**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

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**FORM 10-K**

| (Mark One) | ** **                                                                                              |
|------------|---------------------------------------------------------------------------------------------------------|
| x          | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**     |
| ** ** | **For the fiscal year ended: December 31,  2005**                                                  |
|       | **or**                                                                                                  |
| o          | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition periodfrom *           * to  *            ***

**Commission file number: 0-28494**

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**MILLENNIUM PHARMACEUTICALS, INC.**

(Exact name of registrantas specified in its charter)

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

 

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

(Address of principalexecutive offices) (zip code)

Registrant’s telephonenumber, including area code:  **(617) 679-7000**

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

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

**Common Stock, $.001 parvalue**

(Title of class)

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Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes x   No o

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) ofthe Act.  Yes o   No x

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past90 days.  Yes x   No o

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, andwill not be contained, to the best of registrant’s knowledge, in definitiveproxy or information statements incorporated by reference in Part III ofthis Form 10-K or any amendment to this Form 10-K.  o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act. (Check one):

Large accelerated filer  x          Acceleratedfiler  o          Non-acceleratedfiler  o

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

The aggregate market value of voting Common Stock heldby non-affiliates of the registrant as of June 30, 2005 was $2,813,245,778based on the last reported sale price of the Common Stock on the Nasdaq StockMarket on that date.

Number of shares outstanding of the registrant’s classof Common Stock as of March 3, 2006: 312,129,971.

**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 2006 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                                             | 8                                                                                                                      |
| Competition                                                     | 9                                                                                                                      |
| Drug Research, Discovery and Development                        | 11                                                                                                                     |
| Patents and Proprietary Rights; Licenses                        | 12                                                                                                                     |
| Government Regulation                                           | 13                                                                                                                     |
| Employees                                                       | 16                                                                                                                     |
| Available Information                                           | 16                                                                                                                     |
| Item 1A.                                                        | RISK  FACTORS THAT MAY AFFECT RESULTS                                                                                  | 16 |
| Regulatory Risks                                                | 16                                                                                                                     |
| Risks Relating to Our Business, Strategy and Industry           | 18                                                                                                                     |
| Risks Relating to Our Financial Results and Need for  Financing | 21                                                                                                                     |
| Risks Relating to Collaborators                                 | 23                                                                                                                     |
| Risks Relating to Intellectual Property                         | 24                                                                                                                     |
| Risks Relating to Product Manufacturing, Marketing and  Sales   | 26                                                                                                                     |
| Risks Relating to an Investment in Our Common Stock             | 29                                                                                                                     |
| Item 1B.                                                        | UNRESOLVED STAFF COMMENTS                                                                                              | 30 |
| Item 2.                                                         | PROPERTIES                                                                                                             | 30 |
| Item 3.                                                         | LEGAL  PROCEEDINGS                                                                                                     | 30 |
| Item 4.                                                         | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                                    | 30 |
| OUR  EXECUTIVE OFFICERS                                         | 30                                                                                                                     |
| **PART II**                                                |                                                                                                                   |
| Item 5.                                                         | MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED  STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES | 32 |
| Item  6.                                                        | SELECTED  FINANCIAL DATA                                                                                               | 33 |
| Item 7.                                                         | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF OPERATIONS                            | 34 |
| Item 7A.                                                        | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET  RISK                                                            | 49 |
| Item 8.                                                         | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                                            | 51 |
| Item 9.                                                         | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON  ACCOUNTING AND FINANCIAL DISCLOSURE                                  | 83 |
| Item 9A.                                                        | CONTROLS AND PROCEDURES                                                                                                | 83 |
| Item 9B.                                                        | OTHER  INFORMATION                                                                                                     | 85 |
| **PART III**                                               |                                                                                                                   |
| Item 10.                                                        | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                                                     | 86 |
| Item 11.                                                        | EXECUTIVE COMPENSATION                                                                                                 | 86 |
| Item 12.                                                        | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND  MANAGEMENT AND RELATED STOCKHOLDER MATTERS                        | 86 |
| Item 13.                                                        | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                                         | 87 |
| Item 14.                                                        | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                                                 | 87 |
| **PART IV**                                                |                                                                                                                   |
| Item 15.                                                        | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES                                                                             | 88 |
| SIGNATURES                                                      | 89                                                                                                                     |
| EXHIBIT INDEX                                              | 91                                                                                                                     |
| SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS              | 99                                                                                                                     |

 

 

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**PART I**

**Item 1.**                        BUSINESS

**Overview**

We are a leading biopharmaceutical company focused ondiscovering, developing and commercializing innovative products in diseaseareas with unmet medical needs. We currently commercialize VELCADE® (bortezomib) for Injection,the market leader for the treatment of patients with relapsed multiple myeloma.We have a development pipeline of seven clinical and preclinical productcandidates in our therapeutic focus areas of cancer and inflammation and wehave an oncology-focused discovery organization. Strategic businessrelationships are a key component of our business. For example, we maintain asignificant royalty stake in INTEGRILIN® (eptifibatide) Injection,a market leading cardiovascular product.

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 certain patients with multiple myeloma, a type ofblood cancer. We began marketing VELCADE in the United States shortly after receivingapproval. We sell VELCADE in the United States directly through our oncologysales force. VELCADE is sold in the European Union and other approved areasoutside of the United States by our collaborator Ortho Biotech Products, L.P.,or Ortho Biotech, a member of the Johnson & Johnson Family ofCompanies. In 2005, U.S. sales of VELCADE were approximately $192.1 million,which represented 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 2003, U.S. sales of VELCADEwere approximately $59.6 million, which represented approximately 14% of ourtotal revenue for 2003.

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. As a result of our refined strategy, we restructuredour INTEGRILIN relationship with Schering Corporation andSchering-Plough Ltd., together referred to as SGP, substantially reducedinflammation discovery programs and resources, increased our research anddevelopment focus on our clinical pipeline and expanded our commercial organization.

Our business strategy is to build a portfolio ofinnovative medicines based on our understanding of 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 will seek development and commercialcollaborators on favorable terms or when we otherwise believe that doing sowould be advantageous to us. For example, we generally intend to enter intosales and marketing alliances with major pharmaceutical companies for productsin disease areas that require large sales forces or for markets outside of theUnited States.

In the near term, we expect 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, elsewhere for theinitial treatment of multiple myeloma and for the treatment of additionalcancer types. We believe that these additional uses of VELCADE would lead to asignificant expansion of our cancer business. In inflammatory disease, we areadvancing novel product candidates in clinical development as potentialtreatments for serious and widely prevalent conditions.

In the long-term, we expect to bring new products tomarket on a regular basis from our pipeline of discovery and development-stageprograms and expect to continue to evaluate opportunities to 

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supplement our pipelinethrough in-licensing and acquisitions. If we are successful, we would use therevenues from this expanding portfolio of marketed products to broaden thescope 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 Food and DrugAdministration, or FDA, on May 13, 2003 to market VELCADE for thetreatment of multiple myeloma patients who have received at least two priortherapies and have demonstrated disease progression on their most recenttherapy, commonly referred to as third line and beyond. This approval wassubject to the completion of and submission of data from the phase III APEXclinical trial.

In March 2005, we received approval from the FDAof 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. This regulatory decisionincreases the approved market potential of the drug and also marks thecompletion of the May 2003 post-approval requirements. VELCADE is the onlydrug to demonstrate a statistically significant single agent survival advantagein relapsed multiple myeloma.

In April 2004, the European Commission grantedMarketing Authorization for VELCADE for the treatment of multiple myelomapatients who have received at least two prior therapies and have demonstrateddisease progression on their most recent therapy in Europe. Under thisAuthorization, a single license was granted to Millennium for marketing VELCADEin the 15 member states of the European Union, plus Norway and Iceland. VELCADEwas also approved for marketing in the ten accession member countries whenthose countries officially joined the European Union on May 1, 2004.VELCADE has also been approved in a number of other countries, includingcountries within Latin America and South-East Asia, bringing the total numberof approved countries to more than 60. Under our agreement with Ortho Biotech,since securing these non-U.S. approvals, we have transferred the licenses to anaffiliate of Ortho Biotech. Ortho Biotech’s affiliates now market VELCADE inthese countries.

In April 2005, Ortho Biotech received approvalfrom the European Commission for VELCADE as a monotherapy for multiple myelomapatients who have received at least one prior therapy and who have alreadyundergone or are unsuitable for bone marrow transplantation.

The FDA granted VELCADE fast track designation forrelapsed and refractory mantle cell lymphoma, an aggressive form of non-Hodgkin’slymphoma, in November 2004 due to the high unmet medical need of thesepatients and based on the strength of data for VELCADE in clinical trials. Thisdesignation allows the FDA to accept on a rolling basis portions of a marketingapplication for review prior to the submission of a final document. We expectto file a sNDA for VELCADE as a monotherapy for the treatment for relapsed andrefractory mantle cell lymphoma during the second half of 2006.

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. According to the AmericanCancer Society, approximately 16,000 new cases of multiple myeloma werediagnosed in the United States in 2005 and approximately 11,000 people in theUnited States died of this disease in 2004.

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Non-Hodgkin’s Lymphoma, or NHL, is the fifth mostcommon cancer in the United States. Each year in the United States there areapproximately 56,000 new NHL cases diagnosed and 19,000 NHL-related deaths.According to the American Cancer Society, the incidence of NHL has more thandoubled since the 1970s. Mantle cell lymphoma, or MCL, is an aggressive form ofNHL that accounts for approximately six percent of all lymphomas. MCL is oftenwidespread when diagnosed and typically involves the lymph nodes, bone marrowand spleen. Only one fifth of MCL patients survive more than five yearsfollowing diagnosis.

Proteasome inhibition is a novel approach to treatingcancer. Proteasomes are enzyme complexes in all cells that break downintracellular proteins in a regulated manner in both healthy and cancerouscells. Intracellular proteins form pathways by which cancer cells multiply,spread, interact with other cells and avoid programmed cell death. Inhibitionof the proteasome by VELCADE prevents the regulated breakdown of theseintracellular proteins, thereby interfering with many of these variedfunctions. This disruption of essential pathways in cancer cells can lead tocell death and inhibit tumor growth.

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 Development Efforts**

***VELCADE Development***

We believe thatVELCADE may have broad applications in the treatment of cancer. There are awide range of company-sponsored trials, investigator initiated studies andcooperative group studies on the use of VELCADE alone and in combination withother therapies in patients with cancer. The following is a list of theprincipal VELCADE trials:

·       Threemulti-center phase III clinical trials in front-line multiple myeloma patientsexploring VELCADE in combination with current standards-of-care in thistreatment setting.  In the three trialscombined, approximately 2,000 patients are expected to be enrolled. Resultsfrom previous phase II trials in this setting of VELCADE in combination withthese standards-of-care have shown some of the highest recorded response ratesin the treatment of the disease, with overall response rates as high as 92percent and complete and near-complete responses as high as 43 percent. Sideeffects were manageable and similar to those seen in other VELCADE studies.

·       Asingle-arm phase II clinical trial of single-agent VELCADE in patients withmantle cell lymphoma who have received at least one prior therapy. We expectthat the results from this 155 patient trial will be used for the sNDA filingin the second half of 2006 and will be presented at a medical meeting in thefirst half of 2006. Early interim results of 48 patients enrolled in thistrial, presented at the 2005 American Society of Clinical Oncology annualmeeting, showed an overall response rate of 42 percent and a complete responseof eight percent, with side effects manageable and similar to those seen inother trials.

·       Arandomized phase II clinical trial in patients with follicular or marginal zonelymphoma who have received at least one prior therapy testing the combinationof VELCADE and rituximab, the standard-of-care in this setting, in two dosingregimens. Interim results of this trial, presented at the 2005 American Societyof Hematology meeting, showed overall response rates greater than 50 percent inboth arms with improved efficacy and safety in the arm with a once-weeklyVELCADE regimen matched with the once-weekly rituximab regimen. These interimresults exceeded the threshold established internally by us and our advisoryboard, giving us confidence that the 

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VELCADE and rituximabcombination should be tested in a phase III randomized trial. This trial isexpected to start in the second half of 2006.

·       Tworandomized phase II clinical trials in patients with relapsed non-small celllung cancer, or NSCLC, testing VELCADE in combination with currentstandards-of-care in this setting, including erlotinib and pemetrexed. Thesetrials build on the results seen with VELCADE in the treatment of NSCLC inprevious trials. For example, in a previous phase II trial, VELCADE as asingle-agent in the second-line setting demonstrated an overall response ratein-line with current marketed therapies with manageable side effects. In anadditional phase II trial of approximately 120 patients conducted by theSouthwest Oncology Group, VELCADE in combination with gemcitabine and carboplatinin the front-line treatment setting demonstrated overall survival of 11 monthsand progression-free survival of five months.

·       Clinical trials in patientswith other solid and hematolic malignancies. Currently, approximately 170company-sponsored, investigator-initiated, or cooperative group-sponsoredtrials are ongoing or planned for 2006 with the goal of exploring the potentialof VELCADE broadly in several types of cancer.

***Pipeline Development***

Inaddition to our ongoing clinical trials of VELCADE, we have a number of drugcandidates in clinical and late preclinical development. In January 2006,as part of our portfolio review process, based on the evaluation of recentclinical data in the context of additional opportunities in the pipeline, wedecided to discontinue development at this time of MLN2704 in its current formas well as MLN1202 in rheumatoid arthritis. The following chart summarizes theapplicable disease indication and the clinical or preclinical trial status ofour clinical and late preclinical development drug candidates. 

| **Product Description**                                                                                            | ** **                                                  | ** **                                                                                     | **Disease Indication** | ** ** | ** ** | **Current Trial Status** | ** ** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------|------------------------------------------------------------------------------------------------|------------------------|------------|------------|--------------------------|------------|------------|
| ***Cancer***                                                                                                       |                                                        |                                                                                           |
| MLN518 is a small  molecule inhibitor of the Receptor Tyrosine Kinases, or RTK, including FLT-3,  PDGF-R and c-KIT | Acute myeloid leukemia  Glioma  Renal  Prostate             | phase I/phase II  phase I planned for 2006  phase I planned for 2006  phase I planned for 2006 |
| MLN8054 is a small molecule inhibitor of the AuroraA  kinase                                                       | Advanced  malignancies                                      | phase I                                                                                        |
| ***Inflammatory Diseases***                                                                                        |                                                        |                                                                                           |
| MLN02 is a  humanized monoclonal antibody directed against the alpha4ß7 receptor                              | Crohn’s disease  Ulcerative colitis                    | preclinical with prior  phase II  data  preclinical with prior phase II data                   |
| MLN1202 is a humanized monoclonal antibody directed  against CCR2                                                  | Multiple  sclerosis  Secondary atherosclerosis  Scleroderma | phase IIa  phase IIa  phase IIa planned for 2006                                               |
| MLN3897 is a small molecule CCR1 inhibitor                                                                         | Chronic  inflammatory diseases such as rheumatoid arthritis | phase I with  phase IIa planned for 2006                                                       |
| MLN3701 is a small molecule CCR1 inhibitor, backup  to MLN3897                                                     | Chronic  inflammatory diseases such as rheumatoid arthritis | phase I                                                                                        |
| MLN0415 is a  small molecule inhibitor of IKKB                                                                     | Inflammatory diseases                                       | phase I planned for 2006                                                                       |

 

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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, development and research arrangements with pharmaceuticaland biotechnology companies relating to a broad range of products and potentialproduct opportunities. These collaborations provide us with the opportunity tomaximize the value of our internal resources and to reduce our research anddevelopment cost and risk while at the same time utilizing the resources ofother companies to market and develop our products. In the case of ourcommercial product collaborations, we have in the past and may in the futurereceive combinations of royalties, distribution fees, shares of profits andlosses and/or milestone and other payments. In our research collaborations, wemay receive various combinations of license fees and research funding inaddition to the potential for future payments based on successfulcommercialization of products resulting from the collaborations.

***Ortho Biotech Collaboration***

In June 2003, we entered into an agreement withOrtho Biotech to collaborate on the commercialization and through theagreement, with Johnson & Johnson Pharmaceutical Research &Development, L.L.C., or JJPRD, for the continued clinical development ofVELCADE. Under the terms of the agreement, we retain all commercializationrights to VELCADE in the United States. Ortho Biotech and its affiliate,Janssen-Cilag, have agreed to commercialize VELCADE outside of the UnitedStates and Janssen Pharmaceutical K.K. is responsible for Japan. We receivedistribution fees from Ortho Biotech and its affiliates from sales of VELCADEoutside of the United States. We manage the supply chain for VELCADE at theexpense of Ortho Biotech for products sold in the Ortho Biotech territories. Weretain an option to co-promote VELCADE with Ortho Biotech at a future date inspecified 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. JJPRD was responsible for 40% of the joint development costs through2005 and is responsible for 45% of those costs after 2005. In addition, we mayreceive payments from JJPRD or Ortho Biotech 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 Ortho Biotech and us. However, in theevent of a dispute, specified development, United States commercialization andspecified other decisions are allocated specifically to us, andcommercialization decisions outside of the United States and some otherdecisions are allocated specifically to Ortho Biotech.

Unless our agreement withOrtho Biotech is terminated early due to a material uncured breach by one ofthe parties or by Ortho Biotech unilaterally subject to notice obligations, theagreement continues on a country by country basis outside of the United Statesuntil no earlier than the expiration of the last to expire patent covering themanufacture, use or sale of the product in the country. Revenues from thisalliance including license fees, reimbursement of development expenses,milestone payments and distribution fees accounted for approximately 10% of ourtotal revenues in 2005 and 17% of our total revenues in 2004.

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***INTEGRILIN Collaborations***

INTEGRILIN has been marketed in the United Statessince 1998 and outside of the United States since 1999. Since our acquisitionof COR Therapeutics, Inc., or COR, in February 2002 through August 31,2005, we co-promoted INTEGRILIN in the United States in collaboration with SGP,and shared profits and losses. As of September 1, 2005, we changed ourrelationship with SGP from a co-promotion to a royalty based arrangement. SGPnow exclusively markets INTEGRILIN in the United States and specified otherareas outside of the European Union. GlaxoSmithKline plc, or GSK, marketsINTEGRILIN in the European Union under a license from us.

In 2005, sales of INTEGRILIN as reported by SGP wereapproximately $314.9 million. Approximately 95% of those sales were made in theUnited States. Through September 1, 2005, we recognized approximately$123.5 million of co-promotion revenue based in part on sales of INTEGRILIN bySGP, for approximately 22% of our total revenue. Co-promotion revenue was 46%of our total revenue in 2004 and 43% of our total revenue in 2003, respectively.For the period September 1, 2005 through December 31, 2005, revenuefrom SGP, including license fees, reimbursement of manufacturing-relatedexpenses and royalties accounted for approximately 24% of our total revenues.

INTEGRILIN is a small synthetic peptide that works bypreventing the aggregation of platelets by blocking the platelet receptorglycoprotein, or GP, IIb-IIIa. The effects of INTEGRILIN are specific toplatelets, avoiding interference with other normal cardiovascular processes. Inaddition, these effects can be reversed following INTEGRILIN discontinuationwhen no longer needed. We believe that more than one million people per year inthe United States are candidates for INTEGRILIN therapy. Bleeding is the mostcommon complication encountered during administration of INTEGRILIN therapy.The majority of excess major bleeding events associated with INTEGRILIN arelocalized at the site of catheter 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. This patient group includes individuals whoare medically managed and those undergoing percutaneous coronary intervention,or PCI, including angioplasty. INTEGRILIN is also approved for use at the timeof a PCI, including for patients undergoing intracoronary stenting. This set ofindications is broader than the approved indications for the other two GPIIb-IIIa inhibitors approved for marketing 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, wegenerally shared any profits or losses from the United States with SGP and wegranted SGP an exclusive license to market INTEGRILIN outside the United Statesand the European Union in exchange for royalty obligations.

On September 1, 2005, SGP obtained the exclusiveU.S. development and commercialization rights for INTEGRILIN products from usand paid us a nonrefundable upfront payment of approximately $35.5 million.We receive royalties on net product sales of INTEGRILIN in the United Statesfrom SGP for so long as SGP is engaged in the commercialization and sale of anINTEGRILIN product in the United States, with the potential of receivingroyalties beyond the 2014 patent expiration date. In 2006 and 2007, minimumroyalty payments for each year are set at approximately $85.4 million. Thereare no guaranteed minimum royalty payments beyond 2007. We also receiveroyalties on net product sales by SGP outside of the United States. SGP’sobligation to pay us royalties in other countries expires on a country bycountry basis upon the later of fifteen years from the first commercial use ofan INTEGRILIN product in such country and  the expiration of the last toexpire patent covering such INTEGRILIN product. We are 

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continuing to manage thesupply chain for INTEGRILIN at the expense of SGP for products sold in the SGPterritories.

Strategically, we believethis new relationship increases the near-term certainty of revenues fromINTEGRILIN to us with the guaranteed minimum royalties, while eliminating theneed to further invest our resources into INTEGRILIN sales and marketing anddevelopment activities.

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

***sanofi-aventis Inflammatory Disease DiscoveryCollaboration***

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 the agreement expired on October 31,2005. However, we and sanofi-aventis are continuing a limited research programcovering three advanced preclinical candidates discovered through thecollaboration. The development and commercialization programs continue underthe 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 targetsrelevant in inflammatory diseases. During the remaining portion of thedevelopment phase of the alliance, we and sanofi-aventis have agreed to focusour joint resources on preclinical and clinical development of candidatesidentified in the collaboration. As of the end of 2005, the alliance hadidentified several development candidates, two of which, MLN3897 and MLN3701are now being tested by us in phase I clinical trials.

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**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 andclinical trials. Therefore, we have limited manufacturing capabilities andproduce only a small amount of product for research and development andpreclinical testing.

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 or the facilities that may be used for the manufacture of any of ourpotential products. The manufacture of our products and product candidates isbased in part on technology that we believe to be proprietary to our contractmanufacturers. In addition, some of our manufacturers may develop processtechnology related to the manufacture of our compounds that such suppliers owneither independently or jointly with us. This could increase our reliance onsuch manufacturers, require us to obtain a license from such manufacturers inorder to have our products manufactured or result in us not benefiting from thepotential efficiencies of new process technologies.

We manage the commercial and clinical supply chainsfor the production of both VELCADE and INTEGRILIN for ourselves and ourcollaborators. We rely on third party contract manufacturers for themanufacturing, fill/finish and packaging of VELCADE for both commercialpurposes and 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 anticipated commercial demand forthe product for 2006 and to fulfill the needs for our clinical trials. We workwith one manufacturer to complete fill/finish for VELCADE. We are currentlydeveloping an additional supplier for bortezomib as well as an additionalsupplier for fill and finish of the product.

We also rely on thirdparty contract manufacturers for the clinical and commercial production ofINTEGRILIN. We have two manufacturers that provide us with eptifibatide, theraw material necessary to make INTEGRILIN for both clinical trials andcommercial supply. Solvay, Societe Anonyme, or Solvay, one of the currentmanufacturers, owns the process technology used by it and the othermanufacturer for the production of bulk product. We have submitted our ownalternative process technology for the production of eptifibatide for approvalin the United States, and, we, GSK or SGP will submit that alternative processtechnology in Europe and other countries as required. We are also establishingan additional supply site using our new technology. We entered into a supplyagreement with Solvay in January 2003 which will end in January 2007.We have two manufacturers that currently perform fill/finish services forINTEGRILIN and we have a new packaging supplier for the United States.

**Sales and Marketing**

We have built a cancer specialized sales forcegeographically dispersed across the United States. This sales force marketsVELCADE in its approved indications to physicians, hospitals and other healthcare providers. Ortho Biotech or its affiliates market VELCADE outside of theUnited States and pay us distribution fees on product sales. See “OurCollaborations—Ortho Biotech Collaboration.” All sales of VELCADE in the United States are distributed through asole-source distribution model, where we sell directly to a third party who inturn distributes to the wholesaler base.

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SGP’s sales force markets INTEGRILIN to clinicalcardiologists, interventional cardiologists and emergency medicine physicians. GSKmarkets and sells INTEGRILIN in the European Union and will sell in otherEuropean countries upon regulatory approval of the transfer of the necessarymarketing authorizations from SGP, and SGP sells and markets INTEGRILINelsewhere outside the United States. See “Our Collaborations—INTEGRILINCollaborations—SGP Collaboration” and “Our Collaborations—INTEGRILINCollaborations—GSK License Agreement.”

We have not developed commercialization plans for ourproduct candidates other than VELCADE that may receive marketing approval inthe future because the manner in which we will commercialize these productcandidates will depend in large part on their market potential and ourfinancial resources. We may establish co-promotion, corporate collaboration,licensing or other arrangements for the marketing and sale of some products insome or all geographic markets.

Sales of VELCADE, INTEGRILIN,and product candidates that may be approved in the future will depend heavilyupon the availability of reimbursement from third party payors, such asgovernment and private insurance plans. We meet with administrators of theseplans to discuss the potential medical benefits and cost-effectiveness of ourproducts. 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 and commercial applications for biotechnology productsincrease. Some competitors, primarily large pharmaceutical companies, havegreater resources and experience than we have. Many of these companies havecommercial arrangements with other companies in the biotechnology industry to supplementtheir own research capabilities.

