**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

**___________________**

**FORM 10-Q**

**___________________**

**(MarkOne)**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

 

**For the quarterly period ended March 31,2006**

**OR**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

** **

**For thetransition period from _____________to ______________.**

___________________

**Commission File 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**(Addressof principal executive offices) (zip code)

#### **(617) 679-7000**(Registrant’s telephone number, including area code)

___________________

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements 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 large accelerated filer”in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x          Acceleratedfiler  o          Non-acceleratedfiler

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). Yes   o      No   x

Numberof shares of the registrant’s Common Stock, $0.001 par value, outstanding on May 5,2006:   314,795,116

 

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**MILLENNIUMPHARMACEUTICALS, INC.**

**FORM 10-Q**

**FORTHE QUARTER ENDED MARCH 31, 2006**

**TABLE OF CONTENTS**
|                  | ** ** | ** **                                                                                                     | ** ** | ** ** |
|------------------|------------|----------------------------------------------------------------------------------------------------------------|------------|------------|
| ** **       | ** ** | ** **                                                                                                     | ** ** | ** ** |
| **PART I**  | ** ** | **FINANCIAL  INFORMATION**                                                                                     |       |       |
| ** **       | ** ** | ** **                                                                                                     |       |       |
| Item 1.          |       | Condensed Consolidated Financial Statements                                                                    |       |       |
|             |       |                                                                                                           |       |       |
|             |       | Condensed Consolidated Balance Sheets as of March 31,  2006 and December 31, 2005                    |       | 3          |
|             |       |                                                                                                           |       |       |
|             |       | Condensed Consolidated Statements of Operations for  the three months ended March 31, 2006 and 2005  |       | 4          |
|             |       |                                                                                                           |       |       |
|             |       | Condensed Consolidated Statements of Cash Flows for  the three months ended March 31, 2006 and 2005       |       | 5          |
|             |       |                                                                                                           |       |       |
|             |       | Notes to Condensed Consolidated Financial Statements                                                           |       | 6          |
|             |       |                                                                                                           |       |       |
| Item 2.          |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                    |       | 16         |
|             |       |                                                                                                           |       |       |
|             |       | Risk Factors That May Affect Results                                                                      |       | 28         |
|             |       |                                                                                                           |       |       |
| Item 3.          |       | Quantitative and Qualitative Disclosures about Market  Risk                                                    |       | 39         |
|             |       |                                                                                                           |       |       |
| Item 4.          |       | Controls and Procedures                                                                                        |       | 39         |
|             |       |                                                                                                           |       |       |
| **PART II** | ** ** | **OTHER  INFORMATION**                                                                                         |       |       |
| ** **       | ** ** | ** **                                                                                                     |       |       |
| Item 6.          |       | Exhibits                                                                                                       |       | 40         |
|             |       |                                                                                                           |       |       |
|             |       | Signatures                                                                                                     |       | 41         |
|             |       |                                                                                                           |       |       |
|             |       | Exhibit Index                                                                                             |       | 42         |

*The following Millennium trademarksare used in this Quarterly Report on Form 10-Q:*Millennium®, the Millennium “M” logoand design (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 of Merck &Co., Inc., Thalomid® (thalidomide) and Revlimid® are trademarks of CelgeneCorporation and Angiomax® (bivalirudin) is a trademark of The MedicinesCompany. *Other trademarks used in thisQuarterly Report on Form 10-Q are the property of their respectiveowners.*

 

2

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**PART I   FINANCIAL INFORMATION**

**Item 1.  Condensed Consolidated Financial Statements**

**MillenniumPharmaceuticals, Inc.Condensed Consolidated Balance Sheets**

 
| ** **                                                                                                                                                             | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                             | ** ** | **(unaudited)**          | ** ** | ** **                  | ** ** |
| **(in thousands, except per share  amounts)**                                                                                                                          | ** ** | ** **               | ** ** | ** **                  | ** ** |
| **Assets**                                                                                                                                                             | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                                                                        |       |                     |       |                        |       |
| Cash and cash  equivalents                                                                                                                                             |       | $                        | 17,642     |                        | $          | 5,029 |   |
| Marketable  securities                                                                                                                                                 |       | 614,852                  |       | 640,559                     |       |
| Accounts  receivable, net of allowances of $500 in 2006 and $2,504 in 2005                                                                                             |       | 68,549                   |       | 64,338                      |       |
| Inventory                                                                                                                                                              |       | 16,410                   |       | 15,824                      |       |
| Prepaid expenses  and other current assets                                                                                                                             |       | 15,813                   |       | 15,346                      |       |
| Total current assets                                                                                                                                                   |       | 733,266                  |       | 741,096                     |       |
| Property and  equipment, net                                                                                                                                           |       | 176,119                  |       | 183,059                     |       |
| Restricted cash                                                                                                                                                        |       | 7,332                    |       | 8,486                       |       |
| Other assets                                                                                                                                                           |       | 17,880                   |       | 16,716                      |       |
| Goodwill                                                                                                                                                               |       | 1,211,647                |       | 1,210,926                   |       |
| Developed technology,  net                                                                                                                                             |       | 296,971                  |       | 305,337                     |       |
| Intangible  assets, net                                                                                                                                                |       | 61,891                   |       | 62,012                      |       |
| Total assets                                                                                                                                                           |       | $                        | 2,505,106  |                        | $          | 2,527,632 |   |
|                                                                                                                                                                   |       |                     |       |                        |       |
| **Liabilities and Stockholders’  Equity**                                                                                                                         | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Current liabilities:                                                                                                                                                   |       |                     |       |                        |       |
| Accounts payable                                                                                                                                                       |       | $                        | 21,655     |                        | $          | 31,137 |   |
| Accrued expenses                                                                                                                                                       |       | 52,901                   |       | 60,325                      |       |
| Current portion  of restructuring                                                                                                                                      |       | 32,697                   |       | 35,362                      |       |
| Current portion  of deferred revenue                                                                                                                                   |       | 27,745                   |       | 27,745                      |       |
| Current portion  of capital lease obligations                                                                                                                          |       | 2,658                    |       | 4,136                       |       |
| Current portion  of long-term debt                                                                                                                                     |       | 105,461                  |       | 5,890                       |       |
| Total current liabilities                                                                                                                                              |       | 243,117                  |       | 164,595                     |       |
| Other long-term  liabilities                                                                                                                                           |       | 688                      |       | 48                          |       |
| Restructuring,  net of current portion                                                                                                                                 |       | 64,283                   |       | 69,541                      |       |
| Deferred  revenue, net of current portion                                                                                                                              |       | 10,036                   |       | 15,973                      |       |
| Capital lease  obligations, net of current portion                                                                                                                     |       | 75,935                   |       | 76,226                      |       |
| Long-term debt                                                                                                                                                         |       | —                   |       | 99,571                      |       |
|                                                                                                                                                                   |       |                     |       |                        |       |
| Commitments and  contingencies                                                                                                                                         |       |                     |       |                        |       |
|                                                                                                                                                                   |       |                     |       |                        |       |
| **Stockholders’ Equity:**                                                                                                                                         | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Preferred Stock,  $0.001 par value; 5,000 shares authorized, none issued                                                                                               |       | —                   |       | —                      |       |
| Common Stock,  $0.001 par value; 500,000 shares authorized: 314,107 shares at March 31,  2006 and 311,121 shares at December 31, 2005 issued and outstanding |       | 314                      |       | 311                         |       |
| Additional  paid-in capital                                                                                                                                            |       | 4,599,381                |       | 4,582,204                   |       |
| Deferred  compensation                                                                                                                                                 |       | —                   |       | (4,219                      | )          |
| Accumulated  other comprehensive loss                                                                                                                                  |       | (769                     | )          | (9,580                      | )          |
| Accumulated  deficit                                                                                                                                                   |       | (2,487,879               | )          | (2,467,038                  | )          |
| Total stockholders’ equity                                                                                                                                        |       | 2,111,047                |       | 2,101,678                   |       |
| Total liabilities and stockholders’ equity                                                                                                                        |       | $                        | 2,505,106  |                        | $          | 2,527,632 |   |

 

The accompanying notes are an integral part of thesecondensed consolidated financial statements.

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**Millennium Pharmaceuticals, Inc.Condensed Consolidated Statements of Operations(unaudited)**
| ** **                                                                                               | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                               | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| **(in thousands, except per share  amounts)**                                                            | ** ** | ** **                                       | ** ** | ** ** | ** ** |
|                                                                                                     |       |                                             |       |   |   |
| Revenues:                                                                                                |       |                                             |       |   |   |
| Net product sales                                                                                        |       | $                                                | 53,373     |   | $ | 44,795 |   |
| Co-promotion revenue                                                                                     |       | —                                           |       | 42,826 |   |
| Revenue under strategic alliances                                                                        |       | 38,629                                           |       | 36,090 |   |
| Royalties                                                                                                |       | 30,473                                           |       | — |   |
| Total revenues                                                                                           |       | 122,475                                          |       | 123,711 |   |
|                                                                                                     |       |                                             |       |   |   |
| Costs and expenses:                                                                                      |       |                                             |       |   |   |
| Cost of sales (excludes amortization of acquired  intangible assets)                                     |       | 15,828                                           |       | 14,581 |   |
| Research and development (includes stock-based  compensation expense of $6,334 in 2006)                  |       | 82,598                                           |       | 86,154 |   |
| Selling, general and administrative (includes  stock-based compensation expense of $4,166 in 2006)  |       | 35,465                                           |       | 51,637 |   |
| Restructuring                                                                                            |       | 2,831                                            |       | 1,107 |   |
| Amortization of intangibles                                                                              |       | 8,487                                            |       | 8,500 |   |
| Total costs and expenses                                                                                 |       | 145,209                                          |       | 161,979 |   |
|                                                                                                     |       |                                             |       |   |   |
| Loss from  operations                                                                                    |       | (22,734                                          | )          | (38,268 | ) |
|                                                                                                     |       |                                             |       |   |   |
| Other income (expense):                                                                                  |       |                                             |       |   |   |
| Investment income, net                                                                                   |       | 4,625                                            |       | 4,442 |   |
| Interest expense                                                                                         |       | (2,732                                           | )          | (2,588 | ) |
| Net loss                                                                                                 |       | $                                                | (20,841    | ) | $ | (36,414 | ) |
|                                                                                                     |       |                                             |       |   |   |
| *Amounts per common share:*                                                                              |       |                                             |       |   |   |
|                                                                                                     |       |                                             |       |   |   |
| Net loss per  share, basic and diluted                                                                   |       | $                                                | (0.07      | ) | $ | (0.12 | ) |
|                                                                                                     |       |                                             |       |   |   |
| Weighted average  shares, basic and diluted                                                              |       | 311,823                                          |       | 306,590 |   |

 

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

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**MillenniumPharmaceuticals, IncCondensed Consolidated Statements of Cash Flows(unaudited)**
| ** **                                                                                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                         | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| **(in thousands)**                                                                                 |       |                                             |       |   |   |
| **Cash Flows from Operating  Activities:**                                                         | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Net loss                                                                                           |       | $                                                | (20,841    | ) | $ | (36,414) |   |
| Adjustments to reconcile  net loss to cash used in operating activities:                           |       |                                             |       |   |   |
| Depreciation and amortization                                                                      |       | 16,442                                           |       | 20,579 |   |
| Non-cash restructuring charges, net                                                                |       | 54                                               |       | — |   |
| Amortization and write-off of deferred financing  costs                                            |       | 111                                              |       | 114 |   |
| Realized loss on securities, net                                                                   |       | 2,006                                            |       | 701 |   |
| 401K match stock compensation                                                                      |       | 1,702                                            |       | 1,639 |   |
| Stock-based compensation expense                                                                   |       | 10,500                                           |       | — |   |
| Changes in operating  assets and liabilities:                                                      |       |                                             |       |   |   |
| Accounts receivable                                                                                |       | (4,211                                           | )          | (40,943 | ) |
| Inventory                                                                                          |       | (586                                             | )          | 607 |   |
| Prepaid expenses and other current assets                                                          |       | (467                                             | )          | 228 |   |
| Restricted cash and other assets                                                                   |       | (1,171                                           | )          | (246 | ) |
| Accounts payable and accrued expenses                                                              |       | (24,621                                          | )          | (29,280 | ) |
| Advance from Schering-Plough                                                                       |       | —                                           |       | (49,250 | ) |
| Deferred revenue                                                                                   |       | (5,936                                           | )          | 22,058 |   |
| Other long-term liabilities                                                                        |       | 640                                              |       | — |   |
| Net cash used in  operating activities                                                             |       | (26,378                                          | )          | (110,207 | ) |
|                                                                                               |       |                                             |       |   |   |
| **Cash Flows from Investing  Activities:**                                                         | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Investments in  marketable securities                                                              |       | (84,728                                          | )          | (55,378 | ) |
| Proceeds from  sales and maturities of marketable securities                                       |       | 118,420                                          |       | 175,015 |   |
| Purchases of  property and equipment                                                               |       | (1,386                                           | )          | (4,312 | ) |
| Other investing  activities                                                                        |       | (739                                             | )          | (3,995 | ) |
| Net cash  provided by investing activities                                                         |       | 31,567                                           |       | 111,330 |   |
|                                                                                               |       |                                             |       | ** ** | ** ** |
| **Cash Flows from Financing  Activities:**                                                         | ** ** | ** **                                       | ** ** |   |   |
| Net proceeds  from employee stock option exercises                                                 |       | 9,198                                            |       | 1,363 |   |
| Principal  payments on capital leases                                                              |       | (1,769                                           | )          | (3,132 | ) |
| Net cash  provided by (used in) financing activities                                               |       | 7,429                                            |       | (1,769 | ) |
|                                                                                               |       |                                             |       |   |   |
| Increase  (decrease) in cash and cash equivalents                                                  |       | 12,618                                           |       | (646 | ) |
| Equity  adjustment from foreign currency translation                                               |       | (5                                               | )          | 79 |   |
| Cash and cash  equivalents, beginning of period                                                    |       | 5,029                                            |       | 14,436 |   |
| Cash and cash  equivalents, end of period                                                          |       | $                                                | 17,642     |   | $ | 13,869 |   |
| ** **                                                                                         |       |                                             |       |   |   |
| **Supplemental Cash Flow  Information:**                                                           |       |                                             |       |   |   |
| Cash paid for  interest                                                                            |       | $                                                | 3,920      |   | $ | 3,815 |   |
| **Supplemental Disclosure of  Noncash Investing Activities:**                                      |       |                                             |       |   |   |
| Receipt of  shares of SGX Pharmaceuticals, Inc. common stock in exchange for note  receivable |       | $                                                | 6,000      |   | $ | — |   |

 

The accompanying notes are an integral part of thesecondensed consolidated financial statements.

