**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,DC 20549**

 

**FORM 10-Q**

 

| **(MARK  ONE)**                                                                                                                                                                                                               |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                          |   |   |
| **ý**                                                                                                                                                                                                                    | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                          |
| **For the Quarterly Period Ended  March 31, 2003**                                                                                                                                                                            |
|                                                                                                                                                                                                                          |
| **OR**                                                                                                                                                                                                                        |
|                                                                                                                                                                                                                          |
| **o**                                                                                                                                                                                                                         | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                          |   |   |
| **For the transition period from                 to                 .** |
|                                                                                                                                                                                                                          |   |   |
| **Commission File Number  0-28494**                                                                                                                                                                                      |
|                                                                                                                                                                                                                               |  |  |  |  |

 

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| **MILLENNIUM PHARMACEUTICALS, INC.**                    |
|---------------------------------------------------------|
| (Exact name of  registrant as specified in its charter) |

 

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

 

| **75 SIDNEY STREET, CAMBRIDGE, MASSACHUSETTS  02139**                   |
|------------------------------------------------------------------------------|
| (Address of principal  executive offices) (Zip Code)                         |
|                                                                         |
| **Registrant’s  telephone number, including area code:** (617) 679-7000 |

 

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

 

Number of shares outstanding of the registrant’s classof Common Stock as of May 2, 2003: 297,128,661

 

 

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**MILLENNIUMPHARMACEUTICALS, INC.**

** **

**FORM10-Q**

** **

**FOR THEQUARTER ENDED MARCH 31, 2003**

** **

**TABLE OFCONTENTS**

** **
| **PART I**  | **FINANCIAL INFORMATION**                                                                            |
|-------------|------------------------------------------------------------------------------------------------------|
|        |                                                                                                 |
| Item  1.    | Condensed  Consolidated Financial Statements                                                         |
|        |                                                                                                 |
|        | Condensed  Consolidated Balance Sheets as of March 31, 2003 and December 31, 2002                    |
|        |                                                                                                 |
|        | Condensed  Consolidated Statements of Operations for the three months ended March 31,  2003 and 2002 |
|        |                                                                                                 |
|        | Condensed  Consolidated Statements of Cash Flows for the three months ended March 31,  2003 and 2002 |
|        |                                                                                                 |
|        | Notes  to Condensed Consolidated Financial Statements                                                |
|        |                                                                                                 |
| Item  2.    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations          |
|        |                                                                                                 |
|        | Risk Factors That  May Affect Results                                                                |
|        |                                                                                                 |
| Item  3.    | Quantitative  and Qualitative Disclosures about Market Risk                                          |
|        |                                                                                                 |
| Item 4.     | Controls and  Procedures                                                                             |
|        |                                                                                                 |
| **PART II** | **OTHER INFORMATION**                                                                                |
|        |                                                                                                 |
| Item 2.     | Changes  in Securities and Use of Proceeds                                                           |
|        |                                                                                                 |
| Item 6.     | Exhibits and  Reports on Form 8-K                                                                    |
|        |                                                                                                 |
|        | Signatures                                                                                           |
|        |                                                                                                 |
|        | Certifications                                                                                       |
|        |                                                                                                 |
|        | Exhibit Index                                                                                        |

* *

*The following Millennium trademarksare used in this Quarterly Report on Form 10-Q:*   Millennium®, the Millennium “M” logo anddesign (registered), Millennium PharmaceuticalsTM, “Transcending the Limits ofMedicine”TM, VELCADETM (bortezomib) for Injection, INTEGRILIN® (eptifibatide)Injection and “Breakthrough Science. Breakthrough Medicine.”  All are covered by registrations or pendingapplications for registration in the U.S. Patent and Trademark Office and manyother countries.  CAMPATH® is aregistered trademark of ILEX Pharmaceuticals, L.P., TNKaseTM and Activase®are trademarks of Genentech, Inc., ReoPro® is a trademark of Eli Lilly andCompany and Aggrastat® is a trademark of Merck & Co., Inc.  *Othertrademarks used in this Quarterly Report on Form 10-Q are the property oftheir respective owners.*

 

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**PARTI  FINANCIAL INFORMATION**

 

**Item 1.    CondensedConsolidated Financial Statements**

 

**Millennium Pharmaceuticals, Inc.**

**Condensed Consolidated Balance Sheets**

 
| **(in  thousands, except per share amounts)**                                                                                                                |   | **March 31,  2003** |       | **December  31, 2002** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|------------|------------------------|------------|
|                                                                                                                                                         |   | **(unaudited)**     | ** ** |                   | ** ** |
| **Assets**                                                                                                                                                   |   |                |       |                   |       |
| Current assets:                                                                                                                                              |   |                |       |                   |       |
| Cash and cash equivalents                                                                                                                                    |   | $                   | 488,721    |                   | $          | 1,332,391 |   |
| Marketable securities                                                                                                                                        |   | 1,163,130           |       | 426,672                |       |
| Due from strategic alliance  partners                                                                                                                        |   | 58,786              |       | 44,869                 |       |
| Inventory                                                                                                                                                    |   | 111,284             |       | 105,346                |       |
| Prepaid expenses and other  current assets                                                                                                                   |   | 25,788              |       | 29,463                 |       |
| Total current assets                                                                                                                                         |   | 1,847,709           |       | 1,938,741              |       |
| Property and equipment, net                                                                                                                                  |   | 305,298             |       | 310,325                |       |
| Restricted cash                                                                                                                                              |   | 25,045              |       | 31,056                 |       |
| Other assets                                                                                                                                                 |   | 32,727              |       | 33,168                 |       |
| Goodwill                                                                                                                                                     |   | 1,200,693           |       | 1,200,510              |       |
| Developed technology, net                                                                                                                                    |   | 397,356             |       | 405,721                |       |
| Intangible assets, net                                                                                                                                       |   | 63,205              |       | 78,086                 |       |
| Total assets                                                                                                                                                 |   | $                   | 3,872,033  |                   | $          | 3,997,607 |   |
|                                                                                                                                                         |   |                |       |                   |       |
| **Liabilities  and Stockholders’ Equity**                                                                                                               |   |                |       |                   |       |
| Current liabilities:                                                                                                                                         |   |                |       |                   |       |
| Accounts payable                                                                                                                                             |   | $                   | 19,552     |                   | $          | 34,216 |   |
| Accrued expenses                                                                                                                                             |   | 179,476             |       | 181,318                |       |
| Current portion of deferred  revenue                                                                                                                         |   | 106,809             |       | 118,008                |       |
| Current portion of capital  lease obligations                                                                                                                |   | 16,141              |       | 16,045                 |       |
| Current portion of long  term debt                                                                                                                           |   | 599,960             |       | 599,960                |       |
| Total current liabilities                                                                                                                                    |   | 921,938             |       | 949,547                |       |
| Deferred revenue, net of  current portion                                                                                                                    |   | 3,113               |       | 1,704                  |       |
| Capital lease obligations,  net of current portion                                                                                                           |   | 58,809              |       | 61,338                 |       |
| Long term debt, net of  current portion                                                                                                                      |   | 83,325              |       | 83,325                 |       |
|                                                                                                                                                         |   |                |       |                   |       |
| 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: 296,371 shares at March 31, 2003 and  291,094 shares at December 31, 2002 issued and outstanding |   | 296                 |       | 291                    |       |
| Additional paid-in capital                                                                                                                                   |   | 4,468,961           |       | 4,432,040              |       |
| Deferred compensation                                                                                                                                        |   | (1,448              | )          | (1,952                 | )          |
| Accumulated other  comprehensive income                                                                                                                      |   | 7,699               |       | 4,119                  |       |
| Accumulated deficit                                                                                                                                          |   | (1,670,660          | )          | (1,532,805             | )          |
| Total stockholders’ equity                                                                                                                              |   | 2,804,848           |       | 2,901,693              |       |
| Total liabilities and  stockholders’ equity                                                                                                             |   | $                   | 3,872,033  |                   | $          | 3,997,607 |   |

 

The accompanying notes are anintegral part of these condensed consolidated financial statements.

 

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**Millennium Pharmaceuticals, Inc.**

**CondensedConsolidated Statements of Operations**

**(unaudited)**

 
|                                          |   | **Three  Months Ended March 31,** |     |
|-----------------------------------------------|--------|-----------------------------------|----------|
| **(in thousands, except per share  amounts)** |   | **2003**                          |     | **2002** |   |
|                                          |   |                              |     |   |   |
| Revenues:                                     |   |                              |     |   |   |
| Revenue under strategic  alliances            |   | $                                 | 30,834   |   | $ | 46,457 |   |
| Copromotion revenue                           |   | 50,881                            |     | 22,142 |   |
| Total revenues                                |   | 81,715                            |     | 68,599 |   |
|                                          |   |                              |     |   |   |
| Costs and expenses:                           |   |                              |     |   |   |
| Research and development                      |   | 126,810                           |     | 101,312 |   |
| Selling, general and  administrative          |   | 35,383                            |     | 37,241 |   |
| Cost of copromotion revenue                   |   | 18,696                            |     | 7,728 |   |
| Restructuring charges                         |   | 28,195                            |     | — |   |
| Acquired in-process  research and development |   | —                            |     | 242,000 |   |
| Amortization of intangibles                   |   | 9,676                             |     | 5,543 |   |
| Total costs and expenses                      |   | 218,760                           |     | 393,824 |   |
|                                          |   |                              |     |   |   |
| Loss from operations                          |   | (137,045                          | )        | (325,225 | ) |
|                                          |   |                              |     |   |   |
| Other income (expense):                       |   |                              |     |   |   |
| Investment income                             |   | 9,607                             |     | 28,157 |   |
| Interest expense                              |   | (10,417                           | )        | (6,793 | ) |
| Net loss                                      |   | $                                 | (137,855 | ) | $ | (303,861 | ) |
|                                          |   |                              |     |   |   |
| *Amounts  per common share:*                  |   |                              |     |   |   |
| Net loss, basic and diluted                   |   | $                                 | (0.47    | ) | $ | (1.20 | ) |
|                                          |   |                              |     |   |   |
| Weighted average shares,  basic and diluted   |   | 292,944                           |     | 253,901 |   |

 

The accompanying notes are anintegral part of these condensed consolidated financial statements.

 

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**Millennium Pharmaceuticals, Inc**

**Condensed Consolidated Statements of Cash Flows**

**(unaudited)**

 
|                                                                        |   | **Three  Months Ended March 31,** |     |
|-----------------------------------------------------------------------------|--------|-----------------------------------|----------|
| **(in thousands)**                                                          |   | **2003**                          |     | **2002** | ** ** |
| **Cash Flows  from Operating activities:**                                  |   |                              |     |   |   |
| Net loss                                                                    |   | $                                 | (137,855 | ) | $ | (303,861 | ) |
| Adjustments to reconcile  net loss to cash used in operating activities:    |   |                              |     |   |   |
| Acquired in-process  research and development                               |   | —                            |     | 242,000 |   |
| Depreciation and  amortization                                              |   | 25,650                            |     | 15,526 |   |
| Restructuring charges                                                       |   | 20,785                            |     | — |   |
| Amortization of deferred  financing cost                                    |   | 1,030                             |     | 618 |   |
| Realized (gain) loss on  marketable securities, net                         |   | 22                                |     | (4,887 | ) |
| Stock compensation expense                                                  |   | 3,328                             |     | 2,577 |   |
| Changes in operating assets  and liabilities:                               |   |                              |     |   |   |
| Due from strategic alliance  partners                                       |   | (13,917                           | )        | (33,317 | ) |
| Inventory                                                                   |   | (5,938                            | )        | (662 | ) |
| Prepaid expenses and other  current assets                                  |   | 2,653                             |     | (1,329 | ) |
| Restricted cash and other  assets                                           |   | 24,730                            |     | 1,232 |   |
| Accounts payable and  accrued expenses                                      |   | (16,326                           | )        | (10,896 | ) |
| Deferred revenue                                                            |   | (9,790                            | )        | (1,652 | ) |
| Net cash used in operating  activities                                      |   | (105,628                          | )        | (94,651 | ) |
|                                                                        |   |                              |     |   |   |
| **Cash Flows  from Investing activities:**                                  |   |                              |     |   |   |
| Investments in marketable  securities                                       |   | (793,879                          | )        | (305,947 | ) |
| Proceeds from sales and  maturities of marketable securities                |   | 42,256                            |     | 236,836 |   |
| Purchase of property and  equipment                                         |   | (15,906                           | )        | (31,113 | ) |
| Net cash acquired in COR  Therapeutics, Inc. acquisition                    |   | —                            |     | 309,147 |   |
| Net cash (used in) provided  by investing activities                        |   | (767,529                          | )        | 208,923 |   |
|                                                                        |   |                              |     |   |   |
| **Cash Flows  from Financing activities:**                                  |   |                              |     |   |   |
| Net proceeds from issuance  of common stock and exercises of warrants       |   | 28,571                            |     | 24,804 |   |
| Net proceeds from employee  stock purchases                                 |   | 5,532                             |     | 4,743 |   |
| Principal payments on  capital leases                                       |   | (4,031                            | )        | (3,677 | ) |
| Net cash provided by  financing activities                                  |   | 30,072                            |     | 25,870 |   |
|                                                                        |   |                              |     |   |   |
| (Decrease) increase in cash  and cash equivalents                           |   | (843,085                          | )        | 140,142 |   |
| Equity adjustment from  foreign currency translation                        |   | (585                              | )        | (234 | ) |
| Cash and cash equivalents,  beginning of period                             |   | 1,332,391                         |     | 35,993 |   |
| Cash and cash equivalents,  end of period                                   |   | $                                 | 488,721  |   | $ | 175,901 |   |
|                                                                        |   |                              |     |   |   |
| **Supplemental  Cash Flow Information:**                                    |   |                              |     |   |   |
| Cash paid for interest                                                      |   | $                                 | 10,571   |   | $ | 3,396 |   |
|                                                                        |   |                              |     |   |   |
| **Supplemental  Disclosure of Noncash Investing and Financing Activities:** |   |                              |     |   |   |
| Equipment acquired under  capital leases                                    |   | $                                 | 1,598    |   | $ | — |   |
| Construction costs for  laboratory and office space                         |   | 1,394                             |     | 8,672 |   |
| Acquisition of COR  Therapeutics, Inc., including direct transaction costs  |   | —                            |     | 1,833,329 |   |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

 

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**MillenniumPharmaceuticals, Inc.**

**Notes to Condensed Consolidated Financial Statements**

 

**1.             Basisof Presentation**

 

The accompanying condensed consolidated financialstatements have been prepared in accordance with accounting principlesgenerally accepted in the United States for interim financial information andwith the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements.  Inthe opinion of management, all adjustments, consisting of normal recurringaccruals and revisions of estimates, considered necessary for a fairpresentation of the accompanying condensed consolidated financial statementshave been included.  Interim results forthe three month period ended March 31, 2003 are not necessarily indicative ofthe results that may be expected for the year ended December 31, 2003.  For further information, refer to thefinancial statements and accompanying footnotes included in the Company’sAnnual Report on Form 10-K for the fiscal year ended December 31, 2002, whichwas filed with the Securities and Exchange Commission (SEC) on March 7, 2003.