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. However, we believe our competitive position is enhanced by ourcommitment to research leading to the discovery and development of newproducts. Other factors that may help us meet competition include the qualityand breadth of our technology platform, the skill of our employees and ourability to recruit and retain skilled employees, our program of seeking patentprotection for our discoveries and advances, and our capabilities for earlystage research and drug discovery. However, many large pharmaceutical andbiotechnology companies have significantly larger intellectual property estatesthan we do, more substantial capital resources than we have, and greatercapabilities and experience than we do in discovery, research, preclinical andclinical development, sales, marketing, manufacturing and 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; and

·       theeffects of price control mechanisms.

We expect traditional chemotherapy treatments andother therapies 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 

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of patients withtransfusion-dependent anemia. Celgene is also developing Revlimid for thetreatment of a subset of patients with multiple myeloma and has filed an sNDAwith the FDA in this indication which could be approved in 2006. Additionally,Celgene’s Thalomid® (thalidomide) is marketed and approved as atreatment for patients with leprosy, but has an increasing and significantoff-label use in multiple myeloma based on data published in peer-reviewedpublications. Celgene filed an sNDA for thalidomide for the treatment ofmultiple myeloma that was accepted by the FDA for review. There are also otherpotentially competitive therapies that are in late-stage clinical developmentfor multiple myeloma. We believe that VELCADE generally competes with othertherapies on the basis of efficacy, 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 GuilfordPharmaceuticals, Inc. in the United States.

Other competitivefactors that could negatively impact the future growth and development of theGP IIb-IIIa inhibitors market segment include:

·       expandeduse of heparin replacement therapies, such as Angiomax® (bivalirudin) produced and sold by TheMedicines 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.

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**DrugResearch, 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. Our goal is to generate a sufficiently large portfolio ofdiscovery and development programs at various stages of maturity so that we canmove new drugs through clinical development and onto the market on a regularbasis.

To achieve this goal, we have focused on developing acomprehensive understanding of the mechanisms and pathways that underlieimportant diseases and on building an organization capable of converting thisunderstanding into innovative treatments for patients. We deploy a full rangeof genomics capabilities to decipher the workings of the human genome andidentify genes the regulation of which may play an important role in disease.From among these genes, we select those whose properties appear most suitableas targets for new drugs. Then we seek to identify and optimize small moleculecompounds or antibodies that interact with targets in an appropriate manner.

We test these drug candidates extensively in animalmodels to assess their likely suitability as therapeutic products. We then moveinto clinical testing in humans, to establish the safety and efficacy of theseexperimental products and to understand therapeutically important differencesamong people. At any stage of this process, we may need to 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, wecurrently rely substantially upon third parties to produce material forpreclinical testing purposes and expect to continue to do so in the future. Wealso currently rely and expect to continue to rely, upon other third parties,potentially including our collaborators, to produce materials required forclinical trials and for the commercial production of our products.

We believe that our global regulatory affairs experienceand expertise is an important part of our ability to move developmentcandidates forward in an efficient manner. If we believe we have establishedsafety and efficacy for a new drug candidate, we submit applications formarketing approval to the appropriate regulatory authorities.

During this process, we are informed by the expertiseof our scientists and clinicians in disease biology, chemistry and preclinicaland clinical development, and our efforts are enabled by the comprehensiverange of capabilities we have assembled into our technology platform. Toaugment our internal discovery and development capabilities, we may alsolicense or acquire rights to drugs or drug candidates that have been developedoutside of our company.

As we continue to shift our focus to clinicaldevelopment and product commercialization, and as we conclude ourdiscovery-based alliances, we expect to devote fewer personnel and resources toresearch and discovery activities. As a result of this shift, we recordedrestructuring charges in 2005 of approximately $77.1 million, in 2004 ofapproximately $38.0 million and in 2003 of approximately$191.0 million and expect to record additional restructuring chargesduring 2006 of between $25.0 million and $30.0 million.

Our research and developmentexpenses totaled $342.2 million in 2005, $402.6 million in 2004 and $488.5million in 2003. Our research and development expenses are primarilycompany-sponsored. Our strategic collaborator-sponsored research anddevelopment expenditures totaled $23.5 million in 2005, $37.7 million in 2004and $63.5 million in 2003. In calculating strategic collaborator-sponsoredresearch and development expenditures, we have included net reimbursement forour research and development efforts, excluding license fees, milestones androyalties.

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**Patentsand Proprietary 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 as wellas possible therapeutic, diagnostic and pharmacogenomic products and processes,drug screening methodologies and other inventions based on such genes,proteins, antibodies and small molecules. We also seek patent protection orrely upon trade secret rights to protect other technologies which may be usedto discover and characterize genes, proteins, antibodies and small molecules ormay be used to develop and manufacture novel therapeutic, diagnostic andpharmacogenomic 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 to MLN02,MLN1202 and MLN3897. The issued United States patents for MLN02 expire in 2015and 2016. The issued United States patents for MLN1202 expire in 2018.

***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 on productsales. We are the exclusive licensee of issued United States and foreignpatents and/or pending United States and foreign applications relating to ourproducts on the market and in clinical development as follows:

·       *VELCADE.* We are a party to an exclusiveworldwide Patent License Agreement with the U.S. Public Health Service, orPHS, dated December 12, 2002. This agreement provides us with the right touse the patents belonging to PHS relating to the formulation of VELCADE. Underthis agreement we have obligations to pay PHS up-front royalty payments,royalty milestones, royalties on net sales of VELCADE and sublicensingroyalties. The license extends through the expiration of any licensed patentsthat may result from PHS’ pending applications unless terminated earlier by PHSto meet requirements for public use specified by law or for a default by us ora failure to meet our obligations under the agreement, in either case,following a cure period. The issued United States patents to which thislicense relates expire in 2022.

·       *MLN518.* The issued United States patentsrelating to MLN518 expire in 2018 and 2021. The MLN518 license extends throughthe expiration of the issued patents or any licensed patents that may resultfrom pending applications.

·       *MLN1202.*The MLN1202 license extends through the expirationof the issued patents or any licensed patents that may result from pendingapplications. The issued United States patents subject to the license thatcover MLN1202 expire in 2014 and 2015. 

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***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.

**Government Regulation**

***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 developmentactivities. All of our products require regulatory approval by governmentalagencies prior to commercialization. In particular, our products are subject torigorous preclinical and clinical testing and other premarket approvalrequirements by the FDA and regulatory authorities in other countries. Variousstatutes and regulations also govern or influence the manufacturing, safety,labeling, storage, record keeping and marketing of our products. The lengthyprocess of seeking these approvals, and the subsequent compliance withapplicable statutes and regulations, require the expenditure of substantialresources. Any failure by us to obtain, any delay in obtaining or any failureto maintain, regulatory approvals could materially adversely affect ourbusiness.

The activities required before a pharmaceuticalproduct 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 before proposed clinical testing can begin.

Typically, clinicaltesting involves a three-phase process.

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

·       Inphase II, clinical trials are conducted with groups of patients afflicted witha specified disease in order to provide enough data to statistically evaluatethe preliminary efficacy, optimal dosages and expanded evidence 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 are then submitted to the FDA for approval to commencecommercial sales. For a chemical pharmaceutical product, the submission is inthe form of an 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 

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quality control records todetermine its compliance with these requirements. To assure compliance,applicants must continue to expend time, money and effort in the area oftraining, production and quality control. After the applicant is licensed forthe manufacture of any product, manufacturers are subject to periodic inspectionsby the FDA. We also face similar inspections coordinated by the EMEA byinspectors from particular European Union member states that conductinspections on behalf of the Europe Union.

In European Union countries, Canada, and Australia,regulatory requirements and approval processes are similar in principle tothose in the United States and can be at least as rigorous, costly anduncertain. Additionally, depending on the type of drug for which an applicantis requesting approval, there are currently two potential tracks for marketingapproval in European Union countries: mutual recognition and the centralizedprocedure. These review mechanisms may ultimately lead to approval in allEuropean Union countries, but each method grants all participating countriessome decision making authority in product approval.

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, the first product we have sold directly, we became a participant inthe Medicaid rebate program established by the Omnibus Budget ReconciliationAct of 1990, and under amendments of that law that became effective in 1993.Participation in this program includes requirements such as extendingcomparable discounts under the PHS pharmaceutical pricing program. Under theMedicaid rebate program, we pay a rebate for each unit of our productreimbursed by Medicaid. The amount of the rebate for each product is set by lawas a minimum of 15.1% of the average manufacturer price, or AMP, of thatproduct, or if it is greater, the difference between AMP and the best priceavailable from us to any customer. The rebate amount also includes an inflationadjustment if AMP increases faster than inflation. The PHS pricing programextends discounts comparable to the Medicaid rebate to a variety of communityhealth clinics and other entities that receive health services grants from thePHS, as well as hospitals that serve a disproportionate share of poor Medicareand Medicaid beneficiaries. The rebate amount is recomputed each quarter basedon our reports of our current average manufacturer price and best price foreach of our products to the Centers for Medicare & Medicaid Services.Additionally, under the Medicare Prescription Drug and Modernization Act of2003 we must report our average sales price. Our average sales price is used toestablish Medicare reimbursement.

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 

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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 procedurescomply with the standards prescribed by local, state and federal 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 and profitability of biopharmaceuticalcompanies may be affected by the continuing efforts of government and thirdparty payors to contain or reduce the costs of health care through variousmeans. For example, in some foreign markets, pricing reimbursement orprofitability of therapeutic and other pharmaceutical products is subject togovernmental control. In Canada this practice has led to lower priced productsthan in the United States. As a result, importation of products from Canadainto the United States may result in reduced product revenues. 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 controls. For example, the passage of the Medicare Prescription Drugand Modernization Act of 2003 imposes new requirements for the distribution andpricing of prescription drugs which may affect the marketing of our products.While we cannot predict whether any future legislative or regulatory proposalswill be adopted, the adoption of such proposals could have a material adverseeffect on our business, financial condition and profitability.

In many foreign markets,including the countries in the European Union, pricing of pharmaceuticalproducts is subject to governmental control. In the United States, there havebeen, and we expect that there will continue to be, a number of federal andstate proposals to implement similar governmental pricing controls. While wecannot predict whether such legislative or regulatory proposals will beadopted, the adoption of such proposals could have a material adverse effect onour business, financial condition and results.

***Third Party Reimbursement***

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.

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**Employees**

As of February 28,2006, we had approximately 1,142 full-time employees. We believe that relationswith our employees are good.

**Available Information**

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 AuditCommittee, Compensation and Talent Committee and Board Governance Committee areall available on the corporate governance section of our website athttp://www.millennium.com/investors. Stockholders may request a free copy of anyof these documents by writing to Investor Relations, Millennium Pharmaceuticals, Inc.,40 Landsdowne Street, Cambridge, Massachusetts, U.S.A. 02139.

**Item 1A.**                RISKFACTORS THAT MAY AFFECT RESULTS

This Annual Report on Form 10-K and certainother communications made by us contain forward-looking statements,including statements about our growth and future operating results, discoveryand development of products, strategic alliances and intellectual property. Forthis purpose, any statement that is not a statement of historical fact shouldbe considered a forward-looking statement. We often use the words “believe,”“anticipate,” “plan,” “expect,” “intend,” “may,” “will” and similar expressionsto help identify forward-looking statements.

We cannot assure investorsthat our assumptions and expectations will prove to have been correct.Important factors could cause our actual results to differ materially fromthose indicated or implied by forward-looking statements. Such factorsthat could cause or contribute to such differences include those factorsdiscussed below. We undertake no intention or obligation to update or reviseany forward-looking statements, whether as a result of new information,future events or otherwise.

**Regulatory Risks**

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

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

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

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

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

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

We may need to successfully address a number oftechnological challenges in order to complete development of our products.Moreover, these products may not be effective in treating any disease or mayprove to have undesirable or unintended side effects, toxicities or othercharacteristics that may preclude our obtaining regulatory approval or preventor limit commercial use.  For example, inJanuary 2006, as part of our portfolio review process, based on theevaluation of recent clinical data in the context of additional opportunitiesin the pipeline, we decided to discontinue development at this time of MLN2704in its current form as well as MLN1202 in rheumatoid arthritis.

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

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

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

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

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

Products that result 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 regulatory process in connection with any productsthat we develop based on these new technologies or new therapeutic approaches.

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**Risks Relating to Our Business, Strategy and Industry**

**Our revenues over the nextseveral years will be materially dependent on the commercial success of VELCADEand INTEGRILIN.**

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

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

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

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

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

With respect to VELCADE, we face competition fromCelgene’s Thalomid and its derivatives, a treatment approved for complicationsassociated with leprosy which is used broadly for multiple myeloma based ondata published in peer-reviewed publications. Celgene has filed a sNDA forThalomid for the treatment of multiple myeloma that was accepted by the FDA forreview in 2005. We also face competition for VELCADE from Celgene’s Revlimidwhich was approved by the FDA in December 2005 for the treatment of asubset of patients with transfusion-dependent anemia. Celgene is alsodeveloping Revlimid for the treatment of patients with multiple myeloma and inearly 2006 filed a sNDA with the FDA in this indication which could be approvedin 2006. We expect to see increased competition from Revlimid prior to approvalof this sNDA as Celgene accelerates its prelaunch activities. We also facecompetition for VELCADE from traditional chemotherapy treatments, and there areother potentially competitive therapies for VELCADE, including other proteasomeinhibitors, that are in late-stage clinical development for the treatment ofmultiple myeloma. In addition, multiple myeloma therapies in development mayreduce the number of patients available for VELCADE treatment throughenrollment of these patients in clinical trials of these potentially competingproducts.

Due to the incidence and severity of cardiovasculardiseases, the market for therapeutic products that address these diseases islarge, and we expect the already intense competition in this field to increase.The most significant competitors for SGP in marketing INTEGRILIN are major pharmaceuticalcompanies and biotechnology companies. The two products that compete directlywith INTEGRILIN in the GP IIb-IIIa inhibitor market segment areReoPro® (abciximab), which is produced by Johnson &Johnson 

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

Other competitivefactors that could negatively affect INTEGRILIN include:

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

·       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.

**Sales of INTEGRILINand possibly VELCADE in particular reporting periods may be affected byfluctuations in inventory, allowances and buying patterns.**

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

We distribute VELCADE in the U.S. through 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.

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

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

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manufacturing costs orproducts based on these new technologies may make products uneconomical tocommercialize.

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

We must provide the FDA and foreign regulatoryauthorities with preclinical and clinical data demonstrating that our productsare safe and effective before they can be approved for commercial sale.Clinical development, including preclinical testing, is a long, expensive 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. Preclinicaland clinical data can be interpreted in different ways, which could delay,limit or prevent regulatory approval. Negative or inconclusive results from apreclinical study or clinical trial, adverse medical events during a clinicaltrial or safety issues resulting from products of the same class of drug couldcause a preclinical study or clinical trial to be repeated or a program to beterminated, even if other studies or trials relating to the program are successful.For example, in December 2003 we decided to stop further accrual to aphase II trial examining VELCADE in colorectal cancer because interim findingsproduced results that did not meet the pre-specified efficacy criteria forcontinuation of study accrual.

We may not complete our planned preclinical orclinical trials on schedule or at all. We may not be able to confirm the safetyand efficacy of our potential drugs in long-term clinical trials, which mayresult in a delay or failure to commercialize our products. We may havedifficulty obtaining a sufficient number of appropriate patients or clinicalsupport to conduct our clinical trials as planned. A number of additionalevents could delay the completion of our clinical trials, including conditionsimposed on us by the FDA or foreign regulatory authorities regarding the scopeor design of our clinical trials, lower than anticipated retention rates forpatients in our clinical trials, insufficient supply or deficient quality ofour product candidates or other materials necessary to conduct our clinicaltrials or the failure of our third party contractors to comply with regulatoryrequirements or otherwise meet their contractual obligations to us in a timelymanner. As a result, we may have to expend substantial additional funds toobtain access to resources or delay or modify our plans significantly. Ourproduct development costs will increase if we experience delays in testing orapprovals. Significant clinical trial delays could allow our competitors to bringproducts to market before we do and impair our ability to commercialize ourproducts or potential products.

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

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

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

The commercial success 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 as clinically useful, cost-effective and safe.Many of the products that we are developing are based upon new technologies ortherapeutic approaches. As a result, it may be more difficult for us to achievemarket acceptance of our products, particularly the first products that weintroduce to the market based on new technologies and therapeutic approaches.Our efforts to educate the medical community on these potentially uniqueapproaches may require greater resources than would be typically required forproducts based on conventional technologies or therapeutic approaches. Thesafety, efficacy, convenience and cost-effectiveness of our products ascompared to competitive products will also affect market acceptance.

**Becauseof the high demand for talented personnel within our industry, we couldexperience difficulties in recruiting employees necessary for our success andgrowth.**

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.

**RisksRelating to Our Financial Results and Need for Financing**

**Wehave incurred substantial losses and expect to continue to incur losses. Wewill not be successful unless we reverse this trend.**

We have incurred netlosses of $198.2 million for the year ended December 31, 2005, $252.3million for the year ended December 31, 2004 and $483.7 million for theyear ended December 31, 2003. We expect to continue to incur substantialoperating losses in future periods. Prior to our acquisition of COR,substantially all of our revenues resulted from payments from collaborators,and not from the sale of products.

We expect to continue toincur significant expenses in connection with our research and developmentprograms and commercialization activities. As a result, we will need togenerate significant revenues to help fund these costs and achieve positive netincome. Our ability to achieve positive net income would be adversely impactedif our acquired intangible assets and goodwill, primarily resulting from ouracquisition of COR, became impaired as a result of reduced marketcapitalization or product failures or withdrawals. We cannot be certain whetheror when we will become profitable because of the significant uncertainties withrespect to our ability to successfully develop products and generate revenuesfrom the sale of approved products and from existing and potential futurestrategic alliances.

**Wemay need additional financing, which may be difficult to obtain. Our failure toobtain necessary financing or doing so on unattractive terms could adverselyaffect our business and operations.**

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

If we are unable 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 

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othersthat may require us to relinquish rights to specified technologies, productcandidates or products which we would otherwise pursue on our own.

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

At December 31, 2005,we had approximately $105.5 million of outstanding convertible debt, of which$5.9 million matures in 2006 and $99.6 million matures in 2007 and $80.4million of capital lease obligations. During each of the last five years, ourearnings were insufficient to cover our fixed charges. We will be required tomake interest payments on our outstanding convertible notes totalingapproximately $8.2 million over the next two years. We will be required to makeinterest payments totaling approximately $7.5 million over the next three yearson our capital leases.

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

Ourindebtedness could 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.

**If wedo not achieve the anticipated benefits of our restructuring efforts, or if thecosts of our restructuring efforts exceed anticipated levels, our businesscould be harmed.**

We recorded restructuringcharges of $77.1 million for the year ended December 31, 2005, $38.0 millionfor the year ended December 31, 2004 and $191.0 million for the year endedDecember 31, 2003. In December 2002 and June 2003, we took stepsas part of our 2003 restructuring plan to focus our resources on developmentand commercialization of product opportunities and achieving our goal ofbecoming profitable in the future. We may not achieve the cost savingsanticipated from the restructurings because such savings are difficult topredict and speculative in nature. On September 1, 2005, we transferredexclusive U.S. commercialization and development rights of INTEGRILIN to SGPand on October 26, 2005, we announced additional efforts to refine ourstrategy including a substantial reduction of our inflammation discoveryprograms. As a result of these efforts, we expect to reduce total research anddevelopment and selling, general and administration expenses by approximately19 percent in 2006 from 2005 and 30 percent in 2006 from 2004. We expect torecord additional restructuring charges of between $25.0 million to $30.0million in 2006. We may not achieve our estimated expense reductions becausesuch savings are difficult to predict and speculative in nature.

While we believe ourrestructuring estimates to be reasonable, it is possible that the actualcharges will exceed the ranges discussed above. For example, we may not be ableto lease facilities that we have closed or plan to close in connection with therestructuring as quickly or on as favorable terms as we anticipated.

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**RisksRelating to Collaborators**

**Wedepend significantly on our collaborators to work with us to commercialize anddevelop products including VELCADE and INTEGRILIN.**

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

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

Therisks that we face in connection with these existing and any future alliancesinclude the following:

·       Allof our strategic alliance agreements are for fixed terms and are subject totermination under various circumstances, including, in many cases, such as inour collaboration with Ortho Biotech, without cause.

·       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 ofresearch and development that we may pursue, either alone or in collaborationwith third parties.

·       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 will payus royalties  based on net product salesof INTEGRILIN. In 2006 and 2007, minimum royalty payments for each year are setat $85.4 million, with some conditions that could reduce these minimums. If SGP’sINTEGRILIN sales after 2007 are less than expected, we will receive lessroyalty revenue than we expect, which would have a material adverse effect onour ability to fund other parts of our business.

**Wemay not be successful in establishing additional strategic alliances, whichcould adversely affect our ability to develop and commercialize products.**

An important element ofour business strategy is entering into strategic alliances for the developmentand commercialization of selected products. In some instances, if we areunsuccessful in reaching an agreement with a suitable collaborator, we may failto meet all of our business objectives for the applicable 

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productor program. We face significant competition in seeking appropriatecollaborators. Moreover, these alliance arrangements are complex to negotiateand time-consuming to document. We may not be successful in our efforts toestablish additional strategic alliances or other alternative arrangements. Theterms of any additional strategic alliances or other arrangements that weestablish may not be favorable to us. Moreover, such strategic alliances orother arrangements may not be successful.

**RisksRelating to Intellectual Property**

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

Ourpatent positions, and those of other pharmaceutical and biotechnologycompanies, are generally uncertain and involve complex legal, scientific andfactual questions. Our ability to develop and commercialize products depends insignificant 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.

**Thereis significant uncertainty about the validity and permissible scope of patentsin our industry, which may make it difficult for us to obtain patent protectionfor 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.

**Thirdparties may own or control patents or patent applications and require us toseek licenses, which could increase our development and commercializationcosts, or prevent us from developing or marketing our products.**

We may not have rightsunder some patents or patent applications related to some of our existing andproposed products or processes. Third parties may own or control these patentsand patent applications in the United States and abroad. Therefore, in somecases, such as those described below, in order to develop, manufacture, sell orimport some of our existing and proposed products or processes, we or ourcollaborators may choose to seek, or be required to seek, licenses under thirdparty patents issued in the United States and abroad, or those that might issuefrom United States and foreign patent applications. In such event, we would berequired to pay license fees or royalties or both to the licensor. If licensesare not available to us on acceptable terms, we or our collaborators may not beable to develop, manufacture, sell or import these products or processes.

Our MLN02 and MLN1202product candidates are humanized monoclonal antibodies. We are aware of thirdparty patents and patent applications that relate to humanized or modifiedantibodies, products 

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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 of UnitedStates Patent No. 6,410,516, which is exclusively licensed to Ariad. Ifthis patent is valid and Ariad successfully sues us for infringement, we wouldrequire a license from Ariad in order to manufacture and market VELCADE.

**Wemay become involved in expensive patent litigation or other proceedings, whichcould result in our incurring substantial costs and expenses or substantialliability for damages or require us to stop our development andcommercialization efforts.**

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

The cost to us of anypatent litigation or other proceeding, even if resolved in our favor, could besubstantial. Some of our competitors may be able to sustain the cost of suchlitigation or proceedings more effectively than we can because of theirsubstantially greater financial resources. If a patent litigation or otherproceeding is resolved against us, we or our collaborators may be enjoined fromdeveloping, manufacturing, selling or importing our products or processeswithout a license from the other party and we may be held liable forsignificant damages. We may not be able to obtain any required license oncommercially 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 themarketplace. Patent litigation and other proceedings may also absorbsignificant management time.

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

Although we generally 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 the product’slabeling or approved by the FDA or other regulatory authorities. Even if wehave patent protection of the prescribed indication, as a practical matter, wewould have little recourse as a result of this off-label use. In that event,our revenues from the commercialization of the compound would likely beadversely affected.

**If wefail to comply with our obligations in our intellectual property licenses withthird parties, we could lose license rights that 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, 

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variousdiligence, milestone payment, royalty, insurance and other obligations on us.If we fail to comply with these obligations, the licensor may have the right toterminate the license, in which event we might not be able to market anyproduct that is covered by the licensed patents.

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

**Becausewe have limited sales, marketing and distribution experience and capabilities,in some instances we are dependent on third parties to successfully performthese functions on our behalf, or we may be required to incur significant costsand devote significant efforts to augment our existing capabilities.**

We are marketing andselling VELCADE in the United States solely through our cancer-specific salesforce and without a collaborator. Our success in selling VELCADE will dependheavily on the performance of this sales force. In areas outside the UnitedStates where VELCADE has received approval, Ortho Biotech or its affiliatesmarket VELCADE. As a result, our ability to earn revenue related to VELCADEoutside of the United States will depend heavily on Ortho Biotech.

SGP exclusively marketsINTEGRILIN in areas outside of Europe, including the United States, and GSKexclusively markets INTEGRILIN in Europe. As a result, except for our minimumroyalty payments from SGP in 2006 and 2007, our success in receiving royaltiesand milestone payments from sales of INTEGRILIN depends entirely on themarketing efforts of these third parties.

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.