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**MillenniumPharmaceuticals, Inc.Notes to Condensed Consolidated Financial Statements**

**1.   Basis ofPresentation**

The accompanying condensed consolidated financialstatements have been prepared in accordance with generally accepted accountingprinciples for interim financial information and with the instructions to Form 10-Qand Article 10 of Regulation S-X. Accordingly, they do not include all ofthe information and footnotes required by generally accepted accountingprinciples for complete financial statements. In the opinion of management, alladjustments, consisting of normal recurring accruals and revisions ofestimates, considered necessary for a fair presentation of the accompanyingcondensed consolidated financial statements have been included. Interim resultsfor the three months ended March 31, 2006 are not necessarily indicativeof the results that may be expected for the year ending December 31, 2006.For further information, refer to the financial statements and accompanyingfootnotes included in the Company’s Annual Report on Form 10-K forthe fiscal year ended December 31, 2005, which was filed with theSecurities and Exchange Commission (“SEC”) on March 8, 2006.

The information presented in thecondensed consolidated financial statements and related footnotes at March 31,2006, and for the three months ended March 31, 2006 and 2005, is unauditedand the condensed consolidated balance sheet amounts and related footnotes at December 31,2005, have been derived from audited financial statements.

**2.**   Summaryof Significant Accounting Policies

**Reclassifications**

Certain prior year amounts in operating activities ofthe condensed consolidated statements of cash flows have been reclassified toconform to the current year presentation. This reclassification has no impacton previously reported net loss or net cash used in operating activities.

Certain prior year amounts included in accruedexpenses of the condensed consolidated balance sheets have been reclassified toaccounts payable to conform to the current year presentation. Thisreclassification has no impact on previously reported net loss or currentliabilities.

**Cash Equivalents,Marketable Securities and Other Investments**

Cash equivalents consist principally of money marketfunds and corporate bonds with maturities of three months or less at the dateof purchase. Marketable securities consist primarily of investment-gradecorporate bonds, asset-backed debt securities and U.S. government agencydebt securities. Other investments represent ownership in private companies inwhich the Company holds less than a 20 percent ownership position and does nototherwise exercise significant influence. The Company carries such investmentsat cost unless significant influence can be exercised over the investee, in whichcase such securities are recorded using the equity method. As a matter ofpolicy, the Company monitors these investments in private companies on aquarterly basis and determines whether any impairment in their value wouldrequire a charge to current earnings, based on the implied value from anyrecent rounds of financing completed by the investee, market prices ofcomparable public companies and general market conditions. These otherinvestments are included in other long term assets at March 31, 2006 and December 31,2005.

Management determines the appropriate classificationof marketable securities at the time of purchase and reevaluates suchdesignation at each balance sheet date. Marketable securities at March 31,2006 and December 31, 2005 are classified as “available-for-sale.”Available-for-sale securities are carried at fair value, with the unrealizedgains and losses reported in a separate component of stockholders’ equity. Thecost of debt securities in this category is adjusted for amortization ofpremiums and accretion of discounts to maturity. Such amortization andaccretion are included in investment income. Realized gains and losses anddeclines in value judged to be other-than-temporary on available-for-salesecurities and other investments are included in investment income. The cost ofsecurities sold is based on the specific identification method. Interest anddividends on securities classified as available-for-sale are included ininvestment income.

During the three months ended March 31, 2006, theCompany did not record significant realized gains on marketable securities andrecorded realized losses on marketable securities of $2.0 million. During thethree months ended March 31, 2005,

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the Company recorded realized gains on marketable securitiesof $0.05 million and realized losses on marketable securities of $0.7 million.

**SegmentInformation**

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

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. All of the Company’s co-promotion revenuewas related to sales and development of INTEGRILIN® (eptifibatide) Injectionthrough August 31, 2005. The remainder of the Company’s total revenue isrelated to its strategic alliances and royalties.

Revenues from Ortho Biotech Products, L.P. (“OrthoBiotech”), a member of the Johnson & Johnson Family Of Companies,including license fees, milestones, distribution fees on sales outside of theUnited States and reimbursement accounted for approximately 21 percent and 22percent of total revenues for the three months ended March 31, 2006 and2005, respectively.

Revenues from Schering-Plough Ltd. andSchering Corporation (collectively “SGP”), including license fees, royalties onsales of INTEGRILIN in the United States and other territories andreimbursement accounted for approximately 32 percent of total revenues for thethree months ended March 31, 2006. There was no revenue other thanco-promotion revenue recorded from SGP during the three months ended March 31,2005.

There were no other significant customers understrategic alliances and royalties in the three months ended March 31, 2006and 2005.

**InformationConcerning Market and Source of Supply Concentration**

INTEGRILIN has received regulatory approvals in the UnitedStates, the countries of the European Union and a number of other countries forvarious indications. The Company and SGP co-promoted INTEGRILIN in the UnitedStates and shared any profits and losses through August 31, 2005. In September 2005,SGP acquired the exclusive development and commercialization rights toINTEGRILIN in the United States from the Company. The Company continues tomanage the supply chain for INTEGRILIN at the expense of SGP for products soldin the SGP territories. In the EuropeanUnion, GlaxoSmithKline plc (“GSK”) exclusively markets INTEGRILIN.

The Company relies on third-party contractmanufacturers for the clinical and commercial production of INTEGRILIN. TheCompany has two approved manufacturers that provide eptifibatide, the activepharmaceutical ingredient necessary to make INTEGRILIN for both clinical trialsand commercial supply. Solvay, Societe Anonyme (“Solvay”), one of the currentmanufacturers, owns the process technology used by it and the othermanufacturer for the production of the active pharmaceutical ingredient. TheCompany is seeking approval of its own alternative process technology for theproduction of eptifibatide for approval in the United States, Europe and othercountries, as required. The Company entered into an agreement with Solvay in January 2003for an initial term of four years and one-year renewal periods thereafter. TheCompany has two manufacturers that currently perform fill/finish services forINTEGRILIN and a new packaging supplier for the United States. The FDA or otherregulatory agencies must approve the processes or the facilities that may beused for the manufacture of the Company’s marketed products. Materials inprocess at these alternative suppliers are included in inventory.

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 the active pharmaceutical ingredient and the fill/finish ofVELCADE. The Company currently works with one manufacturer to completefill/finish for VELCADE and the Company is qualifying a second fill/finishsupplier.

During 2004, the Company began distributing VELCADE inthe United States through a sole-source distribution model where the Companysells directly to a third party who in turn distributes to the wholesaler base.

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**Inventory**

Inventory consists of currently marketed products, includingVELCADE and INTEGRILIN, and from time to time, product candidates awaitingregulatory approval, which were capitalized based upon management’s judgment ofprobable near term commercialization. The Company assesses the probability ofcommercialization based upon several factors including estimated launch date,time to manufacture and shelf life. At March 31, 2006 and December 31,2005, inventory does not include amounts for products that have not beenapproved for sale.

Inventories are stated at the lower of cost (first in,first out) or market. Inventories are reviewed periodically for slow-moving orobsolete status based on sales activity, both projected and historical.

Inventory consists of the following (in thousands):

|                 | ** ** | **March 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|-----------------|------------|------------------------------|------------|---------------------------------|------------|
| Raw materials   |       | $                            | 8,426      |                            | $          | 7,632 |   |
| Work in process |       | 7,524                        |       | 7,370                           |       |
| Finished goods  |       | 460                          |       | 822                             |       |
|            |       | $                            | 16,410     |                            | $          | 15,824 |   |

 

**Goodwill andIntangible 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 tospecific intangible assets.

Intangible assets consist of the following (inthousands):
| ** **                                                           | ** ** | **March 31, 2006**    | ** ** | **December 31, 2005** | ** ** |
|----------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                                           | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization**   | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Developed  technology                                                |       | $                               | 435,000    |                            | $          | (138,029 | ) | $ | 435,000 |   | $ | (129,663 | ) |
| Core technology                                                      |       | $                               | 18,712     |                            | $          | (18,712 | ) | $ | 18,712 |   | $ | (18,712 | ) |
| Other                                                                |       | 17,060                          |       | (14,169                         | )          | 17,060 |   | (14,048 | ) |
| Total amortizable intangible assets, excluding  developed technology |       | 35,772                          |       | (32,881                         | )          | 35,772 |   | (32,760 | ) |
| Total indefinite-lived  trademark                                    |       | 59,000                          |       | —                          |       | 59,000 |   | — |   |
| Total intangible  assets, excluding developed technology             |       | $                               | 94,772     |                            | $          | (32,881 | ) | $ | 94,772 |   | $ | (32,760 | ) |

 

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 |

 

Amortization expense was approximately $8.5 millionfor both the three months ended March 31, 2006 and 2005, respectively. TheCompany expects to incur amortization expense of approximately $34.0 millionfor each of the next five years.

As required by SFAS No. 142, “Goodwill and OtherIntangible Assets,” goodwill and indefinite lived intangible assets are notamortized but are reviewed annually for impairment, or more frequently ifimpairment indicators arise. Separable intangible assets that are not deemed tohave an indefinite life are amortized over their useful lives and reviewed forimpairment when events or changes in circumstances suggest that the assets maynot be recoverable. The Company tests for goodwill impairment annually, on October 1,and whenever events or changes in circumstances suggest that the carryingamount may not be recoverable.

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On October 1, 2005, the Company performed itsannual goodwill impairment test and determined that no impairment existed onthat date. The Company continually monitors business and market conditions,including the restructured relationship with SGP, to assess whether animpairment indicator exists. If the Company were to determine that animpairment indicator exists, it would be required to perform an impairment test,which might result in a material impairment charge to the statement ofoperations.

Goodwill as of March 31, 2006 consists of theexcess purchase price over the estimated fair value of net tangible andintangible assets primarily related to the Company’s acquisitions of COR Therapeutics, Inc.(“COR”), LeukoSite, Inc. (“LeukoSite”) and Cambridge Discovery Chemistry,LTD. The carrying value may be adjusted as a result of the continued settlementof contingent consideration arising from the LeukoSite acquisition.

**RevenueRecognition**

The Companyrecognizes revenue from the sale of its products, its co-promotioncollaboration through August 31, 2005, strategic alliances and royalties.The Company’s revenue arrangements with multiple elements are divided intoseparate units of accounting if specified criteria are met, including whetherthe delivered element has stand-alone value to the customer and whetherthere is objective and reliable evidence of the fair value of the undelivereditems. The consideration received is allocated among the separate units basedon their respective fair values, and the applicable revenue recognitioncriteria are applied to each of the separate units. Advance payments receivedin excess of amounts earned are classified as deferred revenue until earned.

*Net product sales*

The Company records product sales of VELCADE whendelivery has occurred, title passes to the customer, collection is reasonablyassured and the Company has no further obligations. Allowances are recorded asa reduction to product sales for estimated returns and discounts at the time ofsale. Costs incurred by the Company for shipping and handling are recorded incost of sales.

*Co-promotionrevenue*

Through August 31, 2005, co-promotion revenueincluded the Company’s share of profits from the sale of INTEGRILIN inco-promotion territories by SGP. Also included in co-promotion revenue werereimbursements from SGP of the Company’s manufacturing-related costs,development costs, advertising and promotional expenses associated with thesale of INTEGRILIN within co-promotion territories and royalties from SGP onsales of INTEGRILIN outside of the co-promotion territory other than Europe.The Company recognized revenue when SGP shipped INTEGRILIN to wholesalers andrecorded it net of allowances, if any. The Company deferred specifiedmanufacturing-related expenses until the time SGP shipped related productto its customers inside and outside of co-promotion territories and outside ofEurope.

Beginning September 1, 2005 as a result of theCompany’s transition from a co-promotion to a royalty arrangement forINTEGRILIN in the United States, the Company no longer reports co-promotionrevenue.

*Revenue understrategic alliances*

The Company recognizes revenue under strategicalliances from nonrefundable license payments, milestone payments,reimbursement of research and development costs and reimbursement ofmanufacturing-related costs. Nonrefundable upfront fees for which no furtherperformance obligations exist are recognized as revenue on the earlier of whenpayments are received or collection is assured.

Nonrefundable upfront licensing fees and guaranteed,time-based payments that require continuing involvement in the form of researchand development, manufacturing or other commercialization efforts by theCompany are recognized as revenue:

·                  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

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

Milestone payments are recognized as revenue when theperformance obligations, as defined in the contract, are achieved. Performanceobligations typically consist of significant milestones in the development lifecycle of the related technology or product candidate, such as initiation ofclinical trials, filing for approval with regulatory agencies and approvals byregulatory agencies.

Reimbursements of research and development costs arerecognized as revenue as the related costs are incurred.

*Royalties*

Beginning on September 1, 2005, in connectionwith the closing of the Company’s amended collaboration agreement with SGP, asdiscussed in Note 4, the Company began to record royalty income. Royalties are recognized as revenue when earned. Royaltiesmay include:

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

·                  royaltiesearned on international sales of VELCADE, as provided by Ortho Biotech;

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

·                  otherroyalties.

**Advertising andPromotional Expenses**

Advertising and promotional expenses are expensed asincurred. During the three months ended March 31, 2006 and 2005,advertising and promotional expenses were $5.2 million and$11.6 million, respectively.

**Net Loss PerCommon 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 of unvestedrestricted shares of common stock. Options and warrants to purchase shares ofcommon stock that were not included in the calculation of diluted sharesbecause the effect of including the options and warrants would have beenanti-dilutive were 2.2 million and 2.9 million at March 31, 2006 and 2005,respectively.