 

**2.****                                      Summaryof Significant Accounting Policies**

 

*(a)          CashEquivalents and Marketable Securities*

 

Cashequivalents consist principally of money market funds and corporate bonds withmaturities of three months or less at the date of purchase. Marketablesecurities consist of high-grade corporate bonds, asset-backed and U.S. governmentagency securities.

 

Managementdetermines the appropriate classification of marketable securities at the timeof purchase and reevaluates such designation at each balance sheet date.Marketable securities at March 31, 2003 and December 31, 2002 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 is included in investment income.Realized gains and losses and declines in value judged to beother-than-temporary on available-for-sale securities are included ininvestment income. The cost of securities sold is based on the specificidentification method. Interest and dividends on securities classified asavailable-for-sale are included in investment income.

 

During the three months ended March 31, 2003 and 2002,the Company recorded realized gains of $0.04 million and$7.2 million, respectively, and realized losses of $0.06 million and$2.4 million, respectively on marketable securities.

 

*(b)          Inventory*

 

Inventories are stated at thelower of cost (first in, first out) or market. Inventory consists of currently marketed products and product candidatesawaiting regulatory approval which were capitalized based upon management’sjudgment of probable near term commercialization.  Inventories are reviewed periodically for slow-moving or obsoletestatus based on sales activity, both projected and historical.  At March 31, 2003, the Company’s totalinventories include $0.6 million of inventory for products that have not yetbeen approved for sale.

 

Inventory consists of thefollowing (in thousands):

 
|            |   | **March 31, 2003** |    | **December 31, 2002** |   |
|-----------------|--------|--------------------|---------|-----------------------|--------|
| Bulk materials  |   | $                  | 71,678  |                  | $      | 67,102 |   |
| Work in process |   | 3,490              |    | —                |   |
| Finished goods  |   | 36,116             |    | 38,244                |   |
|            |   | $                  | 111,284 |                  | $      | 105,346 |   |

 

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*(c)**                                Goodwill and Intangible Assets*

 

Intangible assets consist of specifically identifiedintangible assets.  Goodwill is theexcess of any purchase price over the estimated fair market value of nettangible assets acquired not allocated to specific intangible assets.Intangible assets consist of the following (in thousands):

 
|                          |   | **March 31, 2003**         |    |
|-------------------------------|--------|----------------------------|---------|
|                          |   | **Gross  Carrying Amount** |    | **Accumulated  Amortization** | ** ** | **Reclassification** | ** ** | **Restructuring  Related Asset  Impairment** | ** ** | **Intangibles,  Net** | ** ** |
| Amortized intangible assets   |   |                       |    |   |   |   |   |   |   |   |   |
| Developed technology          |   | $                          | 435,000 |   | $ | (37,644 | ) | $ | — |   | $ | — |   | $ | 397,356 |   |
|                          |   |                       |    |   |   |   |   |   |   |   |   |
| Core technology               |   | $                          | 18,712  |   | $ | (15,319 | ) | $ | — |   | $ | — |   | $ | 3,393 |   |
| Other                         |   | 16,560                     |    | (2,178 | ) | (2,320 | ) | (11,250 | ) | 812 |   |
| Unamortized intangible assets |   |                       |    |   |   |   |   |   |   |   |   |
| Trademark                     |   | 59,000                     |    | — |   | — |   | — |   | 59,000 |   |
| Intangible assets             |   | $                          | 94,272  |   | $ | (17,497 | ) | $ | (2,320 | ) | $ | (11,250 | ) | $ | 63,205 |   |

 
|                          |   | **December 31, 2002**     |    |
|-------------------------------|--------|---------------------------|---------|
|                          |   | **Gross Carrying Amount** |    | **Accumulated Amortization** |   | **Intangibles, Net** |   |
| Amortized intangible assets   |   |                      |    |   |   |   |   |
| Developed technology          |   | $                         | 435,000 |   | $ | (29,279 | ) | $ | 405,721 |   |
|                          |   |                      |    |   |   |   |   |
| Core technology               |   | $                         | 18,712  |   | $ | (14,149 | ) | $ | 4,563 |   |
| Other                         |   | 16,560                    |    | (2,037 | ) | 14,523 |   |
| Unamortized intangible assets |   |                      |    |   |   |   |   |
| Trademark                     |   | 59,000                    |    | — |   | 59,000 |   |
| Intangible assets             |   | $                         | 94,272  |   | $ | (16,186 | ) | $ | 78,086 |   |

 

Amortization of intangibles is computed using thestraight-line method over the useful lives of the respective assets as follows:

 
| Developed  technology |   | 13  years          |
|-----------------------|--------|--------------------|
| Core  technology      |   | 4  years           |
| Other                 |   | 2  to 4 years |

 

As required by Financial Accounting Standards Board(“FASB”) Statement of Financial Accounting Standards (“SFAS”) SFASNo. 142, “Goodwill and Other Intangible Assets,” goodwill and indefinitelived intangible assets are not amortized but are reviewed annually for impairment,or more frequently if impairment indicators arise. Separable intangible assetsthat are not deemed to have an indefinite life are amortized over their usefullives and reviewed for impairment when events or changes in circumstancessuggest that the assets may not be recoverable. The Company tests for goodwillimpairment annually, on October 1 and whenever events or changes incircumstances suggest that the carrying amount may not be recoverable.

 

Since the date of the Company’s acquisition of CORTherapeutics, Inc. (“COR”) which generated a significant amount of goodwill(see Note 3), the Company has experienced a significant decline in marketcapitalization due to a decline in stock price.  The Company continually monitors business and market conditions toassess whether an impairment indicator exists. If the Company were to determine that an

 

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impairment indicator exists, it would be required to perform animpairment test which might result in a material impairment charge to thestatement of operations.

 

*(d)          Revenue Recognition*

 

*Copromotionrevenue*

 

Copromotion revenue includes the Company’s share ofprofits from the sale of INTEGRILIN® (eptifibatide) Injection incopromotion territories by Schering-Plough Ltd. and Schering Corporation(collectively “SGP”).  Also included incopromotion revenue are reimbursements from SGP of the Company’s cost ofcopromotion revenue and royalties from SGP on sales of INTEGRILIN outside thecopromotion territory.  The Companyrecognizes revenue when SGP ships INTEGRILIN to wholesalers and records it netof allowances, if any.  The Company’scosts of copromotion revenue consist of certain manufacturing-related andadvertising and promotional expenses associated with the sale of INTEGRILINwithin copromotion territories.  TheCompany defers certain manufacturing-related expenses until the time SGP shipsrelated product to its customers inside and outside copromotion territories.  Advertising and promotional expenses areexpensed as incurred.  Deferred revenueincludes payments from SGP received prior to the period in which the relatedcontract revenues are earned.  Deferredrevenue also includes cash advances from SGP to the Company for the Company’sprepayments to its manufacturers of INTEGRILIN.

 

*Strategicalliance revenue*

 

The Company recognizes revenue from non-refundable,up-front, license and milestone payments, not specifically tied to a separateearnings process, ratably over the term of the research contract.  When payments are specifically tied to aseparate earnings process, revenue is recognized when the specific performanceobligation associated with the payment is completed. Performance obligationstypically consist of significant milestones in the development life cycle ofthe related technology, such as initiation of clinical trials, filing forapproval with regulatory agencies and approvals by regulatory agencies. Inaddition, when appropriate, the Company recognizes revenue from certainresearch payments based upon the level of research services performed duringthe period of the research contract.

 

*(e)           NetLoss Per Common Share*

 

Basic net loss per common shareis computed using the weighted average number of common shares outstandingduring the period. Diluted net loss per common share is typically computedusing the weighted average number of common and dilutive common equivalentshares from stock options, warrants and convertible debt using the treasurystock method. However, for all periods presented, diluted net loss per share isthe same as basic net loss per share as the inclusion of weighted averageshares of common stock issuable upon the exercise of stock options, warrantsand convertible debt would be antidilutive.

 

*(f)            ComprehensiveLoss*

 

Comprehensive loss was $134.3 million and $333.6million for the three months ended March 31, 2003 and 2002, respectively.  Comprehensive loss is composed of net loss,unrealized gains and losses on marketable securities and cumulative foreigncurrency translation adjustments. Accumulated other comprehensive income at March 31, 2003 included $6.6million of unrealized gains on marketable securities and $1.1 million ofcumulative foreign currency translation adjustments.

 

*(g)          Stock-Based Compensation*

 

The Company has elected to followAccounting Principles Board Opinion No. 25, “Accounting for Stock Issuedto Employees” (“APB 25”) and related interpretations, in accounting forits stock-based compensation plans, rather than the alternative fair valueaccounting method provided for under SFAS No. 123, “Accounting forStock-Based Compensation” (“SFAS No. 123”). Under APB 25, when the exercise price of options granted equals themarket price of the underlying stock on the date of grant, no compensationexpense is recognized. In

 

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accordance with Emerging Issues Task Force (“EITF”) 96-18, the Companyrecords compensation expense equal to the fair value of options granted tonon-employees over the vesting period, which is generally the period ofservice.

 

The following table illustrates the effect on net lossand loss per share if the Company had applied the fair value recognitionprovisions of SFAS No. 123 to stock-based employee compensation (in thousands,except per share amounts):

 
|                                                                                                          |   | **Three  Months Ended March 31,** |     |
|---------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|----------|
|                                                                                                          |   | **2003**                          |     | **2002** |   |
| Net loss                                                                                                      |   | $                                 | (137,855 | ) | $ | (303,861 | ) |
| Add:  Stock-based compensation as reported in  the Statement of Operations                               |   | 445                               |     | 297 |   |
| Deduct:  Total stock-based compensation expense  determined under fair value based method for all awards |   | (19,374                           | )        | (34,484 | ) |
| Pro forma net  loss                                                                                           |   | $                                 | (156,784 | ) | $ | (338,048 | ) |
|                                                                                                          |   |                              |     |   |   |
| Amounts per  common share:                                                                                    |   |                              |     |   |   |
| Basic and  diluted - as reported                                                                              |   | $                                 | (0.47    | ) | $ | (1.20 | ) |
| Basic and  diluted - pro forma                                                                                |   | $                                 | (0.54    | ) | $ | (1.33 | ) |

 

The weighted-average per sharefair value of options granted during the three months ended March 31, 2003 and2002 was $4.90 and $14.80, respectively.

 

The fair value of stock optionsand common shares issued pursuant to the stock option and stock purchase plansat the date of grant were estimated using the Black-Scholes model withthe following weighted-average assumptions:

 
|                  |   | **Stock Options** |   | **Stock  Purchase Plan** |   |
|-----------------------|--------|-------------------|--------|-------------------------------|--------|
|                  |   | **2003**          |   | **2002**                      |   | **2003** |   | **2002** |   |
| Expected life (years) |   | 5.5               |   | 5.4                           |   | 0.5 |   | 0.5 |   |
| Interest rate         |   | 2.51              | %      | 4.47                          | %      | 1.27 | % | 2.36 | % |
| Volatility            |   | .86               |   | .87                           |   | .86 |   | .87 |   |

 

The Company has never declaredcash dividends on any of its capital stock and does not expect to do so in theforeseeable future.

 

*(h)          SegmentInformation*

 

SFAS No. 131, “Disclosures about Segments of anEnterprise and Related Information” (“SFAS No. 131”), establishes standards forthe way public business enterprises report information about operating segmentsin annual financial statements and requires that those enterprises reportselected information about operating segments in interim financial reports.SFAS No. 131 also establishes standards for related disclosures about productsand services, geographic areas, and major customers.

 

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The Company operates in one business segment, whichprimarily focuses on the discovery, development and commercialization ofproprietary therapeutic and diagnostic human healthcare products and services.  All ofthe Company’s copromotion revenue is currently related to sales of INTEGRILIN®(eptifibatide) Injection.

 

*(i)           InformationConcerning Market and Source of Supply*Concentration

 

Millennium and SGP copromote INTEGRILIN in the UnitedStates and share any profits and losses. INTEGRILIN has received regulatoryapproval in the European Union and a number of other countries for variousindications. The Company has exclusively licensed to SGP rights to marketINTEGRILIN outside the United States, and SGP pays the Company royalties basedon these sales of INTEGRILIN. The Company has long-term supply arrangementswith two suppliers for the bulk product and with another two suppliers, one ofwhich is SGP, for the filling and final packaging of INTEGRILIN.