**Becausewe have no commercial manufacturing capabilities, we will continue to bedependent on third party manufacturers to manufacture products for us, or wewill be required to incur significant costs and devote significant efforts toestablish our own manufacturing facilities and capabilities.**

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

We currently relysubstantially upon third parties to produce material for preclinical testingpurposes and expect to continue to do so in the future. We also currently relyand expect to continue to rely, upon other third parties, potentially includingour collaborators, to produce materials required for clinical trials and forthe commercial production of our products.

There are a limited numberof contract manufacturers that operate under the FDA’s good manufacturingpractices regulations capable of manufacturing our products. If we are unableto arrange for third party manufacturing of our products, or to do so oncommercially reasonable terms, we may not be able to complete development ofour products or commercialize them, or we may experience delays in doing so.

Reliance on third partymanufacturers entails risks to which we would not be subject if we manufacturedproducts ourselves, including reliance on the third party for regulatorycompliance, the possibility of breach of the manufacturing agreement by thethird party because of factors beyond our control and the possibility oftermination or non-renewal of the agreement by the third party, based on itsown business priorities, at a time that is costly or inconvenient for us.

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.

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**Becausewe have no commercial manufacturing capability for VELCADE and INTEGRILIN, weare dependent on third parties to produce product sufficient to meet marketdemand.**

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

We rely on third partycontract manufacturers to manufacture, fill/finish and package VELCADE for bothcommercial purposes and for all clinical trials. We have established long-termsupply relationships for the production of commercial supplies of VELCADE. Wework with one manufacturer, with whom we have a long-term supply agreement, tocomplete fill/finish for VELCADE. 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 manufacturingfacilities for INTEGRILIN and, accordingly, rely on third party contractmanufacturers for the clinical and commercial production of INTEGRILIN. We havetwo manufacturers that currently provide us with eptifibatide, the activeingredient necessary to make INTEGRILIN. Solvay, one of the current manufacturers,owns the process technology used by it and the other manufacturer for theproduction of bulk product. As a result, unless we have an approved alternativeprocess technology, we will be reliant on these manufacturers. We have twomanufacturers that currently perform fill/finish services for INTEGRILIN and anew packaging supplier for the United States. If our current manufacturers areunable to continue or decide to discontinue their fill/finish services and weare unable to secure alternative manufacturers, the supply of INTEGRILIN couldbe adversely affected which could harm our business.

We have filed with the FDAfor approval of an alternate process technology for INTEGRILIN. We cannotquantify the time or expense that may ultimately be required to obtain approvalfor an alternate process technology, but it is possible that such time orexpense could be substantial. Moreover, we may not be able to implement any newprocess technology successfully.

In order to mitigate therisk of INTEGRILIN supply interruption, we have entered into a new third partyfill/finish and bulk product manufacturing arrangement on commerciallyreasonable terms and are currently engaged in completing a new third partyarrangement which will manufacture eptifibatide utilizing the new process. Wemay not be able complete this third party arrangement. Even if we do, if demandfor INTEGRILIN does not meet our forecasts, the manufacturing cost under thisnew arrangement could be more expensive on a per unit basis than the cost underour existing arrangements, which would decrease royalty payments due from SGPand would adversely affect our business. Furthermore, because these are newmanufacturing arrangements, these manufacturers may encounter difficulties thatcould adversely affect the supply of INTEGRILIN and, thereby, harm ourbusiness.

**If wefail to obtain an adequate level of reimbursement for our products by thirdparty payors, there may be no commercially viable markets for our products.**

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

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In particular, third partypayors could lower the amount that they will reimburse hospitals or doctors totreat the conditions for which the FDA has approved VELCADE or INTEGRILIN. Ifthey do, pricing levels or sales volumes of VELCADE or INTEGRILIN may decrease.In addition, if we fail to comply with the rules applicable to theMedicaid and Medicare programs, we could be subject to the imposition of civilor criminal penalties or exclusion from these programs.

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

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

In addition, we 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 private reimbursementfor that product is uncertain, as is the amount for which that product will bereimbursed. We cannot predict the availability or amount of reimbursement forour product candidates, and current reimbursement policies for VELCADE orINTEGRILIN could change at any time.

**Weface a risk of product liability claims and may not be able to obtaininsurance.**

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.

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

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

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

**Thetrading price of our securities could be subject to significant fluctuations.**

The trading price of ourcommon stock has been quite volatile, and may be volatile in the future. During2005, our common stock traded as high as $12.34 per share and as low as $7.63per share. Factors such as announcements of our or our competitors’ operatingresults, data from our or our competitors’ clinical trial results, changes inour prospects, market conditions for biopharmaceutical stocks in general andanalyst recommendations or commentary concerning our or our competitors’products or business could have a significant impact on the future tradingprices of our common stock.

Inparticular, the trading price of the common stock of many biopharmaceuticalcompanies, including ours, has experienced extreme price and volumefluctuations, which have at times been unrelated to the operating performanceof such companies whose stocks were affected. Some of the factors that maycause volatility in the 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 oursecurities may also be affected by the estimates and projections of theinvestment community and our ability to meet or exceed the financialprojections we provide to the public. The price may also be affected by generaleconomic and market conditions, and the cost of operations in our productmarkets. While we cannot predict the individual effect that these factors mayhave on the price of our securities, these factors, either individually or inthe aggregate, could result in significant variations in price during any givenperiod of time. We can not assure you that these factors will not have anadverse effect on the trading price of our common stock.

**Wehave anti-takeover defenses that could delay or prevent an acquisition andcould adversely affect the price of our common stock.**

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

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**Item1B.**               UNRESOLVED STAFFCOMMENTS

There were no unresolvedcomments from the Staff of the U.S. Securities and Exchange Commission at December 31,2005.

**Item 2.**                        PROPERTIES

Welease a total of approximately 1,318,593 square feet of office and laboratoryspace. This table contains information about our current materially importantleased properties: 

| Location                 | ** ** | ** **               | ** ** | **Square Feet**        | ** ** | **Use**      | ** ** | **Lease expiration  date** |
|--------------------------|------------|--------------------------|------------|------------------------|------------|--------------|------------|----------------------------|
| Several locations in     |       | 639,279 (183,622 sublet) |       | corporate headquarters |       | 2006 to 2020 |
| Cambridge, Massachusetts |       |                     |       | office                 |       |         |
|                          |       |                     |       | laboratory             |       |         |
| South San  Francisco,    |       | 136,242 (64,720  sublet) |       | office                 |       | 2011         |
| California               |       |                     |       | laboratory             |       |         |
| Cambridge, England       |       | 91,900                   |       | laboratory             |       | 2023         |
|                          |       |                     |       | office                 |       |         |

 

In connection with our 2003 and 2005 restructuringinitiatives, we have sublet 248,342 square feet of our facilities, as shown inthe table above. We have sublet 183,622 square feet of space in various Cambridge,Massachusetts facilities and are seeking to sublease an additional 181,022square feet of these facilities. We have consolidated our Cambridge,Massachusetts operations into our remaining facilities in that location. Wehave closed our facilities in Cambridge, England and South San Francisco,California and have sublet 64,720 square feet of space in South San Francisco,California. We are seeking to sublease the remaining 163,422 square feet of ourCambridge, England and South San Francisco, California facilities and plan tosublease those facilities through the end of our lease terms.

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 any material legal proceedings.

**Item4.**                        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, 2005.

**OUR EXECUTIVEOFFICERS**
| **Deborah Dunsire, M.D.   Chief Executive Officer and President**(since  July 2005)**Age 43**                                                                                                                                                                                                                                                                                                  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Prior  to joining Millennium, Dr. Dunsire was Head of North American Oncology  Operations (2000 to July 2005) and Vice President, Oncology Business  Units (1996 to 2000) of Novartis, a pharmaceutical company. Prior to that she  held various positions with Sandoz, a pharmaceutical company (1988 to 1996)  in the areas of product management, scientific development and clinical  research. |

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| **Christophe Bianchi, M.D.   Executive Vice President, Commercial  Operations**(since February 2006)**Age 44**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Prior  to joining Millennium, Dr. Bianchi was Vice President, Business Unit  Head, Oncology of sanofi-aventis US (formerly sanofi-synthelabo USA), a  biopharmaceutical company (2004 to January 2006). Previously, he was  Vice President, Internal Medicine and Central Nervous System Business Unit at  sanofi-synthelabo (2001 to 2004). He served as President Europe, Senior Vice  President Global Marketing and Business Development of Sangstat  Pharmaceuticals, a biopharmaceutical company (2000 to 2001). Dr. Bianchi  held various positions with Rhone-Poulenc Rorer, a biopharmaceutical company  (1989 to 1999), where his last position was Vice President of Global  Marketing.                                                                                                                                                                                                                                                                                               |
| **Marsha H. Fanucci   Senior Vice President  and Chief Financial Officer**(since July 2004)**Age 52**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| Ms. Fanucci was Senior Vice President,  Finance and Corporate Strategy of Millennium (October 2003 to  July 2004), Vice President, Finance and Corporate Strategy  (July 2003 to October 2003) and Vice President, Corporate  Development (July 2000 to July 2003). Prior to joining Millennium, she was Vice President, Corporate  Development and Strategy of Genzyme Corporation, a biotechnology company  (August 1998 to June 2000).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **Stephen M. Gansler   Senior Vice President,  Human Resources**(since February 2006)**Age 51**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| Prior  to joining Millennium, Mr. Gansler was Vice President, Human Resources  of Synta Pharmaceuticals, Inc., a biotechnology company (2005 to  February 2006). He was Senior Vice President, Human Resources of Covanta  Energy Corporation, a provider of waste-to-energy services (2001 to 2004).  Prior to that, Mr. Gansler held Vice President of Human Resources  positions at Johnson & Johnson, a diversified health care company  (1981 to 2001) and was a member of the management board of a number of  Johnson & Johnson companies.                                                                                                                                                                                                                                                                                                                                                                                                                         |
| **Laurie B. Keating   Senior Vice President,  General Counsel and Secretary**(since September 2004)**Age 52**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| Prior  to joining Millennium, Ms. Keating was Vice President of Operations and  Finance (September 2003 to September 2004), member of the Board of  Directors (June 2001 to present) and Chief Executive Officer  (June 2001 to September 2003) of Hydra Biosciences, Inc., a  biopharmaceutical company. She served as Executive Vice President, General  Counsel and Secretary (July 1999 to June 2000 and November 2000  to January 2001) and Interim Chief Executive Officer (June 2000 to  November 2000) of Campus Pipeline, an Internet infrastructure company  focused on higher education. Prior to that, she was Senior Vice President,  General Counsel and Secretary of Iomega Corporation, a computer storage  solutions company (January 1997 to June 1999) and Senior Vice  President, General Counsel and Secretary of Sybase, Inc., an information  technology company (March 1989 to January 1997). |
| **Anna Protopapas   Senior Vice President,  Corporate Development**(since March 2005)**Age 41**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| Ms. Protopapas  was Vice President, Corporate Development of Millennium (March 2001 to  March 2005), Senior Director, Corporate Development (April 1999 to  March 2001) and Director, Corporate Development (October 1997 to  April 1999). Prior to joining Millennium, Ms. Protopapas held a  variety of marketing and business development roles in companies outside of  the life sciences field.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| **Robert I. Tepper, M.D.   President, Research  and Development**(since December 2002)**Age 50**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| Dr. Tepper  was Executive Vice President, Discovery of Millennium (June 2001 to  December 2002) and Chief Scientific Officer (March 1999 to  December 2002), Senior Vice President (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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |

 

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**PART II**

**Item 5.**                        MARKETFOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES

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

Ourcommon stock is traded on the NASDAQ National Market under the symbol “MLNM.”The following table reflects the range of the reported high and low last saleprices on the NASDAQ National Market for the periods indicated.

| ** **     | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------|------------|----------|------------|----------|------------|
| ** **     | ** ** | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
| First quarter  |       | $        | 11.97      |     | $          | 8.06 |   | $ | 19.63 |   | $ | 16.58 |   |
| Second quarter |       | 9.80     |       | 7.79     |       | 18.51 |   | 13.55 |   |
| Third quarter  |       | 11.09    |       | 9.14     |       | 14.00 |   | 10.15 |   |
| Fourth quarter |       | 10.92    |       | 8.09     |       | 13.41 |   | 11.02 |   |
|                |            |          |            |          |            |  |  |  |  |  |  |  |  |

 

On March 3, 2006, the closing price per share ofour common stock was $10.50, as reported on the NASDAQ National Market and wehad approximately 873 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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**Item 6.**                        SELECTEDFINANCIAL DATA

**MillenniumPharmaceuticals, Inc.Selected Financial Data**

| ** **                                                           | ** ** | **Year Ended December 31,**                            | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                           | ** ** | **2005**                                                              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                           | ** ** | **(In Thousands, Except Per Share Amounts)** | ** ** |
| **Consolidated Statements of  Operations Data:**                     |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Revenues:                                                            |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Net product sales                                                    |       | $                                                                     | 192,073    |   | $ | 143,052 |   | $ | 59,647 |   | $ | — |   | $ | — |   |
| Co-promotion revenue                                                 |       | 123,524                                                               |       | 206,264 |   | 184,333 |   | 159,971 |   | — |   |
| Revenue under strategic alliances                                    |       | 204,519                                                               |       | 98,890 |   | 189,707 |   | 193,062 |   | 246,216 |   |
| Royalties (Note 1)                                                   |       | 38,192                                                                |       | — |   | — |   | — |   | — |   |
| Total revenues                                                       |       | 558,308                                                               |       | 448,206 |   | 433,687 |   | 353,033 |   | 246,216 |   |
| Costs and expenses:                                                  |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Cost of sales (excludes amortization of acquired  intangible assets) |       | 141,327                                                               |       | 70,286 |   | 61,189 |   | 47,256 |   | — |   |
| Research and development                                             |       | 342,184                                                               |       | 402,558 |   | 488,538 |   | 511,210 |   | 400,575 |   |
| Selling, general and administrative                                  |       | 180,599                                                               |       | 196,644 |   | 178,830 |   | 168,902 |   | 82,663 |   |
| Restructuring                                                        |       | 77,110                                                                |       | 38,033 |   | 191,013 |   | 2,994 |   | — |   |
| Acquired in-process R&D (Note 2)                                 |       | —                                                                |       | — |   | — |   | 242,000 |   | — |   |
| Amortization of intangibles (Note 3)                                 |       | 33,987                                                                |       | 33,512 |   | 38,890 |   | 34,916 |   | 64,554 |   |
| Total costs and expenses                                             |       | 775,207                                                               |       | 741,033 |   | 958,460 |   | 1,007,278 |   | 547,792 |   |
| Loss from  operations                                                |       | (216,899                                                              | )          | (292,827 | ) | (524,773 | ) | (654,245 | ) | (301,576 | ) |
| Other income                                                         |       | 18,650                                                                |       | 40,530 |   | 41,086 |   | 64,052 |   | 109,571 |   |
| Net loss                                                             |       | $                                                                     | (198,249   | ) | $ | (252,297 | ) | $ | (483,687 | ) | $ | (590,193 | ) | $ | (192,005 | ) |
| *Amounts per common share:*                                          |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Net loss, basic  and diluted                                         |       | $                                                                     | (0.64      | ) | $ | (0.83 | ) | $ | (1.63 | ) | $ | (2.13 | ) | $ | (0.88 | ) |
| Weighted-average  shares, basic and diluted                          |       | 308,284                                                               |       | 304,830 |   | 297,641 |   | 277,665 |   | 218,937 |   |
| **Consolidated Balance Sheet  Data:**                                |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Cash, cash  equivalents and marketable securities                    |       | $                                                                     | 645,588    |   | $ | 700,407 |   | $ | 915,303 |   | $ | 1,759,063 |   | $ | 1,474,868 |   |
| Total assets                                                         |       | 2,527,632                                                             |       | 2,757,031 |   | 3,010,263 |   | 3,997,607 |   | 1,907,734 |   |
| Current  liabilities                                                 |       | 164,595                                                               |       | 240,861 |   | 255,758 |   | 949,547 |   | 203,163 |   |
| Capital lease  obligations, net of current portion                   |       | 76,226                                                                |       | 80,452 |   | 87,889 |   | 61,338 |   | 35,107 |   |
| Long-term  debt, net of current portion                              |       | 99,571                                                                |       | 105,461 |   | 105,461 |   | 83,325 |   | 83,325 |   |
| Stockholders’ equity                                            |       | 2,101,678                                                             |       | 2,272,994 |   | 2,501,526 |   | 2,901,693 |   | 1,568,237 |   |

 

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Note 1: On September 1, 2005, Millenniumtransferred the exclusive U.S. rights for INTEGRILIN products to ScheringCorporation and Schering-Plough, Ltd, together referred to as SGP. Inconnection with the closing of the transaction, Millennium now records royaltyrevenue.

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 Financial Accounting Standards Board (“FASB”) No. 142,“Goodwill and Other Intangible Assets” (SFAS No. 142). Upon adoption, theCompany 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 used the words “believe,”“anticipate,” “plan,” “expect,” “intend,” “may,” “will” and similar expressionsto 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 That May AffectResults.”

**Overview**

We are a leading biopharmaceutical company focused ondiscovering, developing and commercializing innovative products in diseaseareas with unmet medical needs. We currently market VELCADE, the market leaderin the multiple myeloma relapsed setting. We have a development pipeline ofseven clinical and preclinical product candidates in our therapeutic focusareas of cancer and inflammation and we have an oncology-focused discoveryorganization. Strategic business relationships are a key component of ourbusiness.

On October 26, 2005, we announced our refinedbusiness strategy to focus on advancing key growth assets, including VELCADE,our clinical and preclinical pipeline in oncology and inflammation moleculesand our oncology-focused discovery organization. As part of our refinedstrategy, we have taken and will continue to take steps to reduce total annualresearch and development and selling, general and administrative expenses in2006 by 19% from 2005 and 30% from 2004. These steps build on our restructuredrelationship with Schering Corporation and Schering-Plough Ltd., togetherreferred to as SGP. We reduced the size of our company from 1,500 employees atthe end of 2004 to approximately 1,100 employees at the end of 2005, bymanaging attrition, eliminating INTEGRILIN sales and marketing positions, andreducing the number of positions in inflammation discovery and business supportgroups. In addition, we are evaluating the potential of further consolidationof our Cambridge, Massachusetts-based facilities.

We expect the total restructuring charge resultingfrom the refined strategy to be between approximately $65.0 million and $75.0million, primarily consisting of facilities costs and employee terminationbenefits. We recorded approximately $42.5 million of this charge in 2005 and weexpect to record the remaining charge of between $25.0 and $30.0 million in2006. We continue to evaluate strategic alternatives and as a result, futurerestructuring charges could vary significantly from current expectations. 

On September 1, 2005, SGP obtained the exclusiveU.S. development and commercialization rights for INTEGRILIN products from usand paid us a nonrefundable upfront payment of approximately $35.5 million.We receive royalties on net product sales of INTEGRILIN in the United Statesfrom SGP for so long as SGP is engaged in the commercialization and sale of anINTEGRILIN product in the United States, with the potential of receivingroyalties beyond the 2014 patent expiration date. In 2006 and 2007, minimumroyalty payments for each year are set at approximately $85.4 million. Thereare no guaranteed minimum royalty payments beyond 2007.

In addition, upon closing the SGP transaction in thethird quarter of 2005, we recognized strategic alliance revenue ofapproximately $71.4 million in connection with the sale to SGP of our existingINTEGRILIN raw materials and finished goods inventory, and SGP assumeddevelopment responsibilities 

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relating to the product.We continue to manage the supply of product for INTEGRILIN at the expense ofSGP for products sold in the SGP territories.

We expect our new relationship with SGP to be at leastfinancially equivalent to the former co-promotion arrangement, taking intoaccount the expected future revenues and anticipated costs savings. Strategically,our goal in restructuring the relationship was to increase the near termcertainty of revenues from INTEGRILIN through the guaranteed minimum royaltiesfor 2006 and 2007, while eliminating the need to further invest our resourcesinto INTEGRILIN sales and marketing and development activities.

Our overall business strategy is to build a portfolioof innovative, new medicines based on our understanding of 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 will seek development and commercialcollaborators on favorable terms or when we otherwise believe that doing sowould be advantageous to us. For example, we generally intend to enter intosales and marketing alliances with major pharmaceutical companies for productsin disease areas that require large sales forces or for markets outside of theUnited States.

In the near term, we expect 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., a memberof the Johnson & Johnson Family of Companies, or Ortho Biotech,elsewhere for initial treatment of multiple myeloma and for the treatment ofadditional cancer types. We believe that these additional uses of VELCADE wouldlead to a significant expansion of our cancer business. In inflammatorydisease, we are advancing novel product candidates in clinical development aspotential treatments 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 and expect to continue to evaluateopportunities to supplement our pipeline through in-licensing and acquisitions.If we are successful, we would use the revenues from this expanding portfolioof marketed products to broaden the scope of our operations.

**VELCADE**

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 from the Food and Drug Administration, or FDA, on May 13,2003 to 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.  This approval was subject to the completion ofand submission of data from the phase III APEX clinical trial.

In March 2005, we received approval from the FDAof 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. This regulatory decisionalso marks the completion of the May 2003 post-approval requirements.

In April 2004, the European Commission grantedMarketing Authorization for VELCADE for the treatment of multiple myelomapatients who have received at least two prior therapies and have demonstrateddisease progression on their most recent therapy in Europe. Under thisAuthorization, a single license was granted to Millennium for marketing VELCADEin the 15 member states of the European Union, plus Norway and Iceland. VELCADEwas also approved for marketing in the ten accession member countries whenthose countries officially joined the European Union on May 1, 2004. 

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VELCADE has also beenapproved in a number of other countries, including countries within LatinAmerica and South-East Asia, bringing the total number of approved countries tomore than 60.

In April 2005, our collaborator, Ortho Biotech,received 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.

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

**Our Alliances**

***Ortho Biotech Collaboration***

In June 2003, we entered into an agreement withOrtho Biotech to collaborate on the commercialization of and through theagreement with Johnson & Johnson Pharmaceutical Research &Development, L.L.C., or JJPRD, continue clinical development of VELCADE. Underthe terms of the agreement, we retain all commercialization rights to VELCADEin the United States. Ortho Biotech and its affiliate, Janssen-Cilag, haveagreed to commercialize VELCADE outside of the United States and JanssenPharmaceutical K.K. is responsible for Japan. We receive distribution fees fromOrtho Biotech and its affiliates from sales of VELCADE outside of the UnitedStates. We retain an option to co-promote VELCADE with Ortho Biotech at afuture 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 isinvestigating the potential of VELCADE to treat multiple forms of solid andhematological tumors, including continued clinical development of VELCADE formultiple myeloma. JJPRD was responsible for 40% of the joint development coststhrough 2005 and is responsible for 45% of those costs after 2005. In addition,we may receive payments from Ortho Biotech for achieving clinical developmentmilestones, regulatory milestones outside of the United States or milestonesbased upon agreed-upon sales levels of VELCADE.

***INTEGRILIN***

Through August 31,2005, we co-promoted INTEGRILIN in the United States in collaboration with SGP,and 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 Therapeutics, Inc., orCOR, entered into a collaboration agreement with SGP to jointly develop andcommercialize INTEGRILIN on a worldwide basis. We acquired COR in February 2002.

Under our original agreement with SGP, we generallyshared any profits or losses from sales in the United States with SGP based onthe amount of promotional efforts that each party contributed. Since the UnitedStates launch of INTEGRILIN in June 1998, we shared promotional efforts inthe United States equally with SGP, except for costs associated with marketingprograms specific to us.

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

***GSK License Agreement***

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.

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

***sanofi-aventis Inflammatory Disease DiscoveryCollaboration***

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 the agreement expired on October 31,2005. However, we and sanofi-aventis are continuing a limited research programcovering three advanced preclinical candidates discovered through the researchprogram collaboration. The development and commercialization programs continueunder 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 targetsrelevant in inflammatory diseases. During the remaining portion of the developmentphase of the alliance, we and sanofi-aventis have agreed to focus our jointresources on preclinical and clinical development of candidates identified inthe collaboration. As of the end of 2005, the alliance had identified severaldevelopment candidates, two of which, MLN3897 and MLN3701 are now being testedby us in phase I clinical trials.

**CriticalAccounting Policies and Significant Judgments and Estimates**

Our management’s discussion and analysis of ourfinancial condition and results of operations are based on our consolidatedfinancial statements, which have been prepared in accordance with generallyaccepted accounting principles. The preparation of these financial statementsrequires us to make 

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estimates and assumptionsthat affect the reported amounts of assets and liabilities and the disclosureof contingent assets and liabilities at the date of the financial statements aswell as the reported revenues and expenses during the reporting periods. On anongoing basis, we evaluate our estimates and judgments, including those relatedto revenue recognition, inventory, intangible assets and goodwill. We base ourestimates on historical experience and on various other factors that arebelieved to be appropriate under the circumstances, the results of which formthe basis for making judgments about the carrying value of assets andliabilities that are not readily apparent from other sources. Actual resultsmay differ from these estimates under different assumptions or conditions.

While our 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 co-promotion collaboration through August 31, 2005, our strategicalliances and from royalties based on net sales of licensed products. We divideour revenue arrangements with multiple elements into separate units ofaccounting if specified criteria are met, including whether the deliveredelement has stand-alone value to the customer and whether there is objectiveand reliable evidence of the fair value of the undelivered items. We allocatethe consideration we receive among the separate units based on their respectivefair values, and we apply the applicable revenue recognition criteria to eachof the separate units. We classify advance payments received in excess ofamounts earned as deferred revenue until earned.

