**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10-K**

**(MarkOne)**

**x**                              ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

**For the fiscal year endedDecember 31, 2006**

**Or**

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

**Forthe transition 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 of |   | (I.R.S. Employer     |
| incorporation or  organization)  |   | Identification  No.) |

 

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

(Address of principalexecutive offices) (zip code)

Registrant’s telephone number, including areacode:  **(617) 679-7000**

Securities registeredpursuant to Section 12(b) of the Act:

| **Title of Each Class**          |   | **Name of  Each Exchange on Which Registered** |
|----------------------------------|--------|------------------------------------------------|
| Common Stock,  $.001 par value   |   | The NASDAQ Stock  Market LLC                   |
| Preferred Stock  Purchase Rights |   |                                           |

 

Securities registeredpursuant to Section 12(g) of the Act: **None**

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Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act. Yes x   No o

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes o   No x

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days.  Yes x   No o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K isnot contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K. o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.(Check one):

| Large accelerated filer   x |   | Accelerated filer   o |   | Non-accelerated  filer   o |
|---------------------------------------|--------|---------------------------------|--------|--------------------------------------|

 

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

The aggregate market valueof voting Common Stock held by non-affiliates of the registrant as of June 30,2006 was $3,089,623,579 based onthe last reported sale price of the Common Stock on the NASDAQ Stock Market onthat date.

Number of shares outstandingof the registrant’s class of Common Stock as of February 23, 2007: 317,732,664.

**Documentsincorporated by reference:**

Portionsof the information required by Part III of Form 10-K willappear in the registrant’s definitive Proxy Statement on Schedule 14A forthe 2007 Annual Meeting of Stockholders and are hereby incorporated byreference into this report.

 

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**TABLE OF CONTENTS**

**PART I**
| Item 1.                                                         |   | BUSINESS                                                                                                               |   | 1  |   |
|-----------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------|--------|----|--------|
| Overview                                                        |   | 1                                                                                                                      |   |
| VELCADE                                                         |   | 2                                                                                                                      |   |
| Our  Development Efforts                                        |   | 3                                                                                                                      |   |
| Our  Collaborations                                             |   | 5                                                                                                                      |   |
| Manufacturing                                                   |   | 8                                                                                                                      |   |
| Sales  and Marketing                                            |   | 9                                                                                                                      |   |
| Competition                                                     |   | 10                                                                                                                     |   |
| Drug Research, Discovery and Development                        |   | 11                                                                                                                     |   |
| Patents and Proprietary Rights; Licenses                        |   | 12                                                                                                                     |   |
| Government  Regulation                                          |   | 13                                                                                                                     |   |
| Employees                                                       |   | 16                                                                                                                     |   |
| Available  Information                                          |   | 16                                                                                                                     |   |
| Item  1A. Risk Factors                                          |   | 17                                                                                                                     |   |
| Regulatory  Risks                                               |   | 17                                                                                                                     |   |
| Risks Relating to Our Business, Strategy and Industry           |   | 19                                                                                                                     |   |
| Risks Relating to Our Financial Results and Need for  Financing |   | 23                                                                                                                     |   |
| Risks Relating to Collaborators                                 |   | 25                                                                                                                     |   |
| Risks Relating to Intellectual Property                         |   | 27                                                                                                                     |   |
| Risks Relating to Product Manufacturing, Marketing and  Sales   |   | 29                                                                                                                     |   |
| Risks Relating to Holding Our Common Stock                      |   | 33                                                                                                                     |   |
| Item 1B.                                                        |   | UNRESOLVED STAFF  COMMENTS                                                                                             |   | 34 |   |
| Item 2.                                                         |   | PROPERTIES                                                                                                             |   | 34 |   |
| Item 3.                                                         |   | LEGAL PROCEEDINGS                                                                                                      |   | 34 |   |
| Item 4.                                                         |   | SUBMISSION OF  MATTERS TO A VOTE OF SECURITY HOLDERS                                                                   |   | 34 |   |
| OUR  EXECUTIVE OFFICERS                                         |   | 35                                                                                                                     |   |
| **PART II**                                                |
| Item 5.                                                         |   | MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED  STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |   | 36 |   |
| Item  6.                                                        |   | SELECTED  FINANCIAL DATA                                                                                               |   | 38 |   |
| Item 7.                                                         |   | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF OPERATIONS                            |   | 39 |   |
| Item 7A.                                                        |   | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET  RISK                                                            |   | 58 |   |
| Item 8.                                                         |   | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                                            |   | 59 |   |
| Item 9.                                                         |   | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON  ACCOUNTING AND FINANCIAL DISCLOSURE                                  |   | 92 |   |
| Item 9A.                                                        |   | CONTROLS AND PROCEDURES                                                                                                |   | 92 |   |
| Item  9B.                                                       |   | OTHER  INFORMATION                                                                                                     |   | 94 |   |
| **PART III**                                               |
| Item 10.                                                        |   | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE                                                                 |   | 95 |   |
| Item 11.                                                        |   | EXECUTIVE COMPENSATION                                                                                                 |   | 95 |   |
| Item 12.                                                        |   | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT  AND RELATED STOCKHOLDER MATTERS                        |   | 96 |   |
| Item 13.                                                        |   | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND  DIRECTOR INDEPENDENCE                                             |   | 96 |   |
| Item 14.                                                        |   | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                                                 |   | 96 |   |
| **PART IV**                                                |
| Item 15.                                                        |   | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES                                                                             |   | 97 |   |
| SIGNATURES                                                      |   | 98                                                                                                                     |   |
| EXHIBIT INDEX                                              |   | 100                                                                                                                    |   |
| SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS              |   | 107                                                                                                                    |   |

 

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**PART I**

**Item 1.**                        BUSINESS

**Overview**

We are an innovation-driven, biopharmaceutical companyfocused on discovering, developing and commercializing medicines to change thelives of patients with cancer and inflammatory diseases. We currentlycommercialize VELCADE® (bortezomib) for Injection, the U.S. marketleader for the treatment of patients with multiple myeloma who have received atleast one prior therapy. In addition, VELCADE is the first and only Food andDrug Administration, or FDA, approved therapeutic for the treatment of patientswho have received at least one prior therapy for mantle cell lymphoma, or MCL,an aggressive form of non-Hodgkin’s lymphoma, or NHL. We have a developmentpipeline of nine clinical and preclinical product candidates in our therapeuticfocus areas of cancer and inflammation, and we have an oncology-focuseddiscovery organization. Strategic business relationships are a key component ofour business. For example, we maintain a significant royalty stake inINTEGRILIN® (eptifibatide) Injection, a marketleading cardiovascular product, and receive distribution fees for sales ofVELCADE outside of the United States.

Our cancer product, VELCADE, was first approved in theUnited States in May 2003 and in the European Union in April 2004 formarketing as a treatment for some patients with multiple myeloma, a type ofblood cancer, and received approval in the United States in December 2006for the treatment of some patients with MCL. We began marketing VELCADE in theUnited States shortly after receiving approval. We sell VELCADE in the UnitedStates directly through our oncology sales force. In the first quarter of 2007,our collaborator Ortho Biotech Products, Inc., or OBI, a member of TheJohnson & Johnson Family Of Companies, began jointly promoting VELCADEwith us to U.S.-based physicians.  VELCADE is sold in the European Union andother areas where marketing approval has been obtained outside of the UnitedStates by Ortho Biotech Products, L.P., or OBL, also a member of The Johnson &Johnson Family Of Companies. In 2006, U.S. sales of VELCADE were approximately$220.5 million, which represented approximately 45% of our total revenue for2006. In 2005, U.S. sales of VELCADE were approximately $192.1 million, whichrepresented approximately 34% of our total revenue for 2005. In 2004, U.S.sales of VELCADE were approximately $143.1 million, which representedapproximately 32% of our total revenue for 2004.

In 2005, we refined our business strategy to focus onadvancing key growth assets including VELCADE, our clinical and preclinicalpipeline of oncology and inflammation molecules and our oncology-focuseddiscovery organization. In 2006, we announced a program to further alignresources with our current corporate priorities of advancing VELCADE andaccelerating the clinical pipeline. As part of this program, we reducedin-house research and preclinical development technologies and headcount inareas where we believe the work can now be outsourced cost-effectively withreliable quality, and we are scaling back infrastructure supporting theseactivities.

Our business strategy is to build a portfolio ofinnovative, new medicines based on our understanding of genomics and particularmolecular pathways that affect the establishment and progression of specificdiseases. These molecular pathways include the related effects of proteins oncellular performance, reproduction and death. We plan to develop andcommercialize many of our products on our own, but expect to seek development andcommercial collaborators on favorable terms or when we otherwise believe thatdoing so would be advantageous to us.

In the near-term, we expect to focus our commercialactivities in cancer where we plan to build on our commercial and regulatoryexperience with VELCADE. We also are working to obtain approval to marketVELCADE in the United States and, through OBL, elsewhere for the treatment ofmultiple myeloma in newly diagnosed, or front-line  patients, and for the treatment of additionalcancer types. We believe that, 

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if approved, theseadditional uses of VELCADE would lead to a significant expansion of ourbusiness. We also continue to advance a pipeline of novel oncology productcandidates. In inflammatory disease, we are advancing novel product candidatesin clinical development as potential treatments for serious conditions, some ofwhich are widely prevalent.

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

We were incorporated inDelaware in 1993. Our principal executive offices are located at40 Landsdowne Street, Cambridge, Massachusetts 02139.

***VELCADE***

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

In March 2005, we received full approval from theFDA of our supplemental New Drug Application, or sNDA, for VELCADE for thetreatment of patients with multiple myeloma who have received at least oneprior therapy, commonly referred to as second-line, or relapsed multiplemyeloma. This regulatory decision increases the approved market potential ofthe drug and also marked the completion of the confirmatory studies required bythe FDA after it granted accelerated approval in May 2003. VELCADE is theonly single-agent therapy that has both demonstrated longer survival inpatients in the relapsed multiple myeloma treatment setting and has comparativeextension of patient survival data in its FDA approved labeling.

In April 2004, the European Commission grantedMarketing Authorization for VELCADE in Europe for the treatment of multiple myelomapatients who have received at least two prior therapies and have demonstrateddisease progression on their most recent therapy. Under this Authorization, theEuropean Commission granted us a single license for marketing VELCADE in the 15 member states of the European Union,plus Norway and Iceland. VELCADE was also approved for marketing in the tenaccession member countries when those countries officially joined the EuropeanUnion on May 1, 2004. Regulatory authorities in a number of other countries,including countries within Latin America and South-East Asia and Japan, havealso approved VELCADE. The product is now approved in more than 75 countries. Underour agreement with OBL, we have transferred the licenses to affiliates of OBLon a country-by-country basis. OBL’s affiliates now market VELCADE in thesecountries.

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

In December 2006, the FDA granted full approvalof VELCADE for the treatment of patients with MCL who have received at leastone prior therapy, commonly referred to as relapsed, or second-line, MCL. Thisapproval followed the FDA’s decision in November 2004 to grant VELCADEfast track 

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designation for MCL due tothe high unmet medical need of MCL patients and the strength of clinical trialdata for VELCADE in the treatment of MCL.

Multiple myeloma is a cancer of the bone marrow inwhich some types of white blood cells are overproduced. As a result, there isdecreased production of normal red and normal white blood cells, therebydamaging the body’s immune system. The overproduced white blood cells alsocause the growth of tumors that spread to multiple sites, causing bonedestruction and resulting in pain and bone fractures. In the U.S., multiplemyeloma is the second most common hematologic malignancy and although thedisease is predominantly a cancer of the elderly (the average age of onset is68 years of age), recent statistics indicate both increasing incidence andyounger age of onset. In the U.S., more than 50,000 individuals have multiplemyeloma, over 15,000 new cases are diagnosed each year and more than 11,000people die from the disease each year.

In the U.S., NHL is the most common hematologicalcancer and the sixth leading cause of cancer death. The prevalence of NHL inthe U.S. is approximately 365,000 patients, of which we estimate approximately100,000 are patients with follicular or marginal zone lymphoma which are subtypesof NHL, and 10,000 are patients with mantle cell lymphoma. There areapproximately 59,000 new cases of NHL diagnosed in the U.S. per year, and19,000 deaths are attributed to the disease annually. Mantle cell lymphoma isan aggressive, rapidly progressive subtype of NHL. It is not curable withstandard treatment. The median life expectancy for a patient with MCL followinghis or her first relapse is estimated to be one year.

Proteasome inhibition is a novel approach to treatingcancer. Proteasomes are enzyme complexes in all cells, both healthy andcancerous, that break down intracellular proteins in a regulated manner.Intracellular proteins form pathways by which cancer cells multiply, spread,interact with other cells and avoid programmed cell death. Inhibition of theproteasome by VELCADE prevents the regulated breakdown of these intracellularproteins, thereby interfering with many of these functions. This disruption ofessential pathways in cancer cells can lead to cell death and inhibit tumorgrowth.

The most commonly reportedside effects of VELCADE are asthenic conditions including fatigue, malaise andweakness, nausea, diarrhea, decreased appetite (including anorexia),constipation, thrombocytopenia, peripheral neuropathy, pyrexia, vomiting,anemia, neutropenia and orthostatic hypotension.

**Our DevelopmentEfforts**

***VELCADE Development***

We believe thatVELCADE may have broad applications in the treatment of cancer beyond itscurrently approved indications. Currently, over 300 company-sponsored,investigator-initiated, or cooperative group-sponsored trials are ongoing orplanned with the goal of exploring the potential of the product alone and incombination with other therapies in a variety of cancers. Principal ongoingVELCADE trials are described below:

·                    Threemulti-center phase III clinical trials in front-line multiple myeloma patientsexploring VELCADE in combination with current standards-of-care in thistreatment setting. Enrollment in two of these trials has been completed and inthe three trials combined, we expect approximately 2,000 patients will beenrolled. Results from previous phase II trials in this setting of VELCADE incombination with these standards-of-care have shown some of the highestreported response rates in the treatment of the disease, with overall responserates as high as 95 percent and complete and near-complete responses as high as43 percent. Side effects in those previous phase II trials were manageable andsimilar to those seen in other VELCADE studies.

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·                    Arandomized phase III clinical trial in patients with relapsed follicular ormarginal zone lymphoma. We expect to enroll approximately 670 patients in thistrial. The trial is evaluating the efficacy and safety of the VELCADE incombination with rituximab, the standard-of-care in this setting, compared torituximab alone. Results of a phase II trial in this same patient populationcomparing VELCADE at a once-weekly dose with a once-weekly dose of rituximabversus VELCADE at its standard twice-weekly dose matched with the once-weeklyrituximab regimen were presented at the December 2006 American Society ofHematology meeting. In the arm with a once-weekly VELCADE regimen, an overallinvestigator-assessed response rate of greater than 50 percent with amanageable safety profile was reported.

·                    Arandomized phase II clinical trial in patients with relapsed non-small celllung cancer, or NSCLC, testing VELCADE in combination with pemetrexed, acurrent standard-of-care. Enrollment of 130 patients has been completed forthis trial.

We expect that our abilityto expand sales of VELCADE may be dependent on the outcome of these ongoingclinical trials, in particular the three phase III clinical trials infront-line multiple myeloma.

***PipelineDevelopment***

In addition to our ongoing clinical trials of VELCADE,we have nine product candidates in clinical and late preclinical development.

In January 2006, as part of our portfolio reviewprocess and based on the evaluation of clinical data in the context ofadditional opportunities in the pipeline, we decided to discontinue developmentof MLN2704 as well as MLN1202 in rheumatoid arthritis.

In May 2006, we announced positive top-lineresults from our randomized, double-blinded, placebo-controlled phase IIclinical trial of MLN1202 in patients at high risk for atheroscleroticcardiovascular disease. Preliminary analysis showed that MLN1202 was welltolerated and fully met its primary endpoint of a significant and sustained reductionin C-Reactive Protein levels, an inflammatory biomarker associated withatherosclerosis after a single dose of MLN1202. These results werestatistically significant relative to the placebo control arm (p = 0.0275). Noserious adverse events were observed in patients exposed to MLN1202. We expectthese trial results will be submitted for presentation in 2007 at a medicalmeeting.

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Thefollowing chart summarizes the applicable disease indication and the clinicalor preclinical trial status of our drug candidates.
| 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 2007  phase I/phase II  phase I/phase II |
| MLN8054 is a  small molecule inhibitor of Aurora A Kinase                                                         | Advanced  malignancies                                      | phase I                                                                        |
| MLN8237 is a  small molecule inhibitor of Aurora A Kinase                                                         | Advanced malignancies                                       | preclinical                                                                    |
| ***Inflammatory  Diseases***                                                                                      |                                                        |                                                                           |
| MLN0002 is a  humanized monoclonal antibody directed against the alpha4beta7 receptor                             | Crohn’s disease  Ulcerative colitis                    | preclinical with  prior phase II data  preclinical with prior phase II data    |
| MLN1202 is a  humanized monoclonal antibody directed against CCR2                                                 | Multiple  sclerosis  Atherosclerosis                        | phase IIa  phase IIa-completed                                                 |
| MLN3897 is a  small molecule CCR1 inhibitor(2)                                                                    | Chronic  inflammatory diseases such as rheumatoid arthritis | phase II                                                                       |
| MLN3701 is a  small molecule CCR1 inhibitor, second generation of MLN3897(2)                                      | Chronic  inflammatory diseases such as rheumatoid arthritis | phase I                                                                        |
| MLN0415 is a  small molecule inhibitor of IKKbeta(2)                                                              | Chronic  inflammatory diseases such as rheumatoid arthritis | phase I                                                                        |
| MLN6095 is a small  molecule CrTh2 receptor antagonist(2)                                                         | Inflammatory diseases                                       | preclinical                                                                    |

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

(2)          In development throughour sanofi-aventis inflammatory disease collaboration.

Completion of clinicaltrials may take several years. The length of time can vary substantiallyaccording to the type, complexity, novelty and intended use of a productcandidate. The types of costs incurred during a clinical trial vary dependingupon the type of product candidate and the nature of the study.

**Our Collaborations**

We have entered intocommercialization and development arrangements with pharmaceutical andbiotechnology companies relating to a broad range of products and potentialproduct opportunities. We believe that these collaborations provide us with theopportunity to maximize the value of our internal resources and to reduce ourcommercialization and development costs and risks while at the same timeutilizing the resources of other companies to market and develop our products.Under our collaborations, 

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we havein the past and may in the future receive combinations of royalties,distribution fees, license fees, shares of profits and losses and/or milestoneand other payments.

***Ortho BiotechCollaborations***

In June 2003, we entered into an agreement withOBL to collaborate on the commercialization of VELCADE and with  Johnson & Johnson PharmaceuticalResearch & Development, L.L.C., or JJPRD, for the continued clinicaldevelopment of VELCADE. OBL and its affiliate, Janssen-Cilag, have agreed tocommercialize VELCADE outside of the United States, and Janssen PharmaceuticalK.K. is responsible for Japan. We receive distribution fees from OBL and itsaffiliates from sales of VELCADE outside of the United States. We manage thesupply chain for VELCADE at the expense of OBL for products sold in the OBLterritories. We retain an option to co-promote VELCADE with OBL at a futuredate in specified European countries.

We are engaged with JJPRD in an extensive globalprogram for further clinical development of VELCADE with the purpose ofmaximizing the commercial potential of VELCADE. This program is investigatingthe potential of VELCADE to treat multiple forms of solid and hematologicaltumors, including continued clinical development of VELCADE for multiplemyeloma and NHL. JJPRD was responsible for 40% of the joint development coststhrough 2005 and is now responsible for 45% of those costs. We are eligible toreceive payments from JJPRD or OBL for achieving clinical developmentmilestones, regulatory milestones outside of the United States or agreed-uponsales levels of VELCADE.

Decisions regarding the ongoing development andmarketing of VELCADE are generally subject to the oversight of a joint steeringcommittee with equal membership from OBL and us. However, in the event of adispute, specified development, United States commercialization and specifiedother decisions are allocated specifically to us, and commercializationdecisions outside of the United States and specified other decisions areallocated specifically to OBL.

Unless our agreement with OBL is terminated early dueto a material uncured breach by one of the parties or by OBL unilaterallysubject to notice obligations, the agreement continues on a country by countrybasis outside of the United States until no earlier than the expiration of thelast to expire patent covering the manufacture, use or sale of the product inthe country. Revenues from this alliance, including license fees, reimbursementof development expenses, milestone payments and distribution fees, accountedfor approximately 22% of our total revenues in 2006, 10% of our total revenuesin 2005 and 17% of our total revenues in 2004.

In October 2006, weannounced a two-year agreement with OBI to jointly promote VELCADE in the U.S. Underthe terms of the agreement, in the first quarter of 2007, OBI began jointlypromoting VELCADE with us to U.S.-based physicians. We have agreed to pay thecost of a portion of the OBI sales effort dedicated to VELCADE and a commissionif sales associated with the increased promotional effort exceed pre-specifiedtargets. Both parties are able to terminate the agreement under certaincircumstances and subject to fees. We will continue to be responsible forcommercialization, manufacturing and distribution of VELCADE in the U.S. Webelieve this collaboration with the well-established OBI oncology sales forcewill help us to realize the full potential of the product.

***INTEGRILINCollaborations***

We acquired INTEGRILIN as part of our acquisition ofCOR Therapeutics, Inc., or COR, in February 2002. INTEGRILIN has beenmarketed in the United States since 1998 and outside of the United States since1999. From February 2002 through August 31, 2005, we co-promotedINTEGRILIN in the United States in collaboration with Schering Corporation andSchering-Plough Ltd, together referred to as SGP, and shared profits andlosses. As of September 1, 2005, we changed our relationship with SGP froma co-promotion to a royalty based arrangement. SGP now exclusively marketsINTEGRILIN in the 

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United States andspecified other areas outside of Europe. GlaxoSmithKline plc, or GSK, marketsINTEGRILIN in Europe under a license from us.

In 2006, sales of INTEGRILIN by SGP as reported by SGPwere approximately $329 million. Approximately 95% of those sales were made inthe United States. In 2006, revenues from this alliance, including licensefees, reimbursement of manufacturing-related expenses and royalties accountedfor approximately 27% of our 2006 total revenues.

Under our revised relationship with SGP, we haveincurred lower sales and marketing expenses, including personnel related andpromotional expenses, associated with INTEGRILIN. For the period September 1,2005 through December 31, 2005, revenue from SGP, including license fees,reimbursement of manufacturing-related expenses and royalties accounted forapproximately 24% of our total revenues. From January 1, 2005 through September 1,2005, which was the effective date of our modified relationship with SGP, werecognized approximately $123.5 million of co-promotion revenue from sales ofINTEGRILIN by SGP, which accounted for approximately 22% of our total revenueduring this period. Co-promotion revenue was 46% of our total revenue in 2004.

INTEGRILIN is a small synthetic peptide administeredby injection that prevents the aggregation of platelets by blocking the plateletreceptor glycoprotein, or GP, IIb-IIIa. The effects of INTEGRILIN arespecific to platelets, avoiding interference with other normal cardiovascularprocesses. In addition, these effects can be reversed following INTEGRILINdiscontinuation when no longer needed. Bleeding is the most common complicationencountered during administration of INTEGRILIN therapy. The majority of excessmajor bleeding events associated with INTEGRILIN are localized at the site ofcatheter insertion.

INTEGRILIN is approved formarketing in the United States for the treatment of patients with acutecoronary syndromes, or ACS, which include unstable angina and non-ST segmentelevation myocardial infarction, or heart attack. This patient group includesindividuals who are medically managed and those undergoing percutaneouscoronary intervention, or PCI, including angioplasty. INTEGRILIN is alsoapproved for use at the time of a PCI, including for patients undergoingintracoronary stenting. This set of indications is broader than the FDAapproved indications for the other two GP IIb-IIIa inhibitors approved formarketing in the United States.

*SGP*

In April 1995, COR entered into a collaborationagreement with SGP to jointly develop and commercialize INTEGRILIN on aworldwide basis. Under our original collaboration agreement with SGP followingour acquisition of COR in February 2002, we generally shared any profitsor losses from INTEGRILIN sales in the United States with SGP, and we grantedSGP an exclusive license to market INTEGRILIN outside the United States andEurope in exchange for royalty obligations.

On September 1, 2005,SGP obtained the exclusive U.S. development and commercialization rights forINTEGRILIN products from us and paid us a nonrefundable upfront payment ofapproximately $35.5 million. In addition, we are entitled to receiveroyalties on net product sales of INTEGRILIN in the United States from SGP forso long as SGP is engaged in the commercialization and sale of an INTEGRILINproduct in the United States, with the potential of receiving royalties beyondthe 2014 patent expiration date. Minimum royalties for 2007 are set atapproximately $85.4 million. There are no guaranteed minimum royalty paymentsbeyond 2007. We also receive royalties on net product sales by SGP outside ofthe United States. SGP’s obligation to pay us royalties in other countriesexpires on a country by country basis upon the later of fifteen years from thefirst commercial sale of an INTEGRILIN product in such country and theexpiration of the last to expire patent covering such INTEGRILIN product. Weare continuing to manage the supply chain for INTEGRILIN at the expense of SGPfor products sold in the SGP territories including the U.S.

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*GSK LicenseAgreement*

In June 2004, we reacquired the rights to marketINTEGRILIN in Europe from SGP and concurrently entered into a license agreementgranting GSK exclusive marketing rights to INTEGRILIN in Europe. In January 2005,the transition of the INTEGRILIN marketing authorizations for the EuropeanUnion from SGP to GSK was completed, and GSK began selling INTEGRILIN in thecountries of the European Union. GSK also markets INTEGRILIN in other Europeancountries where it has received approval of the transfer from SGP to GSK of therelevant marketing authorizations. Under the terms of the agreement, we havereceived license fees and are entitled to future royalties from GSK onINTEGRILIN sales in Europe subject to the achievement of specified objectives.We manage the supply chain for INTEGRILIN at the expense of GSK for productssold in the GSK territories.

Under the licenseagreement with GSK, GSK has significant final decision-making authority withrespect to European marketing issues. Our agreement with GSK continues untilthe later of December 31, 2014, or as long as GSK continues to commercializeINTEGRILIN in any European country.

***sanofi-aventis Inflammatory Disease Collaboration***

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

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

To date, we andsanofi-aventis have identified a significant number of novel drug targets andassociated molecules relevant in inflammatory diseases. During the remainingportion of the development phase of the alliance, we and sanofi-aventis haveagreed to focus our joint resources on preclinical and clinical development ofcandidates identified in the collaboration. As of the end of 2006, the alliancehad identified several development candidates, one of which, MLN3897, is nowbeing tested in a phase II clinical trial and two of which, MLN3701 andMLN0415, are now being tested in phase I clinical trials. A fourth productcandidate, MLN6095, is now in preclinical testing.

Prosecution of developmentcandidates discovered through the collaboration will continue until marketingapproval or termination of development by the parties. Either party mayterminate development of a development candidate prior to marketing approval,in which case the other party may continue to develop such candidate subject topayment of royalties to the other party.

**Manufacturing**

Our strategy with regard to manufacturing is tocontract with third parties to meet our needs for commercial supply and, as tomost of our compounds, for research, development, preclinical testing and clinicaltrials. Therefore, we have limited manufacturing capabilities and produce onlya small amount of product for research and development and preclinical testing.

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We have established an in-house qualityassurance/control program to ensure that our products and product candidatesare manufactured in accordance with applicable regulations. We require that ourcontract manufacturers adhere to current Good Manufacturing Practices, or GMP,except for products and product candidates for toxicology studies and animalstudies, which we require to be manufactured in accordance with current GoodLaboratory Practices, or GLP. The facilities of our contract manufacturers ofmarketed products must pass regular post-approval inspections by the FDA andother agencies.

The FDA or other regulatory agencies must approve theprocesses and the facilities that may be used for the manufacture of any of ourpotential drug substances and drug products. The manufacture of our productsand product candidates is based in part on technology that we believe to beproprietary to our contract manufacturers. In addition, some of ourmanufacturers may develop process technology related to the manufacture of ourcompounds that such suppliers own either independently or jointly with us. Thiscould increase our reliance on such manufacturers, require us to obtain alicense from such manufacturers in order to have our products manufactured orresult in us not benefiting from the potential efficiencies of new processtechnologies.

We manage the commercial and clinical supply chainsfor the production of both VELCADE and INTEGRILIN. We rely on third partycontract manufacturers for the manufacturing of the active ingredient,formulation, fill/finish and packaging of VELCADE for both commercial purposesand for ongoing clinical trials. We have established long-term supplyrelationships for the production of commercial supplies of VELCADE. We believewe currently have a sufficient quantity of bortezomib, the activepharmaceutical ingredient necessary to make VELCADE, to meet the anticipatedcommercial demand for the product for 2007 and to fulfill the needs for ourongoing and planned clinical trials. We work with one manufacturer tomanufacture bortezomib and a second manufacturer to complete fill/finish forVELCADE. We are currently developing an additional supplier for bortezomib andhave contracted with an additional manufacturer for the fill/finish of VELCADE.We expect that both of these additional manufacturers will provide services tous in the future.

We also rely on third party contract manufacturers forthe clinical and commercial production of INTEGRILIN. Two manufacturers provideus with eptifibatide, the raw material necessary to make INTEGRILIN, for bothclinical trials and commercial supply. Solvay, S.A., or Solvay, one of thecurrent manufacturers, owns the process technology used by it. Lonza Braine,S.A., or Lonza, is the other current manufacturer of bulk product. We own theprocess technology used by Lonza for the production of eptifibatide. SGP andGSK have had this proprietary process technology approved in the United Statesand in the European Union, and, we, GSK or SGP are responsible for submittingthat proprietary process technology for approval in other countries, asrequired. Our supply agreement with Solvay ends in 2007 and our agreement withLonza expires in 2009. We are exploring several options for additional futuresupply of eptifibatide. Two approved manufacturers currently performfill/finish services for INTEGRILIN for us and we have two packaging suppliersfor the United States.

**Sales and Marketing**

We have built a specialized oncology sales force withapproximately 100 sales representatives and managers located across the UnitedStates. This sales force markets VELCADE in its approved indications tophysicians, hospitals and other health care providers. Under our new agreementwith OBI to jointly promote VELCADE in the U.S.,  in the first quarter of 2007, OBI beganjointly promoting VELCADE to U.S.-based physicians. OBL or its affiliatesmarket VELCADE outside of the United States and pay us distribution fees onproduct sales. See “Our Collaborations—Ortho Biotech Collaborations.”  All sales of VELCADE in the United States aredistributed through a sole-source distribution model, where we sell directly toa third party who in turn distributes to the wholesaler base.

SGP’s sales force markets INTEGRILIN to clinicalcardiologists, interventional cardiologists and emergency medicine physicians.GSK markets and sells INTEGRILIN in the European Union and other 

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European countries, andSGP sells and markets INTEGRILIN elsewhere outside the United States. See “OurCollaborations—INTEGRILIN Collaborations—SGP Collaboration” and “OurCollaborations—INTEGRILIN Collaborations—GSK License Agreement.”

We have not developed commercialization plans for ourproduct candidates that may receive marketing approval in the future becausethe manner in which we will commercialize these product candidates will dependin large part on their market potential and our financial resources. We maydecide to perform all necessary commercial functions for these products on ourown or we may establish co-promotion, collaboration, licensing or otherarrangements for the marketing and sale of some products in some or allgeographic markets.

Sales of VELCADE,INTEGRILIN and product candidates that may be approved in the future willdepend heavily upon the availability of reimbursement from third party payors,such as government and private insurance plans. We meet with administrators ofthese plans to discuss the potential medical benefits and cost-effectiveness ofour products. We believe this approach may assist in obtaining reimbursementauthorization for our products from these third party payors. See “GovernmentRegulation—Third Party Reimbursement.”

**Competition**

We currently face competition, and believe significantlong-term competition can be expected, from a range of pharmaceutical andbiotechnology companies. This competition may become more intense as we developadditional products. Some competitors, primarily large pharmaceuticalcompanies, have greater resources and experience than we have. Many of thesecompanies have commercial arrangements with other companies in thebiotechnology industry to supplement their own research and developmentcapabilities.

The introduction of new products or the development ofnew processes by competitors or new information about existing products mayresult in price reductions or product replacements, even for products protectedby patents. Other factors that may affect our ability to meet competitioninclude the skill of our employees and our ability to recruit and retain skilledemployees, our program of seeking patent protection for our discoveries andadvances and our research, development and regulatory affairs capabilities.Many large pharmaceutical and biotechnology companies have significantly largerintellectual property estates than we do, more substantial capital resourcesthan we have and greater capabilities and experience than we do in discovery,research, preclinical and clinical development, sales, marketing, manufacturingand regulatory affairs.

Over the longerterm, our and our collaborators’ abilities to successfully market products,expand their usage and bring new products to the marketplace will depend onmany factors, including:

·                    theeffectiveness and safety of the products;

·                    FDAand foreign regulatory agencies’ approvals of new products and indications;

·                    thedegree of patent protection afforded to particular products;

·                    theeffects of price control mechanisms; and

·                    reimbursementand treatment guidelines.

We expect traditional chemotherapy treatments and othertherapies on the market and in development, including other proteasomeinhibitors, to compete with VELCADE. In particular, in December 2005,Celgene Corporation received approval for Revlimid® (lenalidomide) for the treatment of a subsetof patients with myelodysplasticsyndromes, a group of related blood disorders, and in June 2006 forthe treatment of patients with multiple myeloma who have received at least oneprior 

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therapy. Competition fromRevlimid may limit the growth opportunities for future sales of VELCADE. Additionally,in May 2006, the FDA approved the use of Celgene’s Thalomid® (thalidomide) for the treatment of newlydiagnosed multiple myeloma. There are also other potentially competitivetherapies that are in late-stage clinical development for multiple myeloma. Webelieve that VELCADE generally competes with other therapies on the basis ofefficacy, safety, convenience and price.