 

*(j)            Accounting Pronouncements*

 

In June 2002, the FASBissued SFAS No. 146, “Accounting for Costs Associated with Exit or DisposalActivities” (“SFAS No. 146”).  SFAS No.146 requires that a liability for a cost associated with an exit or disposalactivity be recognized and measured initially at its fair value in the periodin which the liability is incurred, except for one-time termination benefitsthat meet certain requirements.  TheCompany was required to adopt SFAS No. 146 for activities that were initiatedafter December 31, 2002, with early application encouraged.  The Company adopted SFAS No. 146 as ofDecember 1, 2002 in association with the discontinuation of certain discoveryefforts in December 2002 (See Note 7).

 

In December 2002, the FASB issued SFASNo. 148, “Accounting for Stock Based Compensation—Transition and Disclosure”(“SFAS No. 148”). SFAS 148 provides two additional transition methods forentities that adopt the fair value method of accounting for stock basedcompensation. Further, the statement requires disclosure of comparableinformation for all companies regardless of whether, when, or how an entityadopts the fair value based method of accounting. These disclosures are nowrequired for interim periods in addition to the traditional annual disclosure.SFAS 148 is effective for fiscal periods ending after December 15, 2002.The Company has provided the new disclosures in *Stock-Based Compensation* in Note 2.

 

In January 2003, the FASB issued Interpretation No.46, “Consolidation of Variable Interest Entities, an Interpretation ofAccounting Research Bulletin No. 51” (“FIN 46”).  FIN 46 provides a new consolidation model which determinescontrol and consolidation based on potential variability in gains andlosses.  The provisions of FIN 46 areeffective for enterprises with variable interests in variable interest entitiescreated after January 31, 2003.  Forpublic companies with variable interest in variable interest entities createdbefore February 1, 2003 the provisions of FIN 46 are to be applied no laterthan July 1, 2003.

 

**3.             CORAcquisition**

 

On February 12, 2002, the Company acquired COR for anaggregate purchase price of $1.8 billion primarily consisting of 55.1 millionshares of Millennium common stock pursuant to the merger agreement between theCompany and COR.  The transaction wasrecorded as a purchase for accounting purposes and the Company’s consolidatedfinancial statements include COR’s operating results from the date of theacquisition.  The purchase price wasallocated to the assets purchased and the liabilities assumed based upon theirrespective fair values, with the excess of the purchase price over theestimated fair value of net tangible assets allocated to specific intangibleassets, including developed technology and trademark, and goodwill. Developedtechnology is being amortized over the remaining patent life, or thirteenyears.  The Company recorded a one-time,noncash charge to operations in the quarter ended March 31, 2002 of $242.0million for acquired in-process research and development.  The valuation of acquired in-process researchand development represents the estimated fair value related to incompleteprojects that, at the time of the acquisition, had no alternative future useand for which technological feasibility had not been established.

 

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**4.             Revenuesand Strategic Alliances**

 

Historically, the Company hasformed strategic alliances with major participants in marketplaces where itsdiscovery expertise and technology platform are applicable. These agreementsinclude alliances based on the transfer of technology platforms, allianceswhich combine technology transfer with a focus on a specific disease ortherapeutic approach, and disease-focused programs under which the Companyconducts research funded by its partners. The Company’s disease-based alliancesand alliances which combine technology-transfer with a disease focus aregenerally structured as research collaborations. Under these arrangements, theCompany performs research in a specific disease area aimed at discoveries leadingto novel pharmaceutical (small molecule) products. These alliances generallyprovide research funding over an initial period, with renewal provisions,varying by agreement. Under these agreements, the Company’s partners may makeup-front payments, additional payments upon the achievement of specificresearch and product development milestones, ongoing research funding and/orpay royalties or in some cases profit-sharing payments to the Company basedupon any product sales resulting from the collaboration.

 

*Research and Discovery Alliances*

 

The Company has entered intoresearch, development, technology-transfer and commercializationarrangements with major pharmaceutical and biotechnology companies relating toa broad range of therapeutic and predictive medicine products and services.These alliances provide Millennium with the opportunity to receive variouscombinations of equity investments, license fees and research funding, and mayprovide certain additional payments contingent upon the achievement of researchand regulatory milestones and royalties and/or share profits if the Company’scollaborations are successful in developing and commercializing products.

 

In connection with one suchagreement, in March 2003, Abbott Laboratories (“Abbott”) invested thefinal  $28.6 million of a $250.0 millioncommitment in Millennium common stock pursuant to the March 2001 InvestmentAgreement between the Company and Abbott.

 

**5.****                                      Commitments**

 

**Lease Commitments**

 

On August 4, 2000, theCompany entered into lease agreements, relating to two buildings for laboratoryand office space in Cambridge, Massachusetts. The rent obligation for the firstof these buildings began in July 2002. The rent obligation for the secondbuilding is expected to commence on the earlier of (a) October 1,2003 or (b) the date on which the Company commences occupancy of thebuilding. Each lease is for a term of seventeen years with options that permitrenewals for additional periods. The Company is responsible for a portion of theconstruction costs for both buildings and was deemed to be the owner during theconstruction period of each building under Emerging Issues Task Force (“EITF”)97-10, “The Effect of Lessee Involvement in Asset Construction.” InJuly 2002, upon completion of the construction period of the firstbuilding, the Company recorded the lease as a capital lease.

 

**6.****                                      ConvertibleDebt**

 

TheCompany currently has the following outstanding convertible notes:

 

•                                          5.0% convertible subordinated notes dueMarch 1, 2007, that are convertible into Millennium common stock at anytime prior to maturity at a price equal to $34.21 per share (the “5.0% notes”);

 

•                                          4.5% convertible senior notes due June 15,2006, that are convertible into Millennium common stock at any time prior tomaturity at a price equal to $40.61 per share (the “4.5% notes”); and

 

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•                                          5.5% convertible subordinated notes dueJanuary 15, 2007, that are convertible into Millennium common stock at anytime prior to maturity at a price equal to $42.07 per share (the “5.5% notes”).

 

At March 31, 2003, the Companyhad an aggregate of approximately $600.0 million of principal of the 5.0%and 4.5% notes outstanding after the Company completed a cash repurchase offerto the noteholders in April 2002. In April 2002, the Company amendedthe terms of these notes to add put options permitting noteholders to requirethe Company on April 29, 2003, to repurchase the 4.5% notes for cash at aprice of $1,095 per $1,000 of principal amount and the 5.0% notes for cash at aprice of $1,085 per $1,000 of principal amount, resulting in a maximumaggregate payment obligation of $654.0 million. These put options on thenotes are derivative instruments. SFAS No. 133, “Accounting for DerivativeInstruments and Hedging Activities” requires us to record all derivativeinstruments in the balance sheet at fair value, or $54.0 million at March 31,2003.

 

On March 31, 2003, the Companyannounced its required cash offers to the holders of the 5.0% notes and the4.5% notes under the April 2002 amended terms of the note under whichnoteholders have the right to require the Company to exchange the notes forcash on April 29, 2003 (See Note 8).

 

At March 31, 2003, the Companyhad $83.3 million of principal of 5.5% notes outstanding.

 

Under the terms of these notes,the Company is required to make semi-annual interest payments on theoutstanding principal balance of the 5.5% notes on January 15 andJuly 15 of each year, of the 5.0% notes on March 1 andSeptember 1 of each year and of the 4.5% notes on June 15 andDecember 15 of each year. All required interest payments to date have beenmade.

 

**7.             Restructuring**

 

In December 2002, theCompany announced the first in a series of steps to realign the Company’sresources to become a fully-integrated biopharmaceutical company. The Companyhas discontinued certain discovery research efforts, reduced headcount in thediscovery group and will reallocate other resources to enhance its commercialcapabilities. Such actions resulted in the recognition of restructuring relatedcharges in the fourth quarter of 2002 and again in the first quarter of2003.  Costs of termination benefitsrelate to severance packages, out-placement services and career counseling foremployees affected by the initiative. Facilities include the estimated remaining rental obligation, net ofestimated sublease income, in facilities that the Company no longeroccupies.  Asset impairment chargesinclude the write down of certain intangible assets and the write-off of leaseholdimprovements in facilities the Company is no longer occupying due to thediscontinuation of the related discovery efforts.  These costs are included in restructuring charges in thestatement of operations and accrued expenses on the balance sheet at March 31,2003. The table below displays the activity and liability balance of thisrestructuring charge.

 

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The table below displays theactivity and liability balance of this restructuring charge (in thousands):

 
|                   |   | **Balance at   12/31/02** |   | **Charges** |   | **Payments** |   | **Asset   Impairment** |   | **Balance at   3/31/03** |   |
|------------------------|--------|---------------------------|--------|-------------|--------|--------------|--------|------------------------|--------|--------------------------|--------|
| Termination  benefits  |   | $                         | 2,710  |        | $      | 1,146        |   | $                      | (2,462 | )                        | $      | — |   | $ | 1,394 |   |
| Facilities             |   | —                    |   | 5,876       |   | (845         | )      | —                 |   | 5,031                    |   |
| Asset Impairment       |   | —                    |   | 20,785      |   | —       |   | (20,785                | )      | —                   |   |
| Contract termination   |   | —                    |   | 371         |   | —       |   | —                 |   | 371                      |   |
| Other associated costs |   | 82                        |   | 17          |   | (70          | )      | —                 |   | 29                       |   |
| Total                  |   | $                         | 2,792  |        | $      | 28,195       |   | $                      | (3,377 | )                        | $      | (20,785 | ) | $ | 6,825 |   |

 

**8.****                                      SubsequentEvents**

 

On April 29, 2003, the Company completed therepurchase of $577.8 million of the outstanding 5.0% notes and 4.5% notes foran aggregate payment of approximately $637.0 million, including principal,accrued interest and the put premium. Approximately $22.1 million of these notes were not tendered in theoffer and remain outstanding as of April 29, 2003.  As a result of the repurchase, the Company will record a chargeof approximately $10.0 million which represents the write off of approximately$12.0 million of unamortized original debt issuance costs associated with thenotes, offset by $1.9 million relating to the expired premium put on theuntendered bonds.

 

On April 22, 2003, Aventis Pharmaceuticals, Inc.(“Aventis”) exercised its option to terminate the Technology Transfer Agreementbetween the Company and Aventis dated June 22, 2000, effective on the thirdanniversary of the Agreement, July 21, 2003. Pursuant to the terms of the Agreement, upon providing this notice tothe Company, Aventis paid the Company $40.0 million in consideration for futureuse of certain Millennium technology transferred to Aventis.

 

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**Item 2.  Management’sDiscussion and Analysis of Financial Condition and Results of Ope****rations**

 

Our management’s discussion and analysis of ourfinancial condition and results of our operations are subject to importantfactors that could cause our actual results to differ materially from thoseindicated. See “Risk Factors That May Affect Results.”

 

**Overview**

 

We are a leading biopharmaceutical company focused ondeveloping and commercializing products in several disease areas. We currentlyhave a cardiovascular disease product on the market and a cancer product underreview for marketing approval. We also have potential products in earlierstages of development in each of those areas and in our inflammatory diseaseand metabolic disease areas.

 

Our strategy is to advance multiple products inseveral focus areas through clinical trials and regulatory approvals and to beinvolved in the marketing and sale of many of these products. We plan todevelop and commercialize many of our products on our own, but will seekdevelopment and commercial partners when we believe that to do so will maximizeproduct value. For example, we plan to enter into sales and marketing allianceswith major pharmaceutical companies for products in disease areas that requirelarge sales forces or to address markets outside the United States. Inparticular, we are seeking a strategic arrangement relating to the sales andmarketing of VELCADETM (bortezomib) for Injection.

 

As we continue to market INTEGRILIN® (eptifibatide)Injection, develop our product pipeline, commercialize additional products andenter into new commercial alliances, we expect to continue our shift from adiscovery-focused company towards a product-based company.

 

***Commercialized Product and ProductCandidate***

 

*INTEGRILIN*

 

INTEGRILIN, a market-leading cardiovascular product,has been marketed in the United States since 1998 and outside the United Statessince 1999. We acquired INTEGRILIN as part of our February 2002acquisition of COR Therapeutics, Inc., or COR. In collaboration withSchering-Plough Ltd. and Schering-Plough Corporation, together referred toas SGP, INTEGRILIN is being marketed in the United States, in all 15 memberstates of the European Union and in other countries, including Argentina,Australia, Brazil, Canada, India, Japan, Mexico, Singapore, South Africa,Switzerland and Thailand.

 

INTEGRILIN is approved for marketing in the UnitedStates for the treatment of patients with acute coronary syndromes and for useat the time of a balloon angioplasty procedure. This is a broader set ofindications than the other two GP IIb-IIIa inhibitors approved for marketing inthe United States. We believe that INTEGRILIN sales for its current indicationswill continue to increase if early usage in patients with acute coronarysyndromes becomes more common and if the number of hospitals using INTEGRILINincreases. We are also pursuing opportunities to expand the market potentialfor INTEGRILIN by increasing the approved therapeutic uses for this product.

 

*VELCADE*

 

Our product candidate, VELCADE, is the most advancedof our drug candidates in clinical development. We completed our filing of anew drug application, or NDA, with the United States Food and DrugAdministration, or FDA, covering VELCADE in January 2003. InFebruary 2003, we submitted a complete Marketing AuthorisationApplication, or MAA, to the European Agency for the Evaluation of MedicinalProducts, or EMEA, for the approval of VELCADE. If these applications areapproved, we plan to market VELCADE as a treatment for patients with relapsedand refractory multiple myeloma, a form of bone marrow cancer.

 

In March 2003, the FDA accepted for review and grantedPriority Review designation of our NDA for VELCADE for the treatment ofrelapsed and refractory multiple myeloma. Priority Review is granted by the

 

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FDA to an NDA for a new treatment that addresses an unmet medical need.The FDA expedites the approval process for such an NDA by reducing the targetreview period for the application from ten months to six months. Acceptance ofthe filing means that the FDA has made a threshold determination that the NDAis sufficiently complete to permit a substantive review.  The NDA submission was based primarily uponthe results of the phase II SUMMIT trial, a multi-center study of 202 patentswith relapsed and refractory multiple myeloma which were presented in full atthe December 2002 meeting of the American Society of Hematology.

