**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,DC 20549**

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**FORM 10-Q**

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| **(Mark One)**                                     |
|----------------------------------------------------|
| **  ****x**                              | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                         | ** ** |
| **For the  quarterly period ended March 31, 2007** |
| ** **                                         |
| **OR**                                             |
| ** **                                         |
| **  ****o**                              | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Forthe transition period from                       to                      .**

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**CommissionFile Number  0-28494**

**MILLENNIUM PHARMACEUTICALS, INC.**

(Exact name ofregistrant as specified in its charter)

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

 

**40 Landsdowne Street, Cambridge,Massachusetts  02139**

(Address ofprincipal executive offices) (zip code)

**(617) 679-7000**

(Registrant’stelephone number, including area code)

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

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

Large acceleratedfiler  x          Acceleratedfiler  o          Non-acceleratedfiler  o

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

Number of shares of theregistrant’s Common Stock, $0.001 par value, outstanding on May 4,2007:   321,119,350

 

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**MILLENNIUM PHARMACEUTICALS, INC.**

**FORM 10-Q**

**FOR THE QUARTER ENDED MARCH 31,2007**

**TABLE OFCONTENTS**
| **PART I**  | ** ** | **FINANCIAL  INFORMATION**                                                                           |       |       |
|------------------|------------|------------------------------------------------------------------------------------------------------|------------|------------|
| ** **       | ** ** | ** **                                                                                           | ** ** | ** ** |
| Item  1.         |       | Condensed  Consolidated Financial Statements                                                         |       |       |
|             |       |                                                                                                 |       |       |
|             |       | Condensed  Consolidated Balance Sheets as of March 31, 2007 and December 31, 2006               |       | 3          |
|             |       |                                                                                                 |       |       |
|             |       | Condensed  Consolidated Statements of Operations for the three months ended March 31,  2007 and 2006 |       | 4          |
|             |       |                                                                                                 |       |       |
|             |       | Condensed  Consolidated Statements of Cash Flows for the three months ended March 31,  2007 and 2006 |       | 5          |
|             |       |                                                                                                 |       |       |
|             |       | Notes  to Condensed Consolidated Financial Statements                                                |       | 6          |
|             |       |                                                                                                 |       |       |
| Item 2.          |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations          |       | 15         |
|             |       |                                                                                                 |       |       |
|             |       | Risk Factors  That May Affect Results                                                           |       | 27         |
|             |       |                                                                                                 |       |       |
| Item 3.          |       | Quantitative  and Qualitative Disclosures about Market Risk                                          |       | 40         |
|             |       |                                                                                                 |       |       |
| Item 4.          |       | Controls and  Procedures                                                                             |       | 40         |
|             |       |                                                                                                 |       |       |
| **PART II** | ** ** | **OTHER INFORMATION**                                                                                |       |       |
| ** **       | ** ** | ** **                                                                                           | ** ** | ** ** |
| Item  6.         |       | Exhibits                                                                                             |       | 41         |
|             |       |                                                                                                 |       |       |
|             |       | Signatures                                                                                           |       | 42         |
|             |       |                                                                                                 |       |       |
|             |       | Exhibit Index                                                                                   |       | 43         |

 

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

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**PART I  FINANCIAL INFORMATION**

**Item 1.  Condensed Consolidated Financial Statements**

**Millennium Pharmaceuticals, Inc.**

**Condensed Consolidated Balance Sheets**
| **(in thousands, except per share amounts)**                                                                                             | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                        | ** ** | **(unaudited)**          | ** ** | ** **                  | ** ** |
| **Assets**                                                                                                                                                        | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                                                                   |       |                     |       |                        |       |
| Cash and cash  equivalents                                                                                                                                        |       | $                        | 62,602     |                        | $          | 212,273 |   |
| Marketable  securities                                                                                                                                            |       | 756,567                  |       | 682,076                     |       |
| Accounts  receivable, net of allowances of $519 in 2007 and $521 in 2006                                                                                          |       | 70,313                   |       | 94,516                      |       |
| Inventory                                                                                                                                                         |       | 12,090                   |       | 13,598                      |       |
| Prepaid expenses  and other current assets                                                                                                                        |       | 12,615                   |       | 13,191                      |       |
| Total current assets                                                                                                                                              |       | 914,187                  |       | 1,015,654                   |       |
| Property and equipment,  net                                                                                                                                      |       | 145,796                  |       | 153,349                     |       |
| Restricted cash                                                                                                                                                   |       | 7,615                    |       | 7,600                       |       |
| Other assets                                                                                                                                                      |       | 31,370                   |       | 27,900                      |       |
| Goodwill                                                                                                                                                          |       | 1,214,711                |       | 1,213,910                   |       |
| Developed  technology, net                                                                                                                                        |       | 263,511                  |       | 271,876                     |       |
| Intangible  assets, net                                                                                                                                           |       | 61,401                   |       | 61,523                      |       |
| Total assets                                                                                                                                                      |       | $                        | 2,638,591  |                        | $          | 2,751,812 |   |
|                                                                                                                                                              |       |                     |       |                        |       |
| **Liabilities  and Stockholders’ Equity**                                                                                                                    | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Current  liabilities:                                                                                                                                             |       |                     |       |                        |       |
| Accounts payable                                                                                                                                                  |       | $                        | 19,253     |                        | $          | 26,301 |   |
| Accrued expenses                                                                                                                                                  |       | 52,670                   |       | 62,544                      |       |
| Current portion  of restructuring                                                                                                                                 |       | 23,394                   |       | 25,540                      |       |
| Current portion  of deferred revenue                                                                                                                              |       | 6,905                    |       | 10,378                      |       |
| Current portion  of capital lease obligations                                                                                                                     |       | 1,200                    |       | 1,185                       |       |
| Current portion  of long-term debt                                                                                                                                |       | —                   |       | 99,571                      |       |
| Total current liabilities                                                                                                                                         |       | 103,422                  |       | 225,519                     |       |
| Other long-term  liabilities                                                                                                                                      |       | 791                      |       | 757                         |       |
| Restructuring,  net of current portion                                                                                                                            |       | 40,472                   |       | 41,974                      |       |
| Deferred  revenue, net of current portion                                                                                                                         |       | 15,979                   |       | 13,344                      |       |
| Capital lease  obligations, net of current portion                                                                                                                |       | 74,735                   |       | 75,041                      |       |
| Long-term debt                                                                                                                                                    |       | 250,000                  |       | 250,000                     |       |
|                                                                                                                                                              |       |                     |       |                        |       |
| 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: 320,445 shares at March 31, 2007  and 317,342 shares at December 31, 2006 issued and outstanding |       | 320                      |       | 317                         |       |
| Additional  paid-in capital                                                                                                                                       |       | 4,672,578                |       | 4,657,177                   |       |
| Accumulated  other comprehensive loss                                                                                                                             |       | (1,937                   | )          | (1,326                      | )          |
| Accumulated  deficit                                                                                                                                              |       | (2,517,769               | )          | (2,510,991                  | )          |
| Total stockholders’ equity                                                                                                                                   |       | 2,153,192                |       | 2,145,177                   |       |
| Total  liabilities and stockholders’ equity                                                                                                                  |       | $                        | 2,638,591  |                        | $          | 2,751,812 |   |

 

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

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**MillenniumPharmaceuticals, Inc.**

**CondensedConsolidated Statements of Operations**

**(unaudited)**
| ** **                                                           | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| **(in  thousands, except per share amounts)**                        | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| ** **                                                           | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Revenues:                                                            |       |                                                 |       |   |   |
| Net product sales                                                    |       | $                                                    | 58,640     |   | $ | 53,373 |   |
| Revenue under strategic alliances                                    |       | 15,714                                               |       | 38,629 |   |
| Royalties                                                            |       | 36,370                                               |       | 30,473 |   |
| Total revenues                                                       |       | 110,724                                              |       | 122,475 |   |
|                                                                 |       |                                                 |       |   |   |
| Costs and  expenses:                                                 |       |                                                 |       |   |   |
| Cost of sales (excludes amortization of acquired  intangible assets) |       | 5,358                                                |       | 15,828 |   |
| Research and development (Note 1)                                    |       | 71,229                                               |       | 82,598 |   |
| Selling, general and administrative (Note 1)                         |       | 39,525                                               |       | 35,465 |   |
| Restructuring                                                        |       | 5,611                                                |       | 2,831 |   |
| Amortization of intangibles                                          |       | 8,487                                                |       | 8,487 |   |
| Total costs and expenses                                             |       | 130,210                                              |       | 145,209 |   |
|                                                                 |       |                                                 |       |   |   |
| Loss from  operations                                                | ** ** | (19,486                                              | )          | (22,734 | ) |
|                                                                 |       |                                                 |       |   |   |
| Other income  (expense):                                             |       |                                                 |       |   |   |
| Investment income, net                                               |       | 15,495                                               |       | 4,625 |   |
| Interest expense                                                     |       | (2,787                                               | )          | (2,732 | ) |
| Net loss                                                             |       | $                                                    | (6,778     | ) | $ | (20,841 | ) |
|                                                                 |       |                                                 |       |   |   |
| *Amounts  per common share:*                                         | * *   | * *                                             | * *   | * * | * * |
|                                                                 |       |                                                 |       |   |   |
| Net loss per  share, basic and diluted                               |       | $                                                    | (0.02      | ) | $ | (0.07 | ) |
|                                                                 |       |                                                 |       |   |   |
| Weighted average  shares, basic and diluted                          |       | 316,072                                              |       | 311,823 |   |

 

Note 1:  In accordance with SFAS No. 123 (revised2004), “Share Based Payment,” (“SFAS No. 123R”), stock-based compensationexpense is allocated in the condensed consolidated statements of operationsexpense lines as follows:
| ** **                          | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------|------------|------------------------------------------------------|------------|
| **(in  thousands)**                 | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| ** **                          | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Research and  development           |       | $                                                    | 2,055      |   | $ | 6,334 |   |
| Selling, general and administrative |       | 3,347                                                |       | 4,166 |   |
|                                     |            |                                                      |            |  |  |  |  |

 

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

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**Millennium Pharmaceuticals, Inc**

**CondensedConsolidated Statements of Cash Flows**

**(unaudited)**
| ** **                                                                                        | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(in  thousands)**                                                                               | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| ** **                                                                                        | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| **Cash Flows from Operating  Activities:**                                                        | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Net loss                                                                                          |       | $                                                | (6,778     | ) | $ | (20,841 | ) |
| Adjustments to  reconcile net loss to cash provided by (used in) operating activities:            |       |                                             |       |   |   |
| Depreciation and  amortization                                                                    |       | 17,083                                           |       | 16,442 |   |
| Restructuring  charges, net                                                                       |       | —                                           |       | 54 |   |
| Amortization of  deferred financing costs                                                         |       | 448                                              |       | 111 |   |
| Realized (gain)  loss on securities, net                                                          |       | (5,092                                           | )          | 2,006 |   |
| 401K stock match                                                                                  |       | 1,650                                            |       | 1,702 |   |
| Stock-based  compensation expense                                                                 |       | 5,402                                            |       | 10,500 |   |
| Changes in operating  assets and liabilities:                                                     |       |                                             |       |   |   |
| Accounts  receivable                                                                              |       | 24,203                                           |       | (4,211 | ) |
| Inventory                                                                                         |       | 1,508                                            |       | (586 | ) |
| Prepaid expenses  and other current assets                                                        |       | 576                                              |       | (467 | ) |
| Restricted cash  and other assets                                                                 |       | (3,509                                           | )          | (1,171 | ) |
| Accounts payable  and accrued expenses                                                            |       | (20,534                                          | )          | (24,626 | ) |
| Deferred revenue                                                                                  |       | (838                                             | )          | (5,936 | ) |
| Other long-term  liabilities                                                                      |       | 34                                               |       | 640 |   |
| Net cash provided by  (used in) operating activities                                              |       | 14,153                                           |       | (26,383 | ) |
|                                                                                              |       |                                             |       |   |   |
| **Cash Flows from Investing  Activities:**                                                        | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Investments in  marketable securities                                                             |       | (190,474                                         | )          | (84,728 | ) |
| Proceeds from sales and  maturities of marketable securities                                      |       | 117,991                                          |       | 118,420 |   |
| Purchases of property  and equipment                                                              |       | (1,100                                           | )          | (1,386 | ) |
| Other investing  activities                                                                       |       | 1,269                                            |       | (739 | ) |
| Net cash provided by  (used in) investing activities                                              |       | (72,314                                          | )          | 31,567 |   |
|                                                                                              |       |                                             |       |   |   |
| **Cash Flows from Financing  Activities:**                                                        | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Net proceeds from  employee stock purchases                                                       |       | 8,351                                            |       | 9,198 |   |
| Repayment of principal  of long-term debt obligations                                             |       | (99,571                                          | )          | — |   |
| Principal payments on  capital leases                                                             |       | (291                                             | )          | (1,769 | ) |
| Net cash provided by  (used in) financing activities                                              |       | (91,511                                          | )          | 7,429 |   |
|                                                                                              |       |                                             |       |   |   |
| Increase (decrease) in  cash and cash equivalents                                                 |       | (149,672                                         | )          | 12,613 |   |
| Effects of exchange  rate changes on cash and cash equivalents                                    |       | 1                                                |       | — |   |
| Cash and cash  equivalents, beginning of period                                                   |       | 212,273                                          |       | 5,029 |   |
| Cash and cash  equivalents, end of period                                                         |       | $                                                | 62,602     |   | $ | 17,642 |   |
| ** **                                                                                        | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| **Supplemental Cash Flow  Information:**                                                          | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Cash paid for interest                                                                            |       | $                                                | 3,323      |   | $ | 3,920 |   |
| **Supplemental Disclosure of  Noncash Investing Activities:**                                     | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Receipt of shares of SGX Pharmaceuticals, Inc. common stock in  exchange for note receivable |       | $                                                | —     |   | $ | 6,000 |   |

 

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

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**MillenniumPharmaceuticals, Inc.**

**Notes to Condensed Consolidated Financial Statements**

**1.   Basis of Presentation**

The accompanyingcondensed consolidated financial statements have been prepared in accordancewith generally accepted accounting principles for interim financial informationand with the instructions to Form 10-Q and Article 10 of RegulationS-X. Accordingly, they do not include all of the information and footnotesrequired by generally accepted accounting principles for complete financialstatements. In the opinion of management, all adjustments, consisting of normalrecurring accruals and revisions of estimates, considered necessary for a fairpresentation of the accompanying condensed consolidated financial statementshave been included. Interim results for the three months ended March 31, 2007are not necessarily indicative of the results that may be expected for the yearending December 31, 2007. For further information, refer to theconsolidated financial statements and accompanying footnotes included in theCompany’s Annual Report on Form 10-K for the fiscal year ended December 31,2006, which was filed with the Securities and Exchange Commission (“SEC”) onMarch 1, 2007.

The informationpresented in the condensed consolidated financial statements and relatedfootnotes at March 31, 2007, and for the three months ended March 31, 2007 and2006, is unaudited and the condensed consolidated balance sheet amounts andrelated footnotes at December 31, 2006, have been derived from auditedfinancial statements.

**2.   Summary of SignificantAccounting Policies**

**Reclassifications**

Certain prior yearamounts of the condensed consolidated statements of cash flows have beenreclassified to conform to the current year presentation related to equityadjustments from foreign currency translation.

**Cash Equivalents, MarketableSecurities and Other Investments**

Cash equivalentsprincipally consist of money market funds and corporate bonds with maturitiesof three months or less at the date of purchase. Marketable securitiesprimarily consist of investment-grade corporate bonds, asset-backed debt securitiesand U.S. government agency debt securities. Other investments representownership in private companies in which the Company holds less than a 20percent ownership position and does not otherwise exercise significantinfluence. The Company carries such investments at cost unless significantinfluence can be exercised over the investee, in which case such securities arerecorded using the equity method. As a matter of policy, the Company monitorsthese investments in private companies on a quarterly basis and determineswhether any impairment in their value would require a charge to the statementof operations, based on the implied value from any recent rounds of financingcompleted by the investee, market prices of comparable public companies and generalmarket conditions. These other investments are included in other long-termassets at March 31, 2007 and December 31, 2006.

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, 2007 and December 31, 2006 areclassified as “available-for-sale.” Available-for-sale securities are carriedat fair value, with the unrealized gains and losses reported in a separate componentof stockholders’ equity. The cost of debt securities in this category isadjusted for amortization of premiums and accretion of discounts to maturity.Such amortization and accretion are included in investment income. Realizedgains and losses and declines in value judged to be other-than-temporary onavailable-for-sale securities and other investments are included in investmentincome. The cost of securities sold is based on the specific identificationmethod. Interest and dividends on securities classified as available-for-saleare included in investment income.

During the three months ended March 31, 2007, the Company recordedrealized gains on marketable securities and other investments of $6.0 millionand realized losses on marketable securities of $0.9 million.  During the three months ended March 31, 2006,the Company did not record significant realized gains on marketable securitiesand recorded realized losses on marketable securities of $2.0 million.