We recognize revenue from the sale of VELCADE in theUnited States when delivery has occurred and title has transferred. We recordallowances as a reduction to product sales for product returns, chargebacks anddiscounts at the time of sale. As VELCADE is a fairly new product, we estimateproduct returns based on historical return patterns as they become available.VELCADE returns are expected to be generally low because the shelf life for theproduct is 18 months in the United States and we expect wholesalers not tosignificantly stock inventory due to the expensive nature of the product.Additionally, we consider several factors in our estimation process includingour internal sales forecasts, inventory levels as provided by wholesalers andthird party market research data. During the fourth quarter of 2004, we begandistributing VELCADE through a sole-source distribution model. As wecontinually monitor actual product returns and inventory levels in the domesticdistribution channel, we have reduced and may, from time to time in the future,reduce our product returns estimate. Doing so would result in increased productsales at the time the return estimate is changed. If circumstances change orconditions become more competitive in the market for therapeutic products thataddress multiple myeloma, we may take actions to increase our product returnestimates. Doing so would result in an incremental reduction of product salesat the time the return estimate is changed. Our accruals for rebates,chargebacks, and other discounts were immaterial at December 31, 2005.

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.

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Werecognize nonrefundable upfront licensing fees and guaranteed, time-basedpayments that 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.

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

We are entitled to 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 beganrecording royalty revenues as a separate line item in our statement ofoperations. Going forward, we will 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 will be adjusted for in the period which they become known, typicallythe following quarter. We do not expect these adjustments to be significant. Tothe extent we do not have sufficient ability to accurately estimate royaltyrevenue, we will record royalties on a cash basis.

***Inventory***

Inventory consists ofcurrently marketed products and from time to time product candidates awaitingregulatory approval which were capitalized based upon management’s judgment ofprobable near-term commercialization. We assess the probability ofcommercialization based upon several factors including estimated launch date,time to manufacture and shelf life. At December 31, 2005 and December 31,2004, inventory does not include amounts for products that had not beenapproved for sale. Inventories primarily represent raw materials used inproduction, work in process and finished goods inventory on hand, valued atcost, for VELCADE, raw material used in production and work in process, valuedat cost, for INTEGRILIN to supply GSK and limited amounts of work in process,valued at cost, for INTEGRILIN to supply SGP. Inventories are reviewedperiodically for slow-moving or obsolete status based on sales activity, both projectedand historical. Our current sales projections provide for full utilization ofthe inventory balance. If product sales levels differ from projections or alaunch of a new product is delayed, inventory may not be fully utilized andcould be subject to impairment, at which point we would adjust inventory to itsnet realizable value.

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***Intangible Assets***

We have acquiredsignificant intangible assets that we value and record. Those assets which 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. Thediscounted cash flow model requires assumptions about the timing and amount offuture 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, the intangible asset is written down to the discounted cash flow value.Where cash flows cannot be identified for an individual asset, the review isapplied at the lowest group level for which cash flows are identifiable.

***Goodwill***

On October 1, 2005,we performed our annual goodwill impairment test and determined that noimpairment existed on that date. However, since the date of acquisition of COR,which generated a significant amount of goodwill, we have experienced asignificant decline in market capitalization due to a decline in stock price.We continually monitor business and market conditions, including therestructured relationship with SGP, to assess whether an impairment indicatorexists. If we were to determine that an impairment indicator exists, we wouldbe required to perform an impairment test which could result in a materialimpairment charge to our statement of operations.

**Accounting Pronouncements**

In December 2004,the Financial Accounting Standards Board, or FASB, issued Statement ofFinancial Accounting Standards, or SFAS, No. 123R (revised 2004), “Share-BasedPayment,” or SFAS No. 123R. SFAS No. 123R requires companies tocalculate and record in the statement of operations the cost of equityinstruments, such as stock options or restricted stock, awarded to employeesfor services received. The cost of the equity instrument is to be measuredbased on the fair value of the instruments on the date they are granted and isrequired to be recognized over the period during which the employees arerequired to provide services in exchange for the equity instruments. SFAS No. 123Ris effective at the beginning of the first fiscal year beginning after June 15,2005, or January 1, 2006.

SFAS No. 123R provides two alternatives foradoption:

·       a“modified prospective” method in which compensation cost is recognized for allawards granted subsequent to the effective date of the statement as well as forthe unvested portion of awards outstanding as of the effective date; and

·       a“modified retrospective” method which follows the approach in the “modifiedprospective” method, but also permits entities to restate prior periods torecord compensation cost calculated under SFAS No. 123 for pro formadisclosure.

We adopted SFAS No. 123R as of January 1,2006 using the modified prospective method. As permitted by SFAS No. 123,we historically accounted for share-based payments to employees using theintrinsic value method under APB 25, “Accounting for Stock Issued to Employees”and, as such, generally recognized no compensation cost for employee stockoptions. Accordingly, the adoption of SFAS No. 123R’s fair valuemethod will have a significant impact on our result of operations, although itwill have no impact on our overall financial position. We estimate this expenseto be in the range of $40.0 million to $50.0 million in 2006, dependentupon market price, assumptions used in estimating the 

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fair value and the levelsof share-based payments granted in 2006. Changes in market price and ourassumptions could cause future expenses to vary significantly from our currentestimates.

In May 2005, the FASBissued SFAS No. 154, “Accounting Changes and Error Corrections,” or SFAS No. 154,which replaces Accounting Principles Board Opinions No. 20, “AccountingChanges” and SFAS No. 3, “Reporting Accounting Changes in InterimFinancial Statements—An Amendment of APB Opinion No. 28.” SFAS No. 154provides guidance on the accounting for and reporting of accounting changes anderror corrections. It establishes retrospective application, or the earliestpracticable date, as the required method for reporting a change in accountingprinciple and restatement with respect to the reporting of a correction of anerror. SFAS No. 154 is effective for accounting changes andcorrections of errors made in fiscal years beginning after December 15,2005. Although we will continue to evaluate the application of SFAS No. 154,management does not currently believe that adoption will have a material impacton our results of operations, financial position or cash flows.

***Reclassifications***

We have reclassifiedcertain prior year amounts within operating activities of the consolidatedstatements of cash flows to conform to the current year presentation. Thisreclassification has no impact on our previously reported net loss or net cashused in operating activities in any period.

**Results ofOperations**

| ** **                                                           | ** ** | **Year Ended December 31,** | ** ** | **Annual Percentage  Change** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------|------------|
| ** **                                                           | ** ** | **2005**                                   | ** ** | **2004**                      | ** ** | **2003** | ** ** | **2005/2004** | ** ** | **2004/2003** | ** ** |
| ** **                                                           | ** ** | **(In Thousands, Except Per Share)**       | ** ** | ** **                    | ** ** | ** ** | ** ** |
| Revenues:                                                            |       |                                       |       |                          |       |   |   |   |   |   |   |   |   |   |   |
| Net product sales                                                    |       | $                                          | 192,073    |                          | $          | 143,052 |   | $ | 59,647 |   |   | 34 | % |   |   | 140 | % |   |
| Co-promotion revenue                                                 |       | 123,524                                    |       | 206,264                       |       | 184,333 |   |   | (40 | ) |   |   | 12 |   |   |
| Revenue under strategic alliances                                    |       | 204,519                                    |       | 98,890                        |       | 189,707 |   |   | 107 |   |   |   | (48 | ) |   |
| Royalties                                                            |       | 38,192                                     |       | —                        |       | — |   |   | — |   |   |   | — |   |   |
| Total revenues                                                       |       | 558,308                                    |       | 448,206                       |       | 433,687 |   |   | 25 |   |   |   | 3 |   |   |
| Costs and  expenses:                                                 |       |                                       |       |                          |       |   |   |   |   |   |   |   |   |   |   |
| Cost of sales (excludes amortization of acquired  intangible assets) |       | 141,327                                    |       | 70,286                        |       | 61,189 |   |   | 101 |   |   |   | 15 |   |   |
| Research and development                                             |       | 342,184                                    |       | 402,558                       |       | 488,538 |   |   | (15 | ) |   |   | (18 | ) |   |
| Selling, general and administrative                                  |       | 180,599                                    |       | 196,644                       |       | 178,830 |   |   | (8 | ) |   |   | 10 |   |   |
| Restructuring                                                        |       | 77,110                                     |       | 38,033                        |       | 191,013 |   |   | 103 |   |   |   | (80 | ) |   |
| Amortization of intangibles                                          |       | 33,987                                     |       | 33,512                        |       | 38,890 |   |   | 1 |   |   |   | (14 | ) |   |
| Total costs and expenses                                             |       | 775,207                                    |       | 741,033                       |       | 958,460 |   |   | 5 |   |   |   | (23 | ) |   |
| Loss from  operations                                                |       | (216,899                                   | )          | (292,827                      | )          | (524,773 | ) |   | (26 | ) |   |   | (44 | ) |   |
| Other income  (expense):                                             |       |                                       |       |                          |       |   |   |   |   |   |   |   |   |   |   |
| Investment income, net                                               |       | 29,083                                     |       | 11,221                        |       | 32,625 |   |   | 159 |   |   |   | (66 | ) |   |
| Interest expense                                                     |       | (10,433                                    | )          | (10,691                       | )          | (21,043 | ) |   | (2 | ) |   |   | (49 | ) |   |
| Gain on sale of equity interest in joint   venture                   |       | —                                     |       | 40,000                        |       | 40,000 |   |   | (100 | ) |   |   | — |   |   |
| Debt financing charge                                                |       | —                                     |       | —                        |       | (10,496 | ) |   | — |   |   |   | (100 | ) |   |
| Net loss                                                             |       | $                                          | (198,249   | )                             | $          | (252,297 | ) | $ | (483,687 | ) |   | (21 | )% |   |   | (48 | )% |   |
| *Amounts  per common share:*                                         |       |                                       |       |                          |       |   |   |   |   |   |   |   |   |   |   |
| Net loss per  share, basic and diluted                               |       | $                                          | (0.64      | )                             | $          | (0.83 | ) | $ | (1.63 | ) |   |   |   |   |   |   |   |   |
| Weighted-average  shares, basic and diluted                          |       | 308,284                                    |       | 304,830                       |       | 297,641 |   |   |   |   |   |   |   |   |   |

 

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***Revenues***

Total revenues increased 25% to $558.3 million in2005 and three percent to $448.2 million in 2004. Increases in 2005 wereprimarily due to the net effect of the restructured SGP collaborationrelationship and increased net product sales of VELCADE. Increases in 2004 wereprimarily driven by product-related revenue, including net product salesof VELCADE and increased co-promotion revenue.

Net product sales of VELCADE increased 34% to $192.1million in 2005 and 140% to $143.1 million in 2004 from $59.6 million in 2003. 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. The increase in 2004 over 2003 was due to net product sales for 12months in 2004 compared to only eight months in 2003. Reserves for productreturns, chargebacks and discounts represented approximately 5.0% to 5.5% ofgross product sales in 2005 and 2004. Product sales from VELCADE representedapproximately 34% of our 2005 total revenues, 32% of our 2004 total revenuesand 14% of our 2003 total revenues.

Co-promotion revenue, based on sales of INTEGRILIN,decreased 40% to $123.5 million in 2005 and increased 12% to $206.3 million in2004 from $184.3 million in 2003. As of September 1, 2005, we are nolonger reporting co-promotion revenue due to our restructured relationship withSGP. The 2004 increase was due to higher net reimbursement from SGP based uponour higher level of spending under our original collaboration agreement andincreased product sales in the United States. Co-promotion revenue representedapproximately 22% of our 2005 total revenues, 46% of our 2004 total revenuesand 43% of our 2003 total revenues.

Revenue under strategic alliances increased 107% to$204.5 million in 2005 and decreased 48% to $98.9 million in 2004from $189.7 million in 2003. The increase in 2005 was primarily due to thereimbursement of manufacturing-related expenses, including the September 1,2005 one-time sale of the existing raw materials and finished goods INTEGRILINinventory to SGP of approximately $71.4 million. The decrease in 2004 isprimarily due to the April 2003 termination of the sanofi-aventistechnology transfer agreement and reduced revenue recognized under the researchphase of our alliance with Bayer, AG, partially offset by increased revenueunder our Ortho Biotech alliance from milestone payments of approximately $54.0million earned in 2004 relating to VELCADE for Injection approval in theEuropean Union and the achievement of specified sales levels of VELCADE.Included in strategic alliance revenue in 2003 is $8.6 million that wasrecognized in prior years relating to the adoption of SAB 101, “RevenueRecognition in Financial Statements.”

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

Beginning September 1,2005, in connection with the closing of our transaction with SGP, we now recordroyalty revenue. Royalty revenue may include royalties earned upon sales ofINTEGRILIN in the United States and other territories around the world asprovided by SGP, royalties earned upon sales of INTEGRILIN in Europe asprovided by GSK, distribution fees earned upon sales outside of the UnitedStates of VELCADE as provided by Ortho Biotech and any royalties earned undercertain of our early discovery alliances. During 2005, we recorded $38.2million of royalty revenue which primarily included royalties from SGP andOrtho Biotech.

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***Cost of Sales***

Cost of sales increased101% to $141.3 million in 2005 and 15% to $70.3 million in 2004. Costof sales includes manufacturing-related expenses associated with the saleof VELCADE and INTEGRILIN. The 2005 increase was primarily attributable to theone-time sale of existing INTEGRILIN inventory to SGP on September 1,2005. The increase in 2004 was primarily driven by increased sales of VELCADEand INTEGRILIN.

***Research and Development***

Research and development expenses decreased 15% to$342.2 million in 2005 and 18% to $402.6 million in 2004. Thedecrease in 2005 was primarily a result of cost reductions associated with our2005 strategy refinement and restructuring efforts combined with the decreasedspending in our discovery organization. Research and development expenses in2005 include outside research and development services primarily related to ourfurther development of VELCADE, personnel and personnel-related costs. Thedecrease in 2004 primarily reflected the financial benefits of our June 2003restructuring efforts, partially offset by increases in clinical trial costsfor MLN2704 and INTEGRILIN. We expect research and development expenses todecrease in 2006 due to our 2005 strategy refinement and restructuring efforts.

Inaddition to our ongoing clinical trials of VELCADE, we have a number of drugcandidates in clinical and late preclinical development. In January 2006,as part of our portfolio review process, based on the evaluation of recentclinical data in the context of additional opportunities in the pipeline, wedecided to discontinue development of MLN2704 in its current form as well asMLN1202 in rheumatoid arthritis. The following chart summarizes the applicabledisease indication and the clinical or preclinical trial status of these drugcandidates.

| **Product Description**                                                                                              | ** **                                                  | ** **                                                                                     | **Disease Indication** | ** ** | ** ** | **Current Trial Status** | ** ** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------|------------------------------------------------------------------------------------------------|------------------------|------------|------------|--------------------------|------------|------------|
| ***Cancer***                                                                                                         |                                                        |                                                                                           |
| MLN518 is a small  molecule inhibitor of the Receptor   Tyrosine Kinase, or RTK, including FLT-3, PDGF-R   and c-KIT | Acute myeloid leukemia  Glioma  Renal  Prostate             | phase I/phase II  phase I planned for 2006  phase I planned for 2006  phase I planned for 2006 |
| MLN8054 is a  small molecule inhibitor of AuroraA kinases                                                            | Advanced  malignancies                                      | phase I                                                                                        |
| ***Inflammatory Diseases***                                                                                          |                                                        |                                                                                           |
| MLN02 is a humanized  monoclonal antibody directed against the alpha4ß7 receptor                                | Crohn’s disease  Ulcerative colitis                    | preclinical with prior  phase II data  preclinical with prior phase II data                    |
| MLN1202 is a  humanized monoclonal antibody directed against CCR2                                                    | Multiple  sclerosis  Secondary atherosclerosis  Scleroderma | phase IIa  phase IIa  phase IIa planned for 2006                                               |
| MLN3897 is a  small molecule CCR1 inhibitor                                                                          | Chronic  inflammatory diseases such as rheumatoid arthritis | phase I with  phase IIa planned for 2006                                                       |
| MLN3701 is a  small molecule CCR1 inhibitor, backup to MLN3897                                                       | Chronic  inflammatory diseases such as rheumatoid arthritis | phase I                                                                                        |
| MLN0415 is a small  molecule inhibitor of IKKB                                                                       | Inflammatory diseases                                       | phase I planned for 2006                                                                       |

 

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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.

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 

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inflowsfrom any of our major research and development projects until a productcandidate becomes a profitable commercial product.

***Selling, General and Administrative***

Selling, general andadministrative expenses decreased eight percent to $180.6 million in 2005and increased ten percent to $196.6 million in 2004. The decrease in 2005was primarily the result of reduced sales and marketing expenses associatedwith the transfer of the U.S. commercialization rights to INTEGRILIN to SGP asof September 1, 2005 partially offset by increased sales and marketingspending associated with the launch of VELCADE for its additional indication. Theincrease in 2004 was due to increased commercial spending to support VELCADE andINTEGRILIN, particularly the full year of increased headcount and activities bythe VELCADE and expanded INTEGRILIN sales forces in 2004 partially offset bydecreased expenses in corporate general and administrative functionsattributable to our 2003 restructuring and cost containment efforts.

***Restructuring***

During the fourth quarter of 2005, we announced our2005 strategy refinement focused on advancing key growth assets, includingVELCADE, our clinical and preclinical pipeline in oncology and inflammationmolecules and our oncology-focused discovery organization. As part of ourrefined strategy, we have taken a series of steps, building on our restructuredrelationship with SGP, which together we expect will reduce research anddevelopment and selling, general and administrative expenses in 2006. We havereduced the size of our company from 1,500 employees at the end of 2004 toapproximately 1,100 at the end of 2005, by managing attrition, eliminatingINTEGRILIN sales and marketing positions, and reducing the number of positionsin inflammation discovery and in business support groups. In addition, we areevaluating the potential of further consolidating our Cambridge,Massachusetts-based facilities.

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.

We account for restructuring charges in accordancewith SFAS No. 146, “Accounting for Costs Associated with Exit or DisposalActivities,” or SFAS No. 146. SFAS No. 146 requires that a liabilityfor a cost associated with an exit or disposal activity be recognized andmeasured initially at its fair value in the period in which the liability isincurred, except for one-time termination benefits that meet specifiedrequirements. Costs of termination benefits relate to severance packages,out-placement services and career counseling for employees affected by therestructuring.

In accordance with SFAS No. 146, our facilitiesrelated expenses and liabilities under both the 2003 and 2005 restructuringplans included estimates of the remaining rental obligations, net of estimatedsublease income, for facilities we no longer occupy. We validated our estimatesand assumptions with independent third parties having relevant expertise in thereal estate market. We review our estimates and assumptions on a regular basisuntil the outcome is finalized, and make whatever modifications we believenecessary, based on our best judgment, to reflect any changed circumstances. Itis possible that such estimates could change in the future resulting inadditional adjustments, and the effect of any such adjustments could bematerial.

During 2005, we recorded atotal of $77.1 million of restructuring charges under the 2005 strategyrefinement and our 2003 restructuring plan. We recorded restructuring chargesof approximately $42.5 million under the 2005 restructuring plan primarilyrelated to the remaining rental obligation, net of sublease income, of vacatedfacilities, the impairment charges for leasehold improvements that wereabandoned at such facilities and employee termination benefits for theemployees affected by the transfer 

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of theU.S. commercialization rights to INTEGRILIN to SGP, as well as the headcountreductions within inflammation discovery and business support groups. We expectto record additional restructuring charges of between $25.0 and $30.0 millionin 2006 relating to our restructuring efforts. We continue to evaluatestrategic alternatives and as a result, future results could vary significantlyfrom current expectations. We recorded approximately $34.6 million ofrestructuring charges in 2005 under our 2003 restructuring plan. The majorityof this charge represented $30.6 million of additional facilities expenserecorded  in the third quarter of 2005,primarily reflecting changes in our estimate of the length of time it wouldtake to sublease certain vacated properties based upon our continuing review ofcurrent real estate market conditions.

***Amortization of Intangibles***

Amortization of intangibleassets of $34.0 million in 2005 was relatively unchanged from 2004 of $33.5 millionand decreased 14% from 2003 to 2004. Amortization decreased in 2004 as thespecifically identified intangible assets from our LeukoSite, Inc., orLeukoSite, acquisition were fully amortized as of December 2003.Amortization in 2005 and 2004 primarily related to specifically identifiedintangible assets from the COR acquisition. We will continue to amortize thespecifically identified intangible assets from our COR acquisition through2015. We expect to incur amortization expense of approximately $34.0 millionfor each of the next five years.

***Investment Income***

Investment incomeincreased 159% to $29.1 million in 2005 and decreased 66% to $11.2 millionin 2004. The increase in 2005 was primarily attributable to the realized gainof approximately $10.5 million recognized upon the sale of our cost methodinvestment in TransForm Pharmaceuticals, Inc., or TransForm, combinedwith the lower realized losses recognized in 2005 as compared to 2004. Weexpect to record an additional gain of up to approximately $2.8 million in thesecond half of 2006 upon the final settlement and receipt of the escrowedportion of the TransForm sales proceeds. The decrease in 2004 wasprimarily a result of a lower average balance of invested funds, as well asincreased realized losses on marketable securities and other investments.

***Interest Expense***

Interest expense of $10.4million in 2005 was relatively unchanged from the 2004 expense of $10.7 millionand decreased 49% from 2003 to 2004. The decrease from 2003 to 2004 wasattributable to the April 2003 repurchase of $577.8 million aggregateprincipal amount of our 5.0% convertible subordinated notes due March 1,2007, that are convertible into our common stock at any time prior to maturityat a price equal to $34.21 per share (the “5.0% notes”) and our 4.5%convertible senior notes due June 15, 2006, that are convertible into ourcommon stock at any time prior to maturity at a price equal to $40.61 per share(the “4.5% notes”).

***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, wereceived an initial payment of $20.0 million in December 2001. Duringeach of the second quarters of 2003 and 2002, we recorded additional gains of$40.0 million on our sale of this equity interest based upon theachievement of predetermined sales targets of Campath. During the first quarterof 2004, we recorded the final $40.0 million gain related to our sale ofthis equity interest based upon the achievement of predetermined 2004 salestargets of Campath. We will be entitled to additional payments from ILEX’ssuccessor, Genzyme Corporation, if sales of Campath in the United States after2004 exceed specified annual 

46

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thresholds.However, we currently do not expect that these thresholds will be achieved andtherefore, we are unlikely to receive future additional payments related toCampath.

***Debt Financing Charge***

During 2003, we recorded anon-cash charge of $10.5 million which represents the write-off ofapproximately $12.4 million of unamortized original debt issuance costsassociated with the 5.0% notes and 4.5% notes assumed in the COR acquisition,offset by $1.9 million relating to the expired put premium on theuntendered notes on April 29, 2003.

**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 havealso made strategic purchases of debt and equity securities of some of ouralliance collaborators in accordance with our Board of Directors’ approvedpolicies and our business needs. These investments were generally in smallercompanies. We have and may in the future lose money in these investments andour ability to liquidate these investments is in some cases very limited. Wemay also owe our partners milestone payments and royalties. We also havecommitted to fund development costs incurred by some of our collaborators.

We have funded ourcash requirements primarily through the following:

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

·       productsales of VELCADE;

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

·       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:

·       revenuesand margins from sales of VELCADE, INTEGRILIN and other products and servicesfor which we may obtain marketing approval in the future or which are sold bycompanies that may owe us royalty, milestone, distribution or other payments onaccount of such products;

·       thesuccess of our clinical and preclinical development programs;

·       ourability to enter into additional strategic collaborations and to maintainexisting and new 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, 2005 we had$645.6 million in cash, cash equivalents and marketable securities. Thisexcludes $8.5 million of interest-bearing marketable securitiesclassified as restricted cash on our balance sheet as of December 31,2005, which primarily serve as collateral for letters of credit securing leasedfacilities.

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Oursignificant capital resources are as follows:

| ** **                                        | ** ** | **December 31,** | ** ** |
|---------------------------------------------------|------------|-----------------------|------------|
| **(in thousands)**                           | ** ** | ** **            | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Cash, cash  equivalents and marketable securities |       | $                     | 645,588    |   | $ | 700,407 |   | $ | 915,303 |   |
| Working capital                                   |       | 576,501               |       | 660,751 |   | 858,990 |   |
| Long term debt, net of  current portion           |       | 99,571                |       | 105,461 |   | 105,461 |   |
|                                                   |            |                       |            |  |  |  |  |  |  |  |  |  |

 

| ** **                                                     | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------------|------------|
| **(in thousands)**                                        | ** ** | ** **                                 | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Cash provided by (used  in):                                   |       |                                       |       |   |   |   |   |
| Operating activities                                           |       | $                                          | (56,849    | ) | $ | (173,161 | ) | $ | (221,155 | ) |
| Investing activities                                           |       | 32,988                                     |       | 117,904 |   | (480,321 | ) |
| Financing activities                                           |       | 13,713                                     |       | 14,397 |   | (574,945 | ) |
| Capital expenditures  (included in investing activities above) |       | (12,466                                    | )          | (49,842 | ) | (52,422 | ) |
|                                                                |            |                                            |            |  |  |  |  |  |  |  |  |  |

 

***Cash Flows***

The principal use of cash in operating activities inboth 2005 and 2004 was to fund our net loss. 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.