 

***Revenues***

 

Historically, we have derived our revenue frompayments from our strategic alliances with major pharmaceutical companies. Withthe acquisition of COR, we began generating revenue based on sales ofINTEGRILIN® (eptifibatide) Injection. We expect that our revenue mix willcontinue to shift to product-based revenue as we develop our product pipeline,commercialize additional products and enter into new commercial alliances, andour discovery-focused alliances conclude.

 

*INTEGRILINRevenue*

 

Beginning in the first quarter of 2002, we beganrecognizing copromotion revenue that principally relates to our share of theprofits from the sale of INTEGRILIN by SGP in copromotion territories under ourcollaboration agreement with SGP to jointly develop and commercializeINTEGRILIN on a worldwide basis. Copromotion revenues also include recognitionof reimbursement from SGP of our cost of copromotion revenue and royalties fromSGP on sales of INTEGRILIN outside the copromotion territory.

 

*Revenuefrom Strategic Alliances*

 

We have entered into research, development,technology-transfer and commercialization arrangements with majorpharmaceutical and biotechnology companies relating to a broad range of therapeuticand predictive medicine products and services. These alliances provide us withthe opportunity to receive various combinations of equity investments, licensefees and research funding, and may provide certain additional paymentscontingent upon our achievement of research and regulatory milestones androyalties and/or share profits if our collaborations are successful indeveloping and commercializing products.

 

These alliances are usually established for a fixedterm, typically five years. Upon expiration of the initial term, unlessrenewed, revenue funding under these agreements ceases. We expect revenues fromour discovery-focused alliances to decline as existing alliances expire.

 

In addition to our collaboration agreement with SGP,our major alliances from which we have or may recognize revenues include:

 

•                                          a March 2001 joint development andcommercialization agreement with Abbott Laboratories, or Abbott, in metabolicdiseases;

 

•                                          a June 2000 joint development andcommercialization agreement with Aventis Pharmaceuticals, Inc., orAventis, in inflammatory disease; and

 

•                                          a September 1998 research agreement withBayer AG, or Bayer, in cardiovascular disease, and specified areas of oncology,pain, hematology, atherosclerosis, thrombosis, urology and viral infections.

 

In 2002, our research alliance and technology transferagreement with Monsanto Company, or Monsanto, expired at the end of itsoriginal five-year term. We may receive royalty payments in the future if leadtargets identified during the term of the alliance are further developed byMonsanto into commercial products.

 

In April 2003, Aventis exercised its option toterminate the technology transfer agreement between Aventis and us dated June22, 2000, effective July 21, 2003.  Uponproviding this notice, Aventis paid us $40.0 million in consideration forfuture use of certain technology transferred to Aventis prior to thetermination date.

 

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Termination of the technology transfer agreement has no effect upon theexisting five-year joint development and commercialization agreement.  We expect the joint development andcommercialization agreement with Aventis in the field of inflammatory diseaseto continue through 2005.

 

In 2003, we expect the research phase of our five-yearalliance with Bayer to terminate, although Bayer has an option for anadditional year. We expect Bayer to continue to conduct research anddevelopment work on the targets discovered in the alliance, which may result insuccess payments and royalties to us in the future.

 

We have also entered into a number of arrangements forthe commercialization of products under which we share the costs for thedevelopment and eventual commercialization of specified compounds and may receiveor be obligated to make product revenue, royalty, milestone or other payments.In addition to operating expenses we incur as a result of our alliances, wehave also made commitments to purchase debt and/or equity securities undercertain arrangements. These arrangements include:

 

•                                          aDecember 2001 in-license and development agreement with Xenova Group, plcfor novel compounds for the treatment of solid tumors in cancer;

 

•           a November 2001collaboration agreement with XOMA Ltd., or XOMA, pursuant to which XOMA isdeveloping two biotherapeutic agents in the cardiovascular disease area; and

 

•                                          anApril 2001 joint developmentagreement with BZL Biologics, L.L.C. for chemotherapeutic agent conjugated andradiolabeled biotherapeutics products in the cancer area.

 

***Acquisitions***

 

As part of our business strategy, we consider jointdevelopment, merger and acquisition opportunities that may provide us withproducts on the market, products in later stage development or capabilities toaccelerate our downstream drug discovery efforts.

 

*COR*

 

On February 12, 2002, we acquired COR for anaggregate purchase price of $1.8 billion through the issuance ofapproximately 55.1 million shares of our common stock.  We recorded the transaction as a purchasefor accounting purposes and our consolidated financial statements include COR’soperating results from the date of the acquisition. The purchase price wasallocated, based upon an independent valuation, to the assets purchased andliabilities assumed based upon their respective fair values, with the excess ofthe purchase price over the estimated fair market value of net tangible assetsacquired allocated to in-process research and development, developedtechnology, trademark and goodwill. The charge to earnings in the quarter endedMarch 31, 2002 for acquired in-process research and development was$242.0 million. Through the merger, we added approximately 300 newemployees and a leased facility in South San Francisco, California, andacquired INTEGRILIN® (eptifibatide) Injection for the treatment of acutecoronary syndromes and substantial research capabilities in the areas ofcardiovascular disease and oncology.

 

In connection with the COR acquisition, we assumedCOR’s $600.0 million in convertible debt resulting from two offerings: the5.0% convertible subordinated notes due March 1, 2007 (the “5.0% notes”)and the 4.5% convertible senior notes due June 15, 2006 (the “4.5%notes”). In April 2002, we amended the terms of these notes to add putoptions permitting noteholders to require us on April 29, 2003, torepurchase the 4.5% notes for cash at a price of $1,095 per $1,000 of principalamount and the 5.0% notes for cash at a price of $1,085 per $1,000 of principalamount, resulting in a maximum aggregate payment obligation of $654.0 million.These put options on the notes are derivative instruments. Statement ofFinancial Accounting Standards (“SFAS”) No. 133, “Accounting forDerivative Instruments and Hedging Activities” requires us to record allderivative instruments in the balance sheet at fair value. We determined thefair value of these derivative instruments to be $54.0 million in theaggregate and recorded a liability on the balance sheet and a non-cash chargein the quarter ended June 30, 2002. Changes in the fair value of thesederivatives are recognized in other income (expense).

 

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On March 31, 2003, we announcedour required cash offers to the holders of the 5.0% notes and the 4.5% notesunder the April 2002 amended terms of the notes under which noteholders havethe right to require us to exchange the notes for cash on April 29, 2003.  On April 29, 2003, we completed therepurchase of $577.8 million of the outstanding 5.0% notes and 4.5% notes foran aggregate payment of approximately $637.0 million, including principal,accrued interest and the put premium. Approximately $22.1 million of these notes were not tendered in theoffer and remain outstanding as of April 29, 2003.  As a result of the repurchase, we will record a charge ofapproximately $10.0 million which represents the write off of approximately$12.0 million of unamortized original debt issuance costs associated with thenotes, offset by $1.9 million relating to the expired premium put on theuntendered bonds.

 

***Disposition of Investment in Joint Venture***

 

Through our acquisition of LeukoSite, Inc., orLeukoSite, we became a party to a joint venture partnership, Millennium andILEX Partners, L.P., or M&I, for development of CAMPATH® (alemtuzumab)humanized monoclonal antibody. We accounted for our investment in the jointventure under the equity method of accounting. On December 31, 2001, ILEXacquired our equity interest in M&I, which owns the CAMPATH product. Inexchange for our equity interest in M&I, ILEX paid us $20.0 million onDecember 31, 2001 plus additional consideration contingent upon futuresales of CAMPATH. We earned $40.0 million of such consideration in thesecond quarter of 2002. We are entitled to additional payments of $40.0 millionin each of 2003 and 2004 if sales of CAMPATH in the U.S. meet specifiedthresholds. In addition, we are entitled to additional payments from ILEX ifU.S. sales of CAMPATH after 2004 exceed specified annual thresholds.

 

***Financial Resources***

 

In order to fund our working capital and for othercorporate purposes, we have completed several financings in the past severalyears. The actual and planned uses of proceeds include:

 

•                                          funding ourgrowth;

 

•           developing products, including conductingpreclinical testing and clinical trials;

 

•                                          manufacturingand marketing products that are approved for commercial sale;

 

•                                          acquiringbusinesses and products that expand or complement our business; and

 

•                                          meeting ourdebt service obligations.

 

During the quarter ended March 31, 2003 we received$28.6 million from Abbott for purchases of approximately 3.7 million shares ofour common stock under our equity investment agreement with Abbott.  During the quarter ended March 31, 2002, wereceived $28.6 million from Abbott for purchases of approximately1.4 million shares of our common stock under this agreement.

 

As of March 31, 2003, we had approximately$1.7 billion in cash, cash equivalents and marketable securities. Weprimarily invest in high-grade corporate bonds, asset-backed and U.S.government agency securities. Our objectives are to preserve principal,maintain a high degree of liquidity to meet operating needs and obtaincompetitive returns subject to prevailing market conditions. We expect thatincome from these investments will decline as our cash and marketablesecurities balances decline and will fluctuate based upon market conditions.

 

We are expanding our commercial operations throughinternal growth and by utilizing the capabilities of our alliance partners. Asour discovery-focused alliances expire, we are increasingly focusing ourefforts on entering into commercial alliances. We expect to continue to managecosts through workforce planning, facilities consolidation and productportfolio management.

 

We expect to incur increasing expenses and are likelyto incur operating losses for at least the next several years, primarily due tothe expansion of our research and development programs and as a result of ourefforts to

 

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advance acquired products or our own development programs tocommercialization. In particular, we anticipate significant expendituresrelated to the development, launch and commercialization of VELCADETM(bortezomib) for Injection and increasing our development capabilities for ourclinical and pre-clinical product candidates.

 

We expect to continue to pursue additional alliancesand to consider joint development, merger, or acquisition opportunities thatmay provide us with access to products on the market or in later stages ofcommercial development. Our results of operations for any period may not beindicative of future results as our revenues and expenses may fluctuate fromperiod to period or year to year.

 

**CriticalAccounting Policies and Significant Judgments and Estimates**

 

Our management’s discussion and analysis of ourfinancial condition and results of operations are based on our consolidatedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States of America. The preparationof these financial statements requires us to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and the disclosureof contingent assets and liabilities at the date of the financial statements aswell as the reported revenues and expenses during the reporting periods. On anongoing basis, we evaluate our estimates and judgments, including those relatedto revenue recognition, inventory, intangible assets and goodwill. We base ourestimates on historical experience and on various other factors that arebelieved to be reasonable under the circumstances, the results of which formthe basis for making judgments about the carrying value of assets andliabilities that are not readily apparent from other sources. Actual resultsmay differ from these estimates under different assumptions or conditions.

 

While our significant accounting policies are morefully described in Note 2 to our consolidated financial statementsincluded in our Form 10-K, we believe the following accounting policies aremost critical to aid in fully understanding and evaluating our reportedfinancial results.

 

***Revenue***

 

In connection with our strategic alliances, werecognize revenue from non-refundable, up-front, license and milestonepayments, not specifically tied to a separate earnings process, ratably overthe term of the research contract. When the period of deferral cannot bespecifically identified from the contract, management estimates the periodbased upon other critical factors contained within the contract. We continuallyreview these estimates which could result in a change in the deferral periodand might impact the timing and the amount of revenue recognized. When paymentsare specifically tied to a separate earnings process, revenue is recognizedwhen the specific performance obligation associated with the payment iscompleted. Performance obligations typically consist of significant milestonesin the development life cycle of the related technology, such as initiation ofclinical trials, filing for approval with regulatory agencies and approvals byregulatory agencies. In addition, when appropriate, we recognize revenue fromcertain research payments based upon the level of research services performedduring the period of the research contract.

 

We recognize the research funding portion of our Bayeralliance on a percentage-of-completion basis. The percentage-of-completion isdetermined based upon the actual level of work performed during the period ascompared to our estimate of the total work to be performed under the alliance.We continually review these estimates and adjust as necessary, as experiencedevelops or new information becomes known. Any adjustments to these estimateswill impact the timing and the amount of revenue to be recognized.

 

We recognize copromotion revenue when SGP shipsINTEGRILIN® (eptifibatide) Injection to wholesalers. Copromotion revenueincludes our share of the profits from the sales of INTEGRILIN, reimbursementsof our cost of copromotion revenue, and royalties from SGP on sales ofINTEGRILIN outside the copromotion territory. We communicate with SGP tocalculate our share of the profits from the sales of INTEGRILIN on a monthlybasis. The calculation includes estimates of the amount of advertising andpromotional expenses and other costs of copromotion incurred on a monthlybasis. We also communicate with SGP to estimate royalties earned on salesoutside the copromotion territory. Adjustments to our estimates are based uponactual information that we receive subsequent to our reporting deadlines. Ourestimates are adjusted

 

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on a monthly basis and historically have not been significant due toperiodic communication with our partner. Significant adjustments in futurereporting periods could impact the timing and the amount of revenue to berecognized.

 

***Inventory***

 

Inventory consists of currently marketed products andproduct candidates awaiting regulatory approval which were capitalized basedupon management’s judgment of probable near term commercialization.  Inventory primarily represents bulkmaterials used in the production of INTEGRILIN® (eptifibatide) Injection andINTEGRILIN finished goods inventory on hand, valued at cost. Inventories arereviewed periodically for slow-moving or obsolete status based on salesactivity, both projected and historical. Our current sales projections providefor full utilization of the inventory balance. If product sales levels differfrom projections or a launch of a new product is delayed, inventory may not befully utilized and could be subject to impairment, at which point we wouldrecord a reserve to adjust inventory to its net realizable value.

 

At March 31, 2003, totalinventories include $0.6 million of inventory for products that have not yetbeen approved for sale.

