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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q (Mark One)x
    
    QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended September 30, 2004ORo
    
    TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from  to
 Commission File Number: 000-50516  Eyetech Pharmaceuticals, Inc. (Exact Name of Registrant as Specified in its Charter)
 Delaware
    
    13-4104684(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)
 3 Times Square, 12th Floor
New York, New York 10036
(Address of Principal Executive Offices including Zip Code) (212) 824-3100
(Registrants Telephone Number, Including Area Code) No Change
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)  Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes o No x The number of shares of registrants common stock outstanding on November
8, 2004 was 41,553,904.




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TABLE OF CONTENTS Page No.PART I  FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    1Condensed Consolidated Balance Sheets as of
December 31, 2003 and September 30, 2004 (unaudited)
    
    
    1Condensed Consolidated Statements of Operations for the three and nine months
ended September 30, 2003 and September 30, 2004 (unaudited)
    
    
    2Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2003 and September 30, 2004 (unaudited)
    
    
    3Notes to Condensed Unaudited Consolidated Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    11Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    37Item 4. Controls and Procedures
    
    
    37PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    38Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
    
    
    38Item 3. Defaults Upon Senior Securities
    
    
    38Item 4. Submission of Matters to a Vote of Security Holders
    
    
    38Item 5. Other Information
    
    
    38Item 6. Exhibits and Reports on Form 8-K
    
    
    38Signatures
    
    
    40AMENDED AND RESTATED AMENDMENT TO EMPLOYMENT AGREEMENTAMENDED AND RESTATED AMENDMENT TO EMPLOYMENT AGREEMENTCERTIFICATIONCERTIFICATIONCERTIFICATIONCERTIFICATION




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PART I  FINANCIAL INFORMATION 
 ITEM 1. Financial Statements EYETECH PHARMACEUTICALS, INC. 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 December 31,
    
    September 30,2003
    
    2004(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    25,013,756
    
    
    $
    65,052,058Marketable securities
    
    
    106,360,073
    
    
    
    171,985,997Collaboration receivable
    
    
    2,562,000
    
    
    
    6,661,939Prepaid expenses and other current assets
    
    
    1,301,027
    
    
    
    4,549,696Total current assets
    
    
    135,236,856
    
    
    
    248,249,690Property and equipment, net
    
    
    5,867,582
    
    
    
    10,136,049Restricted cash
    
    
    5,623,865
    
    
    
    5,927,360Other assets
    
    
    2,751,375
    
    
    
    1,251,534Total assets
    
    $
    149,479,678
    
    
    $
    265,564,633LIABILITIES AND STOCKHOLDERS (DEFICIT) EQUITYCurrent liabilities:Accounts payable and accrued expenses
    
    $
    14,308,103
    
    
    $
    20,386,859Deferred revenue, current portion
    
    
    5,000,000
    
    
    
    6,501,210Capital lease obligations, current portion
    
    
    618,350
    
    
    
    651,835Deferred rent liability, current portion
    
    
    171,856
    
    
    
    533,802Total current liabilities
    
    
    20,098,309
    
    
    
    28,073,706Deferred revenue, net of current portion
    
    
    65,416,663
    
    
    
    77,961,548Capital lease obligations, net of current portion
    
    
    1,038,279
    
    
    
    546,812Other liabilities, net of current portion
    
    
    425,761
    
    
    
    3,401,622Redeemable convertible preferred stock  $.01 par
value; 29,093,695 shares authorized; 25,062,278 and
none issued and outstanding at December 31, 2003
and September 30, 2004, respectively, liquidation
preference of $252,053,310 as of December 31, 2003
    
    
    185,506,532
    
    
    
    Stockholders (deficit) equity:Convertible preferred stock  $.01 par value;
120,000 and none authorized, issued and
outstanding at December 31, 2003 and September 30,
2004, respectively; liquidation preference of
$225,000 as of December 31, 2003
    
    
    150,000
    
    
    
    Preferred stock $.01 par value; 5,000,000 shares
authorized, none issued and outstanding at
December 31, 2003 and September 30, 2004
    
    
    
    
    
    
    Common stock $.01 par value; 60,000,000 and
125,000,000 shares authorized; 4,527,736 issued
and 4,102,736 outstanding at December 31, 2003;
41,682,833 issued and 41,257,833 outstanding at
September 30, 2004
    
    
    45,277
    
    
    
    416,828Additional paid-in capital
    
    
    28,804,713
    
    
    
    377,009,231Loans to stockholders
    
    
    (430,666
    )
    
    
    Deferred compensation
    
    
    (13,956,265
    )
    
    
    (12,153,464
    )Treasury stock, at cost
    
    
    (255,000
    )
    
    
    (255,000
    )Accumulated other comprehensive income (loss)
    
    
    130,831
    
    
    
    (375,464
    )Accumulated deficit
    
    
    (137,494,756
    )
    
    
    (209,061,186
    )Total stockholders (deficit) equity
    
    
    (123,005,866
    )
    
    
    155,580,944Total liabilities and stockholders (deficit) equity
    
    $
    149,479,678
    
    
    $
    265,564,633
 See accompanying notes. 1




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EYETECH PHARMACEUTICALS, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
 Three Months Ended September 30,
    
    Nine Months Ended September 30,2003
    
    2004
    
    2003
    
    2004Collaboration revenue:License fees
    
    $
    1,250,000
    
    
    $
    1,407,613
    
    
    $
    3,333,336
    
    
    $
    3,907,615Reimbursement of developmentCosts
    
    
    11,143,313
    
    
    
    12,058,749
    
    
    
    27,567,899
    
    
    
    33,821,146Total collaboration revenue
    
    
    12,393,313
    
    
    
    13,466,362
    
    
    
    30,901,235
    
    
    
    37,728,761Operating expenses:Research and development
    
    
    20,891,869
    
    
    
    25,878,797
    
    
    
    52,229,844
    
    
    
    81,723,256Sales and marketing
    
    
    1,515,054
    
    
    
    9,342,614
    
    
    
    2,826,405
    
    
    
    19,319,524General and administrative
    
    
    3,333,324
    
    
    
    3,961,899
    
    
    
    4,778,756
    
    
    
    9,924,064Total operating expenses
    
    
    25,740,247
    
    
    
    39,183,310
    
    
    
    59,835,005
    
    
    
    110,966,844Loss from operations
    
    
    (13,346,934
    )
    
    
    (25,716,948
    )
    
    
    (28,933,769
    )
    
    
    (73,238,083
    )Interest income
    
    
    482,043
    
    
    
    1,032,586
    
    
    
    1,679,902
    
    
    
    2,604,405Interest expense
    
    
    (52,364
    )
    
    
    (32,613
    )
    
    
    (157,349
    )
    
    
    (116,740
    )Loss before income taxes
    
    
    (12,917,255
    )
    
    
    (24,716,974
    )
    
    
    (27,411,216
    )
    
    
    (70,750,418
    )Provision for income taxes
    
    
    (1,391,000
    )
    
    
    
    
    
    
    (1,391,000
    )
    
    
    Net loss
    
    
    (14,308,255
    )
    
    
    (24,716,974
    )
    
    
    (28,802,216
    )
    
    
    (70,750,418
    )Preferred stock accretion
    
    
    (2,275,575
    )
    
    
    
    
    
    
    (6,793,502
    )
    
    
    (816,012
    )Net loss attributable to
common stockholders
    
    $
    (16,583,830
    )
    
    $
    (24,716,974
    )
    
    $
    (35,595,718
    )
    
    $
    (71,566,430
    )Basic and diluted net loss
attributable to common
stockholders per share
    
    $
    (4.12
    )
    
    $
    (0.60
    )
    
    $
    (9.11
    )
    
    $
    (1.97
    )Weighted average shares
outstanding   basic and
diluted
    
    
    4,023,900
    
    
    
    40,912,422
    
    
    
    3,906,692
    
    
    
    36,294,140Pro forma basic and diluted
net loss attributable to
common stockholders per
share
    
    $
    (0.59
    )
    
    $
    (0.60
    )
    
    $
    (1.28
    )
    
    $
    (1.83
    )Weighted average shares
outstanding  pro forma
basic and diluted
    
    
    28,254,654
    
    
    
    40,912,422
    
    
    
    27,734,966
    
    
    
    39,059,380
 See accompanying notes. 2




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EYETECH PHARMACEUTICALS, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 Nine Months Ended September 30,2003
    
    2004Operating activitiesNet loss
    
    $
    (28,802,216
    )
    
    $
    (70,750,418
    )Adjustments to reconcile net loss to net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    624,918
    
    
    
    1,371,423Loss on disposal of assets
    
    
    31,267
    
    
    
    153,265Noncash stock-based compensation
    
    
    3,483,188
    
    
    
    6,020,780(Gain) loss on sale of marketable securities
    
    
    (58,625
    )
    
    
    28,415Changes in operating assets and liabilities:Collaboration receivable
    
    
    (5,404,068
    )
    
    
    (4,099,939
    )Prepaid expenses and other current assets
    
    
    (141,737
    )
    
    
    (2,770,319
    )Other assets
    
    
    (103,468
    )
    