**Comprehensive Loss**

Comprehensive lossis composed of net loss, change in unrealized gains and losses on marketablesecurities and cumulative foreign currency translation adjustments. Thefollowing table displays comprehensive loss (in thousands):

|                                                  | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                       | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| Net loss                                         |       | $                                                | (20,841    | ) | $ | (36,414 | ) |
| Unrealized gain  (loss) on marketable securities |       | 8,816                                            |       | (4,658 | ) |
| Cumulative  translation adjustments              |       | (5                                               | )          | 79 |   |
| Comprehensive  loss                              |       | $                                                | (12,030    | ) | $ | (40,993 | ) |

 

The components of accumulated other comprehensive losswere as follows (in thousands):

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|                                           | ** ** | **March 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|-------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Unrealized loss  on marketable securities |       | $                            | (925       | )                               | $          | (9,741 | ) |
| Cumulative  translation adjustments       |       | 156                          |       | 161                             |       |
| Accumulated other  comprehensive loss     |       | $                            | (769       | )                               | $          | (9,580 | ) |

 

**Stock-BasedCompensation**

As discussed more fully in Note 6, the Company adoptedSFAS No. 123 (revised 2004), “Share Based Payment,” (“SFAS No. 123R”),effective January 1, 2006. SFAS 123R requires the recognition of the fairvalue of stock-based compensation in its statements of operations. Stock-basedcompensation primarily relates to stock options, restricted stock and theCompany’s employee stock purchase plans.

Prior to January 1, 2006, the Company followedAccounting Principles Board Opinion No. 25, “Accounting for Stock Issuedto Employees” (“APB 25”) and related interpretations, in accounting for itsstock-based compensation plans. Under APB 25, when the exercise price of theemployee stock options equals the market price of the underlying stock on thedate of grant, no compensation expense was recognized. The Company elected themodified prospective transition method for adopting SFAS 123R. Under thismethod, the provisions of SFAS 123R apply to all awards granted or modifiedafter the date of adoption. In addition, the unrecognized expense of awards notyet vested at the date of adoption, determined under the original provisions ofSFAS 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), shall berecognized in statements of operations in the periods after the date ofadoption. For awards granted prior to January 1, 2006, the Companycalculated stock-based compensation expense on an accelerated basis for stockoptions and on a straight-line basis for restricted stock.

As a result of the adoption of SFAS 123R, theincremental impact on stock compensation expense caused net loss for the threemonths ended March 31, 2006, to be $10.5 million or, $0.03 per share,greater than if the Company had continued to account for share-based compensationunder APB 25.

SFAS 123R requires the presentation of pro formainformation for periods prior to adoption as if the Company had accounted forall stock-based employee compensation under the fair value method of thatstatement. For purposes of this pro forma disclosure, the estimated fair valueof the stock options at the date of the grant is amortized to expense on anaccelerated basis over the requisite service period, which generally equals thevesting period and the Company accounted for forfeitures as they occurred. Thefollowing table illustrates the effect on net loss and loss per share for thethree months ended March 31, 2005, as if the Company had applied the fairvalue recognition provisions of SFAS 123R to stock-based employee compensation(in thousands, except per share amounts):

| Net loss                                                                                                          |   | $       | (36,414 | ) |
|-------------------------------------------------------------------------------------------------------------------|--------|---------|---------|---|
| Add: Stock-based  employee compensation as reported in the Statement of Operations                                |   | —  |    |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method for all awards |   | (16,409 | )       |
| Pro forma net  loss                                                                                               |   | $       | (52,823 | ) |
|                                                                                                              |   |    |    |
| Amounts per common  share:                                                                                        |   |    |    |
| Basic and  diluted — as reported                                                                             |   | $       | (0.12   | ) |
| Basic and diluted — pro  forma                                                                               |   | $       | (0.17   | ) |

 

**AccountingPronouncements**

In May 2005, the FASB issued SFAS No. 154, “AccountingChanges and Error Corrections” (“SFAS No. 154”), which replaces AccountingPrinciples Board Opinions No. 20, “Accounting Changes” and SFAS No. 3,“Reporting Accounting Changes in Interim Financial Statements — an Amendment ofAPB Opinion No. 28.”  SFAS No. 154provides guidance on the accounting for and reporting of accounting changes anderror corrections. It establishes retrospective application, or the earliestpracticable dates, as the required method for reporting a change in accountingprinciple and restatement with respect to the reporting of a correction of anerror. SFAS No. 154 is effective for accounting changes and corrections oferrors made in fiscal years beginning after December 15, 2005. Althoughthe Company will continue to evaluate

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the application of SFAS No. 154, the Company doesnot currently believe that adoption will have a material impact on results ofoperations, financial position or cash flows.

**3.**   Restructuring

*2005 StrategicRefinement*

In October 2005, the Company announced its 2005restructuring plan in support of a refined strategy focused on advancing keygrowth assets, including VELCADE, advancing the Company’s clinical pipeline ofseven novel oncology and inflammation molecules and building a leadingoncology-focused discovery organization. In connection with the strategicrefinement, the Company substantially reduced its effort in inflammationdiscovery and reduced overall headcount, including eliminating INTEGRILIN salesand marketing positions, positions in inflammation discovery and various otherbusiness support groups.

The Company recorded restructuring charges of $1.9million during the three months ended March 31, 2006 under the 2005 restructuringplan primarily related to additionalfacility related costs associated with vacated buildings and employeetermination benefits as a result of the headcount reductions withininflammation discovery and business support groups.

These costs are includedin restructuring in the statements of operations and in current and long-termliabilities on the balance sheet at March 31, 2006. The following tabledisplays the restructuring activity and liability balances (in thousands):

|                         | ** ** | **Balance at**   | ** ** | ** **  | ** ** | ** **   | ** ** | ** **     | ** ** | **Balance at** | ** ** |
|-------------------------|------------|-----------------------|------------|-------------|------------|--------------|------------|----------------|------------|---------------------|------------|
| ** **              | ** ** | **December 31,** | ** ** | ** **  | ** ** | ** **   | ** ** | **Asset**      | ** ** | **March 31,**  | ** ** |
| ** **              | ** ** | **2005**              | ** ** | **Charges** | ** ** | **Payments** | ** ** | **Impairment** | ** ** | **2006**            | ** ** |
| Termination  benefits   |       | $                     | 4,367      |        | $          | 837          |       | $              | (2,410     | )                   | $          | — |   | $ | 2,794 |   |
| Facilities              |       | 24,812                |       | 971         |       | (1,527       | )          | —         |       | 24,256              |       |
| Asset impairment        |       | —                |       | 54          |       | —       |       | (54            | )          | —              |       |
| Contract termination    |       | 37                    |       | 37          |       | (74          | )          | —         |       | —              |       |
| Other associated  costs |       | 16                    |       | 34          |       | (9           | )          | —         |       | 41                  |       |
| Total                   |       | $                     | 29,232     |        | $          | 1,933        |       | $              | (4,020     | )                   | $          | (54 | ) | $ | 27,091 |   |

 

The Company continues to evaluate its strategicalternatives under the refined strategy, including facility consolidation, andas a result, significant material restructuring charges could result.

*2003 RestructuringPlan*

In December 2002 and June 2003, the Companyrealigned it 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 chargesof $0.9 million during the three months ended March 31, 2006 under the2003 restructuring plan primarily related to additional facility related costsassociated with vacated buildings.

The followingtable displays the restructuring activity and liability balances relatedentirely to remaining facility obligations (in thousands):

|            | ** ** | **Balance at**   | ** ** | ** **  | ** ** | ** **   | ** ** | **Balance at** | ** ** |
|------------|------------|-----------------------|------------|-------------|------------|--------------|------------|---------------------|------------|
| ** ** | ** ** | **December 31,** | ** ** | ** **  | ** ** | ** **   | ** ** | **March 31,**  | ** ** |
| ** ** | ** ** | **2005**              | ** ** | **Charges** | ** ** | **Payments** | ** ** | **2006**            | ** ** |
| Facilities |       | $                     | 75,671     |        | $          | 898          |       | $                   | (6,680     | ) | $ | 69,889 |   |
|            |            |                       |            |             |            |              |            |                     |            |  |  |  |  |

 

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 disposal activity berecognized and measured initially at its fair value in the period in which theliability is incurred, except for

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one-time termination benefits that meet specifiedrequirements. Costs of termination benefits relate to severance packages,out-placement services and career counseling for employees affected by therestructuring.

In accordance with SFAS No. 146, the Company’sfacilities related expenses and liabilities in both the 2005 and 2003restructuring plans include estimates of the remaining rental obligations, netof estimated sublease income, for facilities the Company no longer occupies.The Company validates its estimates and assumptions with independent thirdparties having relevant expertise in the real estate market. The Companyreviews its estimates and assumptions on a regular basis, until the outcome isfinalized, and makes whatever modifications are necessary, based on the Company’sbest judgment, to reflect any changed circumstances.

The projected timing of payments of the remainingrestructuring liabilities under both the 2005 and the 2003 restructuring plansat March 31, 2006 is approximately $32.7 million due through March 31,2007 and $64.3 million thereafter through 2022. The actual amount and timing ofthe payment of the remaining accrued liability is dependent upon the ultimateterms of any potential subleases or lease restructuring.

**4.**   Revenueand Strategic Alliances

The Company has entered into research, development,technology transfer and commercialization arrangements with majorpharmaceutical and biotechnology companies relating to a broad range oftherapeutic products. These alliances provide the Company with the opportunityto receive various combinations of license fees, research funding, co-promotionrevenue, distribution fees and may provide additional payments contingent uponits achievement of research and regulatory milestones and royalties and/orprofit shares if the Company’s collaborations are successful in developing andcommercializing products.

*Product Alliances*

On September 1, 2005, the Company transferred toSGP the exclusive development and commercialization rights to INTEGRILIN in theUnited States. In exchange for these rights, SGP paid the Company approximately$35.5 million in a nonrefundable upfront payment that the Company isrecognizing as revenue ratably over the Company’s period of involvement inmanaging the supply chain. In addition, SGP is obligated to pay the Companyroyalties on product sales of INTEGRILIN over the lifetime of the product, withthe potential of receiving royalties beyond the 2014 patent expiration date.

As of September 1, 2005, the Company no longerrecords co-promotion revenue. The Company now records royalties on sales ofINTEGRILIN in the United States and other territories, as earned on a quarterlybasis over the life of the INTEGRILIN product. In each of 2006 and 2007,minimum royalties are set at approximately $85.4 million. There are noguaranteed minimum royalty payments beyond 2007.

Upon closing, SGP assumed development obligationsrelating to INTEGRILIN. The Company continues to manage the supply chain forINTEGRILIN at the expense of SGP for products sold in the United States andother areas outside of the European Union.

In January 2005, the Company repaid SGPapproximately $49.3 million for advances SGP had made for inventory purchasesin prior years.

During the three months ended March 31, 2006, theCompany recognized $15.0 million of milestone payments under its alliance withOrtho Biotech relating to VELCADE and the achievement of agreed-upon sales levelsof VELCADE.

**5.**   ConvertibleDebt

The Company had the following convertible notesoutstanding at March 31, 2006, for a total of $105.5 million, all of whichis included in current liabilities:

·                   $5.9million of principal of 4.5% convertible senior notes due June 15, 2006,that are convertible into the Company’s common stock at any time prior tomaturity at a price equal to $40.61 per share (the “4.5% notes”);

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

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

Under the terms of these notes, the Company isrequired to make semi-annual interest payments on the outstanding principalbalance of the 5.0% notes on March 1 and September 1 of each year, ofthe 4.5% notes on June 15 and December 15 of each year and of the5.5% notes on January 15 and July 15 of each year. All requiredinterest payments to date have been made.

**6.**   StockOption Plans

As discussed in Note 2, the Company adopted SFAS 123R,effective January 1, 2006. SFAS 123R requires the recognition of the fairvalue of stock-based compensation in its statements of operations. Stock-based compensation primarily relates tostock options, restricted stock and the Company’s employee stock purchase plans.Stock options are granted to employees at exercise prices equal to the fairmarket value of the Company’s stock at the dates of grant. Generally, optionshave a contractual term of ten years and vest monthly over a four-year periodfrom grant date, although certain options have been, and may in the future, begranted with shorter vesting. Options granted to consultants and othernonemployees generally vest over the period of service to the Company. Awardsof restricted shares are granted to officers and certain employees andgenerally fully vest four years from the grant date, although certain awardshave been, and may in the future, be granted with shorter vesting. The Companyrecognizes stock-based compensation expense equal to the fair value of stockoptions on an accelerated basis over the requisite service period of theindividual grantees, which generally equals the vesting period. Restrictedstock awards are recorded as compensation cost on an accelerated basis over therequisite vesting periods based on the market value on the date of the grant.  The Company provides newly issued shares tosatisfy stock option exercises and the issuance of restricted stock.

As a result of the adoption of SFAS 123R, theincremental impact on stock compensation expense caused net loss for thequarter ended March 31, 2006, to be $10.5 million or, $0.03 per share,greater than if the Company had continued to account for share-based compensationunder APB 25.

In connection withthe adoption of SFAS 123R, the Company reassessed the valuation methodology forstock options and the related input assumptions. The assessment of thevaluation methodology resulted in the continued use of the Black-Scholes model.In the fourth quarter of 2005, the Company considered implied volatilities ofcurrently traded options to provide an estimate of volatility based uponcurrent trading activity. After considering other such factors as its stage ofdevelopment, the length of time the Company has been public and the impact ofhaving a marketed product, the Company believes a blended volatility rate basedupon the most recent three-year and four-year periods of historical performanceas well as the implied volatilities of currently traded options better reflectsthe expected volatility of its stock going forward. The Company uses historicaldata to estimate option exercise and employee termination behavior, adjustedfor known trends, to arrive at the estimated expected life of an option. TheCompany validated its estimates and assumptions with an independent third partyhaving the relevant expertise in valuation methodologies. The risk-free ratefor periods within the contractual life of the option is based on the U.S.Treasury yield curve in effect at the time of grant. The following tablesummarizes the weighted-average assumptions the Company used in its fair valuecalculation at the date of grant:
| ** **               | ** ** | **Stock Options**       | ** ** | **Stock Purchase Plan** | ** ** |
|--------------------------|------------|------------------------------|------------|-----------------------------------|------------|
| ** **               | ** ** | **March 31, 2006** | ** ** | **March 31, 2005**      | ** ** | **March 31, 2006** | ** ** | **March 31, 2005** | ** ** |
| Expected life  (years)   |       | 3.7                          |       | 5.3                               |       | 0.5 |   | 0.5 |   |
| Risk-free  interest rate |       | 4.72                         | %          | 4.11                              | %          | 3.63 | % | 3.27 | % |
| Volatility               |       | 45                           | %          | 60                                | %          | 60 | % | 60 | % |

 

The Company has never declared cash dividends on anyof its capital stock and does not expect do so in the foreseeable future.