Investing activities provided cash of$33.0 million in 2005. The principal source of funds during 2005 was theproceeds from sales and maturities of marketable securities. In April 2005,we recorded proceeds of approximately $10.6 million upon the sale of our costmethod investment in TransForm. We expect to record an additional realized gainof up to approximately $2.8 million in the second half of 2006 upon the finalsettlement and receipt of the escrowed portion of the sale proceeds. Thedecrease in capital expenditures from 2004 is a result of lower leaseholdimprovements expenditures as well as cost savings associated with ourrestructuring efforts. Investing activities provided cash of $117.9 million in2004, primarily from the sales and maturities of marketable securities.

Financing activities provided cash of$13.7 million in 2005 and $14.4 million in 2004. The principal source inboth years was from the sales of common stock to our employees. We used cash infinancing activities to make principal payments on our capital leases.

We believe that ourexisting cash and cash equivalents and the anticipated cash payments from ourproduct sales, co-promotion revenue, current strategic alliances and royaltieswill be sufficient to support our expected operations, fund our debt serviceand capital lease obligations and fund our capital commitments for at least thenext several years.

***Contractual Obligations***

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

As of December 31,2005, our convertible notes aggregated to $105.5 million in principalamount outstanding, of which $5.9 million is classified as short term. Allthree issues of notes require semi-annual 

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interestpayments through maturity. All required interest payments have been made todate. As of December 31, 2005, these notes consisted of:

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

·       $16.3 millionof our 5.0% notes; and

·       $5.9 millionof our 4.5% notes.

In January 2005, we repaid SGP approximately$49.3 million for advances SGP had made to COR for inventory purchases inprior years.

Belowis a table which presents our contractual obligations and commercialcommitments as of December 31, 2005:

| ** **                                                         | ** ** | **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           |       | $                                         | 113,701    |   | $ | 11,417 |   | $ | 102,284 |   | $ | — |   |   | $ | — |   |   |
| Capital lease  obligations, including rental and interest payments |       | 310,224                                   |       | 19,219 |   | 33,266 |   | 34,366 |   |   | 223,373 |   |   |
| Operating lease  obligations                                       |       | 241,483                                   |       | 38,730 |   | 72,923 |   | 50,966 |   |   | 78,864 |   |   |
| Long-term supply  contracts                                        |       | 122,821                                   |       | 54,648 |   | 49,173 |   | 19,000 |   |   | — |   |   |
| External  collaborations                                           |       | 5,083                                     |       | 4,427 |   | 656 |   | — |   |   | — |   |   |
| Total                                                              |       | $                                         | 793,312    |   | $ | 128,441 |   | $ | 258,302 |   | $ | 104,332 |   |   | $ | 302,237 |   |   |
|                                                                    |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

In addition, in the future we may owe royalties andother contingent payments to our collaborators, licensors and other parties towhom we owe commitments based on the achievement of product sales and specifiedother objectives and milestones.

As of December 31,2005, we had net operating loss carryforwards of approximately $1.4 billion tooffset future federal taxable income expiring in 2006 through 2025 and$0.5 billion to offset future state taxable income expiring in 2006through 2010. Due to the degree of uncertainty related to the ultimaterealization of tax benefits created from such prior losses, no benefit has beenrecognized in the financial statements as of December 31, 2005. We wouldallocate any subsequently recognized tax benefits to operations, goodwill andadditional paid-in capital. Moreover, our ability to utilize these losses infuture years may be limited under the change of stock ownership rules ofthe Internal Revenue Service.

**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 are also subject to interest rate risk and willdecrease in value if market interest rates increase. A hypothetical 100 basispoint increase in interest rates would result in an approximate$11.0 million decrease in the fair value of our investments as of December 31,2005. However, due to the conservative nature of our investments and relativelyshort effective maturities of debt instruments, interest rate risk ismitigated. Our Investment 

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Policy specifies creditquality standards for our investments and limits the amount of exposure fromany single issue, issuer or type of investment. We do not own derivativefinancial instruments in our investment portfolio.

As of December 31, 2005, the fair value of our4.5% 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 have no derivative instruments outstanding as of December 31,2005.

As of December 31, 2005 we did not have anyfinancing arrangements that were not reflected in our balance sheet.

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**Item 8.**                        FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA

**Millennium Pharmaceuticals, Inc.Report of IndependentRegistered 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, 2005and 2004, and the related consolidated statements of operations, stockholders’equity, and cash flows for each of the three years in the period ended December 31,2005. 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, 2005 and2004, and the consolidated results of its operations and its cash flows foreach of the three years in the period ended December 31, 2005, 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.

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 31,2005, based on criteria established in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commissionand our report dated March 2, 2006 expressed an unqualified opinionthereon.
|                       | /s/ ERNST & YOUNG LLP |
|-----------------------|--------------------------------|
| Boston, Massachusetts |                           |
| March 2, 2006    |                           |

 

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

| ** **                                                                                                                                                                 | ** ** | **December 31,**                                             | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                                                                                                                                 | ** ** | **2005**                                                          | ** ** | **2004** | ** ** |
| ** **                                                                                                                                                                 | ** ** | **(In Thousands, Except Per  Share Amounts)** | ** ** |
| **Assets**                                                                                                                                                                 |       |                                                              |       |   |   |
| Current assets:                                                                                                                                                            |       |                                                              |       |   |   |
| Cash and cash  equivalents                                                                                                                                                 |       | $       5,029                  |       | $     14,436 |   |
| Marketable  securities                                                                                                                                                     |       | 640,559                                                           |       | 685,971 |   |
| Accounts  receivable, net of allowances of $2,504 in 2005 and $1,500 in 2004                                                                                               |       | 64,338                                                            |       | 87,874 |   |
| Inventory                                                                                                                                                                  |       | 15,824                                                            |       | 97,274 |   |
| Prepaid expenses  and other current assets                                                                                                                                 |       | 15,346                                                            |       | 16,057 |   |
| Total current assets                                                                                                                                                       |       | 741,096                                                           |       | 901,612 |   |
| Property and  equipment, net                                                                                                                                               |       | 183,059                                                           |       | 220,115 |   |
| Restricted cash                                                                                                                                                            |       | 8,486                                                             |       | 10,316 |   |
| Other assets                                                                                                                                                               |       | 16,716                                                            |       | 15,325 |   |
| Goodwill                                                                                                                                                                   |       | 1,210,926                                                         |       | 1,208,328 |   |
| Developed  technology, net                                                                                                                                                 |       | 305,337                                                           |       | 338,798 |   |
| Intangible assets,  net                                                                                                                                                    |       | 62,012                                                            |       | 62,537 |   |
| Total assets                                                                                                                                                               |       | $ 2,527,632                                                  |       | $ 2,757,031 |   |
| **Liabilities  and Stockholders’ Equity**                                                                                                                             |       |                                                              |       |   |   |
| Current liabilities:                                                                                                                                                       |       |                                                              |       |   |   |
| Accounts payable                                                                                                                                                           |       | $     20,698                             |       | $     36,470 |   |
| Accrued expenses                                                                                                                                                           |       | 70,764                                                            |       | 89,125 |   |
| Advance from  Schering-Plough                                                                                                                                              |       | —                                                            |       | 49,250 |   |
| Current portion of  restructuring                                                                                                                                          |       | 35,362                                                            |       | 34,242 |   |
| Current portion of  deferred revenue                                                                                                                                       |       | 27,745                                                            |       | 21,294 |   |
| Current portion of  capital lease obligations                                                                                                                              |       | 4,136                                                             |       | 10,480 |   |
| Current portion of  long-term debt                                                                                                                                         |       | 5,890                                                             |       | — |   |
| Total current liabilities                                                                                                                                                  |       | 164,595                                                           |       | 240,861 |   |
| Other long-term  liabilities                                                                                                                                               |       | 48                                                                |       | 5,778 |   |
| Restructuring, net  of current portion                                                                                                                                     |       | 69,541                                                            |       | 39,794 |   |
| Deferred revenue,  net of current portion                                                                                                                                  |       | 15,973                                                            |       | 11,691 |   |
| Capital lease  obligations, net of current portion                                                                                                                         |       | 76,226                                                            |       | 80,452 |   |
| Long-term debt                                                                                                                                                             |       | 99,571                                                            |       | 105,461 |   |
| Commitments and  contingencies                                                                                                                                             |       |                                                              |       |   |   |
| **Stockholders’  equity:**                                                                                                                                            |       |                                                              |       |   |   |
| Preferred Stock,  $0.001 par value; 5,000 shares authorized, none issued                                                                                                   |       | —                                                            |       | — |   |
| Common Stock,  $0.001 par value; 500,000 shares authorized: 311,121 shares at  December 31, 2005 and 306,399 shares at December 31, 2004 issued  and outstanding |       | 311                                                               |       | 306 |   |
| Additional paid-in  capital                                                                                                                                                |       | 4,582,204                                                         |       | 4,547,430 |   |
| Deferred  compensation                                                                                                                                                     |       | (4,219                                                            | )          | — |   |
| Accumulated other  comprehensive loss                                                                                                                                      |       | (9,580                                                            | )          | (5,953 | ) |
| Accumulated  deficit                                                                                                                                                       |       | (2,467,038                                                        | )          | (2,268,789 | ) |
| Total stockholders’ equity                                                                                                                                            |       | 2,101,678                                                         |       | 2,272,994 |   |
| Total liabilities  and stockholders’ equity                                                                                                                           |       | $ 2,527,632                                                  |       | $ 2,757,031 |   |

 

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

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**Millennium Pharmaceuticals, Inc.Consolidated Statementsof Operations**

| ** **                                                                      | ** ** | **Year Ended December 31,**   | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                      | ** ** | **2005**                                     | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                      | ** ** | **(In Thousands, Except Per Share Amounts)** | ** ** |
| Revenues:                                                                       |       |                                         |       |   |   |   |   |
| Net product sales                                                               |       | $                                            | 192,073    |   | $ | 143,052 |   | $ | 59,647 |   |
| Co-promotion revenue                                                            |       | 123,524                                      |       | 206,264 |   | 184,333 |   |
| Revenue under strategic alliances                                               |       | 204,519                                      |       | 98,890 |   | 189,707 |   |
| Royalties                                                                       |       | 38,192                                       |       | — |   | — |   |
| Total revenues                                                                  |       | 558,308                                      |       | 448,206 |   | 433,687 |   |
| Costs and expenses:                                                             |       |                                         |       |   |   |   |   |
| Cost of sales (excludes amortization of acquired  intangible assets)  |       | 141,327                                      |       | 70,286 |   | 61,189 |   |
| Research and development                                                        |       | 342,184                                      |       | 402,558 |   | 488,538 |   |
| Selling, general and administrative                                             |       | 180,599                                      |       | 196,644 |   | 178,830 |   |
| Restructuring                                                                   |       | 77,110                                       |       | 38,033 |   | 191,013 |   |
| Amortization of intangibles                                                     |       | 33,987                                       |       | 33,512 |   | 38,890 |   |
| Total costs and expenses                                                        |       | 775,207                                      |       | 741,033 |   | 958,460 |   |
| Loss from  operations                                                           |       | (216,899                                     | )          | (292,827 | ) | (524,773 | ) |
| Other income (expense):                                                         |       |                                         |       |   |   |   |   |
| Investment income, net                                                          |       | 29,083                                       |       | 11,221 |   | 32,625 |   |
| Interest expense                                                                |       | (10,433                                      | )          | (10,691 | ) | (21,043 | ) |
| Gain on sale of equity interest in joint venture                                |       | —                                       |       | 40,000 |   | 40,000 |   |
| Debt financing charge                                                           |       | —                                       |       | — |   | (10,496 | ) |
| Net loss                                                                        |       | $                                            | (198,249   | ) | $ | (252,297 | ) | $ | (483,687 | ) |
| *Amounts  per common share:*                                                    |       |                                         |       |   |   |   |   |
| Net loss per  share, basic and diluted                                          |       | $                                            | (0.64      | ) | $ | (0.83 | ) | $ | (1.63 | ) |
| Weighted-average  shares, basic and diluted                                     |       | 308,284                                      |       | 304,830 |   | 297,641 |   |

 

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

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**Millennium Pharmaceuticals, Inc.Consolidated Statementsof Cash Flows**

| ** **                                                                                            | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                            | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                            | ** ** | **(In Thousands)**                         | ** ** |
| **Cash Flows from Operating  Activities:**                                                            |       |                                       |       |   |   |   |   |
| Net loss                                                                                              |       | $                                          | (198,249   | ) | $ | (252,297 | ) | $ | (483,687 | ) |
| Adjustments to reconcile  net loss to cash used in operating activities:                              |       |                                       |       |   |   |   |   |
| Depreciation and amortization                                                                         |       | 76,318                                     |       | 93,387 |   | 106,948 |   |
| Restructuring charges (reversals), net                                                                |       | 6,157                                      |       | (316 | ) | 80,494 |   |
| Restructuring related stock compensation                                                              |       | 479                                        |       | 29 |   | 1,185 |   |
| Amortization and write-off of deferred  financing costs                                               |       | 451                                        |       | 481 |   | 12,206 |   |
| Realized (gain) loss on securities, net                                                               |       | 3,457                                      |       | 11,667 |   | (3,084 | ) |
| Realized gain on sale of investment in  TransForm Pharmaceuticals                                |       | (10,465                                    | )          | — |   | — |   |
| 401K match stock compensation                                                                         |       | 5,232                                      |       | 6,497 |   | 7,618 |   |
| Stock-based compensation expense                                                                      |       | 565                                        |       | 178 |   | 1,280 |   |
| Changes  in operating assets and liabilities:                                                         |       |                                       |       |   |   |   |   |
| Accounts receivable                                                                                   |       | 23,536                                     |       | (28,849 | ) | (24,156 | ) |
| Inventory                                                                                             |       | 81,450                                     |       | 12,939 |   | (4,867 | ) |
| Prepaid expenses and other current assets                                                             |       | 2,466                                      |       | 4,877 |   | 4,087 |   |
| Restricted cash and other assets                                                                      |       | (8,105                                     | )          | 1,086 |   | 25,566 |   |
| Accounts payable and accrued expenses                                                                 |       | (1,624                                     | )          | (11,658 | ) | 81,550 |   |
| Advance from Schering-Plough                                                                          |       | (49,250                                    | )          | — |   | — |   |
| Deferred revenue                                                                                      |       | 10,733                                     |       | (11,182 | ) | (26,295 | ) |
| Net cash used in operating activities                                                                 |       | (56,849                                    | )          | (173,161 | ) | (221,155 | ) |
| **Cash Flows from Investing  Activities:**                                                            |       |                                       |       |   |   |   |   |
| Investments in marketable securities                                                                  |       | (386,887                                   | )          | (398,737 | ) | (1,081,650 | ) |
| Proceeds from sales and maturities of marketable  securities                                          |       | 426,750                                    |       | 567,287 |   | 655,624 |   |
| Proceeds from sale of investment in  TransForm Pharmaceuticals                                   |       | 10,585                                     |       | — |   | — |   |
| Purchase of property and equipment                                                                    |       | (12,466                                    | )          | (49,842 | ) | (52,422 | ) |
| Other investing activities                                                                            |       | (4,994                                     | )          | (804 | ) | (1,873 | ) |
| Net cash provided by (used in) investing activities                                                   |       | 32,988                                     |       | 117,904 |   | (480,321 | ) |
| **Cash Flows from Financing  Activities:**                                                            |       |                                       |       |   |   |   |   |
| Net proceeds from issuance of common stock and  exercises of warrants                                 |       | —                                     |       | — |   | 28,571 |   |
| Net proceeds from employee stock purchases                                                            |       | 24,283                                     |       | 27,858 |   | 44,053 |   |
| Repayment of principal of long-term debt  obligations, including payment of debt premium              |       | —                                     |       | — |   | (629,880 | ) |
| Principal payments on capital leases                                                                  |       | (10,570                                    | )          | (13,461 | ) | (17,689 | ) |
| Net cash provided by (used in) financing activities                                                   |       | 13,713                                     |       | 14,397 |   | (574,945 | ) |
| Decrease in cash and cash equivalents                                                                 |       | (10,148                                    | )          | (40,860 | ) | (1,276,421 | ) |
| Equity adjustment from foreign currency translation                                                   |       | 741                                        |       | (551 | ) | (123 | ) |
| Cash and cash equivalents, beginning of period                                                        |       | 14,436                                     |       | 55,847 |   | 1,332,391 |   |
| Cash and cash equivalents, end of period                                                              |       | $                                          | 5,029      |   | $ | 14,436 |   | $ | 55,847 |   |
| **Supplemental Cash Flow  Information:**                                                              |       |                                       |       |   |   |   |   |
| Cash paid for interest                                                                                |       | $                                          | 10,233     |   | $ | 9,918 |   | $ | 24,412 |   |
| **Supplemental Disclosure of  Noncash Investing and Financing Activities:**                           |       |                                       |       |   |   |   |   |
| Issuance of restricted stock                                                                          |       | $                                          | 4,784      |   | $ | — |   | $ | — |   |
| Technology services due from Gene Logic, Inc.                                                    |       | —                                     |       | 4,500 |   | — |   |
| Deferred gain on sale to Gene Logic, Inc.                                                        |       | —                                     |       | 3,500 |   | — |   |
| Receipt of ILEX common stock on sale of equity  interest in Millennium & ILEX Partners, L.P. |       | —                                     |       | — |   | 10,000 |   |
| Construction costs for laboratory and office space                                                    |       | —                                     |       | — |   | 9,115 |   |
| Equipment acquired  under capital leases                                                              |       | —                                     |       | — |   | 1,598 |   |

 

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

54

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**Millennium Pharmaceuticals, Inc.Consolidated Statementsof Stockholders’ Equity**

| ** **                                              | ** ** | **Common Stock**                            | ** ** | **Additional  Paid-in ** | ** ** | **Deferred** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Accumulated**        | ** ** | **Total  Stockholders’** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------|------------|--------------|------------|---------------------------------------|------------|------------------------|------------|-------------------------------|------------|
| ** **                                              | ** ** | **shares**                                       | ** ** | **amount**                    | ** ** | **Capital**  | ** ** | **Compensation**                      | ** ** | **Income (Loss)** | ** ** | **Deficit**                   | ** ** | **Equity** | ** ** |
| ** **                                              | ** ** | **(In Thousands, Except Shares)** | ** ** |
| Balance at December 31, 2002                       |       | 291,094,230                                      |       |                          | $          | 291          |       |                                  |       | $                      | 4,432,040  |                          |       |   | $ | (1,952 | ) |   |   | $ | 4,119 |   |   |   | $ | (1,532,805 | ) |   |   | $ | 2,901,693 |   |   |
| Net loss                                                |       | —                                           |       |                          | —     |         |       |                                  | —     |                   |       |                          | —     |   |   |   | — |   |   |   | (483,687 | ) |   |   | (483,687 | ) |   |
| Unrealized gain on marketable securities                |       | —                                           |       |                          | —     |         |       |                                  | —     |                   |       |                          | —     |   |   |   | 2,440 |   |   |   | — |   |   |   | 2,440 |   |   |
| Foreign currency translation                            |       | —                                           |       |                          | —     |         |       |                                  | —     |                   |       |                          | —     |   |   |   | (1,715 | ) |   |   | — |   |   |   | (1,715 | ) |   |
| Total comprehensive loss                                |       |                                             |       |                          |       |         |       |                                  |       |                   |       |                          |       |   |   |   |   |   |   |   |   |   |   |   | (482,962 | ) |   |
| Issuance of common stock                                |       | 3,658,314                                        |       |                          | 4          |         |       |                                  | 28,567     |                   |       |                          | —     |   |   |   | — |   |   |   | — |   |   |   | 28,571 |   |   |
| Repurchase of common stock                         |       | (187                                             | )          |                          | —     |         |       |                                  | —     |                   |       |                          | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Exercise of stock warrants                              |       | 143,504                                          |       |                          | —     |         |       |                                  | —     |                   |       |                          | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Employee stock purchases                                |       | 6,697,171                                        |       |                          | 7          |         |       |                                  | 44,046     |                   |       |                          | —     |   |   |   | — |   |   |   | — |   |   |   | 44,053 |   |   |
| Other common stock transactions                         |       | —                                           |       |                          | —     |         |       |                                  | 88         |                   |       |                          | —     |   |   |   | — |   |   |   | — |   |   |   | 88 |   |   |
| Restructuring related stock-based compensation  expense |       | —                                           |       |                          | —     |         |       |                                  | 1,185      |                   |       |                          | —     |   |   |   | — |   |   |   | — |   |   |   | 1,185 |   |   |
| Write off deferred stock compensation                   |       | —                                           |       |                          | —     |         |       |                                  | (401       | )                      |       |                          | 401        |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Stock-based compensation expense                        |       | —                                           |       |                          | —     |         |       |                                  | —     |                   |       |                          | 1,280      |   |   |   | — |   |   |   | — |   |   |   | 1,280 |   |   |
| 401K stock match                                        |       | 697,821                                          |       |                          | —     |         |       |                                  | 7,618      |                   |       |                          | —     |   |   |   | — |   |   |   | — |   |   |   | 7,618 |   |   |
| 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 deferred stock compensation                   |       | —                                           |       |                          | —     |         |       |                                  | (93        | )                      |       |                          | 93         |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Stock-based compensation expense                        |       | —                                           |       |                          | —     |         |       |                                  | —     |                   |       |                          | 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 restricted stock                            |       | 480,000                                          |       |                          | 1          |         |       |                                  | 4,783      |                   |       |                          | (4,784     | ) |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Stock-based compensation expense                        |       | —                                           |       |                          | —     |         |       |                                  | —     |                   |       |                          | 565        |   |   |   | — |   |   |   | — |   |   |   | 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 |   |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

55

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**Millennium Pharmaceuticals, Inc. Notes to Consolidated Financial Statements December 31, 2005**

**1. The Company**

Millennium Pharmaceuticals, Inc. (“Millennium” orthe “Company”) is a leading biopharmaceutical company focused on discovering,developing and commercializing innovative products in disease areas with unmetmedical needs. The Company currently markets VELCADE, the market leader in themultiple myeloma relapsed setting. The Company also has a number of otherpotential therapeutic products in various stages of clinical and preclinicaldevelopment in its therapeutic areas 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 ofSignificant Accounting 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 offinancial statements in accordance with generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenue and expenses during the reporting period. Actual resultscould differ from those estimates.

**Reclassifications**

Certain prior year amountsin operating activities of the consolidated statements of cash flows have beenreclassified to conform to the current year presentation. This reclassificationhas no impact on previously reported net loss or net cash used in operatingactivities in any period.

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

Cash equivalents consist principally of money marketfunds and corporate bonds with maturities of three months or less at the dateof purchase. Marketable securities consist primarily of investment-gradecorporate bonds, asset-backed debt securities and U.S. government agencydebt securities. Other investments represent ownership in private companies inwhich the Company holds less than a 20 percent ownership position and does nototherwise exercise significant influence. The Company carries such investmentsat cost unless significant influence can be exercised over the investee, inwhich case such securities are recorded using the equity method. These otherinvestments are included in other long-term assets at December 31, 2005and December 31, 2004.

Management determines the appropriate classificationof marketable securities at the time of purchase and reevaluates suchdesignation at each balance sheet date. Marketable securities at December 31,2005 and December 31, 2004 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 

56

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**Millennium Pharmaceuticals, Inc. Notes to Consolidated Financial Statements December 31, 2005 (Continued)**

investment income.Realized gains and losses and declines in value judged to beother-than-temporary on available-for-sale securities and other investments areincluded in investment income. The cost of securities sold is based on thespecific identification method. Interest and dividends on securities classifiedas available-for-sale are included in investment income.

During the years ended December 31, 2005, 2004and 2003, the Company recorded realized gains on marketable securities of$0.1 million, $1.9 million and $6.3 million, respectively, andrealized losses on marketable securities and other investments of$3.6 million, $13.6 million and $3.3 million, respectively.

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”). The Company expects to record an additional realized gain of upto approximately $2.8 million in the second half of 2006 upon the finalsettlement and receipt of the escrowed portion of the sale proceeds. TransForm,a company specializing in the discovery of formulations and novel crystallineforms of drug molecules, was acquired by Johnson & Johnson in a cash-for-stocktransaction that closed 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 securities.Marketable securities consist of investment-grade corporate bonds, asset-backedand U.S. government agency securities. The Company’s investment policy,approved by the Board of Directors, limits the amount the Company may invest inany one type of investment, thereby reducing credit risk concentrations.Accounts receivables include trade receivables which result from product salesto a sole distributor and amounts due under strategic alliances. Concentrationof credit risk with respect to trade receivables is limited by credit limits,ongoing credit evaluation and account monitoring procedures.

**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. All of the Company’s co-promotion revenue is related to sales ofINTEGRILIN through August 31, 2005. The remainder of the Company’s totalrevenues is related to its strategic alliances and royalties.

Revenues from Ortho Biotech Products, L.P. (“OrthoBiotech”), a member of the Johnson & Johnson Family of Companiesaccounted for approximately 10 percent, 17 percent and 11 percent ofconsolidated revenues for the years ended December 31, 2005, 2004 and 2003,respectively.