    
    (201,382
    )Accounts payable and accrued expenses
    
    
    6,355,954
    
    
    
    6,579,720Deferred revenue
    
    
    71,666,664
    
    
    
    14,046,095Other liabilities
    
    
    (5,007
    )
    
    
    3,337,807Net cash provided by (used in) operating activities
    
    
    47,646,870
    
    
    
    (46,284,553
    )Investing activitiesPurchases of property and equipment
    
    
    (1,876,908
    )
    
    
    (5,793,154
    )Purchase of marketable securities
    
    
    (304,051,760
    )
    
    
    (2,954,753,624
    )Proceeds from sale of marketable securities
    
    
    268,434,380
    
    
    
    2,888,592,990(Increase) decrease in restricted cash
    
    
    41,775
    
    
    
    (303,495
    )Repayment of loan to stockholders
    
    
    750
    
    
    
    430,666Increase in prepaid expenses and other current assets
    
    
    (1,011,295
    )
    
    
    (478,350
    )Net cash (used in) investing activities
    
    
    (38,463,058
    )
    
    
    (72,304,967
    )Financing activitiesProceeds from issuance of common stock, net
    
    
    
    
    
    
    154,521,784Proceeds from exercise of stock options
    
    
    152,438
    
    
    
    1,923,592Proceeds from issuance of redeemable convertible preferred stock and warrants, net
    
    
    27,936,942
    
    
    
    2,640,427Repayment of capital lease obligations
    
    
    (414,863
    )
    
    
    (457,981
    )Net cash provided by financing activities
    
    
    27,674,517
    
    
    
    158,627,822Net increase in cash and cash equivalents
    
    
    36,858,329
    
    
    
    40,038,302Cash and cash equivalents at beginning of period
    
    
    5,791,845
    
    
    
    25,013,756Cash and cash equivalents at end of period
    
    $
    42,650,174
    
    
    $
    65,052,058Noncash financing and investing activitiesLoans to stockholders in connection with exercise of stock options and stock purchase
    
    $
    34,416
    
    
    $
    Supplemental disclosures of cash flow informationCash paid during the period for:Interest
    
    $
    157,349
    
    
    $
    116,740Income taxes paid
    
    $
    1,391,000
    
    
    $
    Issuance of redeemable preferred stock on conditional exercise of warrants
    
    $
    
    
    
    $
    500,964Conversion of redeemable and convertible preferred stock to common stock
    
    $
    
    
    
    $
    189,613,935Costs in connection with initial public
offering of common stock reclassified to additional paid in capital
    
    $
    
    
    
    $
    1,701,223
 See accompanying notes. 3




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EYETECH PHARMACEUTICALS, INC. 
 NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2004
 1. Organization and Description of Business Eyetech Pharmaceuticals, Inc., together with its wholly owned subsidiary
(Eyetech or the Company), is a biopharmaceutical company that specializes
in the development and commercialization of novel therapeutics to treat
diseases of the eye. The Companys initial focus is on diseases affecting the
back of the eye, particularly the retina. The Companys most advanced product
candidate is Macugen (pegaptanib sodium injection), which it is developing in
a collaboration with Pfizer Inc. (Pfizer) for the treatment of neovascular
age-related macular degeneration, known as AMD, diabetic macular edema, known
as DME, and retinal vein occlusion, known as RVO. In the second half of 2001,
the Company initiated two Phase 2/3 pivotal clinical trials of Macugen for the
treatment of AMD. Based on the results from the first year of these trials, the
Company filed a new drug application with the United States Food and Drug
Administration, or FDA, seeking marketing approval of Macugen for the treatment
of AMD. The Company is also currently conducting a Phase 2 clinical trial for
the use of Macugen in the treatment of DME and a Phase 2 clinical trial for use
in the treatment of RVO. The Company formed a wholly owned subsidiary in Ireland in 2002. There has been
no activity in this company since inception in 2002. The Company operates in a
single business segment. Prior to February 2003, the Company operated as a development-stage company and
did not generate any revenue. Effective February 2003, the Company exited the
development stage when its several concurrent agreements with Pfizer became
effective. On February 4, 2004, the Company successfully completed an initial public
offering of its common stock. The initial public offering consisted of the sale
of 6,500,000 shares of common stock at a price of $21.00 per share. As part of
the offering, the Company granted to the underwriters an option to purchase an
additional 975,000 shares within 30 days of the initial public offering to
cover over-allotments. This option was exercised in full in February 2004. Net
proceeds from the initial public offering after deducting underwriters
discounts and expenses were $142.9 million, including the exercise of the
over-allotment option. In addition, 476,190 shares of common stock were
purchased concurrently with the initial public offering by Pfizer for $10
million as part of its commitment under Pfizers collaboration with the
Company. The Company issued 5,073,435 warrants in connection with original issuances of
preferred stock from April 2000 to August 2002 and the in-licensing of Macugen
in April 2000. Prior to the closing of the Companys initial public offering,
1,511,381 shares of preferred stock were issued in connection with warrant
exercises providing $10.4 million in aggregate proceeds. Included in this
amount were 73,581 shares issued pursuant to conditional exercises received
during the quarter ended December 31, 2003 for proceeds of $0.5 million. An
additional 1,867,124 shares of preferred stock were issued on a cashless basis
to the holders of 2,728,721 preferred stock warrants, who surrendered 861,597
preferred stock warrants as payment for those shares. All outstanding shares of
preferred stock, including those shares issued in connection with warrant
exercises, were automatically converted to an equivalent number of shares of
common stock upon the closing of the Companys initial public offering.
Additionally, warrants to purchase 833,333 shares of Series B preferred stock
converted to an equal number of warrants to purchase an equal number of shares
of common stock upon the closing of the initial public offering. These warrants
were exercised during the quarter ended March 31, 2004 on a cashless basis,
resulting in the issuance of 680,509 shares of common stock in exchange for the
surrender of warrants to purchase 152,824 shares of common stock. No warrants
are outstanding at September 30, 2004. On June 2, 2004, the Company successfully completed a secondary public offering
of its common stock. All shares sold in the offering were sold by existing
stockholders, including employees, and employees through exercise of options.
The secondary public offering consisted of the sale of 3,860,000 shares of
common stock at a price of $38.50 per share. As part of the offering, the
selling stockholders granted to the underwriters an option to purchase an
additional 4




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579,000 shares within 30 days of the secondary public offering to
cover over-allotments. This option was exercised in full in June 2004. Shares
outstanding increased by 106,735 shares after the offering as a result of
option exercises, which provided proceeds to the Company of $0.1 million. The
costs associated with the offering, excluding underwriters discounts and
commissions payable by the selling stockholders, were approximately $1.0
million and have been paid by the Company. 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying condensed consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United
States for interim financial information and with the instructions to Form
10-Q. Accordingly, they do not include all the information and footnotes
required by U.S. generally accepted accounting principles for complete
financial statements. In the opinion of management, the accompanying financial
statements include all adjustments considered necessary for a fair presentation
of the Companys financial position, results of operations, and cash flows for
the periods presented. The results of operations for the three-month and nine month periods ended
September 30, 2004 are not necessarily indicative of the results that may be
expected for the entire fiscal year ending December 31, 2004. These condensed
consolidated financial statements should be read in conjunction with the
audited financial statements included in the Companys Annual Report on Form
10-K for the year ended December 31, 2003 filed with the Securities and
Exchange Commission. Use of Estimates The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Reclassification Certain reclassifications have been made to prior period information to conform
to the most recent 2004 presentation. Cash Equivalents The Company considers all highly-liquid investments with an original maturity
of three months or less to be cash equivalents. At September 30, 2004, the
Company had substantially all of its cash and cash equivalents in investment
grade obligations. Cash and cash equivalents at September 30, 2004 consisted
of $65.1 million in demand deposits, money market funds and money market
instruments. Cash and cash equivalents at December 31, 2003 consisted of $25.0
million in demand deposits, money market funds and money market instruments.
These investments are carried at cost, which approximates fair value. Marketable Securities Marketable securities are classified as available-for-sale and are carried at
market value with unrealized gains and losses reported as other comprehensive
income or loss, which is a separate component of stockholders (deficit)
equity. At September 30, 2004, the Company held available for sale securities
with fair value totaling $172.0 million. These available for sale securities
included various certificates of deposit, corporate debt securities and United
States government securities, $137.5 million of which mature within one year
and $34.5 million of which mature in between one year and up to two years. At
December 31, 2003, the Company held available for sale securities with fair
value totaling $106.4 million. These available for sale securities included
various certificates of deposit, corporate debt securities and United States
government securities, $80.5 million of which mature within one year and $25.9
million of which mature in between one year and up to two years. 5