Realized gains onmarketable securities for the three months ended March 31, 2007 included arealized gain of approximately $3.5 million related to the sale of the Company’sinvestment in SGX Pharmaceuticals, Inc. and a realized gain of  approximately $2.3 million related to theCompany’s share of proceeds from a class action proceeding againstWorldCom, Inc.  During 2002, theCompany recorded realized losses equal to the carrying value of its investmentin WorldCom, Inc., as the decline in value was determined to beother-than-temporary at that time.

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**Segment Information**

Statement of Financial Accounting Standards (“SFAS”)No. 131, “Disclosures about Segments of an Enterprise and RelatedInformation” (“SFAS No. 131”), establishes standards for the way thatpublic business enterprises report information about operating segments intheir financial statements. SFAS No. 131 also establishes standards forrelated disclosures about products and services, geographic areas, and majorcustomers.

The Company operates in one business segment, whichfocuses on the research, development and commercialization of therapeuticproducts. All of the Company’s product sales are currently related to sales ofVELCADE® (bortezomib) for Injection.  Theremainder of the Company’s total revenue is related to its strategic alliancesand royalties.

Revenues from Ortho Biotech Products, L.P. (“OBL”), amember of the Johnson & Johnson Family of Companies, accounted forapproximately 15 percent and 21 percent of consolidated revenues forthe three months ended March 31, 2007 and 2006, respectively.

Revenues from Schering-Plough Ltd. and ScheringCorporation (collectively “SGP”) accounted for approximately 25 percent and 32percent of consolidated revenues for the three months ended March 31, 2007and 2006, respectively.

There were no other significant customers understrategic alliances and royalties for the three months ended March 31, 2007 and2006.

**Information Concerning Market andSource of Supply Concentration**

INTEGRILIN® (eptifibatide) Injection has receivedregulatory approvals in the United States, the countries of the European Unionand a number of other countries for various indications. The Company and SGPco-promoted INTEGRILIN in the United States and shared any profits and lossesthrough August 31, 2005. In September 2005, SGP acquired theexclusive development and commercialization rights to INTEGRILIN in the UnitedStates from the Company. The Company continues to manage the supply chain forINTEGRILIN at the expense of SGP for products sold in the SGP territories. Inthe European Union, GlaxoSmithKline plc (“GSK”) exclusively markets INTEGRILIN.

The Company relies on third-party contractmanufacturers for the clinical and commercial production of INTEGRILIN. TheCompany has three approved manufacturers that provide eptifibatide, the activepharmaceutical ingredient (“API”) necessary to make INTEGRILIN, for bothclinical trials and commercial supply. Solvay, S.A. (“Solvay”), one of thecurrent manufacturers, owns the process technology used by it and one othermanufacturer for the production of the API. The Company entered into anagreement with Solvay in January 2003 for an initial term of four yearsand one-year renewal periods thereafter. In June 2006, the Companyreceived FDA approval of its own alternative process technology utilized by thethird manufacturer for the production of eptifibatide for approval in theUnited States and is currently seeking approval in Europe and other countries,as required. As of July 1, 2006, SGP began to purchase the majority of itsAPI directly from the manufacturer. The Company has two manufacturers thatcurrently perform fill/finish services for INTEGRILIN and two packagingsuppliers for the United States. The FDA or other regulatory agencies mustapprove the processes or the facilities that may be used for the manufacture ofthe Company’s marketed products.

The Company also relies on third-party contractmanufacturers for the manufacturing, fill/finish and packaging of VELCADE forboth commercial purposes and for ongoing clinical trials. The Company hasestablished long-term supply relationships for the production of commercialsupplies of VELCADE. The Company works with one manufacturer under a long-termsupply agreement to complete fill/finish for VELCADE. The Company is currentlyqualifying a second fill/finish supplier in order to mitigate its risk ofVELCADE supply interruption.

During 2004, the Company began distributing VELCADE inthe United States through a sole-source open access distribution model wherethe Company sells directly to an independent third party who in turndistributes to the wholesaler base. In April 2006, the Company’sdistributor added a second distribution site to its network in order to improveaccess to the product for physicians in the western United States.

**Inventory**

Inventory consists of currently marketed products,including VELCADE and INTEGRILIN. Inventories are stated at the lower of cost(first in, first out) or market. Inventories are reviewed periodically forslow-moving or obsolete status based on sales activity, both projected andhistorical.

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VELCADE inventories primarily relate to raw materialsused in production, work in process and finished goods inventory on hand.INTEGRILIN inventories include raw materials used in production and work inprocess to supply GSK and limited amounts of work in process to supply SGP.

Inventory consists of the following (in thousands):
| ** **      | ** ** | **March 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|-----------------|------------|------------------------------|------------|---------------------------------|------------|
| Raw materials   |       | $                            | 9,128      |                            | $          | 9,736 |   |
| Work in process |       | 2,260                        |       | 3,458                           |       |
| Finished goods  |       | 702                          |       | 404                             |       |
|            |       | $                            | 12,090     |                            | $          | 13,598 |   |

 

**Goodwill and Intangible Assets**

Intangible assets consist of specifically identifiedintangible assets. Goodwill is the excess of any purchase price over theestimated fair market value of net tangible assets acquired not allocated to specificintangible assets.

Intangible assets consist of the following (inthousands):
|                                                                      | ** ** | **March 31, 2007**    | ** ** | **December 31, 2006** | ** ** |
|----------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                                           | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization**   | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Developed  technology                                                |       | $                               | 435,000    |                            | $          | (171,489 | ) | $ | 435,000 |   | $ | (163,124 | ) |
| Core technology                                                      |       | $                               | 18,712     |                            | $          | (18,712 | ) | $ | 18,712 |   | $ | (18,712 | ) |
| Other                                                                |       | 17,060                          |       | (14,659                         | )          | 17,060 |   | (14,537 | ) |
| Total amortizable intangible assets, excluding  developed technology |       | 35,772                          |       | (33,371                         | )          | 35,772 |   | (33,249 | ) |
| Total  indefinite-lived trademark                                    |       | 59,000                          |       | —                          |       | 59,000 |   | — |   |
| Total intangible  assets, excluding developed technology             |       | $                               | 94,772     |                            | $          | (33,371 | ) | $ | 94,772 |   | $ | (33,249 | ) |

 

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 12 years |   |

 

Amortizationexpense was approximately $8.5 million in each of the three months endedMarch 31, 2007 and 2006.  TheCompany expects to incur amortization expense of approximately$34.0 million for each of the next five years.

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

Goodwill as ofMarch 31, 2007 consists of the excess purchase price over the estimatedfair value of net tangible and intangible assets. The carrying value may beadjusted as a result of the continued settlement of contingent considerationarising from acquisitions. Accordingly, goodwill increased by $0.8 million and$0.7 million for the three months ended March 31, 2007 and 2006,respectively.

**Revenue Recognition**

The Companyrecognizes revenue from the sale of its products, strategic alliances androyalties. The Company’s revenue arrangements with multiple elements aredivided into separate units of accounting if specified criteria are met,including whether the delivered element has stand-alone value to the customerand whether there is objective and reliable evidence of the fair value of theundelivered items. The consideration received is allocated among the separateunits based on their respective

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fair values, and theapplicable revenue recognition criteria are applied to each of the separateunits. Advance payments received in excess of amounts earned are classified asdeferred revenue until earned.

*Net product sales*

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

*Revenue under strategic alliances*

The Companyrecognizes revenue under strategic alliances from nonrefundable licensepayments, milestone payments, reimbursement of research and development costsand reimbursement of manufacturing-related costs. Nonrefundable upfront feesfor which no further performance obligations exist are recognized as revenue onthe earlier of when payments are received or collection is assured.

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

·    ratablyover the development period if development risk is significant;

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

·    basedupon the level of research services performed during the period of the researchcontract.

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

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

*Royalties*

Royalties arerecognized as revenue when earned. Royalties may include:

·             royalties earned onsales of INTEGRILIN in the United States and other territories around theworld, as provided by SGP;

·    royalties,or distribution fees, earned on international sales of VELCADE, as provided byOBL;

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

·    otherroyalties.

**Advertising and Promotional Expenses**

Advertising andpromotional expenses are expensed as incurred. During the three months endedMarch 31, 2007 and 2006, advertising and promotional expenses were $6.7 millionand $5.2 million, respectively.

**Net Loss Per Common Share**

Basic net loss per common share is computed using theweighted-average number of common shares outstanding during the period,excluding restricted stock that has been issued but is not yet vested. Dilutednet loss per share is based upon the weighted average number of common sharesoutstanding during the period, plus additional weighted average commonequivalent shares outstanding during the period when the effect is notanti-dilutive. Common equivalent shares result from the assumed exercise ofoutstanding stock options and warrants (the proceeds of which are then assumedto have been used to repurchase outstanding stock using the treasury stockmethod), the assumed conversion of convertible notes and the vesting ofunvested restricted shares of common stock. Options and warrants to purchaseshares of common stock and unvested restricted

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shares that were notincluded in the calculation of diluted shares because the effect of includingthe options, warrants and unvested restricted shares would have beenanti-dilutive were 3.4 million and 2.2 million at March 31, 2007 and 2006,respectively.

**Comprehensive Loss**

Comprehensive losscomprises net loss, changes in unrealized gains and losses on marketable securitiesand cumulative foreign currency translation adjustments. The following tabledisplays comprehensive loss (in thousands):
| ** **                                       | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                       | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| Net loss                                         |       | $                                                    | (6,778     | ) | $ | (20,841 | ) |
| Unrealized gain  (loss) on marketable securities |       | (615                                                 | )          | 8,816 |   |
| Cumulative  translation adjustments              |       | 4                                                    |       | (5 | ) |
| Comprehensive  loss                              |       | $                                                    | (7,389     | ) | $ | (12,030 | ) |

 

The components ofaccumulated other comprehensive loss were as follows (in thousands):
| ** **                                | ** ** | **March 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|-------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Unrealized loss  on marketable securities |       | $                            | (971       | )                               | $          | (356 | ) |
| Cumulative  translation adjustments       |       | (966                         | )          | (970                            | )          |
| Accumulated other  comprehensive loss     |       | $                            | (1,937     | )                               | $          | (1,326 | ) |

 

**Stock-Based Compensation Expense**

The Companyadopted SFAS No. 123 (revised 2004), “Share Based Payment,” (“SFAS 123R”),effective January 1, 2006. SFAS 123R requires the recognition of the fairvalue of stock-based compensation in its statements of operations. Stock-basedcompensation expense primarily relates to stock options, restricted stock andstock issued under the Company’s employee stock purchase plans.  The Company recognized stock-basedcompensation expense of $5.4 million and $10.5 million during the three monthsended March 31, 2007 and 2006, respectively. The reduction in stock-based compensation expense was primarily due to forfeituresin excess of original estimates which resulted from the forfeit of certaincliff-based awards held by employees that were severed in connection withrestructuring initiatives, as well as normal attrition.

**Accounting Pronouncements**

In September 2006, the FASB issued SFASNo. 157, “Fair Value Measurements,” or SFAS No. 157. SFASNo. 157 defines fair value, establishes a framework for measuring fairvalue in accordance with generally accepted accounting principles and expandsdisclosures about fair value measurements. SFAS No. 157 codifies thedefinition of fair value as the price that would be received to sell an assetor paid to transfer a liability in an orderly transaction between marketparticipants at the measurement date, clarifies the principle that fair valueshould be based on the assumptions market participants would use when pricingthe asset or liability and establishes a fair value hierarchy that prioritizesthe information used to develop those assumptions. SFAS No. 157 iseffective for fiscal years beginning after November 15, 2007. The Companydoes not believe adoption will have a material impact on its results ofoperations, financial position or cash flows.

InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,”or SFAS No. 159.  SFAS No. 159permits entities to choose to measure many financial instruments and certainother items at fair value. The objective is to improve financial reporting byproviding entities with the opportunity to mitigate volatility in reportedearnings caused by measuring related assets and liabilities differently withouthaving to apply complex hedge accounting provisions. SFAS No. 159 is effectivefor fiscal years beginning after November 15, 2007.  The Company is currently analyzing theeffect, if any, SFAS No. 159 will have on its consolidated financial positionand results of operations.

**3.   Restructuring**

*2006 ResourceAlignment*

In October 2006, the Company announced a programto further align resources with its current corporate priorities of advancingVELCADE and accelerating the clinical and preclinical pipeline by loweringinvestment in discovery and

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supporting areas. As partof its program, the Company has reduced in-house research and developmenttechnologies and headcount in areas where the work can now be outsourced.

The Company recorded restructuring charges ofapproximately $5.0 million during the three months ended March 31, 2007,under the 2006 restructuring program, primarily for facilities-related costsassociated with vacated buildings and employee termination benefits as a resultof headcount reductions.  “Other” in thetable below includes the write-off of deferred rent in accordance with SFAS No.13, “Accounting for Leases,” upon vacating the facilities.

The following table displays the restructuringactivity and liability balances (in thousands):
|                         | ** ** | **Balance at**   | ** ** | ** **  | ** ** | ** **   | ** ** | ** ** | ** ** | **Balance at** | ** ** |
|-------------------------|------------|-----------------------|------------|-------------|------------|--------------|------------|------------|------------|---------------------|------------|
| ** **              | ** ** | **December 31,** | ** ** | ** **  | ** ** | ** **   | ** ** | ** ** | ** ** | **March 31,**  | ** ** |
| ** **              | ** ** | **2006**              | ** ** | **Charges** | ** ** | **Payments** | ** ** | **Other**  | ** ** | **2007**            | ** ** |
| Termination  benefits   |       | $                     | 3,602      |        | $          | 847          |       | $          | (2,749     | )                   | $          | — |   | $ | 1,700 |   |
| Facilities              |       | —                |       | 4,095       |       | —       |       | 93         |       | 4,188               |       |
| Other associated  costs |       | —                |       | 31          |       | (15          | )          | —     |       | 16                  |       |
| Total                   |       | $                     | 3,602      |        | $          | 4,973        |       | $          | (2,764     | )                   | $          | 93 |   | $ | 5,904 |   |

 

*2005 StrategicRefinement*

In October 2005, the Company announced its 2005restructuring plan in support of a refined business strategy focused onadvancing key growth assets, including VELCADE, advancing the Company’sclinical pipeline and building a leading oncology-focused discoveryorganization. In connection with the strategic refinement, the Companysubstantially reduced its effort in inflammation discovery and reduced overallheadcount, including eliminating INTEGRILIN sales and marketing positions,positions in inflammation discovery and various other business support groups.

The Company recorded restructuring charges ofapproximately $0.2 million during the three months ended March 31, 2007under the 2005 restructuring plan, primarily related to the net present valueadjustment for facilities charged to restructuring in prior years.  The Company recorded restructuring charges ofapproximately $1.9 million during the three months ended March 31, 2006 underthe 2005 restructuring plan, primarily related to additional facility relatedcosts associated with vacated buildings and employee termination benefits.

The following table displays the restructuringactivity and liability balances (in thousands):
|                         | ** ** | **Balance at**   | ** ** | ** **  | ** ** | ** **   | ** ** | **Balance at** | ** ** |
|-------------------------|------------|-----------------------|------------|-------------|------------|--------------|------------|---------------------|------------|
| ** **              | ** ** | **December 31,** | ** ** | ** **  | ** ** | ** **   | ** ** | **March 31,**  | ** ** |
| ** **              | ** ** | **2006**              | ** ** | **Charges** | ** ** | **Payments** | ** ** | **2007**            | ** ** |
| Termination  benefits   |       | $                     | 133        |        | $          | —       |       | $                   | (49        | ) | $ | 84 |   |
| Facilities              |       | 13,827                |       | 214         |       | (1,666       | )          | 12,375              |       |
| Other associated  costs |       | 24                    |       | (24         | )          | —       |       | —              |       |
| Total                   |       | $                     | 13,984     |        | $          | 190          |       | $                   | (1,715     | ) | $ | 12,459 |   |

 

*2003 RestructuringPlan*

In December 2002 and June 2003, the Companyrealigned its resources to become a commercially-focused biopharmaceuticalcompany. The Company discontinued specified discovery research efforts, reducedoverall headcount, primarily in its discovery group, and consolidated itsresearch and development facilities.

The Company recorded restructuring charges ofapproximately $0.4 million and $0.9 million during the three months ended March31, 2007 and 2006, respectively, under the Company’s 2003 restructuring plan,primarily related to the net present value adjustment for facilities charged torestructuring in prior years.

