights ofINTEGRILIN to SGP and SGP is solely responsible for the commercialization anddevelopment of INTEGRILIN outside of Europe. GSK is responsible for marketingand selling INTEGRILIN in Europe. We conduct substantial discovery anddevelopment activities through strategic alliances, including with OrthoBiotech for the ongoing development of VELCADE. We expect to enter intoadditional alliances in the future, especially in connection with productcommercialization. The success of our alliances depends heavily on the effortsand activities of our collaborators.

Each of our collaborators has significant discretion indetermining the efforts and resources that it will apply to the alliance andthe degree to which it shares financial and product sales and inventoryinformation. Our existing and any future alliances may not be scientifically orcommercially successful.

The risks that we face in connection with these existingand any future alliances include the following:

·             All of our strategicalliance agreements are for fixed terms and are subject to termination undervarious circumstances, 

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including, in many cases, such as in our collaboration andjoint promotion agreement with Ortho Biotech, without cause.

·             Our collaborators may changethe focus of their development and commercialization efforts. Pharmaceuticaland biotechnology companies historically have re-evaluated their developmentand commercialization priorities following mergers and consolidations, whichhave been common in recent years in these industries. The ability of some ofour products, including VELCADE and INTEGRILIN, to reach their potential couldbe limited if our collaborators decrease or fail to increase marketing orspending efforts related to such products.

·             We expect to rely on ourcollaborators to manufacture many products covered by our alliances.

·             In our strategic allianceagreements, we generally agree not to conduct specified types of research anddevelopment in the field that is the subject of the alliance. These agreementsmay have the effect of limiting the areas of research and development that wemay pursue, either alone or in collaboration with third parties.

·             Our collaborators may developand commercialize, either alone or with others, products that are similar to orcompetitive with the products that are the subject of the alliance with us.

·             Our collaborators may notproperly maintain or defend our intellectual property rights or may use ourproprietary information in such a way as to expose us to potential litigation.

**We aresubstantially dependent on SGP for future revenues related to INTEGRILIN.**

Under the terms of our revised agreement with SGP effectiveas of September 1, 2005, SGP will pay us royalties based on net productsales of INTEGRILIN. In 2006 and 2007, minimum royalty payments for each yearare set at $85.4 million, with some conditions that could reduce theseminimums. There are no minimum guaranteed royalty payments beyond 2007.** **If SGP’s INTEGRILINsales after 2007 are less than expected, we will receive less royalty revenuethan we expect, which would have a material adverse effect on our ability tofund other parts of our business.

**We may not besuccessful in establishing additional strategic alliances, which couldadversely affect our ability to develop and commercialize products.**

An important element of our business strategy is enteringinto strategic alliances for the development and commercialization of selected products.In some instances, if we are unsuccessful in reaching an agreement with asuitable collaborator, we may fail to meet all of our business objectives forthe applicable product or program. We face significant competition in seekingappropriate collaborators. Moreover, these alliance arrangements are complex tonegotiate and time-consuming to document. We may not be successful in ourefforts to establish additional strategic alliances or other alternativearrangements. The terms of any additional strategic alliances or otherarrangements that we establish may not be favorable to us. Moreover, suchstrategic alliances or other arrangements may not be successful.

**Risks Relating to Intellectual Property**

**If we areunable to obtain patent protection for our discoveries, the value of ourtechnology and products will be adversely affected. If we infringe patent orother intellectual property rights of third parties, we may not be able todevelop and commercialize our products or the cost of doing so may increase.**

Our patent positions, and those of other pharmaceutical andbiotechnology companies, are generally uncertain and involve complex legal,scientific and factual questions. Our ability to develop and commercializeproducts depends in significant part on our ability to:

·             obtain and maintain patents;

·             obtain licenses to theproprietary rights of others on commercially reasonable terms;

·             operate without infringingupon the proprietary rights of others;

·             prevent others frominfringing on our proprietary rights; and

·             protect trade secrets.