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Restricted Cash Restricted cash collateralizes outstanding letters of credit associated with
the leases of the Companys office and laboratory facilities. The funds are
invested in certificates of deposit. Concentration of Credit Risk Financial instruments that potentially subject the Company to a concentration
of credit risk consist of cash equivalents and marketable securities. The
Company has established guidelines relating to diversification and maturities
that allow the Company to manage risk. Revenue Recognition In accordance with criteria outlined in Staff Accounting Bulletin No. 104,
Revenue Recognition in Financial Statements, and Emerging Issues Task Force
Issue 00-21, Revenue Arrangements with Multiple Deliverables (EITF 00-21),
the Company records non-refundable license fees associated with its
collaboration agreements with Pfizer as deferred license revenue when all
contractual obligations have been satisfied and the related amounts become due.
The deferred license revenue is recognized ratably over the Companys
performance period, which in the case of the Companys collaboration agreements
with Pfizer is the remaining term of the collaboration agreements. The Company
continually reviews such estimates, which could result in a change in the
amortization period and could impact the timing and the amount of revenue
recognized. At September 30, 2004, deferred license revenue was $82.0 million
with a remaining amortization period of 13 years and 4 months. The Company also receives reimbursement from Pfizer of Pfizers share of
the development cost of Macugen. In accordance with EITF Issue 01-14, Income
Statement Characterization of Reimbursements Received for Out-of-Pocket
Expenses Incurred, the Company reports the reimbursement as revenues because,
among other factors, the Company has the primary obligation to conduct all
clinical studies associated with Macugen and bears all the risk for selection
of and payment to vendors. The Company records expenses for the costs incurred
by Pfizer for which the Company is contractually liable. In addition, Pfizer
has agreed to pay a portion of the costs associated with the purchase of
certain equipment. When the Company receives payment from Pfizer for this
equipment the Company records the reimbursement as deferred equipment revenue
and amortizes it over the equipments expected useful life. At September 30,
2004, deferred equipment revenue was $2.5 million Upon commercial availability and launch of Macugen, the Company plans to report
revenue on a gross basis for sales in the United States. The Company has
determined that it is qualified as a principal under the criteria set forth in
EITF, Issue 99-19, Reporting Gross Revenue as a Principal vs. Net as an
Agent, based on the Companys responsibilities under the Companys contracts
with Pfizer to manage and assume responsibilities for obtaining FDA approvals
for Macugen, including the Companys separate contractual relationships and
responsibilities to its clinical development contractors and its interaction
with monitors and patients. Research and Development Costs Research and development costs are expensed as incurred. Inventory For all periods presented, the Company expensed all of its manufacturing costs
as research and development. Upon any regulatory approval of Macugen, the
Company will begin capitalizing all costs associated with the manufacturing of
Macugen. Stock-Based Compensation In December 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure  an amendment of FASB Statement No.
123 (SFAS 148). SFAS 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation from the intrinsic value-based method of 6




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accounting
prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25). In addition, SFAS 148 amends the disclosure
requirements of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS
123). The Company adopted the disclosure requirements of SFAS 148 effective
December 31, 2002. As allowed by SFAS 123, the Company has elected to continue
to apply the intrinsic value-based method of accounting prescribed in APB 25
and, accordingly, does not recognize compensation expense for stock option
grants made at an exercise price equal to or in excess of the fair market value
of the stock at the date of grant. Had compensation cost for the Companys outstanding employee stock options been
determined based on the fair value at the grant dates for those options
consistent with SFAS 123, the Companys net loss and basic and diluted net loss
per share, would have been changed to the following pro forma amounts: Three Months Ended September 30,
    
    Nine Months Ended September 30,2003
    
    2004
    
    2003
    
    2004Net loss attributable
to common
stockholders, as
reported
    
    $
    (16,583,830
    )
    
    $
    (24,716,974
    )
    
    $
    (35,595,718
    )
    
    $
    (71,566,430
    )Add: Non-cash employee
compensation as
reported
    
    
    1,716,943
    
    
    
    1,216,790
    
    
    
    2,778,392
    
    
    
    4,782,061Deduct: Total
stock-based employee
compensation expense
determined under fair
value based method for
all awards
    
    
    (896,498
    )
    
    
    (3,475,811
    )
    
    
    (1,272,842
    )
    
    
    (8,007,330
    )SFAS 123 pro forma loss
    
    $
    (15,763,385
    )
    
    $
    (26,975,995
    )
    
    $
    (34,090,168
    )
    
    $
    (74,791,699
    )Basic and diluted loss
attributable to common
stockholders per
share, as reported
    
    $
    (4.12
    )
    
    $
    (0.60
    )
    
    $
    (9.11
    )
    
    $
    (1.97
    )Basic and diluted loss
attributable to common
stockholders per
share, SFAS 123 pro
forma
    
    $
    (3.92
    )
    
    $
    (0.66
    )
    
    $
    (8.73
    )
    
    $
    (2.06
    )
 SFAS 123 pro forma information regarding net loss is required by SFAS 123, and
has been determined as if the Company had accounted for its stock-based
employee compensation under the fair value method prescribed in SFAS 123. The
fair value of the options prior to completion of the Companys initial public
offering was estimated at the date of grant using the minimum value pricing
model. Upon completion of the initial public offering in February 2004, the
Company began using the Black-Scholes model to estimate fair value. The
following assumptions were utilized for the calculations during each period: 7




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Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2003
    
    2004
    
    2003
    
    2004Risk-free interest rate
    
    
    2.87
    %
    
    
    4.5
    %
    
    
    2.8% - 2.87
    %
    
    
    3.9% - 4.75Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected life
    
    7 years
    
    5 years
    
    7 years
    
    5 yearsVolatility
    
    
    N/A
    
    
    
    76
    %
    
    
    N/A
    
    
    
    73
    %
 The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. Pro forma compensation related to stock option
grants is expensed over their respective vesting periods. The Company accounts for options issued to non-employees under SFAS 123 and
EITF Issue 96-18, Accounting for Equity Investments that are Issued to Other
than Employees for Acquiring or in Conjunction with Selling Goods or Services.
As such, the value of such unvested options is periodically re-measured and
income or expense is recognized during their vesting terms. In March 2004, the FASB issued an Exposure Draft of a proposed Statement of
Financial Accounting Standards entitled Share-Based Payment. This proposed
standard addresses accounting for stock-based compensation and would result in
stock-based compensation costs, including options, being recognized as an
expense in the financial statements. The proposed standard would eliminate the
ability to account for stock based compensation transactions using APB 25, and
generally would require that such transactions be accounted for using a fair
value based method. In October 2004, the FASB elected to delay the effective
date of this proposed standard. If the proposed standard is approved, it would
be applied prospectively to public entities for periods beginning after June
15, 2005. The Company is still evaluating the impact of the proposed standards
on our results of operations. Income Taxes The Company utilizes the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax basis of assets and
liabilities and are measured using enacted tax rates and laws that will be in
effect when the differences are expected to reverse. A valuation allowance is
provided when it is more likely than not that some portion or all of a deferred
tax asset will not be realized. Recently Issued Accounting Pronouncements In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities SFAS . 146). This standard addresses
financial accounting and reporting for costs associated with an exit or
disposal activities and requires companies to recognize costs associated with
exit or disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. This standard nullifies EITF Issue
94-3, Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring. This Standard is effective for exit or disposal activities
initiated after December 31, 2002. Adoption of this statement resulted in the
recognition of a loss of $1.5 million during the quarter ended June 30, 2004.
The loss was incurred because the Company has not subleased its previous
corporate offices at 500 Seventh Avenue in New York City and office equipment
associated with that facility. The Company reevaluates its assumptions relating
to this loss on a periodic basis and may be required to record additional
losses in the future. 3. Net Loss Per Share The Company computes net loss per share in accordance with SFAS No. 128,
Earnings per Share (SFAS 128). Under the provisions of SFAS 128, basic net
loss per common share (Basic EPS) is computed by dividing net loss by the
weighted-average number of common shares outstanding. Diluted net loss per
common share (Diluted EPS) is computed by dividing net loss by the
weighted-average number of common shares and dilutive common share 8




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##### Table of Contents



equivalents
then outstanding. Common equivalent shares consist of the incremental common
shares issuable upon the conversion of preferred stock, shares issuable upon
the exercise of stock options and the conversion of preferred stock upon the
exercise of warrants. Diluted EPS is identical to Basic EPS since common
equivalent shares are excluded from the calculation, as their effect is
anti-dilutive. The following table sets forth the computation of basic and diluted net
loss per share for the three-month and nine-month periods ended September 30,
2003 and 2004: Three Months Ended September 30,
    
    Nine Months Ended September 30,2003
    
    2004
    
    2003
    
    2004Numerator:Net Loss
    
    $
    (14,308,255
    )
    
    $
    (24,716,974
    )
    
    $
    (28,802,216
    )
    
    $
    (70,750,418
    )Preferred stock accretion
    
    
    (2,275,575
    )
    
    
    
    
    
    
    (6,793,502
    )
    
    
    (816,012
    )Numerator for basic and
diluted net loss
attributable to common
stockholders per share 
net loss attributable to
common stockholders
    
    $
    (16,583,830
    )
    
    $
    (24,716,974
    )
    
    $
    (35,595,718
    )
    
    $
    (71,566,430
    )Denominator:Denominator for basic
and dilutive net loss
attributable to common
stockholders per share 
weighted-average shares
    
    
    4,023,900
    
    
    
    40,912,422
    
    
    
    3,906,692
    
    
    
    36,294,140Basic and diluted net
loss attributable to
common stockholders per
share
    
    $
    (4.12
    )
    