The followingtable displays the restructuring activity and liability balances (inthousands):
| ** ** | ** ** | **Balance at**   | ** ** | ** **  | ** ** | ** **   | ** ** | **Balance at** | ** ** |
|------------|------------|-----------------------|------------|-------------|------------|--------------|------------|---------------------|------------|
| ** ** | ** ** | **December 31,** | ** ** | ** **  | ** ** | ** **   | ** ** | **March 31,**  | ** ** |
| ** ** | ** ** | **2006**              | ** ** | **Charges** | ** ** | **Payments** | ** ** | **2007**            | ** ** |
| Facilities |       | $                     | 49,928     |        | $          | 448          |       | $                   | (4,873     | ) | $ | 45,503 |   |
|            |            |                       |            |             |            |              |            |                     |            |  |  |  |  |

 

The Company accounts for its restructuring charges inaccordance with SFAS No. 146, “Accounting for Costs Associated with Exitor Disposal Activities” (“SFAS No. 146”). SFAS No. 146 requires thata liability for a cost associated with an exit or

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disposal activity berecognized and measured initially at its fair value in the period in which theliability is incurred, except for one-time termination benefits that meetspecified requirements. Costs of termination benefits relate to severancepackages, out-placement services and career counseling for employees affectedby the restructuring.

In accordance with SFAS No. 146, the Company’sfacilities related expenses and liabilities in all restructuring plans includeestimates of the remaining rental obligations, net of estimated subleaseincome, for facilities the Company no longer occupies. The Company validatesits estimates and assumptions with independent third parties having relevantexpertise in the real estate market. The Company reviews its estimates andassumptions on a regular basis, until the outcome is finalized, and makeswhatever modifications are necessary, based on the Company’s best judgment, toreflect any changed circumstances.

The projected timing of payments of the remainingrestructuring liabilities under all of the Company’s restructuring initiativesat March 31, 2007 is approximately $23.4 million due through March 31,2008 and $40.5 million thereafter through 2014. The actual amount and timing ofthe payment of the remaining accrued liability is dependent upon the ultimateterms of any potential subleases or lease restructuring. The Company expects torecord total restructuring charges of between $15.0 to $25.0 million in2007. These charges relate to certain facilities that the Company decided toabandon in November 2006, but will not be vacated until 2007, as well asnet present value adjustments on facilities charged to restructuring in prioryears.   In connection with the decisionto abandon the facilities in 2007, the Company revised the useful lives of theleasehold improvements at these facilities in accordance with SFASNo. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”  During the three months ended March 31, 2007,the Company recorded additional amortization expense of approximately $2.8million in research and development expense related to its decision.

The Company continues to evaluate its strategicalternatives, including facility consolidation, and as a result, significantadditional restructuring charges could occur in future periods.

**4.  Revenueand Strategic Alliances**

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

*Product Alliances*

*VELCADE*

In January 2007, the Company and Ortho Biotech Inc. (“OBI”)began jointly promoting VELCADE to U.S.-based physicians who treat multiplemyeloma patients. The Company pays a proportion of the VELCADE-related costsfor the OBI sales force, and OBI is entitled to receive a commission shouldsales associated with the increased promotional effort exceed pre-specifiedtargets. Both parties are able to terminate the agreement under certaincircumstances and subject to fees. The Company continues to be responsible formanufacturing and distribution of VELCADE in the U.S. The current agreementbetween the Company and OBL for the promotion of VELCADE outside the U.S.remains unchanged.

**5.  ConvertibleDebt**

The Company hadthe following convertible notes outstanding at March 31, 2007 and December 31,2006:
| ** **                                                | ** ** | **March 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|-----------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| 2.25%  convertible senior notes due November 15, 2011     |       | $                            | 250,000    |                            | $          | 250,000 |   |
| 5.5% convertible  subordinated notes due January 15, 2007 |       | —                       |       | 83,325                          |       |
| 5.0% convertible  subordinated notes due March 1, 2007    |       | —                       |       | 16,246                          |       |
| Total                                                     |       | $                            | 250,000    |                            | $          | 349,571 |   |

 

The $250.0 million of principal of 2.25%convertible senior notes due November 15, 2011 are convertible into theCompany’s common stock at a price equal to $15.47 per share (the “2.25% notes”).  Under the terms of the 2.25% notes, theCompany is required to make semi-annual interest payments on the outstandingprincipal balance on May 15 and November 15 of each year.

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The 2.25% notes are convertible into the Company’scommon stock based upon a conversion rate of 64.6465 shares of common stock per$1,000 principal amount of the 2.25% notes, which is equal to an initialconversion price of approximately $15.47 per share of stock, subject toadjustment. The 2.25% notes are convertible only in the followingcircumstances: (1) if the closing price of the common stock exceeds 120%of the conversion price within a specified period, (2) if specifieddistributions to holders of the common stock are made or specified corporatetransactions occur, (3) if the average trading price per $1,000 principalamount is less than 98% of the average conversion of the notes within aspecified period (the “parity trigger”) or (4) during the last threemonths prior to the maturity date of the notes, unless previously repurchasedby the Company under certain circumstances. In lieu of delivery of shares ofthe Company’s common stock, the Company may elect to deliver cash or acombination of cash and shares of the Company’s common stock in satisfaction ofits obligation upon conversion. The 2.25% notes are subordinated in right ofpayment to future senior indebtedness of the Company.

The parity trigger represents an embedded derivativethat requires bifurcation and separate accounting under SFAS No. 133, “Accountingfor Derivative Instruments and Hedging Activities.”  As of March 31, 2007 and December 31, 2006,the Company estimated that the value of the parity trigger was not material toits consolidated results of operations and its financial position.

In accordance with the payment terms, the Companyrepaid the entire $83.3 million principal balance on its 5.5% convertiblesubordinated notes due on January 15, 2007 that were convertible at a priceequal to $42.07 per share and the entire $16.2 million principal balanceon its 5.0% convertible subordinated notes due on March 1, 2007 that wereconvertible at a price equal to $34.21 per share.

**6.  StockPlans**

As discussed in Note 2, the Company adopted SFAS 123Reffective January 1, 2006. SFAS 123R requires the recognition of the fair valueof stock-based compensation in its statements of operations. Stock-basedcompensation expense primarily relates to stock options, restricted stock andstock issued under the Company’s employee stock purchase plans.

In March 2007, the Company implemented performancebased vesting for a portion of executive officer restricted stock awards.  A significant portion of the annual equityawards to all executive officers will vest only upon achievement of predefinedperformance objectives.  Theseperformance based awards vest over a four year period so long as the predefinedannual “target” or “overachievement” performance objectives are met orexceeded.  No shares will vest in theyears where “target” or “overachievement” performance objectives are notachieved and such shares will be forfeited. Performance based awards are recorded as compensation cost, based on themarket value on the date the “target” or “overachievement “ performanceobjectives are known and probable, on a straight-line basis over the requisiteservice period for each separately vesting portion of the award as if the awardwas, in substance, multiple awards.

The following table summarizes the weighted-averageassumptions the Company used in its fair value calculations at the date ofgrant:
| ** **          | ** ** | **Stock Options**                | ** ** | **Stock Purchase Plan**     | ** ** |
|---------------------|------------|---------------------------------------|------------|---------------------------------------|------------|
| ** **          | ** ** | **Three Months Ended March 31,** | ** ** | **Three Months Ended March 31,** | ** ** |
| ** **          | ** ** | **2007**                              | ** ** | **2006**                              | ** ** | **2007** | ** ** | **2006** | ** ** |
| Expected life       |       | 4.4                                   |       | 3.7                                   |       | 0.5 |   | 0.5 |   |
| Risk-free  interest |       | 4.73                                  | %          | 4.72                                  | %          | 4.82 | % | 3.63 | % |
| Volatility          |       | 40                                    | %          | 45                                    | %          | 40 | % | 60 | % |

 

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

The following table presents the combined optionactivity of the Company’s stock plans for the three months ended March 31,2007:
| ** **                                    | ** ** | ** **               | ** ** | ** **              | ** ** | **Weighted-**       | ** ** | ** **               | ** ** |
|-----------------------------------------------|------------|--------------------------|------------|-------------------------|------------|---------------------|------------|--------------------------|------------|
| ** **                                    | ** ** | ** **               | ** ** | ** **              | ** ** | **Average**         | ** ** | ** **               | ** ** |
| ** **                                    | ** ** | **Shares of**       | ** ** | **Weighted-**           | ** ** | **Remaining**       | ** ** | ** **               | ** ** |
| ** **                                    | ** ** | **Common Stock**    | ** ** | **Average**             | ** ** | **Contractual**     | ** ** | **Aggregate**            | ** ** |
| ** **                                    | ** ** | **Attributable to** | ** ** | **Exercise Price** | ** ** | **Term**            | ** ** | **Intrinsic Value** | ** ** |
| ** **                                    | ** ** | **Options**              | ** ** | **of Options**     | ** ** | **(in years)** | ** ** | **(in thousands)**  | ** ** |
| Outstanding at  January 1, 2007               |       | 27,004,963               |       | $                       | 16.19      |                |       |                     |       |   |
| Granted                                       |       | 733,866                  |       | 10.87                   |       |                |       |                     |       |
| Exercised                                     |       | (1,032,354               | )          | 8.08                    |       |                |       |                     |       |
| Forfeited or  expired                         |       | (1,840,031               | )          | 20.97                   |       |                |       |                     |       |
| Outstanding at  March 31, 2007                |       | 24,866,444               |       | $                       | 16.02      |                | 5.47       |                     | $          | 30,342 |   |
| Vested or  expected to vest at March 31, 2007 |       | 23,984,185               |       | $                       | 16.21      |                | 5.35       |                     | $          | 29,493 |   |
| Exercisable at March  31, 2007                |       | 20,168,757               |       | $                       | 17.13      |                | 4.77       |                     | $          | 26,295 |   |

 

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As of March 31, 2007, the total remaining unrecognizedcompensation cost related to nonvested stock option awards amounted toapproximately $12.7 million, including estimated forfeitures, which will berecognized over the weighed-average remaining requisite service period ofapproximately one and one half years.

A summary of the status of nonvested shares ofrestricted stock as of March 31, 2007, and changes during the three months thenended, is presented below:
| ** **                    | ** ** | **Shares** | ** ** | **Weighted-Average  Grant Date Fair Value** | ** ** |
|-------------------------------|------------|------------|------------|------------------------------------------------------------|------------|
| Nonvested at  January 1, 2007 |       | 1,659,100  |       | $                                                          | 10.31      |   |
| Granted                       |       | 2,090,446  |       | 10.84                                                      |       |
| Vested                        |       | (406,184   | )          | 10.45                                                      |       |
| Forfeited                     |       | (151,855   | )          | 10.37                                                      |       |
| Nonvested at March 31,  2007  |       | 3,191,507  |       | $                                                          | 10.64      |   |

 

**As of March 31, 2007 the totalremaining unrecognized compensation cost related to nonvested restricted stockawards amounted to approximately $21.6 million, including estimatedforfeitures, which will be recognized over the weighted-average remainingrequisite service period of approximately one and one half years.**

**7.  IncomeTaxes**

In June 2006, theFASB issued FASB Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes—an Interpretation of FASB Statement No. 109” (the “Interpretation”).The Interpretation clarifies the accounting for uncertainty in income taxesrecognized in an enterprise’s financial statements in accordance with FASBStatement No. 109, “Accounting for Income Taxes”. The Interpretationprescribes a recognition threshold and measurement attribute for the financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return. This Interpretation also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure and transition. The Interpretation is effective for fiscalyears beginning after December 15, 2006. The Company’s adoption did nothave a material impact on its results of operations, financial position or cashflows as it has not recorded any liabilities relating to uncertain tax positions.

The Company files incometax returns in the United States federal jurisdiction and various state, local,and foreign jurisdictions. The Company is no longer subject to any taxassessment from an income tax examination in major taxing jurisdictions foryears before 2003, except to the extent that in the future it utilizes netoperating losses or tax credit carryforwards that originated before 2003. TheCompany currently is not under examination by the Internal Revenue Service orother jurisdictions for any tax years.

The Company recognizesboth accrued interest and penalties related to unrecognized tax benefits inincome tax expense. The Company has not recognized any interest and penaltiessince inception.

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

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

**Overview**

We are an innovation-driven biopharmaceutical companyfocused on discovering, developing and commercializing medicines to change thelives of patients with cancer and inflammatory diseases. We currentlycommercialize VELCADE, the U.S. market leader for the treatment of patientswith multiple myeloma who have received at least one prior therapy. Inaddition, VELCADE is the first and only FDA approved therapeutic for thetreatment of patients who have received at least one prior therapy for mantlecell lymphoma, or MCL. We have a development pipeline of clinical andpreclinical product candidates in our therapeutic focus areas of cancer andinflammatory diseases, and we have an oncology-focused drug discoveryorganization. Strategic business relationships are a key component of ourbusiness.

In January 2007, Ortho Biotech Inc., or OBI, and webegan to jointly promote VELCADE to U.S.-based physicians who treat multiplemyeloma patients.  We believe thiscollaboration, with the well-established OBI oncology sales force, will help usto realize the full potential of VELCADE in the U.S. market.

Our business strategy is to build a portfolio of newmedicines based on our understanding of genomics and particular molecularpathways that affect the establishment and progression of specific diseases.These molecular pathways include the related effects of proteins on cellularperformance, reproduction and death. We plan to develop and commercialize manyof our products on our own, but expect to seek development and commercialcollaborators on favorable terms or when we otherwise believe that doing sowould be advantageous to us.

In April 2007, we announced the advancement of a newsmall molecule, MLN4924, a novel inhibitor of Nedd 8 Activating Enzyme (NAE),from discovery to the development pipeline. NAE is an unprecedented target inthe protein homeostasis pathway that acts upstream of the proteasome, thetarget of VELCADE. NAE regulates a subset of proteins that controls theregulation and survival of cancer cells. MLN4924 is the seventh molecule toadvance from our discovery organization to the development pipeline in the pastthree years.

In the near term, we expect to focus our commercialactivities in cancer where we plan to build on our commercial and regulatoryexperience with VELCADE. We also are working to obtain approval to marketVELCADE in the United States and, through Ortho Biotech Products, L.P., orOBL, elsewhere for the treatment of multiple myeloma in newly diagnosed, orfront-line patients, and for the treatment of additional cancer types. Webelieve, if approved, these additional uses of VELCADE would lead to asignificant expansion of our cancer business. In inflammatory disease, we areadvancing novel product candidates in clinical development as potentialtreatments for serious and widely prevalent conditions.

In the long term, we expect to bring new products tomarket on a regular basis from our pipeline of discovery and development-stageprograms. We also expect to continue to evaluate opportunities to in-licenseand acquire molecules from other companies in order to supplement our pipeline.If we are successful, we will use the revenues from this expanding portfolio ofmarketed products to broaden the scope of our operations.

**VELCADE®(bortezomib) for Injection**

VELCADE, the first of a new class of medicines calledproteasome inhibitors, was the first treatment in more than a decade to beapproved in the United States for patients with multiple myeloma. We receivedaccelerated approval based on phase II data from the FDA on May 13, 2003to market VELCADE for the treatment of multiple myeloma patients who havereceived at least two prior therapies and have demonstrated disease progressionon their most recent therapy, commonly referred to as third-line and beyond.

In December 2006, the FDA granted full approvalof VELCADE for the treatment of patients with MCL who have received at leastone prior therapy, commonly referred to as relapsed, or second-line MCL. Thisapproval followed the FDA’s decision in November 2004 to grant VELCADEfast track designation for MCL due to the high unmet medical need of MCLpatients and the strength of clinical trial data for VELCADE in the treatmentof MCL. In April 2006, we initiated a phase III trial of VELCADE incombination with rituximab in the relapsed follicular and marginal zonenon-Hodgkin’s lymphoma setting.

In March 2005, we received full approval from theFDA of our supplemental New Drug Application, or sNDA, for VELCADE for thetreatment of patients with multiple myeloma who have received at least oneprior therapy, commonly referred to as second-line or relapsed multiplemyeloma. This regulatory decision increased the approved market potential of

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the drug and also markedthe completion of the confirmatory studies required by the FDA after it grantedaccelerated approval in May 2003. VELCADE is the only single-agent therapythat has both demonstrated longer survival in patients with multiple myelomaand the extension of patient survival on its FDA approved labeling.

In April 2004, the European Commission grantedMarketing Authorization for VELCADE in Europe for the treatment of multiplemyeloma patients who have received at least two prior therapies and havedemonstrated disease progression on their most recent therapy. Under thisAuthorization, the European Commission granted us a single license formarketing VELCADE in the 15 member states of the European Union, plus Norwayand Iceland. VELCADE was also approved for marketing in the ten accessionmember countries when those countries officially joined the European Union onMay 1, 2004. Regulatory authorities in a number of other countries,including countries within Latin America and South-East Asia and Japan havealso approved VELCADE. The product is now approved in more than 80 countries.Under our agreement with OBL, we have transferred the licenses to affiliates ofOBL. OBL’s affiliates now market VELCADE in these countries.

In April 2005, OBL received approval from theEuropean Commission for VELCADE as a monotherapy for multiple myeloma patientswho have received at least one prior therapy and who have already undergone orare unsuitable for bone marrow transplantation. In October 2006, OBLreceived approval for marketing VELCADE in Japan for relapsed or refractorymultiple myeloma in patients who have received at least one prior therapy.