Due to theincidence and severity of cardiovascular diseases, the market for therapeuticproducts that address such diseases is large, and we expect the already intensecompetition in this field to increase. INTEGRILIN generally competes with othertherapies on the basis of efficacy, safety, convenience and price. Two GPIIb-IIIa inhibitors which compete with INTEGRILIN have received regulatoryapproval in the United States and Europe:

·                    ReoPro® (abciximab), which is produced by Johnson &Johnson and sold by Johnson & Johnson and Eli Lilly & Co.;and

·                    Aggrastat® (tirofiban), which is produced and sold byMerck & Co., Inc. outside of the United States and by MedicureInc. in the United States.

Sales of INTEGRILINcould also be negatively impacted in the future by other competitive factorsincluding:

·                    expandeduse of heparin replacement therapies, such as Angiomax® (bivalirudin)produced and sold by The Medicines Company for patients undergoing PCI;

·                    changingtreatment practices for PCI and ACS based on new technologies, including theuse of drug-coated stents;

·                    increaseduse of another class of anti-platelet drugs known as ADP inhibitors in patientswhose symptoms make them potential candidates for treatment with INTEGRILIN;and

·                    SGP’sinability to complete clinical trials and develop data to promote increased useof INTEGRILIN in its current indications as well as in new indications.

**Drug Research,Discovery and Development**

A key element of our overall strategy is to build asustainable pipeline of innovative new treatments in areas of high unmetmedical need—cancer and inflammatory diseases. Our goal is to generate asufficiently large portfolio of discovery and development programs at variousstages of maturity so that we can move new drugs through clinical developmentand onto the market on a regular basis.

To achieve this goal, we have focused on developing acomprehensive understanding of the mechanisms and pathways that underlieimportant diseases and identifying appropriate biological targets. Then we seekto identify and optimize small molecule compounds or antibodies that interactwith targets in a desired manner. We test these drug candidates in animalmodels to assess their likely suitability as therapeutic products. Forcandidates meeting our criteria for clinical development, we then move intohuman clinical testing to establish the safety and efficacy of theseexperimental products and to understand therapeutically important differencesamong people. At any stage of this process, we may encounter unexpecteddifficulties and may need to delay or terminate programs or go back to repeatseveral steps with slight variations, in an effort to ensure that we bring themost suitable new drug candidate through clinical testing.

In order to focus our efforts and resources,throughout the discovery and development process we currently relysubstantially upon third parties and expect to continue to do so in the future.For example, we rely on third parties to provide us with discovery technologyservices, produce material for preclinical and clinical testing purposes andperform clinical development activities.

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We believe that our global regulatory affairsexperience and expertise is an important part of our ability to movedevelopment candidates forward in an efficient manner. If we believe we haveestablished safety and efficacy for a new drug candidate, we submit applicationsfor marketing approval to the appropriate regulatory authorities.

During this process, the expertise of our scientific,clinical and regulatory groups is critical. To augment our internal discoveryand development capabilities, we continuously evaluate opportunities to licenseor acquire rights to drugs or drug candidates that have been developed outsideof our company.

We are devoting fewer personnel and resources toresearch and discovery activities than we have in the past. As a result of thisshift, we recorded restructuring charges in 2006 of approximately $20.4million, in 2005 of approximately $77.1 million and in 2004 of approximately$38.0 and expect to record additional restructuring charges during 2007 ofbetween $15.0 million and $25.0 million.

Our research anddevelopment expenses totaled $318.2 million in 2006, $342.2 million in 2005 and$402.6 million in 2004. Our research and development expenses are primarilycompany-sponsored. Our strategic collaborator-sponsored research and developmentexpenditures totaled $16.3 million in 2006, $23.5 million in 2005 and $37.7million in 2004. In calculating strategic collaborator-sponsored research anddevelopment expenditures, we have included net reimbursement for our researchand development efforts, excluding license fees, milestones and royalties.

**Patents andProprietary Rights; Licenses**

***Patents***

Our success depends in part on our ability to obtainand maintain proprietary protection for our products, product candidates,technology and know-how, to operate without infringing the proprietary rightsof others and to prevent others from infringing our proprietary rights. Wegenerally seek United States and foreign patent protection for the genes,proteins and the antibody and small-molecule drug leads that we discover aswell as possible therapeutic, diagnostic and pharmacogenomic products andprocesses, drug screening methodologies and other inventions based on suchgenes, proteins, antibodies and small molecules. We also seek patent protectionor rely upon trade secret rights to protect other technologies which may beused to discover and characterize genes, proteins, antibodies and smallmolecules or may be used to develop and manufacture novel therapeutic,diagnostic and pharmacogenomic products and processes.

We own issued United States patents, granted foreignpatents and pending United States and foreign applications for VELCADE. Theissued U.S. patents related to VELCADE expire in 2014 with the potential forextension and the issued foreign patents expire in 2015 with extensions issuedor pending in a number of countries.

We own issued United States patents, granted foreignpatents and pending United States and foreign applications for INTEGRILIN. Theissued United States patents that cover INTEGRILIN expire in 2014 and 2015 andthe issued foreign patents expire between 2010 and 2012.

We also own issued patentsand/or pending United States and foreign patent applications related toMLN0002, MLN1202 and MLN3897. The issued United States patents for MLN0002expire in 2015 and 2016. The issued United States patents for MLN1202 expire in2018.

***Licenses***

We have obtainedlicenses from various parties for rights to use proprietary technologies andcompounds. These licenses generally are for a fixed duration, typically thelife of the licensed patents, and require us to use reasonable or diligentefforts to develop and commercialize and to pay ongoing royalties 

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onproduct sales. We are the exclusive licensee of issued United States andforeign patents and/or pending United States and foreign applications relatingto our products on the market and in clinical development.

ForVELCADE, we are a party to an exclusive worldwide Patent LicenseAgreement with the U.S. Public Health Service, or PHS, dated December 12,2002. This agreement provides us with the right to use the patents belonging toPHS relating to the formulation of VELCADE. Under this agreement we haveobligations to pay PHS up-front royalty payments, royalty milestones, royaltieson net sales of VELCADE and sublicensing royalties. The license extends throughthe expiration of any licensed patents that may result from PHS’ pendingapplications unless it is terminated earlier by PHS to meet requirements forpublic use specified by law, or based on a default by us or a failure to meetour obligations under the agreement, in either case, following a cure period.The issued United States patents to which this license relates expire in2022.

***Trademarks***

We currently own a numberof trademarks and servicemarks including: Millennium, the Millennium “M” logoand design, “Transcending the Limits of Medicine,” VELCADE, INTEGRILIN and “BreakthroughScience. Breakthrough Medicine.” All of these marks are covered byregistrations or pending applications for registration in the United StatesPatent and Trademark Office and in the Patent and Trademark Offices of manyother countries.

**GovernmentRegulation**

***Regulatory Compliance***

Regulation by governmental authorities in the UnitedStates and other countries is a significant factor in the manufacture andmarketing of our products and in ongoing research and product development activities.All of our products require regulatory approval by governmental agencies priorto commercialization. In particular, our products are subject to rigorouspreclinical and clinical testing and other premarket approval requirements bythe FDA and regulatory authorities in other countries. Various statutes andregulations also govern or influence the manufacturing, safety, labeling,storage, record keeping and marketing of our products. The lengthy process ofseeking these approvals, and the subsequent compliance with applicable statutesand regulations, require the expenditure of substantial resources. Any failureby us to obtain, any delay in obtaining or any failure to maintain, regulatoryapprovals could materially adversely affect our business. In addition, recentlythere has been heightened scrutiny by Congress on the adequacy of the FDA’sdrug approval processes and its efforts to assure the safety of marketed drugs,and new legislation addressing drug safety, among other issues, has beenproposed. If enacted, any new legislation could result in delays or increasedcosts for manufacturers and drug sponsors during the period of productdevelopment, clinical trials, and regulatory review and approval, as well asincreased costs to assure compliance with any new post-approval regulatoryrequirements.

The activities required before a biopharmaceuticalproduct may be marketed in the United States begin with preclinical testing.Preclinical tests include laboratory evaluation of product chemistry and animalstudies to assess the potential safety and efficacy of the product and itsformulations. The results of these studies must be submitted to the FDA as partof an Investigational New Drug application, or IND, which must be reviewed bythe FDA and become effective before proposed clinical testing can begin.

Typically, clinicaltesting prior to approval involves a three-phase process.

·                    Inphase I, clinical trials are conducted with a small number of subjects to assessthe early safety profile and the pattern of drug distribution and metabolism.

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·                    Inphase II, clinical trials are conducted in a limited patient populationafflicted with a specified disease in order to provide enough data tostatistically evaluate the preliminary efficacy, optimal dosages and expandedevidence of safety.

·                    Inphase III, large scale, multicenter, comparative clinical trials are conductedwith patients afflicted with a target disease in order to provide enough datato statistically evaluate the efficacy and safety of the product, as requiredby the FDA.

The results of the preclinical and clinical testing ofa pharmaceutical product, along with descriptions of the manufacturing process,analytical tests conducted on the chemistry of the product, results of chemicalstudies and other relevant information, are then submitted to the FDA for reviewand potential approval to commence commercial sales. For a chemicalpharmaceutical product, the submission is in the form of a new drugapplication, or NDA, and for a biological pharmaceutical product the submissionis in the form of a biologic license application, or BLA. In responding to anNDA or a BLA, the FDA may grant marketing approval, request additionalinformation or deny the application if it determines that the application doesnot provide an adequate basis for approval. We can not assure that any approvalrequired by the FDA will be obtained on a timely basis, if at all.

Among the conditions for an NDA or a BLA approval isthe requirement that the applicable manufacturing, clinical, pharmacovigilance,quality control and manufacturing procedures conform on an ongoing basis withcurrent good clinical practices, or GCP, GLP, for specific non-clinicaltoxicology studies, current GMP and computer information system validationstandards. Before approval of a BLA, the FDA will perform a prelicensinginspection of clinical sites, manufacturing facilities and the related qualitycontrol records to determine its compliance with these requirements. To assurecompliance, applicants must continue to expend time, money and effort in thearea of training, production and quality control. After the applicant islicensed for the manufacture of any product, manufacturers are subject toperiodic inspections by the FDA. We also face similar inspections coordinatedby the EMEA by inspectors from particular European Union member states thatconduct inspections on behalf of the European Union.

Regulatory requirements and approval processes incountries outside the United States can be at least as rigorous, costly anduncertain.

We are also subject to various federal and state lawspertaining to health care “fraud and abuse,” including anti-kickback laws andfalse claims laws. Anti-kickback laws make it illegal for a prescription drugmanufacturer to solicit, offer, receive, or pay any remuneration in exchangefor, or to induce, the referral of business, including the purchase orprescription of a particular drug. False claims laws prohibit anyone fromknowingly and willingly presenting, or causing to be presented for payment tothird party payors, including Medicare and Medicaid, claims for reimburseddrugs or services that are false or fraudulent, claims for items or servicesnot provided as claimed, or claims for medically unnecessary items or services.

As a result of gaining approval of and launchingVELCADE, we are a participant in the Medicaid rebate program established by theOmnibus Budget Reconciliation Act of 1990, and under amendments of that lawthat became effective in 1993. Participation in this program includesrequirements such as extending comparable discounts under the PHSpharmaceutical pricing program. Under the Medicaid rebate program, we pay arebate for each unit of our product reimbursed by Medicaid. The amount of therebate for each product is set by law as a minimum of 15.1% of the averagemanufacturer price, or AMP, of that product, or if it is greater, thedifference between AMP and the best price available from us to any customer.The rebate amount also includes an inflation adjustment if AMP increases fasterthan inflation. The PHS pricing program extends discounts comparable to theMedicaid rebate to a variety of community health clinics and other entitiesthat receive health services grants from the PHS, as well as hospitals thatserve a disproportionate share of poor Medicare and Medicaid beneficiaries. Therebate amount is 

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recomputed each quarterbased on our reports of our current average manufacturer price and best pricefor each of our products to the Centers for Medicare & MedicaidServices.

The Medicaid Prescription Drug, Improvement andModernization Act of 2003, or the MMA has significantly changed how Medicarepays for VELCADE. As of January 1, 2005, Medicare pays for productscovered by the Part B benefit based on the average selling price, or ASP,plus 6%. Medicare had previously paid for these products based on 95% of theaverage wholesale price, or AWP. To date, the change from the AWP to the ASPsystem has not had a material adverse impact on our ability to obtain adequatereimbursement for our products.

VELCADE is available to authorized users of theFederal Supply Schedule of the General Services Administration. Since 1993, asa result of the Veterans Health Care Act of 1992, or VHC Act, federal law hasrequired that product prices for purchases by the Veterans Administration, theDepartment of Defense, Coast Guard, and the PHS, including the Indian HealthService, be discounted by a minimum of 24% off the AMP to non-federalcustomers, the non-federal average manufacturer price, or non-FAMP. Ourcomputation and report of non-FAMP is used in establishing the price, and theaccuracy of the reported non-FAMP may be audited by the government underapplicable federal procurement laws.

Under the laws of the United States, the countries ofthe European Union and other nations, we and the institutions where we sponsorresearch are subject to obligations to ensure the protection of personalinformation of human subjects participating in our clinical trials. We haveinstituted procedures that we believe will enable us to comply with theserequirements and the contractual requirements of our data sources. The laws andregulations in this area are evolving and further regulation, if adopted, couldaffect the timing and the cost of future clinical development activities.

We are also subject to regulation under theOccupational Safety and Health Act, the Toxic Substances Control Act, theResource Conservation and Recovery Act, and other current and potential futurefederal, state, or local regulations. Our research and development activitiesinvolve the controlled use of hazardous materials, chemicals, biologicalmaterials, and various radioactive compounds. We believe that our procedures complywith the standards prescribed by local, state and federal laws and regulations;however, the risk of injury or accidental contamination cannot be completelyeliminated. We conduct our research and manufacturing activities in voluntarycompliance with the National Institutes of Health Guidelines for RecombinantDNA Research.

We are subject to theUnited States Foreign Corrupt Practices Act which prohibits corporations andindividuals from engaging in specified activities to obtain or retain businessor to influence a person working in an official capacity. Under this act, it isillegal to pay, offer to pay, or authorize the payment of anything of value toany foreign government official, government staff member, political party, orpolitical candidate in an attempt to obtain or retain business or to otherwiseinfluence a person working in an official capacity. Our present and futurebusiness has been and will continue to be subject to various other laws andregulations.

***Pricing Controls***

The levels of revenues andprofitability of biopharmaceutical companies may be affected by the continuingefforts of government and third party payors to contain or reduce the costs ofhealth care through various means. For example, in some foreign markets,pricing reimbursement or profitability of therapeutic and other pharmaceuticalproducts is subject to governmental control. In Canada this practice has led insome instances to lower priced products than in the United States. As a result,importation of products from Canada into the United States may result inreduced product revenues. In many foreign markets, including the countries inthe European Union, pricing of pharmaceutical products is subject togovernmental control.  In the UnitedStates there have been, and we expect that there will continue to be, a numberof federal and state proposals to implement similar governmental pricingreimbursement and 

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pricingcontrols. While we cannot predict whether any future legislative or regulatoryproposals will be adopted, the adoption of such proposals could have a materialadverse effect on our business, financial condition and results.

***Third PartyReimbursement***

In the United States andelsewhere, sales of therapeutic and other pharmaceutical products are dependentin part on the availability of reimbursement to the consumer from third partypayors, such as government and private insurance plans. Increasingly, thirdparty payors are challenging the prices charged for medical products andservices. As a result, in the future, our products could be considered not costeffective or reimbursement to the consumer could become unavailable or could beinsufficient to allow us to sell our products on a competitive and profitablebasis.

**Employees**

As of February 19,2007, we had approximately 947 full-time employees. We believe that relationswith our employees are good.

**AvailableInformation**

Our Internet website is http://www.millennium.com. Wemake available free of charge through our website our annual report on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-Kand amendments to those reports filed or furnished pursuant to Sections 13(a) and15(d) of the Securities Exchange Act of 1934, as amended. We have madethese reports available through our website during the period covered by thisreport and, since November 15, 2002, at the same time that they becomeavailable on the Securities and Exchange Commission’s website.

Our code of conduct, theCore Values Handbook, our Board Policies, and the charters of the Audit Committee,Compensation and Talent Committee and Board Governance Committee are allavailable on the corporate governance section of our website athttp://www.millennium.com/investors. Stockholders may request a free copy ofany of these documents by writing to Investor Relations, MillenniumPharmaceuticals, Inc., 40 Landsdowne Street, Cambridge, Massachusetts,U.S.A. 02139.

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**Item 1A.**                RISKFACTORS

This Annual Report on Form 10-K containsforward-looking statements that are based on current expectations, estimates,forecasts and projections about us, our future performance, our business, ourbeliefs and our management’s assumptions. In addition, we, or others on ourbehalf, may make forward-looking statements in press releases or writtenstatements, or in our communications and discussions with investors andanalysts in the normal course of business through meetings, webcasts, phonecalls and conference calls. Words such as “expect,” “anticipate,” “outlook,”“could,” “target,” “project,” “intend,” “plan,” “believe,” “seek,” “estimate,”“should,” “may,” “will,” “assume” or “continue,” and variations of such wordsand similar expressions are intended to identify such forward-lookingstatements. These statements are not guarantees of future performance andinvolve important risks, uncertainties and assumptions that are difficult topredict. We describe some of the risks, uncertainties and assumptions thatcould affect our business, including our financial condition and results ofoperations, in this “Risk Factors” section. We have based our forward-lookingstatements on our management’s beliefs and assumptions based on information availableto our management at the time the statements are made.

We caution you that actualoutcomes and results may differ materially from what is expressed, implied orforecast by our forward-looking statements. Reference is made in particular toforward-looking statements about our growth and future financial and operatingresults, discovery and development of products, strategic alliances, regulatoryapprovals, competitive strengths, intellectual property, litigation, mergersand acquisitions, market acceptance or continued acceptance of our products,accounting estimates, financing activities, ongoing contractual obligations andsales efforts. We do not intend to update or revise any forward-lookingstatements, whether as a result of new information, future events, changes inassumptions or otherwise.

**Regulatory Risks**

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

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

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

VELCADE is currentlyapproved for marketing in the United States and a total of more than 75countries including the countries of the European Union. If we or OBL are notable to obtain approval to market VELCADE in additional countries, OBL willlose the opportunity to sell in those countries and we may not be able to earnpotential milestone and royalty payments under our agreement with OBL orcollect potential distribution fees on sales of VELCADE by OBL in thosecountries.

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

The products that we are developing require researchand development, extensive preclinical studies and clinical trials andregulatory approval, including the submission of user fees, prior to anycommercial sales. This process is expensive and lengthy, and can often take anumber of years. In some cases, the length of time that it takes for us toachieve various regulatory approval milestones affects the payments that we areeligible to receive under our strategic alliance agreements.

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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 clinical data in thecontext of additional opportunities in the pipeline, we decided to discontinuedevelopment of MLN2704 as well as MLN1202 in rheumatoid arthritis.

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

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

Any product for which we obtain marketing approval,along with the manufacturing processes, post-approval clinical data, adverseevent reporting and promotional activities for such product, is subject tocontinual review and periodic inspections by the FDA and other regulatoryauthorities. Later discovery of previously unknown problems or safety issueswith our products or manufacturing processes, or failure to comply withregulatory requirements, may result in restrictions on such products or manufacturingprocesses, withdrawal of the products from the market, the imposition of civilor criminal penalties or a refusal by the FDA and other regulatory authoritiesto approve pending applications for marketing approval of new drugs orsupplements to approved applications. As with any recently approved therapeuticproduct, we expect that our knowledge of the safety profile for VELCADE willexpand after wider usage, and the possibility exists of patients receivingVELCADE treatment experiencing unexpected or more frequently than expectedserious adverse events, which could have a material adverse effect on ourbusiness.

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

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

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

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

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

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

Our business plan contemplates obtaining marketingauthorization to sell VELCADE in many countries for the treatment of allpatients with multiple myeloma and both in the United States and abroad forother indications. We will be adversely affected if VELCADE does not receivesuch approvals, or if such approvals are subject to limitations on theindicated uses for which we may market the product.

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

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

The fields 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,develop and commercialize products that make the products that we or ourcollaborators have developed or are seeking to develop and commercializenon-competitive or obsolete.

With respect to VELCADE, we face competition fromCelgene Corporation’s Thalomid and Revlimid. In May 2006, the FDA approvedthe use of Thalomid for the treatment of newly diagnosed multiple myeloma.Revlimid was approved by the FDA in December 2005 for the treatment ofpatients with myelodysplastic syndromesand in June 2006 for multiple myeloma patients who have received at leastone prior therapy. While Revlimid has limited the growth potential of VELCADEin some indications, as Revlimid only was approved recently, it is difficultfor us to determine the sustained level of competition that it may pose forVELCADE. We also face competition for VELCADE from traditional chemotherapytreatments, and there are other potentially competitive therapies for VELCADE,including other proteasome inhibitors, some of which are in late-stage clinicaldevelopment for the treatment of multiple myeloma. In addition, multiplemyeloma therapies in development may reduce the number of patients availablefor VELCADE treatment through enrollment of these patients in clinical trialsof these potentially competing products.

Due to the incidence and severity of cardiovasculardiseases, the market for therapeutic products that address these diseases islarge, and we expect the already intense competition in this field to increase.The most significant competitors for SGP and GlaxoSmithKline plc, or GSK, inmarketing INTEGRILIN are major pharmaceutical companies and biotechnologycompanies. The two products that compete directly with INTEGRILIN in the GPIIb-IIIa inhibitor market segment are ReoPro® (abciximab),which is produced by Johnson & Johnson and sold by Johnson &Johnson and Eli Lilly and Company, and 

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Aggrastat® (tirofiban HCl), which is produced and sold byMerck & Co., Inc. outside of the United States and by MedicureInc. in the United States.

Sales of INTEGRILINcould also be negatively impacted in the future by other competitive factors,including:

·       expandeduse of heparin replacement therapies, such as Angiomax® (bivalirudin), which is produced and sold byThe Medicines Company;

·       changingtreatment practices for percutaneous coronary intervention and acute coronarysyndrome based on new technologies, including the use of drug-coated stents;

·       increaseduse of another class of anti-platelet drugs known as ADP inhibitors in patientswhose symptoms make them potential candidates for treatment with INTEGRILIN;and

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

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

We distribute VELCADE in the U.S. through asole-source distribution model, where we sell directly to a third party who inturn distributes to the wholesaler base. Our VELCADE product inventory levelsmay fluctuate from time to time depending on the consistency of thedistribution logistics of this arrangement and the buying patterns of thesewholesalers.

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.

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

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

The process of discoveringdrugs based upon genomics and other new technologies is new and evolvingrapidly. We focus a portion of our research on diseases that may be linked to anumber of genes working in combination or to novel targets. Both we and thegeneral scientific and medical communities have only a limited understanding ofthe role that genes play in these diseases. To date, we have not commercializedany products discovered through our genomics research, and we may not be successfulin doing so in the future. In addition, relatively few products based on genediscoveries have been developed and commercialized by others. Rapidtechnological development by us or others may result in compounds, products orprocesses becoming obsolete before we recover our development expenses.Further, 

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manufacturingcosts or products based on these new technologies may make productsuneconomical to commercialize.

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

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 anduncertain process. It may take us several years to complete our testing, andfailure can occur at any stage of testing. Interim results of preclinical orclinical studies do not necessarily predict their final results, and acceptableresults in early studies might not be seen in later studies. Any preclinical orclinical test may fail to produce results satisfactory to the FDA or otherregulatory authorities. Preclinical and clinical data can be interpreted indifferent ways, which could delay, limit or prevent regulatory approval.Negative or inconclusive results from a preclinical study or clinical trial,adverse medical events during a clinical trial or safety issues resulting fromproducts of the same class of drug could cause a preclinical study or clinicaltrial to be repeated or prolonged or a program to be terminated, even if otherstudies or trials relating to the program are successful.

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

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

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

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

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

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

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

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

An important element of our business strategy is toacquire additional therapeutic agents through license arrangements oracquisitions of other companies. Although we regularly review and engage indiscussions with third parties with respect to such transactions, we may beunable to license or acquire other suitable products or product candidates fromthird parties for a number of reasons. In particular, the licensing andacquisition of pharmaceutical and biological products, including through theacquisition of other companies, is a competitive area. A number of other companiesare also pursuing strategies to license or acquire products within ourtherapeutic focus areas of cancer and inflammation. These other companies mayhave a competitive advantage over us due to their size, cash resources andgreater drug research, discovery and development and commercializationcapabilities.

Other factors thatmay prevent us from licensing or otherwise acquiring suitable products andproduct candidates include the following:

·       wemay be unable to license or acquire the relevant technology on terms that wouldallow us to make an appropriate return on the product;

·       companiesthat perceive us to be their competitor may be unwilling to assign or licensetheir product rights to us; or

·       wemay be unable to identify suitable products or product candidates within ourareas of focus.

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

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

Following any future acquisitions, our failure toadequately address the financial, operational or legal risks of thesetransactions could harm our business. Financial aspects of these transactionsthat could alter our financial position, reported operating results or stockprice include:

·       useof cash resources;

·       higherthan anticipated acquisition costs and expenses;

·       potentiallydilutive issuances of equity securities;

·       theincurrence of debt and contingent liabilities, impairment losses orrestructuring charges;

·       largewrite-offs and difficulties in assessing the relative percentages of in-processresearch and development expense that can be immediately written off ascompared to the amount that must be amortized over the appropriate life of theasset; and

·       amortizationexpenses related to other intangible assets.

Operational risksthat could harm our existing operations or prevent realization of anticipatedbenefits from these transactions include:

·       challengesassociated with managing an increasingly diversified business;

·       disruptionof our ongoing business;

·       difficultyand expense in assimilating the operations, products, technology, informationsystems or personnel of the acquired company;

·       diversionof management’s time and attention from other business concerns;

·       inabilityto maintain uniform standards, controls, procedures and policies;

·       theassumption of known and unknown liabilities of the acquired company, includingintellectual property claims; and

·       subsequentloss of key personnel.

If we are unable tosuccessfully manage our acquisitions, our ability to develop new products andcontinue to expand our product pipeline may be limited.

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

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

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

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

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Wecannot be certain whether or when we will become profitable because of the significantuncertainties with respect to our ability to successfully develop products andgenerate revenues from the sale of approved products and from existing andpotential future strategic alliances.

***We may need additional financing, which may be difficultto 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 beavailable when we need it or may not be available on favorable terms.

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

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

At December 31, 2006, we had approximately$349.6 million of outstanding convertible debt, of which $99.6 millionmatures in the first quarter of 2007, and $76.2 million of capital leaseobligations. We will be required to make interest payments on our outstandingconvertible notes of approximately $6.0 million for each of the next fiveyears. Additionally, we will be required to make interest payments on ourcapital lease obligations of approximately $2.4 million for each of thenext three years.

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

Our indebtednesscould have significant additional negative consequences, including:

·       increasingour vulnerability to general adverse economic and industry conditions;

·       limitingour ability to obtain additional financing;

·       requiringthe dedication of a substantial portion of our cash flow from operations toservice our indebtedness, thereby reducing the amount of our expected cash flowavailable for other purposes, including capital expenditures and research anddevelopment;

·       limitingour flexibility in planning for, or reacting to, changes in our business andthe industry in which we compete; and

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

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

We recorded restructuringcharges of $20.4 million for the year ended December 31, 2006,$77.1 million for the year ended December 31, 2005 and$38.0 million for the year ended December 31, 2004. Costs associatedwith our restructuring efforts include reducing personnel and infrastructureresulting from the restructured relationship with SGP for INTEGRILIN andreducing our in-house research and development technologies and headcount inareas in which we believe the work can now be outsourced cost effectively. As aresult of these efforts, we expect to reduce total research and development andselling, general and administration expenses as compared to prior years. We maynot achieve our estimated expense reductions anticipated from restructuringsbecause such savings are difficult to predict and speculative in nature. Wecontinue to evaluate strategic alternatives, including facility consolidation,and as a result, significant additional restructuring charges could occur infuture periods.

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

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

**Risks Relating toCollaborators**

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

Outside of the United States, we commercialize VELCADEthrough an alliance with OBL. We began jointly promoting VELCADE in the UnitedStates in the first quarter of 2007 under a two-year agreement with OBI. OnSeptember 1, 2005, we transferred exclusive U.S. commercialization anddevelopment rights of INTEGRILIN to SGP and SGP is solely responsible for thecommercialization and development of INTEGRILIN outside of Europe. GSK isresponsible for marketing and selling INTEGRILIN in Europe. We conductsubstantial discovery and development activities through strategic alliances,including with OBL for the ongoing development of VELCADE. We expect to enterinto additional alliances in the future, especially in connection with productcommercialization. The success of our alliances depends heavily on the effortsand activities of our collaborators.

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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:

·       Allof our strategic alliance agreements are for fixed terms and are subject totermination under various circumstances, including, in many cases, such as inour collaboration and our joint promotion agreement with OBL and OBI, withoutcause.

·       Ourcollaborators may change the focus of their development and commercializationefforts. Pharmaceutical and biotechnology companies historically havere-evaluated their development and commercialization priorities followingmergers and consolidations, which have been common in recent years in theseindustries. The ability of some of our products, including VELCADE andINTEGRILIN, to reach their potential could be limited if our collaboratorsdecrease or fail to increase marketing or spending efforts related to suchproducts.

·       Weexpect to rely on our collaborators to manufacture many products covered by ouralliances.

·       Inour strategic alliance agreements, we generally agree not to conduct specifiedtypes of research and development in the field that is the subject of thealliance. These agreements may have the effect of limiting the areas of researchand development that we may pursue, either alone or in collaboration with thirdparties.

·       Ourcollaborators may develop and commercialize, either alone or with others,products that are similar to or competitive with the products that are thesubject of the alliance with us.

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

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

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

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

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

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**Risks Relating toIntellectual Property**

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

Our patent positions, and those of otherpharmaceutical and biotechnology companies, are generally uncertain and involvecomplex legal, scientific and factual questions. Our ability to develop andcommercialize products depends in significant part on our ability to:

·       obtainand maintain patents;

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

·       operatewithout infringing upon the proprietary rights of others;

·       preventothers from infringing on our proprietary rights; and

·       protect trade secrets.

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

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

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

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

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

With respect to VELCADE,on June 26, 2002, Ariad Pharmaceuticals, Inc. sent to us andapproximately 50 other parties a letter offering a sublicense for the use ofUnited States Patent No. 6,410,516, which is exclusively licensed toAriad. If this patent is valid and Ariad successfully sues us 

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forinfringement, we would require a license from Ariad in order to manufacture andmarket VELCADE. On May 4, 2006, a federal court jury gave a verdict infavor of Ariad in its patent-infringement lawsuit against Eli Lilly relating toUnited States Patent No. 6,410,516. We expect that Eli Lilly willchallenge this verdict and the validity of the patent with the federal districtjudge and the U.S. Court of Appeals. In addition, we are also aware thatAmgen Inc. has filed a declaratory relief action seeking an invalidityruling with respect to this patent. However, Ariad’s initial success in itsclaim against Eli Lilly may increase the possibility that Ariad could sueadditional parties, including us, and allege infringement of the patent.

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

There has 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. Forexample, we believe that we hold patent applications that cover genes that arealso claimed in patent applications filed by others. Interference proceedingsbefore the United States Patent and Trademark Office may be necessary toestablish which party was the first to invent these genes. In addition, fromtime to time, we receive unsolicited letters purporting to advise us of thealleged relevance of third party patents.

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 resultingfrom the initiation and continuation of patent litigation or other proceedingscould have a material adverse effect on our ability to compete in the marketplace.Patent litigation and other proceedings may also absorb significant managementtime.

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

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

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

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

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

Competition 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 thegeneric product) by a generic manufacturer of a generic version of one of ourproducts, we could lose the major portion of sales of that product in a veryshort period, 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. However, we may notbe granted any such potential or pending extension. The issued United Statespatents that cover INTEGRILIN expire in 2014 and 2015 and the issued foreignpatents expire between 2010 and 2012. Our patent-protected products also canface competition in the form of generic versions of branded products ofcompetitors that lose their market exclusivity.

In addition, third partiescould produce counterfeit products labeled as VELCADE, INTEGRILIN or other ofour products in the future. Counterfeit products could reduce sales or compromisegoodwill associated with our product brands.

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

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

We currently are marketing and selling VELCADE in theUnited States solely through our cancer-specific sales force and without acollaborator. In the first quarter of 2007, we began jointly promoting VELCADEin the United States with OBI. Our success in selling VELCADE will dependheavily on the performance of these sales forces. In areas outside the UnitedStates where VELCADE has received approval, OBL or its affiliates marketVELCADE. As a result, our ability to earn revenue related to VELCADE outside ofthe United States will depend heavily on OBL.

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 2007,our success in receiving royalties and milestone payments from sales ofINTEGRILIN depends entirely on the marketing efforts of these third parties.

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Depending on the nature ofthe products for which we obtain marketing approval, we may need to relysignificantly on sales, marketing and distribution arrangements with ourcollaborators and other third parties. For example, some types ofpharmaceutical products require a large sales force and extensive marketingcapabilities for effective commercialization. If in the future we elect toperform sales, marketing and distribution functions for these types of productsourselves, we would face a number of additional risks, including the need torecruit a large number of additional experienced marketing and sales personnel.

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

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

We currently rely substantially upon 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 current GMP regulations capable of manufacturingour products. In addition, the FDA will inspect our contract manufacturersprior to granting approval of a new drug application, and will conductperiodic, unannounced inspections to ensure strict ongoing compliance withcurrent GMPs and other applicable regulations. If we are unable to arrange forthird party manufacturing of our products, or to do so on commerciallyreasonable terms, we may not be able to complete development of our products orcommercialize them, or we may experience delays in doing so.

Reliance on third party manufacturers 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. Any failure by our third partymanufacturers to comply with applicable regulations, including current GMP regulations,could result in sanctions being imposed on the manufacturers or us, includingfines, injunctions, civil penalties, failure of regulatory authorities to grantmarketing approval of our product candidates, delays, suspension or withdrawalof approvals, seizures or recalls of products, operating restrictions andcriminal prosecutions, any of which could significantly and adversely affectour business.