SFAS 123R requires the application of an estimatedforfeiture rate to current period expense to recognize compensation expenseonly for those awards expected to vest. The Company estimates forfeitures basedupon historical data, adjusted for known trends, and will adjust its estimateof forfeitures if actual forfeitures differ, or are expected to differ fromsuch estimates. Subsequent changes in estimated forfeitures will be recognizedthrough a cumulative catch-up adjustment in the period of change and will alsoimpact the amount of stock-based compensation expense in future periods.

In December 2002, the Company’s Board ofDirectors reduced the number of shares authorized for issuance under some ofthe Company’s older plans and acquired plans so that the Company cannot issuenew options under those plans. Additionally, the

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Board of Directors amended some of the Company’soption plans to provide for full vesting of options issued under the plans tooptionholders who terminate their employment for good reason or are terminatedwithout cause within the period one month before and one year after a change ofcontrol.

The 2000 Incentive Stock Plan (the “2000 Plan”) allowsfor the granting of incentive and nonstatutory stock options, restricted stockawards and other stock-based awards, including the grant of shares based uponspecified conditions, the grant of securities convertible into common stock andthe grant of stock appreciation rights. The number of stock option sharesauthorized is equal to 5% of the number of shares outstanding on April 12,2000 plus an annual increase to be made on January 1, 2001, 2002, and 2003equal to 5% of the number of shares outstanding or a lesser amount determinedby the Board of Directors. At March 31, 2006, a total of 40,537,747 sharesof common stock have been reserved for the exercise of options outstanding andare available for future grant under the 2000 Plan.

During the three months ended March 31, 2006, theCompany issued 1,387,560 shares of restricted stock under the Company’s 2000Incentive Stock Plan to officers and certain key employees. The following tablepresents the combined option activity of the Company’s stock plans for thethree months ended March 31, 2006:
| ** **                                         | ** ** | **Shares of  Common Stock  Attributable to  Options** | ** ** | **Weighted-Average  Exercise Price  of Options** | ** ** | **Weighted-Average  Remaining  Contractual Term  (in years)** | ** ** | **Aggregate  Intrinsic Value  (in thousands)** | ** ** |
|----------------------------------------------------|------------|----------------------------------------------------------------------|------------|------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| Outstanding at  January 1, 2006               |       | 34,949,289                                                           |       | $                                                          | 16.56      |                                                                    |       |                                                     |       |   |
| Granted                                            |       | 2,673,763                                                            |       | 10.45                                                      |       |                                                                    |       |                                                     |       |
| Exercised                                          |       | (1,432,022                                                           | )          | 6.42                                                       |       |                                                                    |       |                                                     |       |
| Forfeited or  expired                              |       | (2,578,870                                                           | )          | 22.68                                                      |       |                                                                    |       |                                                     |       |
| Outstanding at  March 31, 2006                |       | 33,612,160                                                           |       | $                                                          | 16.04      |                                                                    | 7.10       |                                                     | $          | 27,379 |   |
| Vested or  expected to vest at March 31, 2006 |       | 32,181,325                                                           |       | $                                                          | 16.28      |                                                                    | 0.39       |                                                     | $          | 26,527 |   |
| Exercisable at  March 31, 2006                |       | 20,411,621                                                           |       | $                                                          | 19.58      |                                                                    | 5.97       |                                                     | $          | 16,531 |   |

 

The weighted-average grant-date fair value of optionsgranted during the three months ended March 31, 2006 and 2005 was $4.04and $4.81, respectively. The intrinsic value of options exercised during thethree months ended March 31, 2006 and 2005 amounted to approximately$5.5 million and $1.0 million, respectively. As of March 31,2006, the total remaining unrecognized compensation cost related to nonvestedstock option awards amounted to approximately $36.0 million, includingestimated forfeitures, which will be amortized on an accelerated basis over theweighted-average remaining requisite service period of approximately one andone half years.

A summary of thestatus of nonvested shares of restricted stock as of March 31, 2006, andchanges during the three months then ended, is presented below:
| ** **                         | ** ** | **Shares  (in thousands)** | ** ** | **Weighted-Average  Grant Date Fair Value** | ** ** |
|------------------------------------|------------|---------------------------------|------------|------------------------------------------------------------|------------|
| Nonvested at  January 1, 2006 |       | 480,000                         |       | $                                                          | 9.97       |   |
| Granted                            |       | 1,387,560                       |       | 10.44                                                      |       |
| Vested                             |       | —                          |       | —                                                     |       |
| Forfeited                          |       | (1,315                          | )          | 10.50                                                      |       |
| Nonvested at  March 31, 2006  |       | 1,866,245                       |       | $                                                          | 10.32      |   |

 

As of March 31, 2006, the total remainingunrecognized compensation cost related to nonvested restricted stock awardsamounted to approximately $14.4 million, including estimated forfeitures,which will be amortized primarily on an accelerated basis over theweighted-average remaining requisite service period of approximately two years.No shares of restricted stock vested during the three months ended March 31,2006 and 2005, respectively.

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

                Ourmanagement’s discussion and analysis of our financial condition and results ofour operations 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 a leading biopharmaceutical company focused on discovering,developing and commercializing innovative products in disease areas with unmetmedical needs. We currently market VELCADE, the market leader in themultiple myeloma relapsed setting. We have a development pipeline of sevenclinical and preclinical product candidates in our therapeutic focus areas ofcancer and inflammation and we have an oncology-focused discovery organization.Strategic business relationships are a key component of our business.

On October 26,2005, we announced our refined business strategy to focus on advancing keygrowth assets, including VELCADE, our clinical and preclinical pipeline inoncology and inflammation molecules and our oncology-focused discoveryorganization. As part of our refined strategy, we have taken and will continueto take steps to reduce total annual research and development and selling,general and administrative expenses in 2006. These steps build on ourrestructured relationship with Schering Corporation and Schering-Plough Ltd., together referred to as SGP. Wereduced the size of our company from 1,500 employees at the end of 2004 toapproximately 1,100 employees at the end of 2005, by managing attrition,eliminating INTEGRILIN sales and marketing positions, and reducing the numberof positions in inflammation discovery and in business support groups. We haverecorded approximately $44.4 million of this charge between September 2005through March 2006. We continue to evaluate our strategic alternativesunder our refined strategy, including facility consolidation, and as a result,significant material restructuring charges could result.

On September 1, 2005, SGPobtained the exclusive U.S. development and commercialization rights forINTEGRILIN products from us and paid us a nonrefundable upfront payment ofapproximately $35.5 million. We receive royalties on net product sales ofINTEGRILIN in the United States from SGP for so long as SGP is engaged in thecommercialization and sale of an INTEGRILIN product in the United States, withthe potential of receiving royalties beyond the 2014 patent expiration date. In2006 and 2007, minimum royalty payments for each year are set at approximately$85.4 million. There are no guaranteed minimum royalty payments beyond 2007. Inaddition, we continue to manage the supply of product for INTEGRILIN at theexpense of SGP for products sold in the SGP territories. The payments receivedas a result of managing the supply chain are recorded as strategic alliancerevenue.

We expect our newrelationship with SGP to be at least financially equivalent to the formerco-promotion arrangement, taking into account the expected future revenues andanticipated costs savings. Strategically, our goal in restructuring therelationship was to increase the near term certainty of revenues fromINTEGRILIN through the guaranteed minimum royalties for 2006 and 2007, whileeliminating the need to further invest our resources into INTEGRILIN sales andmarketing and development activities.

Our overall business strategy isto build a portfolio of innovative, new medicines based on our understanding ofparticular molecular pathways that affect the establishment and progression ofspecific diseases. These molecular pathways include the related effects ofproteins on cellular performance, reproduction and death. We plan to developand commercialize many of our products on our own, but will seek developmentand commercial collaborators on favorable terms or when we believe that doingso would be advantageous to us. For example, we generally intend to enter intosales and marketing alliances with major pharmaceutical companies for productsin disease areas that require large sales forces or for markets outside of theUnited States.

In the near term, we expect tofocus our commercial activities in cancer where we plan to build on ourcommercial and regulatory experience with VELCADE. We also are working toobtain approval to market VELCADE in the United States and, 

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through Ortho Biotech Products, L.P., a member of theJohnson Family Of Companies, or Ortho Biotech, elsewhere for initial treatmentof multiple myeloma and for the treatment of additional cancer types. Webelieve that these additional uses of VELCADE would lead to significantexpansion of our cancer business. In inflammatory disease, we are advancingnovel product candidates in clinical development as potential treatments forserious and widely prevalent conditions.

In the long term, we expect tobring new products to market on a regular basis from our pipeline of discoveryand development-stage programs and continue to evaluate opportunities tosupplement our pipeline through in-licensing and acquisitions. If we aresuccessful, we would use the revenues from this expanding portfolio of marketedproducts to broaden the scope of our operations.

**VELCADE®(bortezomib) for Injection**

VELCADE, the first of a new classof medicines called proteasome inhibitors, was the first treatment in more thana decade to be approved in the United States for patients with multiplemyeloma. We received accelerated approval from the Food and DrugAdministration, or FDA, on May 13, 2003 to market VELCADE for thetreatment of multiple myeloma patients who have received at least two priortherapies and have demonstrated disease progression on their most recenttherapy, commonly referred to as third line and beyond. This approval wassubject to the completion of and submission of data from the phase III APEXclinical trial.

In March 2005, we receivedapproval from the FDA of our supplemental New Drug Application, or sNDA, forVELCADE for the treatment of patients with multiple myeloma who have receivedat least one prior therapy, commonly referred to as second line. Thisregulatory decision also marks the completion of the May 2003 post-approvalrequirements.

In April 2004, the EuropeanCommission granted Marketing Authorization for VELCADE for the treatment ofmultiple myeloma patients who have received at least two prior therapies andhave demonstrated disease progression on their most recent therapy in Europe.Under this Authorization, a single license was granted to Millennium formarketing VELCADE in the 15 member states of the European Union, plus Norwayand Iceland. VELCADE was also approved for marketing in the ten accession membercountries when those countries officially joined the European Union on May 1,2004. VELCADE has also been approved in a number of other countries, includingcountries within Latin America and South-East Asia, bringing the total numberof approved countries to more than 60.

In April 2005, ourcollaborator, Ortho Biotech, received approval from the European Commission forVELCADE as a monotherapy for multiple myeloma patients who have received atleast one prior therapy and who have already undergone or are unsuitable forbone marrow transplantation.

The FDA granted VELCADE fasttrack designation for relapsed and refractory mantle cell lymphoma, anaggressive form of non-Hodgkin’s lymphoma, in November 2004, due to thehigh unmet medical need of these patients and based on the strength of data forVELCADE in its clinical trials. This designation allows the FDA to accept on arolling basis portions of a marketing application for review prior to thesubmission of a final document. We expect to file an sNDA for VELCADE as amonotherapy for the treatment of relapsed and refractory mantle cell lymphomaduring the second half of 2006.

**OurAlliances**

***Ortho BiotechCollaboration***

In June 2003, we enteredinto an agreement with Ortho Biotech to collaborate on the commercialization ofand through the agreement with Johnson & Johnson PharmaceuticalResearch & Development, L.L.C., or JJPRD, continue clinicaldevelopment of VELCADE. Under the terms of the agreement, we retain allcommercialization rights to VELCADE in the United States. Ortho Biotech and itsaffiliate, Janssen-Cilag, have agreed to commercialize VELCADE outside of theUnited States and Janssen Pharmaceutical K.K. is responsible for Japan. Wereceive distribution fees from Ortho Biotech and its affiliates from sales ofVELCADE outside of the United States. We retain an option to co-promote VELCADEwith Ortho Biotech at a future date in specified European countries.

We are engaged with JJPRD in anextensive global program for further clinical development of VELCADE with thepurpose of maximizing the commercial potential of VELCADE. This program isinvestigating the potential of VELCADE to treat multiple forms of solid andhematological tumors, including continued clinical development of VELCADE formultiple myeloma. JJPRD 

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wasresponsible for 40% of the joint development costs through 2005 and isresponsible for 45% of those costs after 2005. In addition, we may receivepayments from Ortho Biotech for achieving clinical development milestones,regulatory milestones outside of the United States or milestones based uponagreed-upon sales levels of VELCADE.

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

Through August 31, 2005, weco-promoted INTEGRILIN in the United States in collaboration with SGP, andshared profits and losses. As of September 1, 2005, SGP markets INTEGRILINin the United States and specified other areas outside of the European Union. GlaxoSmithKlineplc, or GSK, markets INTEGRILIN in the European Union under a license from us.

***SGPCollaboration***

In April 1995, CORTherapeutics, Inc., or COR, entered into a collaboration agreement withSGP to jointly develop and commercialize INTEGRILIN on a worldwide basis. Weacquired COR in February 2002.

Under our original agreement withSGP, we generally shared any profits or losses from sales in the United Stateswith SGP based on the amount of promotional efforts that each partycontributed. Since the United States launch of INTEGRILIN in June 1998, weshared promotional efforts in the United States equally with SGP, except forcosts associated with marketing programs specific to us.

After September 1, 2005,under our amended collaboration agreement with SGP, we began receivingroyalties on sales of INTEGRILIN in the United States. SGP continues to pay usroyalties on sales of INTEGRILIN in specified territories outside of theEuropean Union and reimburses us for manufacturing-related costs.

***GSK LicenseAgreement***

In June 2004, we reacquiredthe rights to market INTEGRILIN in Europe from SGP and concurrently enteredinto a license agreement granting GSK exclusive marketing rights to INTEGRILINin Europe. In January 2005, the transition of the INTEGRILIN marketingauthorizations for the European Union from SGP to GSK was completed, and GSKbegan selling INTEGRILIN in the countries of the European Union. GSK alsomarkets INTEGRILIN in other European countries where it has received approvalof the transfer from SGP to GSK of the relevant marketing authorizations. Underthe terms of the agreement, we have received license fees and are entitled tofuture royalties from GSK on INTEGRILIN sales in Europe subject to theachievement of specified objectives.