 

***Intangible Assets***

 

We have acquired significant intangible assets that wevalue and record. Those assets which do not yet have regulatory approval andfor which there are no alternative uses are expensed as acquired in-processresearch and development, and those that are specifically identified and havealternative future uses are capitalized. We use a discounted cash flow model tovalue intangible assets acquired.  The discountedcash flow model requires assumptions about the timing and amount of future cashinflows and outflows, risk, the cost of capital, and terminal values. Each ofthese factors can significantly affect the value of the intangible asset. Weengage independent valuation experts who review our critical assumptions forsignificant acquisitions of intangibles. We review intangible assets forimpairment on a periodic basis using an undiscounted net cash flows approach.If the undiscounted cash flows of an intangible asset are less than thecarrying value of an intangible asset, the intangible asset is written down tothe discounted cash flow value. Where cash flows cannot be identified for anindividual asset, the review is applied at the lowest group level for whichcash flows are identifiable.

 

***Goodwill***

 

We adopted the Financial Accounting Standards Board(“FASB”) SFAS No. 142, “Goodwill and Other Intangible Assets” effectiveJanuary 1, 2002 and reclassified amounts to goodwill, which werepreviously allocated to assembled workforce. Upon adoption, we ceased theamortization of goodwill. We completed our transitional assessment of goodwillin the first quarter of 2002 and no impairment loss was recognized. We willcontinue to test for goodwill impairment annually, on October 1.

 

On October 1, 2002, we performed our annualgoodwill impairment test and determined that no impairment existed on thatdate. However, since the date of acquisition of COR, which generated asignificant amount of goodwill, we have experienced a significant decline inmarket capitalization due to a decline in stock price. We continually monitorbusiness and market conditions 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 materialimpairment charge to our statement of operations.

 

**AccountingPronouncements**

 

In January 2003, the FASB issued Interpretation No.46, “Consolidation of Variable Interest Entities, an Interpretation ofAccounting Research Bulletin No. 51” (“FIN 46”).  FIN 46 provides a new consolidation model which determinescontrol and consolidation based on potential variability in gains and losses.  We are required to apply the provisions of FIN46 for variable interests in variable interest entities created afterJanuary 31, 2003

 

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immediately.  We are required toapply to the provisions of FIN 46 no later than July 1, 2003 for variable interestsin variable interest entities created before February 1, 2003.

 

**Results of Operations**

 

**Quarters Ended March 31, 2003 andMarch 31, 2002**

 

For the three months ended March31, 2003 (the “2003 Period”), we reported a net loss of $137.9 million, or$0.47 per basic and diluted share, compared to a net loss of$303.9 million, or $1.20 per basic and diluted share for the three monthsended March 31, 2002 (the “2002 Period”).

 

Revenue increased to$81.7 million for the 2003 Period from $68.6 million for the 2002Period.  Copromotion revenue, based onworldwide sales of INTEGRILIN® (eptifibatide) Injection, was $50.9 million forthe 2003 Period compared to $22.1 million for the same period in 2002, whichonly included six and one half weeks of sales due to the acquisition of COR onFebruary 12, 2002.  Worldwide sales ofINTEGRILIN in the 2003 Period, as provided to us by SGP, were$89.0 million, a 31 percent increase over 2002 driven by increasedvolume and higher average selling prices. Revenue under strategic alliances decreased from $46.5 million inthe 2002 Period to $30.8 million in the 2003 Period. Strategic alliancerevenue decreased due to the termination of certain of our discovery-focusedstrategic alliances, including our research alliance and technology transferagreement with Monsanto which expired at the end of its original five-yearterm.

 

Included in 2003 Period revenueis $2.5 million of revenue that was recognized in prior years relating tothe adoption of SAB 101. Included in 2002 Period revenue is $11.1 millionof revenue that was recognized in prior years relating to the adoption of SAB101. The remaining amount of revenue to be recognized from the cumulativecharge is approximately $6.1 million, which will be recognized through December2003.

 

Research and development expensesincreased to $126.8 million for the 2003 Period from $101.3 millionfor the 2002 Period. The research and development expense categories with themost significant increases were personnel costs, followed by clinical trialcosts and facilities expenses. The increase was primarily attributable to ourcontinued investment in building a sustainable product pipeline, with increasesin clinical costs related to advancing our lead oncology program, VELCADETM(bortezomib) for Injection, and clinical investments made in INTEGRILIN.

 

As of March 31, 2003, excludingINTEGRILIN and VELCADE, we had nine product candidates in various stages ofclinical trials.  Completion of clinicaltrials 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. CMR International, an independent pharmaceutical datacollection agency, estimates that clinical trials in our areas of focus aretypically completed over the following timelines:

 
| **Clinical  Phase** |   | **Estimated Completion Period** | ** ** |
|---------------------|--------|---------------------------------|------------|
|                |   |                            |       |
| Phase I             |   | 1-2 years                       |       |
| Phase II            |   | 2-3 years                       |       |
| Phase III           |   | 2-3 years                       |       |

 

Upon successful completion ofphase III trials, we intend to submit the results to the FDA to supportregulatory approval of the product. However, we cannot be certain that any ofour products will prove to be safe or effective, will receive regulatoryapprovals, or will be successfully commercialized.

 

Our primary mechanism forbudgeting and tracking these costs is by type of cost incurred rather than byproject. The types of costs include the following categories: personnel costs,clinical costs, laboratory costs, technology license fees, research costs andfacilities costs. The duration and the cost relating to preclinical testing

 

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and clinical trials may vary significantly over the life of a project.Our joint development arrangements with our strategic partners also result invariability in our development costs.

 

Selling, general andadministrative expenses decreased from $37.2 million for the 2002 Period to$35.4 million for the 2003 Period. The decrease was primarily attributable toconsulting expenses not present in the 2003 Period partially offset by theincreased resources devoted to sales and marketing activities as we prepare forthe launch of VELCADETM (bortezomib) for Injection, pending approval by the FDA.

 

Cost of copromotion revenueincreased to $18.7 million for the 2003 Period compared to $7.7 millionfor the 2002 Period, which only included six and one half weeks of salesrelated activities due to the acquisition of COR on February 12, 2002.  Cost of copromotion revenue consists ofcertain manufacturing-related and advertising and promotional expensesassociated with the sale of INTEGRILIN® (eptifibatide) within copromotionterritories. Cost of copromotion revenue fluctuates in relation to the domesticsales of INTEGRILIN and based on the proportion of the joint activities that weundertake in our collaboration with SGP.

 

In December 2002, weannounced the first in a series of steps we will take to realign our resourcesto those of a fully-integrated biopharmaceutical company. We havediscontinued certain discovery research efforts, reduced related headcount andwill reallocate certain resources to enhance our commercial capabilities. As aresult, we have recorded a restructuring charge of $28.2 million in the2003 Period related to facilities, asset impairment and personnel costs.  Facilities include the estimated remainingrental obligation, net of estimated sublease income, in facilities that we nolonger occupy.  Asset impairmentincludes the write down of certain intangible assets and the write-off ofleasehold improvements in facilities we are no longer occupying due to thediscontinuation of the related discovery efforts.

 

We recorded a one-time, non-cash charge to operationsin the 2002 Period of $242.0 million for acquired in-process research anddevelopment in connection with the COR acquisition. The valuation of acquiredin-process research and development represents the estimated fair value relatedto incomplete projects that, at the time of the COR acquisition, had noalternative future use and for which technological feasibility had not beenestablished.  Our five significantresearch and development projects acquired in connection with COR are expectedto continue in line with the estimates set forth in our 2002 Form 10-K.

 

Amortization of intangible assetsin the 2003 Period and 2002 Period relates to specifically identifiedintangible assets from the COR, LeukoSite and CDC acquisitions. Amortizationexpense increased to $9.7 million in the 2003 Period from$5.5 million in the 2002 Period due to a full quarter of COR relatedamortization in the 2003 Period compared to six and one half weeks ofamortization in the 2002 Period.

 

Investment income decreased to$9.6 million in the 2003 Period from $28.2 million in the 2002Period. The decrease is primarily attributable to a lower average balance ofinvested funds in the 2003 Period and unfavorable market conditions resultingin lower yields. Because we realized significant gains from our investmentportfolio during 2002, we expect realized gains on the sales of marketablesecurities to decrease in future periods.

 

Interest expense increased to$10.4 million in the 2003 Period from $6.8 million in the 2002Period. Increased interest is due to a full quarter of interest expense in the2003 Period due to the assumption of $600.0 million of principal of the5.0% notes and 4.5% notes as compared to six and one half weeks of interestexpense in the 2002 Period.

** **

**Liquidity and Capital Resources**

 

We require cash to fund ouroperating expenses, to make capital expenditures, acquisitions and investmentsand to pay debt service, including principal and interest and capital leasepayments. We have also made strategic commitments to purchase debt and/orequity securities from certain of our partners in accordance with our Boardapproved policies and our business needs. These investment commitments aregenerally in smaller companies. We may lose money in these investments and ourability to liquidate these investments is in some cases very limited. We mayalso owe our partners milestone payments and royalties and we have committed tofund development costs incurred by some of our partners.

 

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As described above under “*Overview—Financial Resources*,” we expectthat our cash requirements for all of these uses will increase as the scale ofour operations grows.

 

Historically, we have funded ourcash requirements primarily through the following:

 

•                       payments from our strategic collaboratorsincluding license fees, milestone payments and research funding;

 

•                       equity investments by our strategic collaborators;

 

•                       equity and debt financings;

 

•                       property and equipment financings; and

 

•                       net cash acquired in connection with acquisitions.

 

In the future, we expect tocontinue to fund our cash requirements from some of these external sources aswell as the sales of INTEGRILIN® (eptifibatide) Injection and other products.In particular, we are entitled to additional committed research and developmentfunding under a number of our strategic alliances and we expect to receiveadditional substantial payments from ILEX as a result of our sale of our jointventure interest in M&I. We believe that the key factors that could affectour internal and external sources of cash are:

 

•                       revenues and margins from sales of INTEGRILIN andother products and services for which we obtain marketing approval in thefuture;

 

•                       the success of our clinical and preclinicaldevelopment programs;

 

•                       our ability to gain regulatory approval andcommercialize our clinical product candidates;

 

•                       the receptivity of the capital markets tofinancings by biopharmaceutical companies;

 

•                       our ability to enter into additional strategiccollaborations and to maintain existing and new collaborations and the successof such collaborations; and

 

•                       the sales levels of CAMPATH® (alemtuzumab)humanized monoclonal antibody.

 

As of March 31, 2003, we hadapproximately $1.7 billion in cash, cash equivalents and marketablesecurities. This excludes $25.0 million of interest-bearing marketablesecurities classified as restricted cash on our balance sheet as of March 31,2003, which serve as collateral for letters of credit securing leasedfacilities.

 

***Cash Flows***

 

We used $105.6 million ofcash in operating activities in the 2003 Period and $94.7 million in the2002 Period. The principal use of cash in operating activities in both 2003 and2002 was to fund our net loss.

 

We used $767.5 million of cash ininvesting activities in the 2003 Period. Investing activities provided cash of $208.9 million in the 2002Period.  The principal uses of funds inthe 2003 Period and 2002 Period were purchases of marketable securities. Theprincipal source of funds in the 2002 Period is from the cash acquired in theCOR acquisition.

 

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Financing activities provided netcash of $30.1 million in the 2003 Period and $25.9 million in the2002 Period. The principal sources of net cash from financing activities werethe sales of common stock to Abbott in the 2003 and 2002 Periods.

 

We believe that our existing cashand cash equivalents, internally generated funds and the anticipated cashpayments from our current strategic alliances will be sufficient to support ourexpected operations, fund our debt service obligations and fund our capital commitmentsfor the near term.

 

***ContractualObligations***

 

Our major outstanding contractualobligations relate to our convertible notes, capital leases from equipmentfinancings, facilities leases and commitments to purchase debt and/or equitysecurities from certain partners. Our facilities lease expense in future yearswill increase over past years as a result of new lease arrangements enteredinto in 2000 and 2001 described below and the facilities leases assumed by usin the COR acquisition.

 

As of March 31, 2003 ourconvertible notes aggregated $683.3 million in principal amountoutstanding. All three issues of notes require semi-annual interest paymentsthrough maturity. All required interest payments have been made to date. Thesenotes consisted of:

 

•                       $83.3 million of our 5.5% notes;

 

•                       $300.0 million of our 4.5% notes; and

 

•                       $300.0 million of our 5.0% notes.

 

In April 2002, we amendedthe terms of the 4.5% notes and the 5.0% notes to add put options permittingnoteholders to require us on April 29, 2003, to repurchase the 4.5% notesfor cash at a price of $1,095 per $1,000 of principal amount and the 5.0% notesfor cash at a price of $1,085 per $1,000 of principal amount, resulting in amaximum aggregate payment obligation of $654.0 million. These put optionson the notes are derivative instruments. SFAS No. 133 requires us to record all derivative instruments inthe balance sheet at fair value. We determined the fair value of thesederivative instruments to be $54.0 million in the aggregate and we recordeda liability on the balance sheet and a non-cash charge in the quarter endedJune 2002. Changes in the fair value of these derivatives are recognizedin other income (expense).

 

On April 29, 2003, we completed the repurchase of$577.8 million of the outstanding 5.0% notes and 4.5% notes for an aggregatepayment of approximately $637.0 million, including principal, accrued interestand the put premium.  Approximately$22.1 million of these notes were not tendered in the offer and remainoutstanding as of April 29, 2003.  As aresult of the repurchase, we will record a charge of approximately $10.0million which represents the write off of approximately $12.0 million ofunamortized original debt issuance costs associated with the notes, offset by$1.9 million relating to the expired premium put on the untendered bonds.

 

In February 2001, we enteredinto a lease agreement relating to a building for laboratory and office spacein Cambridge, England. The lease has a term of 20 years and is expected tocommence in 2003 upon completion of construction. We are responsible for aportion of the construction costs, which we estimate to be approximately$21.0 million. Rent is expected to be approximately $2.6 million peryear based upon foreign currency exchange rates at March 31, 2003 and issubject to market adjustments at the end of the 5th, 10thand 15th years.