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**There issignificant uncertainty about the validity and permissible scope of patents inour industry, which may make it difficult for us to obtain patent protectionfor our discoveries.**

The validity and permissible scope of patent claims in thepharmaceutical and biotechnology fields, including the genomics field, involveimportant unresolved legal principles and are the subject of public policydebate in the United States and abroad. For example, there is significant uncertaintyboth in the United States and abroad regarding the patentability of genesequences in the absence of functional data and the scope of patent protectionavailable for full-length genes and partial gene sequences. Moreover, somegroups have made particular gene sequences available in publicly accessibledatabases. These and other disclosures may adversely affect our ability toobtain patent protection for gene sequences claimed by us in patentapplications that we file subsequent to such disclosures. There is also someuncertainty as to whether human clinical data will be required for issuance ofpatents for human therapeutics. If such data are required, our ability toobtain patent protection could be delayed or otherwise adversely affected.

**Third partiesmay own or control patents or patent applications and require us to seeklicenses, which could increase our development and commercialization costs, orprevent us from developing or marketing our products.**

We may not have rights under some patents or patentapplications related to some of our existing and proposed products orprocesses. Third parties may own or control these patents and patentapplications in the United States and abroad. Therefore, in some cases, such asthose described below, in order to develop, manufacture, sell or import some ofour existing and proposed products or processes, we or our collaborators maychoose to seek, or be required to seek, licenses under third party patentsissued in the United States and abroad, or those that might issue from UnitedStates and foreign patent applications. In such event, we would be required topay license fees or royalties or both to the licensor. If licenses are notavailable to us on acceptable terms, we or our collaborators may not be able todevelop, manufacture, sell or import these products or processes.

Our MLN0002 and MLN1202 product candidates are humanizedmonoclonal antibodies. We are aware of third party patents and patentapplications that relate to humanized or modified antibodies, products usefulfor making humanized or modified antibodies and processes for making and usingrecombinant antibodies.

With respect to VELCADE, on June 26, 2002, AriadPharmaceuticals, Inc. sent to us and approximately 50 other parties aletter offering a sublicense for the use of United States PatentNo. 6,410,516, which is exclusively licensed to Ariad. If this patent isvalid and Ariad successfully sues us for infringement, we would require alicense from Ariad in order to manufacture and market VELCADE. On May 4,2006, a federal court jury gave a verdict in favor of Ariad in itspatent-infringement lawsuit against Eli Lilly relating to United States PatentNo. 6,410,516. We expect that Eli Lilly will challenge this verdict andthe validity of the patent with the federal district judge and the U.S. Courtof Appeals. In addition, we are also aware that Amgen Inc. has filed adeclaratory relief action seeking an invalidity ruling with respect to thispatent. However, Ariad’s initial success in its claim against Eli Lilly mayincrease the possibility that Ariad could sue additional parties, including us,and allege infringement of the patent.

**We may becomeinvolved in expensive patent litigation or other proceedings, which couldresult in our incurring substantial costs and expenses or substantial liabilityfor damages or require us to stop our development and commercializationefforts.**

There has been substantial litigation and other proceedingsregarding the patent and other intellectual property rights in thepharmaceutical and biotechnology industries. We may become a party to patentlitigation or other proceedings regarding intellectual property rights. Forexample, we believe that we hold patent applications that cover genes that arealso claimed in patent applications filed by others. Interference proceedingsbefore the United States Patent and Trademark Office may be necessary toestablish which party was the first to invent these genes.

The cost to us of any patent litigation or otherproceeding, even if resolved in our favor, could be substantial. Some of ourcompetitors may be able to sustain the cost of such litigation or proceedingsmore effectively than we can because of their substantially greater financialresources. If a patent litigation or other proceeding is resolved against us,we or our collaborators may be enjoined from developing, manufacturing, sellingor importing our products or processes without a license from the other partyand we may be held liable for significant damages. We may not be able to obtainany required license on commercially acceptable terms or at all.