    $
    (0.60
    )
    
    $
    (9.11
    )
    
    $
    (1.97
    )Denominator for
unaudited pro forma
basic and diluted net
loss attributable to
common stockholders per
share  weighted average
shares
    
    
    28,254,654
    
    
    
    40,912,422
    
    
    
    27,734,966
    
    
    
    39,059,380Unaudited pro forma
basic and diluted net
loss attributable to
common stockholders per
share
    
    $
    (0.59
    )
    
    $
    (0.60
    )
    
    $
    (1.28
    )
    
    $
    (1.83
    )
 Pro forma basic and diluted net loss per share is computed using the weighted
average number of common shares outstanding, including the pro forma effects of
the automatic conversion of all outstanding convertible preferred stock into
shares of the Companys common stock effective upon the closing of the
Companys initial public offering, as if such conversion had occurred at the
date of the original issuance. Accordingly, pro forma basic and diluted net
loss per common share has been calculated assuming the preferred stock was
converted as of the original date of issuance of the preferred stock. The following table shows dilutive common share equivalents outstanding on a
weighted average basis, which are not included in the above historical
calculations, as the effect of their inclusion is anti-dilutive during each
period: Three Months Ended September 30,
    
    Nine Months Ended September 30,2003
    
    2004
    
    2003
    
    2004Preferred Stock
    
    
    24,230,755
    
    
    
    
    
    
    
    23,828,274
    
    
    
    2,765,240Options
    
    
    4,372,094
    
    
    
    5,797,200
    
    
    
    3,927,274
    
    
    
    5,636,321Warrants
    
    
    4,982,940
    
    
    
    
    
    
    
    5,043,272
    
    
    
    612,92933,585,789
    
    
    
    5,797,200
    
    
    
    32,798,820
    
    
    
    9,014,490
 4. Comprehensive Loss Comprehensive losses are primarily comprised of net losses and unrealized gains
and losses on available for sales securities. Comprehensive losses for the nine
months ended September 30, 2003 and 2004 are detailed below. 9




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For the nine months endedSeptember 30, 2003
    
    September 30, 2004Net loss
    
    $
    (28,802,216
    )
    
    $
    (70,750,418
    )Unrealized gain (loss) on available for sale securities
    
    
    (72,235
    )
    
    
    (506,295
    )Comprehensive loss
    
    $
    (28,874,451
    )
    
    $
    (71,256,713
    )
 5. Pfizer Collaboration In December 2002, Pfizer and the Company entered into several concurrent
agreements to jointly develop and commercialize Macugen. Macugen will be co-promoted by the Company and Pfizer in the United States,
where the Company and Pfizer will each use its own ophthalmology sales force,
and the Company will maintain the inventory and record all United States
product sales. The Company and Pfizer will share in profits and losses from the
sale of Macugen products in the United States. Outside the United States,
Pfizer will market the product exclusively under a license, for which the
Company will receive royalty income. At commencement of the collaboration, which became effective February 3, 2003
when U.S. government approval was obtained, Pfizer made initial payments of
$100 million, which included the purchase of 2,747,253 shares of the Companys
Series D preferred stock for $24.7 million, net of issuance costs and a $75
million initial license fee which is being amortized over the expected term of
the agreement (estimated at 15 years). In addition, the Company agreed to sell
to Pfizer and Pfizer agreed to purchase from the Company, up to an additional
$25 million of the Companys capital stock at the then current market price
upon the completion of certain events. Pursuant to this agreement, concurrent
with the initial public offering, Pfizer purchased 476,190 shares of common
stock at $21.00 per share, resulting in gross proceeds to the Company of
approximately $10 million. Under the terms of the agreement, both parties will expend funds related to the
co-promotion and development of Macugen. Pfizer will generally fund a majority
of the ongoing development costs incurred pursuant to an agreed upon
development plan covering the development of Macugen for AMD, DME, RVO and
other agreed upon ophthalmic indications. In certain instances, the Company
will reimburse Pfizer for the Companys share of costs that Pfizer incurs. This
funding resulted in the recognition by the Company of $11.1 million in revenue
during the three month period ended September 30, 2003 and $12.1 million in
revenue during the three month period ended September 30, 2004. The Company
recognized $27.6 million in revenue for the nine month period ended September
30, 2003 and $33.8 million in revenue for the nine month period ended September
30, 2004. Additionally during the three and nine month periods ended September
30, 2004 the Company recognized $2.6 million and $5.1 million in research and
development and marketing expenses incurred by Pfizer on our behalf, under the
terms of the agreement. At September 30, 2004, the Company had a collaboration
receivable in the amount of $6.7 million. In addition to the initial license fee received from Pfizer, the Company has
also recorded $15.5 million in additional deferred license fees related to the
completion of certain regulatory events for a total of $90.5 million from
Pfizer through September 30, 2004. These additional deferred license fees will
be amortized over the remaining term of the agreement. For the three month
periods ended September 30, 2003 and 2004 amortization of license fees resulted
in the recognition of $1.3 million and $1.4 million in license fee revenue,
respectively. For the nine month periods ended September 30, 2003 and 2004
amortization of license fees resulted in the recognition of $3.3 million and
$3.9 million in license fee revenue, respectively. 6. Subsequent Event On November 11, 2004, the Company acquired from Transgenomic, Inc. most of the
assets of the companys oligonucleotide manufacturing facility in Boulder,
Colorado, for $3.0 million in cash and the assumption of certain operating
leases associated with acquired facilities. These acquired assets will be
recorded at their purchase price in November, 2004. 10




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ITEM 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations You should read the following discussion and analysis of our financial
condition and results of operations together with our condensed consolidated
financial statements and the related notes appearing elsewhere in this report.
Some of the information contained in this discussion and analysis or set forth
elsewhere in this report, including information with respect to our plans and
strategy for our business and related financing, includes forward-looking
statements that involve risks and uncertainties. You should review the Risk
Factors that May Affect Results section of this report for a discussion of
important factors that could cause actual results to differ materially from the
results described in or implied by the forward-looking statements contained in
the following discussion and analysis. Overview We are a biopharmaceutical company that specializes in the development and
commercialization of novel therapeutics to treat diseases of the eye. We
commenced operations in April 2000. Since our inception, we have generated
significant losses. As of September 30, 2004, we had an accumulated deficit of
$209.1 million. In December 2002, we entered into several concurrent agreements with
Pfizer to jointly develop and commercialize Macugen. As a result of our
collaboration with Pfizer, we ceased to be a development-stage company in
February 2003. As of September 30, 2004, all of our revenues have been
generated from amortization of the non-refundable, license payments that we
have received from Pfizer and reimbursement to us by Pfizer of a portion of the
ongoing development costs for Macugen. Under the terms of our collaboration agreements with Pfizer, Pfizer has
funded and is obligated to continue to fund a majority of the ongoing
development costs incurred pursuant to an agreed upon development plan covering
the development of Macugen for AMD, DME, RVO and other agreed upon ophthalmic
indications. We will co-promote Macugen with Pfizer in the United States
through Pfizers and our own sales forces, we will maintain the inventory and
record as revenue all United States product sales. We and Pfizer will share in
profits and losses from the sale of Macugen in the United States. Outside the
United States, Pfizer will market the product under an exclusive license, for
which we will receive royalty payments based on net sales. Pfizer has made the following payments and investments to date under our
collaboration:  
    
    In February 2003, upon effectiveness of the collaboration
arrangements, Pfizer paid us $100 million, consisting of a $75
million initial license fee and a $25 million equity investment;
    
    In February 2004, Pfizer purchased an additional $10
million of our common stock at the closing of our initial public
offering;
    
    In August 2004, Pfizer paid us $10 million after the
acceptance for review by the FDA of our new drug application for
the use of Macugen in the treatment of neovascular AMD; and
    
    In October 2004, Pfizer paid us $5.5 million after the
European Medicines Agencys acceptance of the filing of Pfizers
marketing authorization application for Macugen for use in the
treatment of neovascular AMD. In the future, Pfizer is obligated to make the following investments and
payments under the following circumstances:  
    
    Pfizer is potentially obligated to purchase up to an
additional $15 million of our common stock in specified
circumstances;
    
    Pfizer is potentially obligated to pay us up to $180
million in additional payments based on the achievement of
additional worldwide regulatory submissions and approvals; and
    
    Pfizer is potentially obligated to pay us up to $450
million in payments based upon attainment of agreed upon sales
levels of Macugen. We can not sell Macugen in the United States unless we receive marketing
approval from the FDA. In June 2004, we and Pfizer completed the filing of our
NDA with the FDA seeking marketing approval for Macugen in the 11