 

We also have lease obligationsrelating to two buildings for laboratory and office space in Cambridge,Massachusetts. The rent obligation for the first of these buildings began inJuly 2002. The rent obligation for the second building is expected tocommence on the earlier of (a) October 1, 2003 or (b) the dateon which we commence occupancy of the building. Rent is calculated on an escalatingscale ranging from approximately $7.6 million, per building per year, toapproximately $9.7 million, per building per year. Each lease is for aterm of seventeen years. The Company is responsible for a portion of theconstruction costs for both buildings and was

 

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deemed to be the owner during the construction period of each buildingunder Emerging Issues Task Force (“EITF”) 97-10, “The Effect of LesseeInvolvement in Asset Construction.” As a result, during the 2003 Period, werecorded approximately $1.4 million and during the 2002 Period, werecorded approximately $8.7 million of additional non-cash constructioncosts under these leases.

 

**Subsequent Events**

 

On April 29, 2003, we completed the repurchase of$577.8 million of the outstanding 5.0% notes and 4.5% notes for an aggregatepayment of approximately $637.0 million, including principal, accrued interestand the put premium.  Approximately$22.1 million of these notes were not tendered in the offer and remain outstandingas of April 29, 2003.  As a result ofthe repurchase, we will record a charge of approximately $10.0 million whichrepresents the write off of approximately $12.0 million of unamortized originaldebt issuance costs associated with the notes, offset by $1.9 million relatingto the expired premium put on the untendered bonds.

 

On April 22, 2003, Aventis exercised its option toterminate the technology transfer agreement between Aventis and us dated June22, 2000, effective July 21, 2003.  Uponproviding this notice, Aventis paid us $40.0 million in consideration forfuture use of certain technology transferred to Aventis prior to thetermination date.  Termination of thetechnology transfer agreement has no effect upon the existing five-year jointdevelopment and commercialization agreement. We expect the joint development and commercialization agreement withAventis in the field of inflammatory disease to continue through 2005.

 

**RISK FACTORS THAT MAY AFFECT RESULTS**

 

This Quarterly Report on Form 10-Q and certain other communicationsmade by us contain forward-looking statements, including statements about ourgrowth and future operating results, discovery and development of products,potential acquisitions, strategic alliances and intellectual property. For thispurpose, any statement that is not a statement of historical fact should beconsidered a forward-looking statement. We often use the words “believe,”“anticipate,” “plan,” “expect,” “intend” and similar expressions to helpidentify forward-looking statements.

 

We cannot assure investors thatour assumptions and expectations will prove to have been correct. Importantfactors could cause our actual results to differ materially from thoseindicated or implied by forward-looking statements. Factors that could cause orcontribute to such differences include those factors discussed below. Weundertake no intention or obligation to update or revise any forward-lookingstatements, whether as a result of new information, future events or otherwise.

 

**Regulatory Risks**

 

**Our business maybe harmed if we do not obtain approval to market INTEGRILIN® (eptifibatide)Injection for additional therapeutic uses.**

 

INTEGRILIN has been approved fora specific set of therapeutic uses. Part of our strategy to grow our business isto market INTEGRILIN for additional indications. To do so, we will need toobtain the appropriate regulatory approvals. If we are unsuccessful inobtaining authorizations for the expanded use of INTEGRILIN, our revenues maynot grow as expected and our business and operating results will be harmed.

 

**We may not beable to obtain marketing approval for products or services resulting from ourdevelopment efforts.**

 

The products that we aredeveloping require research and development, extensive preclinical studies andclinical trials and regulatory approval prior to any commercial sales. Thisprocess is expensive and lengthy, often taking a number of years. In somecases, the length of time that it takes for us to achieve various regulatoryapproval milestones affects the payments that we are eligible to receive underour strategic alliance agreements.

 

We may need to successfullyaddress a number of technological challenges in order to complete developmentof our products. Moreover, these products may not be effective in treating anydisease or may prove to have

 

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undesirable or unintended side effects, toxicities or othercharacteristics that may preclude our obtaining regulatory approval or preventor limit commercial use.

 

In particular, in early 2003, ourfilings of an NDA with the FDA and an MAA with the EMEA to market VELCADETM(bortezomib) for Injection for the treatment of patients with relapsed andrefractory multiple myeloma were accepted for review. These regulatory agenciesmay not grant marketing approval for VELCADE within the time frames that weanticipate or at all. For example, it is possible that these regulatoryagencies will not approve VELCADE for marketing based on the phase II data wesubmitted prior to our successful completion of the ongoing phase III clinicaltrials of VELCADE and the filing of the results of such trials with theseagencies.

 

**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 obtainmarketing approval, along with the manufacturing processes, post-approvalclinical data and promotional activities for such product, will be subject tocontinual review and periodic inspections by the FDA and other regulatorybodies. Later discovery of previously unknown problems with our products ormanufacturing processes, or failure to comply with regulatory requirements, mayresult in restrictions on such products or manufacturing processes, withdrawalof the products from the market or the imposition of civil or criminalpenalties.

 

If we fail to comply with therules applicable to the Medicare and Medicaid programs, we could be subject tothe imposition of civil or criminal penalties and/or the exclusion from theseprograms.

 

**We have onlylimited experience in regulatory affairs, and some of our products may be basedon new technologies; these factors may affect our ability or the time werequire to obtain necessary regulatory approvals.**

 

We have only limited experiencein filing and prosecuting the applications necessary to gain regulatoryapprovals. Moreover, certain of the products that are likely to result from ourresearch and development programs may be based on new technologies and newtherapeutic 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, Strategy and Industry**

 

**Our revenuesover the next several years will be materially dependent on the commercialsuccess of INTEGRILIN® (eptifibatide) Injection and our ability to commence andincrease sales of VELCADETM (bortezomib) for Injection.**

 

Our revenues over the nextseveral years will be materially dependent on the commercial success ofINTEGRILIN, which has been on the market in the United States sinceJune 1998. Marketing outside the United States commenced in mid-1999. Inaddition, our business plan contemplates our receiving marketing authorizationto sell VELCADE for the treatment of patients with multiple myeloma and otherindications, including solid tumors. We will not achieve our business plan, andwe may be forced to scale back our operations and research and developmentprograms, if:

 

•              we do not obtain regulatoryapproval to sell INTEGRILIN for additional therapeutic uses;

 

•                                          changing practice and prescribing patterns resultin lower than expected sales for INTEGRILIN in our current indications;

 

•                                          we do not obtain regulatory approval to begin tomarket VELCADE initially for the treatment of patients with multiple myelomaand, in the future, for solid tumors; or

 

•                                          the sales of VELCADE do not meet our expectations.

 

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**Sales ofINTEGRILIN****® (eptifibatide) Injection in particular reporting periods may beaffected by fluctuations in buying patterns.**

 

A significant portion ofINTEGRILIN domestic pharmaceutical sales is made to major drug wholesalers.These sales are affected by fluctuations in the buying patterns of thesewholesalers and the corresponding changes in inventory levels maintained bythem. These changes may not reflect underlying prescriber demand. Additionally,we expect that sales from INTEGRILIN will generally be lower in the summermonths because fewer medical procedures are typically performed during thesemonths. These fluctuations in sales of INTEGRILIN may have a material adverseeffect on our results of operations for particular reporting periods.

 

**Becausediscovering drugs based upon genomics is new, it is possible that our discoveryprocess will not result in commercial products or services.**

 

The process of discovering drugsbased upon genomics is new and evolving rapidly. We focus a portion of ourresearch on diseases that may be linked to several or many genes working incombination. Both we and the general scientific and medical communities haveonly a limited understanding of the role genes play in these diseases. To date,we have not commercialized any products discovered through our genomicsresearch, and we may not be successful in doing so in the future. In addition,relatively few products based on gene discoveries have been developed andcommercialized by others. Rapid technological development by us or others mayresult in compounds, products or processes becoming obsolete before we recoverour development expenses.

 

**We face growingand new competition, which may result in others discovering, developing orcommercializing products and services before or more successfully than us.**

 

The fields of biotechnology andpharmaceuticals are highly competitive. Many of our competitors aresubstantially larger than we are, and these competitors have substantiallygreater capital resources, research and development staffs and facilities thanwe have. Furthermore, many of our competitors are more experienced than we arein drug discovery, development and commercialization, obtaining regulatoryapprovals and product manufacturing and marketing. As a result, our competitorsmay discover, develop and commercialize pharmaceutical products or servicesbefore us. In addition, our competitors may discover, develop and commercializeproducts or services that render non-competitive or obsolete the products orservices that we or our collaborators are seeking to develop and commercialize.Finally, changing marketing practices regulations or guidelines may adverselyaffect our ability to utilize our preferred set of marketing tools, therebyreducing our competitiveness.

 

Due to the incidence and severityof cardiovascular diseases, the market for therapeutic products that addressthese diseases is large, and we expect the already intense competition in thisfield to increase. Our most significant competitors are major pharmaceuticalcompanies and other biotechnology companies. The two products that competedirectly with INTEGRILIN in the GP IIb-IIIa market segment are ReoPro®(abciximab), which is produced by Johnson & Johnson and sold byJohnson & Johnson and Eli Lilly and Company, and Aggrastat® (tirofibanHCl), which is produced and sold by Merck & Co., Inc. Othercompetitive factors that could negatively affect the GP IIb-IIIa market segmentinclude the market and economic positioning of drug-coated stents; expanded useof heparin replacement therapies in patients undergoing balloon angioplasty;and expanded use of ADP inhibitors in patients presenting with non-ST-segmentelevation in acute coronary syndrome.

 

Competitive factors that couldaffect VELCADETM (bortezomib) for Injection product sales include the timing ofregulatory approval, if any, of competitive products; our pricing decisions andthe pricing decisions of our competitors; and the increasing rate ofdevelopment of new multiple myeloma treatments. Multiple myeloma therapies indevelopment may reduce the number of patients available for VELCADE treatmentthrough enrollment of these patients in clinical trials of the competing product.We also will face competition from Celgene Corporation which markets Thalomid®(thalidomide), a treatment in leprosy, which has an increasing use in multiplemyeloma based on data published in peer-reviewed publications. There are alsoother potentially competitive therapies that are in late stage clinicaldevelopment for multiple myeloma.

 

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

 

We must provide the FDA andforeign regulatory authorities with preclinical and clinical data demonstratingthat our products are safe and effective before they can be approved forcommercial sale. Clinical development, including preclinical testing, is along, expensive and uncertain process. It may take us several years to completeour testing, and failure can occur at any stage of testing. Interim results ofpreclinical or clinical studies do not necessarily predict their final results,and acceptable results in early studies might not be seen in later studies. Anypreclinical or clinical test may fail to produce results satisfactory to theFDA. Preclinical and clinical data can be interpreted in different ways, whichcould delay, limit or prevent regulatory approval. Negative or inconclusiveresults from a preclinical study or clinical trial, adverse medical eventsduring a clinical trial or safety issues resulting from products of the sameclass of drug could cause a preclinical study or clinical trial to be repeatedor a program to be terminated, even if other studies or trials relating to theprogram are successful. For example, in 2002, we discontinued the developmentof MLN977, an oral drug for the treatment of chronic asthma, because threepatients in a phase II clinical study experienced elevations in their liverenzymes that were likely related to the use of the product.

 

We may not complete our plannedpreclinical or clinical trials on schedule or at all. We may not be able toconfirm the safety and efficacy of the results of long-term clinical trialswhich may result in a delay or failure to commercialize our products. Inaddition, due to the substantial demand for clinical trial sites in thecardiovascular area, we may have difficulty obtaining a sufficient number ofappropriate patients or clinician support to conduct our clinical trials asplanned. As a result, we may have to expend substantial additional funds toobtain access to resources or delay or modify our plans significantly. Ourproduct development costs will increase if we experience delays in testing orapprovals. Significant clinical trial delays could allow our competitors tobring products to market before we do and impair our ability to commercialize ourproducts or potential products.

 

**We may not beable to obtain biological material, including human and animal DNA and RNAsamples, required for our genetic studies, which could delay or impede our drugdiscovery efforts.**

 

Our drug discovery strategy usesgenetic studies of families and populations prone to particular diseases. Thesestudies require the collection of large numbers of DNA and RNA samples fromaffected individuals, their families and other suitable populations as well asanimal models. The availability of DNA and RNA samples and other biologicalmaterial is important to our ability to discover the genes responsible forhuman diseases through human genetic approaches and other studies. Competitionfor these resources is intense. Access to suitable populations, materials andsamples could be limited by forces beyond our control, including governmentalactions. Some of our competitors may have obtained access to significantly morefamily and population resources and biological materials than we have obtained.As a result, we may not be able to obtain access to DNA and RNA samplesnecessary to support our human discovery programs.

 

**Because many ofthe products and services that we develop will be based on new technologies andtherapeutic approaches, the market may not be receptive to these products andservices upon their introduction.**

 

The commercial success of any ofour products and services for which we may obtain marketing approval from theFDA or other regulatory authorities will depend upon their acceptance by themedical community and third party payors as clinically useful, cost-effectiveand safe. Many of the products and services that we are developing are basedupon new technologies or therapeutic approaches. As a result, it may be more difficultfor us to achieve market acceptance of our products and services, particularlythe first products and services that we introduce to the market based on newtechnologies and therapeutic approaches. Our efforts to educate the medicalcommunity on these potentially unique approaches may require greater resourcesthan would be typically required for products and services based onconventional technologies or therapeutic approaches. The safety, efficacy,convenience and cost-effectiveness of our products as compared to competitiveproducts will also affect market acceptance.

 

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**Ethical, legaland social issues related to the use of genetic information and genetic testingmay cause less demand for our products.**

 

Genetic testing has raised issuesregarding confidentiality and the appropriate uses of the resultinginformation. This could lead to governmental authorities calling for limits onor regulation of the use of genetic testing or prohibiting testing for geneticpredisposition to certain diseases. Any of these scenarios could hinder ourability to enroll patients in clinical trials which are necessary for us togain regulatory approval of our products.