Uncertainties resulting from the initiation andcontinuation of patent litigation or other proceedings could have a materialadverse effect on our ability to compete in the marketplace. Patent litigationand other proceedings may also absorb significant management time.

**Our patentprotection for any compounds that we seek to develop may be limited to aparticular method of use or**

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**indication suchthat, if a third party were to obtain approval of the compound for use inanother indication, we could be subject to competition arising from off-labeluse.**

Although we generally seek the broadest patent protectionavailable for our proprietary compounds, we may not be able to obtain patentprotection for the actual composition of any particular compound and may belimited to protecting a new method of use for the compound or otherwiserestricted in our ability to prevent others from exploiting the compound. If weare unable to obtain patent protection for the actual composition of anycompound that we seek to develop and commercialize and must rely on method ofuse patent coverage, we would likely be unable to prevent others frommanufacturing or marketing that compound for any use that is not protected byour patent rights. If a third party were to receive marketing approval for thecompound for another use, physicians could nevertheless prescribe it forindications that are not described in the product’s labeling or approved by theFDA or other regulatory authorities. Even if we have patent protection of theprescribed indication, as a practical matter, we would have little recourse asa result of this off-label use. In that event, our revenues from thecommercialization of the compound would likely be adversely affected.

**If we fail tocomply with our obligations in our intellectual property licenses with thirdparties, we could lose license rights that are important to our business.**

We are a party to various license agreements. In particular,we license rights to patents for the formulation of VELCADE and issued patentsrelating to MLN518 and MLN1202. We may enter into additional licenses in thefuture. Our existing licenses impose, and we expect future licenses willimpose, various diligence, milestone payment, royalty, insurance and otherobligations on us. If we fail to comply with these obligations, the licensormay have the right to terminate the license, in which event we might not beable to market any product that is covered by the licensed patents.

**Competitionfrom generic pharmaceutical manufacturers could negatively impact our productssales.**

Competition from manufacturers of generic drugs is a majorchallenge for us in the U.S. and is growing internationally. Upon the expirationor loss of patent protection for one of our products, or upon the “at-risk”launch (despite pending patent infringement litigation against the genericproduct) by a generic manufacturer of a generic version of one of our products,we could lose the major portion of sales of that product in a very shortperiod, which could adversely affect our business.

Generic competitors operate without our large research anddevelopment expenses and our costs of conveying medical information about ourproducts to the medical community. In addition, the FDA approval processexempts generics from costly and time-consuming clinical trials to demonstratetheir safety and efficacy, allowing generic manufacturers to rely on the safetyand efficacy data of the innovator product. Generic products, however, needonly demonstrate a level of availability in the bloodstream equivalent to thatof the innovator product. This means that generic competitors can market acompeting version of our product after the expiration or loss of our patent andcharge much less. The issued U.S. patents related to VELCADE expire in 2014with the potential for extension and the issued foreign patents expire in 2015with extensions issued or pending in a number of countries. The issued UnitedStates patents that cover INTEGRILIN expire in 2014 and 2015 and the issuedforeign patents expire between 2010 and 2012. In addition, our patent-protectedproducts can face competition in the form of generic versions of brandedproducts of competitors that lose their market exclusivity.

**Risks Relating to Product Manufacturing,Marketing and Sales**

**Because we havelimited sales, marketing and distribution experience and capabilities, in someinstances we are dependent on third parties to successfully perform these functionson our behalf, or we may be required to incur significant costs and devotesignificant efforts to augment our existing capabilities.**

We currently are marketing and selling VELCADE in theUnited States solely through our cancer-specific sales force and without acollaborator. Beginning in the first quarter of 2007, we expect to jointlypromote VELCADE in the United States with Ortho Biotech. Our success in sellingVELCADE will depend heavily on the performance of these sales forces. In areasoutside the United States where VELCADE has received approval, Ortho Biotech orits affiliates market VELCADE. As a result, our ability to earn revenue relatedto VELCADE outside of the United States will depend heavily on Ortho Biotech.