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

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

We are responsible for managing the supply of materialfor all clinical and commercial production of VELCADE, including VELCADE thatOBL sells or uses in clinical trials, and INTEGRILIN, including INTEGRILIN thatSGP 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 for

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the production ofcommercial supplies of VELCADE. We work with one manufacturer, with whom wehave a long-term supply agreement, to complete fill/finish for VELCADE, andhave contracted with a second manufacturer who will provide fill/finishservices for VELCADE in the future. If any of our current third partymanufacturers performing production and fill/finish for VELCADE are unable orunwilling to continue performing these services for us, and we are unable tofind a replacement manufacturer or in the future we are otherwise unable tocontract with manufacturers to produce commercial supplies of VELCADE in acost-effective manner, we could run out of VELCADE for commercial sale andclinical trials and our business could be substantially harmed.

We have no manufacturing facilities for INTEGRILINand, accordingly, rely on third party contract manufacturers for the clinicaland commercial production of INTEGRILIN. We have three approved manufacturers,two of which currently provide us with eptifibatide, the active ingredientnecessary to make INTEGRILIN. Solvay, one of the current manufacturers, ownsthe process technology used by it for the production of bulk product. Lonza isthe other current manufacturer of eptifibatide, and we own the processtechnology utilized by it. We have two approved manufacturers that currentlyperform fill/finish services for INTEGRILIN and two packaging supplier for theUnited States. If our current manufacturers are unable to continue or decide todiscontinue their manufacturing, fill/finish or packaging services and we areunable to secure alternative manufacturers, the supply of INTEGRILIN could beadversely affected which could substantially harm our business.

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

***If we fail to obtain an adequate level of reimbursementfor our products by third party payors, there may be no commercially viablemarkets for our products.***

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

In particular, third party payors could lower 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, on federal and statelevels, and foreign jurisdictions, there have been a number of legislative andregulatory proposals to change the health care system. For example, the 

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Medicare Prescription Drugand Modernization 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 believethat the increasing emphasis on managed care in the United States has and willcontinue to put pressure on the price and usage of our present and futureproducts, which may adversely affect product sales. Further, when a newtherapeutic product is approved, the availability of governmental or privatereimbursement for that product is uncertain, as is the amount for which thatproduct will be reimbursed. We cannot predict the availability or amount ofreimbursement for our product candidates, and current reimbursement policiesfor VELCADE or INTEGRILIN could change at any time.

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

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

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

Because we are a company operating in a highlyregulated industry, for many reasons, regulatory authorities could takeenforcement action against us including seizure of allegedly misbrandedproduct, cessation of promotional activities, injunction or criminalprosecution against us and our officers or employees.

For example, we face the potential of FDA enforcementaction for allegations of off-label promotion of VELCADE. Some physiciansprescribe VELCADE for uses not approved by the FDA or comparable regulatoryagencies outside the United States. For example, VELCADE is not approved forfront-line treatment of multiple myeloma. However, we are aware that the oncologyphysician community is using VELCADE for this purpose. Although physicians maylawfully prescribe VELCADE for off-label uses, any promotion by us of off-labeluses would be unlawful. Although we have policies and procedures in placedesigned to help assure ongoing compliance with regulatory requirementsregarding off-label promotion, regulatory authorities could take enforcementaction against us if they believe we are promoting, or have promoted, VELCADEfor off-label use.

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

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

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

**Risks Relating toHolding Our Common Stock**

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

The trading price of our common stock has been quitevolatile, and may be volatile in the future. During 2006, our common stocktraded as high as $12.08 per share and as low as $7.83 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, whichhave at times been unrelated to the operating performance of such companieswhose stocks were affected. Some of the factors that may cause volatility inthe price of our securities include:

·       productrevenues and the rate of revenue growth;

·       introductionor success of competitive products;

·       clinicaltrial results and regulatory developments;

·       quarterlyvariations in financial results and guidance to the investment community withrespect to future financial results;

·       businessand product market cycles;

·       fluctuationsin customer requirements;

·       availabilityand utilization of manufacturing capacity;

·       timingof new product introductions; and

·       ourability to develop and implement new technologies.

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

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

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

**Item 1B.**               UNRESOLVEDSTAFF COMMENTS

There were no unresolvedcomments from the Staff of the U.S. Securities and Exchange Commission at December 31,2006.

**Item 2.**                        PROPERTIES

Welease a total of approximately 1,200,000 square feet of office and laboratoryspace. This table contains information about our current materially importantleased properties:

| **Location**                                    | ** ** | ** ** | ** ** | **Square feet  used in  current  operations** | ** ** | **Square  feet  sublet** | ** ** | **Square  feet we are  seeking to  sublease** | ** ** | **Use** | ** ** | **Lease expiration  date**             | ** ** |
|-------------------------------------------------|------------|------------|------------|---------------------------------------------------------|------------|--------------------------|------------|--------------------------------------------------------------|------------|---------|------------|---------------------------------------------|------------|
| Several locations  in  Cambridge, Massachusetts |       |       | 585,441    |                                                    |       | 256,384                  |       |                                                         | 233,601    |    |       | corporate  headquarters  office  laboratory |       |   | 2008 to 2020 |   |   |
| South San Francisco,  California                |       |       | —     |                                                    |       | 77,224                   |       |                                                         | 59,018     |    |       | office  laboratory                          |       |   | 2011 |   |   |

 

In connection with our 2003 and 2005 restructuringinitiatives and resulting consolidation of facilities, we have sublet and areseeking to sublease certain of our leased facilities as shown in the tableabove. We plan to sublease those facilities through the end of our lease terms.In November 2006, we entered into a Deed of Surrender with Granta ParkLimited for our 91,900 square feet of leased property in Cambridge, England. Underthe terms of the Deed, we have been released from all further obligationsarising under the lease for that property in consideration of a one-timepayment and our return of the property to the landlord.

We believe that our leasedand occupied facilities will be adequate to meet our requirements for the nearterm.

**Item 3.**                        LEGALPROCEEDINGS

We are not a party to anymaterial legal proceedings.

**Item 4.**                        SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submittedto a vote of our security holders, through solicitation of proxies orotherwise, during the last quarter of the year ended December 31, 2006.

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**OUR EXECUTIVE OFFICERS**

**DeborahDunsire, M.D.**   Chief ExecutiveOfficer and President (since July 2005)Age 44

Prior to joining Millennium, Dr. Dunsire was Headof North American Oncology Operations (2000 to July 2005) and VicePresident, Oncology Business Unit (1996 to 2000) of Novartis, a pharmaceuticalcompany. Prior to that she held various positions with Sandoz, a pharmaceuticalcompany (1988 to 1996) in the areas of product management, scientificdevelopment and clinical research.

**ChristopheBianchi, M.D.   Executive Vice President, Commercial Operations**(since February 2006)Age 45

Prior to joining Millennium, Dr. Bianchi was VicePresident, Business Unit Head, Oncology of sanofi-aventis US (formerlysanofi-synthelabo USA), a biopharmaceutical company (2004 toJanuary 2006). Previously, he was Vice President, Internal Medicine andCentral Nervous System Business Unit at sanofi-synthelabo (2001 to 2004). Heserved as President Europe, Senior Vice President Global Marketing and BusinessDevelopment of Sangstat Pharmaceuticals, a biopharmaceutical company (2000 to2001). Dr. Bianchi held various positions with Rhone-Poulenc Rorer, abiopharmaceutical company (1989 to 1999), where his last position was VicePresident of Global Marketing.

**Marsha H. Fanucci**   SeniorVice President and Chief Financial Officer (sinceJuly 2004)Age 53

Ms. Fanucciwas Senior Vice President, Finance and Corporate Strategy of Millennium(October 2003 to July 2004), Vice President, Finance and CorporateStrategy (July 2003 to October 2003) and Vice President, CorporateDevelopment (July 2000 to July 2003). Prior to joining Millennium, she was Vice President, CorporateDevelopment and Strategy of Genzyme Corporation, a biotechnology company(August 1998 to June 2000).

**Stephen M. Gansler**   SeniorVice President, Human Resources (sinceFebruary 2006)Age 52

Prior to joiningMillennium, Mr. Gansler was Vice President, Human Resources of SyntaPharmaceuticals, Inc., a biotechnology company (2005 toFebruary 2006). He was Senior Vice President, Human Resources of CovantaEnergy Corporation, a provider of waste-to-energy services (2001 to 2004).Prior to that, Mr. Gansler held Vice President of Human Resourcespositions at Johnson & Johnson, a diversified health care company(1981 to 2001) and was a member of the management board of a number ofJohnson & Johnson companies.

**Laurie B. Keating**   SeniorVice President, General Counsel (sinceSeptember 2004) and Assistant Secretary (sinceAugust 2006)Age 53

Ms. Keating alsoserved as Secretary of Millennium (September 2004 to August 2006).Prior to joining Millennium, Ms. Keating was Vice President of Operationsand Finance (September 2003 to September 2004), member of the Boardof Directors (June 2001 to present) and Chief Executive Officer(June 2001 to September 2003) of Hydra Biosciences, Inc., a biopharmaceuticalcompany. Previously she held a variety of senior executive positions at hightechnology companies, including serving as Senior Vice President, GeneralCounsel and Secretary of Iomega Corporation.

**Anna Protopapas**   SeniorVice President, Corporate Development (sinceMarch 2005)Age 42

Ms. Protopapas was Vice President, CorporateDevelopment of Millennium (March 2001 to March 2005), SeniorDirector, Corporate Development (April 1999 to March 2001) andDirector, Corporate 

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Development (October 1997 to April 1999).Prior to joining Millennium, Ms. Protopapas held a variety of marketingand business development roles in companies outside of the life sciences field.

**Robert I. Tepper, M.D.**   President,Research and Development (sinceDecember 2002)Age 51

Dr. Tepper was Executive Vice President,Discovery of Millennium (June 2001 to December 2002) and ChiefScientific Officer (March 1999 to December 2002); Senior VicePresident (June 2000 to June 2001); Chief Scientific Officer,Pharmaceuticals (November 1997 to March 1999); Vice President,Biology (January 1996 to November 1997) and Director, Biology(August 1994 to January 1996).

 

**PART II**

**Item 5.**                        MARKETFOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDERMATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

**Market Price of andDividends on Millennium’s Common Stock and Related Stockholder Matters**

Our common stock is tradedon the NASDAQ Global Select Market under the symbol “MLNM.”  Prior to July 2006, our common stocktraded on the NASDAQ National Market. The following table reflects the range ofthe reported high and low last sale prices of our common stock for the periodsindicated.

| ** **     | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------|------------|----------|------------|----------|------------|
| ** **     | ** ** | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
| First quarter  |       | $        | 11.15      |     | $          | 9.85 |   | $ | 11.97 |   | $ | 8.06 |   |
| Second quarter |       | 10.09    |       | 8.04     |       | 9.80 |   | 7.79 |   |
| Third quarter  |       | 10.99    |       | 8.95     |       | 11.09 |   | 9.14 |   |
| Fourth quarter |       | 11.97    |       | 9.83     |       | 10.92 |   | 8.09 |   |
|                |            |          |            |          |            |  |  |  |  |  |  |  |  |

 

On February 23, 2007, the closing price per shareof our common stock was $11.26, as reported on the NASDAQ Global Select Marketand we had approximately 887 stockholders of record.

We have never declared orpaid any cash dividends on our common stock. We anticipate that, in theforeseeable future, we will retain any earnings for use in the operation of ourbusiness and will not pay any cash dividends.

**Recent Sales ofUnregistered Securities; Uses of Proceeds from Registered Securities**

None.

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**STOCK PERFORMANCEGRAPH**

*The followingperformance graph and related information shall not be deemed “solicitingmaterial” or to be “filed” with the Securities and Exchange Commission, norshall such information be incorporated by reference into any future filingunder the Securities Act of 1933 or Securities Exchange Act of 1934, each asamended, except to the extent that we specifically incorporate it by referenceinto such filing.*

This graph compares theperformance of Millennium common stock with the performance of the NASDAQComposite Index and the NASDAQ Pharmaceuticals Index (assuming reinvestment ofdividends). The graph assumes $100 invested at the per share closing price onthe NASDAQ Global Select Market in Millennium and each of the indices on December 31,2001. Measurement points are on the last trading days of the years ended December 31,2002, December 31, 2003, December 31, 2004, December 31, 2005and December 31, 2006. In this year’s graph, the NASDAQ Composite Indexreplaces the NASDAQ Stock Market (U.S. Companies) Index, which we have used inprior years, because NASDAQ retired the NASDAQ Stock Market (U.S. Companies)Index in July 2006 and it is no longer available.

**COMPARISONOF 5 YEAR CUMULATIVE TOTAL RETURN**Among Millennium Pharmaceuticals, Inc. The NASDAQ CompositeIndexAnd The NASDAQ Pharmaceuticals Index

| ** **                             | ** ** | **12/31/2001** | ** ** | **12/31/2002** | ** ** | **12/31/2003** | ** ** | **12/31/2004** | ** ** | **12/31/2005** | ** ** | **12/31/2006** | ** ** |   |
|----------------------------------------|------------|----------------|------------|----------------|------------|----------------|------------|----------------|------------|----------------|------------|----------------|------------|--------|
| Millennium  Pharmaceuticals, Inc. |       |           | 100.00     |           |       |           | 32.39      |           |       |           | 76.09      |           |       |   | 49.53 |   |   |   | 39.58 |   |   |   | 44.47 |   |   |
| NASDAQ Composite  Index                |       |           | 100.00     |           |       |           | 71.97      |           |       |           | 107.18     |           |       |   | 117.07 |   |   |   | 120.50 |   |   |   | 137.02 |   |   |
| NASDAQ  Pharmaceuticals Index          |       |           | 100.00     |           |       |           | 64.40      |           |       |           | 92.31      |           |       |   | 100.78 |   |   |   | 113.36 |   |   |   | 115.84 |   |   |

 

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**Item 6.**                        SELECTEDFINANCIAL DATA

The following selectedfinancial data are derived from the consolidated financial statements of MillenniumPharmaceuticals, Inc. The data should be read in conjunction with “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” andthe consolidated financial statements and related notes included elsewhere inthis report on Form 10-K.

**MillenniumPharmaceuticals, Inc.Selected Financial Data**

| ** **                                                           | ** ** | **Year Ended December 31,**                            | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                           | ** ** | **2006**                                                              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                           | ** ** | **(in thousands, except per share amounts)** | ** ** |
| **Consolidated Statements of Operations Data:**                      | ** ** | ** **                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues:                                                            |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Net product sales                                                    |       | $                                                                     | 220,452    |   | $ | 192,073 |   | $ | 143,052 |   | $ | 59,647 |   | $ | — |   |
| Co-promotion  revenue                                                |       | —                                                                |       | 123,524 |   | 206,264 |   | 184,333 |   | 159,971 |   |
| Revenue under  strategic alliances                                   |       | 131,675                                                               |       | 204,519 |   | 98,890 |   | 189,707 |   | 193,062 |   |
| Royalties (Note 1)                                                   |       | 134,703                                                               |       | 38,192 |   | — |   | — |   | — |   |
| Total revenues                                                       |       | 486,830                                                               |       | 558,308 |   | 448,206 |   | 433,687 |   | 353,033 |   |
| Costs and expenses:                                                  |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Cost of sales  (excludes amortization of acquired intangible assets) |       | 45,445                                                                |       | 141,327 |   | 70,286 |   | 61,189 |   | 47,256 |   |
| Research and  development                                            |       | 318,170                                                               |       | 342,184 |   | 402,558 |   | 488,538 |   | 511,210 |   |
| Selling, general  and administrative                                 |       | 155,633                                                               |       | 180,599 |   | 196,644 |   | 178,830 |   | 168,902 |   |
| Restructuring                                                        |       | 20,393                                                                |       | 77,110 |   | 38,033 |   | 191,013 |   | 2,994 |   |
| Acquired  in-process R&D (Note 2)                                |       | —                                                                |       | — |   | — |   | — |   | 242,000 |   |
| Amortization of  intangibles (Note 3)                                |       | 33,950                                                                |       | 33,987 |   | 33,512 |   | 38,890 |   | 34,916 |   |
| Total costs and  expenses                                            |       | 573,591                                                               |       | 775,207 |   | 741,033 |   | 958,460 |   | 1,007,278 |   |
| Loss from  operations                                                |       | (86,761                                                               | )          | (216,899 | ) | (292,827 | ) | (524,773 | ) | (654,245 | ) |
| Other income, net                                                    |       | 42,808                                                                |       | 18,650 |   | 40,530 |   | 41,086 |   | 64,052 |   |
| Net loss                                                             |       | $                                                                     | (43,953    | ) | $ | (198,249 | ) | $ | (252,297 | ) | $ | (483,687 | ) | $ | (590,193 | ) |
| *Amounts per common share:*                                          | * *   | * *                                                              | * *   | * * | * * | * * | * * | * * | * * | * * | * * |
| Net loss per  share, basic and diluted                               |       | $                                                                     | (0.14      | ) | $ | (0.64 | ) | $ | (0.83 | ) | $ | (1.63 | ) | $ | (2.13 | ) |
| Weighted average  shares, basic and diluted                          |       | 313,724                                                               |       | 308,284 |   | 304,830 |   | 297,641 |   | 277,665 |   |
| **Consolidated Balance Sheet Data:**                                 | ** ** | ** **                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash, cash  equivalents and marketable securities                    |       | $                                                                     | 894,349    |   | $ | 645,588 |   | $ | 700,407 |   | $ | 915,303 |   | $ | 1,759,063 |   |
| Total assets                                                         |       | 2,751,812                                                             |       | 2,527,632 |   | 2,757,031 |   | 3,010,263 |   | 3,997,607 |   |
| Current  liabilities                                                 |       | 225,519                                                               |       | 164,595 |   | 240,861 |   | 255,758 |   | 949,547 |   |
| Capital lease  obligations, net of current portion                   |       | 75,041                                                                |       | 76,226 |   | 80,452 |   | 87,889 |   | 61,338 |   |
| Long-term debt,  net of current portion                              |       | 250,000                                                               |       | 99,571 |   | 105,461 |   | 105,461 |   | 83,325 |   |
| Stockholders’  equity                                           |       | 2,145,177                                                             |       | 2,101,678 |   | 2,272,994 |   | 2,501,526 |   | 2,901,693 |   |

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Note 1: On September 1, 2005, Millenniumtransferred the exclusive U.S. rights for INTEGRILIN products to Schering Corporationand Schering-Plough, Ltd. In connection with the closing of the transaction,the Company no longer reports co-promotion revenue and now records royaltyrevenue as a separate line item.

Note 2: On February 12, 2002, Millennium acquiredCOR Therapeutics, Inc. The transaction was recorded as a purchase foraccounting purposes and the consolidated statements of operations data includeCOR’s operating results from the date of acquisition.

Note 3: The Company’s 2002 results from operationsreflect the adoption of Statement of Financial Accounting StandardsNo. 142, “Goodwill and Other Intangible Asset” (SFAS No. 142). Upon adoption,the Company ceased the amortization of goodwill.

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**Item 7.**                        MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our management’s discussion and analysis of ourfinancial condition and results of our operations contains 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 the words “expect,”“anticipate,” “intend,” “plan,” “believe,” “may,” “will” and similarexpressions to help identify forward-looking statements.

Actual results may differfrom those indicated by such forward-looking statements as a result of variousimportant factors, including, without limitation, those factors discussed inthis annual report under the heading “Risk Factors.”

**Overview**

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

In November 2006, we completed a sale of $250.0million of 2.25% convertible senior notes due November 15, 2011, or the2.25% notes, which resulted in net proceeds to us of approximately $242.2 million.The 2.25% notes are convertible into shares of our common stock at an initial conversionprice equal to $15.47 per share, subject to adjustment, unless previouslyrepurchased by us under certain circumstances. Under the terms of the 2.25%notes, we are required to make semi-annual interest payments on the outstandingprincipal balance of the 2.25% notes on May 15 and November 15 ofeach year. We expect to use the net proceeds from the 2.25% notes primarily toacquire therapeutic agents, which may be in development or already marketed,through license arrangements or acquisitions of other companies, and anybalance for general corporate purposes, including working capital.

In 2005 we refined our business strategy to focus onadvancing key growth assets including VELCADE, our clinical and preclinicalpipeline of oncology and inflammation molecules and our oncology-focuseddiscovery organization. In 2006, we announced a program to further alignresources with our current corporate priorities of advancing VELCADE andaccelerating the clinical pipeline. As part of this program, we reducedin-house research and preclinical development technologies and headcount inareas where we believe the work can now be outsourced cost-effectively, and wealso scaled back infrastructure supporting these activities. We recordedrestructuring charges of approximately $5.2 million related to the 2006 programfor the year ended December 31, 2006. We recorded total restructuringcharges of approximately $20.4 million under all restructuring initiativesprimarily related to facilities charges for the year ended December 31,2006. We expect total restructuring charges in 2007, under all restructuringinitiatives, to be within the range of $15.0 million to $25.0 million.  We are still evaluating the need oropportunity for further facilities consolidation associated with the 2006restructuring initiative and the total future restructuring charges forfacility consolidation are dependent upon the nature and timing of the finaldecisions we make. As we continue to evaluate strategic alternatives, includingpotential facilities consolidation in connection with our programs, we mayincur significant restructuring charges in future periods.

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In October 2006, we announced a two-yearagreement with Ortho Biotech Inc., or OBI, to jointly promote VELCADE in the U.S.In the first quarter of 2007, OBI and we began to jointly promote VELCADE toU.S.-based physicians who treat multiple myeloma patients.

On September 1, 2005, Schering-Plough Ltd. and ScheringCorporation, together referred to as SGP, obtained the exclusive U.S.development and commercialization rights for INTEGRILIN from us. Ourrestructured relationship with SGP has been, and we expect it to continue tobe, at least financially equivalent to the former co-promotion arrangement thatwe had with SGP prior to September 1, 2005, taking into account theexpected future revenues and anticipated costs savings. Strategically, our goalin restructuring the relationship was to increase the near term certainty ofrevenues from INTEGRILIN through the guaranteed minimum royalties for 2006 and2007, while eliminating the need to further invest our resources intoINTEGRILIN sales and marketing and development activities. In addition, therestructured relationship allows us to focus on our key growth assets,including VELCADE, our product candidate pipeline and our oncology-focuseddiscovery organization.

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

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

In the long term, weexpect to bring new products to market on a regular basis from our pipeline ofdiscovery and development-stage programs. We also expect to continue to evaluateopportunities to in-license and acquire molecules from other companies in orderto supplement our pipeline. If we are successful, we will use the revenues fromthis expanding portfolio of marketed products to broaden the scope of ouroperations.

**VELCADE**

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

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

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In March 2005, we received full approval from theFDA of our supplemental New Drug Application, or sNDA, for VELCADE for thetreatment of patients with multiple myeloma who have received at least oneprior therapy, commonly referred to as second-line or relapsed multiplemyeloma. This regulatory decision increases the approved market potential ofthe drug and also marked the completion of the confirmatory studies required bythe FDA after it granted accelerated approval in May 2003. VELCADE is theonly single-agent therapy that has both demonstrated longer survival inpatients with multiple myeloma and the extension of patient survival on its FDAapproved labeling.

In April 2004, the European Commission grantedMarketing Authorization for VELCADE in Europe for the treatment of multiplemyeloma patients who have received at least two prior therapies and havedemonstrated disease progression on their most recent therapy. Under thisAuthorization, the European Commission granted us a single license formarketing VELCADE in the 15 member states of the European Union, plus Norwayand Iceland. VELCADE was also approved for marketing in the ten accessionmember countries when those countries officially joined the European Union on May 1,2004. Regulatory authorities in a number of other countries, includingcountries within Latin America and South-East Asia and Japan have also approvedVELCADE. The product is now approved in more than 75 countries. Under ouragreement with OBL, we have transferred the licenses to affiliates of OBL. OBL’saffiliates now market VELCADE in these countries.

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

**Our Alliances**

***VELCADE***

***Ortho BiotechCollaborations***

In October 2006, we announced a two-yearagreement with Ortho Biotech Inc., or OBI, to jointly promote VELCADE in theU.S. In the first quarter of 2007, OBI and we began to jointly promote VELCADEto U.S.-based physicians who treat multiple myeloma patients. We will pay thecost of a portion of the OBI sales effort dedicated to VELCADE and a commissionif sales associated with the increased effort exceed specified targets. Both parties are able to terminate theagreement under certain circumstances and subject to termination fees. Wewill continue to be responsible for manufacturing and distribution of VELCADEin the U.S. We believe this collaboration, with the well-established OBIoncology sales force, will help us to realize the full potential of VELCADE inthe U.S. market. Our current agreement with OBL, a member of the Johnson FamilyOf Companies and an affiliate of OBI, for the promotion of VELCADE outside theU.S. remains unchanged.

In June 2003, we entered into an agreement withOBL to collaborate on the commercialization of VELCADE and with Johnson &Johnson Pharmaceutical Research & Development, L.L.C., or JJPRD, forthe continued clinical development of VELCADE. OBL and its affiliate,Janssen-Cilag, are commercializing VELCADE outside of the United States, andJanssen Pharmaceutical K.K. is responsible for Japan. We receive distributionfees included in royalties from OBL and its affiliates from sales of VELCADEoutside of the United States. We manage the supply chain for VELCADE at theexpense of OBL for products sold in the OBL territories. We retain an option toco-promote VELCADE with OBL at a future date in specified European countries.

We are engaged with JJPRDin an extensive global program for further clinical development of VELCADE withthe purpose of maximizing the commercial potential of VELCADE. This program is 

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investigatingthe potential of VELCADE to treat multiple forms of solid and hematologicaltumors, including continued clinical development of VELCADE for multiplemyeloma and non-Hodgkin’s lymphoma, or NHL. JJPRD was responsible for 40% ofthe joint development costs through 2005 and is now responsible for 45% ofthose costs. We are eligible to receive payments from JJPRD or OBL forachieving clinical development milestones, regulatory milestones outside of theUnited States or agreed-upon sales levels of VELCADE.

***INTEGRILIN***

Through August 31,2005, we co-promoted INTEGRILIN in the United States in collaboration with SGPand shared profits and losses. As of September 1, 2005, SGP marketsINTEGRILIN in the United States and specified other areas outside of theEuropean Union. GlaxoSmithKline plc, or GSK, markets INTEGRILIN in the EuropeanUnion under a license from us.

***SGP Collaboration***

In April 1995, COR entered into a collaborationagreement with SGP to jointly develop and commercialize INTEGRILIN on aworldwide basis. We acquired COR in February 2002. Under our originalcollaboration agreement with SGP, we generally shared any profits or lossesfrom INTEGRILIN sales in the United States included in co-promotion revenuewith SGP and we granted SGP an exclusive license to market INTEGRILIN outsidethe United States and the European Union in exchange for royalty obligations.

On September 1, 2005,SGP obtained the exclusive U.S. development and commercialization rights forINTEGRILIN products from us and paid us a nonrefundable upfront payment ofapproximately $35.5 million. In addition, we are entitled to receiveroyalties on net product sales of INTEGRILIN in the United States from SGP forso long as SGP is engaged in the commercialization and sale of an INTEGRILINproduct in the United States, with the potential of receiving royalties beyondthe 2014 patent expiration date. Minimum royalty payments for 2007 are set atapproximately $85.4 million. There are no guaranteed minimum royalty paymentsbeyond 2007. We also receive royalties on net product sales by SGP outside ofthe United States. SGP’s obligation to pay us royalties in other countriesexpires on a country by country basis upon the later of fifteen years from thefirst commercial use of an INTEGRILIN product in such country and theexpiration of the last to expire patent covering such INTEGRILIN product. Weare continuing to manage the supply chain for INTEGRILIN at the expense of SGPfor products sold in the SGP territories including the U.S. We receive paymentsas a result of managing the supply chain and record those payments as strategicalliance revenue.

***GSK LicenseAgreement***

In June 2004, wereacquired the rights to market INTEGRILIN in Europe from SGP and concurrentlyentered into a license agreement granting GSK exclusive marketing rights toINTEGRILIN in Europe. In January 2005, the transition of the INTEGRILINmarketing authorizations for the European Union from SGP to GSK was completed,and GSK began selling INTEGRILIN in the countries of the European Union. GSKalso markets INTEGRILIN in other European countries where it has receivedapproval of the transfer from SGP to GSK of the relevant marketing authorizations.Under the terms of the agreement, we have received license fees and areentitled to future royalties from GSK on INTEGRILIN sales in Europe subject tothe achievement of specified objectives. We manage the supply chain forINTEGRILIN at the expense of GSK for products sold in the GSK territories. Wereceive payments as a result of managing the supply chain and record thosepayments as strategic alliance revenue.

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***sanofi-aventisInflammatory Disease Collaboration***

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

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

To date, we andsanofi-aventis have identified a significant number of novel drug targets andassociated molecules relevant in inflammatory diseases. During the remainingportion of the development phase of the alliance, we and sanofi-aventis haveagreed to focus our joint resources on preclinical and clinical development ofcandidates identified in the collaboration. As of the end of 2006, the alliancehad identified several development candidates, one of which, MLN3897, is nowbeing tested in a phase II clinical trial and two of which, MLN3701 andMLN0415, are now being tested by us in phase I clinical trials. A fourthcandidate, MLN6095, is now in preclinical testing.

**Critical AccountingPolicies and Significant Judgments and Estimates**

Our management’s discussion and analysis of ourfinancial condition and results of operations are based on our  consolidated financial statements, which havebeen prepared in accordance with generally accepted accounting principles. Thepreparation of these financial statements requires us to make estimates andassumptions that affect the reported amounts of assets and liabilities and thedisclosure of contingent assets and liabilities at the date of the financialstatements as well as the reported revenues and expenses during the reportingperiods. On an ongoing basis, we evaluate our estimates and judgments,including those related to revenue recognition, inventory, intangible assets,goodwill, restructuring and stock-based compensation expense. We base ourestimates on historical experience and on various other factors that we believeare appropriate under the circumstances, the results of which form the basisfor making judgments about the carrying value of assets and liabilities thatare not readily apparent from other sources. Actual results may differ fromthese estimates under different assumptions or conditions.

While our significantaccounting policies are more fully described in Note 2 to our consolidatedfinancial statements included in this report, we believe the followingaccounting policies are most critical to aid in fully understanding andevaluating our reported financial results.

***Revenue***

We recognize revenue from the sale of our products,our strategic alliances and royalties and distribution fees based on net salesof licensed products. We recognized revenue from our co-promotion collaborationthrough August 31, 2005. We divide our revenue arrangements with multipleelements into separate units of accounting if specified criteria are met,including whether the delivered element has stand-alone value to the customerand whether there is objective and reliable evidence of the fair value of theundelivered items. We allocate the consideration we receive among the separateunits based on their respective fair values, and we apply the applicablerevenue recognition criteria to each of the separate 

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units. We classify advancepayments received in excess of amounts earned as deferred revenue until earned.

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

We record allowances as a reduction to product salesfor product returns, chargebacks and discounts at the time of sale. We estimateVELCADE product returns based on historical return patterns. We expect VELCADEreturns to be, and returns have been, generally low because the shelf life forthe product is 18 months in the United States, and we expect, and haveexperienced, that wholesalers will not stock significant inventory due to therelatively high cost of the product. We consider several factors in ourestimation process, including our internal sales forecasts, inventory levels asprovided by wholesalers and third party market research data.  As we continually monitor actual productreturns and inventory levels in the domestic distribution channel, we havereduced and may, from time to time in the future, reduce our product returnsestimate. Doing so results in increased product sales at the time the returnestimate is changed. If circumstances change or conditions become morecompetitive in the market for therapeutic products that address multiplemyeloma, we may take actions to increase our product return estimates. Doing sowould result in an incremental reduction of product sales at the time thereturn estimate is changed. Our accruals for rebates, chargebacks, and otherdiscounts were immaterial at December 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 that,in either case, require continuing involvement in the form of research anddevelopment, manufacturing or other commercialization efforts by us asstrategic alliance revenue:

·       ratablyover the development period if development risk is significant;

·       ratablyover the manufacturing period or estimated product useful life if developmentrisk has been substantially eliminated; or

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

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

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

We are entitled to receiveroyalty payments under license agreements with a number of third parties thatsell products based on technology we have developed or to which we have rights.These license agreements provide for the payment of royalties to us based onsales of the licensed product and we record royalty revenues based on estimatesof sales from interim data provided by licensees. Beginning September 1,2005, upon closing the amended collaboration agreement with SGP, we began recordingroyalty revenues as a separate line item in our statement of operations. Forall of our royalty arrangements, we perform an analysis of historical royaltieswe have been paid, adjusted for any changes in facts and circumstances, asappropriate. Differences between actual royalty revenues and estimated royaltyrevenues are adjusted for in the period which they become known, typically thefollowing quarter. These adjustments have not been, and we do not expect themto be, significant. To the extent we do not have sufficient ability toaccurately estimate royalty revenue, we record royalties on a cash basis.

***Inventory***

Inventory consists ofcurrently marketed products. VELCADE inventories primarily represent rawmaterials used in production, work in process and finished goods inventory onhand, valued at cost. INTEGRILIN inventories include raw materials used inproduction and work in process, valued at cost, to supply GSK and limitedamounts of work in process, valued at cost, to supply SGP. We review inventoriesperiodically for slow-moving or obsolete status based on sales activity, bothprojected and historical. Our current sales projections provide for fullutilization of the inventory balance. If product sales levels differ fromprojections or a launch of a new product is delayed, inventory may not be fullyutilized and could be subject to impairment, at which point we would adjustinventory to its net realizable value.