 

**Risks Relating to Our Financial Results and Need forFinancing**

 

**We have incurredsubstantial losses and expect to continue to incur losses. We will not besuccessful unless we reverse this trend.**

 

We have incurred losses in allbut two of the years since our inception. We expect to continue to incur substantialoperating losses in future periods. Prior to our acquisition of COR,substantially all of our revenues resulted from payments from collaborators,and not from the sale of products. In 2002, we recognized significantinvestment income from our investment portfolio. We expect that investmentincome will be lower in 2003 as a result of lower cash balances and lowerreturns on investments.

 

We expect to increase ourspending as we continue to expand our research and development programs andcommercialization activities. As a result, we will need to generate significantrevenues to pay these costs and achieve profitability. We cannot be certainwhether or when we will become profitable because of the significantuncertainties with respect to our ability to generate revenues from the sale ofproducts and services and from existing and potential future strategicalliances.

 

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

 

We will require substantial fundsto conduct research and development, including preclinical testing and clinicaltrials of our potential products. We will also require substantial funds tomeet our obligations to our collaborators and maximize the prospective benefitsto us from our alliances, manufacture and market products and services that areapproved for commercial sale, including INTEGRILIN® (eptifibatide) Injection,and meet our debt service obligations. Additional financing may not beavailable when we need it or may not be available on favorable terms.

 

If we are unable to obtainadequate funding on a timely basis, we may have to delay or curtail our researchand development programs or our product commercialization activities. We couldbe required to seek funds through arrangements with collaborators or othersthat may require us to relinquish rights to certain of our technologies,product candidates or products which we would otherwise pursue on our own.

 

**Our indebtednessand debt service obligations may adversely affect our cash flow and otherwisenegatively affect our operations.**

 

At April 29, 2003, we hadapproximately $105.4 million of outstanding convertible debt. During eachof the last five years, our earnings were insufficient to cover our fixedcharges. We will be required to make interest payments on our outstandingconvertible notes totaling approximately $17.0 million over the next threeyears, assuming the convertible debt remains outstanding until maturity.

 

We may in the future incuradditional indebtedness, including long-term debt, credit lines and propertyand equipment financings to finance capital expenditures. We intend to satisfyour current and future debt service obligations from cash generated by ouroperations and from our existing cash and investments. We may also requirefunds from exernal sources to meet these obligations. We may not havesufficient funds and we may be unable to arrange for additional financing tosatisfy our principal or interest payment obligations when those obligationsbecome due.

 

Our indebtedness could havesignificant additional negative consequences, including:

 

•                                          increasing our vulnerability to general adverseeconomic and industry conditions;

 

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•                                          limiting our ability to obtain additionalfinancing;

 

•                                          requiring the dedication of a substantial portionof our expected cash flow from operations to service our indebtedness, therebyreducing the amount of our expected cash flow available for other purposes,including capital expenditures and research and development;

 

•                                          limiting our flexibility in planning for, orreacting to, changes in our business and the industry in which we compete; and

 

•                                          placing us at a possible competitive disadvantageto less leveraged competitors and competitors that have better access tocapital resources.

 

**We have sold ourinterest in CAMPATH® (alemtuzumab) humanized monoclonal antibody; our financialplan assumes we will receive future significant payments that are contingent onthe achievement of sales thresholds for the product.**

 

On December 31, 2001, ILEXacquired our equity interest in Millennium & ILEX Partners, L.P., orM&I, which owns the CAMPATH product. To date, we have received payments of$60.0 million from ILEX related to CAMPATH. We are entitled to additionalpayments of $40.0 million in each of 2003 and 2004 if sales of CAMPATH inthe United States meet specified thresholds. In addition, we will be entitledto additional payments from ILEX if U.S. sales of CAMPATH after 2004 exceedspecified annual thresholds. If these thresholds are not achieved, we will notreceive any future additional payments related to CAMPATH. We have no abilityto influence the actions of the entity that owns CAMPATH. Therefore, we have nocontrol over the financial success of CAMPATH or our ability to earn additionalrevenues from the product.

 

**Risks Relating to Collaborators**

 

**We dependsignificantly on our collaborators to work with us to develop and commercializeproducts and services.**

 

We conduct substantial discoveryand development activities through strategic alliances, and we market and sellINTEGRILIN® (eptifibatide) Injection through an alliance with SGP. We expect toenter into additional alliances in the future, especially in connection withproduct commercialization. The success of our alliances depends heavily on theefforts and activities of our collaborators. Each of our collaborators hassignificant discretion in determining the efforts and resources that they willapply to the alliance. Our existing and any future alliances may not bescientifically or commercially successful.

 

The risks that we face inconnection with these alliances include the following:

 

•                                          All of our strategic alliance agreements are forfixed terms and are subject to termination under various circumstances,including, in many cases, on short notice without cause. For example, theresearch phase of our alliance with Bayer is scheduled to be completed inOctober 2003, with an option for Bayer to extend for an additional year,and our technology transfer alliance with Aventis will end in July 2003.

 

•                                          In our strategic alliance agreements, we generallyagree not to conduct specified types of research and development in the fieldthat is the subject of the alliance. These agreements may have the effect oflimiting the areas of research and development that we may pursue, either aloneor in collaboration with third parties.

 

•                                          Our collaborators may develop and commercialize,either alone or with others, products and services that are similar to orcompetitive with the products and services that are the subject of the alliancewith us.

 

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•                                          Our collaborators may change the focus of theirdevelopment and commercialization efforts. Pharmaceutical and biotechnologycompanies historically have re-evaluated their priorities following mergers andconsolidations, which have been common in recent years in these industries. Theability of certain of our products reach their potential could be limited ifour collaborators decrease or fail to increase spending related to suchproducts.

 

•                                          We will rely on our collaborators to manufacturemost products covered by our alliances. For example, SGP is one of themanufacturers of INTEGRILIN® (eptifibatide) Injection.

 

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

 

An important element of ourbusiness strategy is entering into strategic alliances for the development andcommercialization of products and services when we believe it will maximizeproduct value. In particular, we are currently seeking a strategic arrangementcollaborator for the commercialization of VELCADETM (bortezomib) for Injection.If we are unsuccessful in engaging a suitable collaborator, we may fail to meetcertain of our financial projections. We face significant competition inseeking appropriate collaborators. Moreover, these alliance arrangements arecomplex to negotiate and time-consuming to document. We may not be successfulin our efforts 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 are unableto obtain patent protection for our discoveries, the value of our technologyand products will be adversely affected. If we infringe patent or otherintellectual property rights of third parties, we may not be able to developand commercialize our products and services or the cost of doing so mayincrease.**

 

Our patent positions, and thoseof other pharmaceutical and biotechnology companies, are generally uncertainand involve complex legal, scientific and factual questions.

 

Our ability to develop andcommercialize products and services depends in significant part on our abilityto:

 

•                                          obtain patents;

 

•                                          obtain licenses to the proprietary rights ofothers on commercially reasonable terms;

 

•                                          operate without infringing upon the proprietaryrights of others;

 

•                                          prevent others from infringing on our proprietaryrights; and

 

•                                          protect trade secrets.

 

**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 permissiblescope of patent claims in the pharmaceutical and biotechnology fields,including the genomics field, involve important unresolved legal principles andare the subject of public policy debate in the United States and abroad. Forexample, there is significant uncertainty both in the United States and abroadregarding the patentability of gene sequences in the absence of functional dataand the scope of patent protection available for full-length genes and partialgene sequences. Moreover, some groups have made particular gene sequencesavailable in publicly accessible databases. These and other disclosures mayadversely affect our ability to obtain patent protection for gene sequencesclaimed by us in patent applications that we file subsequent to suchdisclosures. There is also some uncertainty as to whether human clinical datawill be required for issuance of patents for human therapeutics. If such dataare required, our ability to obtain patent protection could be delayed orotherwise adversely affected.

 

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**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 or services.**

 

We may not have rights under somepatents or patent applications related to our products, processes or services.Third parties may own or control these patents and patent applications in theUnited States and abroad. Therefore, in some cases, such as those describedbelow, in order to develop, manufacture, sell or import some of our proposedproducts, processes or services, we or our collaborators may choose to seek, orbe required to seek, licenses under third party patents issued in the UnitedStates and abroad or those that might issue from United States and foreignpatent applications. In such event, we would be required to pay license fees orroyalties or both to the licensor. If licenses are not available to us onacceptable terms, we or our collaborators may not be able to develop,manufacture, sell or import these products, processes or services.

 

With respect to our productcandidate MLN01, we are aware of third party patents and patent applicationswhich relate to anti-CD18 antibodies and their use in various methods oftreatment, including methods of reperfusion therapy and methods of treatingfocal ischemic stroke. In addition, our MLN01 and MLN02 product candidates arehumanized monoclonal 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 usinghumanized or modified antibodies. We are also aware of third party patents andpatent applications relating to manufacturing processes for humanized ormodified antibodies, products thereof and materials useful in such processes.We are also aware of third party patent applications relating to anti-PSMAantibodies.

 

With respect to VELCADETM(bortezomib) for Injection and other proteasome inhibitors in the treatment ofmyocardial infarctions, we are aware of the existence of a potentiallyinterfering patent application filed by a third party. In addition, onJune 26, 2002, Ariad Pharmaceuticals, Inc., or Ariad, sent us andapproximately 50 other parties a letter offering a sublicense for the use ofU.S. Patent No. 6,410,516, which is exclusively licensed to Ariad. If thispatent is valid and Ariad successfully sues us for infringement, we wouldrequire a license from Ariad in order to commercialize VELCADE.

 

**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 substantiallitigation and other proceedings regarding the patent and other intellectualproperty rights in the pharmaceutical and biotechnology industries. We maybecome a party to patent litigation or other proceedings regarding intellectualproperty rights. For example, we believe that we hold patent applications thatcover genes that are also claimed in patent applications filed by others.Interference proceedings before the United States Patent and Trademark Officemay be necessary to establish which party was the first to invent these genes.

 

The cost to us of any patentlitigation or other proceeding, even if resolved in our favor, could besubstantial. Some of our competitors may be able to sustain the cost of suchlitigation or proceedings more effectively than we can because of theirsubstantially greater financial resources. If a patent litigation or otherproceeding is resolved against us, we or our collaborators may be enjoined fromdeveloping, manufacturing, selling or importing our products, processes orservices without a license from the other party and we may be held liable forsignificant damages. We may not be able to obtain any required license oncommercially acceptable terms or at all.

 

Uncertainties resulting from theinitiation and continuation of patent litigation or other proceedings couldhave a material adverse effect on our ability to compete in the marketplace.Patent litigation and other proceedings may also absorb significant managementtime.

 

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

 

**Because we havelimited sales, marketing and distribution experience and capabilities, we maybe dependent on third parties to successfully perform these functions on ourbehalf, or we may be required to incur significant costs and devote significantefforts to augment our existing capabilities.**

 

We have limited sales, marketingand distribution experience and capabilities. These capabilities consistprimarily of the specialty cardiovascular sales force that we acquired in theCOR merger that markets INTEGRILIN® (eptifibatide) Injection. Depending on thenature of the products and services for which we obtain marketing approval, wemay need to rely significantly on sales, marketing and distributionarrangements with our collaborators and other third parties. For example, some typesof pharmaceutical products require a large sales force and extensive marketingcapabilities for effective commercialization. If in the future we elect toperform sales, marketing and distribution functions for such types of productsourselves, we would face a number of additional risks, including the need torecruit a large number of additional experienced marketing and sales personnel.In particular, we are seeking a strategic arrangement relating to the sales andmarketing of VELCADETM (bortezomib) for Injection in worldwide markets. If weare unable to complete such an arrangement, we may not be able to maximize thevalue of VELCADE as quickly as we have planned.

 

**Because we havelimited manufacturing capabilities, we will be dependent on third-partymanufacturers to manufacture products for us, or we will be required to incursignificant costs and devote significant efforts to establish our ownmanufacturing facilities and capabilities.**

 

We have limited manufacturingexperience and no commercial scale manufacturing capabilities. In order tocontinue to develop products and services, apply for regulatory approvals andcommercialize products and services, we will need to develop, contract for orotherwise arrange for the necessary manufacturing capabilities. In particular,we are currently seeking to establish long-term supply relationships for theproduction of commercial supplies of VELCADE.

 

We currently rely upon thirdparties to produce material for preclinical testing purposes and expect tocontinue to do so in the future. We also expect to rely upon other thirdparties, including our collaborators, to produce materials required forclinical trials and for the commercial production of certain of our products.

 

There are a limited number ofmanufacturers that operate under the FDA’s good manufacturing practicesregulations capable of manufacturing our products. As a result, we haveexperienced some difficulty finding manufacturers for our products withadequate capacity for our anticipated future needs. 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 ormarket them.

 

Reliance on third partymanufacturers entails risks to which we would not be subject if we manufacturedproducts ourselves, including reliance on the third party for regulatorycompliance and quality assurance, the possibility of breach of themanufacturing agreement by the third party because of factors beyond ourcontrol and the possibility of termination or nonrenewal of the agreement bythe third party, based on its own business priorities, at a time that is costlyor inconvenient for us.

 

We may in the future elect tomanufacture certain of our products in our own manufacturing facilities. Wewould need to invest substantial additional funds and recruit qualifiedpersonnel in order to build or lease and operate any manufacturing facilities.

 

**We faceparticular challenges in connection with the manufacture of INTEGRILIN®(eptifibatide) Injection; if we do not meet these challenges our revenues andincome will be adversely affected.**

 

With respect to INTEGRILIN, wehave two manufacturers that produce bulk product and two manufacturers thatperform fill/finish and packaging. If we do not have adequate supplies ofINTEGRILIN to meet market demand, we may lose potential revenues, and thehealthcare community may turn to competing products.