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treatment of
neovascular AMD. Macugen has been granted priority review status from the FDA
for use in the treatment of neovascular AMD and our NDA has been filed and is
being reviewed as a rolling submission. On August 27, 2004, the FDAs
Dermatologic and Ophthalmic Drugs Advisory Committee held a public meeting to
review our NDA for Macugen. The FDA is expected to act on their review of our
NDA by or on December 17, 2004. We are currently in active dialogue with the FDA regarding our NDA for
Macugen. Our NDA consists of three components, pre-clinical, clinical, and
chemistry, manufacturing and controls. We received a review letter from the
FDA with respect to the preclinical and clinical components of our NDA. We
believe we have addressed all items communicated to us to date on such
components that we believe will have an impact on approval, but we can not
assure you that the FDA shares our view. Administration of a drug, such as Macugen,
via intravitreal injection is a new method for the potentially long-term
treatment of chronic eye disease. As a result, we are in active dialogue with
the FDA in connection with the chemistry, manufacturing and controls component
of our NDA to develop appropriate standards for the safety, manufacturing,
packaging and distribution of drugs using this mode of administration. For
example, we are in active dialogue with the FDA to establish acceptable limits
for sub-visible particulate matter appropriate for ophthalmologic treatments
administered as ultra low-volume injectables. We are also in active dialogue
with the FDA to agree an appropriate control environment for the outer
packaging we propose for commercial sale. We also need to complete process
validation on the finished product in the packaging we propose for commercial
sale. It may be time consuming or expensive for us to comply with any new
standards. Such standards could increase our commercialization costs, possibly
materially, delay our obtaining marketing approval for Macugen, or even
preclude us from obtaining such approval. The FDA may grant marketing approval
but may not grant such approval by or on December 17, 2004. Even if we are
granted marketing approval for Macugen, if we are not successful in
manufacturing Macugen at commercial scale according to applicable
specifications, are not successful in commercializing Macugen, or are
significantly delayed in doing either, our business will be materially harmed. Assuming we receive approval to market Macugen for use in the treatment of
neovascular AMD in the fourth quarter of 2004, we plan to begin selling Macugen
in the United States for the treatment of neovascular AMD in the first half of
2005. Upon commercial launch, we intend to sell Macugen to a limited number of
specialty distributors who will in turn sell Macugen to physicians, physician
group practices, hospitals, federal government buying groups and clinics. Outside the United States, Pfizer is responsible for seeking regulatory
approvals of Macugen. In July 2004, the Pfizer-led bridging trial for the use
of Macugen in the treatment of neovascular AMD began in Japan. On September
20, 2004, we announced the completion of the filing of the new drug application
for Macugen in Canada, where the application has been given priority review and
that the European Medicines Agency accepted the filing of the marketing
authorization application for Macugen for the use in the treatment of
neovascular AMD. Our NDA for neovascular AMD is based on the results from the first year of
our ongoing Phase 2/3 pivotal clinical trials for the use of Macugen in the
treatment of neovascular AMD. On October 21, 2004, we announced positive data
from the second year of these clinical trials. These data were previously
submitted to the FDA. These two-year data showed that Macugens treatment
effect extends for two years in patients with neovascular AMD. An
additional treatment
benefit was also seen for patients who received Macugen for two years compared
to those receiving only one year of therapy. The safety profile of the second
year data was similar to that of the first year with no new safety concerns
identified. We expect to continue to invest significant resources on the development
of Macugen and other product candidates. We expect to incur significantly
greater commercialization costs as we continue to prepare for the commercial
launch of Macugen. We also plan to continue to invest in research for
additional applications of Macugen and to develop new drugs and drug delivery
technologies and to build the appropriate infrastructure to support our
business. In May 2004, we entered into a lease for new research and development
space in Lexington, Massachusetts, that will increase our annual facilities
expenses by $1.6 million. On November 11, 2004, we acquired most of the assets
related to an oligonucleotide manufacturing facility in Boulder, Colorado,
which we plan to develop by investing in appropriate infrastructure to prepare
it as a second-source for commercial scale production of the active
pharmaceutical ingredient in Macugen. Additionally, we plan to continue to
evaluate possible acquisitions or licenses of rights to potential new drugs,
drug targets and drug delivery technologies that would fit within our growth
strategy. Accordingly, we will need to generate significant revenues to achieve
and then maintain profitability. 12




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Most of our expenditures to date have been for research and development
activities and general and administrative expenses. Research and development
expenses represent costs incurred for product acquisition, clinical trials and
activities relating to regulatory filings and manufacturing development
efforts. We outsource our foreign clinical trials and our global manufacturing
development activities to third parties to maximize efficiency and minimize our
internal overhead. We expense our research and development costs as they are
incurred. Certain reclassifications have been made to prior period information to
conform to the most recent 2004 presentation. Business Strategy Our mission is to develop and commercialize novel therapeutics to treat
diseases of the eye, with an initial focus on diseases of the back of the eye.
The key elements of our strategy are to:  
    
    Maximize Commercial Potential of Macugen.We are devoting most of our
efforts to preparing for the commercial launch of Macugen for the
treatment of neovascular AMD and completing the clinical and regulatory
development of Macugen. We are also exploring the application of Macugen
to a range of additional ophthalmic indications, including DME and RVO.
DME is a serious disease of the retina that can lead to severe vision
loss and blindness. The FDA has given fast track designation to
Macugen for the treatment of DME. In the United States, there are
approximately 500,000 people suffering from DME, with approximately
75,000 new cases each year. RVO is a condition that is characterized by
abnormal blood vessel growth and blood vessel leakage.
    
    Develop Alternative Drug Delivery Technologies.We are working to
develop and/or acquire alternative technologies for the administration
of drugs to the back of the eye that could facilitate the use of Macugen
and other drugs as chronic or even preventative treatments for various
back of the eye diseases, including neovascular AMD and DME.
    
    Identify New Ophthalmic Products.We have established an internal
research program with the goal of discovering and validating new
ophthalmic disease targets and developing novel therapies for the
treatment of ophthalmic diseases. We are also seeking to license or
otherwise acquire the rights to potential new drugs and drug targets for
the treatment of ophthalmic disease. For example, in April 2004, we
announced an agreement with Archemix Corp. to collaborate on the
research and development of aptamers for ophthalmic indications.
    
    Explore Additional Non-Ophthalmic Indications for Macugen.We are
using our preclinical research expertise to evaluate whether the
anti-VEGF characteristics of Macugen may make it an attractive local
treatment for cancer. In order to realize these objectives, we must, among other things, obtain
marketing approval for Macugen from non-U.S. regulatory authorities and
internally develop, license or otherwise acquire alternative drug delivery
technologies and new therapies for the treatment of ophthalmic disease. We anticipate that our revenues for the foreseeable future will result
primarily from sales in the United States of Macugen for the treatment of
neovascular AMD, if approved, and the continued amortization of the license
fees and the reimbursement of a portion of our ongoing development costs for
Macugen. Critical Accounting Policies and Significant Judgments and Estimates Our managements discussion and analysis of our financial condition and
results of operations are based on our condensed consolidated financial
statements, which have been prepared in accordance with U.S. generally accepted
accounting principles. The preparation of these financial statements requires
us to make estimates and assumptions that affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements as well as the reported revenues and expenses
during the reporting periods. On an ongoing basis, we evaluate our estimates
and judgments related to revenue recognition. We base our estimates on
historical experience 13




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and on various other factors that we believe are
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. While our significant accounting policies are more fully described in Note
2 to our consolidated financial statements appearing in the Companys Annual
Report on Form 10-K for the year ended December 31, 2003 filed with the
Securities and Exchange Commission, we believe that the following accounting
policies relating to revenue recognition, manufacturing development and
inventory and stock-based compensation charges are most critical to aid you in
fully understanding and evaluating our reported financial results. Revenue Recognition In connection with our collaboration with Pfizer, we are entitled to
receive non-refundable license payments from Pfizer based on the achievement of
certain events. We record deferred license revenue when all the contractual
obligations related to a non-refundable payment have been satisfied. As of
September 30, 2004, we have recorded a total of $90.5 million ($15.5 million in
the quarter ended September 30, 2004) in deferred license fee revenue from
Pfizer. We are amortizing deferred license revenue ratably over our
performance period. Our performance period with respect to our collaboration
agreement is the effective life of the agreement which was 15 years commencing
in December 2002. Management estimates the performance period based upon
critical factors contained within the agreement along with other relevant facts
and circumstances. We periodically review our estimates, which could result in
a change in the deferral period, which could impact the timing and the amount
of revenue recognized. We also receive reimbursement from Pfizer of Pfizers share of the
development cost of Macugen. In accordance with EITF Issue 01-14, Income
Statement Characterization of Reimbursements Received for Out-of-Pocket
Expenses Incurred, we report the reimbursement as revenues because among other
factors, we have the primary obligation to conduct all clinical studies
associated with Macugen and bear risk for selection of and payment to vendors.
We record as expense the costs incurred by Pfizer for which we are
contractually liable to Pfizer. In future periods we may be liable for costs
incurred that do not meet the criteria to be classified as revenue. We would
record these costs as expenses, and we may be required to reimburse Pfizer. We receive reimbursement from Pfizer for a portion of the costs associated
with the purchase of certain equipment related to the development of Macugen.
When we receive payment from Pfizer for this we record the reimbursement as
deferred equipment revenue and amortize it over the equipments expected useful
life. Upon commercial availability and launch of Macugen, we plan to report
revenue on a gross basis for sales in the United States. We have determined
that our responsibilities under our contracts with Pfizer to manage and assume
responsibilities for obtaining FDA approvals for Macugen, including our
separate contractual relationships and responsibilities to our clinical
development contractors and our interaction with monitors and patients qualify
us as principal under the criteria set forth in EITF, Issue 99-19, Reporting
Gross Revenue as a Principal vs. Net as an Agent. During the nine months ended September 30, 2003 and 2004, we recognized
$2.1 million and $2.5 million of license fee revenue, respectively. At
September 30, 2004, we classified as current deferred revenue $6.5 million
related to payments for licenses and equipment. The balance of $78.0 million is
classified as long-term deferred revenue on our balance sheet with a remaining
amortization period of 13 years and 4 months. Manufacturing Development and Inventory For all periods presented we expensed all of our manufacturing costs as
research and development. Upon any regulatory approval of Macugen, we will
begin capitalizing all costs associated with the manufacturing of Macugen. Stock-based Compensation Stock-based compensation charges represent the difference between the
exercise price of options and restricted stock granted to employees and
directors and the fair value of our common stock on the date of grant for
financial statement 14