***Intangible Assets***

We have acquiredsignificant intangible assets that we value and record. Those assets that donot yet have regulatory approval and for which there are no alternative usesare expensed as acquired in-process research and development, and those thatare specifically identified and have alternative future uses are capitalized.We use a discounted cash flow model to value intangible assets at acquisition.The discounted cash flow model requires assumptions about the timing and amountof future cash inflows and outflows, risk, the cost of capital, and terminalvalues. Each of these factors can significantly affect the value of theintangible asset. We engage independent valuation experts who review ourcritical assumptions for significant acquisitions of intangibles. We reviewintangible assets for impairment on a periodic basis using an undiscounted netcash flows approach when impairment indicators arise. If the undiscounted cashflows of an intangible asset are less than the carrying value of an intangibleasset, we would write down the intangible asset to the discounted cash flowvalue. Where we cannot identify cash flows for an individual asset, our reviewis applied at the lowest group level for which cash flows are identifiable.

***Goodwill***

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

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impairmentindicator exists, we would be required to perform an impairment test, whichcould result in a material impairment charge to our statement of operations.

***Restructuring***

In accordance with SFASNo. 146, “Accounting for Costs Associated with Exit or DisposalActivities,” our facilities related expenses and liabilities under all of ourrestructuring plans included estimates of the remaining rental obligations, netof estimated sublease income, for facilities we no longer occupy. We validatedour estimates and assumptions with independent third parties having relevantexpertise in the real estate market. We review our estimates and assumptions ona regular basis until the outcome is finalized, and make whatever modificationswe believe necessary, based on our best judgment, to reflect any changedcircumstances. It is possible that such estimates could change in the futureresulting in additional adjustments, and the effect of any such adjustmentscould be material.

***Stock-Based Compensation Expense***

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

We use historical data to estimate option exercise andemployee termination behavior, adjusted for known trends, to arrive at theestimated expected life of an option. We update these assumptions on a quarterlybasis to reflect recent historical data. Additionally, we are required toestimate forfeiture rates to approximate the number of shares that will vest ina period to which the fair value is applied. We will continually monitoremployee exercise behavior and may further adjust the estimated term andforfeiture rates in future periods. Increasing the estimated life would resultin an increase in the fair value to be recognized over the requisite serviceperiod, generally the vesting period. Estimated forfeitures will be adjusted toactual forfeitures upon the vest date of the cancelled options as a cumulativecatch up adjustment on a quarterly basis. Doing so could cause future expensesto vary at each reporting period.

In March 2006, we revised our annual meritcompensation program to include the availability of both stock options andrestricted stock to certain employees. For the year ended December 31,2006, we recognized total stock-based compensation expense under SFAS 123R of$42.1 million. As of December 31, 2006, the total remaining unrecognizedcompensation cost related to nonvested stock option awards amounted toapproximately $15.6 million, including estimated forfeitures, which willbe amortized over the weighted-average remaining requisite service periods ofapproximately one and one half years. As of December 31, 2006, the totalremaining unrecognized compensation cost related to nonvested restricted stockawards amounted to approximately $7.6 million, including estimatedforfeitures, which will be amortized over the weighted-average remainingrequisite service periods of approximately one and three quarter years.

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During the second quarterof 2006, we received a telephone inquiry from the Securities ad ExchangeCommission, or SEC, regarding whether stock options we awarded with a statedgrant date of September 26, 2001 were, in fact, granted on that date. Wewere one of more than 30 companies discussed in a May 2006 third partyreport concerning the timing of stock option grants from 1997 through 2002. Withrespect to us, the report referenced option grants dated September 26,2001. During the second quarter of 2006, we initiated a review of our September 26,2001 grants, as well as other historical grants. We completed this review duringthe third quarter of 2006 and met with the SEC to discuss our findings. Wereported to the SEC that our review did not uncover any evidence of fraud withrespect to the September 26, 2001 options grants or the other historicaloption grants that we reviewed. Additionally, we reported to the SEC ourconclusion that any additional compensation expense resulting from the grantswe reviewed was immaterial. The SEC staff advised us at our meeting that theywould communicate with us after they had evaluated the results of our reviewand the documentation we provided.

**AccountingPronouncements**

In September 2006, the FASB issued SFAS No. 157,“Fair Value Measurements,” or SFAS No. 157. SFAS No. 157 defines fairvalue, establishes a framework for measuring fair value in accordance withgenerally accepted accounting principles and expands disclosures about fairvalue measurements. SFAS No. 157 codifies the definition of fair value asthe price that would be received to sell an asset or paid to transfer aliability in an orderly transaction between market participants at themeasurement date, clarifies the principle that fair value should be based onthe assumptions market participants would use when pricing the asset orliability and establishes a fair value hierarchy that prioritizes theinformation used to develop those assumptions. SFAS No. 157 is effectivefor fiscal years beginning after December 15, 2006. We do not currentlybelieve that adoption will have a material impact on our results of operations,financial position or cash flows.

In June 2006, theFASB issued FASB Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes—an Interpretation of FASB Statement No. 109.” Thisinterpretation clarifies the accounting for uncertainty in income taxesrecognized in an enterprise’s financial statements in accordance with FASBStatement No. 109, Accounting for Income Taxes. The interpretationprescribes a recognition threshold and measurement attribute for the financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return. This interpretation also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure and transition. The interpretation is effective for fiscalyears beginning after December 15, 2006. Although we have not completedour evaluation of the interpretation, we do not currently believe that adoptionwill have a material impact on our results of operations, financial position orcash flows.

***Reclassifications***

We have reclassified certain prior year amounts withinthe consolidated statements of cash flows to conform to the current yearpresentation related to equity adjustments from foreign currency translation.

We have reclassifiedcertain prior year amounts included in accrued expenses of the consolidatedbalance sheets to accounts payable to conform to the current year presentationrelated to uninvoiced receipts in the normal course of business. Thisreclassification has no impact on previously reported net loss or currentliabilities in any period presented.

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**Results of Operations**

| ** **                                                           | ** ** | **Year Ended December 31,**                            | ** ** | **Annual Percentage  Change** | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                           | ** ** | **2006**                                                              | ** ** | **2005**                           | ** ** | **2004** | ** ** | **2006/2005** | ** ** | **2005/2004** | ** ** |
| ** **                                                           | ** ** | **(in thousands, except per share amounts)** | ** ** | ** **                         | ** ** | ** ** | ** ** |
| Revenues:                                                            |       |                                                                  |       |                               |       |   |   |   |   |   |   |   |   |   |   |
| Net product sales                                                    |       | $                                                                     | 220,452    |                               | $          | 192,073 |   | $ | 143,052 |   |   | 15 | % |   |   | 34 | % |   |
| Co-promotion revenue                                                 |       | —                                                                |       | 123,524                            |       | 206,264 |   |   | (100 | ) |   |   | (40 | ) |   |
| Revenue under strategic alliances                                    |       | 131,675                                                               |       | 204,519                            |       | 98,890 |   |   | (36 | ) |   |   | 107 |   |   |
| Royalties                                                            |       | 134,703                                                               |       | 38,192                             |       | — |   |   | 253 |   |   |   | — |   |   |
| Total revenues                                                       |       | 486,830                                                               |       | 558,308                            |       | 448,206 |   |   | (13 | ) |   |   | 25 |   |   |
| Costs and expenses:                                                  |       |                                                                  |       |                               |       |   |   |   |   |   |   |   |   |   |   |
| Cost of sales (excludes amortization of acquired  intangible assets) |       | 45,445                                                                |       | 141,327                            |       | 70,286 |   |   | (68 | ) |   |   | 101 |   |   |
| Research and development                                             |       | 318,170                                                               |       | 342,184                            |       | 402,558 |   |   | (7 | ) |   |   | (15 | ) |   |
| Selling, general and administrative                                  |       | 155,633                                                               |       | 180,599                            |       | 196,644 |   |   | (14 | ) |   |   | (8 | ) |   |
| Restructuring                                                        |       | 20,393                                                                |       | 77,110                             |       | 38,033 |   |   | (74 | ) |   |   | 103 |   |   |
| Amortization of intangibles                                          |       | 33,950                                                                |       | 33,987                             |       | 33,512 |   |   | — |   |   |   | 1 |   |   |
| Total costs and expenses                                             |       | 573,591                                                               |       | 775,207                            |       | 741,033 |   |   | (26 | ) |   |   | 5 |   |   |
| Loss from operations                                                 |       | (86,761                                                               | )          | (216,899                           | )          | (292,827 | ) |   | (60 | ) |   |   | (26 | ) |   |
| Other income (expense):                                              |       |                                                                  |       |                               |       |   |   |   |   |   |   |   |   |   |   |
| Investment income, net                                               |       | 30,973                                                                |       | 29,083                             |       | 11,221 |   |   | 6 |   |   |   | 159 |   |   |
| Interest expense                                                     |       | (11,068                                                               | )          | (10,433                            | )          | (10,691 | ) |   | 6 |   |   |   | (2 | ) |   |
| Other income                                                         |       | 22,903                                                                |       | —                             |       | — |   |   | — |   |   |   | — |   |   |
| Gain on sale of equity interest in joint                             |       |                                                                  |       |                               |       |   |   |   |   |   |   |   |   |   |   |
| venture                                                              |       | —                                                                |       | —                             |       | 40,000 |   |   | — |   |   |   | (100 | ) |   |
| Net loss                                                             |       | $                                                                     | (43,953    | )                                  | $          | (198,249 | ) | $ | (252,297 | ) |   | (78 | ) |   |   | (21 | ) |   |
| *Amounts per common share:*                                          | * *   | * *                                                              | * *   | * *                           | * *   | * * | * * |   |   |   |   |   |   |   |   |
| Net loss per share, basic and diluted                                |       | $                                                                     | (0.14      | )                                  | $          | (0.64 | ) | $ | (0.83 | ) |   |   |   |   |   |   |   |   |
| Weighted average  shares, basic and diluted                          |       | 313,724                                                               |       | 308,284                            |       | 304,830 |   |   |   |   |   |   |   |   |   |

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Note1: Upon adoption of SFAS 123R on January 1, 2006, the Company beganrecording stock-based compensation expense in its consolidated statements ofoperations. No stock-based compensation expense was recognized under SFAS 123Rin any prior period. Stock-based compensation expense is allocated in theconsolidated statements of operations expense lines as follows:

| ** **                           | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------|------------|--------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Research and  development            |       | $                                          | 23,280     |   | $ | — |   | $ | — |   |
| Selling, general  and administrative |       | 18,861                                     |       | — |   | — |   |
|                                 |       | $                                          | 42,141     |   | $ | — |   | $ | — |   |

 

48

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***Revenues***

Total revenues decreased 13% to $486.8 million in 2006compared to 2005 and increased 25% in 2005 to $558.3 million from $448.2 millionin 2004. The decrease in 2006 was primarily related to lower revenue receivedfrom our collaborators, which consists of revenue under strategic alliances,royalties, and in 2005, co-promotion revenue. The decrease in revenue receivedfrom our collaborations was primarily the result of the restructuredrelationship with SGP, including a one-time sale of existing INTEGRILINinventory to SGP during the third quarter of 2005. Additionally, we recognizedlower license fees from GSK in 2006. This decrease was offset in part byincreased distribution fees recognized from OBL on sales of VELCADE outside ofthe United States. The increase in 2005 was primarily due to the net effect ofthe restructured SGP collaboration relationship and increased net product salesof VELCADE.

Net product sales of VELCADE increased 15% to $220.5million in 2006 and 34% to $192.1 million in 2005 from $143.1 million in 2004.The increase in 2006 was primarily due to price increases of the product andour ability to maintain the product’s market leadership in the relapsedmultiple myeloma treatment setting despite new competition in 2006. Theincrease in 2005 was primarily due to growth in the second-line treatmentsetting as a result of the March 2005 FDA market approval of our sNDAfiling. Reserves for product returns, chargebacks and discounts representedapproximately 5.4% to 6.5% of gross product sales in 2006 and 2005. Net productsales from VELCADE represented approximately 45% of our 2006 total revenues,34% of our 2005 total revenues and 32% of our 2004 total revenues.

Total revenues related to VELCADE, including net productsales of the product by us in the U.S. and revenues from OBL included instrategic alliance revenue and royalties more fully described below, wereapproximately $327.2 million in 2006, $248.6 million in 2005 and$221.0 million in 2004.

As of September 1, 2005, we are no longerreporting co-promotion revenue due to our restructured relationship with SGP.Co-promotion revenue from INTEGRILIN represented approximately 22% of our 2005total revenues and 46% of our 2004 total revenues.

In 2006, the first full year of our modifiedrelationship with SGP, total revenues related to INTEGRILIN were approximately$142.0 million, including $85.4 million in royalties we received from SGP forsales of INTEGRILIN in the United States. In 2005 and 2004, total revenuesrelated to INTEGRILIN, including co-promotion revenue and revenues from SGP andGSK included in strategic alliance revenues and royalties more fully describedbelow, were approximately $287.9 million and $206.3 million, respectively.

Revenue under strategic alliances decreased 36% to$131.7 million in 2006 and increased 107% to $204.5 million in 2005 from$98.9 million in 2004. The decrease in 2006 was primarily due to the one-timesale of existing INTEGRILIN inventory to SGP in 2005, as well as lower licensefees recognized from GSK. The increase in 2005 was primarily due to thereimbursement of manufacturing-related expenses, including theSeptember 1, 2005 one-time sale of the existing raw materials and finishedgoods INTEGRILIN inventory to SGP of approximately $71.4 million.

We expect revenue under strategic alliances tofluctuate in future periods depending on the level of revenues earned forongoing development efforts, the timing of milestones achieved and the numberof alliances we may enter into in the future with major biopharmaceuticalcompanies.

Beginning September 1, 2005, in connection withthe closing of our transaction with SGP, we now record royalty revenue. Royaltyrevenue may include royalties earned upon sales of INTEGRILIN in the UnitedStates and other territories around the world as provided by SGP, royaltiesearned upon sales of INTEGRILIN in Europe as provided by GSK, distribution feesearned upon sales outside of the United States of VELCADE as provided by OBLand any royalties earned under certain of our early discovery alliances. Werecorded $134.7 million and $38.2 million of royalty revenue in 2006 and 2005,primarily consisting of  royalties from SGPand OBL.

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***We recognize revenues from activities outside of the U.S.,including royalties, distribution fees, milestones from OBL, SGP and GSK forsales of VELCADE and INTEGRILIN and for cost reimbursement of product sold tothese parties. Without taking into account revenues we receive for developmentcosts or milestones, our revenues for these activities outside of the U.S. were$113.5 million in 2006, $62.2 million in 2005 and $64.9 millionin 2004.***

***Cost of Sales***

Cost of sales decreased68% to $45.4 million in 2006 and increased 101% to $141.3 million in 2005from $70.3 million in 2004. Cost of sales includes manufacturing-relatedexpenses associated with the sale of VELCADE, as well as costs associated withmanaging the INTEGRILIN supply chain on behalf of SGP. The decrease in 2006 andthe 2005 increase was primarily due to the one-time sale of existing INTEGRILINinventory to SGP in 2005 on September 1, 2005.

***Research and Development***

Research and development expenses decreased 7% to$318.2 million in 2006 and 15% to $342.2 million in 2005 from $402.6million in 2004. The decreases in both 2006 and 2005 were primarily a result ofcost reductions associated with our 2005 strategy refinement and restructuringefforts combined with the decreased spending in our discovery organization.Research and development expenses in 2006 include stock-based compensationexpense of approximately $23.3 million related to the adoption of SFAS 123R onJanuary 1, 2006.

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In addition to ourongoing clinical trials of VELCADE, we have a number of drug candidates inclinical and late preclinical development. In January 2006, as part of ourportfolio review process, based on the evaluation of recent clinical data inthe context of additional opportunities in the pipeline, we decided todiscontinue development of MLN2704 as well as MLN1202 in rheumatoid arthritis.The following chart summarizes the applicable disease indication and theclinical or preclinical trial status of our pipeline of drug candidates as ofFebruary 2007.

| **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-Rand c-KIT |       | Acute myeloid leukemia  Glioma(1)  Renal(1)  Prostate(1)    |       | phase I/phase II  phase I planned for 2007  phase I /phase II  phase I /phase II     |
| MLN8054 is a  small molecule  inhibitor of Aurora A Kinase                                                         |       | Advanced malignancies                                       |       | phase I                                                                              |
| MLN8237 is a  small molecule  inhibitor of Aurora A Kinase                                                         |       | Advanced malignancies                                       |       | preclinical                                                                          |
| ***Inflammatory  Diseases***                                                                                       |       |                                                        |       |                                                                                 |
| MLN0002 is a humanized  monoclonal antibody directed  against the alpha4beta7 receptor                             |       | Crohn’s disease  Ulcerative colitis                    |       | preclinical with prior phase II data  preclinical with prior phase II data |
| MLN1202 is a  humanized monoclonal antibody directed against CCR2                                                  |       | Multiple sclerosis  Atherosclerosis                         |       | phase IIa  phase IIa-completed                                                       |
| MLN3897 is a  small molecule CCR1 inhibitor(2)                                                                |       | Chronic inflammatory  diseases such as rheumatoid arthritis |       | phase II                                                                             |
| MLN3701 is a  small molecule CCR1 inhibitor, backup to MLN3897(2)                                                  |       | Chronic inflammatory  diseases such as rheumatoid arthritis |       | phase I                                                                              |
| MLN0415 is a small  molecule inhibitor of IKKbeta                                                                  |       | Chronic inflammatory  diseases such as rheumatoid arthritis |       | phase I                                                                              |
| MLN6095 is a small  molecule CrTh2 receptor antagonist (2)                                                         |       | Inflammatory diseases                                       |       | preclinical                                                                          |

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(1)          Trials being conductedor planned to be conducted through Cancer Therapy Evaluation Program, adivision of the National Cancer Institute.

(2)          Indevelopment through our sanofi-aventis inflammatory disease collaboration.

Completion of clinical trials may take several yearsor more and the length of time can vary substantially according to the type,complexity, novelty and intended use of a product candidate. The types of costsincurred during a clinical trial vary depending upon the type of productcandidate and the nature of the study.

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Weestimate that clinical trials in our areas of focus are typically completedover the following 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 clinicaltrials of a product candidate, we intend to submit the results to the FDA tosupport regulatory approval. However, we cannot be certain that any of ourproduct candidates will prove to be safe or effective, will receive regulatoryapprovals, or will be successfully commercialized. Our clinical trials mightprove that our product candidates may not be effective in treating the diseaseor have undesirable or unintended side effects, toxicities or othercharacteristics that require us to cease further development of the productcandidate. The cost to take a product candidate through clinical trials isdependent upon, among other things, the disease indications, the timing, thesize and dosing schedule of each clinical trial, the number of patientsenrolled in each trial and the speed at which patients are enrolled andtreated. We could incur increased product development costs if we experiencedelays in clinical trial enrollment, delays in the evaluation of clinical trialresults or delays in regulatory approvals.

Some products that are likely to result from ourresearch and development projects are based on new technologies and newtherapeutic approaches that have not been extensively tested in humans. Theregulatory requirements governing these types of products may be more rigorousthan for conventional products. As a result, it is difficult to estimate thenature and length of the efforts to complete such products as we may experiencea longer regulatory process in connection with any products that we developbased upon these new technologies or therapeutic approaches. In addition,ultimate approval 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 necessaryto develop a product, the uncertainties related to the estimated cost of theprojects and ultimate ability to obtain governmental approval forcommercialization, accurate and meaningful estimates of the ultimate cost tobring our product candidates to market are not available.

We budget and monitor our research and developmentcosts by type or category, rather than by project on a comprehensive or fullyallocated basis. Significant categories of costs include personnel, clinical,third party research and development services and laboratory supplies. Inaddition, a significant portion of our research and development expenses is nottracked by project as it benefits multiple projects or our technology platform.Consequently, fully loaded research and development cost summaries by projectare not available.

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

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***Selling, General and Administrative***

Selling, general andadministrative expenses decreased 14% to $155.6 million in 2006 comparedto 2005 and decreased eight percent to $180.6 million in 2005 from $196.6million in 2004. The decrease in both 2006 and 2005 was primarily the result ofreduced sales and marketing expenses associated with the transfer of the U.S.commercialization rights for INTEGRILIN to SGP as of September 1, 2005. Selling,general and administrative expenses in 2006 include stock-based compensationexpense of approximately $18.9 million related to the adoption of SFAS 123R on January 1,2006.

***Restructuring***

In October 2006,we announced a program to further align resources with our currentcorporate priorities of advancing VELCADE and accelerating the clinicalpipeline by lowering investment in discovery and supporting areas. As part ofour program, we are reducing in-house research and development technologies andheadcount in areas where the work can now be outsourced effectively, and wealso scaled back infrastructure supporting these activities.

During the fourth quarter of 2005, we announced a 2005strategy refinement focused on advancing key growth assets, including VELCADE,our clinical and preclinical pipeline of oncology and inflammation moleculesand our oncology-focused discovery organization. As part of our refinedstrategy, we took a series of steps, building on our restructured relationshipwith SGP, which together reduced research and development and selling, generaland administrative expenses in 2006. We reduced the size of our company fromapproximately 1,500 employees at the end of 2004 to approximately 1,100 at theend of 2005, by managing attrition, eliminating INTEGRILIN sales and marketingpositions, and reducing the number of positions in our inflammation discoveryand business support groups.

In December 2002 and June 2003, we tooksteps as part of our 2003 restructuring plan to focus our resources on drugdevelopment and commercialization. Our restructuring plan includedconsolidation of research and development facilities, overall headcountreduction and streamlining of discovery and development projects.

During 2006, we recorded a total of $20.4 million ofrestructuring charges under all of our restructuring initiatives. We recordedrestructuring charges of approximately $5.2 million under the 2006restructuring program primarily related to employee termination benefits. Costsof termination benefits relate to severance packages, outplacement services andcareer counseling for employees affected by restructuring. We also recordedrestructuring charges in 2006 of approximately $1.2 million under the 2005restructuring plan, primarily related to the impairment charges for leaseholdimprovements that were abandoned at facilities, offset by a credit resultingfrom the earlier than anticipated sublease of one of the vacated buildings at ahigher rate per square foot than we had originally estimated. We recordedrestructuring charges of approximately $14.0 million in 2006 under the 2003restructuring plan, primarily related to the lease termination payment for ourvacated facility in Cambridge, England.

During 2005, we recorded a total of $77.1 million ofrestructuring charges for our 2005 and 2003 restructuring plans. We recordedrestructuring charges of approximately $42.5 million under the 2005restructuring plan, primarily related to the remaining rental obligation, netof sublease income, of vacated facilities, the impairment charges for leaseholdimprovements that were abandoned at such facilities and employee terminationbenefits for the employees affected by the transfer of the U.S.commercialization rights to INTEGRILIN to SGP, as well as the headcountreductions within inflammation discovery and business support groups. Werecorded approximately $34.6 million of restructuring charges in 2005 under our2003 restructuring plan. This charge included $30.6 million of additionalfacilities expense reflecting changes in our estimates of the length of time itwould take to sublease certain vacated properties based upon our continuingreview of current real estate market conditions.

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We estimate that of the remaining restructuringliabilities under all restructuring initiatives at December 31, 2006, wewill pay approximately $25.5 million in 2007 and $42.0 million thereafterthrough 2014.

We expect to record additional restructuring chargesin 2007 of between $15.0 million to $25.0 million.  These charges relate to certain facilitiesthat we decided to abandon in November 2006, but will not be vacated until2007, as well as net present value adjustments on facilities charged to restructuringin prior years. In connection with the decision to abandon the facilities in2007, we revised the useful lives of the leasehold improvements at thesefacilities in accordance with SFAS No. 144, “Accounting for the Impairmentor Disposal of Long-Lived Assets.”  Werecorded additional amortization expense of approximately $3.8 million inresearch and development expense related to our decision.

We are still evaluatingthe need or opportunity for further facilities consolidation associated with the2006 restructuring initiative and the total future restructuring charges forfacility consolidation are dependent upon the nature and timing of the finaldecisions we make. As we continue to evaluate strategic alternatives, includingpotential facilities consolidation in connection with our programs, significantrestructuring charges could occur in future periods.

***Amortization of Intangibles***

Amortization of intangibleassets of $34.0 million in 2006 was relatively unchanged from 2005 of$34.0 million and increased one percent from 2004 to 2005. Amortization in2006, 2005 and 2004 primarily related to specifically identified intangibleassets from the COR acquisition. We will continue to amortize the specificallyidentified intangible assets from our COR acquisition through 2015. We expectto incur amortization expense of approximately $34.0 million for each ofthe next five years.

***Investment Income***

Investment incomeincreased 6% to $31.0 million in 2006 compared to 2005 and increased 159% to$29.1 million in 2005 from $11.2 million in 2004. The increase in 2006 wasprimarily attributable to a higher average balance of invested funds combinedwith a $3.1 million gain recognized in December 2006 upon the settlementof the class action lawsuit of WorldCom, Inc. and an additional realized gainof approximately $2.9 million in October 2006 upon the final settlementand receipt of the escrowed portion of the TransForm Pharmaceuticals, Inc.,or TransForm, sales proceeds. The increase in 2005 was primarily attributableto the realized gain of approximately $10.5 million recognized upon thesale of our cost method investment in TransForm combined with the lowerrealized losses recognized in 2005 as compared to 2004.

***Interest Expense***

Interest expense increased6% to $11.1 million in 2006 from the 2005 expense of $10.4 million anddecreased 2% in 2005 from the 2004 expense of $10.7 million. The increase in2006 is primarily due to increased interest expense under our 2.25% notescombined with the amortization of deferred financing costs incurred inconnection with the sale of our 2.25% notes.

***Other income***

We recorded other incomeof approximately $22.9 million in 2006 upon the receipt of $19.5 million inconnection with the termination of the support agreement that we entered intoin connection with a proposed acquisition of AnorMED, Inc. in October 2006and the recognition of a deferred gain of $3.4 million in July 2006 fromthe sale of assets to GeneLogic, Inc. in 2004.

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***Gain on Sale of Equity Interest in Joint Venture***

Through our acquisition ofLeukoSite, we became a party to a joint venture partnership, Millennium andILEX Partners, L.P., or M&I, for development of Campath® (alemtuzumab) humanized monoclonal antibody.We sold our equity interest in M&I and in consideration for the sale,during the first quarter of 2004, we recorded the final $40.0 million gainrelated to our sale of this equity interest based upon the achievement ofpredetermined 2004 sales targets of Campath. We will be entitled to additionalpayments from ILEX’s successor, Genzyme Corporation, if sales of Campath in theUnited States exceed specified annual thresholds. However, we currently do notexpect that these thresholds will be achieved and, therefore, we are unlikelyto receive future additional payments related to Campath.

**Liquidity andCapital Resources**

We require cash to fund our operating expenses, tomake capital expenditures, acquisitions and investments and to pay debtservice, including principal and interest and capital lease payments. We haveand may in the future lose money in these investments and our ability toliquidate these investments is in some cases very limited. We may also owe ourpartners milestone payments and royalties. We also have committed to fund developmentcosts incurred by some of our collaborators.

We have funded ourcash requirements primarily through the following:

·       productsales of VELCADE;

·       paymentsfrom our strategic collaborators, including equity investments, license fees,milestone payments and research funding;

·       ourco-promotion relationship with SGP for the sale of INTEGRILIN through August 31,2005;

·       royaltypayments related to the sales of our products; and

·       equityand debt financings in the public markets.

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

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

·       thesuccess of our clinical and preclinical development programs;

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

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

As of December 31, 2006, we had$894.3 million in cash, cash equivalents and marketable securities. Thisexcludes $7.6 million of interest-bearing marketable securitiesclassified as restricted cash on our balance sheet as of December 31,2006, which primarily serve as collateral for letters of credit securing leasedfacilities.

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Oursignificant capital resources and sources and uses of cash are as follows:

| ** **                                        | ** ** | **December 31,** | ** ** |
|---------------------------------------------------|------------|-----------------------|------------|
| **(in thousands)**                           | ** ** | ** **            | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Cash, cash  equivalents and marketable securities |       | $                     | 894,349    |   | $ | 645,588 |   | $ | 700,407 |   |
| Working capital                                   |       | 790,135               |       | 576,501 |   | 660,751 |   |
|                                                   |            |                       |            |  |  |  |  |  |  |  |  |  |

 

| ** **                                                     | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------------|------------|
| **(in thousands)**                                        | ** ** | ** **                                 | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Cash provided by (used  in):                                   |       |                                       |       |   |   |   |   |
| Operating activities                                           |       | $                                          | (19,185    | ) | $ | (56,065 | ) | $ | (173,755 | ) |
| Investing activities                                           |       | (38,152                                    | )          | 32,988 |   | 117,904 |   |
| Financing activities                                           |       | 264,557                                    |       | 13,713 |   | 14,397 |   |
| Capital expenditures  (included in investing activities above) |       | (8,789                                     | )          | (12,466 | ) | (49,842 | ) |
|                                                                |            |                                            |            |  |  |  |  |  |  |  |  |  |

 

***Cash Flows***

The principal use of cash in operating activities inboth 2006 and 2005 was to fund our net loss. In December 2006, we achieveda $25.0 million milestone related to sales of VELCADE outside of the UnitedStates, which we collected in January 2007. In September 2005, wereceived approximately $85.5 million from SGP, consisting of the upfrontlicense fee associated with the U.S. commercialization rights for INTEGRILIN,as well as payment for the one-time sale of existing INTEGRILIN raw materialsand finished goods inventory. In January 2005, we paid SGP approximately$49.3 million for advances SGP had made to COR for inventory purchases in prioryears. Cash flows from operations can vary significantly due to various factorsincluding changes in accounts receivable, as well as changes in accountspayable and accrued expenses. The average collection period of our accountsreceivable can vary and is dependent on various factors, including the type ofrevenue and the payment terms related to those revenues.

The principal use of cash in investing activities in2006 was to invest in marketable securities, partially offset by the receipt ofapproximately $2.9 million in October 2006 upon the final settlement ofthe escrowed portion of the sale proceeds from TransForm. Investing activitiesprovided cash of $33.0 million in 2005, primarily from the sales and maturitiesof marketable securities. In April 2005, we received proceeds ofapproximately $10.6 million upon the sale of our cost method investment inTransForm.

Financing activities provided cash of$264.6 million in 2006, primarily from the sale of our 2.25% notes in November 2006,and $13.7 million in 2005, primarily from the purchases of common stock by ouremployees. We used cash of approximately $5.9 million in 2006 to pay off our4.5% convertible senior notes in accordance with the payment terms. We alsoused cash in financing activities to make principal payments on our capitalleases in all periods presented.

We believe that ourexisting cash and cash equivalents and the anticipated cash payments from ourproduct sales, current strategic alliances and royalties will be sufficient tosupport our expected operations, fund our debt service and capital leaseobligations and fund our capital commitments for at least the next severalyears.

***Contractual Obligations***

Our major outstanding contractual obligations relateto our facilities leases, convertible notes, and capital lease financings.

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As of December 31,2006, our convertible notes aggregated to $349.6 million in principalamount outstanding, of which $99.6 million is classified as short term and maturein January and March 2007. All three issues of notes requiresemi-annual interest payments through maturity. All required interest paymentshave been made to date. As of December 31, 2006, these notes consisted of:

·       $250.0million of the 2.25% notes due November 15, 2011;

·       $83.3 millionof principal of 5.5% convertible subordinated notes which were due and paid on January 15,2007. These notes were convertible into Millennium common stock at any timeprior to maturity at a price equal to $42.07 per share, or the 5.5% notes; and

·       $16.3 millionof principal of 5.0% convertible subordinated notes due March 1, 2007,that are convertible into Millennium common stock at any time prior to maturityat a price equal to $34.21 per share, or the 5.0% notes.

In November 2006,we completed a sale of the 2.25% notes, which resulted in net proceeds ofapproximately $242.2 million. The notes bear interest at the rate of 2.25% peryear on the principal amount accruing from November 15, 2006 and payablesemiannually in arrears in cash on May 15 and November 15 of eachyear, beginning May 15, 2007. The 2.25% notes are convertible into ourcommon stock based upon a conversion rate of 64.6465 shares of common stock per$1,000 principal amount of the notes, which is equal to an initial conversionprice of approximately $15.47 per share, subject to adjustment. The 2.25% notesare convertible only in the following circumstances:

·       ifthe closing price of our common stock exceeds 120% of the conversion pricewithin a specified period;

·       ifspecified distributions to holders of our common stock are made or specifiedcorporate transactions occur;

·       ifthe average trading price per $1,000 principal amount of the 2.25% notes isless than 98% of the average conversion value of the 2.25% notes within aspecified period, which we refer to as the parity trigger; or

·       duringthe last three months prior to maturity of the 2.25% notes.

Upon conversion, we have the right to deliver sharesof our common stock, cash or a combination of cash and shares of our commonstock to satisfy our conversion obligation.

The parity trigger represents an embedded derivativethat requires bifurcation and separate accounting under SFAS No. 133, “Accountingfor Derivative Instruments and Hedging Activities.”  At issuance and as of December 31, 2006,we estimated that the value of the parity trigger was not material to ourconsolidated results of operations and financial position.

In January 2007, we repaid our 5.5% notes in fullfor approximately $83.3 million in accordance with the payment terms.

57

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Belowis a table which presents our contractual obligations and commercialcommitments as of December 31, 2006:

| ** **                                                         | ** ** | **Payments Due by Period** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------------------------|------------|
| **(in thousands)**                                            | ** ** | ** **                                | ** ** | **Total** | ** ** | **Less than  One Year** | ** ** | **1-2 Years** | ** ** | **3-4 Years** | ** ** | **5 Years and  Beyond** | ** ** |
| Long-term debt  obligations, including interest payments           |       | $                                         | 378,170    |   | $ | 105,697 |   | $ | 11,599 |   | $ | 260,874 |   |   | $ | — |   |   |
| Capital lease  obligations, including rental and interest payments |       | 290,808                                   |       | 16,155 |   | 34,098 |   | 34,366 |   |   | 206,189 |   |   |
| Operating lease  obligations                                       |       | 143,753                                   |       | 34,068 |   | 52,910 |   | 34,995 |   |   | 21,780 |   |   |
| Long-term supply  contracts                                        |       | 107,090                                   |       | 29,600 |   | 47,250 |   | 20,160 |   |   | 10,080 |   |   |
| External  collaborations                                           |       | 2,871                                     |       | 2,779 |   | 92 |   | — |   |   | — |   |   |
| Total                                                              |       | $                                         | 922,692    |   | $ | 188,299 |   | $ | 145,949 |   | $ | 350,395 |   |   | $ | 238,049 |   |   |
|                                                                    |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

In addition to the amounts reflected in the tableabove, in the future we may owe royalties and other contingent payments to ourcollaborators, licensors and other parties based on the achievement of productsales and specified other objectives and milestones.