**OurAlliances**

***Ortho Biotech Collaborations***

In January 2007, OBI and we began to jointly promoteVELCADE to U.S.-based physicians who treat multiple myeloma patients. We paythe cost of a portion of the OBI sales effort dedicated to VELCADE and acommission if sales associated with the increased effort exceed specifiedtargets. Both parties are able toterminate the agreement under certain circumstances and subject to terminationfees. We continue to be responsible for manufacturing and distributionof VELCADE in the U.S. Our current agreement with OBL, a member of the JohnsonFamily Of Companies and an affiliate of OBI, for the promotion of VELCADEoutside the U.S. remains unchanged.

In June 2003, we entered into an agreement withOBL to collaborate on the commercialization of VELCADE and withJohnson & Johnson Pharmaceutical Research & Development,L.L.C., or JJPRD, for the continued clinical development of VELCADE. OBL andits affiliate, Janssen-Cilag, are commercializing VELCADE outside of the UnitedStates, and Janssen Pharmaceutical K.K. is responsible for Japan. We receivedistribution fees included in royalties from OBL and its affiliates from salesof VELCADE outside of the United States. We manage the supply chain for VELCADEat the expense of OBL for products sold in the OBL territories. We retain anoption to co-promote VELCADE with OBL at a future date in specified Europeancountries.

We are engaged with JJPRD in an extensive globalprogram for further clinical development of VELCADE with the purpose ofmaximizing the commercial potential of VELCADE. This program is investigatingthe potential of VELCADE to treat multiple forms of solid and hematologicaltumors, including continued clinical development of VELCADE for multiplemyeloma and non-Hodgkin’s lymphoma, or NHL. JJPRD is responsible for 45% of thejoint development costs. We are eligible to receive payments from JJPRD or OBLfor achieving clinical development milestones, regulatory milestones outside ofthe United States or agreed-upon sales levels of VELCADE.

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

Schering-Plough Ltd. and Schering Corporation,together referred to as SGP, markets INTEGRILIN in the United States andspecified other areas outside of the European Union. GlaxoSmithKline plc, orGSK, markets INTEGRILIN in the European Union under a license from us.

***SGP Collaboration***

InApril 1995, COR Therapeutics, Inc., or COR, entered into acollaboration agreement with SGP to jointly develop and commercializeINTEGRILIN on a worldwide basis. We acquired COR in February 2002.  Under our original collaboration agreementwith SGP, we generally shared any profits or losses from INTEGRILIN sales inthe United States included in co-promotion revenue with SGP and we granted SGPan exclusive license to market INTEGRILIN outside the United States and theEuropean Union in exchange for royalty obligations.

On September 1, 2005, SGP obtained the exclusiveU.S. development and commercialization rights for INTEGRILIN products from usand paid us a nonrefundable upfront payment of approximately$35.5 million. In addition, we are entitled to receive royalties on netproduct sales of INTEGRILIN in the United States from SGP for so long as SGP isengaged in the commercialization and sale of an INTEGRILIN product in the UnitedStates, with the potential of receiving royalties beyond

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the 2014 patentexpiration date. Minimum royalty payments for 2007 are set at approximately$85.4 million. There are no guaranteed minimum royalty payments beyond 2007. Wealso receive royalties on net product sales by SGP outside of the UnitedStates. SGP’s obligation to pay us royalties in other countries expires on acountry by country basis upon the later of fifteen years from the firstcommercial use of an INTEGRILIN product in such country and the expiration ofthe last to expire patent covering such INTEGRILIN product. We are continuingto manage the supply chain for INTEGRILIN at the expense of SGP for productssold in the SGP territories including the U.S. We receive payments as a result ofmanaging the supply chain and record those payments as strategic alliancerevenue.

***GSK License Agreement***

In June 2004,we reacquired the rights to market INTEGRILIN in Europe from SGP andconcurrently entered into a license agreement granting GSK exclusive marketingrights to INTEGRILIN in Europe. In January 2005, the transition of theINTEGRILIN marketing authorizations for the European Union from SGP to GSK wascompleted, and GSK began selling INTEGRILIN in the countries of the EuropeanUnion. GSK also markets INTEGRILIN in other European countries where it hasreceived approval of the transfer from SGP to GSK of the relevant marketingauthorizations. Under the terms of the agreement, we have received license feesand are entitled to future royalties from GSK on INTEGRILIN sales in Europesubject to the achievement of specified objectives. We manage the supply chainfor INTEGRILIN at the expense of GSK for products sold in the GSK territories.We receive payments as a result of managing the supply chain and record thosepayments as strategic alliance revenue.

***sanofi-aventisInflammatory Disease Collaboration***

In June 2000, we entered into a broad agreementin the field of inflammatory disease with Aventis, now sanofi-aventis, whichincludes joint discovery, development and commercialization of small moleculedrugs for the treatment of specified inflammatory diseases. This agreementcovers a substantial portion of our development program in the inflammatorydisease area and provides us with potential access to sanofi-aventis’ largepromotional infrastructure in connection with the commercialization of jointlydeveloped products. The discovery phase of this collaboration has concluded.However, we and sanofi-aventis are continuing a limited research program coveringtwo advanced preclinical candidates discovered through the collaboration. Thedevelopment and commercialization programs continue under the agreement.

As provided in the original agreement, in NorthAmerica, we have agreed to share the responsibility for and cost of developing,manufacturing and marketing products arising from the alliance. Outside ofNorth America, sanofi-aventis is responsible for and will bear the cost ofdeveloping, manufacturing and marketing products arising from the alliance. sanofi-aventisis required to pay us a royalty on product sales outside of North America.Under this agreement, sanofi-aventis acquired 4.5 million shares of our commonstock over a two-year period through 2001 for $250.0 million.

To date, we and sanofi-aventis have identified asignificant number of novel drug targets and associated molecules relevant ininflammatory diseases. During the remaining portion of the development phase ofthe alliance, we and sanofi-aventis have agreed to focus our joint resources onpreclinical and clinical development of candidates identified in thecollaboration. The alliance has identified several development candidates, oneof which, MLN3897, is now being tested in a phase II clinical trial and two ofwhich, MLN3701 and MLN0415, are now being tested by us in phase I clinicaltrials. A fourth candidate, MLN6095, is now in preclinical testing.

**CriticalAccounting Policies and Significant Judgments and Estimates**

Our management’s discussion and analysis of ourfinancial condition and results of operations are based on our condensedconsolidated financial statements, which have been prepared in accordance withgenerally accepted accounting principles. The preparation of these financialstatements requires us to make estimates and assumptions that affect thereported amounts of assets and liabilities and the disclosure of contingentassets and liabilities at the date of the financial statements as well as thereported revenues and expenses during the reporting periods. On an ongoing basis,we evaluate our estimates and judgments, including those related to revenuerecognition, inventory, intangible assets, goodwill and stock-basedcompensation expense. We base our estimates on historical experience and onvarious other factors that we believe are appropriate under the circumstances,the results of which form the basis for making judgments about the carryingvalue of assets and liabilities that are not readily apparent from othersources. Actual results may differ from these estimates under differentassumptions or conditions.

While our significant accounting policies are morefully described in Note 2 to our consolidated financial statementsincluded in our Form 10-K, filed with the SEC on March 1, 2007, webelieve the following accounting policies are most critical to aid in fullyunderstanding and evaluating our reported financial results.

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***Revenue***

We recognize revenue from the sale of our products,our strategic alliances and royalties and distribution fees based on net salesof licensed products. We divide our revenue arrangements with multiple elementsinto separate units of accounting if specified criteria are met, includingwhether the delivered element has stand-alone value to the customer and whetherthere is objective and reliable evidence of the fair value of the undelivereditems. We allocate the consideration we receive among the separate units basedon their respective fair values, and we apply the applicable revenuerecognition criteria to each of the separate units. We classify advancepayments received in excess of amounts earned as deferred revenue until earned.

We recognize revenue from the sale of VELCADE in theUnited States when delivery has occurred and title has transferred. During thefourth quarter of 2004, we began distributing VELCADE through a sole-sourceopen access distribution model in which we sell directly to an independentthird party who in turn distributes to the wholesaler base. In April 2006,our sole-source distributor added a second distribution site to its network inorder to improve access to the product for physicians in the western UnitedStates. Under our agreement with our sole-source distributor, inventory levelsare contractually limited to no more than three weeks. VELCADE productinventory levels held by the sole-source distributor and wholesalers mayfluctuate from time to time within our desired range of one to two weeks ofinventory in the distribution channel.

We record allowances as a reduction to product salesfor product returns, chargebacks and discounts at the time of sale. We estimateVELCADE product returns based on historical return patterns. We expect VELCADEreturns to be, and returns have been, generally low because the shelf life forthe product is 18 months in the United States, and we expect, and haveexperienced, that wholesalers will not stock significant inventory due to therelatively high cost of the product. We consider several factors in ourestimation process, including our internal sales forecasts, inventory levels asprovided by wholesalers and third party market research data.  As we continually monitor actual productreturns and inventory levels in the domestic distribution channel, we havereduced and may, from time to time in the future, reduce our product returns estimate.Doing so results in increased product sales at the time the return estimate ischanged. If circumstances change or conditions become more competitive in themarket for therapeutic products that address multiple myeloma, we may takeactions to increase our product return estimates. Doing so would result in anincremental reduction of product sales at the time the return estimate ischanged. Our accruals for rebates, chargebacks, and other discounts wereimmaterial at March 31, 2007.

We recognize nonrefundableupfront licensing fees and guaranteed, time-based payments that, in eithercase, require continuing involvement in the form of research and development,manufacturing or other commercialization efforts by us as strategic alliancerevenue:

·       ratably over thedevelopment period if development risk is significant;

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

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

When the period of deferral cannot be specificallyidentified from the contract, management estimates the period based upon othercritical factors contained within the contract. We continually review theseestimates, which could result in a change in the deferral period and mightimpact the timing and the amount of revenue recognized.

Milestone payments are recognized as strategicalliance revenue when the substantive performance obligations, as defined inthe contract, are achieved. Performance obligations typically consist ofsignificant milestones in the development life cycle of the related productcandidate, such as initiation of clinical trials, filing for approval withregulatory agencies and approvals by regulatory agencies. Reimbursements ofresearch and development costs are recognized as strategic alliance revenue asthe related costs are incurred.

We are entitled to receive royalty payments underlicense agreements with a number of third parties that sell products based ontechnology we have developed or to which we have rights. These licenseagreements provide for the payment of royalties to us based on sales of thelicensed product and we record royalty revenues based on estimates of salesfrom interim data provided by licensees. For all of our royalty arrangements,we perform an analysis of historical royalties we have been paid, adjusted forany changes in facts and circumstances, as appropriate. Differences betweenactual royalty revenues and estimated royalty revenues are adjusted for in theperiod which they become known, typically the following quarter. Theseadjustments have not been, and we do not expect them to be, significant. To theextent we do not have sufficient ability to accurately estimate royaltyrevenue, we record royalties on a cash basis.

***Inventory***

Inventory consists of currently marketed products.VELCADE inventories primarily represent raw materials used in production, workin process and finished goods inventory on hand, valued at cost. INTEGRILINinventories include raw 

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materials used inproduction and work in process, valued at cost, to supply GSK and limitedamounts of work in process, valued at cost, to supply SGP. We reviewinventories 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 be fullyutilized and could be subject to impairment, at which point we would adjustinventory to its net realizable value.

***Intangible Assets***

We have acquired significant intangible assets that wevalue and record. Those assets that do not yet have regulatory approval and forwhich 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 at acquisition. The discounted cash flow model requiresassumptions about the timing and amount of future cash inflows and outflows,risk, the cost of capital, and terminal values. Each of these factors cansignificantly affect the value of the intangible asset. We engage independentvaluation experts who review our critical assumptions for significantacquisitions of intangibles. We review intangible assets for impairment on aperiodic basis using an undiscounted net cash flows approach when impairmentindicators arise. If the undiscounted cash flows of an intangible asset areless than the carrying value of an intangible asset, we would write down theintangible asset to the discounted cash flow value. Where we cannot identifycash flows for an individual asset, our review is applied at the lowest grouplevel for which cash flows are identifiable.

***Goodwill***

On October 1, 2006, 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, including the restructured relationship withSGP, to assess whether an impairment indicator exists. If we were to determinethat an impairment indicator exists, we would be required to perform animpairment test, which could result in a material impairment charge to our statementof operations.

***Restructuring***

In accordance with SFAS No. 146, “Accounting forCosts Associated with Exit or Disposal Activities,” our facilities relatedexpenses and liabilities under all of our restructuring plans includedestimates of the remaining rental obligations, net of estimated subleaseincome, for facilities we no longer occupy. We validated our estimates andassumptions with independent third parties having relevant expertise in thereal estate market. We review our estimates and assumptions on a regular basisuntil the outcome is finalized, and make whatever modifications we believenecessary, based on our best judgment, to reflect any changed circumstances. Itis possible that such estimates could change in the future resulting in additionaladjustments, and the effect of any such adjustments could be material.

***Stock-Based Compensation Expense***

We adopted Statement of Financial AccountingStandards, or SFAS, No. 123 (revised 2004), “Share Based Payment,” or SFAS123R, effective January 1, 2006 under the modified prospective method.SFAS 123R requires the recognition of the fair value of stock-basedcompensation expense in our operations, and accordingly the adoption of SFAS123R fair value method has had and will continue to have a significant impacton our results of operations, although it will have no impact on our overallfinancial position. Option valuation models require the input of highlysubjective assumptions, including stock price volatility and expected term ofan option. In determining our volatility, we have considered impliedvolatilities of currently traded options to provide an estimate of volatilitybased upon current trading activity in addition to our historical volatility.After considering other such factors as our stage of development, the length oftime we have been public and the impact of having a marketed product, webelieve a blended volatility rate based upon historical performance, as well asthe implied volatilities of currently traded options, best reflects the expectedvolatility of our stock going forward. Changes in market price directly affectvolatility and could cause stock-based compensation expense to varysignificantly in future reporting periods.

We use historical data to estimate option exercise andemployee termination behavior, adjusted for known trends, to arrive at theestimated expected life of an option. We update these assumptions on aquarterly basis to reflect recent historical data. Additionally, we arerequired to estimate forfeiture rates to approximate the number of shares thatwill vest in a period to which the fair value is applied. We will continuallymonitor employee exercise behavior and may further adjust the estimated termand forfeiture rates in future periods. Increasing the estimated life wouldresult in an increase in the fair value to be recognized over the requisiteservice period, generally the vesting period. Estimated forfeitures will beadjusted to actual forfeitures upon the vest date of the cancelled options as acumulative adjustment on a quarterly basis. Doing so could cause futureexpenses to vary at each reporting period.

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In March 2006, we revised our annual meritcompensation program to include the availability of both stock options andrestricted stock to certain employees. In March 2007, we extended the choice ofstock options or restricted stock to all employees through the annual meritcompensation program.  Additionally, inMarch 2007, we implemented performance based vesting for a portion of executiveofficer restricted stock awards.  Asignificant portion of the annual equity awards to all executive officers willvest only upon achievement of predefined performance objectives.  For the three months ended March 31, 2007, werecognized total stock-based compensation expense under SFAS 123R of $5.4million. As of March 31, 2007, the total remaining unrecognizedcompensation cost related to nonvested stock option awards amounted toapproximately $12.7 million, including estimated forfeitures, which willbe amortized over the weighted-average remaining requisite service periods ofapproximately one and one half years. As of March 31, 2007, the totalremaining unrecognized compensation cost related to nonvested restricted stockawards amounted to approximately $21.6 million, including estimatedforfeitures, which will be amortized over the weighted-average remainingrequisite service periods of approximately one and one half years.

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

**AccountingPronouncements**

In September 2006, the FASB issued SFASNo. 157, “Fair Value Measurements,” or SFAS No. 157. SFASNo. 157 defines fair value, establishes a framework for measuring fairvalue in accordance with generally accepted accounting principles and expandsdisclosures about fair value measurements. SFAS No. 157 codifies thedefinition of fair value as the price that would be received to sell an assetor paid to transfer a liability in an orderly transaction between marketparticipants at the measurement date, clarifies the principle that fair valueshould be based on the assumptions market participants would use when pricing theasset or liability and establishes a fair value hierarchy that prioritizes theinformation used to develop those assumptions. SFAS No. 157 is effectivefor fiscal years beginning after November 15, 2007. We do not currentlybelieve that adoption will have a material impact on our results of operations,financial position or cash flows.

InFebruary 2007, the FASB released SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,”or SFAS No. 159.  SFAS No. 159permits entities to choose to measure many financial instruments and certainother items at fair value. The objective is to improve financial reporting byproviding entities with the opportunity to mitigate volatility in reportedearnings caused by measuring related assets and liabilities differently withouthaving to apply complex hedge accounting provisions. SFAS No. 159 is effectivefor fiscal years beginning after November 15, 2007.  We are currently analyzing the effect, if any,SFAS No. 159 will have on our consolidated financial position and results ofoperations.