 

57

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**Millennium Pharmaceuticals, Inc. Notes to Consolidated Financial Statements December 31, 2005 (Continued)**

Revenues from Schering-Plough Ltd. and ScheringCorporation (collectively “SGP”), excluding co-promotion revenue, accounted forapproximately 24 percent of total revenues for the year ended December 31,2005.

Revenues from sanofi-aventis Group (“sanofi-aventis”)accounted for approximately two percent, two percent and 15 percentof consolidated revenues for the years ended December 31, 2005, 2004 and2003, respectively.

Revenues from Bayer, AG (“Bayer”) accounted forapproximately less than one percent, two percent and 14 percent ofconsolidated revenues for the years ended December 31, 2005, 2004 and2003, respectively.

There were no othersignificant customers under strategic alliances and royalties in 2005, 2004 and2003, respectively.

**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 two manufacturers that provide eptifibatide, the active ingredientnecessary to make INTEGRILIN for both clinical trials and commercial supply.Solvay, Societe Anonyme (“Solvay”), one of the current manufacturers, owns theprocess technology used by it and the other manufacturer for the production ofthe active pharmaceutical ingredient. The Company is seeking approval of itsown alternative process technology for the production of eptifibatide forapproval in the United States, Europe and other countries as required. TheCompany entered into an agreement with Solvay in January 2003 for aninitial term of four years and one-year renewal periods thereafter. The Companyhas two manufacturers that currently perform fill/finish services forINTEGRILIN. The Company has identified an alternative packaging supplier toserve as future sources of supply for the United States. The FDA or otherregulatory agencies must approve the processes or the facilities that may beused for the manufacture of our marketed products. Materials in process atthese alternative suppliers are included in inventory.

The Company also relies on third party contractmanufacturers for the manufacturing, fill/finish and packaging of VELCADE forboth commercial purposes and for ongoing clinical trials. The Company hasestablished long-term supply relationships for the production of the activepharmaceutical ingredient and the fill/finish of VELCADE. The Company currentlyworks with one manufacturer to complete fill/finish for VELCADE and the Companyis qualifying a second fill/finish supplier.

During 2004, the Companybegan distributing VELCADE in the United States through a sole-sourcedistribution model where the Company sells directly to a third party who inturn distributes to the wholesaler base.

 

58

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**Millennium Pharmaceuticals, Inc. Notes to Consolidated Financial Statements December 31, 2005 (Continued)**

**Inventory**

Inventory consists of currently marketed products,including VELCADE and INTEGRILIN, and from time to time, product candidatesawaiting regulatory approval which were capitalized based upon management’sjudgment of probable near term commercialization. The Company assesses theprobability of commercialization based upon several factors including estimatedlaunch date, time to manufacture and shelf life. At December 31, 2005 and2004, inventory does not include amounts for products that have not beenapproved for sale.

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

Inventoryconsists of the following (in thousands):

| ** **      | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|-----------------|------------|---------------------------------|------------|---------------------------------|------------|
| Raw materials   |       |                            | $          | 7,632                           |       |   |   | $ | 73,214 |   |   |
| Work in process |       |                            | 7,370      |                            |       |   | 8,507 |   |   |
| Finished goods  |       |                            | 822        |                            |       |   | 15,553 |   |   |
|            |       |                            | $          | 15,824                          |       |   |   | $ | 97,274 |   |   |

 

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 andEquipment**

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 |

 

**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.

 

59

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**Millennium Pharmaceuticals, Inc. Notes to Consolidated Financial Statements December 31, 2005 (Continued)**

Intangibleassets consist of the following (in thousands):

| ** **                                                           | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|----------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                                           | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization**   | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Developed  technology                                                |       |                            | $          | 435,000                         |       |   |   | $ | (129,663 | ) |   |   | $ | 435,000 |   |   |   | $ | (96,202 | ) |   |
| Core technology                                                      |       |                            | $          | 18,712                          |       |   |   | $ | (18,712 | ) |   |   | $ | 18,712 |   |   |   | $ | (18,712 | ) |   |
| Other                                                                |       |                            | 17,060     |                            |       |   | (14,048 | ) |   |   | 20,060 |   |   |   | (16,523 | ) |   |
| Total amortizable intangible assets, excluding  developed technology |       |                            | 35,772     |                            |       |   | (32,760 | ) |   |   | 38,772 |   |   |   | (35,235 | ) |   |
| Total indefinite-lived  trademark                                    |       |                            | 59,000     |                            |       |   | — |   |   |   | 59,000 |   |   |   | — |   |   |
| Total intangible  assets                                             |       |                            | $          | 94,772                          |       |   |   | $ | (32,760 | ) |   |   | $ | 97,772 |   |   |   | $ | (35,235 | ) |   |

 

On February 12, 2002, the Company acquired CORTherapeutics, Inc. (“COR”) for an aggregate purchase price of$1.8 billion, primarily consisting of 55.1 million shares of Millenniumcommon stock. The transaction was recorded as a purchase for accountingpurposes. The purchase price was allocated to the assets purchased andliabilities assumed based upon their respective fair values, with the excess ofthe purchase price over the estimated fair market value of net tangible assetsacquired allocated to in-process research and development, developedtechnology, trademark and goodwill.

COR’s developed technology consisted of an existingproduct, INTEGRILIN and related patents. This developed technology wasdetermined to be separable from goodwill and was valued at approximately$435.0 million. Because the INTEGRILIN name was well recognized in themarketplace and was considered to contribute to the product revenue, thetrademark was determined to be separable from goodwill. The INTEGRILIN trademarkwas valued at approximately $59.0 million and is considered to have anindefinite life.

Intangible assets that were not specificallyidentifiable, had indeterminate lives or were inherent in the continuingbusiness and related to the Company as a whole were classified as goodwill. Thesignificant factors contributing to the existence of goodwill at the time ofacquisition related to company management, a specialized cardiovascular salesforce, market position and operating experience.

Amortizationof intangibles is computed using the straight-line method over the useful livesof the respective assets as follows:

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

 

Amortization expense wasapproximately $34.0 million, $33.5 million and $38.9 million in2005, 2004 and 2003, respectively. During the year ended December 31,2005, the Company retired intangible assets of approximately $3.0 million thathad been fully amortized. In addition, inconnection with the 2003 restructuring plan discussed in Note 3, theCompany recognized an impairment charge in the year ended December 31,2003 of approximately $11.3 million for technology it no longer intends topursue.

The Company expects to incur amortization expense ofapproximately $34.0 million for each of the next five years.

 

60

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**Millennium Pharmaceuticals, Inc. Notes to Consolidated Financial Statements December 31, 2005 (Continued)**

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

Goodwill as of December 31,2005 consists of the excess purchase price over the estimated fair value of nettangible and intangible assets primarily related to the Company’s acquisitionof COR in 2002, as well as previous acquisitions of Leukosite, Inc. (“LeukoSite”)and Cambridge Discovery Chemistry, LTD. The carrying value may be adjusted as aresult of the continued settlement of contingent consideration arising from theLeukosite acquisition.

**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 has stand-alonevalue to the customer and whether there is objective and reliable evidence ofthe fair value of the undelivered items. The consideration received isallocated among the separate units based on their respective fair values, andthe applicable revenue recognition criteria are applied to each of the separateunits. Advance payments received in excess of amounts earned are classified asdeferred revenue until earned.

*Net product sales*

The Company recordsproduct sales of VELCADE when delivery has occurred, title passes to thecustomer, collection is reasonably assured and the Company has no furtherobligations. Allowances are recorded as a reduction to product sales forestimated returns and discounts at the time of sale. During the fourth quarterof 2004, the Company reduced its reserve for product returns by approximately$1.5 million based upon actual returns to date and inventory levels at thewholesalers. No further material adjustments have been recorded for estimatedproduct returns and discounts. Costs incurred by the Company for shipping andhandling are recorded in cost of sales.

 

61

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**Millennium Pharmaceuticals, Inc. Notes to Consolidated Financial Statements December 31, 2005 (Continued)**

*Co-promotionrevenue*

Through August 31, 2005, co-promotion revenueincluded the Company’s share of profits from the sale of  INTEGRILIN in co-promotion territories bySGP. Also included in co-promotion revenue were reimbursements from SGP of theCompany’s manufacturing-related costs, development costs, advertising andpromotional expenses associated with the sale of INTEGRILIN within co-promotionterritories and royalties from SGP on sales of INTEGRILIN outside of theco-promotion territory other than Europe. The Company recognized revenue whenSGP shipped INTEGRILIN to wholesalers and recorded it net of allowances, ifany. The Company deferred specified manufacturing-related expenses until thetime SGP shipped related product to its customers inside and outside ofco-promotion territories and outside of Europe.

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

*Revenue understrategic alliances*

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

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, such as initiation of clinical trials, filingfor approval with regulatory agencies and approvals by regulatory 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;

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

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**Millennium Pharmaceuticals, Inc. Notes to Consolidated Financial Statements December 31, 2005 (Continued)**

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

·       otherroyalties.

**Advertising andPromotional Expenses**

Advertising andpromotional expenses are expensed as incurred. During the years ended December 31,2005, 2004 and 2003, advertising and promotional expenses were $35.8 million,$43.4 million and $37.0 million, respectively.

**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 taxbasis of assets and liabilities, as well as net operating loss carryforwards,and are measured using the enacted tax rates and laws that will be in effectwhen the differences reverse. Deferred tax assets are reduced by a valuationallowance to reflect the uncertainty associated with their ultimaterealization. Specified reclassifications of prior years’ amounts have been madeto the Company’s notes to consolidated financial statements to conform to thecurrent year 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) and unvested restricted shares of common stock.  Options to purchase shares of common stock thatwere not included in the calculation of diluted shares because the effect ofincluding the options would have been anti-dilutive were 2.8 million, 6.3million and 8.1 million at December 31, 2005, 2004 and 2003, respectively.

**Foreign Currency Translation**

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.

**Comprehensive Loss**

Comprehensive loss iscomprised of net loss, unrealized gains and losses on marketable securities andcumulative foreign currency translation adjustments. Accumulated othercomprehensive loss as of December 31, 2005 and 2004 included unrealizedlosses of $9.7 million and $5.4 million, respectively, on marketable securitiesand $0.1 million and $(0.6) million, respectively, of cumulative foreigncurrency 

63

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**Millennium Pharmaceuticals, Inc. Notes to Consolidated Financial Statements December 31, 2005 (Continued)**

translationadjustments. Comprehensive loss is reflected in the consolidated statements ofstockholders’ equity.

**Stock-BasedCompensation**

The Company follows the intrinsic value method underAccounting Principles Board Opinion No. 25, “Accounting for Stock Issuedto Employees” (“APB 25”) and related interpretations, in accounting for itsstock-based compensation plans, rather than the alternative fair valueaccounting method provided for under SFAS No. 123, “Accounting for Stock-BasedCompensation” (“SFAS No. 123”) as amended by SFAS No. 148, “Accountingfor Stock-based Compensation—Transition and Disclosure” (“SFAS No. 148”).Under APB 25, when the exercise price of options granted equals the market priceof the underlying stock on the date of grant, no compensation expense isrecognized. Restricted stock awards are recorded as compensation cost over therequisite vesting periods based on the market value on the date ofgrant. In accordance with Emerging Issues Task Force (“EITF”) 96-18,the Company records compensation expense equal to the fair value of optionsgranted to non-employees over the vesting period, which is generally the periodof service.

The following information regarding net loss and net lossper share has been determined as if the Company had accounted for its employeestock options and employee stock plan under the fair value method prescribed bySFAS No. 123, as amended by SFAS No. 148. The resulting effect on netloss and net loss per share pursuant to SFAS No. 123 is not likely to berepresentative of the effects in future periods, due to subsequent additionaloption grants and periods of vesting.

Thefollowing table illustrates the effect on net loss and loss per share if theCompany had applied the fair value recognition provisions of SFAS No. 123to stock-based employee compensation (in thousands, except per shareamounts):

| ** **                                                                                                        | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                        | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net loss                                                                                                          |       | $                                          | (198,249   | ) | $ | (252,297 | ) | $ | (483,687 | ) |
| Add: Stock-based  compensation as reported in the Statement of Operations                                         |       | 1,044                                      |       | 207 |   | 2,465 |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value  based method for all awards |       | (48,629                                    | )          | (72,323 | ) | (68,776 | ) |
| Pro forma net  loss                                                                                               |       | $                                          | (245,834   | ) | $ | (324,413 | ) | $ | (549,998 | ) |
| Amounts per common  share:                                                                                        |       |                                       |       |   |   |   |   |
| Basic and  diluted—as reported                                                                               |       | $                                          | (0.64      | ) | $ | (0.83 | ) | $ | (1.63 | ) |
| Basic and diluted—pro  forma                                                                                 |       | $                                          | (0.80      | ) | $ | (1.06 | ) | $ | (1.85 | ) |

 

Stock-based compensation expense as disclosed abovewas recorded on an accelerated basis in accordance with FASB Interpretation No. 28,“Accounting for Stock Appreciation Rights and Other Variable Stock Option orAward Plans.”  Adjustments forforfeitures were made in the period in which they occurred.

The weighted-average per share fair value ofoptions granted during 2005, 2004 and 2003 was $4.56, $8.39 and $7.51,respectively.

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**Millennium Pharmaceuticals, Inc. Notes to Consolidated Financial Statements December 31, 2005 (Continued)**

Thefair value of stock options and common stock issued pursuant to the stockoption and stock purchase plans at the date of grant were estimated using theBlack-Scholes model with the following weighted-averageassumptions:

| ** **             | ** ** | **Stock Options** | ** ** | **Stock  Purchase Plan** | ** ** |
|------------------------|------------|------------------------|------------|-------------------------------|------------|
| ** **             | ** ** | **2005**               | ** ** | **2004**                      | ** ** | **2003** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Expected life  (years) |       | 4.8                    |       | 5.5                           |       | 5.2 |   | 0.5 |   | 0.5 |   | 0.5 |   |
| Interest rate          |       | 4.03                   | %          | 2.38                          | %          | 2.32 | % | 3.13 | % | 2.39 | % | 1.13 | % |
| Volatility             |       | .60                    |       | .70                           |       | .85 |   | .60 |   | .73 |   | .85 |   |

 

The Black-Scholes model was developed for use inestimating the fair value of traded options, which have no vesting restrictionsand are fully transferable. Option valuation models require the input of highlysubjective assumptions including the expected stock price volatility. TheCompany’s employee stock options have characteristics significantly differentfrom those of traded options and changes in the subjective inputs assumptionscan materially affect the fair value estimate.

Through the end of the second quarter of 2004, thefair value of stock options granted was determined utilizing a historicalvolatility rate. In the third quarter of 2004, the Company reevaluated andsubsequently changed its expected volatility assumption. The Company now usesthe most recent three-year time period for purposes of calculating the expectedvolatility. Additionally, in the fourth quarter of 2005, in preparation for theadoption of SFAS No. 123R, the Company considered implied volatilities ofcurrently traded options to provide an estimate of volatility based uponcurrent trading activity. After considering other such factors as its stage ofdevelopment, the length of time the Company has been public and the impact ofhaving a marketed product, the Company believes this blended volatility ratebetter reflects the expected volatility of its stock going forward. The blendedvolatility rate was used beginning in the fourth quarter of 2005.

The Company has neverdeclared cash dividends on any of its capital stock and does not expect to doso in the foreseeable future.

**AccountingPronouncements**

In December 2004, the FASB issued SFAS No. 123R(revised 2004), “Share-Based Payment,” (“SFAS No. 123R”). SFAS No. 123R requires companies tocalculate and record in the income statement the cost of equity instruments,such as stock options or restricted stock, awarded to employees for servicesreceived. The cost of the equity instrument is to be measured based on the fairvalue of the instruments on the date they are granted and is required to berecognized over the period during which the employees are required to provideservices in exchange for the equity instruments. SFAS No. 123R iseffective at the beginning of the first interim period beginning after June 15,2005, or January 1, 2006.

SFAS No. 123Rprovides two alternatives for adoption:

·       a“modified prospective” method in which compensation cost is recognized for allawards granted subsequent to the effective date of the statement as well as forthe unvested portion of awards outstanding as of the effective date; or

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**Millennium Pharmaceuticals, Inc. Notes to Consolidated Financial Statements December 31, 2005 (Continued)**

·       a“modified retrospective” method which follows the approach in the “modifiedprospective” method, but also permits entities to restate prior periods torecord compensation cost calculated under SFAS No. 123 for pro formadisclosure.

The Company adopted SFAS No. 123R using themodified prospective method as of January 1, 2006. As permitted by SFAS No. 123,the Company historically accounted for share-based payments to employeesusing the intrinsic value method under APB 25 and, as such, generallyrecognizes no compensation cost for employee stock options. Accordingly, theadoption of SFAS No. 123R’s fair value method will have a significantimpact on the Company’s results of operations, although it will have no impacton its overall financial position. The Company estimates this expense to be inthe range of $40.0 million to $50.0 million in 2006, dependent upon marketprice, assumptions used in estimating the fair value and the levels ofshare-based payments granted in 2006. Changes in market price and other of theCompany’s assumptions could cause future expenses to vary significantly fromthe Company’s current expectations.

In May 2005, the FASBissued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS No. 154”)which replaces Accounting Principles Board Opinions No. 20, “AccountingChanges” and SFAS 3, “Reporting Accounting Changes in Interim FinancialStatements—An Amendment of APB Opinion No. 28.” SFAS No. 154 providesguidance on the accounting for and reporting of accounting changes and errorcorrections. It establishes retrospective application, or the earliestpracticable date, as the required method for reporting a change in accountingprinciple and restatement with respect to the reporting of a correction of anerror. SFAS No. 154 is effective for accounting changes and corrections oferrors made in fiscal years beginning after December 15, 2005. Althoughthe Company will continue to evaluate the application of SFAS No. 154, theCompany does not currently believe that adoption will have a material impact onresults of operations, financial position or cash flows.

**3. Restructuring**

*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 has substantially reduced its effort ininflammation discovery and has reduced overall headcount, including eliminatingINTEGRILIN sales and marketing positions, positions in inflammation discoveryand various other business support groups. As a result of the headcountreductions, the Company is also evaluating potential further consolidation ofits Cambridge, MA facilities.

The Company recorded restructuring charges ofapproximately $42.5 million under the 2005 restructuring plan primarily relatedto the remaining rental obligation, net of sublease income, of vacatedfacilities, the impairment charge on leasehold improvements that were abandonedat such facilities and employee termination benefits for the 180 employeesaffected by the transfer of the U.S. commercialization rights to INTEGRILIN toSGP, as well as the headcount reductions within inflammation discovery andbusiness support groups.

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**Millennium Pharmaceuticals, Inc. Notes to Consolidated Financial Statements December 31, 2005 (Continued)**

Thesecosts are included in restructuring in the statements of operations and incurrent and long-term liabilities on the balance sheet at December 31,2005. The following table displays the restructuring activity and liabilitybalances (in thousands):

| ** **              | ** ** | **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 |   |   |

 

The Company expects to record additional restructuringcharges of between $25.0 and $30.0 million in 2006. The Company continuesto evaluate its strategic alternatives and as a result, future restructuringcharges could vary significantly from current operations.

*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. Based upon a review of current real estatemarket conditions, the Company recorded an additional $30.6 million ofrestructuring expense in the third quarter of 2005 reflecting changes in theCompany’s estimates of the length of time it would take to sublease certainproperties vacated under the 2003 restructuring plan.

Thefollowing table displays the restructuring activity and liability balances (inthousands):

| ** **              | ** ** | **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 |   |   |

 

| ** **              | ** ** | **Balance at  December 31,  2003** | ** ** | **Charges** | ** ** | **Payments** | ** ** | **Stock-based  Compensation** | ** ** | **Other** | ** ** | **Balance at  December 31,  2004** | ** ** |
|-------------------------|------------|----------------------------------------------|------------|-------------|------------|--------------|------------|-------------------------------|------------|-----------|------------|----------------------------------------------|------------|
| Termination  benefits   |       |                                         | $          | 14,139      |       |         | $          | 639                           |       | $         | (14,028    | )                                            |       | $ | (22 | ) |   | $ | — |   |   | $ | 728 |   |   |
| Facilities              |       |                                         | 58,585     |        |       | 37,838       |       | (30,270                       | )          |      | —     |                                         |       | 1,803 |   |   | 67,956 |   |   |
| Asset impairment        |       |                                         | —     |        |       | (324         | )          | —                        |       |      | —     |                                         |       | 324 |   |   | — |   |   |
| Contract  termination   |       |                                         | 10,352     |        |       | (340         | )          | (5,360                        | )          |      | —     |                                         |       | 700 |   |   | 5,352 |   |   |
| Other associated  costs |       |                                         | 110        |        |       | 220          |       | (330                          | )          |      | —     |                                         |       | — |   |   | — |   |   |
| Total                   |       |                                         | $          | 83,186      |       |         | $          | 38,033                        |       | $         | (49,988    | )                                            |       | $ | (22 | ) |   | $ | 2,827 |   |   | $ | 74,036 |   |   |

 

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**Millennium Pharmaceuticals, Inc. Notes to Consolidated Financial Statements December 31, 2005 (Continued)**

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 be recognizedand measured initially at its fair value in the period in which the liabilityis incurred, except for one-time termination benefits that meet specifiedrequirements. Costs of termination benefits relate to severance packages,out-placement services and career counseling for employees affected by therestructuring. Stock-based compensation amounts relate to modifications ofstock option grants to accelerate vesting and to extend the exercise period ofcertain stock option grants upon termination.

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

The 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 ofpayments of the remaining restructuring liabilities under both the 2005 and the2003 restructuring plans at December 31, 2005 is approximately $35.4million in 2006 and $69.5 million thereafter through 2022. The actual amountand timing of the payment of the remaining accrued liability is dependent uponthe ultimate terms of any potential subleases or lease restructuring.

**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, co-promotion revenue, distribution fees and may provide additionalpayments contingent upon its achievement of research and regulatory milestonesand royalties and/or profit shares if the Company’s collaborations aresuccessful in developing and commercializing products.

*Product Alliances*

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 

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**Millennium Pharmaceuticals, Inc. Notes to Consolidated Financial Statements December 31, 2005 (Continued)**

marketing programs thatare specific to the Company. The Company had granted SGP an exclusive licenseto market INTEGRILIN outside of the United States and European Union, and SGPpaid the Company royalties based on 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 year ended December 31,2005, the Company recognized approximately $21.7 million of strategic alliancerevenue, excluding manufacturing-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 isrecognizing as revenue ratably over the Company’s period of involvement inmanaging the supply chain. In addition, SGP is obligated to pay the Companyroyalties on product sales of INTEGRILIN over the lifetime of the product, withthe potential of receiving royalties beyond the 2014 patent expiration date.

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

Upon closing the amended collaboration agreement withSGP, the Company recognized strategic alliance revenue of approximately $71.4million in the third quarter of 2005 relating to the Company’s sale to SGP ofthe existing raw materials and finished goods INTEGRILIN inventory. SGP assumeddevelopment obligations relating to the product. The Company continues tomanage the supply chain for INTEGRILIN at the expense of SGP for products sold inthe United States and other areas outside of the European Union.

In January 2005, the Company repaid SGPapproximately $49.3 million for advances SGP had made for inventorypurchases in prior years. This amount was included in Advance from Schering-Ploughin current liabilities at December 31, 2004.

On June 30, 2003, the Company entered into anagreement with Ortho Biotech, a wholly owned subsidiary of Johnson &Johnson, to collaborate on the commercialization and through the agreement withJohnson & Johnson Pharmaceutical Research & Development,L.L.C., or JJPRD, continue clinical development of VELCADE. Under the terms ofthe agreement, the Company retains all commercialization rights to VELCADE inthe United States. Ortho Biotech and its affiliate, Janssen-Cilag, haveagreed to commercialize VELCADE outside of the United States. The Company isentitled to royalties in the form of distribution fees from Ortho Biotech andits affiliate on sales of VELCADE outside of the United States. The Companyalso retains an option to co-promote VELCADE with Ortho Biotech at a futuredate 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, 

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**Millennium Pharmaceuticals, Inc. Notes to Consolidated Financial Statements December 31, 2005 (Continued)**

including continuedclinical development of VELCADE for multiple myeloma. JJPRD was responsible for40% of the joint development costs through 2005 and will be responsible for 45%of such costs thereafter.

In connection with the agreement, the Company receiveda nonrefundable payment from Ortho Biotech of $15.0 million in July 2003.In addition, the Company may receive payments for achieving clinicaldevelopment milestones, for achieving regulatory milestones outside of theUnited 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, 2005 and 2004, theCompany recognized approximately $22.0 million and $54.0 million,respectively, of milestone payments as revenue under this alliance.

Through its merger withLeukoSite in 1999, the Company became a party to a joint venture agreement withILEX Products, Inc. (“ILEX”) to form Millennium and ILEX Partners, L.P. (“M&I”)for the purpose of developing and commercializing Campath® (alemtuzumab) humanized monoclonal antibodyfor use in the treatment of chronic lymphocytic leukemia. The Company accountedfor its investment in the joint venture under the equity method of accounting.On December 31, 2001, ILEX Oncology acquired the Company’s equity interestin M&I which owns the Campath product in exchange for $20.0 millionplus additional consideration contingent upon future sales of Campath. TheCompany earned $40.0 million of such consideration in each of 2004, 2003and 2002. In addition, the Company may be entitled to additional payments fromILEX Oncology based on future U.S. sales of Campath. However, the Companycurrently does not expect that these thresholds will be achieved and therefore,are unlikely to receive future additional payments related to Campath.