As of December 31,2006, we had net operating loss carryforwards of approximately $1.4 billion tooffset future federal taxable income, expiring in 2007 through 2026, and$0.4 billion to offset future state taxable income expiring in 2007through 2011. We also have federal and net state tax credits of approximately$104.3 million to offset federal and state income taxes, both of which expirebeginning in 2007.  Due to the degree ofuncertainty related to the ultimate use of the operating loss carryforwards andtax credits, we have fully reserved these tax benefits.

**Item 7A.**                QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT 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 also are 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$11.0 million decrease in the fair value of our investments as of December 31,2006. However, due to the conservative nature of our investments and relativelyshort effective maturities of debt instruments, interest rate risk ismitigated. Our Investment Policy specifies credit quality standards for ourinvestments and limits the amount of exposure from any single issue, issuer ortype of investment. We do not own derivative financial instruments in ourinvestment portfolio as of December 31, 2006.

As of December 31, 2006, the fair value of our2.25% notes, 5.0% notes and 5.5% notes approximates their carrying value. Theinterest rates on our convertible notes and capital lease obligations are fixedand therefore not subject to interest rate risk.

We receive distribution fees from OBL based onworldwide sales of VELCADE outside of the U.S. As a result, our financialposition, results of operations and cash flows can be affected by fluctuationsin foreign currency exchange rates, primarily EURO. Movement in foreigncurrency exchange rates could cause royalty revenue to vary significantly infuture periods.

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

58

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**Item 8.**                        FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

**MillenniumPharmaceuticals, Inc.Report of Independent Registered Public Accounting Firm**

Board of Directors and StockholdersMillennium Pharmaceuticals, Inc.

We have audited the accompanying consolidated balancesheets of Millennium Pharmaceuticals, Inc. as of December 31, 2006and 2005, and the related consolidated statements of operations, stockholders’equity, and cash flows for each of the three years in the period ended December 31,2006. Our audits also included the financial statement schedule listed in theIndex at Item 15. These financial statements and schedule are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred toabove present fairly, in all material respects, the consolidated financialposition of Millennium Pharmaceuticals, Inc. at December 31, 2006 and2005, and the consolidated results of its operations and its cash flows foreach of the three years in the period ended December 31, 2006, in conformitywith U.S. generally accepted accounting principles. Also, in our opinion, therelated financial statement schedule, when considered in relation to the basicfinancial statements taken as a whole, presents fairly in all material respectsthe information set forth therein.

As discussed in Note 2 to the consolidated financialstatements, effective January 1, 2006, the Company adopted Statement ofFinancial Accounting Standards No. 123R, “Share-Based Payments” using themodified prospective transition method.

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the effectiveness of MillenniumPharmaceuticals, Inc.’s internal control over financial reporting as of December 31,2006, based on criteria established in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commissionand our report dated February 23, 2007 expressed an unqualified opinionthereon.
|                         | /s/ ERNST & YOUNG LLP |
|-------------------------|--------------------------------|
| Boston,  Massachusetts  |                           |
| February 23,  2007 |                           |

 

59

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**Millennium Pharmaceuticals, Inc. Consolidated Balance Sheets**

| ** **                                                                                                                                                                | ** ** | **December 31,**                                             | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                                                                                                                                | ** ** | **2006**                                                          | ** ** | **2005** | ** ** |
| ** **                                                                                                                                                                | ** ** | **(in thousands, except per  share amounts)** | ** ** |
| **Assets**                                                                                                                                                                | ** ** | ** **                                                        | ** ** | ** ** | ** ** |
| Current assets:                                                                                                                                                           |       |                                                              |       |   |   |
| Cash and cash equivalents                                                                                                                                                 |       | $                                                                 | 212,273    |   | $ | 5,029 |   |
| Marketable securities                                                                                                                                                     |       | 682,076                                                           |       | 640,559 |   |
| Accounts receivable, net  of allowances of $521 in 2006 and $2,504 in 2005                                                                                                |       | 94,516                                                            |       | 64,338 |   |
| Inventory                                                                                                                                                                 |       | 13,598                                                            |       | 15,824 |   |
| Prepaid expenses and  other current assets                                                                                                                                |       | 13,191                                                            |       | 15,346 |   |
| Total current  assets                                                                                                                                                     |       | 1,015,654                                                         |       | 741,096 |   |
| Property and equipment,  net                                                                                                                                              |       | 153,349                                                           |       | 183,059 |   |
| Restricted cash                                                                                                                                                           |       | 7,600                                                             |       | 8,486 |   |
| Other assets                                                                                                                                                              |       | 27,900                                                            |       | 16,716 |   |
| Goodwill                                                                                                                                                                  |       | 1,213,910                                                         |       | 1,210,926 |   |
| Developed technology, net                                                                                                                                                 |       | 271,876                                                           |       | 305,337 |   |
| Intangible assets, net                                                                                                                                                    |       | 61,523                                                            |       | 62,012 |   |
| Total assets                                                                                                                                                              |       | $                                                                 | 2,751,812  |   | $ | 2,527,632 |   |
| **Liabilities and Stockholders’ Equity**                                                                                                                             | ** ** | ** **                                                        | ** ** | ** ** | ** ** |
| Current liabilities:                                                                                                                                                      |       |                                                              |       |   |   |
| Accounts payable                                                                                                                                                          |       | $                                                                 | 26,301     |   | $ | 31,137 |   |
| Accrued expenses                                                                                                                                                          |       | 62,544                                                            |       | 60,325 |   |
| Current portion of  restructuring                                                                                                                                         |       | 25,540                                                            |       | 35,362 |   |
| Current portion of  deferred revenue                                                                                                                                      |       | 10,378                                                            |       | 27,745 |   |
| Current portion of  capital lease obligations                                                                                                                             |       | 1,185                                                             |       | 4,136 |   |
| Current portion of long  term debt                                                                                                                                        |       | 99,571                                                            |       | 5,890 |   |
| Total current  liabilities                                                                                                                                                |       | 225,519                                                           |       | 164,595 |   |
| Other long term  liabilities                                                                                                                                              |       | 757                                                               |       | 48 |   |
| Restructuring, net of  current portion                                                                                                                                    |       | 41,974                                                            |       | 69,541 |   |
| Deferred revenue, net of  current portion                                                                                                                                 |       | 13,344                                                            |       | 15,973 |   |
| Capital lease  obligations, net of current portion                                                                                                                        |       | 75,041                                                            |       | 76,226 |   |
| Long term debt                                                                                                                                                            |       | 250,000                                                           |       | 99,571 |   |
| Commitments and contingencies                                                                                                                                             |       |                                                              |       |   |   |
| **Stockholders’ Equity:**                                                                                                                                            | ** ** | ** **                                                        | ** ** | ** ** | ** ** |
| Preferred stocks, $0.001  par value; 5,000 shares authorized, none issued                                                                                                 |       | —                                                            |       | — |   |
| Common stock, $0.001 par  value; 500,000 shares authorized: 317,342 shares at December 31, 2006  and 311,121 shares at December 31, 2005 issued and outstanding |       | 317                                                               |       | 311 |   |
| Additional paid-in  capital                                                                                                                                               |       | 4,657,177                                                         |       | 4,582,204 |   |
| Deferred compensation                                                                                                                                                     |       | —                                                            |       | (4,219 | ) |
| Accumulated other  comprehensive loss                                                                                                                                     |       | (1,326                                                            | )          | (9,580 | ) |
| Accumulated deficit                                                                                                                                                       |       | (2,510,991                                                        | )          | (2,467,038 | ) |
| Total  stockholders’ equity                                                                                                                                          |       | 2,145,177                                                         |       | 2,101,678 |   |
| Total liabilities  and stockholders’ equity                                                                                                                          |       | $                                                                 | 2,751,812  |   | $ | 2,527,632 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

60

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**Millennium Pharmaceuticals, Inc. Consolidated Statements of Operations**
|                                                                           | ** ** | **Year Ended December 31,**                            | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                | ** ** | **2006**                                                              | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                | ** ** | **(in thousands, except per share amounts)** | ** ** |
| Revenues:                                                                 |       |                                                                  |       |   |   |   |   |
| Net product sales                                                         |       | $                                                                     | 220,452    |   | $ | 192,073 |   | $ | 143,052 |   |
| Co-promotion revenue                                                      |       | —                                                                |       | 123,524 |   | 206,264 |   |
| Revenue under strategic alliances                                         |       | 131,675                                                               |       | 204,519 |   | 98,890 |   |
| Royalties                                                                 |       | 134,703                                                               |       | 38,192 |   | — |   |
| Total revenues                                                            |       | 486,830                                                               |       | 558,308 |   | 448,206 |   |
| Costs and expenses:                                                       |       |                                                                  |       |   |   |   |   |
| Cost of sales (excludes amortization of acquired  intangible assets) |       | 45,445                                                                |       | 141,327 |   | 70,286 |   |
| Research and development                                                  |       | 318,170                                                               |       | 342,184 |   | 402,558 |   |
| Selling, general and administrative                                       |       | 155,633                                                               |       | 180,599 |   | 196,644 |   |
| Restructuring                                                             |       | 20,393                                                                |       | 77,110 |   | 38,033 |   |
| Amortization of intangibles                                               |       | 33,950                                                                |       | 33,987 |   | 33,512 |   |
| Total costs and expenses                                                  |       | 573,591                                                               |       | 775,207 |   | 741,033 |   |
| Loss from  operations                                                     |       | (86,761                                                               | )          | (216,899 | ) | (292,827 | ) |
| Other income (expense):                                                   |       |                                                                  |       |   |   |   |   |
| Investment income, net                                                    |       | 30,973                                                                |       | 29,083 |   | 11,221 |   |
| Interest expense                                                          |       | (11,068                                                               | )          | (10,433 | ) | (10,691 | ) |
| Other income                                                              |       | 22,903                                                                |       | — |   | — |   |
| Gain on sale of equity interest in joint venture                          |       | —                                                                |       | — |   | 40,000 |   |
| Net loss                                                                  |       | $                                                                     | (43,953    | ) | $ | (198,249 | ) | $ | (252,297 | ) |
| *Amounts  per common share:*                                              |       |                                                                  |       |   |   |   |   |
| Net loss per  share, basic and diluted                                    |       | $                                                                     | (0.14      | ) | $ | (0.64 | ) | $ | (0.83 | ) |
| Weighted average shares,  basic and diluted                               |       | 313,724                                                               |       | 308,284 |   | 304,830 |   |

----

Note1: Upon adoption of Statement of Financial Accounting Standards No. 123(revised 2004), “Share Based Payments,” (“SFAS 123R”) on January 1,2006, the Company began recording stock-based compensation expense in itsconsolidated statements of operations. No stock-based compensation expense wasrecognized under SFAS 123R in any prior period. See Note 10 to theconsolidated financial statements for further discussion. Stock-basedcompensation expense is allocated in the consolidated statements of operationsexpense lines as follows:
|                                      | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------|------------|--------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Research and  development            |       | $                                          | 23,280     |   | $ | — |   | $ | — |   |
| Selling, general  and administrative |       | 18,861                                     |       | — |   | — |   |
|                                 |       | $                                          | 42,141     |   | $ | — |   | $ | — |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

61

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**MillenniumPharmaceuticals, Inc.Consolidated Statements of Cash Flows**
|                                                                             | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                  | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                  | ** ** | **(in thousands)**                    | ** ** |
| **Cash Flows from Operating Activities:**                                   | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net loss                                                                    |       | $                                          | (43,953    | ) | $ | (198,249 | ) | $ | (252,297 | ) |
| Adjustments to reconcile net loss to cash used in  operating activities:    |       |                                       |       |   |   |   |   |
| Depreciation and  amortization                                              |       | 66,427                                     |       | 76,318 |   | 93,387 |   |
| Restructuring  (reversals) charges, net                                     |       | 4,869                                      |       | 6,157 |   | (316 | ) |
| Restructuring  related stock-based compensation expense                     |       | —                                     |       | 479 |   | 29 |   |
| Amortization and  write-off of deferred financing costs                     |       | 632                                        |       | 451 |   | 481 |   |
| Realized loss on  securities, net                                           |       | 2,223                                      |       | 3,457 |   | 11,667 |   |
| Realized gain on  sale of investment in TransForm Pharmaceuticals      |       | (2,898                                     | )          | (10,465 | ) | — |   |
| Realized gain on sale  of assets to GeneLogic, Inc.                    |       | (3,403                                     | )          | — |   | — |   |
| 401K stock match                                                            |       | 4,716                                      |       | 5,232 |   | 6,497 |   |
| Stock-based  compensation expense                                           |       | 42,141                                     |       | 565 |   | 178 |   |
| Changes in operating  assets and liabilities:                               |       |                                       |       |   |   |   |   |
| Accounts  receivable                                                        |       | (30,178                                    | )          | 23,536 |   | (28,849 | ) |
| Inventory                                                                   |       | 2,226                                      |       | 81,352 |   | 13,015 |   |
| Prepaid expenses  and other current assets                                  |       | (1,248                                     | )          | 2,405 |   | 4,923 |   |
| Restricted cash  and other assets                                           |       | (3,976                                     | )          | (8,113 | ) | 1,089 |   |
| Accounts payable  and accrued expenses                                      |       | (37,476                                    | )          | (673 | ) | (12,377 | ) |
| Advance from  Schering-Plough                                               |       | —                                     |       | (49,250 | ) | — |   |
| Deferred revenue                                                            |       | (19,996                                    | )          | 10,733 |   | (11,182 | ) |
| Other long-term  liabilities                                                |       | 709                                        |       | — |   | — |   |
| Net cash used in  operating activities                                      |       | (19,185                                    | )          | (56,065 | ) | (173,755 | ) |
| **Cash Flows from Investing Activities:**                                   | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Investments in marketable  securities                                       |       | (391,683                                   | )          | (386,887 | ) | (398,737 | ) |
| Proceeds from  sales and maturities of marketable securities                |       | 355,540                                    |       | 426,750 |   | 567,287 |   |
| Proceeds from the  sale of investment in TransForm Pharmaceuticals     |       | 2,898                                      |       | 10,585 |   | — |   |
| Proceeds from the  sale of assets to GeneLogic, Inc.                   |       | 3,403                                      |       |   |   |   |   |
| Purchases of  property and equipment                                        |       | (8,789                                     | )          | (12,466 | ) | (49,842 | ) |
| Other investing  activities                                                 |       | 479                                        |       | (4,994 | ) | (804 | ) |
| Net cash provided  by (used in) investing activities                        |       | (38,152                                    | )          | 32,988 |   | 117,904 |   |
| **Cash Flows from Financing Activities:**                                   | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Issuance of  convertible senior notes, net of issuance costs                |       | 242,239                                    | ** ** | **—** | ** ** | **—** | ** ** |
| Net proceeds from  employee stock purchases                                 |       | 32,341                                     |       | 24,283 |   | 27,858 |   |
| Repayment of  principal of long-term debt obligations                       |       | (5,890                                     | )          | — |   | — |   |
| Principal payments  on capital leases                                       |       | (4,133                                     | )          | (10,570 | ) | (13,461 | ) |
| Net cash provided  by financing activities                                  |       | 264,557                                    |       | 13,713 |   | 14,397 |   |
| Increase  (decrease) in cash and cash equivalents                           |       | 207,220                                    |       | (9,364 | ) | (41,454 | ) |
| Effects of  exchange rate changes on cash and cash equivalents              |       | 24                                         |       | (43 | ) | 43 |   |
| Cash and cash  equivalents, beginning of period                             |       | 5,029                                      |       | 14,436 |   | 55,847 |   |
| Cash and cash  equivalents, end of period                                   |       | $                                          | 212,273    |   | $ | 5,029 |   | $ | 14,436 |   |
| ** **                                                                  |       | —                                     |       | — |   |   |   |
| **Supplemental Cash Flow Information:**                                     |       |                                       |       |   |   |   |   |
| Cash paid for interest                                                      |       | $                                          | 9,442      |   | $ | 10,233 |   | $ | 9,918 |   |
| **Supplemental Disclosure of Noncash Investing and  Financing Activities:** | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Issuance of  restricted stock under APB No. 25                         |       | $                                          | —     |   | $ | 4,784 |   | — |   |
| Services due from  the sale to Gene Logic, Inc.                        |       | —                                     |       | — |   | 4,500 |   |
| Deferred gain on  sale to Gene Logic, Inc.                             |       | —                                     |       | — |   | 3,500 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

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**Millennium Pharmaceuticals, Inc. Statements of Stockholders’ Equity**

| ** **                                                                      | ** ** | ** **                        | ** ** | ** **        | ** ** | ** **     | ** ** | ** **        | ** ** | **Accumulated**        | ** ** | ** **             | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------------------|------------|-------------------|------------|----------------|------------|-------------------|------------|------------------------|------------|------------------------|------------|------------|------------|
| ** **                                                                      | ** ** | ** **                        | ** ** | ** **        | ** ** | **Additional** | ** ** | ** **        | ** ** | **Other**              | ** ** | ** **             | ** ** | **Total**  | ** ** |
| ** **                                                                      | ** ** | **Common Stock**                  | ** ** | **Paid-in ** | ** ** | **Deferred**   | ** ** | **Comprehensive** | ** ** | **Accumulated**        | ** ** | **Stockholders’** | ** ** |
| ** **                                                                      | ** ** | **shares**                        | ** ** | **amount**        | ** ** | **Capital**    | ** ** | **Compensation**  | ** ** | **Income (Loss)** | ** ** | **Deficit**            | ** ** | **Equity** | ** ** |
| ** **                                                                      | ** ** | **(in thousands, except shares)** | ** ** |
| Balance at December 31, 2003                                               |       | 302,290,853                       |       |              | $          | 302            |       |              |       | $                      | 4,513,143  |                   |       |       | $          | (271 | ) |   |   | $ | 4,844 |   |   |   | $ | (2,016,492 | ) |   |   | $ | 2,501,526 |   |   |
| Net loss                                                                        |       | —                            |       |              | —     |           |       |              | —     |                   |       |                   | —     |       |       |   | — |   |   |   | (252,297 | ) |   |   | (252,297 | ) |   |
| Unrealized loss on marketable securities                                        |       | —                            |       |              | —     |           |       |              | —     |                   |       |                   | —     |       |       |   | (10,246 | ) |   |   | — |   |   |   | (10,246 | ) |   |
| Foreign currency translation                                                    |       | —                            |       |              | —     |           |       |              | —     |                   |       |                   | —     |       |       |   | (551 | ) |   |   | — |   |   |   | (551 | ) |   |
| Total comprehensive loss                                                        |       |                              |       |              |       |           |       |              |       |                   |       |                   |       |       |       |   |   |   |   |   |   |   |   |   | (263,094 | ) |   |
| Exercise of stock warrants                                                      |       | 93,729                            |       |              | —     |           |       |              | —     |                   |       |                   | —     |       |       |   | — |   |   |   | — |   |   |   | — |   |   |
| Employee stock purchases                                                        |       | 3,549,158                         |       |              | 4          |           |       |              | 27,854     |                   |       |                   | —     |       |       |   | — |   |   |   | — |   |   |   | 27,858 |   |   |
| Restructuring related stock-based compensation  expense                         |       | —                            |       |              | —     |           |       |              | 29         |                   |       |                   | —     |       |       |   | — |   |   |   | — |   |   |   | 29 |   |   |
| Write-off of deferred stock-based compensation                                  |       | —                            |       |              | —     |           |       |              | (93        | )                      |       |                   | 93         |       |       |   | — |   |   |   | — |   |   |   | — |   |   |
| Stock-based compensation earned                                                 |       | —                            |       |              | —     |           |       |              | —     |                   |       |                   | 178        |       |       |   | — |   |   |   | — |   |   |   | 178 |   |   |
| 401K stock match                                                                |       | 465,380                           |       |              | —     |           |       |              | 6,497      |                   |       |                   | —     |       |       |   | — |   |   |   | — |   |   |   | 6,497 |   |   |
| Balance at December 31, 2004                                               |       | 306,399,120                       |       |              | 306        |           |       |              | 4,547,430  |                   |       |                   | —     |       |       |   | (5,953 | ) |   |   | (2,268,789 | ) |   |   | 2,272,994 |   |   |
| Net loss                                                                        |       | —                            |       |              | —     |           |       |              | —     |                   |       |                   | —     |       |       |   | — |   |   |   | (198,249 | ) |   |   | (198,249 | ) |   |
| Unrealized loss on marketable securities                                        |       | —                            |       |              | —     |           |       |              | —     |                   |       |                   | —     |       |       |   | (4,368 | ) |   |   | — |   |   |   | (4,368 | ) |   |
| Foreign currency translation                                                    |       | —                            |       |              | —     |           |       |              | —     |                   |       |                   | —     |       |       |   | 741 |   |   |   | — |   |   |   | 741 |   |   |
| Total comprehensive loss                                                        |       | —                            |       |              | —     |           |       |              | —     |                   |       |                   | —     |       |       |   | — |   |   |   | — |   |   |   | (201,876 | ) |   |
| Employee stock purchases                                                        |       | 3,662,719                         |       |              | 4          |           |       |              | 24,280     |                   |       |                   | —     |       |       |   | — |   |   |   | — |   |   |   | 24,284 |   |   |
| Restructuring related stock-based compensation  expense                         |       | —                            |       |              | —     |           |       |              | 479        |                   |       |                   | —     |       |       |   | — |   |   |   | — |   |   |   | 479 |   |   |
| Issuance of deferred stock-based compensation                                   |       | 480,000                           |       |              | 1          |           |       |              | 4,783      |                   |       |                   | (4,219     | )          |       |   | — |   |   |   | — |   |   |   | 565 |   |   |
| 401K stock match                                                                |       | 579,036                           |       |              | —     |           |       |              | 5,232      |                   |       |                   | —     |       |       |   | — |   |   |   | — |   |   |   | 5,232 |   |   |
| Balance at December 31, 2005                                               |       | 311,120,875                       |       |              | 311        |           |       |              | 4,582,204  |                   |       |                   | (4,219     | )          |       |   | (9,580 | ) |   |   | (2,467,038 | ) |   |   | 2,101,678 |   |   |
| Net loss                                                                        |       | —                            |       |              | —     |           |       |              | —     |                   |       |                   | —     |       |       |   | — |   |   |   | (43,953 | ) |   |   | (43,953 | ) |   |
| Unrealized gain on marketable securities                                        |       | —                            |       |              | —     |           |       |              | —     |                   |       |                   | —     |       |       |   | 9,385 |   |   |   | — |   |   |   | 9,385 |   |   |
| Foreign currency translation                                                    |       | —                            |       |              | —     |           |       |              | —     |                   |       |                   | —     |       |       |   | (1,131 | ) |   |   | — |   |   |   | (1,131 | ) |   |
| Total comprehensive loss                                                        |       | —                            |       |              | —     |           |       |              | —     |                   |       |                   | —     |       |       |   | — |   |   |   | — |   |   |   | (35,699 | ) |   |
| Employee stock purchases                                                        |       | 4,533,701                         |       |              | 5          |           |       |              | 32,336     |                   |       |                   | —     |       |       |   | — |   |   |   | — |   |   |   | 32,341 |   |   |
| Issuance of restricted stock                                                    |       | 1,391,730                         |       |              | 1          |           |       |              | (1         | )                      |       |                   | —     |       |       |   | — |   |   |   | — |   |   |   | — |   |   |
| Forfeiture of restricted stock                                                  |       | (172,630                          | )          |              | —     |           |       |              | —     |                   |       |                   | —     |       |       |   | — |   |   |   | — |   |   |   | — |   |   |
| Write-off of deferred stock-based compensation upon  adoption of SFAS 123R |       | —                            |       |              | —     |           |       |              | (4,219     | )                      |       |                   | 4,219      |       |       |   | — |   |   |   | — |   |   |   | — |   |   |
| Stock-based compensation expense                                                |       | —                            |       |              | —     |           |       |              | 42,141     |                   |       |                   | —     |       |       |   | — |   |   |   | — |   |   |   | 42,141 |   |   |
| 401K stock match                                                                |       | 467,857                           |       |              | —     |           |       |              | 4,716      |                   |       |                   | —     |       |       |   | — |   |   |   | — |   |   |   | 4,716 |   |   |
| Balance at  December 31, 2006                                              |       | 317,341,533                       |       |              | $          | 317            |       |              |       | $                      | 4,657,177  |                   |       |       | $          | — |   |   |   | $ | (1,326 | ) |   |   | $ | (2,510,991 | ) |   |   | $ | 2,145,177 |   |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

63

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**Millennium Pharmaceuticals, Inc. Notes to Consolidated Financial Statements December 31, 2006**

**1. The Company**

Millennium Pharmaceuticals, Inc. (“Millennium” orthe “Company”) is an innovation-driven, biopharmaceutical company focused ondiscovering, developing and commercializing medicines to change the lives ofpatients with cancer and inflammatory diseases. The Company currently marketsVELCADE in the relapsed multiple myeloma and relapsed non-Hodgkin’s lymphomasettings. The Company also has a number of other potential therapeutic productsin various stages of clinical and preclinical development in its therapeuticareas of disease focus.

Millennium’s strategy isto develop and commercialize important new medicines through clinical trialsand regulatory approvals and to play a significant role in the marketing andsale of many of these products. The Company plans to develop and commercializemany of its products on its own, but will also seek development and commercialcollaborators on favorable terms or when it would otherwise be advantageous tothe Company.

**2. Summary of SignificantAccounting Policies**

**Basis ofPresentation**

The consolidated financial statements include theaccounts of Millennium and its majority-owned subsidiaries. Allsignificant intercompany accounts and transactions have been eliminated inconsolidation.

The preparation of financialstatements in accordance with generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenue andexpenses during the reporting period. Actual results could differ from thoseestimates.

**Reclassifications**

Certain prior year amounts within the consolidatedstatements of cash flows have been reclassified to conform to the current yearpresentation related to equity adjustments from foreign currency translation.

Certain prior year amountsincluded in accrued expenses of the consolidated balance sheets have beenreclassified to accounts payable to conform to the current year presentationrelated to uninvoiced receipts in the normal course of business. This reclassificationhas no impact on previously reported net loss or current liabilities in anyperiod presented.

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

Cash equivalents principally consist of money marketfunds and corporate bonds with maturities of three months or less at the dateof purchase. Marketable securities primarily consist of investment-gradecorporate bonds, asset-backed debt securities and U.S. government agency debtsecurities. Other investments represent ownership in private companies in whichthe 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, inwhich case 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 the statement of operations, based on the implied valuefrom any recent 

64

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**Millennium Pharmaceuticals, Inc. Notes to Consolidated Financial Statements December 31, 2006 (Continued)**

rounds of financingcompleted by the investee, market prices of comparable public companies andgeneral market conditions. These other investments are included in otherlong-term assets at December 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 December 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 years ended December 31, 2006, 2005and 2004, the Company recorded realized gains on marketable securities of$3.1 million, $0.1 million and $1.9 million, respectively, andrealized losses on marketable securities and other investments of$5.3 million, $3.6 million and $13.6 million, respectively.

Realized gains on marketable securities for the yearended December 31, 2006 included a realized gain of  approximately $3.1 million related to theCompany’s share of proceeds from a class action proceeding against WorldCom, Inc.The Company had previously recorded realized losses equal to the carrying valueof its investment in WorldCom, Inc., as the decline in value wasdetermined to be other-than-temporary at that time.

During the year ended December 31,2005, the Company recorded a realized gain of approximately $10.5 million fromthe sale of its cost method investment in TransForm Pharmaceuticals, Inc.(“TransForm”). In October 2006, the Company recorded an additionalrealized gain of $2.9 million upon the final settlement and receipt of theescrowed portion of the sale proceeds. TransForm, a company specializing in thediscovery of formulations and novel crystalline forms of drug molecules, wasacquired by Johnson & Johnson in a cash-for-stock transaction thatclosed in April 2005.

**Concentrations ofCredit Risk**

Cash and cash equivalentsare primarily maintained with two major financial institutions in the UnitedStates. Deposits with banks may exceed the amount of insurance provided on suchdeposits. Generally, these deposits may be redeemed upon demand and, therefore,bear minimal risk. Financial instruments that potentially subject the Companyto concentrations of credit risk consist principally of marketable securitiesand accounts receivable. Marketable securities consist of investment-gradecorporate bonds, asset-backed and U.S. government agency securities. TheCompany’s investment policy, approved by the Board of Directors, limits theamount the Company may invest in any one type of investment, thereby reducingcredit risk concentrations. Accounts receivable includes trade receivableswhich result from product sales to a sole distributor and amounts due understrategic alliances. Concentration of credit risk with respect to tradereceivables is limited by credit limits, ongoing credit evaluation and accountmonitoring procedures.

65

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**Millennium Pharmaceuticals, Inc. Notes to Consolidated Financial Statements December 31, 2006 (Continued)**

**Segment Information**

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’sco-promotion revenue reported in prior periods was related to sales anddevelopment of INTEGRILIN® (eptifibatide) Injection through August 31,2005. The remainder of the Company’s total revenue is related to its strategicalliances and royalties.

Revenues from Ortho Biotech Products, L.P. (“OBL”), amember of the Johnson & Johnson Family of Companies, accounted forapproximately 22 percent, 10 percent and 17 percent of consolidatedrevenues for the years ended December 31, 2006, 2005 and 2004,respectively.

Revenues from Schering-Plough Ltd. and ScheringCorporation (collectively “SGP”), excluding co-promotion revenue, accounted forapproximately 27 percent and 24 percent of consolidated revenues for the yearsended December 31, 2006 and 2005, respectively.

There were no othersignificant customers under strategic alliances and royalties in 2006, 2005 and2004.

**InformationConcerning Market and Source of Supply Concentration**

INTEGRILIN has received regulatory approvals in theUnited States, the countries of the European Union and a number of othercountries for various indications. The Company and SGP co-promoted INTEGRILINin the United States and shared any profits and losses through August 31,2005. In September 2005, SGP acquired the exclusive development andcommercialization rights to INTEGRILIN in the United States from the Company.The Company continues to manage the supply chain for INTEGRILIN at the expenseof SGP for products sold in the SGP territories. In the European Union,GlaxoSmithKline plc (“GSK”) exclusively markets INTEGRILIN.

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

66

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**Millennium Pharmaceuticals, Inc. Notes to Consolidated Financial Statements December 31, 2006 (Continued)**

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

During 2004, the Companybegan distributing VELCADE in the United States through a sole-source openaccess distribution model where the Company sells directly to an independentthird party who in turn distributes to the wholesaler base. In April 2006,the Company’s distributor added a second distribution site to its network inorder to improve access to the product for physicians in the western UnitedStates.

**Inventory**

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

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

Inventoryconsists of the following (in thousands):

| ** **      | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|-----------------|------------|---------------------------------|------------|---------------------------------|------------|
| Raw materials   |       |                            | $          | 9,736                           |       |   |   | $ | 7,632 |   |   |
| Work in process |       |                            | 3,458      |                            |       |   | 7,370 |   |   |
| Finished goods  |       |                            | 404        |                            |       |   | 822 |   |   |
|            |       |                            | $          | 13,598                          |       |   |   | $ | 15,824 |   |   |

 

On September 1, 2005,upon the transfer of the commercialization rights for INTEGRILIN to SGP, theCompany sold all existing raw material and finished goods INTEGRILINinventories to SGP. This one-time sale of approximately $71.4 million, at cost,was included in revenue under strategic alliances for the year ended December 31,2005.

**Property and Equipment**

Propertyand equipment are stated at cost. Assets held under capitalized leases arestated at the present value of future minimum lease obligations. Applicationdevelopment costs incurred for computer software developed or obtained forinternal use are capitalized in accordance with Statement of Position (“SOP”) No. 98-1,“Accounting for the Costs of Computer Software Developed for Internal Use.”Leasehold improvements are stated at cost and are amortized over the shorter ofthe remaining life of the building lease or useful life. Depreciation isrecorded on the straight-line method over the shorter of the estimated usefullife of the asset or the term of the lease as follows:

| Equipment              |   | 3 to  4 years |   |
|------------------------|--------|---------------|--------|
| Capitalized  software  |   | 3 to  5 years |   |
| Leasehold improvements |   | 4 to 27 years |   |

 

67

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**Millennium Pharmaceuticals, Inc. Notes to Consolidated Financial Statements December 31, 2006 (Continued)**

**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.

Intangibleassets consist of the following (in thousands):

| ** **                                                           | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|----------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                                           | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization**   | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Developed  technology                                                |       |                            | $          | 435,000                         |       |   |   | $ | (163,124 | ) |   |   | $ | 435,000 |   |   |   | $ | (129,663 | ) |   |
| Core technology                                                      |       |                            | $          | 18,712                          |       |   |   | $ | (18,712 | ) |   |   | $ | 18,712 |   |   |   | $ | (18,712 | ) |   |
| Other                                                                |       |                            | 17,060     |                            |       |   | (14,537 | ) |   |   | 17,060 |   |   |   | (14,048 | ) |   |
| Total amortizable intangible assets, excluding  developed technology |       |                            | 35,772     |                            |       |   | (33,249 | ) |   |   | 35,772 |   |   |   | (32,760 | ) |   |
| Total indefinite-lived  trademark                                    |       |                            | 59,000     |                            |       |   | — |   |   |   | 59,000 |   |   |   | — |   |   |
| Total intangible  assets                                             |       |                            | $          | 94,772                          |       |   |   | $ | (33,249 | ) |   |   | $ | 94,772 |   |   |   | $ | (32,760 | ) |   |

 

Amortization ofintangibles is computed using the straight-line method over the useful lives ofthe respective assets as follows:

| Developed  technology |   | 13  years     |   |
|-----------------------|--------|---------------|--------|
| Core technology       |   | 4  years      |   |
| Other                 |   | 2 to 12 years |   |

 

Amortization expense was approximately$34.0 million, $34.0 million and $33.5 million in the years ended December 31,2006, 2005, and 2004, respectively. During the year ended December 31,2005, the Company retired intangible assets of approximately $3.0 million thathad been fully amortized.