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**Resultsof Operations**
| ** **                                                           | ** ** | ** **                       | ** ** | ** **     | ** ** | **Increase/**  | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------|------------|----------------|------------|----------------|------------|
| ** **                                                           | ** ** | ** **                       | ** ** | ** **     | ** ** | **(Decrease)** | ** ** |
| ** **                                                           | ** ** | **Three Months Ended** | ** ** | **Percentage** | ** ** |
| ** **                                                           | ** ** | **March 31,**               | ** ** | **Change**     | ** ** |
| **(in  thousands, except per share amounts)**                        | ** ** | **2007**                         | ** ** | **2006**       | ** ** | **2007/2006**  | ** ** |
| ** **                                                           | ** ** | ** **                       | ** ** | ** **     | ** ** | ** **     | ** ** |
| Revenues:                                                            |       |                             |       |           |       |           |       |
| Net product sales                                                    |       | $                                | 58,640     |           | $          | 53,373         |       | 10 | % |
| Revenue under strategic alliances                                    |       | 15,714                           |       | 38,629         |       | (59            | )          |
| Royalties                                                            |       | 36,370                           |       | 30,473         |       | 19             |       |
| Total revenues                                                       |       | 110,724                          |       | 122,475        |       | (10            | )          |
|                                                                 |       |                             |       |           |       |           |       |
| Costs and  expenses:                                                 |       |                             |       |           |       |           |       |
| Cost of sales (excludes amortization of acquired  intangible assets) |       | 5,358                            |       | 15,828         |       | (66            | )          |
| Research and development (Note 1)                                    |       | 71,229                           |       | 82,598         |       | (14            | )          |
| Selling, general and administrative (Note 1)                         |       | 39,525                           |       | 35,465         |       | 11             |       |
| Restructuring                                                        |       | 5,611                            |       | 2,831          |       | 98             |       |
| Amortization of intangibles                                          |       | 8,487                            |       | 8,487          |       | —         |       |
| Total costs and expenses                                             |       | 130,210                          |       | 145,209        |       | (10            | )          |
|                                                                 |       |                             |       |           |       |           |       |
| Loss from  operations                                                |       | (19,486                          | )          | (22,734        | )          | (14            | )          |
|                                                                 |       |                             |       |           |       |           |       |
| Other income  (expense):                                             |       |                             |       |           |       |           |       |
| Investment income, net                                               |       | 15,495                           |       | 4,625          |       | 235            |       |
| Interest expense                                                     |       | (2,787                           | )          | (2,732         | )          | 2              |       |
| Net loss                                                             |       | $                                | (6,778     | )              | $          | (20,841        | )          | (67 | )% |
|                                                                 |       |                             |       |           |       |           |       |
| *Amounts  per common share:*                                         | * *   | * *                         | * *   | * *       | * *   | * *       | * *   |
| Net loss per  share, basic and diluted                               |       | $                                | (0.02      | )              | $          | (0.07          | )          |   |   |
|                                                                 |       |                             |       |           |       |           |       |
| Weighted average  shares, basic and diluted                          |       | 316,072                          |       | 311,823        |       |           |       |

 

Note 1:  In accordance with SFAS 123R, stock-basedcompensation expense is allocated in the condensed consolidated statements ofoperations expense lines as follows:
| ** **                           | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------|------------|--------------------------------------------------|------------|
| **(in  thousands)**                  | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
|                                 |       |                                             |       |   |   |
| Research and  development            |       | $                                                | 2,055      |   | $ | 6,334 |   |
| Selling, general and  administrative |       | 3,347                                            |       | 4,166 |   |
|                                      |            |                                                  |            |  |  |  |  |

 

***Revenues***

Total revenuesdecreased 10% to $110.7 million during the three months ended March 31,2007, or the 2007 Three Month Period, compared to the three months ended March31, 2006, or the 2006 Three Month Period. The decrease was primarily related to lower strategic alliance revenueas a result of a decrease in milestone revenue during 2007 and lower revenueunder the SGP relationship.  Partiallyoffsetting these decreases were increased product sales of VELCADE within theUnited States and increased distribution fees recognized from OBL on sales ofVELCADE outside of the United States.

Net product salesof VELCADE increased 10% to $58.6 million in the 2007 Three Month Periodcompared to the 2006 Three Month Period. The increase was primarily attributable to growth in product demand aswell as price increases during the period. The growth in product demand was primarily a result of an increase inthe number of cycles used in patients and greater use in patients with relapsedmantle cell lymphoma, for which the product received FDA approval in December2006.  Reserves for product returns,chargebacks and discounts were within the range of 5% and 10%

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of gross product sales ineach of the 2007 and 2006 Three Month Periods. Net product sales from VELCADErepresented approximately 53% and 44% of our total revenues in the 2007 and2006 Three Month Periods, respectively.

Revenue understrategic alliances decreased 59% to $15.7 million in the 2007 Three MonthPeriod compared to the 2006 Three Month Period. The decrease was primarily related to a decrease in milestone revenueearned in the 2007 Three Month Period as well as lower revenue under the SGPrelationship.  Revenue under the SGPrelationship was generated from the management of the INTEGRILIN supply chainon behalf of SGP in the form of license fees and reimbursement ofmanufacturing-related expenses.  On July1, 2006, SGP began purchasing the majority of the active pharmaceuticalingredient necessary to manufacture INTEGRILIN resulting in lower reimbursementof manufacturing-related expenses during the 2007 Three Month Period.

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

Royalty revenueincreased 19% to $36.4 million in the 2007 Three Month Period compared to the2006 Three Month Period.  The increasewas primarily a result of increased distribution fees recognized from OBL onsales of VELCADE outside of the United States.

***Cost of Sales***

Cost of sales decreased66% to $5.4 million in the 2007 Three Month Period compared to the 2006 ThreeMonth Period.  Cost of sales includedmanufacturing-related expenses associated with the sales of VELCADE as well ascosts associated with managing the INTEGRILIN supply chain on behalf ofSGP.  The decrease in the 2007 ThreeMonth Period was primarily due to the decrease in INTEGRILINmanufacturing-related expenses as a result of SGP purchasing the majority ofthe active pharmaceutical ingredient directly as of July 1, 2006.

***Research and Development***

Research anddevelopment expenses decreased 14% to $71.2 million in the 2007 Three MonthPeriod compared to the 2006 Three Month Period. The decrease was primarily a result of cost reductions associated withour 2006 resource alignment and restructuring efforts combined with reducedstock-based compensation expense.  Thereduction in stock-based compensation expense was primarily due to forfeituresin excess of original estimates which resulted from the forfeit of certaincliff-based awards held by employees that were severed in connection withrestructuring initiatives, as well as normal attrition.

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In addition to ourongoing clinical trials of VELCADE, we have a number of drug candidates inclinical and late preclinical development. The following chart summarizes theapplicable disease indication and the clinical or preclinical trial status ofour drug candidates as of April 2007.
| **Product  Description**                                                                                         | ** **   | **Disease Indication**                                                          | ** **   | **Current Trial Status**                               |
|------------------------------------------------------------------------------------------------------------------|--------------|---------------------------------------------------------------------------------|--------------|--------------------------------------------------------|
| ***Cancer***                                                                                                     | *** *** | *** ***                                                                    | *** *** | *** ***                                           |
| *** ***                                                                                                     | *** *** | *** ***                                                                    | *** *** | *** ***                                           |
| MLN518 is a small molecule inhibitor of the class  III receptor tyrosine kinase (RTKs), FLT-3, c-KIT, and PDGF-R |         | Acute myeloid leukemia  Glioma(1)  Renal cell carcinoma(1)  Prostate cancer (1) |         | phase I/phase II  phase I/phase II  phase II  phase II |
|                                                                                                             |         |                                                                            |         |                                                   |
| MLN8054 is a small molecule inhibitor of Aurora A  Kinase                                                        |         | Advanced malignancies                                                           |         | phase I                                                |
|                                                                                                             |         |                                                                            |         |                                                   |
| MLN8237 is a small molecule inhibitor of Aurora A  Kinase                                                        |         | Advanced malignancies                                                           |         | preclinical / phase I planned for May 2007             |
|                                                                                                             |         |                                                                            |         |                                                   |
| MLN4924 is a small molecule inhibitor of Nedd8 –  activating enzyme (NAE)                                   |         | Advanced malignancies                                                           |         | preclinical                                            |
|                                                                                                             |         |                                                                            |         |                                                   |
| ***Inflammatory  Diseases***                                                                                     |         |                                                                            |         |                                                   |
| *** ***                                                                                                     |         |                                                                            |         |                                                   |
| MLN0002 is a humanized monoclonal antibody directed  against the alpha4beta7 integrin                            |         | Crohn’s disease  Ulcerative colitis                                        |         | phase II (2)                                           |
|                                                                                                             |         |                                                                            |         |                                                   |
| MLN1202 is a humanized monoclonal antibody directed  against CCR2                                                |         | Multiple sclerosis  Atherosclerosis                                             |         | phase IIa  phase IIa-completed                         |
|                                                                                                             |         |                                                                            |         |                                                   |
| MLN3897 is a small molecule CCR1 inhibitor(3)                                                                    |         | Chronic inflammatory diseases such as rheumatoid  arthritis                     |         | phase II                                               |
|                                                                                                             |         |                                                                            |         |                                                   |
| MLN3701 is a small molecule CCR1 inhibitor, backup  to MLN3897(3)                                                |         | Chronic inflammatory diseases such as rheumatoid  arthritis                     |         | phase I                                                |
|                                                                                                             |         |                                                                            |         |                                                   |
| MLN0415 is a small molecule inhibitor of IKKbeta                                                                 |         | Chronic inflammatory diseases such as rheumatoid  arthritis                     |         | phase I                                                |
|                                                                                                             |         |                                                                            |         |                                                   |
| MLN6095 is a small molecule CrTh2 receptor  antagonist(3)                                                        |         | Asthma                                                                          |         | preclinical                                            |

 

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(1)    Trialsplanned to be conducted through Cancer Therapy Evaluation Program, a divisionof the National Cancer Institute.

(2)    Clinical trials in ulcerative colitis patients resumed, May 2007with a new commercially scalable cell line; prior phase II dataestablishes proof-of-concept for this mechanism.

(3)    In development through our sanofi-aventis inflammatory diseasecollaboration.

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. The types of costs incurred during a clinical trial varydepending upon the type of product candidate and the nature of the study.

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

 

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Upon successfulcompletion of phase III clinical trials of a product candidate, we intend tosubmit the results to the FDA to support regulatory approval. However, wecannot be certain that any of our product candidates will prove to be safe oreffective, will receive regulatory approvals, or will be successfullycommercialized. Our clinical trials might prove that our product candidates maynot be effective in treating the disease or have undesirable or unintended sideeffects, toxicities or other characteristics that require us to cease furtherdevelopment of the product candidate. The cost to take a product candidatethrough clinical trials is dependent upon, among other things, the diseaseindications, the timing, the size and dosing schedule of each clinical trial,the number of patients enrolled in each trial and the speed at which patientsare enrolled and treated. We could incur increased product development costs ifwe experience delays in clinical trial enrollment, delays in the evaluation ofclinical trial results or delays in regulatory approvals.

Some products that arelikely to result from our research and development projects are based on newtechnologies and new therapeutic approaches that have not been extensivelytested in humans. The regulatory requirements governing these types of productsmay be more rigorous than for conventional products. As a result, it is difficultto estimate the nature and length of the efforts to complete such products aswe may experience a longer regulatory process in connection with any productsthat we develop based upon these new technologies or therapeutic approaches. Inaddition, ultimate approval for commercial manufacturing and marketing of ourproducts is dependent on the FDA or applicable approval body in the country forwhich approval is being sought, adding further uncertainty to estimated costsand completion dates. Significant delays could allow our competitors to bringproducts to market before we do and impair our ability to commercialize ourproduct candidates.

Due to the variability inthe length of time necessary to develop a product, the uncertainties related tothe estimated cost of the projects and ultimate ability to obtain governmentalapproval for commercialization, accurate and meaningful estimates of theultimate cost to bring our product candidates to market are not available.

We budget and monitor ourresearch and development costs by type or category, rather than by project on acomprehensive or fully allocated basis. Significant categories of costs includepersonnel, clinical, third party research and development services andlaboratory supplies. In addition, a significant portion of our research anddevelopment expenses is not tracked by project as it benefits multiple projectsor our technology platform. Consequently, fully loaded research and developmentcost summaries by project are not available.

Given the uncertaintiesrelated to development, we are currently unable to reliably estimate when, ifever, our product candidates will generate revenue and cash flows. We do notexpect to receive net cash inflows from any of our major research anddevelopment projects until a product candidate becomes a profitable commercialproduct.

***Selling, General and Administrative***

Selling, general andadministrative expenses increased 11% to $39.5 million in the 2007 Three MonthPeriod compared to the 2006 Three Month Period. The increase is primarily attributable to higher commission expenseassociated with the increased product sales as well as increased costsrepresenting our portion of funding the OBI sales effort dedicated to VELCADEunder the new OBI collaboration arrangement.

***Restructuring***

During the 2007 ThreeMonth Period, we recorded a total of $5.6 million of restructuring chargesunder all of our restructuring initiatives. We recorded restructuring chargesof approximately $5.0 million under the 2006 restructuring program primarilyfor facilities-related costs associated with vacated buildings and employeetermination benefits as a result of headcount reductions.  We also recorded restructuring charges in the2007 Three Month Period of approximately $0.2 million and $0.4 million underthe 2005 and 2003 restructuring plans, respectively, primarily related to thenet present value adjustment for facilities charged to restructuring in prioryears.

We estimate that of theremaining restructuring liabilities under all restructuring initiatives atMarch 31, 2007, we will pay approximately $23.4 million through March 31, 2008and $40.5 million thereafter through 2014.

We expect torecord total restructuring charges in 2007, under all restructuringinitiatives, of between $15.0 million and $25.0 million.  These charges relate primarily to certainfacilities that we decided to abandon in November 2006, but will not bevacated until 2007, as well as net present value adjustments on facilitiescharged to restructuring in prior years. In connection with the decision to abandon the facilities in 2007, werevised the useful lives of the leasehold improvements at these facilities inaccordance with SFAS No. 144, “Accounting for the Impairment or Disposalof Long-Lived Assets.”  During the 2007Three Month Period, we recorded additional amortization expense ofapproximately $2.8 million in research and development expense related to ourdecision.

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We are still evaluatingthe need or opportunity for further facilities consolidation associated withthe 2006 restructuring initiative and the total future restructuring chargesfor facility consolidation are dependent upon the nature and timing of thefinal decisions we make. As we continue to evaluate strategic alternatives,including potential facilities consolidation in connection with our programs,significant restructuring charges could occur in future periods.

***Amortization of Intangibles***

Amortization ofintangible assets of $8.5 million in the 2007 Three Month Period was unchangedfrom the 2006 Three Month Period. Amortization in 2007 and 2006 primarilyrelated to specifically identified intangible assets from the COR acquisition.We will continue to amortize the specifically identified intangible assets fromour COR acquisition through 2015. We expect to incur amortization expense ofapproximately $34.0 million for each of the next five years.

***Investment Income***

Investment incomeincreased 235% to $15.5 million in the 2007 Three Month Period compared to the2006 Three Month Period.  The increasewas primarily attributable to a $3.5 million gain on sale of our investment inSGX Pharmaceuticals, Inc. common stock, a $2.3 million gain recognized in January2007 upon the settlement of the class action lawsuit of WorldCom, Inc., andhigher average balance of invested funds during the quarter.

***Interest Expense***

Interest expenseincreased 2% to $2.8 million in the 2007 Three Month Period compared to the2006 Three Month Period.  The increasewas primarily related to an increase in accrued interest on our convertiblenotes as a result of higher average balances of indebtedness during the periodoffset by decreased capital lease buyouts resulting in lower related interestexpense.

**Liquidityand 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 and may in the future 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. We also have committedto fund development costs incurred by some of our collaborators.

We have funded our cashrequirements primarily through the following:

·     product sales of VELCADE;

·     payments from our strategiccollaborators, including equity investments, license fees, milestone paymentsand research funding;

·     royalty payments related tothe sales of our products; and

·     equity and debt financings inthe public markets.

In the future, we expectto continue to fund our cash requirements from some or all of these sources aswell as from sales of other products, subject to receiving regulatory approval.We are entitled to additional committed research and development funding undersome of our strategic alliances. We believe the key factors that could affectour internal and external sources of cash are:

·  revenuesfrom sales of VELCADE, INTEGRILIN and other products and services for which wemay obtain marketing approval in the future or which are sold by companies thatmay owe us royalty, milestone, distribution or other payments on account ofsuch products;

·  thesuccess of our clinical and preclinical development programs;

·  ourability to enter into additional strategic collaborations and to maintainexisting collaborations as well as the success of such collaborations; and

·  thereceptivity of the capital markets to financings by biopharmaceutical companiesgenerally and to financings by us specifically.