SGP exclusively markets INTEGRILIN in areas outside ofEurope, including the United States, and GSK exclusively markets INTEGRILIN inEurope. As a result, except for our minimum royalty payments from SGP in 2006and 2007, our success in receiving royalties and milestone payments from salesof INTEGRILIN depends entirely on the marketing efforts of these third parties.

Depending on the nature of the products for which we obtainmarketing approval, we may need to rely significantly on sales, marketing anddistribution arrangements with our collaborators and other third parties. Forexample, some types of pharmaceutical products require a large sales force andextensive marketing capabilities for effective commercialization. If in 

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the futurewe elect to perform sales, marketing and distribution functions for these typesof products ourselves, we would face a number of additional risks, includingthe need to recruit a large number of additional experienced marketing andsales personnel.

**Because we haveno commercial manufacturing capabilities, we will continue to be dependent onthird party manufacturers to manufacture products for us, or we will berequired to incur significant costs and devote significant efforts to establishour own manufacturing facilities and capabilities.**

  We have no commercial-scale manufacturingcapabilities. In order to continue to develop products, apply for regulatoryapprovals and commercialize products, we will need to develop, contract for orotherwise arrange for the necessary manufacturing capabilities.

  We currently rely substantially upon thirdparties to produce material for preclinical testing purposes and expect tocontinue to do so in the future. We also currently rely and expect to continueto rely, upon other third parties, potentially including our collaborators, toproduce materials required for clinical trials and for the commercialproduction of our products.

  There are a limited number of contractmanufacturers that operate under the FDA’s good manufacturing practicesregulations capable of manufacturing our products. If we are unable to arrangefor third party manufacturing of our products, or to do so on commerciallyreasonable terms, we may not be able to complete development of our products orcommercialize them, or we may experience delays in doing so.

  Reliance on third party manufacturers entailsrisks to which we would not be subject if we manufactured products ourselves,including reliance on the third party for regulatory compliance, thepossibility of breach of the manufacturing agreement by the third party becauseof factors beyond our control and the possibility of termination or non-renewalof the agreement by the third party, based on its own business priorities, at atime that is costly or inconvenient for us.

  We may in the future elect to manufacture someof our products in our own manufacturing facilities. We would need to investsubstantial additional funds and recruit qualified personnel in order to buildor lease and operate any manufacturing facilities.

**Because we haveno commercial manufacturing capability for VELCADE and INTEGRILIN, we aredependent on third parties to produce product sufficient to meet market demand.**

We are responsible for managing the supply of material forall clinical and commercial production of VELCADE, including VELCADE that OrthoBiotech sells or uses in clinical trials, and INTEGRILIN, including INTEGRILINthat SGP and GSK sell or use in clinical trials.

We rely on third party contract manufacturers tomanufacture, fill/finish and package VELCADE for both commercial purposes andfor all clinical trials. We have established long-term supply relationships forthe production of commercial supplies of VELCADE. We work with onemanufacturer, with whom we have a long-term supply agreement, to completefill/finish for VELCADE. If any of our current third party manufacturersperforming production and fill/finish for VELCADE are unable or unwilling tocontinue performing these services for us and we are unable to find areplacement manufacturer or in the future we are otherwise unable to contractwith manufacturers to produce commercial supplies of VELCADE in acost-effective manner, we could run out of VELCADE for commercial sale andclinical trials and our business could be substantially harmed.