The Company expects to incur amortization expense ofapproximately $34.0 million for 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.

On October 1, 2006, the Company performed itsannual impairment test of goodwill and its indefinite-lived trademark anddetermined that no impairment existed on that date. The Company continuallymonitors business and market conditions, including the restructured relationshipwith SGP, to assess whether an impairment indicator exists. If the Company wereto determine that an impairment indicator exists, it would be required toperform an impairment test, which might result in a material impairment chargeto the statement of operations.

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**Millennium Pharmaceuticals, Inc. Notes to Consolidated Financial Statements December 31, 2006 (Continued)**

Goodwill as of December 31,2006 consists of the excess purchase price over the estimated fair value of nettangible and intangible assets. The carrying value may be adjusted as a resultof the continued settlement of contingent consideration arising from acquisitions.Accordingly, goodwill increased by $3.0 million and $2.6 million for the yearsended December 31, 2006 and 2005, respectively.

**Fair Value ofFinancial Instruments**

The carrying amountsreported in the Company’s balance sheets for other current assets, currentportion of long-term debt and long-term debt approximate their fair value. Thefair values of the Company’s long-term debt are estimated using discounted cashflow analyses based on the Company’s current incremental borrowing rates forsimilar types of borrowing arrangements.

**Revenue Recognition**

The Company recognizesrevenue from the sale of its products, its co-promotion collaboration through August 31,2005, strategic alliances and royalties. The Company’s revenue arrangementswith multiple elements are divided into separate units of accounting ifspecified criteria are met, including whether the delivered element hasstand-alone value to the customer and whether there is objective and reliableevidence of the fair value of the undelivered items. The consideration receivedis allocated among the separate units based on their respective fair values,and the applicable revenue recognition criteria are applied to each of theseparate units. Advance payments received in excess of amounts earned areclassified as deferred revenue until earned.

*Net product sales*

The Company recordsproduct sales of VELCADE when delivery has occurred, title has transferred,collection is reasonably assured and the Company has no further obligations.Allowances are recorded as a reduction to product sales for estimated returnsand discounts at the time of sale. Costs incurred by the Company for shippingand handling are recorded in cost 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 product toits customers inside and outside of co-promotion territories and outside ofEurope.

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

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**Millennium Pharmaceuticals, Inc. Notes to Consolidated Financial Statements December 31, 2006 (Continued)**

*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.

Nonrefundableupfront licensing fees and guaranteed, time-based payments that require continuinginvolvement in the form of research and development, manufacturing or othercommercialization efforts by the Company are recognized as revenue:

·       ratablyover the development period if development risk is significant;

·       ratablyover the manufacturing period or estimated product useful life if developmentrisk has been substantially eliminated; or

·       basedupon the level 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 researchand development costs are recognized as revenue as the related costs areincurred.

*Royalties*

Beginning on September 1,2005, in connection with the closing of the Company’s amended collaborationagreement with SGP, as discussed in Note 4, the Company began to record royaltyincome. Royalties are recognized as revenue when earned. Royalties may include:

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

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

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

·       other royalties.

**Advertising andPromotional Expenses**

Advertising andpromotional expenses are expensed as incurred. During the years ended December 31,2006, 2005 and 2004, advertising and promotional expenses were $23.2 million,$35.8 million and $43.4 million, respectively. Amounts recorded in2005 and 2004 include advertising and promotional expenses related toINTEGRILIN.

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**Millennium Pharmaceuticals, Inc. Notes to Consolidated Financial Statements December 31, 2006 (Continued)**

**Other Income**

In July 2006, the Company recognized a deferredgain of $3.4 million upon receipt of proceeds from the sale of assets to GeneLogic, Inc., which was included in other income for the year ended December 31,2006.

In September 2006,the Company entered into a support agreement to acquire the outstanding stockof AnorMED, Inc. Subsequent to executing the support agreement, AnorMEDreceived a more favorable acquisition offer from Genzyme Corporation andterminated the initial support agreement with the Company. As a result of thetermination of the support agreement, the Company received a $19.5 milliontermination fee from AnorMED in October 2006, which was included in otherincome for the year ended December 31, 2006. Transaction costs associatedwith the attempted acquisition of approximately $5.5 million are includedin selling, general and administrative expenses.

**Income Taxes**

The liability method isused to account for income taxes. Deferred tax assets and liabilities aredetermined based on differences between financial reporting and income tax basesof assets and liabilities, as well as net operating loss carryforwards, and aremeasured using the enacted tax rates and laws that will be in effect when thedifferences reverse. Deferred tax assets are reduced by a valuation allowanceto reflect the uncertainty associated with their ultimate realization.Specified reclassifications of prior years’ amounts have been made to theCompany’s notes to consolidated financial statements to conform to the currentyear presentation.

**Net Loss Per CommonShare**

Basic net loss per commonshare is computed using the weighted-average number of common sharesoutstanding during the period, excluding restricted stock that has been issuedbut is not yet vested. Diluted net loss per share is based upon the weightedaverage number of common shares outstanding during the period, plus additionalweighted average common equivalent shares outstanding during the period whenthe effect is not anti-dilutive. Common equivalent shares result from theassumed exercise of outstanding stock options and warrants (the proceeds ofwhich are then assumed to have been used to repurchase outstanding stock usingthe treasury stock method), the assumed conversion of convertible notes and thevesting of unvested restricted shares of common stock. Options and warrants topurchase shares of common stock and unvested restricted shares that were notincluded in the calculation of diluted shares because the effect of includingthe options, warrants and unvested restricted shares would have beenanti-dilutive were 1.9 million, 2.8 million and 6.3 million at December 31,2006, 2005 and 2004, respectively.

**Foreign CurrencyTranslation**

The financial statementsof the Company’s foreign subsidiaries are measured using the local currency asthe functional currency, with results of operations and cash flows translatedat average exchange rates during the period, and assets and liabilitiestranslated at end of period exchange rates. Foreign currency transaction gainsand losses are included in the results of operations and are not material tothe Company’s consolidated financial statements. Translation adjustments areexcluded from the determination of net loss and are accumulated in a separatecomponent of accumulated other comprehensive loss in stockholders’ equity.

71

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**Millennium Pharmaceuticals, Inc. Notes to Consolidated Financial Statements December 31, 2006 (Continued)**

**Comprehensive Loss**

Comprehensive losscomprises net loss, unrealized gains and losses on marketable securities andcumulative foreign currency translation adjustments. Accumulated othercomprehensive loss as of December 31, 2006 and 2005 included unrealizedlosses of $0.4 million and $9.7 million, respectively, on marketable securitiesand $0.9 million and $(0.1) million, respectively, of cumulative foreigncurrency translation adjustments. Comprehensive loss is reflected in theconsolidated statements of stockholders’ equity.

**Stock-BasedCompensation Expense**

As discussed more fully in Note 10, the Companyadopted SFAS 123R effective January 1, 2006 under the modified-prospectivemethod of adoption. SFAS 123R requires the recognition of the fair value ofstock-based compensation in its statements of operations. Stock-basedcompensation expense primarily relates to stock options, restricted stock andstock issued under the Company’s employee stock purchase plans.

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”), is beingrecognized in the Company’s statements of operations in the periods after thedate of adoption. For stock options granted prior to January 1, 2006, theCompany calculated stock-based compensation expense on a straight-line basisover the requisite service period for each separately vesting portion of theaward as if the award was, in substance, multiple awards. For restricted stockgranted prior to January 1, 2006, the Company calculated stock-basedcompensation expense on a straight-line basis over the requisite service periodof the entire award.

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**Millennium Pharmaceuticals, Inc. Notes to Consolidated Financial Statements December 31, 2006 (Continued)**

SFAS 123and 123R require the presentation of pro forma information for periods prior toadoption as if the Company had accounted for all stock-based employeecompensation expense under the fair value method of those statements. Forpurposes of this pro forma disclosure, the estimated fair value of the stockoptions at the date of the grant is amortized to expense on a straight-linebasis over the requisite service period for each separately vesting portion ofthe award as if the award was, in substance, multiple awards. The Companyaccounted for forfeitures as they occurred. The following table illustrates theeffect on net loss and loss per share as if the Company had applied the fairvalue recognition provisions to stock-based employee compensation expense (inthousands, except per share amounts):

| ** **                                                                                                        | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                        | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| Net loss                                                                                                          |       | $                                          | (198,249   | ) | $ | (252,297 | ) |
| Add: Stock-based  compensation as reported in the Statement of Operations                                         |       | 1,044                                      |       | 207 |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value  based method for all awards |       | (48,629                                    | )          | (72,323 | ) |
| Pro forma net  loss                                                                                               |       | $                                          | (245,834   | ) | $ | (324,413 | ) |
| Amounts per common  share:                                                                                        |       |                                       |       |   |   |
| Basic and  diluted—as reported                                                                               |       | $                                          | (0.64      | ) | $ | (0.83 | ) |
| Basic and diluted—pro  forma                                                                                 |       | $                                          | (0.80      | ) | $ | (1.06 | ) |

 

**AccountingPronouncements**

In September 2006, the FASB issued SFAS No. 157,“Fair Value Measurements,” or SFAS No. 157. SFAS No. 157 defines fairvalue, establishes a framework for measuring fair value in accordance withgenerally accepted accounting principles and expands disclosures about fairvalue measurements. SFAS No. 157 codifies the definition of fair value asthe price that would be received to sell an asset or paid to transfer aliability in an orderly transaction between market participants at themeasurement date, clarifies the principle that fair value should be based onthe assumptions market participants would use when pricing the asset or liabilityand establishes a fair value hierarchy that prioritizes the information used todevelop those assumptions. SFAS No. 157 is effective for fiscal yearsbeginning after December 15, 2006. The Company does not believe thatadoption will have a material impact on its results of operations, financialposition or cash flows.

In June 2006, theFASB issued FASB Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes—an Interpretation of FASB Statement No. 109” (the “Interpretation”).The Interpretation clarifies the accounting for uncertainty in income taxesrecognized in an enterprise’s financial statements in accordance with FASBStatement No. 109, Accounting for Income Taxes. The Interpretationprescribes a recognition threshold and measurement attribute for the financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return. This Interpretation also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure and transition. The Interpretation is effective for fiscalyears beginning after December 15, 2006. The Company has not completed itsevaluation of the Interpretation, but does not currently believe that adoptionwill have a material impact on its results of operations, financial position orcash flows.

73

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**Millennium Pharmaceuticals, Inc. Notes to Consolidated Financial Statements December 31, 2006 (Continued)**

**3. Restructuring**

*2006 ResourceAlignment*

In October 2006, the Company announced a programto further align resources with its current corporate priorities of advancingVELCADE and accelerating the clinical and preclinical pipeline by loweringinvestment in discovery and supporting areas. As part of its program, theCompany is reducing in-house research and development technologies andheadcount in areas where the work can now be outsourced.

The Company recorded restructuring charges ofapproximately $5.2 million during the year ended December 31, 2006, underthe 2006 restructuring program, primarily related to employee terminationbenefits as a result of headcount reductions.

These costs are included in restructuring in thestatements of operations and in current and long-term liabilities on thebalance sheet at December 31, 2006. The following table displays therestructuring activity and liability balances (in thousands):
|                      | ** ** | **Balance at  December 31,  2005** | ** ** | **Charges** | ** ** | **Payments** | ** ** | **Balance at  December 31,  2006** | ** ** |
|----------------------|------------|----------------------------------------------|------------|-------------|------------|--------------|------------|----------------------------------------------|------------|
| Termination benefits |       |                                         | $          | —      |       |         |       | $                                            | 5,155      |   |   |   | $ | (1,553 | ) |   |   | $ | 3,602 |   |   |
|                      |            |                                              |            |             |            |              |            |                                              |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

*2005 StrategicRefinement*

In October 2005, the Company announced its 2005restructuring plan in support of a refined business strategy focused onadvancing key growth assets, including VELCADE, advancing the Company’sclinical pipeline of seven novel oncology and inflammation molecules andbuilding a leading oncology-focused discovery organization. In connection withthe strategic refinement, the Company substantially reduced its effort ininflammation discovery and reduced overall headcount, including eliminatingINTEGRILIN sales and marketing positions, positions in inflammation discoveryand various other business support groups.

The Company recorded restructuring charges ofapproximately $1.2 million during the year ended December 31, 2006 underthe 2005 restructuring plan, primarily for additional facility-related costsassociated with vacated buildings, changes in sublease assumptions of certainvacated buildings, and employee termination benefits as a result of theheadcount reductions within inflammation discovery and business support groups,partially offset by a credit resulting from the earlier than anticipatedsublease of one of the vacated buildings at a higher rate per square foot thanthe Company had originally estimated. “Other” in the table below includes thewrite-off of deferred rent recorded in accordance with SFAS No. 13, “Accountingfor Leases,” upon vacating the facilities.

74

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**Millennium Pharmaceuticals, Inc. Notes to Consolidated Financial Statements December 31, 2006 (Continued)**

Thesecosts are included in restructuring in the statements of operations and incurrent and long-term liabilities on the balance sheet at December 31,2006. The following table displays the restructuring activity and liabilitybalances (in thousands):
|                         | ** ** | **Balance at  December 31,  2005** | ** ** | **Charges** | ** ** | **Payments** | ** ** | **Asset  Impairment** | ** ** | ** ** | **Other** | ** ** | **Balance at  December 31,  2006** | ** ** |
|-------------------------|------------|----------------------------------------------|------------|-------------|------------|--------------|------------|-----------------------|------------|------------|-----------|------------|----------------------------------------------|------------|
| Termination  benefits   |       |                                         | $          | 4,367       |       |         | $          | 280                   |       | $          | (4,514    | )          |                                         | $          | — |   |   |   |   | $ | — |   |   |   | $ | 133 |   |   |
| Facilities              |       |                                         | 24,812     |        |       | (3,997       | )          | (7,240                | )          |       | —    |       |                                         |       |   | 252 |   |   |   | 13,827 |   |   |
| Asset impairment        |       |                                         | —     |        |       | 4,869        |       | —                |       |       | (4,869    | )          |                                         |       |   | — |   |   |   | — |   |   |
| Contract  termination   |       |                                         | 37         |        |       | 37           |       | (74                   | )          |       | —    |       |                                         |       |   | — |   |   |   | — |   |   |
| Other associated  costs |       |                                         | 16         |        |       | 47           |       | (39                   | )          |       | —    |       |                                         |       |   | — |   |   |   | 24 |   |   |
| Total                   |       |                                         | $          | 29,232      |       |         | $          | 1,236                 |       | $          | (11,867   | )          |                                         | $          | (4,869 | ) |   |   |   | $ | 252 |   |   |   | $ | 13,984 |   |   |

 
|                         | ** ** | **Balance at  December 31,  2004** | ** ** | **Charges** | ** ** | **Payments** | ** ** | **Asset  Impairment** | ** ** | **Stock-based  Compensation** | ** ** | **Other** | ** ** | **Balance at  December 31,  2005** | ** ** |
|-------------------------|------------|----------------------------------------------|------------|-------------|------------|--------------|------------|-----------------------|------------|-------------------------------|------------|-----------|------------|----------------------------------------------|------------|
| Termination  benefits   |       |                                         | $          | —      |       |         | $          | 7,744                 |       |                          | $          | (2,753    | )          |                                         |       | $ | — |   |   |   | $ | (479 | ) |   | $ | (145 | ) |   | $ | 4,367 |   |   |
| Facilities              |       |                                         | —     |        |       | 26,968       |       |                  | (1,923     | )                             |       |      | —     |                                         |       |   | — |   |   | (233 | ) |   | 24,812 |   |   |
| Asset impairment        |       |                                         | —     |        |       | 6,698        |       |                  | —     |                          |       |      | (6,698     | )                                            |       |   | — |   |   | — |   |   | — |   |   |
| Contract  termination   |       |                                         | —     |        |       | 1,059        |       |                  | (401       | )                             |       |      | —     |                                         |       |   | — |   |   | (621 | ) |   | 37 |   |   |
| Other associated  costs |       |                                         | —     |        |       | 46           |       |                  | (30        | )                             |       |      | —     |                                         |       |   | — |   |   | — |   |   | 16 |   |   |
| Total                   |       |                                         | $          | —      |       |         | $          | 42,515                |       |                          | $          | (5,107    | )          |                                         |       | $ | (6,698 | ) |   |   | $ | (479 | ) |   | $ | (999 | ) |   | $ | 29,232 |   |   |

 

*2003 RestructuringPlan*

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

During the year ended December 31, 2006, theCompany recorded restructuring charges under the Company’s 2003 restructuringplan of approximately $14.0 million primarily related to the lease terminationpayment from its vacated facility in the Cambridge, England. During the yearended December 31, 2005, the Company recorded an additional $34.6 millionof restructuring expense reflecting changes in the Company’s estimates of thelength of time it would take to sublease certain facilities vacated under the 2003restructuring plan based upon a review of real estate market conditions.

Thefollowing table displays the restructuring activity and liability balances (inthousands):
|                         | ** ** | **Balance at  December 31,  2005** | ** ** | **Charges** | ** ** | **Payments** | ** ** | **Balance at  December 31,  2006** | ** ** |
|-------------------------|------------|----------------------------------------------|------------|-------------|------------|--------------|------------|----------------------------------------------|------------|
| Termination  benefits   |       |                                         | $          | —      |       |         | $          | —                                       |       | $ | — |   |   | $ | — |   |   |
| Facilities              |       |                                         | 75,671     |        |       | 13,995       |       | (39,738                                      | )          |   | 49,928 |   |   |
| Other associated  costs |       |                                         | —     |        |       | 7            |       | (7                                           | )          |   | — |   |   |
| Total                   |       |                                         | $          | 75,671      |       |         | $          | 14,002                                       |       | $ | (39,745 | ) |   | $ | 49,928 |   |   |

 

75

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**Millennium Pharmaceuticals, Inc. Notes to Consolidated Financial Statements December 31, 2006 (Continued)**
|                         | ** ** | **Balance at  December 31,  2004** | ** ** | **Charges** | ** ** | **Payments** | ** ** | **Other** | ** ** | **Balance at  December 31,  2005** | ** ** |
|-------------------------|------------|----------------------------------------------|------------|-------------|------------|--------------|------------|-----------|------------|----------------------------------------------|------------|
| Termination  benefits   |       |                                         | $          | 728         |       |         | $          | —    |       | $                                            | (485       | ) | $ | (243 | ) |   | $ | — |   |   |
| Facilities              |       |                                         | 67,956     |        |       | 35,781       |       | (28,066   | )          | —                                       |       |   | 75,671 |   |   |
| Asset impairment        |       |                                         | —     |        |       | (1,000       | )          | —    |       | 1,000                                        |       |   | — |   |   |
| Contract  termination   |       |                                         | 5,352      |        |       | (189         | )          | (5,163    | )          | —                                       |       |   | — |   |   |
| Other associated  costs |       |                                         | —     |        |       | 3            |       | (3        | )          | —                                       |       |   | — |   |   |
| Total                   |       |                                         | $          | 74,036      |       |         | $          | 34,595    |       | $                                            | (33,717    | ) | $ | 757 |   |   | $ | 75,671 |   |   |

 

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 one-time termination benefits that meetspecified requirements. Costs of termination benefits relate to severancepackages, out-placement services and career counseling for employees affectedby the restructuring. Stock-based compensation amounts relate to modificationsof stock option grants to accelerate vesting and to extend the exercise periodof certain stock option grants upon termination.

In accordance with SFAS No. 146, the Company’sfacilities related expenses and liabilities in all  restructuring plans include estimates of theremaining rental obligations, net of estimated sublease income, for facilitiesthe Company no longer occupies. The Company validates its estimates andassumptions with independent third parties having relevant expertise in thereal estate market. The Company reviews its estimates and assumptions on aregular basis, until the outcome is finalized, and makes whatever modificationsare necessary, based on the Company’s best judgment, to reflect any changedcircumstances.

The Company’s decisions to vacate specified facilitiesand abandon the related leasehold improvements as well as terminate specifiedresearch programs were deemed to be impairment indicators under SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets.” As a resultof performing the impairment evaluations, asset impairment charges wererecorded to adjust the carrying value of the related long-lived assets to theirnet realizable values. The fair values of the assets were estimated based uponanticipated future cash flows, discounted at a rate commensurate with the riskinvolved. These amounts are included in asset impairment in the above tables.

The projected timing of payments of the remainingrestructuring liabilities under all of the Company’s restructuring initiativesat December 31, 2006 is approximately $25.5 million in 2007 and $42.0million thereafter through 2014. The actual amount and timing of the payment ofthe remaining accrued liability is dependent upon the ultimate terms of anypotential subleases or lease restructuring. The Company expects to recordadditional restructuring charges of between $15.0 to $25.0 million in2007. These charges relate to certain facilities that the Company decided toabandon in November 2006, but will not be vacated until 2007, as well asnet present value adjustments on facilities charged to restructuring in prioryears. In connection with the decision to abandon the facilities in 2007, theCompany revised the useful lives of the leasehold improvements at thesefacilities in accordance with SFAS No. 144, “Accounting for the Impairmentor Disposal of Long-Lived Assets.”  TheCompany recorded additional amortization expense of approximately $3.8 millionin research and development expense related to its decision.

The Company continues toevaluate its strategic alternatives, including facility consolidation, and as aresult, significant additional restructuring charges could occur in futureperiods.

76

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**Millennium Pharmaceuticals, Inc. Notes to Consolidated Financial Statements December 31, 2006 (Continued)**

**4. Revenue andStrategic Alliances**

The Company has enteredinto research, development, technology transfer and commercializationarrangements with major pharmaceutical and biotechnology companies relating toa broad range of therapeutic products. These alliances provide the Company withthe opportunity to receive various combinations of license fees, researchfunding, 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*

*INTEGRILIN*

In April 1999, COR entered into a collaborationagreement with SGP to jointly develop and commercialize INTEGRILIN on aworldwide basis. The Company acquired COR in February 2002. Under itscollaboration agreement with SGP, the Company generally shared any profits orlosses from the sale of INTEGRILIN in the United States with SGP based on theamount of promotional efforts that each party contributed. Since the UnitedStates launch of INTEGRILIN in June 1998, the Company and SGP had agreedto share promotional efforts in the United States equally, except for costsassociated with marketing programs that are specific to the Company. TheCompany had granted SGP an exclusive license to market INTEGRILIN outside ofthe United States and European Union, and SGP paid the Company royalties basedon those sales.

In June 2004, the Company reacquired the rightsto market INTEGRILIN in Europe from SGP and concurrently entered into a licenseagreement granting GSK exclusive marketing rights to INTEGRILIN in Europe. In January 2005,the transition of the INTEGRILIN marketing authorization for the European Unionfrom SGP to GSK was completed and GSK began selling INTEGRILIN in the countriesof the European Union. Under the terms of the agreement, the Company isentitled to license fees and royalties from GSK on INTEGRILIN sales in Europeupon the achievement of specified objectives. During the years ended December 31,2006 and 2005, the Company recognized approximately $2.9 million and $21.7million, respectively, of strategic alliance revenue, excludingmanufacturing-related cost reimbursements, from GSK.

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 is recognizingas revenue ratably over the Company’s period of involvement in managing thesupply chain. In addition, SGP is obligated to pay the Company royalties onproduct sales of INTEGRILIN over the lifetime of the product, with thepotential of receiving royalties beyond the 2014 patent expiration date.

As 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 2007, minimum royalties areset at approximately $85.4 million. There are no guaranteed minimum royaltypayments beyond 2007.

Upon closing the amendedcollaboration agreement with SGP, the Company recognized strategic alliancerevenue of approximately $71.4 million in the third quarter of 2005 relating tothe Company’s sale to SGP of the existing raw materials and finished goodsINTEGRILIN inventory. SGP assumed development obligations relating to theproduct. The Company continues to manage the supply chain for 

77

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**Millennium Pharmaceuticals, Inc. Notes to Consolidated Financial Statements December 31, 2006 (Continued)**

INTEGRILINat the expense of SGP for products sold in the United States and other areasoutside of the European Union.

*VELCADE*

On June 30, 2003, the Company entered into anagreement with OBL, a member of the Johnson & Johnson Family OfCompanies, to collaborate on the commercialization and with Johnson &Johnson Pharmaceutical Research & Development, L.L.C., or JJPRD, to continueclinical development of VELCADE. Under the terms of the agreement, the Companyretains all commercialization rights to VELCADE in the United States. OBL andits affiliate, Janssen-Cilag, have agreed to commercialize VELCADEoutside of the United States. The Company is entitled to royalties in the formof distribution fees from OBL and its affiliate on sales of VELCADE outside ofthe United States. The Company also retains an option to co-promote VELCADEwith OBL at a future date in specified European countries.

The Company is engaged with JJPRD in an extensiveglobal program for further clinical development of VELCADE with the purpose ofmaximizing the commercial potential of VELCADE. This program is investigatingthe potential of VELCADE to treat multiple forms of solid and hematologicalcancers, including continued clinical development of VELCADE for multiplemyeloma. JJPRD was responsible for 40% of the joint development costs through2005 and is responsible for 45% of those costs after 2005.

The Company may receive payments for achievingclinical development milestones, for achieving regulatory milestones outside ofthe United States and for achieving agreed-upon sales levels of VELCADE. TheCompany may also receive additional payments for achieving specified clinicaland regulatory approval milestones outside of the United States for additionalsolid and hematological cancers and for achieving sales milestones outside ofthe United States. During the years ended December 31, 2006, 2005 and2004, the Company recognized approximately $48.0 million, $22.0 millionand $54.0 million, respectively, of milestone payments as revenue underthis alliance.

In October 2006, theCompany and Ortho Biotech Inc. (“OBI”) announced a two-year agreement tojointly promote VELCADE in the U.S. Under the terms of the agreement, in thefirst quarter of 2007, OBI and the Company began jointly promoting VELCADE toU.S.-based physicians. The Company will pay a proportion of the VELCADE-relatedcosts for the OBI sales force, and OBI will be entitled to receive a commissionshould sales associated with the increased promotional effort exceedpre-specified targets. Both parties are able to terminate the agreement undercertain circumstances and subject to fees. The Company will continue to beresponsible for manufacturing and distribution of VELCADE in the U.S. TheCompany believes this collaboration, with the well-established OBI oncology salesforce, will help realize the full potential of the product. The currentagreement between the Company and OBL for the promotion of VELCADE outside theU.S. remains unchanged.

*Campath*

On December 31, 2001, ILEXOncology acquired the Company’s equity interest in M&I which owns theCampath product in exchange for $20.0 million plus additional considerationcontingent upon future sales of Campath. The Company earned $40.0 million ofsuch consideration in 2004. In addition, the Company may be entitled toadditional payments from ILEX Oncology based on future U.S. sales of Campath.However, the Company currently does not expect that these thresholds will beachieved and therefore, believes it is unlikely to receive future additionalpayments related to Campath.

78

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**Millennium Pharmaceuticals, Inc. Notes to Consolidated Financial Statements December 31, 2006 (Continued)**

**5. MarketableSecurities**

Thefollowing is a summary of available-for-sale securities (in thousands):

| ** **                         | ** ** | **December 31, 2006** | ** ** |
|------------------------------------|------------|---------------------------------|------------|
| ** **                         | ** ** | **Cost**                        | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair Value** | ** ** |
| Corporate bonds                    |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Due in one year or less            |       | $                               | 15,420     |   |   | $ | — |   |   |   | $ | (181 | ) |   | $ | 15,239 |   |
| Due in one to three years          |       | 537,055                         |       |   | 426 |   |   |   | (3,719 | ) |   | 533,762 |   |
| Asset-backed securities            |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Due in one to five years           |       | 65,385                          |       |   | 152 |   |   |   | (206 | ) |   | 65,331 |   |
| Due in six to ten years            |       | 3,441                           |       |   | 5 |   |   |   | (52 | ) |   | 3,394 |   |
| Due after ten years                |       | 15,435                          |       |   | 37 |   |   |   | (99 | ) |   | 15,373 |   |
| U.S. government agency  securities |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Due in one year or less            |       | 2,275                           |       |   | — |   |   |   | (11 | ) |   | 2,264 |   |
| Due in one to three years          |       | 43,422                          |       |   | 48 |   |   |   | (257 | ) |   | 43,213 |   |
| Equity securities                  |       | —                          |       |   | 3,500 |   |   |   | — |   |   | 3,500 |   |
|                               |       | $                               | 682,433    |   |   | $ | 4,168 |   |   |   | $ | (4,525 | ) |   | $ | 682,076 |   |

 

| ** **                         | ** ** | **December 31, 2005** | ** ** |
|------------------------------------|------------|---------------------------------|------------|
| ** **                         | ** ** | **Cost**                        | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair Value** | ** ** |
| Corporate bonds                    |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Due in one year or less            |       | $                               | 30,525     |   |   | $ | — |   |   |   | $ | (582 | ) |   | $ | 29,943 |   |
| Due in one to three years          |       | 510,334                         |       |   | 41 |   |   |   | (7,607 | ) |   | 502,768 |   |
| Asset-backed securities            |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Due in one to five years           |       | 50,193                          |       |   | 9 |   |   |   | (563 | ) |   | 49,639 |   |
| Due in six to ten years            |       | 5,073                           |       |   | — |   |   |   | (73 | ) |   | 5,000 |   |
| Due after ten years                |       | 10,943                          |       |   | 1 |   |   |   | (160 | ) |   | 10,784 |   |
| U.S. government agency  securities |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Due in one year or less            |       | 2,807                           |       |   | — |   |   |   | (48 | ) |   | 2,759 |   |
| Due in one to three years          |       | 40,426                          |       |   | — |   |   |   | (760 | ) |   | 39,666 |   |
|                               |       | $                               | 650,301    |   |   | $ | 51 |   |   |   | $ | (9,793 | ) |   | $ | 640,559 |   |

 

79

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**Millennium Pharmaceuticals, Inc. Notes to Consolidated Financial Statements December 31, 2006 (Continued)**

 

Thefollowing is a summary of the gross unrealized losses and fair value of theCompany’s investments with unrealized losses that are not deemed to beother-than-temporarily impaired, aggregated by investment category and lengthof time that individual securities have been in a continuous unrealized lossposition (in thousands):

| ** **                         | ** ** | **December 31, 2006**        | ** ** |
|------------------------------------|------------|----------------------------------------|------------|
| ** **                         | ** ** | **Less Than 12 Months** | ** ** | **12 Months or Greater** | ** ** | **Total** | ** ** |
| ** **                         | ** ** | **Fair Value**                    | ** ** | **Unrealized  Losses** | ** ** | **Fair Value** | ** ** | **Unrealized  Losses** | ** ** | **Fair Value** | ** ** | **Unrealized  Losses** | ** ** |
| Corporate bonds                    |       | $                                      | 257,089    |   |   | $ | (1,209 | ) |   | $ | 186,924 |   |   | $ | (2,691 | ) |   | $ | 444,013 |   |   | $ | (3,900 | ) |   |
| Asset-backed  securities           |       | 26,338                                 |       |   | (74 | ) |   | 22,617 |   |   | (283 | ) |   | 48,955 |   |   | (357 | ) |   |
| U.S. government  agency securities |       | 27,635                                 |       |   | (134 | ) |   | 10,883 |   |   | (134 | ) |   | 38,518 |   |   | (268 | ) |   |
| Total                              |       | $                                      | 311,062    |   |   | $ | (1,417 | ) |   | $ | 220,424 |   |   | $ | (3,108 | ) |   | $ | 531,486 |   |   | $ | (4,525 | ) |   |

 

The unrealized losses on investments in corporatebonds and asset-backed securities at December 31, 2006 were generated from318 and 106 securities, respectively. The majority of the securities in a lossposition greater than one year have been in an unrealized loss position for aperiod of two to three years. The unrealized losses were caused by interestrate increases, and not credit quality issues. To determine whether another-than-temporary impairment exists, the Company considered whether it hasthe ability and intent to hold the investment until a market price recovery andconsiders whether evidence indicating the cost of the investment is recoverableoutweighs evidence to the contrary. Since the decline in market value isattributable to changes in interest rates and the Company has the ability andintent to hold these investments until a recovery of fair value, the Companydoes not consider these investments to be other-than-temporarily impaired at December 31,2006.

The unrealized losses at December 31,2006 on investments in United States government agency securities at December 31,2006 were primarily caused by interest rate increases. The contractual terms ofthose investments do not permit the issuer to settle the securities at a priceless than amortized cost of the investment. Because the company has the abilityand intent to hold these investments until a recovery of fair value, theCompany does not consider these investments to be other-than-temporarilyimpaired at December 31, 2006.

**6. Property andEquipment**

Propertyand equipment consists of the following at December 31 (in thousands):

| ** **                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
| Equipment                                       |       | $        | 164,463    |     | $          | 181,329 |   |
| Capitalized  software                           |       | 39,192   |       | 45,572   |       |
| Leasehold  improvements                         |       | 231,730  |       | 254,893  |       |
| Construction in  progress                       |       | 1,621    |       | 2,254    |       |
|                                            |       | 437,006  |       | 484,048  |       |
| Less accumulated  depreciation and amortization |       | (283,657 | )          | (300,989 | )          |
|                                            |       | $        | 153,349    |     | $          | 183,059 |   |

 

80

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**Millennium Pharmaceuticals, Inc. Notes to Consolidated Financial Statements December 31, 2006 (Continued)**

Depreciation expense,which includes amortization of assets recorded under capital leases, was$31.9 million, $42.3 million and $59.9 million, in 2006, 2005and 2004, respectively. During the years ended December 31, 2006 and December 31,2005, the Company retired certain fixed assets that had been fully amortized.