As of March 31,2007, we had $819.2 million in cash, cash equivalents and marketablesecurities. This excludes $7.6 million of interest-bearingmarketable securities classified as restricted cash on our balance sheet as ofMarch 31, 2007, which primarily serve as collateral for letters of creditsecuring leased facilities.

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Our significant capitalresources and sources and uses of cash are as follows:

 
| **(in thousands)**                           | ** ** | **March 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|---------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Cash, cash  equivalents and marketable securities |       | $                            | 819,169    |                            | $          | 894,349 |   |
| Working capital                                   |       | 810,765                      |       | 790,135                         |       |
|                                                   |            |                              |            |                                 |            |  |  |

 
| ** **                                                     | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                     | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| Cash provided by  (used in):                                   |       |                                                 |       |   |   |
| Operating activities                                           |       | $                                                    | 14,153     |   | $ | (26,383 | ) |
| Investing activities                                           |       | (72,314                                              | )          | 31,567 |   |
| Financing activities                                           |       | (91,511                                              | )          | 7,429 |   |
| Capital  expenditures (included in investing activities above) |       | (1,100                                               | )          | (1,386 | ) |
|                                                                |            |                                                      |            |  |  |  |  |

 

***Cash Flows***

Operatingactivities provided cash of $14.2 million in the 2007 Three Month Period.  The principal source of funds was thecollection of accounts receivable offset by the payment of expenses in order tofund our net loss.  Cash flows fromoperations can vary significantly due to various factors including changes inaccounts receivable, as well as changes in accounts payable and accrued expenses.The average collection period of our accounts receivable can vary and isdependent on various factors, including the type of revenue and the paymentterms related to those revenues.

Investingactivities used cash of $72.3 million in the 2007 Three Month Period. Theprincipal use of funds was the purchases of marketable securities.  In February 2007, we received proceeds ofapproximately $3.5 million related to the sale of our investment in SGXPharmaceuticals, Inc.  In January 2007,we received proceeds of approximately $2.3 million related to our share ofproceeds from a class action proceeding against WorldCom, Inc.

Financingactivities used cash of $91.5 million in the 2007 Three Month Period. Theprincipal use of funds was the repayment of our 5.5% and 5.0% convertible subordinatednotes in accordance with the payment terms offset by payments received from thepurchase of common stock by our employees. We also used $0.3 million in financing activities to make principalpayments on our capital leases.

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

***Contractual Obligations***

As noted above andin accordance with the payment terms, we paid off the $83.3 million and $16.3million principal balances on our 5.5% and 5.0% convertible subordinated notes,respectively, during the 2007 Three Month Period.

The parity triggerassociated with our 2.25% convertible senior notes represents an embeddedderivative that requires bifurcation and separate accounting under SFAS No. 133,“Accounting for Derivative Instruments and Hedging Activities.”  At March 31, 2007 and December 31, 2006,we estimated that the value of the parity trigger was not material to ourconsolidated results of operations and financial position.

There have been noadditional significant changes to our contractual obligations and commercialcommitments included in our Form 10-K as of December 31, 2006.

As of March 31,2007, we did not have any financing arrangements that were not reflected in ourbalance sheet.

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**RISK FACTORS THAT MAY AFFECT RESULTS**

This Quarterly Report onForm 10-Q contains forward-looking statements that are based oncurrent expectations, estimates, forecasts and projections about us, our futureperformance, our business, our beliefs and our management’s assumptions. Inaddition, we, or others on our behalf, may make forward-looking statements inpress releases or written statements, or in our communications and discussionswith investors and analysts in the normal course of business through meetings,webcasts, phone calls and conference calls. Words such as “expect,” “anticipate,”“outlook,” “could,” “target,” “project,” “intend,” “plan,” “believe,” “seek,” “estimate,”“should,” “may,” “will,” “assume” or “continue,” and variations of such wordsand similar expressions are intended to identify such forward-lookingstatements. These statements are not guarantees of future performance andinvolve important risks, uncertainties and assumptions that are difficult topredict. We describe some of the risks, uncertainties and assumptions thatcould affect our business, including our financial condition and results ofoperations, in this “Risk Factors” section. We have based our forward-lookingstatements on our management’s beliefs and assumptions based on informationavailable to our management at the time the statements are made.

We caution you thatactual outcomes and results may differ materially from what is expressed,implied or forecast by our forward-looking statements. Reference is made in particularto forward-looking statements about our growth and future financial andoperating results, discovery and development of products, strategic alliances,regulatory approvals, competitive strengths, intellectual property, litigation,mergers and acquisitions, market acceptance or continued acceptance of ourproducts, accounting estimates, financing activities, ongoing contractualobligations and sales efforts. We do not intend to update or revise anyforward-looking statements, whether as a result of new information, futureevents, changes in assumptions or otherwise.

**Regulatory Risks**

***Our business may be harmed if we do not obtainapproval to market VELCADE for additional therapeutic uses.***

An important part of ourstrategy to grow our business is to market VELCADE for additional indications.To do so, we will need to successfully conduct clinical trials in accordancewith GCP and then apply for and obtain the appropriate regulatory approvals. Ifwe are unsuccessful in our clinical trials, or we experience a delay inobtaining or are unable to obtain authorizations for expanded uses of VELCADE,our revenues may not grow as expected and our business and operating resultswill be harmed.

***We may not be able to obtain approval in additionalcountries to market VELCADE.***

VELCADE is currentlyapproved for marketing in the United States and a total of more than 80countries including the countries of the European Union. If we or OBL are notable to obtain approval to market VELCADE in additional countries, OBL willlose the opportunity to sell in those countries and we may not be able to earnpotential milestone and royalty payments under our agreement with OBL orcollect potential distribution fees on sales of VELCADE by OBL in thosecountries.

***We may not be able to obtain marketing approval forproducts resulting from our development efforts.***

The products that we aredeveloping require research and development, extensive preclinical studies andclinical trials and regulatory approval, including the submission of user fees,prior to any commercial sales. This process is expensive and lengthy, and canoften take a number of years. In some cases, the length of time that it takesfor us to achieve various regulatory approval milestones affects the paymentsthat we are eligible to receive under our strategic alliance agreements.

We may need tosuccessfully address a number of technological challenges in order to completedevelopment of our products. Moreover, these products may not be effective intreating any disease or may prove to have undesirable or unintended sideeffects, toxicities or other characteristics that may preclude our obtainingregulatory approval or prevent or limit commercial use. For example, inJanuary 2006, as part of our portfolio review process, based on theevaluation of clinical data in the context of additional opportunities in thepipeline, we decided to discontinue development of MLN2704 as well as MLN1202in rheumatoid arthritis.

Failure to gain approvalfor the products we are developing could have a material adverse impact on ourbusiness.

***If we fail to comply with regulatory requirements, orif we experience unanticipated problems with our approved products, ourproducts could be subject to restrictions or withdrawal from the market.***

Any product for which weobtain marketing approval, along with the manufacturing processes,post-approval clinical data, adverse event reporting and promotional activitiesfor such product, is subject to continual review and periodic inspections bythe FDA and other regulatory authorities. Later discovery of previously unknownproblems or safety issues with our products or manufacturing processes, orfailure to comply with regulatory requirements, may result in restrictions onsuch products or

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manufacturing processes,withdrawal of the products from the market, the imposition of civil or criminalpenalties or a refusal by the FDA and other regulatory authorities to approvepending applications for marketing approval of new drugs or supplements toapproved applications. As with any recently approved therapeutic product, weexpect that our knowledge of the safety profile for VELCADE will expand afterwider usage, and the possibility exists of patients receiving VELCADE treatmentexperiencing unexpected or more frequently than expected serious adverseevents, which could have a material adverse effect on our business.

We are a party tocollaborations that transfer responsibility for specified regulatoryrequirements, such as filing and maintenance of marketing authorizations andsafety reporting, to our collaborators. If our collaborators do not fulfillthese regulatory obligations, products, including VELCADE or INTEGRILIN, couldbe withdrawn from the market, which would have a material adverse effect on ourbusiness. Additionally, the FDA requires that we, along with our collaboratorsand third party manufacturers, may not employ, in any capacity, persons whohave been debarred under the FDA’s Application Integrity Policy. Employment ofsuch a debarred person (even if inadvertently) may result in delays in the FDA’sreview or approval of our products, or the rejection of data developed with theinvolvement of such person(s).

***Some of our products may be based on new technologies,which may affect our ability or the time we require to obtain necessaryregulatory approvals.***

Products that result fromour research and development programs may be based on new technologies, such asproteasome inhibition, and new therapeutic approaches that have not beenextensively tested in humans. The regulatory requirements governing these typesof products may be more rigorous than for conventional products. As a result,we may experience a longer development or regulatory process in connection withany products that we develop based on these new technologies or new therapeuticapproaches.

**Risks Relating toOur Business, Strategy and Industry**

***Our revenues over the next several years will bematerially dependent on the commercial success of VELCADE and INTEGRILIN.***

VELCADE was approved bythe FDA in May 2003 and commercially launched in the United States shortlyafter that date. Marketing of VELCADE outside the United States commenced inApril 2004. INTEGRILIN has been on the market in the United States sinceJune 1998. Marketing of INTEGRILIN outside the United States commenced inmid-1999.

Our business plancontemplates obtaining marketing authorization to sell VELCADE in manycountries for the treatment of all patients with multiple myeloma and both inthe United States and abroad for other indications. We will be adverselyaffected if VELCADE does not receive such approvals, or if such approvals aresubject to limitations on the indicated uses for which we may market theproduct.

We will not achieve ourbusiness plan, and we may be forced to scale back our operations and researchand development programs, if we do not obtain regulatory approval to sellVELCADE in additional countries or for additional therapeutic uses or the salesof VELCADE or INTEGRILIN do not meet our expectations.

***We face substantial competition, and others maydiscover, develop or commercialize products before or more successfully than wedo.***

The fields ofbiotechnology and pharmaceuticals are highly competitive. Many of ourcompetitors are substantially larger than we are, and these competitors havesubstantially greater capital resources, research and development staffs andfacilities than we have. Furthermore, many of our competitors are moreexperienced than we are in drug research, discovery, development and commercialization,obtaining regulatory approvals and product manufacturing and marketing. As aresult, our competitors may discover, develop and commercialize pharmaceuticalproducts before or in a shorter timeframe than we do. In addition, ourcompetitors may discover, develop and commercialize products that make theproducts that we or our collaborators have developed or are seeking to developand commercialize non-competitive or obsolete.

With respect to VELCADE,we face competition from Celgene Corporation’s Thalomid and Revlimid. InMay 2006, the FDA approved the use of Thalomid for the treatment of newlydiagnosed multiple myeloma. Revlimid was approved by the FDA inDecember 2005 for the treatment of patients with myelodysplastic syndromes and in June 2006 for multiplemyeloma patients who have received at least one prior therapy. While Revlimidhas limited the growth potential of VELCADE in some indications, as Revlimidonly was approved recently, it is difficult for us to determine the sustainedlevel of competition that it may pose for VELCADE. We also face competition forVELCADE from traditional chemotherapy treatments, and there are otherpotentially competitive therapies for VELCADE, including other proteasomeinhibitors, some of which are in late-stage clinical development for thetreatment of multiple myeloma. In addition, multiple myeloma therapies indevelopment may reduce the number of patients available for VELCADE treatmentthrough enrollment of these patients in clinical trials of these potentiallycompeting products.

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Due to the incidence andseverity of cardiovascular diseases, the market for therapeutic products thataddress these diseases is large, and we expect the already intense competitionin this field to increase. The most significant competitors for SGP andGlaxoSmithKline plc, or GSK, in marketing INTEGRILIN are major pharmaceuticalcompanies and biotechnology companies. The two products that compete directlywith INTEGRILIN in the GP IIb-IIIa inhibitor market segment are ReoPro® (abciximab), which is produced byJohnson & Johnson and sold by Johnson & Johnson and Eli Lillyand Company, and Aggrastat® (tirofiban HCl), which isproduced and sold by Merck & Co., Inc. outside of the UnitedStates and by Medicure Inc. in the United States.

Sales of INTEGRILIN couldalso be negatively impacted in the future by other competitive factors,including:

·     expanded use of heparinreplacement therapies, such as Angiomax® (bivalirudin), which is produced and sold byThe Medicines Company;

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

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

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

***Sales of INTEGRILIN and possibly VELCADE in particularreporting periods may be affected by fluctuations in inventory, allowances andbuying patterns.***

We distribute VELCADE inthe U.S. through a sole-source distribution model, where we sell directly to athird party who in turn distributes to the wholesaler base. Our VELCADE productinventory levels may fluctuate from time to time depending on the consistencyof the distribution logistics of this arrangement and the buying patterns ofthese wholesalers.

Additionally, we makeprovisions at the time of sale of VELCADE for discounts, rebates, productreturns and other allowances based on historical experience updated for changesin facts and circumstances, as appropriate. To the extent these allowances areincorrect, we may need to adjust our estimates, which could have a materialimpact on the timing and actual amount of revenue we are able to recognize fromthese sales.

A significant portion ofINTEGRILIN domestic pharmaceutical sales is made by SGP to major drugwholesalers. These sales are affected by fluctuations in the buying patterns ofthese wholesalers and the corresponding changes in inventory levels maintainedby them. Inventory levels held by these wholesalers may fluctuate significantlyfrom quarter to quarter. If these wholesalers build inventory levelsexcessively in any quarter, sales to the wholesalers in future quarters mayunexpectedly decrease notwithstanding steady prescriber demand. Because SGPcommercializes INTEGRILIN and manages product distribution, we have limitedinsight into or control over factors affecting changes in distributor inventorylevels. If SGP does not appropriately manage this distribution, SGP may notrealize sales goals for the product and could reduce the royalty revenue werecognize and thus adversely affect our business.

***Because our research and development projects arebased on new technologies and new therapeutic approaches that have not beenextensively tested in humans, it is possible that our discovery process willnot result in commercial products.***

The process ofdiscovering drugs based upon genomics and other new technologies is new andevolving rapidly. We focus a portion of our research on diseases that may belinked to a number of genes working in combination or to novel targets. Both weand the general scientific and medical communities have only a limitedunderstanding of the role that genes play in these diseases. To date, we havenot commercialized any products discovered through our genomics research, andwe may not be successful in doing so in the future. In addition, relatively fewproducts based on gene discoveries have been developed and commercialized byothers. Rapid technological development by us or others may result incompounds, products or processes becoming obsolete before we recover ourdevelopment expenses. Further, manufacturing costs or products based on thesenew technologies may make products uneconomical to commercialize.

***If our clinical trials are unsuccessful, or if theyexperience significant delays, our ability to commercialize products will beimpaired.***

We must provide the FDAand foreign regulatory authorities with preclinical and clinical datademonstrating that our products are safe and effective before they can beapproved for commercial sale. Clinical development, including preclinicaltesting, is a long, expensive and uncertain process. It may take us severalyears to complete our testing, and failure can occur at any stage of testing.Interim results of preclinical or clinical studies do not necessarily predicttheir final results, and acceptable results in early studies might not be seenin later studies. Any preclinical or clinical test may fail to produce resultssatisfactory

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to the FDA or otherregulatory authorities. Preclinical and clinical data can be interpreted indifferent ways, which could delay, limit or prevent regulatory approval.Negative or inconclusive results from a preclinical study or clinical trial,adverse medical events during a clinical trial or safety issues resulting fromproducts of the same class of drug could cause a preclinical study or clinicaltrial to be repeated or prolonged or a program to be terminated, even if otherstudies or trials relating to the program are successful.

We may not complete ourplanned preclinical or clinical trials on schedule or at all. We may not beable to confirm the safety and efficacy of our potential drugs in long-termclinical trials, which may result in a delay or failure to commercialize ourproducts. We may have difficulty obtaining a sufficient number of appropriatepatients or clinical support to conduct our clinical trials as planned. Anumber of additional events could delay the completion of our clinical trials,including conditions imposed on us by the FDA or foreign regulatory authoritiesregarding the scope or design of our clinical trials, lower than anticipatedretention rates for patients in our clinical trials, insufficient supply ordeficient quality of our product candidates or other materials necessary toconduct our clinical trials or the failure of our third party contractors tocomply with regulatory requirements or otherwise meet their contractualobligations to us in a timely manner, or at all. In addition, institutionalreview boards or regulators, including the FDA, or our collaborators may hold,suspend or terminate our clinical trials for various reasons, includingnoncompliance with regulatory requirements or if, in their opinion, theparticipating subjects are being exposed to unacceptable health risks. As aresult, we may have to expend substantial additional funds to obtain access toresources or delay or modify our plans significantly. Our product developmentcosts will increase if we experience delays in testing or approvals.Significant clinical trial delays could allow our competitors to bring productsto market before we do and impair our ability to commercialize our products orpotential products.