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

**Critical Accounting Policies andSignificant Judgments and Estimates**

Our management’sdiscussion and analysis of our financial condition and results of operationsare based on our consolidated financial statements, which have been prepared inaccordance with generally accepted accounting principles. The preparation ofthese financial statements requires us to make estimates and assumptions thataffect the reported amounts of assets and liabilities and the disclosure ofcontingent assets and liabilities at the date of the financial statements aswell as the reported revenues and expenses during the reporting periods. On anongoing basis, we evaluate our estimates and judgments, including those relatedto revenue recognition, inventory, intangible assets, goodwill and stock-basedcompensation. We base our estimates on historical experience and on variousother factors that are believed to be appropriate under the circumstances, theresults of which form the basis for making judgments about the carrying valueof assets and liabilities that are not readily apparent from other sources.Actual results may differ from these estimates under different assumptions orconditions.

                Whileour significant accounting policies are more fully described in Note 2 toour consolidated financial statements included in our Form 10-K,filed with the SEC on March 8, 2006, we believe the following accountingpolicies are most critical to aid in fully understanding and evaluating ourreported financial results.

***Revenue***

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We recognize revenue from the sale of our products,our co-promotion collaboration through August 31, 2005, our strategicalliances and from royalties based on net sales of licensed products. We divideour revenue arrangements with multiple elements into separate units ofaccounting if specified criteria are met, including whether the deliveredelement has stand-alone value to the customer and whether there is objectiveand reliable evidence of the fair value of the undelivered items. We allocatethe consideration we receive among the separate units based on their respectivefair values, and we apply the applicable revenue recognition criteria to eachof the separate units. We classify advance payments received in excess ofamounts 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. We recordallowances as a reduction to product sales for product returns, chargebacks anddiscounts at the time of sale. As VELCADE is a fairly new product, we estimateproduct returns based on historical return patterns as they become available.VELCADE returns are expected to be generally low because the shelf life for theproduct is 18 months in the United States and we expect wholesalers not tosignificantly stock inventory due to the expensive nature of the product.Additionally, we consider several factors in our estimation process includingour internal sales forecasts, inventory levels as provided by wholesalers andthird party market research data. During the fourth quarter of 2004, we begandistributing VELCADE through a sole-source distribution model. As wecontinually monitor actual product returns and inventory levels in the domesticdistribution channel, we have reduced and may, from time to time in the future,reduce our product returns estimate. Doing so would result in increased productsales at the time the return estimate is changed. If circumstances change orconditions become more competitive in the market for therapeutic products thataddress multiple myeloma, we may take actions to increase our product returnestimates. Doing so would result in an incremental reduction of product salesat the time the return estimate is changed. Our accruals for rebates,chargebacks, and other discounts were immaterial at March 31, 2006.

Through August 31, 2005, we recognizedco-promotion revenue based on SGP’s reported shipments of INTEGRILIN towholesalers. Co-promotion revenue included our share of the profits from thesales of INTEGRILIN and reimbursements of our manufacturing-related costs,development costs and advertising and promotional expenses. We communicatedwith SGP to calculate our share of the profits from the sales of INTEGRILIN ona monthly basis. The calculation included estimates of the amount ofadvertising and promotional expenses and other costs incurred on a monthlybasis. Adjustments to our estimates were based upon actual information that wereceived subsequent to our reporting deadlines. Our estimates were adjusted ona monthly basis and historically the adjustments were not significant due tofrequent communication with SGP.

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

·       ratably over thedevelopment period if development risk is significant;

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

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

When the period 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 might impactthe timing and the amount of revenue recognized.

Milestone payments are recognized as strategicalliance revenue when the performance obligations, as defined in the contract,are achieved. Performance obligations typically consist of significantmilestones in the development life cycle of the related technology, such asinitiation of clinical trials, filing for approval with regulatory agencies andapprovals by regulatory agencies. Reimbursements of research and developmentcosts are recognized as strategic alliance revenue as the related costs areincurred.

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 license agreementsprovide for the payment of royalties to us based on sales of the licensedproduct and we record royalty revenues based on estimates of sales from interimdata provided by licensees. Beginning September 1, 2005, upon closing theamended collaboration agreement with SGP, we began recording royalty revenuesas a separate line item in our statement of operations. Going forward, we willperform an analysis of historical royalties we have been paid, adjusted for anychanges in facts and circumstances, as appropriate. Differences between actualroyalty revenues and estimated royalty revenues will be adjusted for in theperiod which they 

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become known, typicallythe following quarter. We do not expect these adjustments to be significant. Tothe extent we do not have sufficient ability to accurately estimate royaltyrevenue, we will record royalties on a cash basis.

***Inventory***

Inventory consists of currently marketed products andfrom time to time product candidates awaiting regulatory approval, which werecapitalized based upon management’s judgment of probable near-termcommercialization. We assess the probability of commercialization based uponseveral factors including estimated launch date, time to manufacture and shelflife. At March 31, 2006 and December 31, 2005, inventory does notinclude amounts for products that had not been approved for sale. Inventoriesprimarily represent raw materials used in production, work in process andfinished goods inventory on hand, valued at cost, for VELCADE, raw materialused in production and work in process, valued at cost, for INTEGRILIN tosupply GSK and limited amounts of work in process, valued at cost, forINTEGRILIN to supply SGP. Inventories are reviewed periodically for slow-movingor obsolete status based on sales activity, both projected and historical. Ourcurrent sales projections provide for full utilization of the inventorybalance. If product sales levels differ from projections or a launch of a newproduct is delayed, inventory may not be fully utilized and could be subject toimpairment, at which point we would adjust inventory to its net realizablevalue.

***IntangibleAssets***

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 impairment indicatorsarise. If the undiscounted cash flows of an intangible asset are less than thecarrying value of an intangible asset, the intangible asset is written down tothe discounted cash flow value. Where cash flows cannot be identified for anindividual asset, the review is applied at the lowest group level for whichcash flows are identifiable.

***Goodwill***

On October 1, 2005, 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 ourstatement of operations.

***Stock-BasedCompensation Expense***

We adopted Statement of FinancialAccounting Standards, or SFAS No. 123 (revised 2004), “Share BasedPayment,” or SFAS No. 123R, effective January 1, 2006. SFAS 123Rrequires the recognition of the fair value of stock-based compensation in ouroperations, and accordingly the adoption of SFAS No. 123R fair valuemethod will have a significant impact on our results of operations, although itwill have no impact on our overall financial position. Option valuation models requirethe input of highly subjective assumptions, including stock price volatilityand expected term of an option. In the fourth quarter of 2005, we consideredimplied volatilities of currently traded options to provide an estimate ofvolatility based upon current trading activity. After considering other suchfactors as our stage of development, the length of time we have been public andthe impact of having a marketed product, we believe a blended volatility ratebased upon the most recent three-year and four-year periods of historicalperformance, as well as the implied volatilities of currently traded optionsbetter reflects the expected volatility of our stock going forward. Changes inmarket price directly affect volatility and could cause future stock-basedcompensation expenses to vary significantly in future reporting periods.

We use historical data toestimate option exercise and employee termination behavior, adjusted for knowntrends, to arrive at the estimated expected life of an option. Upon adoption ofSFAS 123R, we validated our estimates and assumptions with an independent thirdparty having the relevant expertise in valuation methodologies. Additionally,we are required to estimate forfeiture rates to 

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estimate the number of shares that will vest in a periodto which the fair value is applied.   Wewill continually monitor employee exercise behavior and may adjust theestimated term and forfeiture rates in future periods. Increasing the estimatedlife would result in an increase in the fair value to be recognized over therequisite service period, generally the vesting period. Estimated forfeitureswill be adjusted to actual forfeitures upon the vest date of the cancelledoptions as a cumulative catch up adjustment on a quarterly basis. Doing socould cause future expenses to vary at each reporting period.

Prior to January 1, 2006, wefollowed Accounting Principles Board Opinion No. 25, “Accounting for StockIssued to Employees” (“APB 25”) and related interpretations, in accounting forour stock-based compensation plans. Under APB 25, because the exercise price ofthe employee stock options equals the market price of the underlying stock onthe date of grant, no compensation expense was recognized. We elected themodified prospective transition method for adopting SFAS 123R. Under thismethod, the provisions of SFAS 123R apply to all awards granted or modifiedafter the date of adoption. In addition, the unrecognized expense of awards notyet vested at the date of adoption, determined under the original provisions ofSFAS 123, shall be recognized in our statements of operations in the periodsafter the date of adoption.

We estimate stock-basedcompensation expense to be in the range of $40.0 million to $50.0 million in2006, dependent upon market price, assumptions used in estimating the fairvalue as discussed above and the levels of share-based payments granted in 2006.In March 2006, we revised our annual merit compensation program to includeboth stock options and restricted stock to certain employees. For the threemonths ended March 31, 2006, we recognized total stock-based compensationexpense under SFAS 123R of $10.5 million. As of March 31, 2006, thetotal remaining unrecognized compensation cost related to nonvested stockoption awards and nonvested restricted stock awards amounted to approximately$36.0 million and $14.4 million, including estimated forfeitures,respectively, which will be amortized primarily on an accelerated basis overthe weighted-average remaining requisite service periods of approximately oneand one half years and two years, respectively.

**Accounting Pronouncements**

In May 2005, the Financial Accounting StandardsBoard issued SFAS No. 154, “Accounting Changes and Error Corrections,” orSFAS No. 154 which replaces Accounting Principles Board Opinions No. 20,“Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes inInterim Financial Statements — an Amendment of APB Opinion No. 28.”  SFAS No. 154 provides guidance on theaccounting for and reporting of accounting changes and error corrections. Itestablishes retrospective application, or the earliest practicable dates, asthe required method for reporting a change in accounting principle andrestatement with respect to the reporting of a correction of an error. SFAS No. 154is effective for accounting changes and corrections of errors made in fiscalyears beginning after December 15, 2005. Although we continue to evaluatethe application of SFAS No. 154, we do not currently believe that adoptionwill have a material impact on our results of operations, financial position orcash flows.

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** **

**Resultsof Operations**(in thousands, except per share amounts)

 
| ** **                                                                                         | ** ** | **Three Months Ended March 31,** | ** ** | **Increase/  (Decrease) Percentage  Change** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                         | ** ** | **2006**                              | ** ** | **2005**                                          | ** ** | **2006/2005** | ** ** |
| **(in thousands, except per share amounts)**                                                       | ** ** | ** **                            | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Revenues:                                                                                          |       |                                  |       |                                              |       |   |   |
| Net product sales                                                                                  |       | $                                     | 53,373     |                                              | $          | 44,795 |   | 19 | % |
| Co-promotion revenue                                                                               |       | —                                |       | 42,826                                            |       | (100 | ) |
| Revenue under strategic  alliances                                                                 |       | 38,629                                |       | 36,090                                            |       | 7 |   |
| Royalties                                                                                          |       | 30,473                                |       | —                                            |       | — |   |
| Total revenues                                                                                     |       | 122,475                               |       | 123,711                                           |       | (1 | ) |
|                                                                                               |       |                                  |       |                                              |       |   |   |
| Costs and expenses:                                                                                |       |                                  |       |                                              |       |   |   |
| Cost of sales (excludes  amortization of acquired intangible assets)                               |       | 15,828                                |       | 14,581                                            |       | 9 |   |
| Research and  development (includes stock-based compensation expense of $6,334 in 2006)            |       | 82,598                                |       | 86,154                                            |       | (4 | ) |
| Selling, general and  administrative (includes stock-based compensation expense of $4,166 in 2006) |       | 35,465                                |       | 51,637                                            |       | (31 | ) |
| Restructuring                                                                                      |       | 2,831                                 |       | 1,107                                             |       | 156 |   |
| Amortization of  intangibles                                                                       |       | 8,487                                 |       | 8,500                                             |       | — |   |
| Total costs and  expenses                                                                          |       | 145,209                               |       | 161,979                                           |       | (10 | ) |
|                                                                                               |       |                                  |       |                                              |       |   |   |
| Loss from operations                                                                               |       | (22,734                               | )          | (38,268                                           | )          | (41 | ) |
|                                                                                               |       |                                  |       |                                              |       |   |   |
| Other income (expense):                                                                            |       |                                  |       |                                              |       |   |   |
| Investment income, net                                                                             |       | 4,625                                 |       | 4,442                                             |       | 4 |   |
| Interest expense                                                                                   |       | (2,732                                | )          | (2,588                                            | )          | 6 |   |
| Net loss                                                                                           |       | $                                     | (20,841    | )                                                 | $          | (36,414 | ) | (43 | )% |
|                                                                                               |       |                                  |       |                                              |       |   |   |
| *Amounts per common share:*                                                                        | * *   | * *                              | * *   | * *                                          | * *   | * * | * * |
| Net loss, basic and diluted                                                                        |       | $                                     | (0.07      | )                                                 | $          | (0.12 | ) |   |   |
|                                                                                               |       |                                  |       |                                              |       |   |   |
| Weighted average shares, basic and diluted                                                         |       | 311,823                               |       | 306,590                                           |       |   |   |

 

***Revenues***

Total revenues decreased 1% to$122.5 million in the first quarter of 2006 compared to the first quarterof 2005. The decrease primarily relates to lower revenue from ourcollaborators, including total lower revenue from SGP as a result of therestructured relationship, lower license fee revenue recognized from GSK andother strategic alliances. Revenue from our collaborators includes revenueunder strategic alliance, royalties, and in 2005, co-promotion revenue. Thisdecrease is partially offset by higher net product sales of VELCADE.

Netproduct sales of VELCADE increased 19% to $53.4 million in the firstquarter of 2006 compared to the first quarter of 2005. The increase wasprimarily due to growth in the second-line treatment setting as a result of theMarch 2005 FDA market 

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approval of our sNDA filing. Reservesfor product returns, chargebacks and discounts represent approximately 6% ofgross product sales in the first quarters of 2006 and 2005. Product sales fromVELCADE represented approximately 44% of our first quarter revenues in 2006 and36% for the first quarter of 2005.