 

One of the manufacturers thatperforms fill/finish and packaging of INTEGRILIN is SGP at its Manati facilityin Puerto Rico. Supply of INTEGRILIN for European sales from SGP’s Manatifacility has been restarted recently after being temporarily halted andfill/finish and packaging of INTEGRILIN at that facility for sale in the

 

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United States is in abeyance. We are activelyworking with SGP to identify alternative fill/finish and packaging suppliers toserve as future sources of supply. Although we believe that the fill/finish andpackaging performed by our primary manufacturer is sufficient to meet ourrequirements for INTEGRILIN® (eptifibatide) Injection supply in the UnitedStates for the foreseeable future, our inability to resolve the issues relatingto the Manati facility could adversely affect the supply of INTEGRILIN and,thereby, harm our results of operations.

 

We expect to improve or modifyour existing process technologies and manufacturing capabilities forINTEGRILIN. We cannot quantify the time or expense that may ultimately berequired to improve or modify our existing process technologies, but it ispossible that such time or expense could be substantial. Moreover, we may notbe able to implement any of these improvements or modifications successfully.

 

Our manufacturing plans andcommercialization strategy for INTEGRILIN include the addition of extracapacity for the manufacture of INTEGRILIN. This will require us to establishmultiple third-party manufacturing arrangements on commercially reasonableterms. We may not be able to do so, and, even if such arrangements areestablished, they may not continue to be available to us on commerciallyreasonable terms. If we are unable to obtain contract manufacturing oncommercially acceptable terms, we may not be able to produce INTEGRILIN insufficient quantities to meet future market demand.

 

We frequently carry significantamounts of INTEGRILIN in inventory. If for some reason we were unable to sellINTEGRILIN, our inventory could expire and we would be required to write-off thevalue of the stale inventory.

 

**If we fail toobtain an adequate level of reimbursement for our products or services by thirdparty payors, there may be no commercially viable markets for our products orservices.**

 

The availability and levels ofreimbursement by governmental and other third party payors affect the marketfor any pharmaceutical product or healthcare service. These third party payorscontinually attempt to contain or reduce the costs of healthcare by challengingthe prices charged for medical products and services. In certain foreigncountries, particularly the countries of the European Union, the pricing ofprescription pharmaceuticals is subject to governmental control. We may not beable to sell our products and services profitably if reimbursement isunavailable or limited in scope or amount.

 

In particular, third party payorscould lower the amount that they will reimburse hospitals to treat theconditions for which the FDA has approved INTEGRILIN. If they do, pricinglevels or sales volumes of INTEGRILIN may decrease. In foreign markets, anumber of different governmental and private entities determine the level atwhich hospitals will be reimbursed for administering INTEGRILIN to insuredpatients. If these levels are set, or reset, too low, it may not be possible tosell INTEGRILIN at a profit in these markets.

 

In both the United States andcertain foreign jurisdictions, there have been a number of legislative andregulatory proposals to change the healthcare system. Further proposals arelikely. The potential for adoption of these proposals affects or will affectour ability to raise capital, obtain additional collaborators and market ourproducts.

 

In addition, we believe theincreasing emphasis on managed care in the United States has and will continueto put pressure on the price and usage of our present and future products,which may adversely impact product sales. Further, when a new therapeuticproduct is approved, the availability of governmental and/or privatereimbursement for that product is uncertain, as is the amount for which thatproduct will be reimbursed. We cannot predict the availability or amount ofreimbursement for our product candidates, such as VELCADETM (bortezomib) forInjection, and current reimbursement policies INTEGRILIN could change at anytime.

 

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

 

Our business exposes us to therisk of product liability claims that is inherent in the manufacturing, testingand marketing of human therapeutic products. In particular, INTEGRILIN isadministered to patients with serious cardiovascular disease who have a highincidence of mortality. Although we have product liability insurance that

 

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we believe is appropriate, this insurance issubject to deductibles and coverage limitations and the market for suchinsurance becoming more restrictive. We may not be able to obtain or maintainadequate protection against potential liabilities. If we are unable to obtaininsurance at acceptable cost or otherwise protect against potential productliability claims, we will be exposed to significant liabilities, which maymaterially and adversely affect our business and financial position. Theseliabilities could prevent or interfere with our product commercializationefforts.

 

**Guidelines andrecommendations can affect the use of our products.**

 

Government agencies promulgateregulations and guidelines directly applicable to us and to our products. Inaddition, professional societies, practice management groups, private healthand science foundations and organizations involved in various diseases fromtime to time may also publish guidelines or recommendations to the health careand patient communities. Recommendations of government agencies or these othergroups or organizations may relate to such matters as usage, dosage, route ofadministration and use of concomitant therapies. Recommendations or guidelinesthat are followed by patients and health care providers could result indecreased use of our products.

 

**Risks Relating to an Investment in Our Common Stock**

 

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

 

The trading price of our commonstock has been volatile and may be volatile in the future. During 2002, ourcommon stock traded as high as $25.55 per share and as low as $7.19 per share.Factors such as announcements of our or our competitors’ operating results,changes in our prospects and market conditions for biotechnology stocks ingeneral could have a significant impact on the future trading prices of ourcommon stock.

 

In particular, the trading priceof the common stock of many biotechnology companies, including ours, hasexperienced extreme price and volume fluctuations, which have at times beenunrelated to the operating performance of such companies whose stocks wereaffected. Some of the factors that may cause volatility in the price of oursecurities include:

 

•                                          clinical trial results and regulatory developments;

 

•                                          product revenues;

 

•                                          quarterly variations in financial results;

 

•                                          business and product market cycles;

 

•                                          fluctuations in customer requirements;

 

•                                          availability and utilization of manufacturingcapacity;

 

•                                          timing of new product introductions; and

 

•                                          ability to develop and implement new technologies.

 

The price of our securities mayalso be affected by the estimates and projections of the investment community,general economic and market conditions, and the cost of operations in ourproduct markets. While we cannot predict the individual effect that thesefactors may have on the price of our securities, these factors, eitherindividually or in the aggregate, could result in significant variations inprice during any given period of time. There can be no assurance that thesefactors will not have an adverse effect on the trading prices of our commonstock.

 

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

 

Provisions of our certificate ofincorporation and bylaws and of Delaware law could have the effect of delaying,deferring or preventing an acquisition of our company. For example, we havedivided our board of directors into three classes that serve staggeredthree-year terms, we may issue shares of our authorized “blank check” preferredstock and our stockholders are limited in their ability to call specialstockholder meetings. In addition, we have issued preferred stock purchaserights that would adversely affect the economic and voting interests of aperson or group that seeks to acquire us or a 15% or more interest in ourcommon stock without negotiations with our board of directors.

 

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

 

We manage our investmentportfolio in accordance with our Investment Policy. The primary objectives ofour Investment Policy are to preserve principal, maintain a high degree ofliquidity to meet operating needs, and obtain competitive returns subject toprevailing market conditions. Investments are made primarily in high-gradecorporate bonds with effective maturities of three years or less, asset-backedand U.S. government agency 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 $20.4 million decrease inthe fair value of our investments as of March 31, 2003. 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.

 

As of March 31, 2003, the fairvalue of our 4.5% and 5.0% notes, including the put options, is approximately$662.4 million. The fair value of our 5.5% notes approximates its carryingvalue.

 

The interest rates on ourconvertible notes and capital lease obligations are fixed and therefore notsubject to interest rate risk.

 

Accordingly, we do not believethat there is any material market risk exposure with respect to derivative orother financial instruments which would require disclosure under this item.

 

As of March 31, 2003 we did nothave any financing arrangements that were not reflected in our balance sheet.

 

**Item4.    Controls and Procedures**

 

(a)           Evaluation of disclosure controls andprocedures.

 

We have established andmaintain disclosure controls and procedures to ensure that we record, process,summarize, and report information we are required to disclose in our periodicreports filed with the Securities and Exchange Commission in the manner andwithin the time periods specified in the SEC’s rules and forms.  Our chief executive officer and chieffinancial officer evaluated these controls and procedures— within 90 days ofthe filing date of this quarterly report — and concluded based upon thatevaluation, that they are effective in achieving this purpose.

 

(b)           Changes in internal controls.

 

We maintain internalfinancial controls and procedures to ensure that we comply with applicable lawsand our established financial policies. There were no significant changes, including any corrective actions withregard to significant deficiencies and material weaknesses, in our internalcontrols or in other factors that could significantly affect internalcontrols since the date of the most recent evaluation of these controls by ourchief executive officer and chief financial officer.

 

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**PARTII    OTHER INFORMATION**

 

**Item2.  Changes in Securities and Use ofProc****eeds**

 

On March 7, 2003, we issued and sold to AbbottLaboratories 3,658,314 shares of our common stock for aggregate proceeds ofapproximately $28.6 million.  Theseshares were issued in connection with a collaboration agreement between theparties and no person served as an underwriter with respect to thistransaction.  We relied on Section 4(2)of the Securities Act of 1933, as amended (the “Securities Act”) for exemptionfrom the registration requirements of the Securities Act.

 

On January 31, 2003, we issued 143,504 shares of ourcommon stock to Deutsche Bank Securities upon their net exercise of a warrantto purchase 176,000 shares of our common stock at an exercise price of $1.50per share.  These shares were issuedpursuant to a warrant agreement dated March 12, 1998 between us and DeutscheBank Securities and no person served as an underwriter with respect to thistransaction.  For this issuance andsale, we relied on Section 4(2) of the Securities Act for exemption from theregistration requirements of the Securities Act.

 

**Item6.  Exhibits and Reports on Form 8-K**

 

(a)          Exhibits

 

The exhibits listed inthe Exhibit Index are included in this report.

 

(b)         Reports on Forms 8-K.

 

1.                    A CurrentReport on Form 8-K was furnished to the Securities and Exchange Commission onApril 15, 2003, to report, pursuant to Item 9, that we issued a press releaseon April 15, 2003 to report our financial results for the quarter ended March31, 2003.

 

2.                    A CurrentReport on Form 8-K was filed with the Securities and Exchange Commission onApril 22, 2003, to report, pursuant to Item 5, that Aventis Pharmaceuticals,Inc. (“Aventis”) provided us notice of exercise of Aventis’s option toterminate the three to five-year Technology Transfer Agreement between us andAventis dated June 22, 2000, effective on the third anniversary of theAgreement, July 21, 2003.

 

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**SIGNATURES**

 

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

 
|                      |   | MILLENNIUM PHARMACEUTICALS, INC.                      |
|---------------------------|--------|-------------------------------------------------------|
|                      |   | (Registrant)                                          |
|                      |   |                                                  |
| Dated :  May 6, 2003 |   | /s/ KENNETH M. BATE                                   |   |
|                      |   | Kenneth M. Bate                                       |
|                      |   | *Senior  Vice President and  Chief Financial Officer* |
|                      |   | *(principal  financial and chief accounting officer)* |

 

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**CERTIFICATIONS**

 

I, Mark J. Levin, certify that:

 

1.       I have reviewed thisquarterly report on Form 10-Q of Millennium Pharmaceuticals, Inc.;

 

2.       Based on my knowledge,this quarterly report does not contain any untrue statement of a material factor omit to state a material fact necessary to make the statements made, inlight of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.       Based on my knowledge,the financial statements, and other financial information included in thisquarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.       The registrant’s othercertifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

a)  designed such disclosurecontrols and procedures to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b)  evaluated the effectivenessof the registrant’s disclosure controls and procedures as of a date within 90days prior to the filing date of this quarterly report (the “Evaluation Date”);and

 

c)  presented in this quarterlyreport our conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date;

 

5.       The registrant’s othercertifying officers and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function):

 

a)  all significant deficienciesin the design or operation of internal controls which could adversely affectthe registrant’s ability to record, process, summarize and report financialdata and have identified for the registrant’s auditors any material weaknessesin internal controls; and

 

b)  any fraud, whether or notmaterial, that involves management or other employees who have a significantrole in the registrant’s internal controls; and

 

6.       The registrant’s othercertifying officers and I have indicated in this quarterly report whether ornot there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 
| Date: May 6, 2003 |   | /s/ MARK J. LEVIN                                  |   |
|-------------------|--------|----------------------------------------------------|--------|
|              |   | Mark J. Levin                                      |   |
|              |   | Chairperson, President and Chief Executive Officer |

 

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**CERTIFICATIONS**

 

I, Kenneth M. Bate, certify that:

 

1.       I have reviewed thisquarterly report on Form 10-Q of Millennium Pharmaceuticals, Inc.;

 

2.       Based on my knowledge,this quarterly report does not contain any untrue statement of a material factor omit to state a material fact necessary to make the statements made, inlight of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.       Based on my knowledge,the financial statements, and other financial information included in thisquarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.       The registrant’s othercertifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

a)  designed such disclosurecontrols and procedures to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b)  evaluated the effectivenessof the registrant’s disclosure controls and procedures as of a date within 90days prior to the filing date of this quarterly report (the “Evaluation Date”);and

 

c)  presented in this quarterlyreport our conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date;

 

5.       The registrant’s othercertifying officers and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function):

 

a)  all significant deficienciesin the design or operation of internal controls which could adversely affectthe registrant’s ability to record, process, summarize and report financialdata and have identified for the registrant’s auditors any material weaknessesin internal controls; and

 

b)  any fraud, whether or notmaterial, that involves management or other employees who have a significantrole in the registrant’s internal controls; and

 

6.       The registrant’s othercertifying officers and I have indicated in this quarterly report whether ornot there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 
| Date: May 6, 2003 |   | /s/ KENNETH M. BATE                               |   |
|-------------------|--------|---------------------------------------------------|--------|
|              |   | Kenneth M. Bate                                   |
|              |   | Senior Vice President and Chief Financial Officer |

 

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**EXHIBITINDEX**

 

The following exhibits are filed as part of this Quarterly Report onForm 10-Q:

 
| **Exhibit No.** |   | **Description**                            |
|-----------------|--------|--------------------------------------------|
|            |   |                                       |
| 99.1            |   | Statement Pursuant to 18 U.S.C. §1350 |
|            |   |                                       |
| 99.2            |   | Statement Pursuant to 18 U.S.C. §1350 |

 

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