***If third parties on which we rely for clinical trialsdo not perform as contractually required or as we expect, we may not be able toobtain regulatory approval for or commercialize our product candidates.***

We depend on independentclinical investigators and, in some cases, contract research organizations andother third party service providers to conduct the clinical trials of ourproduct candidates and expect to continue to do so. We rely heavily on theseparties for successful execution of our clinical trials, but we do not controlmany aspects of their activities. Nonetheless, we are responsible forconfirming that each of our clinical trials is conducted in accordance with thegeneral investigational plan and protocol. Our reliance on these third partiesthat we do not control does not relieve us of our responsibility to comply withthe regulations and standards of the FDA relating to good clinical practices.Third parties may not complete activities on schedule or may not conduct ourclinical trials in accordance with regulatory requirements or the applicabletrial plans and protocols. The failure of these third parties to carry outtheir obligations could delay or prevent the development, approval andcommercialization of our product candidates or result in enforcement actionagainst us.

***Because many of the products that we are developingare based on new technologies and therapeutic approaches, the market may not bereceptive to these products upon their introduction.***

The commercial success ofany of our products for which we may obtain marketing approval from the FDA orother regulatory authorities will depend upon their acceptance by the medicalcommunity and third party payors and consumers as clinically useful,cost-effective and safe. Many of the products 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, particularly the firstproducts that we introduce to the market based on new technologies andtherapeutic approaches. Our efforts to educate the medical community on thesepotentially unique approaches may require greater resources than would betypically required for products based on conventional technologies ortherapeutic approaches. The safety, efficacy, convenience andcost-effectiveness of our products as compared to competitive products willalso affect market acceptance.

***Because of the high demand for talented personnelwithin our industry, we could experience difficulties in recruiting employeesnecessary for our success and growth.***

Because competition fortalented employees within our industry is fierce, we may not be successful inhiring, retaining or promptly replacing key management, sales, marketing andtechnical personnel. Any failure to expeditiously fill our needs for keypersonnel could have a material adverse effect on our business.

***Our strategy of generating growth through licensearrangements and acquisitions may not be successful.***

An important element ofour business strategy is to acquire additional therapeutic agents throughlicense arrangements or acquisitions of other companies. Although we regularlyreview and engage in discussions with third parties with respect to suchtransactions, we may be unable to license or acquire other suitable products orproduct candidates from third parties for a number of reasons. In particular,the licensing and acquisition of pharmaceutical and biological products,including through the acquisition of other companies, is a competitive area. Anumber of other companies are also pursuing strategies to license or acquireproducts within our therapeutic focus areas of cancer and inflammation. Theseother companies may have a

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competitive advantageover us due to their size, cash resources and greater drug research, discoveryand development and commercialization capabilities.

Other factors that may preventus from licensing or otherwise acquiring suitable products and productcandidates include the following:

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

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

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

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

***If we fail to successfully manage any acquisitions,our ability to develop our product candidates and expand our product candidatepipeline may be harmed.***

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

·     use of cash resources;

·     higher than anticipatedacquisition costs and expenses;

·     potentially dilutiveissuances of equity securities;

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

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

·     amortization expenses relatedto other intangible assets.

Operational risks thatcould harm our existing operations or prevent realization of anticipatedbenefits from these transactions include:

·     challenges associated withmanaging an increasingly diversified business;

·     disruption of our ongoingbusiness;

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

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

·     inability to maintain uniformstandards, controls, procedures and policies;

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

·     subsequent loss of keypersonnel.

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

**Risks Relating toOur Financial Results and Need for Financing**

***We have incurred substantial losses and expect tocontinue to incur losses. We will not be successful unless we reverse thistrend.***

We have incurred netlosses of $6.8 million for three months ended March 31, 2007, $20.8 million forthe three months ended March 31, 2006, $44.0 million for the year endedDecember 31, 2006, $198.2 million for the year endedDecember 31, 2005 and $252.3 million for the year endedDecember 31, 2004. We expect to continue to incur operating losses infuture periods. Prior to our acquisition of COR Therapeutics, Inc., orCOR, in February 2002, substantially all of our revenues resulted frompayments from collaborators, and not from the sale of products. As ofMarch 31, 2007, we had an accumulated deficit of $2.5 billion.

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We expect to continue toincur significant expenses in connection with our research and developmentprograms and commercialization activities. As a result, we will need togenerate significant revenues to help fund these costs and achieve positive netincome. Our ability to achieve positive net income would be adversely impactedif our acquired intangible assets, primarily resulting from our acquisition ofCOR and goodwill became impaired as a result of reduced market capitalizationor product failures or withdrawals.

We cannot be certainwhether or when we will become profitable because of the significantuncertainties with respect to our ability to successfully develop products andgenerate revenues from the sale of approved products and from existing andpotential future strategic alliances.

***We may need additional financing, which may bedifficult to obtain. Our failure to obtain necessary financing or doing so onunattractive terms could adversely affect our business and operations.***

We will requiresubstantial funds to conduct research and development, including preclinicaltesting and clinical trials of our potential products. We will also requiresubstantial funds to meet our obligations to our collaborators, manufacture andmarket products that are approved for commercial sale, including VELCADE, andmeet our debt service obligations. We may also require additional financing toexecute on product in-licensing or acquisition opportunities. Additionalfinancing may not be available when we need it or may not be available onfavorable terms.

If we are unable toobtain adequate funding on a timely basis, we may have to delay or curtail ourresearch and development programs, our product commercialization activities orour in-licensing or acquisition activities. We could be required to seek fundsthrough arrangements with collaborators or others that may require us torelinquish rights to specified technologies, product candidates or productswhich we would otherwise pursue on our own.

***Our indebtedness and debt service obligations mayadversely affect our cash flow and otherwise negatively affect our operations.***

At March 31, 2007,we had approximately $250.0 million of outstanding convertible debt and$75.9 million of capital lease obligations. We will be required to makeinterest payments on our outstanding convertible notes of approximately $6.0million for each of the next four and a half years. Additionally, we will berequired to make interest payments on our capital lease obligations ofapproximately $2.4 million for each of the next three years.

We may in the futureincur additional indebtedness, including long-term debt, credit lines andproperty and equipment financings to finance capital expenditures. We intend tosatisfy our current and future debt service obligations from cash generated byour operations, our existing cash and investments and, in the case of principalpayments at maturity, funds from external sources. We may not have sufficientfunds and we may be unable to arrange for additional financing to satisfy ourprincipal or interest payment obligations when those obligations become due.Funds from external sources may not be available on acceptable terms, or atall.

Our indebtedness couldhave significant additional negative consequences, including:

·     increasing our vulnerabilityto general adverse economic and industry conditions;

·     limiting our ability toobtain additional financing;

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

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

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

***If we do not achieve the anticipated benefits of ourrestructuring efforts, or if the costs of our restructuring efforts exceedanticipated levels, our business could be harmed.***

We recorded restructuringcharges of $5.6 million for the three months ended March 31, 2007, $2.8 millionfor the three months ended March 31, 2006, $20.4 million for the yearended December 31, 2006, $77.1 million for the year ended December 31,2005 and $38.0 million for the year ended December 31, 2004. Costsassociated with our restructuring efforts include reducing personnel andinfrastructure resulting from the restructured relationship with SGP forINTEGRILIN and reducing our in-house research and development technologies andheadcount in areas in which we believe the work can now be outsourced costeffectively. As a result of these efforts, we expect to reduce total researchand development and selling, general and administration expenses as compared toprior years. We may not achieve our estimated expense reductions anticipated

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from restructuringsbecause such savings are difficult to predict and speculative in nature. Wecontinue to evaluate strategic alternatives, including facility consolidation,and as a result, significant additional restructuring charges could occur infuture periods.

***We received an informal inquiry from the Securitiesand Exchange Commission regarding stock options that we granted inSeptember 2001. If the Securities and Exchange Commission, or SEC,  does not agree with our conclusion regardingthe accounting for such options and determines that we have incorrectlyaccounted for historical stock option grants, and if the associated expense notpreviously recorded is material, we likely would be required to restate certainhistorical financial statements and could become subject to litigation.***

During the second quarterof 2006, we received a telephone inquiry from the SEC regarding whether stockoptions we awarded with a stated grant date of September 26, 2001 were, infact, granted on that date. We were one of over 30 public companies discussedin a May 2006 third party report concerning the timing of stock optiongrants from 1997 through 2002. With respect to us, the report referenced optiongrants we made in September 2001. In September 2006, we met with theSEC to discuss the findings of our review of the September 2001 optiongrants and other of our historical option grants. We reported to the SEC thatour review did not uncover any evidence of fraud with respect to theSeptember 2001 option grants or the other historical option grants that wereviewed. Additionally, we reported to the SEC our conclusion that anyadditional compensation expense resulting from our review of theSeptember 2001 option grants and other historical option grants wasimmaterial. We cannot express any view as to how the SEC may assess theinformation we provided. If it is determined that any of our option grants wereincorrectly granted or accounted for, we may be required to record compensationexpense relating to those grants, and, if the expense is material, we likelywould be required to restate certain of our historical financial statements.Additionally, we could become subject to an enforcement proceeding or otherlitigation. The effects of such a restatement or litigation could be material.

**Risks Relating toCollaborators**

***We depend significantly on our collaborators to workwith us to commercialize and develop products including VELCADE and INTEGRILIN.***

Outside of the UnitedStates, we commercialize VELCADE through an alliance with OBL. We began jointlypromoting VELCADE in the United States in the first quarter of 2007 under atwo-year agreement with OBI. On September 1, 2005, we transferredexclusive U.S. commercialization and development rights of INTEGRILIN to SGPand SGP is solely responsible for the commercialization and development ofINTEGRILIN outside of Europe. GSK is responsible for marketing and sellingINTEGRILIN in Europe. We conduct substantial discovery and developmentactivities through strategic alliances, including with OBL for the ongoingdevelopment of VELCADE. We expect to enter into additional alliances in thefuture, especially in connection with product commercialization. The success ofour alliances depends heavily on the efforts and activities of ourcollaborators.

Each of our collaboratorshas significant discretion in determining the efforts and resources that itwill apply to the alliance and the degree to which it shares financial andproduct sales and inventory information. Our existing and any future alliancesmay not be scientifically or commercially successful.

The risks that we face inconnection with these existing and any future alliances include the following:

·     All of our strategic allianceagreements are for fixed terms and are subject to termination under variouscircumstances, including, in many cases, such as in our collaboration and ourjoint promotion agreement with OBL and OBI, without cause.

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

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

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

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

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

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***We are substantially dependent on SGP for futurerevenues related to INTEGRILIN.***

Under the terms of ourrevised agreement with SGP effective as of September 1, 2005, SGP beganpaying us royalties based on net product sales of INTEGRILIN. In 2007, theminimum royalty payment is set at $85.4 million, with some conditions thatcould reduce this minimum. There are no minimum guaranteed royalty paymentsbeyond 2007. If SGP’s INTEGRILIN sales after 2007 are less than expected, wewill receive less royalty revenue than we expect, which would have a materialadverse effect on our ability to fund other parts of our business.

***We may not be successful in establishing additionalstrategic alliances, which could adversely affect our ability to develop andcommercialize products.***

An important element ofour business strategy is entering into strategic alliances for the developmentand commercialization of selected products. In some instances, if we areunsuccessful in reaching an agreement with a suitable collaborator, we may failto meet all of our business objectives for the applicable product or program.We face significant competition in seeking appropriate collaborators. Moreover,these alliance arrangements are complex to negotiate and time-consuming todocument. We may not be successful in our efforts to establish additionalstrategic alliances or other alternative arrangements. The terms of anyadditional strategic alliances or other arrangements that we establish may notbe favorable to us. Moreover, such strategic alliances or other arrangementsmay not be successful.

**Risks Relating toIntellectual Property**

***If we are unable to obtain patent protection for ourdiscoveries, the value of our technology and products will be adverselyaffected. If we infringe patent or other intellectual property rights of thirdparties, we may not be able to develop and commercialize our products or thecost of doing so may increase.***

Our patent positions, andthose of other pharmaceutical and biotechnology companies, are generally uncertainand involve complex legal, scientific and factual questions. Our ability todevelop and commercialize products depends in significant part on our abilityto:

·             obtainand maintain patents;

·             obtainlicenses to the proprietary rights of others on commercially reasonable terms;

·             operatewithout infringing upon the proprietary rights of others;

·             preventothers from infringing on our proprietary rights; and

·             protecttrade secrets.

***There is significant uncertainty about the validityand permissible scope of patents in our industry, which may make it difficultfor us to obtain patent protection for our discoveries.***

The validity andpermissible scope of patent claims in the pharmaceutical and biotechnologyfields, including the genomics field, involve important unresolved legalprinciples and are the subject of public policy debate in the United States andabroad. For example, there is significant uncertainty both in the United Statesand abroad regarding the patentability of gene sequences in the absence of functionaldata and the scope of patent protection available for full-length genes andpartial gene sequences. Moreover, some groups have made particular genesequences available in publicly accessible databases. These and otherdisclosures may adversely affect our ability to obtain patent protection forgene sequences claimed by us in patent applications that we file subsequent tosuch disclosures. There is also some uncertainty as to whether human clinicaldata will be required for issuance of patents for human therapeutics. If suchdata are required, our ability to obtain patent protection could be delayed orotherwise adversely affected.

***Third parties may own or control patents or patentapplications and require us to seek licenses, which could increase ourdevelopment and commercialization costs, or prevent us from developing ormarketing our products.***

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

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Our MLN0002 and MLN1202product candidates are humanized monoclonal antibodies. We are aware of thirdparty patents and patent applications that relate to humanized or modifiedantibodies, products useful for making humanized or modified antibodies andprocesses for making and using recombinant antibodies.

With respect to VELCADE,on June 26, 2002, Ariad Pharmaceuticals, Inc. sent to us andapproximately 50 other parties a letter offering a sublicense for the use ofUnited States Patent No. 6,410,516, which is exclusively licensed toAriad. If this patent is valid and Ariad successfully sues us for infringement,we would require a license from Ariad in order to manufacture and marketVELCADE. On May 4, 2006, a federal court jury gave a verdict in favor ofAriad in its patent-infringement lawsuit against Eli Lilly relating to UnitedStates Patent No. 6,410,516. We expect that Eli Lilly will challenge thisverdict and the validity of the patent with the federal district judge and theU.S. Court of Appeals. In addition, we are also aware that Amgen Inc. hasfiled a declaratory relief action seeking an invalidity ruling with respect tothis patent. However, Ariad’s initial success in its claim against Eli Lillymay increase the possibility that Ariad could sue additional parties, includingus, and allege infringement of the patent.

***We may become involved in expensive patent litigationor other proceedings, which could result in our incurring substantial costs andexpenses or substantial liability for damages or require us to stop ourdevelopment and commercialization efforts.***

There has beensubstantial litigation and other proceedings regarding the patent and otherintellectual property rights in the pharmaceutical and biotechnologyindustries. We may become a party to patent litigation or other proceedingsregarding intellectual property rights. For example, we believe that we holdpatent applications that cover genes that are also claimed in patentapplications filed by others. Interference proceedings before the United StatesPatent and Trademark Office may be necessary to establish which party was thefirst to invent these genes. In addition, from time to time, we receiveunsolicited letters purporting to advise us of the alleged relevance of thirdparty patents.

The cost to us of anypatent litigation 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 or processeswithout a license from the other party and we may be held liable for significantdamages. We may not be able to obtain any required license on commerciallyacceptable terms or at all.

Uncertainties resultingfrom the initiation and continuation of patent litigation or other proceedingscould have a material adverse effect on our ability to compete in themarketplace. Patent litigation and other proceedings may also absorbsignificant management time.

***Our patent protection for any compounds that we seekto develop may be limited to a particular method of use or indication such that,if a third party were to obtain approval of the compound for use in anotherindication, we could be subject to competition arising from off-label use.***

Although we generallyseek the broadest patent protection available for our proprietary compounds, wemay not be able to obtain patent protection for the actual composition of anyparticular compound and may be limited to protecting a new method of use forthe compound or otherwise restricted in our ability to prevent others fromexploiting the compound. If we are unable to obtain patent protection for theactual composition of any compound that we seek to develop and commercializeand must rely on method of use patent coverage, we would likely be unable toprevent others from manufacturing or marketing that compound for any use thatis not protected by our patent rights. If a third party were to receivemarketing approval for the compound for another use, physicians couldnevertheless prescribe it for indications that are not described in the product’slabeling or approved by the FDA or other regulatory authorities. Even if wehave patent protection of the prescribed indication, as a practical matter, wewould have little recourse as a result of this off-label use. In that event,our revenues from the commercialization of the compound would likely beadversely affected.

***If we fail to comply with our obligations in ourintellectual property licenses with third parties, we could lose license rightsthat are important to our business.***

We are a party to variouslicense agreements. In particular, we license rights to patents for theformulation of VELCADE and issued patents relating to MLN518 and MLN1202. Wemay enter into additional licenses in the future. Our existing licenses impose,and we expect future licenses will impose, various diligence, milestonepayment, royalty, insurance and other obligations on us. If we fail to complywith these obligations, the licensor may have the right to terminate thelicense, in which event we might not be able to market any product that iscovered by the licensed patents.