As of September 1,2005, we are no longer reporting co-promotion revenue due to our restructuredrelationship with SGP. Co-promotion revenue represented approximately 35% ofour first quarter revenues in 2005.

Revenue under strategic alliancesincreased 7% to $38.6 million during the first quarter of 2006 compared to thefirst quarter of 2005. The increase is primarily due to the restructured SGPrelationship, which generated additional revenue from the management of theINTEGRILIN supply chain previously reported under co-promotion revenue,partially offset by a reduction in milestone revenue compared to the prioryear.

We expect revenue under strategicalliances to fluctuate in future periods depending on the level of revenuesearned for ongoing development efforts, the level of milestones achieved andthe number of alliances we may enter into in the future with majorpharmaceutical companies.

Beginning, September 1,2005, in connection with the closing of our transaction with SGP, we now recordroyalty revenue. Royalty revenue may include royalties earned upon sales ofINTEGRILIN in the United States and other territories around the world asprovided by SGP, royalties earned upon sales of INTEGRILIN in Europe asprovided by GSK, distribution fees earned upon sales outside of the UnitedStates of VELCADE as provided by Ortho Biotech and any royalties earned undercertain of our early discovery alliances. During the first quarter of 2006, werecorded $30.5 million of royalty revenue, which primarily included royaltiesfrom SGP and Ortho Biotech.

***Cost of Sales***

Cost of sales increased 9% to$15.9 million in the first quarter of 2006 compared to the first quarter of2005. Cost of sales includes manufacturing-related expenses associatedwith the sales of VELCADE as well as costs associated with managing the INTEGRILINsupply chain on behalf of SGP. The increase is primarily attributable toincreased shipments of VELCADE.

***Research andDevelopment***

Research and development expensesdecreased 4% to $82.6 million in the first quarter of 2006 compared to thefirst quarter of 2005. The decrease was primarily a result of cost reductionsassociated with our 2005 strategy refinement and restructuring efforts combinedwith decreased spending in our discovery organization partially offset by theaddition of stock-based compensation expense of approximately $6.3 millionrelated to the adoption of SFAS 123R on January 1, 2006.

In addition to ourongoing clinical trials of VELCADE, we have a number of drug candidates inclinical and late preclinical development. In January 2006, as part of ourportfolio review process, based on the evaluation of recent clinical data inthe context of additional opportunities in the pipeline, we decided todiscontinue development of MLN2704 in its current form as well as MLN1202 inrheumatoid arthritis. The following chart summarizes the applicable diseaseindication and the clinical or preclinical trial status of these drugcandidates.

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

Glioma(1)  Renal(1)  Prostate(1)    |       | phase I/phase II  phase I planned for 2006  phase I planned for 2006  phase I planned for 2006 |
| MLN8054 is a  small molecule inhibitor of AuroraA kinases                                                            |       | Advanced malignancies                                        |       | phase I                                                                                        |
|                                                                                                                 |       |                                                         |       |                                                                                           |
| ***Inflammatory  Diseases***                                                                                         |       |                                                         |       |                                                                                           |
| MLN02 is a  humanized monoclonal antibody directed against the alpha4ß7 receptor                                |       | Crohn’s disease   Ulcerative colitis                    |       | preclinical with prior phase II data  preclinical with prior phase II data                     |
| MLN1202 is a  humanized monoclonal antibody directed   against CCR2                                                  |       | Multiple sclerosis   Secondary atherosclerosis   Scleroderma |       | phase IIa   phase IIa   phase IIa planned for 2006                                             |
| MLN3897 is a  small molecule   CCR1 inhibitor                                                                        |       | Chronic inflammatory diseases such as rheumatoid  arthritis  |       | phase I with phase IIa planned for 2006                                                        |
| MLN3701 is a  small molecule   CCR1 inhibitor, backup to   MLN3897                                                   |       | Chronic inflammatory diseases such as rheumatoid  arthritis  |       | phase I                                                                                        |
| MLN0415 is a  small molecule inhibitor of IKKB                                                                       |       | Inflammatory diseases                                        |       | phase I planned for 2006 / 2007                                                                |

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(1)    Trials tobe conducted through Cancer Therapy Evaluation Program, a division of theNational Cancer Institute.

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

We estimate thatclinical trials in our areas of focus are typically completed over thefollowing timelines:
| **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                       |

 

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

Some products that are likely to result from our research anddevelopment projects are based on new technologies and new therapeuticapproaches that have not been extensively tested in humans. The regulatoryrequirements governing these types of products may be more rigorous than forconventional products. As a result, it is difficult to estimate the nature andlength of the efforts to complete such products as we may experience a longerregulatory process in connection with any products that we develop based uponthese new technologies or therapeutic approaches. In addition, ultimateapproval for commercial manufacturing and marketing of our products isdependent on the FDA or applicable approval body in the country for whichapproval is being sought, adding further uncertainty to estimated costs andcompletion 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 in the length of time necessary to develop aproduct, the uncertainties related to the estimated cost of the projects andultimate ability to obtain governmental approval for commercialization,accurate and meaningful estimates of the ultimate cost to bring our productcandidates to market are not available.

We budget and monitor our research and development costs by type orcategory, rather than by project on a comprehensive or fully allocated basis.Significant categories of costs include personnel, clinical, third partyresearch and development services and laboratory supplies. In addition, asignificant portion of our research and development expenses is not tracked byproject as it benefits multiple projects or our technology platform.Consequently, fully loaded research and development cost summaries by projectare not available.

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Given the uncertainties related to development, we are currently unableto reliably estimate when, if ever, our product candidates will generaterevenue and cash flows. We do not expect to receive net cash inflows from anyof our major research and development projects until a product candidatebecomes a profitable commercial product.

***Selling, General and Administrative***

Selling, general and administrative expenses decreased 31% to $35.5million in the first quarter of 2006 compared to the first quarter of 2005. Thedecrease is primarily the result of reduced sales and marketing expensesassociated with the transfer of the U.S. commercialization rights to INTEGRILINto SGP as of September 1, 2005 combined with cost reductions associatedwith our 2005 strategy refinement and restructuring efforts partially offset bythe addition of stock-based compensation expense of approximately $4.2 millionrelated to the adoption of SFAS 123R on January 1, 2006.

***Restructuring***

During the fourth quarter of 2005, we announced our 2005 strategyrefinement focused on advancing key growth assets, including VELCADE, ourclinical and preclinical pipeline in oncology and inflammation molecules andour oncology-focused discovery organization. As part of our refined strategy,we have taken a series of steps, building on our restructured relationship withSGP, which together have reduced research and development and selling, generaland administrative expenses in 2006. We expect these cost reductions tocontinue throughout the remainder of 2006. We reduced the size of our companyfrom 1,500 employees at the end of 2004 to approximately 1,100 at the end of2005, by managing attrition, eliminating INTEGRILIN sales and marketingpositions, and reducing the number of positions in inflammation discovery andin business support groups.

In December 2002 and June 2003, we took steps as part of our2003 restructuring plan to focus our resources on drug development andcommercialization. Our restructuring plan included consolidation of researchand development facilities, overall headcount reduction and streamlining ofdiscovery and development projects.

In accordance with SFAS No. 146, our facilities related expensesand liabilities under both the 2003 and 2005 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 inadditional adjustments, and the effect of any such adjustments could bematerial.

During the first quarter of 2006, we recorded a total of $2.8 million ofrestructuring charges under the 2005 strategy refinement and our 2003restructuring plan. We recorded restructuring charges of approximately$1.9 million under the 2005 restructuring plan primarily related toadditional facility related costs associated with vacated buildings andemployee termination benefits as a result of the headcount reductions withininflammation discovery and business support groups. We recorded approximately$0.9 million of restructuring charges in the first quarter of 2006 under our2003 restructuring plan, primarily related to additional facility related costsassociated with vacated buildings.  Wecontinue to evaluate strategic alternatives under our strategy refinement,including facility consolidation, and as a result, significant material chargescould result.

***Amortization ofIntangibles***

Amortization of intangible assetsof $8.5 million in the first quarter of 2006 was relatively unchanged from thefirst quarter of 2005. Amortization in 2006 and 2005 primarily relates tospecifically identified intangible assets from the COR acquisition. We willcontinue to amortize the specifically identified intangible assets from our CORacquisition through 2015. We expect to incur amortization expense ofapproximately $34.0 million for each of the next five years.

***InvestmentIncome***

Investment income increased 4% to$4.6 million in the first quarter of 2006 compared to the first quarter of 2005.The increase is primarily attributable to more favorable market conditionsresulting in higher yields.

***InterestExpense***

Interest expense increased 6% to$2.7 million in the first quarter of 2006 compared to the first quarter of 2005.The increase is primarily attributable to increased capital lease buyoutsresulting in higher related interest expense.

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**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 also made strategic purchases of debt and equity securitiesof some of our alliance collaborators in accordance with our Board of Directors’approved policies and our business needs. These investments were generally insmaller companies. We have and may in the future lose money in theseinvestments and our ability to liquidate these investments is in some casesvery limited. We may also owe our partners milestone payments and royalties. Wealso have committed to fund development costs incurred by some of ourcollaborators.

We have funded our cash requirements primarily through the following:

·       our co-promotion relationship with SGP for thesale of INTEGRILIN through August 31, 2005;

·       product sales of VELCADE;

·       payments from our strategic collaborators,including equity investments, license fees, milestone payments and researchfunding;

·       royalty payments related to the sales of ourproducts; and

·       equity and debt financings in the public markets.

In the future, we expect to continue to fund our cash requirements fromsome or all of these sources as well as from sales of other products, subjectto receiving regulatory approval. We are entitled to additional committedresearch and development funding under some of our strategic alliances. Webelieve the key factors that could affect our internal and external sources ofcash are:

·       revenues and margins from sales of VELCADE,INTEGRILIN and other products and services for which we may obtain marketingapproval in the future or which are sold by companies that may owe us royalty,milestone, distribution or other payments on account of such products;

·       the success of our clinical and preclinicaldevelopment programs;

·       our ability to enter into additional strategiccollaborations and to maintain existing and new collaborations as well as thesuccess of such collaborations; and

·       the receptivity of the capital markets tofinancings by biopharmaceutical companies generally and to financings by ourcompany specifically.

As of March 31, 2006 we had$632.5 million in cash, cash equivalents and marketable securities. Thisexcludes $7.3 million of interest-bearing marketable securitiesclassified as restricted cash on our balance sheet as of March 31, 2006,which primarily serve as collateral for letters of credit securing leasedfacilities. As of March 31, 2006 we had $105.5 million of outstandingconvertible debt, all of which is included in current liabilities.

Our significant capital resources are as follows:
| **(in thousands)**                           | ** ** | **March 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|---------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Cash, cash  equivalents and marketable securities |       | $                            | 632,494    |                            | $          | 645,588 |   |
| Working capital                                   |       | 490,149                      |       | 576,501                         |       |
| Long term debt,  net of current portion           |       | —                       |       | 99,571                          |       |
|                                                   |            |                              |            |                                 |            |  |  |

 
| ** **                                                     | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                     | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| Cash provided by (used  in):                                   |       |                                                 |       |   |   |
| Operating activities                                           |       | $                                                    | (26,378    | ) | $ | (110,207 | ) |
| Investing activities                                           |       | 31,567                                               |       | 111,330 |   |
| Financing activities                                           |       | 7,429                                                |       | (1,769 | ) |
| Capital expenditures  (included in investing activities above) |       | (1,386                                               | )          | (4,312 | ) |
|                                                                |            |                                                      |            |  |  |  |  |

 

***CashFlows***

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The principal use of cash inoperating activities in both 2006 and 2005 was to fund our net loss. In January 2005,we paid SGP approximately $49.3 million for advances SGP had made to COR forinventory purchases in prior years. Cash flows from operations can varysignificantly due to various factors including changes in accounts receivable,as well as changes in accounts payable and accrued expenses. The averagecollection period of our accounts receivable can vary and is dependent onvarious factors, including the type of revenue and the payment terms related tothose revenues.

Investing activities providedcash of $31.6 million in 2006 and $111.3 million in 2005. The principalsource of funds in both 2006 and 2005 was the proceeds from sales andmaturities of marketable securities. The decrease in capital expenditures from2005 is due to lower equipment expenditures as a result of our restructuringefforts.

Financing activities providedcash of $7.4 million in 2006. The principal source of funds was from thesales of common stock to our employees. We used $1.8 million in financingactivities in 2005 primarily to make principal payments on our capital leases.

We believe that our existing cashand cash equivalents and the anticipated cash receipts from our product sales,current strategic alliances and royalties will be sufficient to support ourexpected operations, fund our debt service and capital lease obligations andfund our capital commitments for at least the next several years.

***Contractual Obligations***

There have been nosignificant changes to our contractual obligations and commercial commitmentsincluded in our Form 10-K as of December 31, 2005.

As of March 31, 2006, we did not have anyfinancing arrangements that were not reflected in our balance sheet.

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** **

**RISKFACTORS THAT MAY AFFECT RESULTS**

This Quarterly Report on Form 10-Q andcertain other communications made by us contain forward-lookingstatements, including statements about our growth and future operating results,discovery and development of products, strategic alliances and intellectualproperty. For this purpose, any statement that is not a statement of historicalfact should be considered a forward-looking statement. We often use thewords “believe,” “anticipate,” “plan,” “expect,” “intend,” “may,” “will” andsimilar expressions to help identify forward-looking statements.

We cannot assure investors that our assumptions andexpectations will prove to have been correct. Important factors could cause ouractual results to differ materially from those indicated or implied by forward-lookingstatements. Such factors that could cause or contribute to such differencesinclude those factors discussed below. We undertake no intention or obligationto update or revise any forward-looking statements, whether as a resultof new information, future events or otherwise.

**RegulatoryRisks**

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

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

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

VELCADE is currently approved for marketing in theUnited States and more than 60 other countries including the countries of theEuropean Union. If we are not able to obtain approval to market VELCADE inadditional countries, we will lose the opportunity to sell in those countriesand will not be able to earn potential milestone payments under our agreementwith Ortho Biotech or collect potential distribution fees on sales of VELCADEby Ortho Biotech in those countries.