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##### Table of Contents



purposes in accordance with Accounting Principles Board
Opinion No. 25 and its related interpretations. We recognize this compensation
charge over the vesting periods of the shares purchasable upon exercise of
options or the lapsing of restrictions on restricted shares granted. We recorded deferred stock-based compensation related to stock options and
restricted stock granted to employees and directors through September 30, 2004
of $12.2 million, net of related amortization expense of $4.0 million for the
nine months ended September 30, 2004. We expect to amortize deferred
stock-based compensation with respect to stock options and restricted stock
awards granted through September 30, 2004 in future periods, including $1.1
million during the remainder of 2004, $4.4 million during 2005, $4.2 million
during 2006 and $2.5 million during 2007. Accounting Pronouncements In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This standard addresses financial
accounting and reporting for costs associated with an exit or disposal
activities and requires companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. This standard nullifies EITF Issue
94-3, Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring. This Standard is effective for exit or disposal activities
initiated after December 31, 2002. Our adoption of this statement resulted in
the recognition of a loss of $1.5 million during the quarter ended September
30, 2004. The loss was incurred because we have not subleased our previous
corporate offices at 500 Seventh Avenue in New York City and office equipment
associated with that facility. We reevaluate our assumptions relating to this
loss on a periodic basis and may be required to record additional losses in the
future. Results of Operations Quarters ended September 30, 2003 and 2004 The following table identifies our collaboration revenue for each of our
major categories, for the three months ended September 30, 2003 and 2004. Revenue Three Months Ended September 30,2003
    
    2004Revenue from license fees
    
    $
    1,250,000
    
    
    $
    1,407,613Revenue from reimbursement of
research and development costs
    
    $
    11,143,313
    
    
    $
    12,058,749Total
    
    $
    12,393,313
    
    
    $
    13,466,362
 Revenue.Collaboration revenue increased 9% from $12.4 million for the
quarter ended September 30, 2003 to $13.5 million for the quarter ended
September 30, 2004. In the current quarter, we recorded an additional $15.5
million of deferred license fee revenue from Pfizer due to the acceptance for
review by the FDA of our new drug application for the use of Macugen in the
treatment of neovascular AMD in August 2004 and the European Medicines Agencys
acceptance of the filing of Pfizers marketing authorization application for
Macugen in September 2004. These payments resulted in total deferred revenue at
September 30, 2004 of $84.5 million. Of this amount, $6.5 million is
considered current, with the balance of $78 million classified as long-term.
These license fees will be recognized ratably over the remaining period of the
collaboration, currently estimated to be 13 years and 4 months. Revenue from
license fees increased by $0.1 million while revenue from reimbursement of
development costs increased by $1.0 million. Reimbursement of development costs
increased due to the continued refinement and expansion of our manufacturing
capabilities in preparation for commercial launch. 15




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Research and Development Expenses.Research and development expenses
increased 24% from $20.9 million for the quarter ended September 30, 2003 to
$25.9 million for the quarter ended September 30, 2004. The increase in
research and development expenses of $5.0 million was attributable to an
increase of $3.9 million relating to the continued development of manufacturing
capabilities and related costs, $3.0 million related to milestone payments made
to Gilead Sciences, Inc. in connection with the filing of the Macugen marketing
authorization application and an increase of $2.9 million relating to the
continued expansion of research and development resources including
additional staffing, raw materials and other related costs. These increases
were partially offset by reductions in the cost of clinical trials for the use
of Macugen in the treatment of AMD and DME of $3.9 million. We anticipate that
research and development expenses will continue to increase as we further advance Macugen to
commercialization and begin to devote additional resources to other research
and development projects. Sales and Marketing Expenses.Sales and marketing expenses increased from
$1.5 million for the quarter ended September 30, 2003 to $9.3 million for the
quarter ended September 30, 2004. The increase in sales and marketing expenses
of $7.8 million was primarily related to $3.1 million in higher personnel
expenses, relating to the hiring and training of the sales field force, $4.7
million of costs for pre-launch activities, which includes $2.3 million
representing our share of marketing expenses incurred by Pfizer. As of
September 30, 2004, we had a trained sales force consisting of 49 Retina
Account Managers and Sales Directors. General and Administrative Expenses.General and administrative expenses
increased from $3.3 million for the quarter ended September 30, 2003 to $4.0
million for the quarter ended September 30, 2004. Interest Income.Interest income increased from $0.5 million in the
quarter ended September 30, 2003 to $1.0 million in the quarter ended September
30, 2004 as a result of higher levels of cash and marketable securities
available for investment during 2004 compared to 2003. Net LossNet loss attributable to common stockholders increased from
$16.6 million in the third quarter of 2003 to $24.7 million for the same period
in 2004. The increase in net loss is primarily a result of $4.7 million of
costs incurred for pre-launch activities, $3.9 million of costs incurred for
the continued development of manufacturing capabilities and related costs and
includes $1.1 million of non-cash stock compensation expense. Basic and diluted
net loss per common share in the third quarter was $0.60 in 2004, compared to
$4.12 for the same period in 2003. Pro forma basic and diluted loss per common
share in the third quarter for 2003 was $0.59. The pro forma basic and diluted
loss per common share gives effect to the automatic conversion of our
outstanding convertible preferred stock into shares of common stock upon
completion of our initial public offering in February 2004. Nine months ended September 30, 2003 and 2004 The following table identifies our collaboration revenue for each of our
major categories, for the nine months ended September 30, 2003 and 2004. Revenue Nine Months Ended September 30,2003
    
    2004Revenue from license fees
    
    $
    3,333,336
    
    
    $
    3,907,615Revenue from reimbursement of
research and development costs
    
    $
    27,567,899
    
    
    $
    33,821,146Total
    
    $
    30,901,235
    
    
    $
    37,728,761
 Revenue.Collaboration revenue increased 22% from $30.9 million for the
nine months ended September 30, 2003 to $37.7 million for the nine months ended
September 30, 2004. Revenue from license fees increased by $0.6 million due to
amortization of higher deferred revenue balances and an additional month of
amortization in 2004 versus 2003. Revenue from reimbursement of research and
development costs increased by $6.2 million. This increase was primarily due
to increased reimbursement of expenditures related to preparations of our
manufacturing capabilities for the 16




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expected commercial launch of Macugen. Research and Development Expenses.Research and development expenses
increased from $52.2 million for the nine months ended September 30, 2003 to
$81.7 million for the nine months ended September 30, 2004. The increase in
research and development expenses of $29.5 million was attributable to an
increase of $16.7 million related to the continued development of manufacturing
capabilities and related costs, including additional staffing, pre-approval
readiness, raw materials and other related costs, an increase of $12.8 million
related to milestone payments incurred in connection with the filing of our NDA
in the U.S. for Macugen, the marketing approval application filed with the
European Medicines Agency and payments in connection with the licensing of
technologies from third parties, primarily Archemix, and an increase of $2.9 million relating to additional research and
development resources. These increases in cost were partially offset by a $0.9
million reduction in expenditures related to our clinical trials for the use of
Macugen in the treatment of AMD and DME and a $2.0 million reduction in
expenditures associated with the development of drug delivery technologies and
related costs. We anticipate that research and development expenses will
continue to increase as we further advance Macugen to commercialization and
begin to devote additional resources to other research and development
projects. Sales and Marketing Expenses.Sales and marketing expenses increased from
$2.8 million for the nine months ended September 30, 2003 to $19.3 million for
the nine months ended September 30, 2004. The increase in sales and marketing
expenses of $16.5 million was primarily related to $8.6 million in higher
personnel expenses, relating to the hiring and training of the sales field
force, and $7.9 million of marketing related costs for pre-launch activities
which also includes $4.4 million of expenses representing our share of
marketing expenses incurred by Pfizer to prepare for the commercial launch of
Macugen. General and Administrative Expenses.General and administrative expenses
increased from $4.8 million for the nine months ended September 30, 2003 to
$9.9 million for the nine months ended September 30, 2004. The increase of $5.1
million resulted from a $2.8 million increase in expenses related to facilities
and infrastructure to support our growth and our Pfizer collaboration, a $1.5
million charge related to our former New York headquarters and a $0.8 million
increase related to the cost of being a public company comprised primarily of
professional services fees and Directors and Officers liability insurance. Interest Income.Interest income increased from $1.6 million in the nine
months ended September 30, 2003 to $2.6 million in the nine months ended
September 30, 2004 as a result of higher levels of cash and marketable
securities available for investment during 2004 compared to 2003. Net LossNet loss attributable to common stockholders increased from
$35.6 million for the nine-month period ended September 30, 2003 to $71.6
million in the same period of 2004. The increase of $36.0 million in net loss
is primarily a result of $16.7 million of costs incurred for the continued
development of manufacturing capabilities, $12.8 million of costs incurred in
connection milestone and license payments and includes $6.0 million of non-cash
stock compensation expense. Basic and diluted net loss per common share for the
nine-month period ended September 30, was $1.97 in 2004, compared to $9.11 for
the same period in 2003. Pro forma basic and diluted loss per common share for
the nine-month period ended September 30, was $1.83 in 2004, compared to $1.28
for the same period in 2003. The pro forma basic and diluted loss per common
share gives effect to the automatic conversion of our outstanding convertible
preferred stock into shares of common stock upon completion of our initial
public offering in February 2004. Liquidity and Capital Resources Sources of Liquidity Since our inception, we have financed our operations through public sales
and private placements of our capital stock, the initial and subsequent license
fee payments that we received from Pfizer as part of our Macugen collaboration,
reimbursement of development costs from Pfizer and the receipt of interest
income. Through September 30, 2004, we have received net proceeds of $334.1
million from the issuance of shares of common stock, convertible preferred
stock and warrants. In connection with our initial public offering, all shares
of preferred stock and related warrants were converted to common stock prior to
September 30, 2004. We have also received net proceeds from capital equipment
financing of $2.4 million. The table below summarizes our initial issuances of
convertible preferred stock and warrants. 17