We have no manufacturing facilities for INTEGRILIN and,accordingly, rely on third party contract manufacturers for the clinical andcommercial production of INTEGRILIN. We have three approved manufacturers thatcurrently provide us with eptifibatide, the active ingredient necessary to makeINTEGRILIN. Solvay, one of the current manufacturers, owns the processtechnology used by it and one other manufacturer for the production of bulkproduct. We own the technology utilized by the third supplier. We have two manufacturersthat currently perform fill/finish services for INTEGRILIN and a new packagingsupplier for the United States. If our current manufacturers are unable tocontinue or decide to discontinue their manufacturing, fill/finish or packagingservices and we are unable to secure alternative manufacturers, the supply ofINTEGRILIN could be adversely affected which could substantially harm ourbusiness.

In order to mitigate the risk of INTEGRILIN supplyinterruption, we have entered into a new third party fill/finish arrangementand we are in the process of establishing a second bulk product manufacturingsite that will manufacture eptifibatide using the Millennium owned processtechnology. Because these are new manufacturing arrangements, these manufacturersmay encounter difficulties that could adversely affect the supply of INTEGRILINand, thereby, harm our business. For example, Solvay, the owner of the processtechnology used by two of our manufacturers, has raised concerns that 

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the newMillennium process may have been developed using information asserted to beconfidential to that owner. If that owner succeeds in a claim relating to theseconcerns, our ability to practice the new process could be negatively impactedwhich could affect the cost of manufacturing eptifibatide and negatively impactour business.

**If we fail toobtain an adequate level of reimbursement for our products by third partypayors, there may be no commercially viable markets for our products.**

The availability and levels of reimbursement bygovernmental and other third party payors affect the market for anypharmaceutical product or health care service. These third party payorscontinually attempt to contain or reduce the costs of health care bychallenging the prices charged for medical products and services. In someforeign countries, particularly the countries of the European Union, thepricing of prescription pharmaceuticals is subject to governmental control. Wemay not be able to sell our products as profitably as we expect if we arerequired to sell our products at lower than anticipated prices or reimbursementis unavailable or limited in scope or amount.

In particular, third party payors could lower the amountthat they will reimburse hospitals or doctors to treat the conditions for whichthe FDA has approved VELCADE or INTEGRILIN. If they do, pricing levels or salesvolumes of VELCADE or INTEGRILIN may decrease. In addition, if we fail tocomply with the rules applicable to the Medicaid and Medicare programs, wecould be subject to the imposition of civil or criminal penalties or exclusionfrom these programs.

In foreign markets, a number of different governmental andprivate entities determine the level at which hospitals will be reimbursed foradministering VELCADE and INTEGRILIN to insured patients. If these levels areset, or reset, too low, it may not be possible to sell VELCADE or INTEGRILIN ata profit in these markets.

In both the United States, on federal and state levels, andforeign jurisdictions, there have been a number of legislative and regulatoryproposals to change the health care system. For example, the MedicarePrescription Drug and Modernization Act of 2003 and its implementingregulations impose new requirements for the distribution and pricing ofprescription drugs which may affect the marketing of our products. These newrequirements have created uncertainty among oncologists and could impact saleslevels of VELCADE as oncologists adapt to the new reimbursement model. Furtherproposals are also likely. The current uncertainty and the potential foradoption of additional proposals could affect the timing of product revenue,our ability to raise capital, obtain additional collaborators and market ourproducts.

In addition, we believe that the increasing emphasis onmanaged care in the United States has and will continue to put pressure on theprice and usage of our present and future products, which may adversely affectproduct sales. Further, when a new therapeutic product is approved, theavailability of governmental or private reimbursement for that product isuncertain, as is the amount for which that product will be reimbursed. Wecannot predict the availability or amount of reimbursement for our productcandidates, and current reimbursement policies for VELCADE or INTEGRILIN couldchange at any time.