***Competition from generic pharmaceutical manufacturerscould negatively impact our products sales.***

Competition frommanufacturers of generic drugs is a major challenge for us in the U.S. and isgrowing internationally. Upon the expiration or loss of patent protection forone of our products, or upon the “at-risk” launch (despite pending patent

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infringement litigationagainst the generic product) by a generic manufacturer of a generic version ofone of our products, we could lose the major portion of sales of that productin a very short period, which could adversely affect our business.

Generic competitorsoperate without our large research and development expenses and our costs ofconveying medical information about our products to the medical community. Inaddition, the FDA approval process exempts generics from costly andtime-consuming clinical trials to demonstrate their safety and efficacy,allowing generic manufacturers to rely on the safety and efficacy data of theinnovator product. Generic products, however, need only demonstrate a level ofavailability in the bloodstream equivalent to that of the innovator product.This means that generic competitors can market a competing version of ourproduct after the expiration or loss of our patent and charge much less. Theissued U.S. patents related to VELCADE expire in 2017 and the issued foreignpatents expire in 2015 with extensions issued or pending in a number ofcountries. However, we may not be granted any such potential or pendingextension. The issued United States patents that cover INTEGRILIN expire in2014 and 2015 and the issued foreign patents expire between 2010 and 2012. Ourpatent-protected products also can face competition in the form of genericversions of branded products of competitors that lose their market exclusivity.

In addition, thirdparties could produce counterfeit products labeled as VELCADE, INTEGRILIN orother of our products in the future. Counterfeit products could reduce sales orcompromise goodwill associated with our product brands.

**Risks Relating toProduct Manufacturing, Marketing and Sales**

***Because we have limited sales, marketing anddistribution experience and capabilities, in some instances we are dependent onthird parties to successfully perform these functions on our behalf, or we maybe required to incur significant costs and devote significant efforts toaugment our existing capabilities.***

We currently aremarketing and selling VELCADE in the United States solely through ourcancer-specific sales force and without a collaborator. In the first quarter of2007, we began jointly promoting VELCADE in the United States with OBI. Oursuccess in selling VELCADE will depend heavily on the performance of thesesales forces. In areas outside the United States where VELCADE has receivedapproval, OBL or its affiliates market VELCADE. As a result, our ability toearn revenue related to VELCADE outside of the United States will dependheavily on OBL.

SGP exclusively marketsINTEGRILIN in areas outside of Europe, including the United States, and GSKexclusively markets INTEGRILIN in Europe. As a result, except for our minimumroyalty payments from SGP in 2007, our success in receiving royalties andmilestone payments from sales of INTEGRILIN depends entirely on the marketingefforts of these third parties.

Depending on the natureof the products for which we obtain marketing approval, we may need to relysignificantly on sales, marketing and distribution arrangements with ourcollaborators and other third parties. For example, some types ofpharmaceutical 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 these 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.

***Because we have no commercial manufacturingcapabilities, we will continue to be dependent on third party manufacturers tomanufacture products for us, or we will be required to incur significant costsand devote significant efforts to establish our own manufacturing facilitiesand capabilities.***

We have nocommercial-scale manufacturing capabilities. In order to continue to developproducts, apply for regulatory approvals and commercialize products, we willneed to develop, contract for or otherwise arrange for the necessarymanufacturing capabilities.

We currently rely substantiallyupon third parties to produce material for preclinical testing purposes andexpect to continue to do so in the future. We also currently rely and expect tocontinue to rely, upon other third parties, potentially including ourcollaborators, to produce materials required for clinical trials and for thecommercial production of our products.

There are a limitednumber of contract manufacturers that operate under the FDA’s current GMPregulations capable of manufacturing our products. In addition, the FDA willinspect our contract manufacturers prior to granting approval of a new drugapplication, and will conduct periodic, unannounced inspections to ensurestrict ongoing compliance with current GMPs and other applicable regulations.If we are unable to arrange for third party manufacturing of our products, orto do so on commercially reasonable terms, we may not be able to completedevelopment of our products or commercialize them, or we may experience delaysin doing so.

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, the possibility of breach of the manufacturing agreement by thethird party because of factors beyond our control and the possibility oftermination or non-renewal of the agreement by the third party, based on itsown business priorities, at a time that is costly or inconvenient for us. Anyfailure by

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our third partymanufacturers to comply with applicable regulations, including current GMPregulations, could result in sanctions being imposed on the manufacturers orus, including fines, injunctions, civil penalties, failure of regulatoryauthorities to grant marketing approval of our product candidates, delays,suspension or withdrawal of approvals, seizures or recalls of products,operating restrictions and criminal prosecutions, any of which couldsignificantly and adversely affect our business.

We may in the futureelect to manufacture some of our products in our own manufacturing facilities.We would need to invest substantial additional funds and recruit qualifiedpersonnel in order to build or lease and operate any manufacturing facilities.

***Because we have no commercial manufacturing capabilityfor VELCADE and INTEGRILIN, we are dependent on third parties to produceproduct sufficient to meet market demand.***

We are responsible formanaging the supply of material for all clinical and commercial production ofVELCADE, including VELCADE that OBL sells or uses in clinical trials, andINTEGRILIN, including INTEGRILIN that SGP and GSK sell or use in clinicaltrials.

We rely on third partycontract manufacturers to manufacture, fill/finish and package VELCADE for bothcommercial purposes and for all clinical trials. We have established long-termsupply relationships for the production of commercial supplies of VELCADE. Wework with one manufacturer, with whom we have a long-term supply agreement, tocomplete fill/finish for VELCADE, and have contracted with a secondmanufacturer who will provide fill/finish services for VELCADE in the future.If any of our current third party manufacturers performing production andfill/finish for VELCADE are unable or unwilling to continue performing theseservices for us, and we are unable to find a replacement manufacturer or in thefuture we are otherwise unable to contract with manufacturers to producecommercial supplies of VELCADE in a cost-effective manner, we could run out ofVELCADE for commercial sale and clinical trials and our business could besubstantially harmed.

We have no manufacturingfacilities for INTEGRILIN and, accordingly, rely on third party contractmanufacturers for the clinical and commercial production of INTEGRILIN. We havethree approved manufacturers, two of which currently provide us witheptifibatide, the active ingredient necessary to make INTEGRILIN. Solvay, oneof the current manufacturers, owns the process technology used by it for theproduction of bulk product. Lonza is the other current manufacturer ofeptifibatide, and we own the process technology utilized by it. We have twoapproved manufacturers that currently perform fill/finish services forINTEGRILIN and two packaging suppliers for the United States. If our currentmanufacturers are unable to continue or decide to discontinue theirmanufacturing, fill/finish or packaging services and we are unable to securealternative manufacturers, the supply of INTEGRILIN could be adversely affectedwhich could substantially harm our business.

In order to mitigate therisk of INTEGRILIN supply interruption, we are exploring several options forthe long-term supply of eptifibatide. Also, Solvay, the owner of the processtechnology used by it and by one of our former suppliers of eptifibatide, has raisedconcerns that the new Millennium process may have been developed usinginformation asserted to be confidential and proprietary to Solvay. If Solvaysucceeds in a claim relating to these concerns, our ability to practice our newprocess could be negatively impacted, which could adversely affect our abilityto obtain INTEGRILIN from suppliers using the new process or the cost ofmanufacturing eptifibatide and negatively impact our business. We are indiscussions with Solvay regarding its concern.

***If we fail to obtain an adequate level ofreimbursement for our products by third party payors, there may be nocommercially viable markets for our products.***

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

In particular, thirdparty payors could lower the amount that they will reimburse hospitals ordoctors to treat the conditions for which the FDA has approved VELCADE orINTEGRILIN. If they do, pricing levels or sales volumes of VELCADE orINTEGRILIN may decrease. In addition, if we fail to comply with therules applicable to the Medicaid and Medicare programs, we could besubject to the imposition of civil or criminal penalties or exclusion fromthese programs.

In foreign markets, anumber of different governmental and private entities determine the level atwhich hospitals will be reimbursed for administering VELCADE and INTEGRILIN toinsured patients. If these levels are set, or reset, too low, it may not bepossible to sell VELCADE or INTEGRILIN at a profit in these markets.

In both the UnitedStates, on federal and state levels, and foreign jurisdictions, there have beena number of legislative and regulatory proposals to change the health caresystem. For example, the Medicare Prescription Drug and Modernization Act of

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2003 and its implementingregulations impose new requirements for the distribution and pricing ofprescription drugs which may affect the marketing of our products. These newrequirements have created uncertainty among oncologists and could impact saleslevels of VELCADE as oncologists adapt to the new reimbursement model. Furtherproposals are also likely. The current uncertainty and the potential foradoption of additional proposals could affect the timing of product revenue,our ability to raise capital, obtain additional collaborators and market ourproducts.

In addition, we believethat the increasing emphasis on managed care in the United States has and willcontinue to put pressure on the price and usage of our present and futureproducts, which may adversely affect product sales. Further, when a newtherapeutic product is approved, the availability of governmental 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, and current reimbursement policiesfor VELCADE or INTEGRILIN could change at any time.

***We face a risk of product liability claims and may notbe able to obtain insurance.***

Our business exposes usto the risk of product liability claims that is inherent in the manufacturing,testing and marketing of human therapeutic products. In particular, VELCADE andINTEGRILIN are administered to patients with serious diseases who have a highincidence of mortality. Although we have product liability insurance that webelieve is appropriate, this insurance is subject to deductibles, co-insurancerequirements and coverage limitations and the market for such insurance isbecoming more restrictive. We may not be able to obtain or maintain adequateprotection against potential liabilities. If we are unable to obtain insuranceat acceptable cost or otherwise protect against potential product liabilityclaims, we will be exposed to significant liabilities, which may materially andadversely affect our business and financial position. These liabilities couldprevent or interfere with our product commercialization efforts.

***We face a risk of government enforcement actions inconnection with marketing activities.***

Because we are a companyoperating in a highly regulated industry, for many reasons, regulatoryauthorities could take enforcement action against us including seizure ofallegedly misbranded product, cessation of promotional activities, injunctionor criminal prosecution against us and our officers or employees.

For example, we face thepotential of FDA enforcement action for allegations of off-label promotion ofVELCADE. Some physicians prescribe VELCADE for uses not approved by the FDA orcomparable regulatory agencies outside the United States. For example, VELCADEis not approved for front-line treatment of multiple myeloma. However, we areaware that the oncology physician community is using VELCADE for this purpose.Although physicians may lawfully prescribe VELCADE for off-label uses, anypromotion by us of off-label uses would be unlawful. Although we have policiesand procedures in place designed to help assure ongoing compliance withregulatory requirements regarding off-label promotion, regulatory authoritiescould take enforcement action against us if they believe we are promoting, orhave promoted, VELCADE for off-label use.

Additionally, theDepartment of Justice can bring civil or criminal actions against companiesthat promote drugs for unapproved uses, based on the False Claims Act and otherfederal laws governing reimbursement for such products under the Medicare,Medicaid and other federally supported healthcare programs.  Monetary penalties in such cases have oftenbeen in excess of $100 million.  Civilpenalties can include costly mandatory compliance programs and exclusion fromfederal healthcare programs.

***Guidelines and recommendations can affect the use ofour products.***

Government agenciespromulgate regulations and guidelines directly applicable to us and to ourproducts. In addition, professional societies, practice management groups,private health and science foundations and organizations involved in variousdiseases from time to time may also publish guidelines or recommendations tothe health care and patient communities. Recommendations of government agenciesor these other groups or organizations may relate to such matters as usage,dosage, route of administration and use of concomitant therapies.Recommendations or guidelines suggesting the reduced use of our products or theuse of competitive or alternative products that are followed by patients andhealth care providers could result in decreased use of our products.

**Risks Relating toHolding Our Common Stock**

***The trading price of our common stock could be subjectto significant fluctuations.***

The trading price of ourcommon stock has been quite volatile, and may be volatile in the future. Duringthe three months ended March 31, 2007, our common stock traded as high as$11.53 per share and as low as $10.24 per share.  During 2006, our common stock traded as highas $12.08 per share and as low as $7.83 per share. Factors such asannouncements of our or our competitors’ operating results, data from our orour competitors’ clinical trial results, changes in our prospects, marketconditions for biopharmaceutical stocks in general and analyst recommendationsor commentary concerning our or our competitors’ products or business couldhave a significant impact on the future trading prices of our common stock.

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In particular, thetrading price of the common stock of many biopharmaceutical companies,including ours, has experienced extreme price and volume fluctuations, whichhave at times been unrelated to the operating performance of such companieswhose stocks were affected. Some of the factors that may cause volatility inthe price of our securities include:

·     product revenues and the rateof revenue growth;

·     introduction or success ofcompetitive products;

·     clinical trial results andregulatory developments;

·     quarterly variations infinancial results and guidance to the investment community with respect tofuture financial results;

·     business and product market cycles;

·     fluctuations in customerrequirements;

·     availability and utilizationof manufacturing capacity;

·     timing of new productintroductions; and

·     our ability to develop andimplement new technologies.

The price of our commonstock may also be affected by the estimates and projections of the investmentcommunity and our ability to meet or exceed the financial projections weprovide to the public. The price may also be affected by general economic andmarket conditions, and the cost of operations in our product markets. While wecannot predict the individual effect that these factors may have on the priceof our securities, these factors, either individually or in the aggregate,could result in significant variations in price during any given period of time.We can not assure you that these factors will not have an adverse effect on thetrading price of our common stock.

***We have anti-takeover defenses that could delay orprevent an acquisition and could adversely affect the price of our commonstock.***

Provisions of ourcertificate of incorporation and bylaws and of Delaware law could have theeffect of delaying, deferring or preventing an acquisition of our company. Forexample, we have divided our board of directors into three classes that servestaggered three-year terms, we may issue shares of our authorized “blank check”preferred stock and our stockholders are limited in their ability to callspecial stockholder meetings. In addition, we have issued preferred stockpurchase rights that would adversely affect the economic and voting interestsof a person or group that seeks to acquire us or a 15% or greater interest inour common stock without negotiations with our board of directors.

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

We manage ourfixed income investment portfolio in accordance with our Policy for SecuritiesInvestments, or Investment Policy, that has been approved by our Board ofDirectors. The primary objectives of our Investment Policy are to preserveprincipal, maintain a high degree of liquidity to meet operating needs, andobtain competitive returns subject to prevailing market conditions. Investmentsare made primarily in investment-grade corporate bonds with effectivematurities of three years or less, asset-backed debt securities and U.S.government agency debt securities. These investments are subject to risk ofdefault, changes in credit rating and changes in market value. Theseinvestments are also subject to interest rate risk and will decrease in value ifmarket interest rates increase. A hypothetical 100 basis point increase ininterest rates would result in an approximate $12.9 million decrease in thefair value of our investments as of March 31, 2007. 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 ofMarch 31, 2007.

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

As of March 31,2007, the fair value of our 2.25% notes approximates their carrying value. Theinterest rates on our convertible notes and capital lease obligations are fixedand therefore not subject to interest rate risk.

As of March 31,2007 we did not have any financing arrangements that were not reflected in ourbalance sheet.

**Item4.         Controls and Procedures**

Our management,with the participation of our chief executive officer and chief financialofficer, evaluated the effectiveness of our disclosure controls and procedures(as defined in Rules 13a-15(e) and 15d-15(e) under the ExchangeAct) as of March 31, 2007. In designing and evaluating our disclosure controlsand procedures, management recognized that any controls and procedures, nomatter how well designed and operated, can provide only reasonable assurance ofachieving their objectives and our management necessarily applied its judgmentin evaluating the cost-benefit relationship of possible controls andprocedures. Based on this evaluation, our chief executive officer and chieffinancial officer concluded that as of March 31, 2007, our disclosure controlsand procedures were (1) designed to ensure that material informationrelating to us is made known to our chief executive officer and chief financialofficer by others, particularly during the period in which this report wasprepared and (2) effective, in that they provide reasonable assurance thatinformation required to be disclosed by us in the reports we file or submitunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in the SEC’s rules and forms.

No change in ourinternal control over financial reporting (as defined inRules 13a-15(f) and 15d-15(f) under the Exchange Act) occurredduring the fiscal quarter ended March 31, 2007 that has materially affected, oris reasonably likely to materially affect, our internal control over financialreporting.

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**PART II OTHER INFORMATION**

**Item 6.    Exhibits**

(a)               Exhibits

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

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.
|                    | MILLENNIUM PHARMACEUTICALS, INC.                      |
|--------------------|-------------------------------------------------------|
|               | (Registrant)                                          |
|               |                                                  |
|               |                                                  |
| Dated: May 9, 2007 | /s/ MARSHA H. FANUCCI                                 |   |
|               | Marsha H. Fanucci                                     |
| * *           | *Senior Vice President and Chief Financial Officer*   |
| * *           | *(principal financial and chief accounting  officer)* |

 

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

 

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