**7. Accrued expenses**

Accruedexpenses consist of the following at December 31 (in thousands):

| ** **                            | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
| Payroll and  benefits                 |       | $        | 24,895     |     | $          | 21,629 |   |
| Clinical and preclinical  development |       | 10,933   |       | 9,875    |       |
| Manufacturing                         |       | 4,330    |       | 4,036    |       |
| Other expenses                        |       | 22,386   |       | 24,785   |       |
|                                  |       | $        | 62,544     |     | $          | 60,325 |   |

 

**8. Commitments**

**Lease Commitments**

The Company leases some of its laboratory and officespace under operating lease agreements with various terms and renewal options,including major facilities with lease expirations ranging from 2007 through2023. In addition to minimum lease commitments, these lease agreements requirethe Company to pay its pro rata share of property taxes and building operatingexpenses.

On August 4, 2000, the Company entered into leaseagreements, relating to two buildings for laboratory and office space inCambridge, MA. The rent obligation for the first of these buildings began in July 2002and the rent obligation on the second building began in July 2003. TheCompany was responsible for a portion of the construction costs for bothbuildings and was deemed to be the owner during the construction period of eachbuilding under EITF 97-10, “The Effect of Lessee Involvement in AssetConstruction.” In July 2002 and July 2003, upon completion of theconstruction period of the buildings, respectively, the Company recorded theleases as capital leases. Payments under these capital leases compriseprincipal, interest and rent expense.

At December 31, 2006, the Company has pledged$6.9 million of marketable securities, included in restricted cash,primarily as collateral for letters of credit for specified leased facilities.

81

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**Millennium Pharmaceuticals, Inc. Notes to Consolidated Financial Statements December 31, 2006 (Continued)**

At December 31,2006, future minimum commitments under leases with noncancelable terms,including leases for facilities that the Company no longer occupies as part ofits restructuring plan, of more than one year are as follows (in thousands):

| ** **                                           | ** ** | **Capital  Leases** | ** ** | **Operating  Leases** | ** ** | **Operating  Subleases** | ** ** |
|------------------------------------------------------|------------|---------------------|------------|-----------------------|------------|--------------------------|------------|
| Year:                                                |       |                |       |                  |       |                     |       |
| 2007                                                 |       | $                   | 16,155     |                  | $          | 34,068                   |       | $ | (8,479 | ) |
| 2008                                                 |       | 16,915              |       | 31,604                |       | (8,774                   | )          |
| 2009                                                 |       | 17,183              |       | 21,306                |       | (8,051                   | )          |
| 2010                                                 |       | 17,183              |       | 20,427                |       | (7,658                   | )          |
| 2011                                                 |       | 17,183              |       | 14,568                |       | (5,590                   | )          |
| Thereafter                                           |       | 206,189             |       | 21,780                |       | (9,147                   | )          |
| Total                                                |       | 290,808             |       | $                     | 143,753    |                     | $          | (47,699 | ) |
| Less amount  representing additional rental payments |       | (180,111            | )          |                  |       |                     |       |
| Less amount  representing interest                   |       | (34,471             | )          |                  |       |                     |       |
| Present value of  minimum lease payments             |       | 76,226              |       |                  |       |                     |       |
| Less current  portion of capital lease obligations   |       | (1,185              | )          |                  |       |                     |       |
| Capital lease  obligations, net of current portion   |       | $                   | 75,041     |                  |       |                     |       |   |

 

Total rent expense, whichincludes rent for buildings and equipment, was $31.4 million,$37.4 million and $46.2 million in 2006, 2005 and 2004, respectively.

**Long-Term SupplyContracts**

The Company relies onthird party contract manufacturers for the manufacturing, fill/finish andpackaging of VELCADE and INTEGRILIN for both commercial purposes and forongoing clinical trials. The Company has entered into long-term supplycontracts with certain of these manufacturers. Total future fixed commitmentsunder these long-term arrangements approximate $29.6 million in 2007,$24.2 million in 2008, $23.0 million in 2009 and $30.2 million thereafter.

**ExternalCollaborations**

The Company funds researchefforts of its strategic alliance and various academic collaborators inconnection with its research and development programs. Total future fixedcommitments under these agreements approximate $2.8 million in 2007 and$0.1 million thereafter.

**9. Convertible Debt**

TheCompany had the following convertible notes outstanding at December 31,2006 and 2005:

| ** **                                     | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|
| 2.25% convertible  notes due November 15, 2011 |       | $        | 250,000    |     | $          | — |   |
| 5.5% convertible  notes due January 15, 2007   |       | 83,325   |       | 83,325   |       |
| 5.0% convertible  notes due March 1, 2007      |       | 16,246   |       | 16,246   |       |
| 4.5% convertible  notes due June 15, 2006      |       | —   |       | 5,890    |       |
| Total                                          |       | $        | 349,571    |     | $          | 105,461 |   |

 

82

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**Millennium Pharmaceuticals, Inc. Notes to Consolidated Financial Statements December 31, 2006 (Continued)**

The 5.5% convertible subordinated notes due and paidJanuary 15, 2007 were convertible into the Company’s common stock at anytime prior to maturity at a price equal to $42.07 per share (the“5.5% notes”). The $16.2 million of principal of 5.0% convertiblesubordinated notes due March 1, 2007 are convertible into the Company’scommon stock at any time prior to maturity at a price equal to $34.21 pershare (the “5.0% notes”). The $250.0 million of principal of 2.25%convertible senior notes due November 15, 2011 are convertible into theCompany’s common stock at a price equal to $15.47 per share (the“2.25% notes”).

Under the terms of these notes, the Company isrequired to make semi-annual interest payments on the outstanding principalbalance of the 5.5% notes on January 15 and July 15 of each year, ofthe 5.0% notes on March 1 and September 1 of each year and ofthe 2.25% notes on May 15 and November 15 of each year. All requiredinterest payments to date have been made.

In November 2006, the Company completed the saleof $250.0 million of the 2.25% notes, which resulted in net proceeds ofapproximately $242.2 million. The 2.25% notes are convertible into the Company’scommon stock based upon a conversion rate of 64.6465 shares of common stock per$1,000 principal amount of the 2.25% notes, which is equal to an initialconversion price of approximately $15.47 per share of stock, subject toadjustment. The 2.25% notes are convertible only in the followingcircumstances: (1) if the closing price of the common stock exceeds 120%of the conversion price within a specified period, (2) if specifieddistributions to holders of the common stock are made or specified corporate transactionsoccur, (3) if the average trading price per $1,000 principal amount isless than 98% of the average conversion of the notes within a specified period(the “parity trigger”) or (4) during the last three months prior to thematurity date of the notes, unless previously repurchased by the Company undercertain circumstances. The 2.25% notes are subordinated in right of payment toall existing and future senior indebtedness of the Company.

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

In connection withthe sale of the 2.25% notes, the Company paid approximately $7.8 million infinancing costs, which have been deferred and are included in other assets. Thesedeferred financing costs are being amortized to interest expense over the lifeof the debt. The Company recognized $0.2 million of interest expense during theyear ended December 31, 2006.

In accordance with thepayment terms, the Company repaid the entire $5.9 million principal balance onits 4.5% convertible senior notes due on June 15, 2006 that were convertible ata price equal to $40.61 per share. As noted above, in January 2007, theCompany repaid its 5.5% notes in full for approximately $83.3 million inaccordance with the payment terms.

83

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**Millennium Pharmaceuticals, Inc. Notes to Consolidated Financial Statements December 31, 2006 (Continued)**

**10. Stockholders’Equity**

**Preferred Stock**

The Company has 5,000,000authorized shares of preferred stock, $0.001 par value, issuable in one or moreseries, each of such series to have such rights and preferences, includingvoting rights, dividend rights, conversion rights, redemption privileges andliquidation preferences, as shall be determined by the Board of Directors.

**Common Stock**

At December 31, 2006,the Company had 500,000,000 authorized shares of common stock, $0.001 parvalue, with 317,341,533 shares issued and outstanding.

**Common StockWarrants**

At December 31, 2006,the Company had outstanding exercisable warrants to purchase 429,600 shares ofcommon stock with a weighted-average exercise price of $9.44 per share, whichexpire in 2007.

**Stock Option Plans**

As discussed in Note 2, the Company adopted SFAS 123Reffective January 1, 2006. SFAS 123R requires the recognition of the fairvalue of stock-based compensation in its statements of operations. Stock-basedcompensation expense primarily relates to stock options, restricted stock andstock issued under the Company’s employee stock purchase plans. Stock optionsare granted to employees at exercise prices equal to the fair market value ofthe Company’s stock at the dates of grant. Generally, options have acontractual term of ten years and vest monthly over a four-year period fromgrant date, although certain options have been, and may in the future, begranted with shorter vesting periods. Certain of the Company’s option plansprovide for full vesting of options issued under the plans to optionholders whoterminate their employment for good reason or are terminated without causewithin the period one month before and one year after a change of control. Optionsgranted to consultants and other nonemployees generally vest over the period ofservice to the Company. Awards of restricted stock are granted to officers andcertain employees and generally fully vest four years from the grant date,although certain awards have been, and may in the future, be granted withshorter vesting periods. The Company recognizes stock-based compensationexpense equal to the fair value of stock options on a straight-line basis overthe requisite service period for each separately vesting portion of the awardas if the award was, in substance, multiple awards. Restricted stock awards arerecorded as compensation cost, based on the market value on the date of thegrant, on a straight-line basis over the requisite service period for eachseparately vesting portion of the award as if the award was, in substance,multiple awards. The Company provides newly issued shares to satisfy stockoption exercises, the issuance of restricted stock and stock issued under theCompany’s employee stock purchase plans.

As a result of the adoption of SFAS 123R, the Company’snet loss for the year ended December 31, 2006 was $34.8 million, or$0.11 per share, greater than if it had continued to account for shared-basedcompensation related to stock options and the Company’s employee stock purchaseplan under APB 25.

Inconnection with the adoption of SFAS 123R, the Company reassessed its valuationmethodology for stock options and the related input assumptions. The assessmentof the valuation methodology resulted in the continued use of the Black-Scholesmodel. In the fourth quarter of 2005, the Company considered 

84

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**Millennium Pharmaceuticals, Inc. Notes to Consolidated Financial Statements December 31, 2006 (Continued)**

implied volatilities of currently traded options toprovide an estimate of volatility based upon current trading activity. Afterconsidering other factors such as its stage of development, the length of timethe Company has been public and the impact of having a marketed product, theCompany concluded that a blended volatility rate based upon the most recentthree-year and four-year periods of historical performance, as well as the impliedvolatilities of currently traded options, better reflects the expectedvolatility of its stock going forward. The Company uses 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, the Company validated its estimates and assumptions with anindependent third party having the relevant expertise in valuationmethodologies. The Company updates these assumptions on a quarterly basis toreflect recent historical data. The risk-free interest rate for periods withinthe contractual life of the option is based on the U.S. Treasury yield curve ineffect at the time of grant. The following table summarizes theweighted-average assumptions the Company used in its fair value calculations atthe date of grant:
| ** **               | ** ** | **Stock Options** | ** ** | **Stock Purchase Plan** | ** ** |
|--------------------------|------------|------------------------|------------|-----------------------------------|------------|
| ** **               | ** ** | **2006**               | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Expected life  (years)   |       | 3.7                    |       | 4.8                               |       | 5.5 |   | 0.5 |   | 0.5 |   | 0.5 |   |
| Risk-free  interest rate |       | 4.76                   | %          | 4.03                              | %          | 2.38 | % | 4.49 | % | 3.13 | % | 2.39 | % |
| Volatility               |       | 45                     | %          | 60                                | %          | 70 | % | 49 | % | 60 | % | 73 | % |

 

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

SFAS 123R requires the application of an estimatedforfeiture rate to current period expense to recognize stock-based compensationexpense only for those awards expected to vest. The Company estimatesforfeitures based upon historical data, adjusted for known trends, and willadjust its estimate of forfeitures if actual forfeitures differ, or areexpected to differ from such estimates. Subsequent changes in estimatedforfeitures will be recognized through a cumulative catch-up adjustment in theperiod of change and will also impact the amount of stock-based compensationexpense in future periods.

The Company has various stock options plans availablefor the granting of stock-based awards. The Company’s 1993 Incentive Stock Plan(the “1993 Plan”), 1996 Equity Incentive Plan (the “1996 Plan”), and 1997Equity Incentive Plan (the “1997 Plan”), allow for the granting of incentiveand nonstatutory stock options or purchase common stock. The 1993, 1996, and1997 Plans allow for the granting of up to 21,680,000, 22,400,000, and 16,000,000options, respectively. At December 31, 2006, a total of 79,435 shares ofcommon stock have been reserved for exercise of options outstanding under the1993 Plan and 7,019,981 and 5,139,599 shares of common stock have been reservedfor the exercise of options outstanding and are available for future grantunder the 1996 and 1997 Plans, respectively. No options are available forfuture grant under the 1993 Plan. The Company’s 2000 Incentive Stock Plan (the “2000Plan”) allows for the granting of incentive and nonstatutory stock options,restricted stock awards and other stock-based awards, including the grant ofshares based upon specified conditions, the grant of securities convertibleinto common stock and the grant of stock appreciation rights of up to45,607,706 shares of common stock. At December 31, 2006, a total of38,925,919 shares of common stock have been reserved for the exercise ofoptions outstanding and are available for future grant under the 2000 Plan.

In connection with acquisitions prior to 2004, theCompany assumed certain stock options plans of its acquired companies. ThePlans, as assumed, allowed for the granting of incentive and nonstatutoryoptions to purchase up to 14,595,425 shares of Millennium common stock. At December 31,2006, a total of 

85

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**Millennium Pharmaceuticals, Inc. Notes to Consolidated Financial Statements December 31, 2006 (Continued)**

624,512 shares of commonstock have been reserved for the exercise of options outstanding under theseassumed Plans. At December 31, 2006, a total of 3,442,732 shares areavailable for future grant under these plans.

Under the 1996 Employee Stock Purchase Plan (the “1996Stock Purchase Plan”), eligible employees may purchase common stock at a priceper share equal to 85% of the lower of the fair market value of the commonstock at the beginning or end of each offering period. Participation in theoffering is limited to 10% of the employee’s compensation or $25,000 in anycalendar year. The offering periods begin on May 1 and November 1 ofeach year. At December 31, 2006, subscriptions were outstanding for anestimated 70,532 shares at $9.78 per share.

Thefollowing table presents the combined option activity of the Company’s stockplans for the year ended December 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                                               |       |                                                                 | 3,776,790  |                                                         |       |                                                                      | 10.24        |                                                     |       |   |   |   |   |   |   |   |   |
| Exercised                                             |       |                                                                 | (3,987,900 | )                                                            |       |                                                                      | 7.04         |                                                     |       |   |   |   |   |   |   |   |   |
| Forfeited or  expired                                 |       |                                                                 | (7,733,216 | )                                                            |       |                                                                      | 19.69        |                                                     |       |   |   |   |   |   |   |   |   |
| Outstanding at  December 31, 2006                |       |                                                                 | 27,004,963 |                                                         |       |                                                                      | $ 16.19 |                                                     |       |   | 5.76 |   |   |   | $ 28,244 |   |   |
| Vested or  expected to vest at December 31, 2006 |       |                                                                 | 26,002,784 |                                                         |       |                                                                      | $ 16.42 |                                                     |       |   | 5.65 |   |   |   | $ 27,216 |   |   |
| Exercisable at  December 31, 2006                |       |                                                                 | 19,067,943 |                                                         |       |                                                                      | $ 18.62 |                                                     |       |   | 4.83 |   |   |   | $ 17,976 |   |   |

 

The weighted-average grant-date fair value of optionsgranted during 2006, 2005 and 2004 was $3.93, $4.56 and $8.39, respectively.

The intrinsic value of options exercised during 2006,2005 and 2004 was $13.5 million, $9.4 million and $27.9 million, respectively.

As of December 31, 2006, the total remainingunrecognized compensation cost related to nonvested stock option awardsamounted to approximately $15.6 million, including estimated forfeitures,which will be recognized over the weighted-average remaining requisite serviceperiod of approximately one and one half years.

Asummary of the status of nonvested shares of restricted stock as of December 31,2006, and changes during the year then ended, is presented below:
| ** **                           | ** ** | **Shares** | ** ** | **Weighted-Average  Grant Date Fair Value** | ** **   |
|--------------------------------------|------------|------------|------------|------------------------------------------------------------|--------------|
| Nonvested at  January 1, 2006   |       | 480,000    |       |                                                       | $ 9.97  |   |   |
| Granted                              |       | 1,391,730  |       |                                                       | 10.44        |   |   |
| Vested                               |       | (40,000    | )          |                                                       | 9.80         |   |   |
| Forfeited                            |       | (172,630   | )          |                                                       | 10.50        |   |   |
| Nonvested at  December 31, 2006 |       | 1,659,100  |       |                                                       | $ 10.31 |   |   |

 

86

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**Millennium Pharmaceuticals, Inc. Notes to Consolidated Financial Statements December 31, 2006 (Continued)**

The total fair value ofshares of restricted stock vested during the period ended December 31,2006 was approximately $0.4 million. No shares of restricted stock vested in2005 or 2004.

As of December 31,2006, the total remaining unrecognized compensation cost related to nonvestedrestricted stock awards amounted to approximately $7.6 million, includingestimated forfeitures, which will be recognized over the weighted-averageremaining requisite service period of approximately one and three quarter years.

**11. Income Taxes**

Thedifference between the Company’s expected tax provision (benefit), as computedby applying the U.S. federal corporate tax rate of 35% to (loss) beforeprovision for income taxes, and actual tax is reconciled in the following chart(in thousands):
| ** **                                                                      | ** ** | **2006**                                                      | ** ** | **2005**                                                                  | ** ** | **2004**                                                                  | ** ** |
|---------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| Loss before  provision for income taxes                                         |       | $ (43,953                                                | )          | $ (198,249                                                           | )          | $ (252,297                                                           | )          |
| Expected tax  benefit at 35%                                                    |       | $ (15,384                                                | )          | $ (69,387                                                            | )          | $ (88,304                                                            | )          |
| Change in  valuation allowance for deferred tax assets allocated to tax expense |       | 13,236                                                        |       | 68,694                                                                    |       | 85,947                                                                    |       |
| Stock  compensation                                                             |       | 1,324                                                         |       | —                                                                    |       | —                                                                    |       |
| Other permanent  items                                                          |       | 824                                                           |       | 693                                                                       |       | 2,357                                                                     |       |
| Income tax provision                                                            |       | $         — |       | $           — |       | $           — |       |

 

At December 31, 2006, the Company had unused netoperating loss carryforwards of approximately $1.4 billion available to reducefederal taxable income, expiring in 2007 through 2026, and $0.4 billionavailable to reduce state taxable income, expiring in 2007 through 2011. TheCompany also has federal and net state tax credits of approximately $104.3 millionavailable to offset federal and state income taxes, both of which expirebeginning in 2007. Due to the degree of uncertainty related to the ultimate useof the loss carryforwards and tax credits, the Company has fully reserved thesetax benefits.

87

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**Millennium Pharmaceuticals, Inc. Notes to Consolidated Financial Statements December 31, 2006 (Continued)**

Deferredincome taxes reflect the net tax effects of temporary differences between thecarrying amounts of assets and liabilities for financial reporting purposes andthe amounts used for income tax purposes. Significant components of the Company’sdeferred tax assets as of December 31 are as follows (in thousands):
| ** **                                | ** ** | **2006**                                                                  | ** ** | **2005**                                                                  | ** ** |
|-------------------------------------------|------------|---------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| Net operating  loss carryforwards         |       | $ 276,830                                                            |       | $ 512,534                                                            |       |
| Tax credit  carryforwards                 |       | 104,291                                                                   |       | 99,038                                                                    |       |
| Capitalized  research costs               |       | 388,219                                                                   |       | 376,664                                                                   |       |
| Property and  other intangible assets     |       | 65,898                                                                    |       | 72,122                                                                    |       |
| Deferred revenue                          |       | 7,769                                                                     |       | 11,508                                                                    |       |
| Stock  compensation                       |       | 14,216                                                                    |       | 565                                                                       |       |
| Accrued  restructuring                    |       | 27,005                                                                    |       | 41,963                                                                    |       |
| Unrealized loss  on marketable securities |       | 143                                                                       |       | 3,891                                                                     |       |
| Other                                     |       | 13,625                                                                    |       | 16,155                                                                    |       |
| Total deferred  tax assets                |       | 897,996                                                                   |       | 1,134,440                                                                 |       |
| Valuation  allowance                      |       | (765,646                                                                  | )          | (988,705                                                                  | )          |
| Total deferred  tax assets                |       | 132,350                                                                   |       | 145,735                                                                   |       |
| Deferred tax  liabilities:                |       |                                                                      |       |                                                                      |       |
| Intangible assets                         |       | (132,350                                                                  | )          | (145,735                                                                  | )          |
| Net deferred tax asset                    |       | $           — |       | $           — |       |

 

The valuation allowance decreased by $223.1 millionduring 2006 due primarily to the Company’s election, as more fully describedbelow, to derecognize approximately $231.2 million of deferred tax assets andrelated valuation allowance in connection with its adoption of SFAS 123R.This reduction was offset by an increase of approximately $8.1 million intemporary items arising from changes in timing differences of costs forfinancial accounting and tax purposes, especially for capitalized researchcosts, stock compensation, accrued restructuring and amortized intangibleassets. Net operating loss carryforwards decreased as the amount of lossesexpiring during the year exceeded current net operating losses from operations.

Anysubsequently recognized tax benefits relating to the valuation allowance fordeferred tax assets as of December 31, 2006 would be allocated as follows(in thousands):
| Reported in the  statement of operations |   | $ 750,619 |   |
|------------------------------------------|--------|----------------|--------|
| Reported as a  decrease to goodwill      |   | 14,884         |   |
| Reported in  additional paid-in capital  |   | 143            |   |
| Total valuation  allowance               |   | $ 765,646 |   |

 

As discussed inNote 2, the Company adopted SFAS 123R effective January 1, 2006for stock-based compensation plans. Generally, tax return deductions areallowable on such arrangements, but, may arise in different amounts and periodsfrom compensation costs recognized on financial statements. Pursuant toSFAS 123R, if the tax return deduction for an award exceeds the cumulativecompensation cost recognized on the financial statements, any excess taxbenefit shall be recognized as additional paid-in capital when the deductionreduces taxes payable. Prior to adoption, the Company recognized deferred tax assets,along with an offsetting valuation allowance, for net operating losscarryforwards that included deductions for 

88

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**Millennium Pharmaceuticals, Inc. Notes to Consolidated Financial Statements December 31, 2006 (Continued)**

excesstax benefits from stock-based compensation. On adoption, the Company has chosento derecognize the deferred tax asset for these excess tax deductions in the netoperating loss carryforwards, along with the offsetting valuation allowance. Thenet tax amount of the unrealized excess tax benefits as of December 31,2006, no longer included and disclosed as a deferred tax asset, is approximately$232.4 million.

**12. Related PartyTransactions**

In November 2003, theCompany sold specified assets, including intellectual property to PortolaPharmaceuticals, Inc. (“Portola”), a company founded and owned in part bya member of Millennium’s board of directors. In exchange for these assets, theCompany received Portola Series A preferred convertible stock,representing less than a 5% ownership in Portola. The investment in Portola isaccounted for using the cost method and is included in other long-term assetson the balance sheet at December 31, 2006 and 2005, respectively. Inaddition, commencing in June 2004, Portola sub-leased specified researchfacilities of the Company in South San Francisco, CA. In August 2004, theCompany entered into an additional transaction with Portola to license toPortola the Company’s Factor Xa inhibitor program in return for milestone androyalty payments upon achievement of certain events. In December 2005, theCompany entered into a transaction with Portola to license to Portola theCompany’s Aggregometer system in exchange for cash and Portola Series Bpreferred stock, which combined with the previous stock issued, maintains theCompany’s ownership in Portola at less than 5%.

**13. QuarterlyFinancial Information (unaudited)**
| ** **                                                           | ** ** | **First Quarter**                                                | ** **               | **Second Quarter**     | ** ** | **Third Quarter**           | ** **               | **Fourth Quarter**         | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------------------------------------------------|--------------------------|-----------------------------|------------|----------------------------------|--------------------------|---------------------------------|------------|
| ** **                                                           | ** ** | **Ended**                                                             | ** **               | **Ended**                   | ** ** | **Ended**                        | ** **               | **Ended**                       | ** ** |
| ** **                                                           | ** ** | **March 31, 2006**                                          | ** **               | **June 30, 2006** | ** ** | **September 30, 2006** | ** **               | **December 31, 2006** | ** ** |
| ** **                                                           | ** ** | **(In Thousands, Except Per Share Amounts)** | ** **               |
| Revenues:                                                            |       |                                                                  |                     |                        |       |                             |                     |                            |       |   |   |   |   |   |   |   |   |
| Net product sales                                                    |       |                                                                  | $ 53,373            |                        |       |                             | $ 58,786            |                            |       |   | $ 53,161 |   |   |   | $ 55,132 |   |   |
| Revenue under strategic alliances                                    |       |                                                                  | 38,629                   |                        |       |                             | 27,165                   |                            |       |   | 17,196 |   |   |   | 48,685 |   |   |
| Royalties                                                            |       |                                                                  | 30,473                   |                        |       |                             | 34,172                   |                            |       |   | 33,737 |   |   |   | 36,321 |   |   |
| Total revenues                                                       |       |                                                                  | 122,475                  |                        |       |                             | 120,123                  |                            |       |   | 104,094 |   |   |   | 140,138 |   |   |
| Costs and expenses:                                                  |       |                                                                  |                     |                        |       |                             |                     |                            |       |   |   |   |   |   |   |   |   |
| Cost of sales (excludes amortization of acquired  intangible assets) |       |                                                                  | 15,828                   |                        |       |                             | 14,102                   |                            |       |   | 6,730 |   |   |   | 8,785 |   |   |
| Research and development                                             |       |                                                                  | 82,598                   |                        |       |                             | 79,309                   |                            |       |   | 73,436 |   |   |   | 82,827 |   |   |
| Selling, general and administrative                                  |       |                                                                  | 35,465                   |                        |       |                             | 37,391                   |                            |       |   | 34,365 |   |   |   | 48,412 |   |   |
| Restructuring                                                        |       |                                                                  | 2,831                    |                        |       |                             | 1,554                    |                            |       |   | 1,352 |   |   |   | 14,656 |   |   |
| Amortization of intangibles                                          |       |                                                                  | 8,487                    |                        |       |                             | 8,487                    |                            |       |   | 8,488 |   |   |   | 8,488 |   |   |
| Total costs and expenses                                             |       |                                                                  | 145,209                  |                        |       |                             | 140,843                  |                            |       |   | 124,371 |   |   |   | 163,168 |   |   |
| Loss from  operations                                                |       |                                                                  | (22,734                  | )                           |       |                             | (20,720                  | )                               |       |   | (20,277 | ) |   |   | (23,030 | ) |   |
| Other income, net                                                    |       |                                                                  | 1,893                    |                        |       |                             | 3,053                    |                            |       |   | 6,560 |   |   |   | 31,302 |   |   |
| Net (loss)/income                                                    |       |                                                                  | $ (20,841           | )                           |       |                             | $ (17,667           | )                               |       |   | $ (13,717 | ) |   |   | $  8,272 |   |   |
| **Amounts per common share:**                                        | ** ** |                                                                  |                     |                        |       |                             |                     |                            |       |   |   |   |   |   |   |   |   |
| Net (loss)/income  per share, basic and diluted                      |       |                                                                  | $   (0.07 | )                           |       |                             | $   (0.06 | )                               |       |   | $   (0.04 | ) |   |   | $     0.03 |   |   |
| Weighted-average  shares, basic                                      |       |                                                                  | 311,823                  |                        |       |                             | 313,321                  |                            |       |   | 314,228 |   |   |   | 315,481 |   |   |
| Weighted-average shares,  diluted                                    |       |                                                                  | 311,823                  |                        |       |                             | 313,321                  |                            |       |   | 314,228 |   |   |   | 318,468 |   |   |

 

 

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**Millennium Pharmaceuticals, Inc. Notes to Consolidated Financial Statements December 31, 2006 (Continued)**

| ** **                                                           | ** ** | **First Quarter  Ended  March 31, 2005**               | ** ** | **Second Quarter  Ended  June 30, 2005** | ** ** | **Third Quarter  Ended  September 30, 2005** | ** ** | **Fourth Quarter  Ended  December 31, 2005** | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|---------------------------------------------------------|------------|-------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                                           | ** ** | **(In Thousands, Except Per Share Amounts)** | ** ** |                                                    |
| Revenues:                                                            |       |                                                                  |       |                                                    |       |                                                        |       |                                                        |       |   |   |   |   |   |   |   |   |   |
| Net product sales                                                    |       |                                                                  | $          | 44,795                                                  |       |                                                        |       | $                                                           | 43,892     |   |   |   | $ | 50,942 |   |   |   | $ | 52,444 |   |   |   |
| Co-promotion revenue                                                 |       |                                                                  | 42,826     |                                                    |       |                                                        | 47,661     |                                                        |       |   | 33,037 |   |   |   | — |   |   |   |
| Revenue under strategic alliances                                    |       |                                                                  | 36,090     |                                                    |       |                                                        | 19,092     |                                                        |       |   | 105,186 |   |   |   | 44,151 |   |   |   |
| Royalties                                                            |       |                                                                  | —     |                                                    |       |                                                        | —     |                                                        |       |   | 12,514 |   |   |   | 25,678 |   |   |   |
| Total revenues                                                       |       |                                                                  | 123,711    |                                                    |       |                                                        | 110,645    |                                                        |       |   | 201,679 |   |   |   | 122,273 |   |   |   |
| Costs and  expenses:                                                 |       |                                                                  |       |                                                    |       |                                                        |       |                                                        |       |   |   |   |   |   |   |   |   |   |
| Cost of sales (excludes amortization of acquired  intangible assets) |       |                                                                  | 14,581     |                                                    |       |                                                        | 16,680     |                                                        |       |   | 89,020 |   |   |   | 21,046 |   |   |   |
| Research and development                                             |       |                                                                  | 86,154     |                                                    |       |                                                        | 86,939     |                                                        |       |   | 80,632 |   |   |   | 88,459 |   |   |   |
| Selling, general and administrative                                  |       |                                                                  | 51,637     |                                                    |       |                                                        | 52,060     |                                                        |       |   | 40,623 |   |   |   | 36,279 |   |   |   |
| Restructuring                                                        |       |                                                                  | 1,107      |                                                    |       |                                                        | 2,999      |                                                        |       |   | 58,791 |   |   |   | 14,213 |   |   |   |
| Amortization of intangibles                                          |       |                                                                  | 8,500      |                                                    |       |                                                        | 8,500      |                                                        |       |   | 8,500 |   |   |   | 8,487 |   |   |   |
| Total costs and expenses                                             |       |                                                                  | 161,979    |                                                    |       |                                                        | 167,178    |                                                        |       |   | 277,566 |   |   |   | 168,484 |   |   |   |
| Loss from  operations                                                |       |                                                                  | (38,268    | )                                                       |       |                                                        | (56,533    | )                                                           |       |   | (75,887 | ) |   |   | (46,211 | ) |   |   |
| Other income, net                                                    |       |                                                                  | 1,854      |                                                    |       |                                                        | 12,422     |                                                        |       |   | 2,082 |   |   |   | 2,292 |   |   |   |
| Net loss                                                             |       |                                                                  | $          | (36,414                                                 | )          |                                                        |       | $                                                           | (44,111    | ) |   |   | $ | (73,805 | ) |   |   | $ | (43,919 | ) |   |   |
| **Amounts  per common share:**                                       | ** ** |                                                                  |       |                                                    |       |                                                        |       |                                                        |       |   |   |   |   |   |   |   |   |   |
| Net loss per  share, basic and diluted                               |       |                                                                  | $          | (0.12                                                   | )          |                                                        |       | $                                                           | (0.14      | ) |   |   | $ | (0.24 | ) |   |   | $ | (0.14 | ) |   |   |
| Weighted-average  shares, basic and diluted                          |       |                                                                  | 306,590    |                                                    |       |                                                        | 307,570    |                                                        |       |   | 308,848 |   |   |   | 310,096 |   |   |   |
|                                                                      |            |                                                                       |            |                                                         |            |                                                             |            |                                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**Item 9.**                        CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL DISCLOSURE

None.

**Item 9A.**                CONTROLSAND PROCEDURES

**1.   DisclosureControls and Procedures**

Our management, with theparticipation of our chief executive officer and chief financial officer,evaluated the effectiveness of our disclosure controls and procedures (asdefined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934, as amended, or the Exchange Act) as of December 31,2006. In designing and evaluating our disclosure controls and procedures,management recognized that any controls and procedures, no matter how welldesigned and operated, can provide only reasonable assurance of achieving theirobjectives and our management necessarily applied its judgment in evaluatingthe cost-benefit relationship of possible controls and procedures. Based onthis evaluation, our chief executive officer and chief financial officerconcluded that as of December 31, 2006, our disclosure controls andprocedures were (1) designed to ensure that material information relatingto us is made known to our chief executive officer and chief financial officerby others, particularly during the period in which this report was prepared,and (2) effective, in that they provide reasonable assurance thatinformation required to be disclosed by us in the reports we file or submitunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in the SEC’s rules and forms.

**2.   InternalControl Over Financial Reporting**

**a) Management’sReport on Internal Control Over Financial Reporting**

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and15d-15(f) promulgated under the Exchange Act as a process designedby, or under the supervision of, the Company’s principal executive andprincipal financial officers and effected by the Company’s board of directors,management and other personnel, to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples and includes those policies and procedures that:

·       Pertainto the maintenance of records that in reasonable detail accurately and fairlyreflect the transactions and dispositions of the assets of the Company;

·       Providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the Company arebeing made only in accordance with authorizations of management and directorsof the Company; and

·       Providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use or disposition of the Company’s assets that could have amaterial effect on the financial statements.