*Research andDiscovery Alliances*

On March 9, 2001, the Company entered into astrategic alliance with Abbott Laboratories (“Abbott”) for a five-year term inthe area of metabolic diseases. The Company and Abbott agreed to share the costof developing, manufacturing and marketing products on a worldwide basis. Thisarrangement with Abbott also included a technology exchange and developmentagreement and a $250.0 million equity investment agreement. As part ofthis $250.0 million equity investment agreement, Abbott made investmentsin 2002 and 2001 totaling $221.4 million. Abbott made the remaining$28.6 million investment in March 2003.

On August 8, 2003, the Company and Abbott agreedto terminate their alliance covering joint discovery, development andcommercialization of metabolic disease products in connection with the Company’sJune 2003 restructuring plan. Included in restructuring charges for thethree months ended September 30, 2003 are restructuring chargesspecifically related to the discontinuation of metabolic research anddevelopment, which include termination benefits and costs associated with theAbbott separation agreement.

On June 22, 2000, the Company entered into analliance with Aventis, now sanofi-aventis, covering the joint development andcommercialization of drugs for the treatment of inflammatory diseases; jointdevelopment of new drug discovery technologies; transfer of key elements of theCompany’s technology platform to Aventis to enhance its existing capabilities;and purchase of an equity interest in the Company by sanofi-aventis. Thecompanies agreed to share the responsibility for and cost of developing, marketingand manufacturing products arising from the alliance, as well as profits inNorth America. Outside of North America, sanofi-aventis is responsible fordeveloping and marketing products arising from the alliance, with a royaltyobligation to the Company. Under a Technology Transfer Agreement, the 

70

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**Millennium Pharmaceuticals, Inc. Notes to Consolidated Financial Statements December 31, 2005 (Continued)**

Company agreed to providesanofi-aventis with rights to its drug discovery technologies in exchange forpayments between $160.0 million and $200.0 million over a three tofive-year period. sanofi-aventis has purchased $250.0 million of theCompany’s common stock as agreed under an Investment Agreement with theCompany.

On April 22, 2003, sanofi-aventis exercised itsoption to terminate the Technology Transfer Agreement between the Company andsanofi-aventis effective on the third anniversary of the Agreement, July 21,2003. Pursuant to the terms of the agreement, upon providing this notice to theCompany, sanofi-aventis paid the Company $40.0 million in considerationfor future use of specified Millennium technology transferred tosanofi-aventis, which is included in revenue under strategic alliances for theyear ended December 31, 2003. The Company will not receive any additionalpayments from sanofi-aventis under the Technology Transfer Agreement.

On October 31, 2005, the discovery phase of thesanofi-aventis agreement expired in accordance with its terms. The developmentand commercialization programs continue under the agreement. During theremaining portion of the development phase of the alliance, the Company andsanofi-aventis will focus on preclinical and clinical development of candidatesidentified in the collaboration.

On October 31, 2003, the research phase of theCompany’s five year strategic alliance with Bayer concluded. On October 10,2003, Bayer and Millennium amended the agreement to provide both parties accessto specified identified drug targets for a period of seven years. If Bayersuccessfully develops and commercializes any of these targets discovered in thealliance, Bayer may make success payments and royalties to Millennium on thesale of products generated from the alliance.

Revenues recognized underthe research phase of the Bayer alliance were approximately $45.5 millionfor the year ended December 31, 2003. The Company recognized the researchfunding portion of the alliance on a percentage-of-completion basis. Thepercentage-of-completion was determined at each measurement date based upon theactual full-time equivalents to date as compared to management’s estimate ofthe total full-time equivalents needed to complete the deliverables required bythe alliance. In September 2001, the Company revised the estimate of totalfull-time equivalents required to complete the project downward as a result ofproductivity improvements made at the Company and changes to the programrequirements made by Bayer. During each subsequent reporting period, theCompany continued to monitor the full-time equivalent estimate necessary tocomplete the deliverables and compared the estimate to the actual effort put forth.No further adjustments were necessary and the accounting estimates usedapproximated actual efforts from September 2001 to the end of the researchphase of the agreement, October 31, 2003.

71

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**Millennium Pharmaceuticals, Inc. Notes to Consolidated Financial Statements December 31, 2005 (Continued)**

**5. MarketableSecurities**

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

| ** **                         | ** ** | **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 |   |

 

| ** **                         | ** ** | **December 31, 2004** | ** ** |
|------------------------------------|------------|---------------------------------|------------|
| ** **                         | ** ** | **Cost**                        | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair Value** | ** ** |
| Corporate bonds                    |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Due in one year or less            |       | $                               | 35,345     |   |   | $ | — |   |   |   | $ | (89 | ) |   | $ | 35,256 |   |
| Due in one to three years          |       | 532,294                         |       |   | 181 |   |   |   | (4,044 | ) |   | 528,431 |   |
| Asset-backed  securities           |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Due in one year or less            |       | 259                             |       |   | — |   |   |   | — |   |   | 259 |   |
| Due in one to five years           |       | 52,673                          |       |   | — |   |   |   | (759 | ) |   | 51,914 |   |
| Due in six to ten years            |       | 3,764                           |       |   | — |   |   |   | (48 | ) |   | 3,716 |   |
| Due after ten years                |       | 16,931                          |       |   | 3 |   |   |   | (129 | ) |   | 16,805 |   |
| U.S. government agency  securities |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Due in one year or less            |       | 4,814                           |       |   | — |   |   |   | (34 | ) |   | 4,780 |   |
| Due in one to three years          |       | 45,265                          |       |   | 6 |   |   |   | (461 | ) |   | 44,810 |   |
|                               |       | $                               | 691,345    |   |   | $ | 190 |   |   |   | $ | (5,564 | ) |   | $ | 685,971 |   |

 

72

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**Millennium Pharmaceuticals, Inc. Notes to Consolidated Financial Statements December 31, 2005 (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, 2005** | ** ** |
|------------------------------------|------------|----------------------------|------------|
| ** **                         | ** ** | **Less Than 12 Months**    | ** ** | **12 Months or Greater** | ** ** | **Total** | ** ** |
| ** **                         | ** ** | **Fair Value**        | ** ** | **Unrealized  Losses** | ** ** | **Fair Value** | ** ** | **Unrealized  Losses** | ** ** | **Fair Value** | ** ** | **Unrealized  Losses** | ** ** |
| Corporate bonds                    |       | $                          | 392,084    |   |   | $ | (6,094 | ) |   | $ | 99,775 |   |   | $ | (2,095 | ) |   | $ | 491,859 |   |   | $ | (8,189 | ) |   |
| Asset-backed  securities           |       | 38,769                     |       |   | (401 | ) |   | 16,619 |   |   | (394 | ) |   | 55,388 |   |   | (795 | ) |   |
| U.S. government  agency securities |       | 34,424                     |       |   | (649 | ) |   | 7,024 |   |   | (160 | ) |   | 41,448 |   |   | (809 | ) |   |
| Total                              |       | $                          | 465,277    |   |   | $ | (7,144 | ) |   | $ | 123,418 |   |   | $ | (2,649 | ) |   | $ | 588,695 |   |   | $ | (9,793 | ) |   |

 

The unrealized losses on investments in corporatebonds and asset-backed securities at December 31, 2005 were generated from354 and 88 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 an other-than-temporaryimpairment exists, the Company considered whether it has the ability and intentto hold the investment until a market price recovery and considers whetherevidence indicating the cost of the investment is recoverable outweighsevidence to the contrary. Since the decline in market value is attributable tochanges in interest rates and the Company has the ability and intent to holdthese investments until a recovery of fair value, the Company does not considerthese investments to be other-than-temporarily impaired at December 31,2005.

The Company’s unrealizedlosses at December 31, 2005 on the Company’s investment in United Statesgovernment agency securities were primarily caused by interest rate increases. Thecontractual terms of those investments do not permit the issuer to settle thesecurities at a price less than amortized cost of the investment. Because thecompany has the ability and intent to hold these investments until a recoveryof fair value, the Company does not consider these investments to beother-than-temporarily impaired at December 31, 2005.

**6. Property and Equipment**

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

| ** **                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
| Equipment                                       |       | $        | 181,329    |     | $          | 195,515 |   |
| Capitalized  software                           |       | 45,572   |       | 41,513   |       |
| Leasehold  improvements                         |       | 254,893  |       | 259,028  |       |
| Construction in  progress                       |       | 2,254    |       | 7,163    |       |
|                                            |       | 484,048  |       | 503,219  |       |
| Less accumulated  depreciation and amortization |       | (300,989 | )          | (283,104 | )          |
|                                            |       | $        | 183,059    |     | $          | 220,115 |   |

 

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**Millennium Pharmaceuticals, Inc. Notes to Consolidated Financial Statements December 31, 2005 (Continued)**

Depreciation expense,which includes amortization of assets recorded under capital leases, was$42.3 million, $59.9 million and $68.1 million, in 2005, 2004and 2003, respectively. During the years ended December 31, 2005 andDecember 31, 2004, the Company retired certain fixed assets that had beenfully amortized.

**7. Accrued expenses**

Accrued expenses consistof the following at December 31 (in thousands):

| ** **                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
| Payroll and  benefits                 |       | $        | 21,629     |     | $          | 24,039 |   |
| Inventory  receipts                   |       | 10,439   |       | 8,005    |       |
| Clinical and  preclinical development |       | 9,875    |       | 11,556   |       |
| Manufacturing                         |       | 4,036    |       | 9,983    |       |
| Other expenses                        |       | 24,785   |       | 35,542   |       |
|                                  |       | $        | 70,764     |     | $          | 89,125 |   |

 

**8. Commitments**

**Lease Commitments**

The Company conducts the majority of its operations inleased facilities with a combination of leased and owned equipment. At December 31,2005, the Company has capitalized leased equipment totaling $13.7 million,with related accumulated amortization of $13.1 million. Such amounts areincluded in the appropriate categories of property and equipment inNote 6.

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 2006 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, Massachusetts. The rent obligation for the first of these buildingsbegan in July 2002 and the rent obligation on the second building began inJuly 2003. The Company was responsible for a portion of the constructioncosts for both buildings and was deemed to be the owner during the constructionperiod of each building under EITF 97-10, “The Effect of LesseeInvolvement in Asset Construction.” In July 2002 and July 2003, uponcompletion of the construction period of the buildings, respectively, theCompany recorded the leases as capital leases. Payments under these capitalleases are comprised of principal, interest and rent expense.

At December 31, 2005, the Company has pledged$8.5 million of marketable securities, included in restricted cash,primarily as collateral for letters of credit for specified leased facilities.

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**Millennium Pharmaceuticals, Inc. Notes to Consolidated Financial Statements December 31, 2005 (Continued)**

At December 31,2005, 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:                                                |       |                |       |                  |       |                     |       |
| 2006                                                 |       | $                   | 19,219     |                  | $          | 38,730                   |       | $ | (5,709 | ) |
| 2007                                                 |       | 16,351              |       | 36,749                |       | (6,584                   | )          |
| 2008                                                 |       | 16,915              |       | 36,174                |       | (6,277                   | )          |
| 2009                                                 |       | 17,183              |       | 25,916                |       | (5,565                   | )          |
| 2010                                                 |       | 17,183              |       | 25,050                |       | (5,013                   | )          |
| Thereafter                                           |       | 223,373             |       | 78,864                |       | (7,791                   | )          |
| Total                                                |       | 310,224             |       | $                     | 241,483    |                     | $          | (36,939 | ) |
| Less amount  representing additional rental payments |       | (192,784            | )          |                  |       |                     |       |
| Less amount  representing interest                   |       | (37,078             | )          |                  |       |                     |       |
| Present value of  minimum lease payments             |       | 80,362              |       |                  |       |                     |       |
| Less current  portion of capital lease obligations   |       | (4,136              | )          |                  |       |                     |       |
| Capital lease  obligations, net of current portion   |       | $                   | 76,226     |                  |       |                     |       |   |

 

Total rent expense, whichincludes rent for buildings and equipment was $37.4 million,$46.2 million and $57.6 million in 2005, 2004 and 2003, 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 $54.6 million in 2006 and$68.2 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 $4.4 million in 2006 and$0.7 million thereafter.

**9. Convertible Debt**

The Company had thefollowing convertible notes outstanding at December 31, 2005, for a totalof $105.5 million, of which $5.9 million is included in current liabilities:

·       $5.9 millionof principal of 4.5% convertible senior notes due June 15, 2006, that areconvertible into the Company’s common stock at any time prior to maturity at aprice equal to $40.61 per share (the “4.5% notes”), included in current portionof long-term debt at December 31, 2005;

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**Millennium Pharmaceuticals, Inc. Notes to Consolidated Financial Statements December 31, 2005 (Continued)**

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

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

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

In April 2002, theCompany amended the 4.5% notes and 5.0% notes to add put options permittingnoteholders to require the Company on April 29, 2003, to repurchase the4.5% notes for cash at a price of $1,095 per $1,000 of principal amount and the5.0% notes for cash at a price of $1,085 per $1,000 of principal amount,resulting in a maximum aggregate payment obligation of $654.0 million.These put options on the notes were derivative instruments under SFAS No. 133,“Accounting for Derivative Instruments and Hedging Activities” and as such wererecorded on the balance sheet at fair value.

On April 29, 2003,the Company completed the repurchase of $577.8 million of aggregateprincipal amount of the outstanding 4.5% notes and 5.0% notes for an aggregatepayment of approximately $637.1 million, including principal, accruedinterest and put premium. Approximately $22.1 million of aggregateprincipal amount of these notes was not tendered in the offer and remainoutstanding as of December 31, 2005. As a result of the repurchase, theCompany recorded a charge in 2003 of approximately $10.5 million whichrepresents the write-off of approximately $12.4 million of unamortized originaldebt issuance costs associated with the 4.5% notes and 5.0% notes, offset by$1.9 million relating to the expired put premium on the untendered notes.

**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, 2005,the Company had 500,000,000 authorized shares of common stock, $0.001 parvalue, with 311,120,875 shares issued and outstanding.

**Common StockWarrants**

At December 31, 2005,the Company had outstanding exercisable warrants to purchase 429,600 shares ofCommon Stock with a weighted-average exercise price of $9.44 per share,which expire through 2007.

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**Millennium Pharmaceuticals, Inc. Notes to Consolidated Financial Statements December 31, 2005 (Continued)**

**Stock Option Plans**

In December 2002, the Company’s Board ofDirectors reduced the number of shares authorized for issuance under some ofthe Company’s older plans and acquired plans so that the Company cannot issuenew options under those plans. Additionally, the Board of Directors amendedsome of the Company’s option plans to provide for full vesting of optionsissued under the plans to optionholders who terminate their employment for goodreason or are terminated without cause within the period one month before andone year after a change of control.

The Company’s 1993 Incentive Stock Plan (the “1993Plan”) allowed for the granting of incentive and nonstatutory options topurchase up to 21,600,000 shares of common stock. At December 31, 2005, atotal of 127,691 shares of common stock have been reserved for the exercise ofoptions outstanding under the 1993 Plan. No options are available for futuregrant under the 1993 Plan.

The 1996 Equity Incentive Plan (the “1996 Plan”) issubstantially consistent with the terms of the 1993 Plan and, as amended,provides for the granting of options to purchase 22,400,000 shares of commonstock. At December 31, 2005, a total of 7,457,134 shares of common stockhave been reserved for the exercise of options outstanding and are availablefor future grant under the 1996 Plan.

The 1997 Equity Incentive Plan (the “1997 Plan”), asamended, provides for the granting of options to purchase 16,000,000 shares ofcommon stock. The terms and conditions of the 1997 Plan are substantiallyconsistent with those of the 1993 Plan and the 1996 Plan. At December 31,2005, a total of 5,520,262 shares of common stock have been reserved for theexercise of options outstanding and are available for future grant under the1997 Plan.

The 2000 Incentive Stock Plan (the “2000 Plan”) allowsfor the granting of incentive and nonstatutory stock options, restricted stockawards and other stock-based awards, including the grant of shares basedupon specified conditions, the grant of securities convertible into commonstock and the grant of stock appreciation rights. The number of stock optionshares authorized is equal to 5% of the number of shares outstanding on April 12,2000 plus an annual increase to be made on January 1, 2001, 2002, and 2003equal to 5% of the number of shares outstanding or a lesser amount determinedby the Board of Directors. At December 31, 2005, a total of 42,407,853shares of common stock have been reserved for the exercise of optionsoutstanding and are available for future grant under the 2000 Plan.

During the year ended December 31, 2005, theCompany issued 480,000 shares of restricted stock under the 2000 Plan tocertain key executives. Restricted stock awards generally vest over four yearsfrom the grant date although certain awards have been, and may in the future begranted with shorter vesting schedules. The Company recorded $4.8 million ofdeferred compensation in connection with the issuance of restricted stock andrecognized approximately $0.6 million of compensation expense during the yearended December 31, 2005 related to these awards.

The 1996 Director Option Plan (the “Director Plan”)provides for the granting of nonstatutory stock options to non-employeedirectors. At December 31, 2005, a total of 240,000 shares of common stockhave been reserved for the exercise of options outstanding under the DirectorPlan. No options are available for future grant under the Director Plan.

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 first offering period began on 

77

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**Millennium Pharmaceuticals, Inc. Notes to Consolidated Financial Statements December 31, 2005 (Continued)**

October 1, 1996.During 2002, the Company reset the offering periods to begin on May 1 and November 1of each year. At December 31, 2005, subscriptions were outstanding for anestimated 87,393 shares at $9.10 per share.

In connection with the February 2002 merger ofCOR and the Company, COR’s 1991 Equity Incentive Plan (the “COR 1991 Plan”),1994 Equity Incentive Plan (the “COR 1994 Plan”) and 1998 Equity Incentive Plan(the “COR 1998 Plan”) were assumed by Millennium. In connection with themergers of MBio and MPMx into the Company, MBio’s 1997 Equity Incentive Plan(the “MBio 1997 Plan”) and MPMx’s 1997 Equity Incentive Plan (the “MPMx 1997Plan”) were assumed by Millennium. In December 1999, in connection withthe merger of LeukoSite and the Company, Millennium assumed the LeukoSite 1993Stock Option Plan (the “LeukoSite 1993 Plan”). The Plans, as assumed, allowedfor the granting of incentive and nonstatutory options to purchase up to14,595,425 shares of Millennium common stock. At December 31, 2005, atotal of 1,613,301 shares of common stock have been reserved for the exerciseof options outstanding under these assumed Plans. No options are available forfuture grant under the COR 1994 Plan, the COR 1998 Plan, the MBio 1997 Plan,the MPMx 1997 Plan and the LeukoSite 1993 Plan. At December 31, 2005, atotal of 3,220,590 shares are available for future grant under the COR 1991Plan.

Options granted to employees generally vest over afour-year period. Options granted to consultants and other nonemployeesgenerally vest over the period of service to the Company and the Companyrecords compensation expense equal to the fair value of these options. Thecontractual term of the Company’s stock options is typically ten years.

Thefollowing table presents the combined activity of the Company’s stock plans forthe years ended December 31, 2005, 2004 and 2003:

| ** **                               | ** ** | **2005**   | ** ** | **2004**                                | ** ** | **2003**   | ** ** |
|------------------------------------------|------------|------------|------------|-----------------------------------------|------------|------------|------------|
| ** **                               | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
| Outstanding at  January 1           |       | 35,705,922 |       |                                    | $          | 18.61      |       |   | 36,818,414 |   |   | $ | 20.21 |   |   | 43,847,975 |   |   | $ | 21.97 |   |   |
| Granted                                  |       | 10,947,553 |       |                                    | 8.55       |       |       | 9,082,479 |   |   | 14.70 |   |   | 9,789,968 |   |   | 11.12 |   |   |
| Exercised                                |       | (2,948,336 | )          |                                    | 6.45       |       |       | (3,043,834 | ) |   | 7.19 |   |   | (5,859,807 | ) |   | 6.41 |   |   |
| Canceled                                 |       | (8,755,850 | )          |                                    | 18.51      |       |       | (7,151,137 | ) |   | 26.72 |   |   | (10,959,722 | ) |   | 26.50 |   |   |
| Outstanding at  December 31         |       | 34,949,289 |       |                                    | 16.56      |       |       | 35,705,922 |   |   | 18.61 |   |   | 36,818,414 |   |   | 20.21 |   |   |
| Options exercisable at  December 31 |       | 22,366,634 |       |                                    | $          | 19.86      |       |   | 22,286,760 |   |   | $ | 21.41 |   |   | 22,829,678 |   |   | $ | 22.80 |   |   |

 

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**Millennium Pharmaceuticals, Inc. Notes to Consolidated Financial Statements December 31, 2005 (Continued)**

Thefollowing table presents weighted-average exercise price and lifeinformation about significant option groups outstanding at December 31,2005 for the above plans:

| ** **                              | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|-----------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| **Range of Exercise  Prices** | ** ** | ** **                   | ** ** | **Number**                   | ** ** | **Weighted-  Average  Remaining  Contractual Life  (Yrs.)** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Number** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
| $0.07 – $7.53                      |       | 3,883,549                    |       |                         | 4.31       |   |   |   | $ | 5.89 |   |   | 3,340,607 |   |   | $ | 5.72 |   |   |
| $7.81 – $8.27                      |       | 1,451,682                    |       |                         | 5.57       |   |   |   | $ | 8.09 |   |   | 1,195,026 |   |   | $ | 8.10 |   |   |
| $8.33 – $8.41                      |       | 7,271,761                    |       |                         | 9.16       |   |   |   | $ | 8.41 |   |   | 1,491,421 |   |   | $ | 8.41 |   |   |
| $8.42 – $12.09                     |       | 5,048,427                    |       |                         | 8.14       |   |   |   | $ | 10.64 |   |   | 2,261,272 |   |   | $ | 10.65 |   |   |
| $12.14 – $14.68                    |       | 3,778,970                    |       |                         | 7.75       |   |   |   | $ | 13.77 |   |   | 2,333,042 |   |   | $ | 13.84 |   |   |
| $14.73 – $17.77                    |       | 4,533,433                    |       |                         | 7.00       |   |   |   | $ | 16.69 |   |   | 3,051,781 |   |   | $ | 16.47 |   |   |
| $17.81 – $26.55                    |       | 3,874,480                    |       |                         | 6.16       |   |   |   | $ | 21.14 |   |   | 3,586,956 |   |   | $ | 21.32 |   |   |
| $26.70 – $44.00                    |       | 3,538,762                    |       |                         | 4.88       |   |   |   | $ | 37.46 |   |   | 3,538,304 |   |   | $ | 37.46 |   |   |
| $45.00 – $72.56                    |       | 1,474,383                    |       |                         | 4.43       |   |   |   | $ | 54.51 |   |   | 1,474,383 |   |   | $ | 54.51 |   |   |
| $73.03 – $73.03                    |       | 93,842                       |       |                         | 4.75       |   |   |   | $ | 73.03 |   |   | 93,842 |   |   | $ | 73.03 |   |   |
|                                    |       | 34,949,289                   |       |                         |       |   |   |   |   |   |   | 22,366,634 |   |   |   |   |   |
|                                         |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

At December 31, 2005,an aggregate of 60,707,656 shares of Common Stock were reserved for theexercise of stock options and warrants outstanding and for future grant.

**11. Income Taxes**

Thedifference between the Company’s “expected” tax provision (benefit), ascomputed by applying the U.S. federal corporate tax rate of 35% to (loss)before provision for income taxes, and actual tax is reconciled in thefollowing chart (in thousands):

| ** **                                                                      | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Loss before  provision for income taxes                                         |       | $        | (198,249   | )        | $          | (252,297 | )          | $ | (483,687 | ) |
| Expected tax  benefit at 35%                                                    |       | $        | (69,387    | )        | $          | (88,304  | )          | $ | (169,290 | ) |
| Change in  valuation allowance for deferred tax assets allocated to tax expense |       | 68,694   |       | 85,947   |       | 164,904  |       |
| Other permanent  items                                                          |       | 693      |       | 2,357    |       | 4,386    |       |
| Income tax provision                                                            |       | $        | —     |     | $          | —   |       | $ | — |   |

 

At December 31, 2005, the Company had unused netoperating loss carryforwards of approximately $1.4 billion available to reducefederal taxable income, expiring in 2006 through 2025 and $0.5 billionavailable to reduce state taxable income, expiring in 2006 through 2010. TheCompany also has federal and net state research tax credits of approximately$99.0 million available to offset federal and state income taxes, both of whichexpire beginning in 2006. Due to the degree of uncertainty related to theultimate use of the loss carryforwards and tax credits, the Company has fullyreserved these tax benefits.