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Number of
    
    Number of Shares
    
    ApproximateSeries
    
    Date
    
    Shares
    
    Underlying Warrants
    
    Gross Proceeds(In thousands)A
    
    March 2000
    
    
    120,000
    
    
    
    
    
    
    $
    150B
    
    April 2000
    
    
    5,766,332
    
    
    
    1,142,902
    
    
    
    34,600B
    
    January 2001
    
    
    20,666
    
    
    
    
    
    
    
    124C-1
    
    July-August 2001
    
    
    7,964,229
    
    
    
    1,592,846
    
    
    
    54,200C-2
    
    August 2002
    
    
    7,521,777
    
    
    
    1,504,354
    
    
    
    54,200D
    
    February 2003
    
    
    2,747,253
    
    
    
    
    
    
    
    25,000
 On February 4, 2004, we completed an initial public offering of our common
stock of 6,500,000 shares at a price of $21.00 per share. As part of the
offering, we granted to the underwriters an option to purchase an additional
975,000 shares within 30 days of the initial public offering to cover
over-allotments. This option was exercised in February 2004. Net proceeds from
our initial public offering after deducting underwriters discounts and
expenses were $142.9 million, including the exercise of the over-allotment
option. In addition, 476,190 shares of common stock were purchased
concurrently with the initial public offering by Pfizer for $10 million as part
of its commitment under our collaboration with Pfizer. We issued 5,073,435 warrants in connection with original issuances of
preferred stock from April 2000 to August 2002 and the in-licensing of Macugen
in April 2000. Prior to the closing of our initial public offering, 1,511,381
shares of preferred stock were issued in connection with warrant exercises
providing $10.4 million in aggregate proceeds. An additional 1,867,124 shares
of preferred stock were issued on a cashless basis to the holders of 2,728,721
preferred stock warrants, who surrendered 861,597 preferred stock warrants as
payment for those shares. All outstanding shares of preferred stock, including
those shares issued in connection with warrant exercises, were automatically
converted to an equivalent number of shares of common stock upon the closing of
our initial public offering. Additionally, warrants to purchase 833,333 shares
of Series B preferred stock converted to an equal number of warrants to
purchase an equal number of shares of common stock upon the closing of the
initial public offering. These warrants were exercised during the quarter
ended March 31, 2004 on a cashless basis, resulting in the issuance of 680,509
shares of common stock in exchange for the surrender of warrants to purchase
152,824 shares of common stock. No warrants remain outstanding at September
30, 2004. In connection with our collaboration with Pfizer, we received a $25.0
million investment in our series D preferred stock, a $75.0 million initial
license fee and subsequent license fee payments of $15.5 million. Pfizer has
also agreed generally to fund a majority of the ongoing development costs
incurred pursuant to an agreed development plan covering the development of
Macugen for AMD, DME, retinal vein occlusion and other agreed upon ophthalmic
indications. Pfizer purchased an additional $10 million of our common stock at
the closing of our initial public offering in February 2004 and is obligated to
purchase up to an additional $15 million of our common stock and make
additional payments in specified circumstances. These obligations of Pfizer are
contingent upon the achievement of milestones and are currently our only
committed external source of funds. On June 2, 2004, we completed a secondary public offering of our common
stock. The secondary public offering consisted of the sale of 3,860,000 shares
of common stock at a price of $38.50 per share. As part of the offering, the
selling stockholders granted to the underwriters an option to purchase an
additional 579,000 shares within 30 days of the secondary public offering to
cover over-allotments. This option was exercised in full in June 2004. All
shares sold were offered by existing stockholders, including employees, and
employees exercising options. Our shares outstanding increased by 106,735
shares after the offering as a result of option exercises, which provided
proceeds to us of $0.1 million. The costs associated with the offering,
excluding underwriters discounts and commissions which were payable by the
selling stockholders, were approximately $1.0 million and have been paid by us. As of September 30, 2004, we had $237.0 million in cash, cash equivalents
and marketable securities. Also as of that date, we had pledged $5.9 million of
restricted cash as collateral for letters of credit for certain of our leased
facilities. We believe that our available cash, cash equivalents and marketable
securities, together with expected license and milestone payments and
reimbursements from Pfizer under our collaboration and interest income will be
sufficient to 18




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fund anticipated levels of operations through at least the end of
2005. We had no material capital expenditures during the quarter ended
September 30, 2004 and expect to have no material capital expenditures during
the remainder of 2004. On November 11, 2004, we acquired from Transgenomic, Inc. most of the
assets of the companys oligonucleotide manufacturing facility in Boulder,
Colorado, for $3.0 million in cash and the assumption of certain operating
leases associated with acquired facilities. These acquired assets will be
recorded at their purchase price in November, 2004. We plan to invest
significantly in appropriate infrastructure at this facility to develop the
facility to become a second source for commercial scale production of the
active pharmaceutical ingredient in Macugen. Income Taxes As of December 31, 2003, we had net operating loss carryforwards for
federal income taxes of $43.3 million. Our utilization of the net operating
loss and tax credit carryforwards may be subject to annual limitations pursuant
to Section 382 of the Internal Revenue Code, and similar state provisions, as a
result of changes in our ownership structure. The annual limitations may result
in the expiration of net operating losses and credits prior to utilization. If
not utilized, federal net operating loss carry-forwards will begin to expire in
2020. To date, we have not recognized the potential tax benefit of our net
operating losses on our balance sheets or statements of operations. At December 31, 2003 we had deferred tax assets representing the benefit
of net operating loss carryforwards, deferred license fees received and certain
start up costs capitalized for tax purposes. We did not record a benefit for
the deferred tax asset because realization of the benefit was uncertain and,
accordingly, a full valuation allowance is provided to offset the deferred tax
asset. We have not recorded any provision for taxes during the nine months ended
September 30, 2004. However, if we receive approval for Macugen in the fourth
quarter of 2004, we will receive certain license fee payments that may subject
us to the alternative minimum tax. For the year ended December 31, 2003, we
incurred $1.6 million for the alternative minimum tax as a result of the
receipt of license fees from Pfizer. Cash Flows For the nine months ended September 30, 2004, we used net cash of $46.3
million in operating activities. This consisted primarily of a net loss for the
period of $70.8 million, offset by an increase in accounts payable and accrued
expenses of $6.6 million, an increase in deferred revenue of $14.0 million, an
increase in other liabilities of $3.3 million and $6.0 million in non-cash
stock-based compensation. We used $72.3 million for investing activities for
the quarter ended September 30, 2004, which consisted primarily of net
purchases of marketable securities. We received net cash of $158.6 million from
financing activities during the nine months ended September 30, 2004,
principally relating to the issuance of common stock in our initial public
offering and other issuances of common stock, resulting in net proceeds, after
transaction costs, of $156.4 million and the issuance of convertible preferred
stock upon the exercise of warrants for net proceeds of $2.6 million, offset by
the repayment of capital leases of $0.4 million. Funding Requirements We expect to devote substantial resources to continue our research and
development efforts and to expand our sales, marketing and manufacturing
programs associated with the commercialization and launch of Macugen and other
future products. Our funding requirements will depend on numerous factors,
including:  
    
    the success of our collaboration with Pfizer to develop and commercialize Macugen;
    
    the scope and results of our clinical trials;
    
    the cost of manufacturing activities;
    
    the cost of commercialization activities, including product marketing, sales and distribution;
    
    advancement of other product candidates into development;
    
    potential acquisition or in-licensing of other products or technologies;
    
    the timing of, extent of, and the costs involved in, obtaining regulatory approvals;
    
    the costs involved in preparing, filing, prosecuting, maintaining and
enforcing patent claims and other patent- 19