Because of its inherent limitations, internal control overfinancial reporting may not prevent or detect misstatements. Therefore, eventhose systems determined to be effective can provide only reasonable assurancewith respect to financial statement preparation and presentation. Projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.

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Our management assessed the effectiveness of ourinternal control over financial reporting as of December 31, 2006. Inmaking this assessment, management used the criteria set forth by the Committeeof Sponsoring Organizations of the Treadway Commission (COSO) in *Internal Control—Integrated Framework*.

Based on our assessment, management believes that, asof December 31, 2006, our internal control over financial reporting iseffective based on those criteria.

Our independent registeredpublic accounting firm has issued an audit report on our assessment of ourinternal control over financial reporting. This report appears below.

**b) AttestationReport of the Independent Registered Public Accounting Firm**

**Report ofIndependent Registered Public Accounting Firmon Internal Control over Financial Reporting**

The Board of Directors and StockholdersMillennium Pharmaceuticals, Inc.

We have audited management’s assessment, included inthe accompanying Management’s Report on Internal Control over FinancialReporting, that Millennium Pharmaceuticals, Inc. maintained effectiveinternal control over financial reporting as of December 31, 2006, basedon criteria established in Internal Control—Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (the COSOcriteria). Millennium Pharmaceuticals, Inc.’s management is responsiblefor maintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financial reporting.Our responsibility is to express an opinion on management’s assessment and anopinion on the effectiveness of the company’s internal control over financialreporting based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also, projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.

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In our opinion, management’s assessment thatMillennium Pharmaceuticals, Inc. maintained effective internal controlover financial reporting as of December 31, 2006, is fairly stated, in allmaterial respects, based on the COSO criteria. Also, in our opinion, MillenniumPharmaceuticals, Inc. maintained, in all material respects, effectiveinternal control over financial reporting as of December 31, 2006, basedon the COSO criteria**.**

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated balance sheets ofMillennium Pharmaceuticals, Inc. as of December 31, 2006 and 2005, and therelated consolidated statements of operations, stockholders’ equity, and cashflows for each of the three years in the period ended December 31, 2006 ofMillennium Pharmaceuticals, Inc. and our report dated February 23,2007 expressed an unqualified opinion thereon.

|                                                | /s/ ERNST & YOUNG LLP |
|------------------------------------------------|--------------------------------|
| Boston,  Massachusetts  February 23, 2007 |                           |

 

**c) Changes inInternal Control Over Financial Reporting**

No change in our internalcontrol over financial reporting occurred during the fiscal quarter ended December 31,2006 that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

**Item 9B.**               OTHERINFORMATION

There is no information required to be disclosed by usin a report on Form 8-K during the last quarter of the year ended December 31,2006 that was not reported.

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**PART III**

**Item 10.**                 DIRECTORS,EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The section entitled “Our Executive Officers” in Part Iof this annual report contains information about our executive officers.

We provideinformation in response to this item in the proxy statement we file with theSecurities and Exchange Commission in connection with our solicitation ofproxies for our 2007 Annual Meeting of Stockholders to be held on May 10,2007 as follows:

·       Informationabout our directors will appear in the section entitled “Election of Directors.”

·       Informationabout compliance with Section 16(a) of the Exchange Act will appearin the section entitled “Section 16(a) Beneficial Ownership ReportingCompliance.”

·       Informationabout the audit committee of our Board of Directors and the audit committeefinancial expert will appear in the subsection entitled “Committees of theBoard” in the section entitled “Our Corporate Governance.”

·       Informationabout procedures for recommending nominees to the Board of Directors willappear in the subsection entitled “Committees of the Board” in the sectionentitled “Our Corporate Governance.”

We incorporate herein by reference the informationcontained in those sections of our proxy statement.

We have adopted a code ofbusiness conduct and ethics for directors, officers (including our principalexecutive officer, principal financial officer, principal accounting officer orcontroller, or persons performing similar functions) and employees, known asthe Core Values Handbook. The Core Values Handbook is available on our websiteat http://www.millennium.com/investors in the corporate governance section. Weintend to post on our website all disclosures that are required by law orNASDAQ Global Market listing standards concerning any amendments to, or waiversfrom, our code of business conduct and ethics. Stockholders may request a freecopy of the Core Values Handbook by writing to Investor Relations, MillenniumPharmaceuticals, Inc., 40 Landsdowne Street, Cambridge, Massachusetts02139.

**Item 11.**                 EXECUTIVECOMPENSATION

We provide information about our executivecompensation in the sections entitled “Director Compensation,” “Compensation ofExecutive Officers,” “Compensation Discussion and Analysis,” and “Compensationand Talent Committee Report on Executive Compensation” in the proxy statementwe file with the Securities and Exchange Commission in connection with thesolicitation of proxies for our 2007 Annual Meeting of Stockholders to be heldon May 10, 2007. We incorporate herein by reference the informationcontained in those sections of our proxy statement.

The Compensation andTalent Committee Report on Executive Compensation contained in the proxystatement for our 2007 Annual Meeting of Stockholders shall be deemed furnishedin this annual report and shall not be deemed “soliciting material” or to be“filed” with the Securities and Exchange Commission or otherwise subject to theliabilities of Section 18 of the Exchange Act, nor shall it be deemed incorporatedby reference into any filing under the Securities Act of 1933 or the SecuritiesExchange Act of 1934, each as amended, except to the extent that wespecifically request that such information be treated as soliciting material orspecifically incorporate such information by reference into such filing.

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**Item 12.**                 SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTAND RELATED STOCKHOLDER MATTERS

**Security Ownershipof Certain Beneficial Owners and Management**

We provide informationabout security ownership of certain beneficial owners and management requiredby this item in the section entitled “Ownership of Our Common Stock” in theproxy statement we file with the Securities and Exchange Commission inconnection with our solicitation of proxies for our 2007 Annual Meeting ofStockholders to be held on May 10, 2007. We incorporate herein byreference the information contained in that section of our proxy statement.

**Equity CompensationPlan Information**

We provide informationabout security ownership of certain beneficial owners and management requiredby this item in the section entitled “Equity Compensation Plan Information” inthe proxy statement we file with the Securities and Exchange Commission inconnection with our solicitation of proxies for our 2007 Annual Meeting ofStockholders to be held on May 10, 2007. We incorporate herein byreference the information contained in that section of our proxy statement.

**Item 13.**                 CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

We provide the informationrequired by this item in the section entitled “Our Corporate Governance” in theproxy statement we file with the Securities and Exchange Commission inconnection with our solicitation of proxies for our 2007 Annual Meeting ofStockholders to be held on May 10, 2007. We incorporate herein byreference the information contained in that section of our proxy statement.

**Item 14.**                 PRINCIPALACCOUNTANT FEES AND SERVICES

We provide the informationrequired by this item in the section entitled “Independent Registered PublicAccounting Firm” in the proxy statement we file with the Securities andExchange Commission in connection with our solicitation of proxies for our 2007Annual Meeting of Stockholders to be held on May 10, 2007. We incorporateherein by reference the information contained in that section of our proxystatement.

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**PART IV**

**Item 15.**                 EXHIBITSAND FINANCIAL STATEMENT SCHEDULES

The followingdocuments are included as part of this Annual Report on Form 10-K.

1.                 FinancialStatements:
|                                                                                                                 | ** ** | **Page number  In this report** |
|-----------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------|
| Report of Independent Registered Public Accounting  Firm on Financial Statements                                |       | 59                                             |
| Consolidated  Balance Sheets at December 31, 2006 and 2005                                                 |       | 60                                             |
| Consolidated Statements of Operations for the years  ended December 31, 2006, 2005, and 2004               |       | 61                                             |
| Consolidated Statements of Cash Flows for the years  ended December 31, 2006, 2005, and 2004               |       | 62                                             |
| Consolidated Statements of Stockholders’ Equity for  the years ended December 31, 2006, 2005 and 2004 |       | 63                                             |
| Notes to Consolidated Financial Statements                                                                      |       | 64                                             |

 

2.                 Schedule II—Valuationand Qualifying Accounts

All schedules,other than the one listed above, are omitted as the information required isinapplicable or the information is presented in the consolidated financialstatements or the related notes.

3.                 The Exhibitslisted in the Exhibit Index immediately preceding the Exhibits are filedas a part of this Annual Report on Form 10-K.

*The following Millennium trademarks are used inthis Annual Report on Form 10-K*: Millennium®, the Millennium “M” logo and design(registered), Millennium PharmaceuticalsTM, VELCADE® (bortezomib) for Injection, and INTEGRILIN® (eptifibatide) Injection. All are covered byregistrations or pending applications for registration in the U.S. Patent andTrademark Office and many other countries. Campath® isa registered trademark of Genzyme Corporation or its subsidiaries, ReoPro® (abciximab) is a trademark of Eli Lilly &Company, Aggrastat® (tirofiban) is a trademark of Merck & Co.,Inc., Thalomid® (thalidomide) and Revlimid® (lenalidomide) are trademarks of CelgeneCorporation and Angiomax® (bivalirudin) is a trademark of The MedicinesCompany. *Other trademarks used in this Annual Report on Form10-K are the property of their respective owners*.

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

| Date: March 1, 2007 | MILLENNIUM  PHARMACEUTICALS, INC. |
|--------------------------|----------------------------------------|
|                     | By:                                    |   | /s/  DEBORAH DUNSIRE |
|                     |                                   |   | Deborah Dunsire |
|                     |                                   |   | *President and  Chief Executive Officer* |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated.

|                                 | **Signature** | ** **                                    | ** ** | ** **         | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** | ** ** |
|---------------------------------|---------------|-----------------------------------------------|------------|--------------------|-----------|------------|------------|------------|----------|------------|------------|
| /s/ DEBORAH DUNSIRE        |          | President and Chief Executive Officer and     |       | March 1, 2007 |      |
| Deborah Dunsire                 |          | Director                                      |       |               |      |
|                            |          | (Principal  Executive Officer)                |       |               |      |
| /s/ MARSHA H. FANUCCI           |          | Senior Vice President and Chief Financial     |       | March 1, 2007 |      |
| Marsha H. Fanucci               |          | Officer                                       |       |               |      |
|                            |          | (Principal  Financial and Accounting Officer) |       |               |      |
| /s/ ROBERT F. FRIEL             |          | Director                                      |       | March 1, 2007 |      |
| Robert F. Friel                 |          |                                          |       |               |      |
| /s/ A. GRANT HEIDRICH, III |          | Director                                      |       | March 1, 2007 |      |
| A. Grant Heidrich, III     |          |                                          |       |               |      |
| /s/ CHARLES J. HOMCY       |          | Director                                      |       | March 1, 2007 |      |
| Charles J. Homcy                |          |                                          |       |               |      |
| /s/  RAJU S.  KUCHERLAPATI      |          | Director                                      |       | March 1, 2007 |      |
| Raju S. Kucherlapati            |          |                                          |       |               |      |
| /s/  ERIC S. LANDER             |          | Director                                      |       | March 1, 2007 |      |
| Eric S. Lander                  |          |                                          |       |               |      |

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| /s/ MARK J. LEVIN    |   | Director |   | March 1, 2007 |   |
|----------------------|--------|----------|--------|--------------------|--------|
| Mark J. Levin        |   |     |   |               |   |
| /s/ NORMAN C.  SELBY |   | Director |   | March 1, 2007 |   |
| Norman C. Selby      |   |     |   |               |   |
| /s/  KENNETH E. WEG  |   | Director |   | March 1, 2007 |   |
| Kenneth E. Weg       |   |     |   |               |   |
| /s/  ANTHONY H. WILD |   | Director |   | March 1, 2007 |   |
| Anthony H. Wild      |   |     |   |               |   |

 

 

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**EXHIBITINDEX**
|                      | ** **   | ** **                                                                                                                                                                                                                                                        | ** **                                                                                                                                                                                                                                                                        | **Incorporated by Reference** | ** ** | **Filed   with**                               |
|----------------------|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------|------------|------------------------------------------------|
| **Exhibit No.** | ** **   | **Description**                                                                                                                                                                                                                                                   | ** **                                                                                                                                                                                                                                                                        | **Form**                      | ** ** | **SEC   filing date**                     | ** ** | **Exhibit   number** | ** ** | **this   10-K** |
|                 | *** *** | ***Articles of Incorporation and  By-laws***                                                                                                                                                                                                                      |                                                                                                                                                                                                                                                                              |                          |       |                                           |   |   |   |   |
| 3.1                  |         | Amended and Restated  Certificate of Incorporation of the Company, as amended                                                                                                                                                                                     |                                                                                                                                                                                                                                                                              | 10-Q  8-K  10-Q               |       | 06/20/1996  04/13/2000  04/19/2001             |   | 4.1  3  3.1 |   |   |
| 3.2                  |         | Amended and Restated  Bylaws of the Company, as amended                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                              | 10-Q  10-Q  10-Q              |       | 06/20/1996  05/02/2000  11/09/2000             |   | 4.2  3.1  3.1 |   |   |
|                 | *** *** | ***Instruments  defining the rights of security holders, including indentures***                                                                                                                                                                                  |                                                                                                                                                                                                                                                                              |                          |       |                                           |
| 4.1                  |         | Specimen Certificate for  shares of Common Stock, $.001 par value, of the Company                                                                                                                                                                                 |                                                                                                                                                                                                                                                                              | S-1/A(333-02490)              |       | 05/02/1996                                     |   | 4.1 |   |   |
| 4.2                  |         | Rights Agreement dated  April 5, 2001 by and between the Company and State Street Bank and Trust  Company, N.A.                                                                                                                                              |                                                                                                                                                                                                                                                                              | 8-K                           |       | 04/05/2001                                     |   | 4.1 |   |   |
| 4.3                  |         | (a)                                                                                                                                                                                                                                                               | Indenture, dated  February 24, 2000, between the Company (as successor to COR  Therapeutics, Inc.) and U.S. Bank National Association (formerly known  as Firstar Bank, N.A.), as Trustee, relating to the 5.00% Convertible  Subordinated Notes due March 1, 2007 |                          | (a)10-Q*   |                                           | 05/10/2000 |   | 4.1 |   |   |
|                 |         | (b)                                                                                                                                                                                                                                                               | First Supplemental Indenture, dated as of  February 12, 2002                                                                                                                                                                                                                 |                          | (b)8-K     |                                           | 02/13/2002 |   | 4.5 |   |   |
|                 |         | (c)                                                                                                                                                                                                                                                               | Second Supplemental Indenture, dated as of  February 12, 2002                                                                                                                                                                                                                |                          | (c)8-K     |                                           | 02/13/2002 |   | 4.6 |   |   |
|                 |         | (d)                                                                                                                                                                                                                                                               | Third Supplemental Indenture, dated as of  April 22, 2002                                                                                                                                                                                                                    |                          | (d)8-K     |                                           | 04/23/2002 |   | 4.2 |   |   |
| 4.4                  |         | Indenture, dated  November 15, 2006, between the Company and U.S. Bank National  Association, as Trustee, relating to the 2.25% Convertible Senior Notes due  November 15, 2011 (including the form of Global Note attached as  Exhibit A thereto) |                                                                                                                                                                                                                                                                              | 8-K                           |       | 11/21/2006                                     |   | 4.1 |   |   |
|                 | *** *** | ***Material  contracts—financing agreements***                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                              |                          |       |                                           |   |   |   |   |
| 10.1                 |         | Form of Master Equipment Lease Financing  Agreement, dated September 19, 1996 by and between the Company and GE  Capital Corporation,  as amended                                                                                             |                                                                                                                                                                                                                                                                              | 10-Q  10-Q  10-K  10-K        |       | 11/13/1996  08/14/1997  02/25/2000  03/15/2001 |   | 10.2  10.9  10.3, 10.4 10.2 |   |   |
|                      |              |                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                   |                               |            |                                                |  |  |  |  |  |  |

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|        |         | ***Material  contracts—leases***                                                                                                                                                  |                                                                                                                                                                                           |                               |    |                                           |       |                       |    |       |
|--------|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------|---------|------------------------------------------------|------------|----------------------------|---------|------------|
| 10.2   |         | Lease Agreement dated  August 26, 1993, as amended, by and between the Company and the  Massachusetts Institute of Technology, as amended, for 640 Memorial Drive,  Cambridge, MA |                                                                                                                                                                                           | S-1 (333-2490)    10-K  10-K  10-K |    | 03/18/1996  03/24/1999  02/25/2000  03/15/2001 |       | 10.32   10.57   10.6  10.4 |    |       |
| 10.3   |         | Lease Agreement dated  August 4, 2000 by and between the Company and Forest City  Enterprises, Inc. for 35 Landsdowne Street, Cambridge, MA                             |                                                                                                                                                                                           | 10-Q                               |    | 11/9/2000                                      |       | 10.3                       |    |       |
| 10.4   |         | Lease Agreement dated  August 4, 2000 by and between the Company and Forest City  Enterprises, Inc. for 40 Landsdowne Street, Cambridge, MA                             |                                                                                                                                                                                           | 10-Q                               |    | 11/9/2000                                      |       | 10.4                       |    |       |
| 10.5   |         | First Amendment to Lease  FC 40 Landsdowne, Inc. to the Company dated November 5, 2001                                                                                  |                                                                                                                                                                                           | 10-K                               |    | 03/08/2006                                     |       | 10.5                       |    |       |
|   | *** *** | ***Material  contracts—research and development/collaboration agreements***                                                                                                       |                                                                                                                                                                                           |                               |    |                                           |
| 10.6   |         | (a)                                                                                                                                                                                    | Collaboration and  License Agreement dated June 22, 2000 by and between the Company and the  sanofi-aventis Group (as successor to Aventis Pharmaceuticals, Inc.), as  amended† |                               | (a)     | 10-Q  10-Q                                     |       | 07/26/2000  10/25/2001     |    | 10.1  10.3 |   |   |
|   |         | (b)                                                                                                                                                                                    | Second Amendment effective as of December 22,  2002 and dated April 22, 2003 to the Collaboration and License  Agreement†                                                       |                               | (b)10-Q |                                           | 08/12/2003 |                       | 10.1    |       |   |
|   |         | (c)                                                                                                                                                                                    | Technology Development Agreement dated June 22,  2000†                                                                                                                               |                               | (c)10-Q |                                           | 07/26/2000 |                       | 10.2    |       |   |
|   |         | (d)                                                                                                                                                                                    | Registration Rights Agreement dated June 22,  2000                                                                                                                                        |                               | (d)10-Q |                                           | 07/26/2000 |                       | 10.4    |       |   |
|   |         | (e)                                                                                                                                                                                    | Letter Agreement dated May 27, 2004 relating to  the Collaboration and License Agreement†                                                                                            |                               | (e)10-Q |                                           | 08/04/2004 |                       | 10.1    |       |   |
|   |         | (f)                                                                                                                                                                                    | Letter Agreement dated July 21, 2005†                                                                                                                                                |                               | (f)10-Q |                                           | 08/08/2005 |                       | 10.7    |       |   |
|   |         | (g)                                                                                                                                                                                    | Third Amendment effective as of October 31,  2005 and dated November 7, 2005 to the Collaboration and License  Agreement ††                                                |                               | (g)10-K |                                           | 03/08/2006 |                       | 10.7(g) |       |   |
|        |              |                                                                                                                                                                                        |                                                                                                                                                                                                |                                    |         |                                                |            |                            |         |            |  |  |

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|       | *** *** | ***Material  contracts—INTEGRILIN******® (eptifibatide)  Injection***                                                                                                                          |   |                              |   |                                                       |
|-------|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|------------------------------------------------------------|
| 10.7  |         | License and Supply  Agreement between the Company (as successor to COR Therapeutics, Inc.)  and Solvay, Société Anonyme, dated July 27, 1994, as amended†                       |   | 10-Q*                             |   | 11/13/1998                                                 |   | 10.24   10.25   10.26   10.27   10.28   10.29 |   |   |
| 10.8  |         | New Long Term Supply  Agreement between the Company and Solvay, Société Anonyme, dated  January 1, 2003†                                                                             |   | 10-K                              |   | 03/07/2003                                                 |   | 10.9 |   |   |
| 10.9  |         | Collaboration Agreement  between Schering-Plough Ltd., Schering Corporation and the Company (as  successor to COR Therapeutics, Inc.) dated April 10, 1995, as  amended†                  |   | 10-Q*  10-K*  10-K*  10-Q*  10-Q* |   | 08/08/1995  03/25/1999  03/30/2000  08/10/2000  11/08/2000 |   | 10.41   10.33   10.35   10.1   10.1, 10.2 |   |   |
| 10.10 |         | Letter agreement dated  June 4, 2002 relating to the Collaboration Agreement dated April 10,  1995 between Schering Corporation and the Company†                                          |   | 10-K                              |   | 03/10/2004                                                 |   | 10.8 |   |   |
| 10.11 |         | Addendum to  Collaboration Agreement among the Company, Schering Corporation and  Schering-Plough, Ltd. dated June 1, 2003†                                                                    |   | 10-K                              |   | 03/10/2004                                                 |   | 10.9 |   |   |
| 10.12 |         | Letter agreement dated  November 3, 2003 relating to the Collaboration Agreement dated  April 10, 1995 between Schering Corporation and the Company†                                      |   | 10-K                              |   | 03/10/2004                                                 |   | 10.10 |   |   |
| 10.13 |         | Agreement about European  Commercialization of Integrilin by and among the Company, Schering  Corporation and Schering-Plough, Ltd. dated June 21, 2004†                                       |   | 10-Q                              |   | 08/04/2004                                                 |   | 10.2 |   |   |
| 10.14 |         | Letter agreement dated  September 17, 2004 relating to the Addendum dated June 1, 2003 to  the Collaboration Agreement among the Company, Schering Corporation and  Schering-Plough, Ltd† |   | 10-K                              |   | 03/08/2005                                                 |   | 10.10 |   |   |

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| 10.15  |         | Letter agreement dated  November 30, 2004 relating to the Addendum dated June 1, 2003 to  the Collaboration Agreement among the Company, Schering Corporation and  Schering-Plough, Ltd† |                                                                                                                                                                                                | 10-K   |   | 03/08/2005 |       | 10.11  |     |   |
|--------|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|------------|------------|--------|----------|--------|
| 10.16  |         | Amended and Restated  Integrilin Agreement dated July 22, 2005 among the Company, Schering  Corporation and Schering-Plough, Ltd.†                                                            |                                                                                                                                                                                                | 10-Q   |   | 11/08/2005 |       | 10.1   |     |   |
| 10.17  |         | Side Agreement dated  October 13, 2005 among the Company, Schering Corporation and  Schering-Plough Ltd.†                                                                                     |                                                                                                                                                                                                | 10-Q   |   | 11/08/2005 |       | 10.2   |     |   |
| 10.18  |         | Supply Agreement dated  September 1, 2005 by and between the Company and Schering Corporation†                                                                                                |                                                                                                                                                                                                | 10-Q   |   | 11/08/2005 |       | 10.3   |     |   |
| 10.19  |         | (a)                                                                                                                                                                                                     | License,  Development and Commercialization Agreement by and between GlaxoSmithKline  plc and the Company dated June 22, 2004†                                                            |   | 10-Q   |       | 08/04/2004 |   | 10.3     |   |   |
|   |         | (b)                                                                                                                                                                                                     | Letter agreement  dated March 4, 2005 relating to the License, Development and  Commercialization Agreement by and between GlaxoSmithKline plc and the  Company dated June 22, 2004† |   | 10-K   |       | 03/08/2005 |   | 10.12(b) |   |   |
|   | *** *** | ***Material  contracts—VELCADE******® (bortezomib)  for Injection***                                                                                                                     |                                                                                                                                                                                                |   |   |       |
| 10.20  |         | Patent License Agreement  between the Public Health Service and the Company dated December 2,  2002†                                                                                          |                                                                                                                                                                                                | 10-K   |   | 03/10/2004 |       | 10.11  |     |   |
| 10.21  |         | (a)                                                                                                                                                                                                     | Collaboration,  Distribution and License Agreement by and between the Company and Ortho  Biotech Products, L.P. dated June 30, 2003†                                                      |   | 10-Q   |       | 08/12/2003 |   | 10.2     |   |   |
|   |         | (b)                                                                                                                                                                                                     | Amendment dated July 15, 2004 to Collaboration,  Distribution and License Agreement by and between the Company and Ortho  Biotech Products, L.P. dated June 30, 2003                      |   | 10-Q/A |       | 11/09/2006 |   | 10.5     |   |   |
| 10.22  |         | Co-Promotion Agreement  dated October 25, 2006 between the Company and Ortho Biotech Inc. ††                                                                                             |                                                                                                                                                                                                |   |   |       |       |   |     | X      |

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|        | *** *** | ***Material  contracts—miscellaneous***                                                                                                                                                                                                                                                                     |   |             |   |       |   |   |   |   |
|--------|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|--------|------------|--------|--------|--------|--------|
| 10.23  |         | Registration Rights  Agreement among the Company (as successor to COR Therapeutics, Inc.) and  Goldman, Sachs & Co., Chase H&Q, a division of Chase Securities  Inc., CIBC World Markets Corp., FleetBoston Robertson Stephens Inc. and  Warburg Dillon Read LLC, dated February 24, 2000 |   | 10-Q*            |   | 05/10/2000 |   | 10.2   |   |   |
|   | *** *** | ***Material  contracts—management contracts and compensatory plans***                                                                                                                                                                                                                                       |   |             |   |       |
| 10.24  |         | Key Employee Change in  Control Severance Plan#                                                                                                                                                                                                                                                                  |   | 10-K             |   | 03/08/2006 |   | 10.26  |   |   |
| 10.25  |         | Non-Qualified Deferred  Compensation Plan#                                                                                                                                                                                                                                                                       |   | 10-K             |   | 03/08/2006 |   | 10.27  |   |   |
| 10.26  |         | Description of  Non-Employee Director Compensation#                                                                                                                                                                                                                                                              |   |             |   |       |   |   |   | X      |
| 10.27  |         | Description of Success  Sharing Bonus Program of Millennium Pharmaceuticals, Inc.#                                                                                                                                                                                                                          |   |             |   |       |   |   |   | X      |
| 10.28  |         | 2003 Employee Stock  Purchase Plan for Non-U.S. Subsidiaries and Affiliated Entities, as  amended#                                                                                                                                                                                                               |   | 10-Q             |   | 11/08/2005 |   | 10.5   |   |   |
| 10.29  |         | 2000 Stock Incentive  Plan, as amended#                                                                                                                                                                                                                                                                          |   | 10-K             |   | 03/07/2003 |   | 10.14  |   |   |
| 10.30  |         | Form of Terms of  Stock Option Granted Under 2000 Stock Incentive Plan#                                                                                                                                                                                                                                     |   | 10-K             |   | 03/08/2006 |   | 10.33  |   |   |
| 10.31  |         | Form of Restricted  Stock Agreement Under 2000 Stock Incentive Plan#                                                                                                                                                                                                                                        |   | 10-K             |   | 03/08/2006 |   | 10.28  |   |   |
| 10.32  |         | 1997 Equity Incentive  Plan, as amended#                                                                                                                                                                                                                                                                         |   | 10-K             |   | 03/07/2003 |   | 10.15  |   |   |
| 10.33  |         | 1996 Equity Incentive  Plan, as amended#                                                                                                                                                                                                                                                                         |   | 10-K             |   | 03/07/2003 |   | 10.16  |   |   |
| 10.34  |         | 1996 Director Option  Plan#                                                                                                                                                                                                                                                                                      |   | S-1/A(333-02490) |   | 04/09/1996 |   | 10.1   |   |   |
| 10.35  |         | 1996 Employee Stock  Purchase Plan, as amended#                                                                                                                                                                                                                                                                  |   | 10-Q             |   | 08/04/2006 |   | 10.2   |   |   |
| 10.36  |         | 1993 Incentive Stock  Plan, as amended#                                                                                                                                                                                                                                                                          |   | 10-K             |   | 03/07/2003 |   | 10.20  |   |   |
| 10.37  |         | 1991 Equity Incentive  Plan, as amended, assumed by the Company as successor to COR  Therapeutics, Inc.#                                                                                                                                                                                                    |   | 10-Q*            |   | 05/09/2001 |   | 10.2   |   |   |

104

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| 10.38 |   | 1994 Non-employee  Directors’ Stock Option Plan, as amended, assumed by the Company as successor  to COR Therapeutics, Inc.#            |   | 10-Q*           |   | 05/09/2001 |   | 10.4  |   |   |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------|--------|------------|--------|-------|--------|--------|
| 10.39 |   | 1997 Equity Incentive  Plan, as amended, assumed by the Company as successor to Millennium  BioTherapeutics, Inc.#                           |   | 10-K            |   | 03/07/2003 |   | 10.23 |   |   |
| 10.40 |   | 1997 Equity Incentive  Plan, as amended, assumed by the Company as successor to Millennium  Predictive Medicine, Inc.#                       |   | 10-K            |   | 03/07/2003 |   | 10.24 |   |   |
| 10.41 |   | Form of Employment  Offer Letter entered into with certain executive officers of the Company,  together with a schedule of parties thereto # |   | 10-K            |   | 03/08/2005 |   | 10.35 |   |   |
| 10.42 |   | Form of  Indemnification Agreement between the Company (as successor to COR  Therapeutics, Inc.) and Charles J. Homcy#                  |   | S-1 (33-40627)* |   | 05/16/1991 |   | 10.1  |   |   |
| 10.43 |   | Agreement dated  August 6, 2004 between the Company and Marsha H. Fanucci#                                                                   |   | 10-Q            |   | 11/09/2004 |   | 10.1  |   |   |
| 10.44 |   | Offer letter agreement  dated September 28, 2004 between the Company and Laurie B. Keating#                                                  |   | 10-Q            |   | 11/09/2004 |   | 10.3  |   |   |
| 10.45 |   | Offer Letter Agreement  dated June 23, 2005 between the Company and Deborah Dunsire#                                                         |   | 10-Q            |   | 08/08/2005 |   | 10.1  |   |   |
| 10.46 |   | Restricted Stock  Agreement dated July 18, 2005 between the Company and Deborah Dunsire#                                                     |   | 10-Q            |   | 08/08/2005 |   | 10.2  |   |   |
| 10.47 |   | Restricted Stock  Agreement dated July 18, 2005 between the Company and Deborah Dunsire#                                                     |   | 10-Q            |   | 08/08/2005 |   | 10.3  |   |   |
| 10.48 |   | Incentive Stock Option  Granted under 2000 Stock Incentive Plan to Deborah Dunsire on July 18,  2005#                                        |   | 10-Q            |   | 08/08/2005 |   | 10.4  |   |   |
| 10.49 |   | Nonstatutory Stock  Option Granted under 2000 Stock Incentive Plan to Deborah Dunsire on  July 18, 2005#                                     |   | 10-Q            |   | 08/08/2005 |   | 10.5  |   |   |
| 10.50 |   | Description of Deferred  Compensation Plan for Deborah Dunsire #                                                                                  |   | 10-Q            |   | 08/08/2005 |   | 10.6  |   |   |

105

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| 10.51  |         | Offer letter agreement  dated January 23, 2006 between the Company and Christophe Bianchi#                                                  |   | 10-K   |   | 03/08/2006 |   | 10.53  |   |   |
|--------|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|------------|--------|--------|--------|--------|
| 10.52  |         | Offer letter agreement  dated February 6, 2006 between the Company and Stephen M. Gansler#                                                  |   | 10-K   |   | 03/08/2006 |   | 10.54  |   |   |
| 10.53  |         | Letter Agreement dated  May 25, 2006 between the Company and Anna Protopapas#                                                               |   | 10-Q   |   | 08/04/2006 |   | 10.1   |   |   |
| 10.54  |         | Amendment dated  December 14, 2006 to offer letter agreement dated May 5, 1994  between the Company and Robert I. Tepper#              |   |   |   |       |   |   |   | X      |
|   | *** *** | ***Additional  Exhibits***                                                                                                                       |   |   |   |       |   |   |   |   |
| 21     |         | Subsidiaries of the  Company                                                                                                                     |   |   |   |       |   |   |   | X      |
| 23.1   |         | Consent of  Ernst & Young LLP, Independent Registered Public Accounting Firm                                                            |   |   |   |       |   |   |   | X      |
| 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 |   |   |   |       |   |   |   | X      |
| 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 |   |   |   |       |   |   |   | X      |
| 32.1   |         | Statement Pursuant to 18  U.S.C. §1350                                                                                                      |   |   |   |       |   |   |   | X      |
| 32.2   |         | Statement Pursuant to 18  U.S.C. §1350                                                                                                      |   |   |   |       |   |   |   | X      |

----

#                 Management contractor compensatory plan or arrangement filed as an exhibit to this report pursuantto Items 15(a) and 15(c) of Form 10-K

†                     Confidentialtreatment granted as to certain portions, which portions have been separatelyfiled with the Securities and Exchange Commission

††               Confidentialtreatment requested as to certain portions, which portions have been separatelyfiled with the Securities and Exchange Commission

*                    CORTherapeutics, Inc. filing (Commission file number 0-19290)

Unless otherwise noted, the Commission file number forall exhibits incorporated by reference herein is 0-28494.

106

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**MillenniumPharmaceuticals, Inc.SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTSAllowance for Doubtful Accounts**

Valuationand qualifying account information related to operations is as follows (inthousands):

| ** **                         | ** ** | **Balance at  Beginning of Period** | ** ** | **Additions  Charged to  Cost and Expenses** | ** ** | **Charges  Utilized/Write-offs** | ** ** | **Balance at  End of Period** | ** ** |
|------------------------------------|------------|----------------------------------------------------|------------|-------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------------------|------------|
| Year ended  December 31, 2004 |       |                                               | $          | (1,500                                                      | )          |                             |       | $                                            | (640       | ) |   |   | $ | 640 |   |   |   | $ | (1,500 | ) |   |
| Year ended  December 31, 2005 |       |                                               | (1,500     | )                                                           |       |                             | (2,004     | )                                            |       |   | 1,000 |   |   |   | (2,504 | ) |   |
| Year ended  December 31, 2006 |       |                                               | (2,504     | )                                                           |       |                             | (21        | )                                            |       |   | 2,004 |   |   |   | (521 | ) |   |

 

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