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 

79

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**Millennium Pharmaceuticals, Inc. Notes to Consolidated Financial Statements December 31, 2005 (Continued)**

purposes. Significant components of the Company’sdeferred tax assets as of December 31 are as follows (in thousands):

| ** **                                         | ** ** | **2005**  | ** ** | **2004**  | ** ** | **2003** | ** ** |
|----------------------------------------------------|------------|-----------|------------|-----------|------------|----------|------------|
| Net operating  loss carryforwards                  |       | $         | 512,534    |      | $          | 523,255  |       | $ | 498,005 |   |
| Research and  development tax credit carryforwards |       | 99,038    |       | 94,413    |       | 84,912   |       |
| Capitalized  research costs                        |       | 376,664   |       | 349,970   |       | 275,303  |       |
| Property and  other intangible assets              |       | 72,122    |       | 71,469    |       | 71,458   |       |
| Deferred revenue                                   |       | 11,508    |       | 6,931     |       | 21,230   |       |
| Accrued  restructuring                             |       | 41,963    |       | 27,614    |       | 31,274   |       |
| Unrealized loss  on marketable securities          |       | 3,891     |       | 2,149     |       | —   |       |
| Other                                              |       | 16,720    |       | 22,132    |       | 15,740   |       |
| Total deferred  tax assets                         |       | 1,134,440 |       | 1,097,933 |       | 997,922  |       |
| Valuation  allowance                               |       | (988,705  | )          | (938,814  | )          | (824,185 | )          |
| Total deferred  tax assets                         |       | 145,735   |       | 159,119   |       | 173,737  |       |
| Deferred tax  liabilities:                         |       |      |       |      |       |     |       |
| Intangible assets                                  |       | (145,735  | )          | (159,119  | )          | (172,504 | )          |
| Unrealized (gain)  loss on marketable securities   |       | —    |       | —    |       | (1,233   | )          |
| Net deferred tax asset                             |       | $         | —     |      | $          | —   |       | $ | — |   |

 

The valuation allowance increased by$49.9 million during 2005 due primarily to a net increase in temporaryitems arising from timing differences of costs for financial accounting and taxpurposes, especially for capitalized research costs and amortized intangibleassets. Net operating loss carryforwards decreased as losses expiring duringthe year exceeded current net operating losses from operations and stockoptions exercises. The valuation allowance increased by $114.6 millionduring 2004 due primarily to the increase in net operating loss carryforwardsfrom operations and stock option exercises, as well as a net increase intemporary items arising from timing differences of costs for financial accountingand tax purposes especially for capitalized research costs and amortizedintangible assets. The deferred tax assets acquired from COR, LeukoSite andChemGenics are subject to review and possible adjustments by the InternalRevenue Service and may be limited due to the change in ownership provisions ofthe Internal Revenue Code.

Anysubsequently recognized tax benefits relating to the valuation allowance fordeferred tax assets as of December 31, 2005 would be allocated as follows(in thousands):

| Reported in the  statement of operations |   | $       | 739,003 |   |
|------------------------------------------|--------|---------|---------|--------|
| Reported as a  decrease to goodwill      |   | 16,411  |    |
| Reported in  additional paid-in capital  |   | 233,291 |    |
| Total valuation  allowance               |   | $       | 988,705 |   |

 

**12. Related PartyTransactions**

In November 2003, the Company sold specifiedassets, including intellectual property to Portola Pharmaceuticals, Inc. (“Portola”),a company founded and owned in part by a member of Millennium’s board ofdirectors. In exchange for these assets, the Company received Portola Series Apreferred convertible stock, representing less than a 5% ownership in Portola.The investment in Portola is 

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**Millennium Pharmaceuticals, Inc. Notes to Consolidated Financial Statements December 31, 2005 (Continued)**

accounted for using thecost method and is included in other long-term assets on the balance sheet at December 31,2005 and 2004, respectively. In addition, commencing in June 2004, Portolasub-leased specified research facilities of the Company in South San Francisco,CA. The Company believes these lease terms are comparable to those that wouldbe available from unaffiliated third parties. In August 2004, the Companyentered into an additional transaction with Portola to license to Portola theCompany’s Factor Xa inhibitor program in return for milestone and royaltypayments upon achievement of certain events. In December 2005, the Companyentered into a transaction with Portola to license to Portola the Company’sAggregometer system in exchange for cash and Portola Series B preferredstock, which combined with the previous stock issued, maintains the Company’sownership in Portola at less than 5%.

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**Millennium Pharmaceuticals, Inc. Notes to Consolidated Financial Statements December 31, 2005 (Continued)**

**13. Quarterly Financial Information (unaudited)**

| ** **                                       | ** ** | **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 goods sold                               |       |                                                                  | 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 |   |

 

| ** **                                       | ** ** | **First Quarter  Ended  March 31, 2004**               | ** ** | **Second Quarter  Ended  June 30, 2004** | ** ** | **Third Quarter  Ended  September 30, 2004** | ** ** | **Fourth Quarter  Ended  December 31, 2004** | ** ** |
|--------------------------------------------------|------------|-----------------------------------------------------------------------|------------|---------------------------------------------------------|------------|-------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                       | ** ** | **(In Thousands, Except Per Share Amounts)** | ** ** |
| Revenues:                                        |       |                                                                  |       |                                                    |       |                                                        |       |                                                        |       |   |   |   |   |
| Net product sales                                |       |                                                                  | $          | 29,648                                                  |       |                                                        | $          | 34,972                                                      |       |   | $ | 37,668 |   |   | $ | 40,764 |   |
| Co-promotion  revenue                            |       |                                                                  | 47,826     |                                                    |       | 48,651                                                      |       |                                                        | 62,557     |   |   | 47,230 |   |
| Revenue under strategic  alliances               |       |                                                                  | 15,091     |                                                    |       | 61,697                                                      |       |                                                        | 9,749      |   |   | 12,353 |   |
| Total revenues                                   |       |                                                                  | 92,565     |                                                    |       | 145,320                                                     |       |                                                        | 109,974    |   |   | 100,347 |   |
| Costs and expenses:                              |       |                                                                  |       |                                                    |       |                                                        |       |                                                        |       |   |   |   |   |
| Cost of goods sold                               |       |                                                                  | 15,771     |                                                    |       | 18,061                                                      |       |                                                        | 18,630     |   |   | 17,824 |   |
| Research and development                         |       |                                                                  | 96,278     |                                                    |       | 104,382                                                     |       |                                                        | 98,961     |   |   | 102,937 |   |
| Selling, general and  administrative             |       |                                                                  | 44,829     |                                                    |       | 46,768                                                      |       |                                                        | 45,903     |   |   | 59,144 |   |
| Restructuring                                    |       |                                                                  | 11,593     |                                                    |       | 25,191                                                      |       |                                                        | (414       | ) |   | 1,663 |   |
| Amortization of  intangibles                     |       |                                                                  | 8,378      |                                                    |       | 8,378                                                       |       |                                                        | 8,378      |   |   | 8,378 |   |
| Total costs and expenses                         |       |                                                                  | 176,849    |                                                    |       | 202,780                                                     |       |                                                        | 171,458    |   |   | 189,946 |   |
| Loss from operations                             |       |                                                                  | (84,284    | )                                                       |       | (57,460                                                     | )          |                                                        | (61,484    | ) |   | (89,599 | ) |
| Other income (expense),  net                     |       |                                                                  | 43,697     |                                                    |       | 3,551                                                       |       |                                                        | (1,610     | ) |   | (5,108 | ) |
| Net loss                                         |       |                                                                  | $          | (40,587                                                 | )          |                                                        | $          | (53,909                                                     | )          |   | $ | (63,094 | ) |   | $ | (94,707 | ) |
| **Amounts per common share:**                    |       |                                                                  |       |                                                    |       |                                                        |       |                                                        |       |   |   |   |   |
| Net loss per share,  basic and diluted           |       |                                                                  | $          | (0.13                                                   | )          |                                                        | $          | (0.18                                                       | )          |   | $ | (0.21 | ) |   | $ | (0.31 | ) |
| Weighted-average shares, basic and diluted  |       |                                                                  | 303,412    |                                                    |       | 304,714                                                     |       |                                                        | 305,202    |   |   | 305,977 |   |

 

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

There have been nodisagreements with our independent accountants on accounting and financialdisclosure matters.

**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 31,2005. 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, 2005, 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 that informationrequired to be disclosed by us in the reports we file or submit under theExchange Act is recorded, processed, summarized and reported within the timeperiods 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 controlover financial reporting may not prevent or detect misstatements. Therefore,even those systems determined to be effective can provide only reasonableassurance with respect to financial statement preparation and presentation.Projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

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Our management assessed the effectiveness of ourinternal control over financial reporting as of December 31, 2005. 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, 2005, 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**

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, 2005, 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,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

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In our opinion, management’s assessment thatMillennium Pharmaceuticals, Inc. maintained effective internal controlover financial reporting as of December 31, 2005, 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, 2005, 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, 2005 and 2004,and the related consolidated statements of operations, stockholders’ equity,and cash flows for each of the three years in the period ended December 31,2005 of Millennium Pharmaceuticals, Inc. and our report dated March 2,2006 expressed an unqualified opinion thereon.

|                                            | /s/ ERNST & YOUNG LLP |
|--------------------------------------------|--------------------------------|
| Boston,  Massachusetts  March 2, 2006 |                           |

 

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

No change in our internalcontrol over financial reporting occurred during the fiscal quarter ended December 31,2005 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 endedDecember 31, 2005, that was not reported.

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**PART III**

**Item 10.**                 DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT

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 2006 annual meeting of stockholders to be held on May 4,2006 as follows:

·       Informationabout our directors will appear in the section entitled “Proposal 1—Electionof 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 stock 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, Massachusetts 02139.

**Item 11.**                 EXECUTIVECOMPENSATION

We provide informationabout our executive compensation in the sections entitled “DirectorCompensation,” “Compensation of Executive Officers,” and “Compensation andTalent Committee Report on Executive Compensation” in the proxy statement wefile with the Securities and Exchange Commission in connection with thesolicitation of proxies for our 2006 annual meeting of stockholders to be heldon May 4, 2006. We incorporate herein by reference the informationcontained in those sections of our proxy statement.

**Item 12.**                 SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS

**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 2006 Annual Meeting ofStockholders to be held on May 4, 2006. We incorporate herein by referencethe information contained in that section of our proxy statement.

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**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 2006 Annual Meeting ofStockholders to be held on May 4, 2006. We incorporate herein by referencethe information contained in that section of our proxy statement.

**Item 13.**                 CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS

We provide the informationrequired by this item in the section entitled “Certain Relationships andRelated Transactions” in the proxy statement we file with the Securities andExchange Commission in connection with our solicitation of proxies for our 2006Annual Meeting of Stockholders to be held on May 4, 2006. We incorporateherein by reference the information contained in that section of our proxystatement.

**Item 14.**                 PRINCIPALACCOUNTANT FEES AND SERVICES

We provide the information required by this item inthe section entitled “Independent Registered Public Accounting Firm” in theproxy statement we file with the Securities and Exchange Commission inconnection with our solicitation of proxies for our 2006 Annual Meeting ofStockholders to be held on May 4, 2006. We incorporate herein by referencethe information contained in that section of our proxy statement.

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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                                 |       |                                           | 51         |   |   |
| Consolidated  Balance Sheets at December 31, 2005 and 2004                                                  |       |                                           | 52         |   |   |
| Consolidated Statements of Operations for the years  ended December 31, 2005, 2004, and  2003               |       |                                           | 53         |   |   |
| Consolidated Statements of Cash Flows for the years  ended December 31, 2005, 2004, and  2003               |       |                                           | 54         |   |   |
| Consolidated Statements of Stockholders’ Equity for  the years ended December 31, 2005,  2004 and 2003 |       |                                           | 55         |   |   |
| Notes to  Consolidated Financial Statements                                                                      |       |                                           | 56         |   |   |

 

**2.**                 ScheduleII—Valuation and 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 filed as apart of this Annual Report on Form 10-K.

*The following Millennium trademarksare used in this 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 AnnualReport on Form 10-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 8, 2006 |   | 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.

|                            | **Name** | ** **                                    | ** ** | ** **         | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** | ** ** |
|----------------------------|----------|-----------------------------------------------|------------|--------------------|-----------|------------|------------|------------|----------|------------|------------|
| /s/ DEBORAH DUNSIRE   |     | President and Chief Executive Officer;        |       | March 8, 2006 |      |
| Deborah Dunsire            |     | Director                                      |       |               |      |
|                       |     | (Principal  Executive Officer)                |       |               |      |
| /s/ MARSHA H. FANUCCI |     | Senior Vice President and Chief Financial     |       | March 8, 2006 |      |
| Marsha H. Fanucci          |     | Officer                                       |       |               |      |
|                       |     | (Principal  Financial and Accounting Officer) |       |               |      |
| /s/ ROBERT F. FRIEL        |     | Director                                      |       | March 8, 2006 |      |
| Robert F. Friel            |     |                                          |       |               |      |
| /s/ A. GRANT HEIDRICH, III |     | Director                                      |       | March 8, 2006 |      |
| A. Grant Heidrich, III     |     |                                          |       |               |      |
| /s/ CHARLES J. HOMCY       |     | Director                                      |       | March 8, 2006 |      |
| Charles J. Homcy           |     |                                          |       |               |      |
| /s/ RAJU S. KUCHERLAPATI   |     | Director                                      |       | March 8, 2006 |      |
| Raju S. Kucherlapati       |     |                                          |       |               |      |
| /s/ ERIC S. LANDER         |     | Director                                      |       | March 8, 2006 |      |
| Eric S. Lander             |     |                                          |       |               |      |

89

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| /s/ MARK  J. LEVIN  |   | Director |   | March 8, 2006 |   |
|---------------------|--------|----------|--------|--------------------|--------|
| Mark J. Levin       |   |     |   |               |   |
| /s/ NORMAN C. SELBY |   | Director |   | March 8, 2006 |   |
| Norman C. Selby     |   |     |   |               |   |
| /s/ KENNETH E. WEG  |   | Director |   | March 8, 2006 |   |
| Kenneth E. Weg      |   |     |   |               |   |
| /s/ ANTHONY H. WILD |   | Director |   | March 8, 2006 |   |
| Anthony H. Wild     |   |     |   |               |   |

 

 

90

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**EXHIBIT INDEX**

|                      | ** **   | ** **                                                                                                                                                                                                                                                             | ** ** | **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                  |         | Indenture, dated as of  January 20, 2000, between the Company and State Street Bank and Trust  Company, as Trustee relating to the 5.50% Convertible Subordinated Notes due  January 15, 2007 (including the form of debenture)                              |       | 10-K                          |       | 02/25/2000                         |       | 4.2 |   |   |
| 4.3                  |         | 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 |   |   |
| 4.4                  |         | (a) Indenture,  dated February 24, 2000, between the Company (as successor to COR  Therapeutics, Inc.) and U.S. Bank, N.A. (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 |   |   |
| 4.5                  |         | (a) Indenture,  dated June 11, 2001, between the Company (as successor to COR  Therapeutics, Inc.) and U.S. Bank, N.A. (as successor to Firstar Bank,  N.A.), as Trustee, relating to the 4.50% Convertible Senior Notes due  June 15, 2006             |       | (a)10-Q*                      |       | 08/03/2001                         |       | 4.1 |   |   |
|                      |              |                                                                                                                                                                                                                                                                        |            |                               |            |                                    |            |  |  |  |  |  |  |

91

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|        |         | (b) First  Supplemental Indenture, dated as of February 12, 2002                                                                                                                              |   | (b)S-3(333-82654)                    |   | 02/13/2002                                     |   | 4.2                          |   |   |
|--------|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|--------|------------------------------------------------|--------|------------------------------|--------|--------|
|   |         | (c) Second  Supplemental Indenture, dated as of February 12, 2002                                                                                                                             |   | (c)S-3(333-82654)                    |   | 02/13/2002                                     |   | 4.3                          |   |   |
|   |         | (d) Third  Supplemental Indenture, dated as of April 22, 2002                                                                                                                                 |   | (d)8-K                               |   | 04/23/2002                                     |   | 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 |   |   |
| 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     |   | 3/18/1996  3/24/1999  2/25/2000  3/15/2001     |   | 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                                                                                              |   |                                 |   |                                           |   |                         |   | X      |
| 10.6   |         | Agreement for Lease  dated February 9, 2001 among Granta Park Limited, MEPC Limited,  Millennium Pharmaceuticals Limited and the Company (including the form of  lease)                       |   | 10-K                                 |   | 3/15/2001                                      |   | 10.8                         |   |   |
|   | *** *** | ***Material  contracts—research and development/collaboration agreements***                                                                                                                   |   |
| 10.7   |         | (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                   |   |   |   |
|        |              |                                                                                                                                                                                                    |        |                                      |        |                                                |        |                              |        |        |  |  |  |

92

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|        |         | (b) Second  Amendment effective as of December 22, 2002 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 †                                           |   |                              |   |                                                       |   |                                     |   | X      |   |
|   | *** *** | ***Material  contracts—INTEGRILIN******® (eptifibatide) Injection***                                                                                                     |   |
| 10.8   |         | 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 |   |   |
| 10.9   |         | New Long Term Supply  Agreement between the Company and Solvay, Société Anonyme, dated  January 1, 2003†                                                            |   | 10-K                              |   | 03/07/2003                                                 |   | 10.9                                     |   |   |
| 10.10  |         | 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    |   |   |
| 10.11  |         | 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                                     |   |   |
|        |              |                                                                                                                                                                                         |        |                                   |        |                                                            |        |                                          |        |        |        |  |  |

93

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| 10.12 |   | Addendum to Collaboration Agreement among the  Company, Schering Corporation and Schering-Plough, Ltd. dated June 1,  2003†                                                                    |   | 10-K |   | 03/10/2004 |   | 10.9  |   |   |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------|--------|------------|--------|-------|--------|--------|
| 10.13 |   | 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 |   |   |
| 10.14 |   | 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  |   |   |
| 10.15 |   | 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 |   |   |
| 10.16 |   | 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 |   |   |
| 10.17 |   | 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  |   |   |
| 10.18 |   | Side Agreement dated  October 13, 2005 among the Company, Schering Corporation and  Schering-Plough Ltd.†                                                                                      |   | 10-Q |   | 11/08/2005 |   | 10.2  |   |   |
| 10.19 |   | Supply Agreement dated  September 1, 2005 by and between the Company and Schering Corporation†                                                                                                 |   | 10-Q |   | 11/08/2005 |   | 10.3  |   |   |
| 10.20 |   | (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  |   |   |

94

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|        |         | (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***                                                                                                                                                                                                                              |   |
| 10.21  |         | Patent License Agreement  between the Public Health Service and the Company dated December 2,  2002†                                                                                                                                                                                                   |   | 10-K   |   | 03/10/2004 |   | 10.11    |   |   |   |
| 10.22  |         | 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     |   |   |   |
|   | *** *** | ***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     |   |   |   |
| 10.24  |         | Registration Rights  Agreement among the Company (as successor to COR Therapeutics, Inc.) and  Goldman, Sachs & Co., Robertson Stephens, Inc., Credit Suisse  First Boston Corporation, CIBC World Markets Corp., and Needham &  Company, Inc., dated June 11, 2001        |   | 10-Q*  |   | 08/03/2001 |   | 10.2     |   |   |   |
| 10.25  |         | Registration Rights  Agreement dated January 20, 2000 between the Company and Goldman,  Sachs & Co., ING Barings LLC, FleetBoston Robertson Stephens Inc.,  and Credit Suisse First Boston Corporation                                                                                             |   | 10-K   |   | 02/25/2000 |   | 10.29    |   |   |   |
|   | *** *** | ***Material  contracts—management contracts and compensatory plans***                                                                                                                                                                                                                                       |   |
| 10.26  |         | Key Employee Change in  Control Severance Plan#                                                                                                                                                                                                                                                                  |   |   |   |       |   |     |   | X      |   |
|        |              |                                                                                                                                                                                                                                                                                                                  |        |        |        |            |        |          |        |        |  |  |  |

95

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| 10.27 |   | Non-Qualified Deferred  Compensation Plan#                                                                                             |   |             |   |       |   |   |   | X      |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|--------|------------|--------|--------|--------|--------|
| 10.28 |   | Form of Restricted  Stock Agreement#                                                                                              |   |             |   |       |   |   |   | X      |
| 10.29 |   | Description of Non-Employee  Director Compensation#                                                                                    |   |             |   |       |   |   |   | X      |
| 10.30 |   | Description of Success  Sharing Bonus Program of Millennium Pharmaceuticals, Inc.#                                                |   | 8-K              |   | 02/06/2006 |   | 10.1   |   |   |
| 10.31 |   | 2003 Employee Stock Purchase  Plan for Non-U.S. Subsidiaries and Affiliated Entities, as amended#                                      |   | 10-Q             |   | 11/08/2005 |   | 10.5   |   |   |
| 10.32 |   | 2000 Stock Incentive  Plan, as amended#                                                                                                |   | 10-K             |   | 03/07/2003 |   | 10.14  |   |   |
| 10.33 |   | Form of Terms of  Stock Option Granted Under 2000 Stock Incentive Plan#                                                           |   |             |   |       |   |   |   | X      |
| 10.34 |   | 1997 Equity Incentive  Plan, as amended#                                                                                               |   | 10-K             |   | 03/07/2003 |   | 10.15  |   |   |
| 10.35 |   | 1996 Equity Incentive  Plan, as amended#                                                                                               |   | 10-K             |   | 03/07/2003 |   | 10.16  |   |   |
| 10.36 |   | 1996 Director Option  Plan#                                                                                                            |   | S-1/A(333-02490) |   | 04/09/1996 |   | 10.1   |   |   |
| 10.37 |   | 1996 Employee Stock  Purchase Plan, as amended#                                                                                        |   | 10-Q             |   | 11/08/2005 |   | 10.4   |   |   |
| 10.38 |   | 1993 Incentive Stock  Plan, as amended#                                                                                                |   | 10-K             |   | 03/07/2003 |   | 10.20  |   |   |
| 10.39 |   | 1991 Equity Incentive  Plan, as amended, assumed by the Company as successor to COR  Therapeutics, Inc.#                          |   | 10-Q*            |   | 05/09/2001 |   | 10.2   |   |   |
| 10.40 |   | 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   |   |   |
| 10.41 |   | 1997 Equity Incentive  Plan, as amended, assumed by the Company as successor to Millennium  BioTherapeutics, Inc.#                |   | 10-K             |   | 03/07/2003 |   | 10.23  |   |   |
| 10.42 |   | 1997 Equity Incentive  Plan, as amended, assumed by the Company as successor to Millennium  Predictive Medicine, Inc.#            |   | 10-K             |   | 03/07/2003 |   | 10.24  |   |   |

96

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| 10.43  |         | 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  |   |   |
|--------|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------|--------|------------|--------|--------|--------|--------|
| 10.44  |         | 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   |   |   |
| 10.45  |         | Agreement dated  August 6, 2004 between the Company and Marsha H. Fanucci#                                                                   |   | 10-Q            |   | 11/09/2004 |   | 10.1   |   |   |
| 10.46  |         | Offer letter agreement  dated September 28, 2004 between the Company and Laurie B. Keating#                                                  |   | 10-Q            |   | 11/09/2004 |   | 10.3   |   |   |
| 10.47  |         | Offer Letter Agreement  dated June 23, 2005 between the Company and Deborah Dunsire#                                                         |   | 10-Q            |   | 08/08/2005 |   | 10.1   |   |   |
| 10.48  |         | Restricted Stock  Agreement dated July 18, 2005 between the Company and Deborah Dunsire#                                                     |   | 10-Q            |   | 08/08/2005 |   | 10.2   |   |   |
| 10.49  |         | Restricted Stock  Agreement dated July 18, 2005 between the Company and Deborah Dunsire#                                                     |   | 10-Q            |   | 08/08/2005 |   | 10.3   |   |   |
| 10.50  |         | Incentive Stock Option  Granted under 2000 Stock Incentive Plan to Deborah Dunsire on July 18,  2005#                                        |   | 10-Q            |   | 08/08/2005 |   | 10.4   |   |   |
| 10.51  |         | Nonstatutory Stock  Option Granted under 2000 Stock Incentive Plan to Deborah Dunsire on  July 18, 2005#                                     |   | 10-Q            |   | 08/08/2005 |   | 10.5   |   |   |
| 10.52  |         | Description of Deferred  Compensation Plan for Deborah Dunsire #                                                                                  |   | 10-Q            |   | 08/08/2005 |   | 10.6   |   |   |
| 10.53  |         | Offer letter agreement  dated January 23, 2006 between the Company and Christophe Bianchi#                                                   |   |            |   |       |   |   |   | X      |
| 10.54  |         | Offer letter agreement  dated February 6, 2006 between the Company and Stephen M. Gansler#                                                   |   |            |   |       |   |   |   | X      |
|   | *** *** | ***Additional Exhibits***                                                                                                                         |
| 21     |         | Subsidiaries of the Company                                                                                                                       |   |            |   |       |   |   |   | X      |

97

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| 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 |

----

#                 Managementcontract or compensatory plan or arrangement filed as an exhibit to this reportpursuant to Items 15(a) and 15(c) of Form 10-K

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

*                    CORTherapeutics, Inc. filing (Commission file no. 0-19290)

98

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**MillenniumPharmaceuticals, Inc.SCHEDULE II—VALUATIONAND 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, 2003 |       |                                               | $          | (1,671                                                      | )          |                             |       | $                                            | (2,254     | ) |   |   | $ | 2,425 |   |   |   | $ | (1,500 | ) |   |
| Year ended  December 31, 2004 |       |                                               | (1,500     | )                                                           |       |                             | (640       | )                                            |       |   | 640 |   |   |   | (1,500 | ) |   |
| Year ended  December 31, 2005 |       |                                               | (1,500     | )                                                           |       |                             | (2,004     | )                                            |       |   | 1,000 |   |   |   | (2,504 | ) |   |

 

99

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