**We face a riskof product liability claims and may not be able to obtain insurance.**

Our business exposes us to the risk of product liabilityclaims that is inherent in the manufacturing, testing and marketing of humantherapeutic products. In particular, VELCADE and INTEGRILIN are administered topatients with serious diseases who have a high incidence of mortality. Althoughwe have product liability insurance that we believe is appropriate, thisinsurance is subject to deductibles, co-insurance requirements and coveragelimitations and the market for such insurance is becoming more restrictive. Wemay not be able to obtain or maintain adequate protection against potentialliabilities. If we are unable to obtain insurance at acceptable cost orotherwise protect against potential product liability claims, we will beexposed to significant liabilities, which may materially and adversely affectour business and financial position. These liabilities could prevent or interferewith our product commercialization efforts. Guidelines and recommendations canaffect the use of our products.

Government agencies promulgate regulations and guidelinesdirectly applicable to us and to our products. In addition, professional societies,practice management groups, private health and science foundations andorganizations involved in various diseases from time to time may also publishguidelines or recommendations to the health care and patient communities.Recommendations of government agencies or these other groups or organizationsmay relate to such matters as usage, dosage, route of administration and use ofconcomitant therapies. Recommendations or guidelines suggesting the reduced useof our products or the use of competitive or alternative products that arefollowed by patients and health care providers could result in decreased use ofour products.

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**Risks Relating to****Holding****Our Common Stock**

**The tradingprice of our securities could be subject to significant fluctuations.**

The trading price of our common stock has been quitevolatile, and may be volatile in the future. During the nine months endedSeptember 30, 2006, our common stock traded as high as $11.46 per share and aslow as $7.83 per share. During 2005, our common stock traded as high as $12.34per share and as low as $7.63 per share. Factors such as announcements of ouror our competitors’ operating results, data from our or our competitors’clinical trial results, changes in our prospects, market conditions forbiopharmaceutical stocks in general and analyst recommendations or commentaryconcerning our or our competitors’ products or business could have asignificant impact on the future trading prices of our common stock.

In particular, the trading price of the common stock ofmany biopharmaceutical companies, including ours, has experienced extreme priceand volume fluctuations, which have at times been unrelated to the operatingperformance of such companies whose stocks were affected. Some of the factorsthat may cause volatility in the price of our securities include:

·        product revenues and the rate of revenue growth;

·        introduction or success of competitive products;

·        clinical trial results and regulatory developments;

·        quarterly variations in financial results and guidance to theinvestment community with respect to future financial results;

·        business and product market cycles;

·        fluctuations in customer requirements;

·        availability and utilization of manufacturing capacity;

·        timing of new product introductions; and

·        our ability to develop and implement new technologies.

The price of our securities may also be affected by theestimates and projections of the investment community and our ability to meetor exceed the financial projections we provide to the public. The price mayalso be affected by general economic and market conditions, and the cost ofoperations in our product markets. While we cannot predict the individualeffect that these factors may have on the price of our securities, thesefactors, either individually or in the aggregate, could result in significantvariations in price during any given period of time. We can not assure you thatthese factors will not have an adverse effect on the trading price of ourcommon stock.

**We haveanti-takeover defenses that could delay or prevent an acquisition and couldadversely affect the price of our common stock.**

Provisions of our certificate of incorporation and bylawsand of Delaware law could have the effect of delaying, deferring or preventingan acquisition of our company. For example, we have divided our board ofdirectors into three classes that serve staggered three-year terms, we mayissue shares of our authorized “blank check” preferred stock and ourstockholders are limited in their ability to call special stockholder meetings.In addition, we have issued preferred stock purchase rights that wouldadversely affect the economic and voting interests of a person or group thatseeks to acquire us or a 15% or greater interest in our common stock withoutnegotiations with our board of directors.