**We may not be able toobtain marketing approval for products resulting from our development efforts.**

The products that we are developing require researchand development, extensive preclinical studies and clinical trials andregulatory approval prior to any commercial sales. This process is expensiveand lengthy, and can often take a number of years. In some cases, the length oftime that it takes for us to achieve various regulatory approval milestonesaffects the payments that we are eligible to receive under our strategicalliance agreements.

We may need to successfully address a number oftechnological challenges in order to complete development of our products.Moreover, these products may not be effective in treating any disease or mayprove to have undesirable or unintended side effects, toxicities or othercharacteristics that may preclude our obtaining regulatory approval or preventor limit commercial use. For example, in January 2006, as part of ourportfolio review process, based on the evaluation of recent clinical data inthe context of additional opportunities in the pipeline, we decided todiscontinue development at this time of MLN2704 in its current form as well asMLN1202 in rheumatoid arthritis.

Failure to gain approval for the products we aredeveloping could have an adverse material impact on our business.

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

Any product for which we obtain marketing approval,along with the manufacturing processes, post-approval clinical data andpromotional activities for such product, is subject to continual review andperiodic inspections by the FDA, and other regulatory bodies. Later discoveryof previously unknown problems or safety issues with our products ormanufacturing processes, or failure to comply with regulatory requirements, mayresult in restrictions on such products or manufacturing processes, withdrawalof the products from the market, the imposition of civil or criminal penaltiesor a refusal by the FDA and other regulatory bodies to approve pendingapplications for marketing approval of new drugs or supplements to approvedapplications. As with any recently approved therapeutic product, we expect thatour knowledge of the safety profile for VELCADE will expand after wider usage,and the possibility exists of patients receiving VELCADE treatment experiencingunexpected or more frequently than expected serious adverse events, which couldhave a material adverse effect on our business.

We are a party to collaborations that transferresponsibility for specified regulatory requirements, such as filing andmaintenance of marketing authorizations and safety reporting, to ourcollaborators. If our collaborators do not fulfill these regulatoryobligations, products, including VELCADE or INTEGRILIN, could be withdrawn fromthe market, which would have a material adverse effect on our business.

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**Some of ourproducts may be based on new technologies which may affect our ability or thetime we require to obtain necessary regulatory approvals.**

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

**RisksRelating to Our Business, Strategy and Industry**

**Our revenues over thenext several years will be materially dependent on the commercial success ofVELCADE and INTEGRILIN.**

Our revenues over the next several years will bematerially dependent on the commercial success of our two currently marketedproducts: VELCADE and INTEGRILIN. VELCADE was approved by the FDA in May 2003and commercially launched in the United States shortly after that date.Marketing of VELCADE outside the United States commenced in April 2004.INTEGRILIN has been on the market in the United States since June 1998.Marketing of INTEGRILIN outside the United States commenced in mid-1999.

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

We will not achieve our business plan, and we may beforced to scale back our operations and research and development programs, ifwe do not obtain regulatory approval to sell VELCADE in additional countries orfor additional therapeutic uses or the sales of VELCADE or INTEGRILIN do notmeet our expectations.

**We face substantialcompetition, and others may discover, develop or commercialize products beforeor more successfully than we do.**

The fields of biotechnology and pharmaceuticals arehighly competitive. Many of our competitors are substantially larger than weare, and these competitors have substantially greater capital resources,research and development staffs and facilities than we have. Furthermore, manyof our competitors are more experienced than we are in drug research,discovery, development and commercialization, obtaining regulatory approvalsand product manufacturing and marketing. As a result, our competitors maydiscover, develop and commercialize pharmaceutical products before or in ashorter timeframe than we do. In addition, our competitors may discover, developand commercialize products that make the products that we or our collaboratorshave developed or are seeking to develop and commercialize non-competitive orobsolete.

With respect to VELCADE, we face competition fromCelgene’s Thalomid and its derivatives, a treatment approved for complicationsassociated with leprosy which is used broadly for multiple myeloma based ondata published in peer-reviewed publications. Celgene has filed a sNDA forThalomid for the treatment of multiple myeloma that was accepted by the FDA forreview in 2005. We also face competition for VELCADE from Celgene’s Revlimidwhich was approved by the FDA in December 2005 for the treatment of asubset of patients with transfusion-dependent anemia. Celgene is alsodeveloping Revlimid for the treatment of patients with multiple myeloma and in March 2006announced that the FDA granted a priority review designation to its sNDA forthe treatment of relapsed or refractory multiple myeloma. We expect to seeincreased competition from Revlimid prior to approval of this sNDA as Celgeneaccelerates its prelaunch activities. We also face competition for VELCADE fromtraditional chemotherapy treatments, and there are other potentiallycompetitive therapies for VELCADE, including other proteasome inhibitors, thatare in late-stage clinical development for the treatment of multiple myeloma.In addition, multiple myeloma therapies in development may reduce the number ofpatients available for VELCADE treatment through enrollment of these patients inclinical trials of these potentially competing products.

Due to the incidence and severity of cardiovasculardiseases, the market for therapeutic products that address these diseases islarge, and we expect the already intense competition in this field to increase.The most significant competitors for SGP in marketing INTEGRILIN are majorpharmaceutical companies and biotechnology companies. The two products thatcompete directly with INTEGRILIN in the GP IIb-IIIa inhibitor marketsegment are ReoPro® (abciximab), which isproduced by Johnson & Johnson and sold by Johnson & Johnsonand Eli Lilly and Company, and Aggrastat® (tirofiban HCl), which is produced and sold byMerck & Co., Inc. outside of the United States and by GuilfordPharmaceuticals, Inc. in the United States.

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Other competitivefactors that could negatively affect INTEGRILIN include:

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

·       changing treatment practicesfor PCI and ACS based on new technologies, including the use of drug-coatedstents;

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

A significant portion of INTEGRILIN domesticpharmaceutical sales is made by SGP to major drug wholesalers. These sales areaffected by fluctuations in the buying patterns of these wholesalers and thecorresponding changes in inventory levels maintained by them. Inventory levelsheld by these wholesalers may fluctuate significantly from quarter to quarter.If these wholesalers build inventory levels excessively in any quarter, salesto the wholesalers in future quarters may unexpectedly decrease notwithstandingsteady prescriber demand. Because SGP commercializes INTEGRILIN and managesproduct distribution, we have limited insight into or control over forcesaffecting changes in distributor inventory levels. If SGP does notappropriately manage this distribution, SGP may not realize sales goals for theproduct and could reduce the royalty revenue we recognize and thus adverselyaffect our business.

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

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

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

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

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

We must provide the FDA and foreign regulatoryauthorities with preclinical and clinical data demonstrating that our productsare safe and effective before they can be approved for commercial sale.Clinical development, including preclinical testing, is a long, expensive and uncertainprocess. It may take us several years to complete our testing, and failure canoccur at any stage of testing. Interim results of preclinical or clinicalstudies do not necessarily predict their final results, and acceptable resultsin early studies might not be seen in later studies. Any preclinical orclinical test may fail to produce results satisfactory to the FDA. Preclinicaland clinical data can be interpreted in different ways, which could delay,limit or prevent regulatory approval. Negative or inconclusive results from apreclinical study or clinical trial, adverse medical events during a clinicaltrial or safety issues resulting from products of the same class of drug couldcause a preclinical study or clinical trial to be repeated or a program to beterminated, even if other studies or trials relating to the program aresuccessful. For example, in December 2003 we decided to stop furtheraccrual to a phase II trial examining VELCADE in colorectal cancer becauseinterim findings produced results that did not meet the pre-specified efficacycriteria for continuation of study accrual.

We may not complete our planned preclinical orclinical trials on schedule or at all. We may not be able to confirm the safetyand efficacy of our potential drugs in long-term clinical trials, which mayresult in a delay or failure to commercialize

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our products. We may have difficulty obtaining asufficient number of appropriate patients or clinical support to conduct ourclinical trials as planned. A number of additional events could delay thecompletion of our clinical trials, including conditions imposed on us by theFDA or foreign regulatory authorities regarding the scope or design of ourclinical trials, lower than anticipated retention rates for patients in ourclinical trials, insufficient supply or deficient quality of our productcandidates or other materials necessary to conduct our clinical trials or thefailure of our third party contractors to comply with regulatory requirementsor otherwise meet their contractual obligations to us in a timely manner. As aresult, we may have to expend substantial additional funds to obtain access toresources or delay or modify our plans significantly. Our product developmentcosts will increase if we experience delays in testing or approvals.Significant clinical trial delays could allow our competitors to bring productsto market before we do and impair our ability to commercialize our products orpotential products.

**If third parties on whichwe rely for clinical trials do not perform as contractually required or as weexpect, we may not be able to obtain regulatory approval for or commercializeour product candidates.**

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

**Because many 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 of any of our products forwhich we may obtain marketing approval from the FDA or other regulatoryauthorities will depend upon their acceptance by the medical community andthird party payors as clinically useful, cost-effective and safe. Many of theproducts that we are developing are based upon new technologies or therapeuticapproaches. As a result, it may be more difficult for us to achieve marketacceptance of our products, particularly the first products that we introduceto the market based on new technologies and therapeutic approaches. Our effortsto educate the medical community on these potentially unique approaches mayrequire greater resources than would be typically required for products basedon conventional technologies or therapeutic approaches. The safety, efficacy,convenience and cost-effectiveness of our products as compared to competitiveproducts will also 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 for talented employees within ourindustry is fierce, we may not be successful in hiring, retaining or promptlyreplacing key management, sales, marketing and technical personnel. Any failureto expeditiously fill our needs for key personnel could have a material adverseeffect on our business.

**RisksRelating to Our 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 net losses $20.8 million for thethree months ended March 31, 2006 and $36.4 million for the threemonths ended March 31, 2005, net losses of $198.2 million for the yearended December 31, 2005, $252.3 million for the year ended December 31,2004 and $483.7 million for the year ended December 31, 2003. We expect tocontinue to incur substantial operating losses in future periods. Prior to ouracquisition of COR, substantially all of our revenues resulted from paymentsfrom collaborators, and not from the sale of products.

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

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**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 require substantial funds to conduct researchand development, including preclinical testing and clinical trials of ourpotential products. We will also require substantial funds to meet ourobligations to our collaborators, manufacture and market products that areapproved for commercial sale, including VELCADE, and meet our debt serviceobligations. We may also require additional financing to execute on productin-licensing or acquisition opportunities. Additional financing may not be availablewhen we need it or may not be available on favorable terms.

If we are unable to obtain adequate funding on atimely basis, we may have to delay or curtail our research and developmentprograms, our product commercialization activities or our in-licensing oracquisition activities. We could be required to seek funds through arrangementswith collaborators or others that may require us to relinquish rights tospecified technologies, product candidates or products which we would otherwisepursue on our own.

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

At March 31, 2006, we had approximately $105.5million of outstanding convertible debt, of which $5.9 million matures in 2006and $99.6 million matures in 2007 and $78.6 million of capital leaseobligations. During each of the last five years, our earnings were insufficientto cover our fixed charges. We will be required to make interest payments onour outstanding convertible notes totaling approximately $5.5 million over thenext year.

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

Our indebtednesscould have significant additional negative consequences, including:

·       increasing ourvulnerability to general adverse economic and industry conditions;

·       limiting our ability toobtain additional financing;

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

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

·       placing us at a possiblecompetitive disadvantage to less leveraged competitors and competitors thathave better access 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 restructuring charges of $2.8 million and$1.1 million for the three months ended March 31, 2006 and 2005,respectively, restructuring charges of $77.1 million for the year ended December 31,2005, $38.0 million for the year ended December 31, 2004 and $191.0million for the year ended December 31, 2003. In December 2002 and June 2003,we took steps as part of our 2003 restructuring plan to focus our resources ondevelopment and commercialization of product opportunities and achieving ourgoal of becoming profitable in the future. We may not achieve the cost savingsanticipated from the restructurings because such savings are difficult topredict and speculative in nature. On September 1, 2005, we transferredexclusive U.S. commercialization and development rights of INTEGRILIN to SGPand on October 26, 2005, we announced additional efforts to refine ourstrategy including a substantial reduction of our inflammation discoveryprograms. As a result of these efforts, we expect to reduce total research anddevelopment and selling, general and administration expenses. We may notachieve our estimated expense reductions because such savings are difficult topredict and speculative in nature.

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**RisksRelating to Collaborators**

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

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

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

The risks that weface in connection with these existing and any future alliances include thefollowing:

·       All of our strategicalliance agreements are for fixed terms and are subject to termination undervarious circumstances, including, in many cases, such as in our collaborationwith Ortho Biotech, without cause.

·       Our collaborators maychange the focus of their development and commercialization efforts.Pharmaceutical and biotechnology companies historically have re-evaluated theirdevelopment and commercialization priorities following mergers andconsolidations, which have been common in recent years in these industries. Theability of some of our products, including VELCADE and INTEGRILIN, to reachtheir potential could be limited if our collaborators decrease or fail toincrease marketing or spending 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 maydevelop and commercialize, either alone or with others, products that aresimilar to or competitive with the products that are the subject of thealliance with us.

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

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

Under the terms of our revised agreement with SGPeffective as of September 1, 2005, SGP will pay us royalties based on netproduct sales of INTEGRILIN. In 2006 and 2007, minimum royalty payments foreach year are set at $85.4 million, with some conditions that could reducethese minimums. 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 besuccessful in establishing additional strategic alliances, which couldadversely affect our ability to develop and commercialize products.**

An important element of our business strategy isentering into strategic alliances for the development and commercialization ofselected products. In some instances, if we are unsuccessful in reaching anagreement with a suitable collaborator, we may fail to meet all of our businessobjectives for the applicable product or program. We face significantcompetition in seeking appropriate collaborators. Moreover, these alliancearrangements are complex to negotiate and time-consuming to document. We maynot be successful in our efforts to establish additional strategic alliances orother alternative arrangements. The terms of any additional strategic alliancesor other arrangements that we establish may not be favorable to us. Moreover,such strategic alliances or other arrangements may not be successful.