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**Item 3.      Quantitative and Qualitative DisclosuresAbout Market Risk**

We manage ourfixed income investment portfolio in accordance with our Policy for SecuritiesInvestments, or Investment Policy, that has been approved by our Board ofDirectors. The primary objectives of our Investment Policy are to preserveprincipal, maintain a high degree of liquidity to meet operating needs, andobtain competitive returns subject to prevailing market conditions. Investmentsare made primarily in investment-grade corporate bonds with effectivematurities of three years or less, asset-backed debt securities and U.S.government agency debt securities. These investments are subject to risk ofdefault, changes in credit rating and changes in market value. Theseinvestments are also subject to interest rate risk and will decrease in valueif market interest rates increase. A hypothetical 100 basis point increase ininterest rates would result in an approximate $9.9 million decrease in the fairvalue of our investments as of September 30, 2006. However, due to theconservative nature of our investments and relatively short effectivematurities of debt instruments, interest rate risk is mitigated. Our InvestmentPolicy specifies credit quality standards for our investments and limits theamount of exposure from any single issue, issuer or type of investment. We donot own derivative financial instruments in our investment portfolio.

We receivedistribution fees from Ortho Biotech based on worldwide product sales ofVELCADE outside of the U.S.  As a result,our financial position, results of operations and cash flows can be affected byfluctuations in foreign currency exchange rates, primarily EURO.  Movement in foreign currency exchange ratescould cause royalty revenue to vary significantly in future reporting periods.

As of September30, 2006, the fair value of our 5.0% notes and 5.5% notes approximates theircarrying value. The interest rates on our convertible notes and capital leaseobligations are fixed and therefore not subject to interest rate risk.

We have noderivative instruments outstanding as of September 30, 2006.

As of September30, 2006 we did not have any financing arrangements that were not reflected inour balance sheet.

**Item4.         Controls and Procedures**

Our management,with the participation of our chief executive officer and chief financialofficer, evaluated the effectiveness of our disclosure controls and procedures(as defined in Rules 13a-15(e) and 15d-15(e) under the ExchangeAct) as of September 30, 2006. In designing and evaluating our disclosurecontrols and procedures, management recognized that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving their objectives and our managementnecessarily applied its judgment in evaluating the cost-benefit relationship ofpossible controls and procedures. Based on this evaluation, our chief executiveofficer and chief financial officer concluded that as of September 30, 2006,our disclosure controls and procedures were (1) designed to ensure thatmaterial information relating to us is made known to our chief executiveofficer and chief financial officer by others, particularly during the periodin which this report was prepared and (2) effective, in that they providereasonable assurance that information required to be disclosed by us in thereports we file or submit under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the SEC’srules and forms.

No change in ourinternal control over financial reporting (as defined inRules 13a-15(f) and 15d-15(f) under the Exchange Act) occurredduring the fiscal quarter ended September 30, 2006 that has materially affected,or is reasonably likely to materially affect, our internal control overfinancial reporting.

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**PART II OTHER INFORMATION**

**Item 6.    Exhibits**

(a)               Exhibits

The exhibits listed in the Exhibit Index are includedin this report.

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.
|                         |   | MILLENNIUM PHARMACEUTICALS, INC.  (Registrant)        |
|-------------------------|--------|-------------------------------------------------------|
|                    |   |                                                  |
| Dated: October 31, 2006 |   | /s/ MARSHA H. FANUCCI                                 |
|                    |   | Marsha H. Fanucci                                     |
| * *                |   | *Senior Vice President and Chief Financial Officer*   |
| * *                |   | *(principal financial and chief accounting  officer)* |

 

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**Exhibit Index**

 
| Exhibit No. | ** ** | **Description**                                                                                                                        |
|-------------|------------|----------------------------------------------------------------------------------------------------------------------------------------|
| 31.1        |       | Certification of principal executive officer  pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934,  as amended |
|        |       |                                                                                                                                   |
| 31.2        |       | Certification of principal financial officer  pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934,  as amended |
|        |       |                                                                                                                                   |
| 32.1        |       | Statement Pursuant to 18 U.S.C. §1350                                                                                             |
|        |       |                                                                                                                                   |
| 32.2        |       | Statement Pursuant to 18 U.S.C. §1350                                                                                             |

 

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