 

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**RisksRelating to Intellectual Property**

**If we are unableto obtain patent protection for our discoveries, the value of our technologyand products will be adversely affected. If we infringe patent or otherintellectual property rights of third parties, we may not be able to developand commercialize our products or the cost of doing so may increase.**

Our patentpositions, and those of other pharmaceutical and biotechnology companies, aregenerally uncertain and involve complex legal, scientific and factual questions.Our ability to develop and commercialize products depends in significant parton our ability to:

·       obtain and maintainpatents;

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

·       operate without infringingupon the proprietary rights of others;

·       prevent others frominfringing on our proprietary rights; and

·       protect trade secrets.

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

The validity and permissible scope of patent claims inthe pharmaceutical and biotechnology fields, including the genomics field,involve important unresolved legal principles and are the subject of publicpolicy debate in the United States and abroad. For example, there issignificant uncertainty both in the United States and abroad regarding thepatentability of gene sequences in the absence of functional data and the scopeof patent protection available for full-length genes and partial genesequences. Moreover, some groups have made particular gene sequences availablein publicly accessible databases. These and other disclosures may adverselyaffect our ability to obtain patent protection for gene sequences claimed by usin patent applications that we file subsequent to such disclosures. There isalso some uncertainty as to whether human clinical data will be required forissuance of patents for human therapeutics. If such data are required, our abilityto obtain patent protection could be delayed or otherwise adversely affected.

**Third parties mayown or control patents or patent applications and require us to seek licenses,which could increase our development and commercialization costs, or prevent usfrom developing or marketing our products.**

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

Our MLN02 and MLN1202 product candidates are humanizedmonoclonal antibodies. We are aware of third party patents and patentapplications that relate to humanized or modified antibodies, products usefulfor making humanized or modified antibodies and processes for making and usingrecombinant antibodies.

With respect to VELCADE, on June 26, 2002, AriadPharmaceuticals, Inc. sent to us and approximately 50 other parties aletter offering a sublicense for the use of United States Patent No. 6,410,516,which is exclusively licensed to Ariad. If this patent is valid and Ariadsuccessfully sues us for infringement, we would require a license from Ariad inorder to manufacture and market VELCADE. On May 4, 2006, a federal courtruled in favor of Ariad in its patent-infringement lawsuit against Eli Lillyrelating to United States Patent No. 6,410,516. We expect that Eli Lillywill challenge this verdict and the validity of the patent. However, Ariad’sinitial success in its claim against Eli Lilly may increase the possibilitythat Ariad could sue us and allege infringement of the patent.

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

There has been substantial litigation and otherproceedings regarding the patent and other intellectual property rights in thepharmaceutical and biotechnology industries. We may become a party to patentlitigation or other proceedings regarding intellectual property rights. For example,we believe that we hold patent applications that cover genes that are alsoclaimed in patent applications filed by others. Interference proceedings beforethe United States Patent and Trademark Office may be necessary to establishwhich party was the first to invent these genes.

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

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

**Our patentprotection for any compounds that we seek to develop may be limited to aparticular method of use or indication such that, if a third party were toobtain approval of the compound for use in another indication, we could besubject to competition arising from off-label use.**

Although we generally seek the broadest patentprotection available for our proprietary compounds, we may not be able toobtain patent protection for the actual composition of any particular compoundand may be limited to protecting a new method of use for the compound orotherwise restricted in our ability to prevent others from exploiting thecompound. If we are unable to obtain patent protection for the actualcomposition of any compound that we seek to develop and commercialize and mustrely on method of use patent coverage, we would likely be unable to preventothers from manufacturing or marketing that compound for any use that is notprotected by our patent rights. If a third party were to receive marketingapproval for the compound for another use, physicians could nevertheless prescribeit for indications that are not described in the product’s labeling or approvedby the FDA or other regulatory authorities. Even if we have patent protectionof the prescribed indication, as a practical matter, we would have littlerecourse as a result of this off-label use. In that event, our revenues fromthe commercialization of the compound would likely be adversely affected.

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

We are a party to various license agreements. Inparticular, we license rights to patents for the formulation of VELCADE andissued patents relating to MLN518 and MLN1202. We may enter into additionallicenses in the future. Our existing licenses impose, and we expect futurelicenses will impose, various diligence, milestone payment, royalty, insuranceand other obligations on us. If we fail to comply with these obligations, thelicensor may have the right to terminate the license, in which event we mightnot be able to market any product that is covered by the licensed patents.

**Competition from genericpharmaceutical manufacturers could negatively impact our products sales.**

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

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

**RisksRelating to Product Manufacturing, Marketing and Sales**

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

We are marketing and selling VELCADE in the UnitedStates solely through our cancer-specific sales force and without acollaborator. Our success in selling VELCADE will depend heavily on theperformance of this sales force. In areas outside the 

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United States where VELCADE has received approval,Ortho Biotech or its affiliates market VELCADE. As a result, our ability toearn revenue related to VELCADE outside of the United States will dependheavily on Ortho Biotech.

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

Depending on the nature of the products for which weobtain marketing approval, we may need to rely significantly on sales,marketing and distribution arrangements with our collaborators and other thirdparties. For example, some types of pharmaceutical products require a largesales force and extensive marketing capabilities for effectivecommercialization. If in the future we elect to perform sales, marketing anddistribution functions for these types of products ourselves, we would face anumber of additional risks, including the need to recruit a large number ofadditional experienced marketing and sales personnel.

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

We have no commercial-scale manufacturing capabilities.In order to continue to develop products, apply for regulatory approvals andcommercialize products, we will need to develop, contract for or otherwisearrange for the necessary manufacturing capabilities.

We currently rely substantially upon third parties toproduce material for preclinical testing purposes and expect to continue to doso in the future. We also currently rely and expect to continue to rely, uponother third parties, potentially including our collaborators, to producematerials required for clinical trials and for the commercial production of ourproducts.

There are a limited number of contract manufacturersthat operate under the FDA’s good manufacturing practices regulations capableof manufacturing our products. If we are unable to arrange for third partymanufacturing of our products, or to do so on commercially reasonable terms, wemay not be able to complete development of our products or commercialize them,or we may experience delays in doing so.

Reliance on third party manufacturers entails risks towhich we would not be subject if we manufactured products ourselves, includingreliance on the third party for regulatory compliance, the possibility ofbreach of the manufacturing agreement by the third party because of factorsbeyond our control and the possibility of termination or non-renewal of theagreement by the third party, based on its own business priorities, at a timethat is costly or inconvenient for us.

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

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

We are responsible for managing the supply of materialfor all clinical and commercial production of VELCADE, including VELCADE thatOrtho Biotech sells or uses in clinical trials, and INTEGRILIN, includingINTEGRILIN that SGP and GSK sell or use in clinical trials.

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

We have no manufacturing facilities for INTEGRILIN and,accordingly, rely on third party contract manufacturers for the clinical andcommercial production of INTEGRILIN. We have two approved manufacturers thatcurrently provide us with eptifibatide, the active ingredient necessary to makeINTEGRILIN. Solvay, one of the current manufacturers, owns the processtechnology used by it and the other manufacturer for the production of bulkproduct. As a result, unless we have an approved alternative processtechnology, we will be reliant on these manufacturers. We have twomanufacturers that currently perform fill/finish services for INTEGRILIN and anew packaging supplier for the United States. If our current manufacturers areunable to 

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continue or decide to discontinue their fill/finishservices and we are unable to secure alternative manufacturers, the supply ofINTEGRILIN could be adversely affected which could harm our business.

We have filed with the FDA for approval of analternate process technology for INTEGRILIN. We cannot quantify the time orexpense that may ultimately be required to obtain approval for an alternateprocess technology, but it is possible that such time or expense could besubstantial. Moreover, we may not be able to implement any new processtechnology successfully.

In order to mitigate the risk of INTEGRILIN supplyinterruption, we have entered into a new third party fill/finish and bulkproduct manufacturing arrangement on commercially reasonable terms and arecurrently engaged in completing a new third party arrangement which will manufactureeptifibatide utilizing the new process. We may not be able complete this thirdparty arrangement. Even if we do, if demand for INTEGRILIN does not meet ourforecasts, the manufacturing cost under this new arrangement could be moreexpensive on a per unit basis than the cost under our existing arrangements,which would increase the cost of the product for SGP, and could adverselyaffect our business. Furthermore, because these are new manufacturingarrangements, these manufacturers may encounter difficulties that couldadversely affect the supply of INTEGRILIN and, thereby, harm our business.

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

The availability and levels of reimbursement bygovernmental and other third party payors affect the market for anypharmaceutical product or health care service. These third party payorscontinually attempt to contain or reduce the costs of health care by challengingthe prices charged for medical products and services. In some foreigncountries, particularly the countries of the European Union, the pricing ofprescription pharmaceuticals is subject to governmental control. We may not beable to sell our products as profitably as we expect if we are required to sellour products at lower than anticipated prices or reimbursement is unavailableor limited in scope or amount.

In particular, third party payors could lower theamount that they will reimburse hospitals or doctors to treat the conditionsfor which the FDA has approved VELCADE or INTEGRILIN. If they do, pricinglevels or sales volumes of VELCADE or INTEGRILIN may decrease. In addition, ifwe fail to comply with the rules applicable to the Medicaid and Medicareprograms, we could be subject to the imposition of civil or criminal penaltiesor exclusion from these programs.

In foreign markets, a number of different governmentaland private entities determine the level at which hospitals will be reimbursedfor administering VELCADE and INTEGRILIN to insured patients. If these levelsare set, or reset, too low, it may not be possible to sell VELCADE orINTEGRILIN at a profit in these markets.

In both the United States and foreign jurisdictions,there have been a number of legislative and regulatory proposals to change thehealth care system. For example, the Medicare Prescription Drug andModernization Act of 2003 and its implementing regulations impose newrequirements for the distribution and pricing of prescription drugs which mayaffect the marketing of our products. These new requirements have createduncertainty among oncologists and could impact sales levels of VELCADE asoncologists adapt to the new reimbursement model. Further proposals are alsolikely. The current uncertainty and the potential for adoption of additionalproposals could affect the timing of product revenue, our ability to raisecapital, obtain additional collaborators and market our products.

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

**We face a risk ofproduct liability claims and may not be able to obtain insurance.**

Our business exposes us to the risk of productliability claims that is inherent in the manufacturing, testing and marketingof human therapeutic products. In particular, VELCADE and INTEGRILIN areadministered to patients with serious diseases who have a high incidence ofmortality. Although we have product liability insurance that we believe isappropriate, 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.

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**Guidelines and recommendations can affect the use of our products.**

Government agencies promulgate regulations andguidelines directly applicable to us and to our products. In addition,professional societies, practice management groups, private health and sciencefoundations and organizations involved in various diseases from time to timemay also publish guidelines or recommendations to the health care and patientcommunities. Recommendations of government agencies or these other groups ororganizations may relate to such matters as usage, dosage, route ofadministration and use of concomitant therapies. Recommendations or guidelinessuggesting the reduced use of our products or the use of competitive oralternative products that are followed by patients and health care providerscould result in decreased use of our products.

**RisksRelating to an Investment in Our Common Stock**

**The trading priceof our securities could be subject to significant fluctuations.**

The trading price of our common stock has been quitevolatile, and may be volatile in the future. During 2005, our common stocktraded as high as $12.34 per share and as low as $7.63 per share. Factors suchas announcements 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.

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

·       product revenues and therate of 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 marketcycles;

·       fluctuations in customerrequirements;

·       availability andutilization of manufacturing capacity;

·       timing of new productintroductions; and

·       our ability to develop andimplement new technologies.

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

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

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

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

We manage our fixed income investment portfolio inaccordance with our Policy for Securities Investments, or Investment Policy,that has been approved by our Board of Directors. The primary objectives of ourInvestment Policy are to preserve principal, maintain a high degree ofliquidity to meet operating needs, and obtain competitive returns subject toprevailing market conditions. Investments are made primarily in investment-gradecorporate bonds with effective maturities of three years or less, asset-backeddebt securities and U.S. government agency debt securities. These investmentsare subject to risk of default, changes in credit rating and changes in marketvalue. These investments are also subject to interest rate risk and willdecrease in value if market interest rates increase. A hypothetical 100 basispoint increase in interest rates would result in an approximate $10.6 milliondecrease in the fair value of our investments as of March 31, 2006.However, due to the conservative nature of our investments and relatively shorteffective maturities of debt instruments, interest rate risk is mitigated. OurInvestment Policy specifies credit quality standards for our investments andlimits the amount of exposure from any single issue, issuer or type ofinvestment. We do not own derivative financial instruments in our investmentportfolio.

As of March 31, 2006, thefair value of our 4.5% notes, 5.0% notes and 5.5% notes approximates theircarrying value. The interest rates on our convertible notes and capital lease obligationsare fixed and therefore not subject to interest rate risk.

We have no derivative instrumentsoutstanding as of March 31, 2006.

As of March 31, 2006 we didnot have any financing arrangements that were not reflected in our balancesheet.

**Item 4.         Controls and Procedures**

Our management, with the participation of our chiefexecutive officer and chief financial officer, evaluated the effectiveness ofour disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act) as of March 31, 2006. Indesigning and evaluating our disclosure controls and procedures, managementrecognized that any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving their objectivesand our management necessarily applied its judgment in evaluating thecost-benefit relationship of possible controls and procedures. Based on thisevaluation, our chief executive officer and chief financial officer concludedthat as of March 31, 2006, our disclosure controls and procedures were (1) designedto ensure that material information relating to us is made known to our chiefexecutive officer and chief financial officer by others, particularly duringthe period in which this report was prepared and (2) effective, in thatthey provide reasonable assurance that information required to be disclosed byus in the reports we file or submit under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms.

No change in our internal control over financialreporting (as defined in Rules 13a-15(f) and 15d-15(f) underthe Exchange Act) occurred during the fiscal quarter ended March 31, 2006that has materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

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**PART II OTHER INFORMATION**

**Item 6.    Exhibits**

(a)               Exhibits

The exhibits listed in the Exhibit Index areincluded in 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)                                                                                            |   |
|                    |                                                                                                    |   |
| Date: May 9,  2006 | /s/ MARSHA H. FANUCCI                                                                                   |   |
|                    | Marsha H. Fanucci                                                                                       |   |
|                    | *Senior Vice President and Chief Financial Officer  (principal financial and chief accounting officer)* |   |

 

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**Exhibit Index**

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

 

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