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related costs, including litigation costs and the results of such litigation; and
    
    our ability to establish and maintain additional collaborative
arrangements. We do not expect to generate significant additional funds, other than
payments that we receive from our collaboration with Pfizer, until we
successfully obtain marketing approval for, and begin selling, Macugen. We
believe that the key factors that will affect our internal and external sources
of cash are:  
    
    our ability to commercially launch Macugen in the United States and to obtain marketing approval outside the United States;
    
    the receptivity of the capital markets to financings by biotechnology companies;
    
    the success of our other preclinical and clinical development programs; and
    
    our ability to enter into additional strategic collaborations with corporate and academic collaborators and
the success of such collaborations. If our existing resources are insufficient to satisfy our liquidity
requirements or if we acquire or license rights to additional product
candidates, we may need to raise additional external funds through the sale of
additional equity or debt securities. The sale of additional equity securities
may result in additional dilution to our stockholders. Additional financing may
not be available in amounts or on terms acceptable to us or at all. If we are
unable to obtain additional financing, we may be required to reduce the scope
of, delay or eliminate some or all of our planned business expansion, research,
development and commercialization activities, which could harm our financial
condition and operating results. Contractual Obligations Our major outstanding contractual obligations relate to our capital leases
from equipment financings, facilities leases and obligations under a number of
our collaboration and alliance agreements to pay milestone payments and
royalties to the other parties to these agreements. We have summarized in the table below our fixed contractual cash
obligations as of September 30, 2004. Payments Due by PeriodLess Than
    
    One to
    
    Four to
    
    AfterContractual Obligations
    
    Total
    
    One Year
    
    Three Years
    
    Five Years
    
    Five YearsCapital lease obligations,
including interest
    
    $
    1,1198,647
    
    
    $
    651,835
    
    
    $
    546,812
    
    
    $
    
    
    
    $
    Operating leases
    
    
    79,025,660
    
    
    
    3,626,871
    
    
    
    11,498,124
    
    
    
    10,093,436
    
    
    
    53,807,229Total contractual cash obligations
    
    $
    80,224,307
    
    
    $
    4,278,706
    
    
    $
    12,044,936
    
    
    $
    10,093,436
    
    
    $
    53,807,229
 Under our agreements with Gilead Sciences, Inc., Nektar Therapeutics, and
Isis Pharmaceuticals, Inc., we are obligated to make payments aggregating up to
$36.3 million, of which $10.5 million has been accrued at September 30, 2004,
upon achieving specified milestones relating to the development and regulatory
approval of Macugen and to pay royalties based on net sales of Macugen. The
events that trigger the milestone payments include filing of a new drug
application, or NDA, with the FDA, making similar filings with foreign
regulatory authorities, receiving marketing approval for Macugen by the FDA or
similar foreign regulatory authorities and the first commercial sale of Macugen
in various countries. These contingent milestone and royalty payment
obligations are not included in the above table. The above table also excludes
approximately $2.0 million in minimum fixed site fees payable to one of our
contract manufacturers on a quarterly basis. 20




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In January 2004, we entered into a sub-sublease arrangement for new
corporate headquarters, clinical, safety and regulatory space in New York City.
Our rent expense under the lease is expected to be $3.2 million in 2004.
However, due to 2004 rent abatements, we expect cash expenditures for this
property in 2004 to be $0.1 million. As security for the sublease, we have
named the sub-landlord as beneficiary under a secured bank letter of credit in
the amount of $3.0 million, which is included in restricted cash on the balance
sheet. We have not sub-leased our former corporate offices at 500 Seventh Avenue,
New York, New York, and as a result, under generally accepted accounting
principles we have assessed the recoverability of the carrying value of our
lease. We have determined that the amounts due under the lease will not be
recoverable, and have recorded a loss in connection with this lease. The loss of $1.5 million was recorded in the second
quarter of 2004 and includes the write down of certain office equipment. In
connection with our cessation of use of this facility, we had previously
accelerated the recognition of amortization and depreciation expenses in
connection with certain leasehold improvements and furniture and fixtures used
at this facility. This resulted in an increase of $0.3 million to amortization
and depreciation expense during the nine months ended September 30, 2004. In May 2004, we entered into a lease agreement for new research and
development space to replace our Woburn research facility. Payments related to
this new space are included in the table above listing our contractual
obligations and are expected to result in approximately $1.6 million of
additional expense annually. If we do not sub-lease our space at 42 Cummings
Park, Woburn, Massachusetts, we will be required under generally accepted
accounting principles to assess the recoverability of the carrying value of our
lease. If it is determined that the amounts due under the lease will not be
recoverable, we will record a loss in connection with this lease. The loss
could be up to approximately $1.1 million and will be recorded during the
fourth quarter of 2004. 21




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##### Table of Contents



RISK FACTORS THAT MAY AFFECT RESULTS Risks Relating to Our Business We depend heavily on the success of our lead product candidate, Macugen, which
is still under development. If we are unable to commercialize Macugen, or
experience significant delays in doing so, our business will be materially
harmed. We have invested a significant portion of our time and financial resources
since our inception in the development of Macugen. We anticipate that in the
near term our ability to generate revenues will depend solely on the successful
development and commercialization of Macugen. The commercial success of Macugen
will depend on several factors, including the following:  
    
    receipt of marketing approvals from the FDA and similar foreign regulatory authorities;
    
    producing batches of finished drug product in sufficient commercial quantities through a validated process;
    
    supplying sufficient quantities of Macugen in compliance with required specifications to meet anticipated market demand for
our planned commercial launch in the first half of 2005;
    
    successfully launching commercial sales of the product in collaboration with Pfizer;
    
    successfully building and sustaining manufacturing capacity to meet anticipated future demand;
    
    the competitive landscape for approved and developing therapies that will compete with Macugen;
    
    achieving acceptance of the product by the medical community, by patients receiving therapy and by third party payors; and
    
    receiving continued positive data from our clinical trials. Based on the results from the first year of our ongoing Phase 2/3 pivotal
clinical trials for the use of Macugen in the treatment of neovascular AMD, in
June 2004, we and Pfizer completed the filing of a new drug application with
the FDA as a rolling submission to seek marketing approval for Macugen in the
treatment of neovascular AMD. The FDA accepted our NDA for review and held a
public advisory committee meeting in which it reviewed our NDA. We also
recently submitted to the FDA and announced positive data from the second year
of our ongoing Phase 2/3 pivotal clinical trials for the use of Macugen in the
treatment of neovascular AMD. The FDA may still request additional information
from us, including additional data from our clinical trials or data from
additional clinical trials. Furthermore, new information may arise from our
continuing analysis of the data from our clinical trials that may be less
favorable than currently anticipated. Clinical data often are susceptible to
varying interpretations and many companies that have believed that their
products performed satisfactorily in clinical trials have nonetheless failed to
obtain FDA approval for their products. The FDA may not grant marketing
approval for Macugen. The FDA may grant marketing approval but may not grant
such approval to the extent we have requested in our NDA. Even if we are
granted marketing approval for Macugen, if we are not successful in
manufacturing Macugen at commercial scale according to applicable
specifications, commercializing Macugen, or are significantly delayed in doing
either, our business will be materially harmed and we may need to curtail or
cease operations. We depend heavily on our collaboration with Pfizer, which involves a complex
sharing of control over decisions, responsibilities and costs and benefits. Any
loss of Pfizer as a collaborator, or adverse development in the collaboration,
would materially harm our business. In December 2002, we entered into our collaboration with Pfizer to develop
and commercialize Macugen for the prevention and treatment of diseases of the
eye. The collaboration involves a complex sharing of control over decisions,
responsibilities and costs and benefits. For example, with respect to the
sharing of costs and benefits, Pfizer will co-promote Macugen with us in the
United States and will share with us in profits and losses. Outside the United
States, Pfizer will commercialize Macugen pursuant to an exclusive license and
pay us a royalty on net sales. In addition, Pfizer generally is required to
fund a majority of ongoing development costs incurred pursuant to an agreed
upon development plan. Our collaboration is governed by a joint operating
committee, consisting of an equal number of representatives of Pfizer and us
who control decisions and responsibilities. There are also subcommittees with
equal representation from both parties that have responsibility over
development, regulatory, manufacturing and commercialization matters. 22




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Ultimate decision-making authority is vested in us as to some matters and
in Pfizer as to other matters. A third category of decisions requires the
approval of both Pfizer and us. Outside the United States, ultimate
decision-making authority as to most matters is vested in Pfizer. Pfizer may
terminate the collaboration relationship without cause upon six to twelve
months prior notice, depending on when such notice is given. Any loss of
Pfizer as a collaborator in the development or commercialization of Macugen,
dispute over the terms of, or decisions regarding, the collaboration or other
adverse development in our relationship with Pfizer would materially harm our
business and might accelerate our need for additional capital. If Macugen is approved in the United States, our product revenues will be
substantially dependent on a limited number of wholesalers to which we plan to
sell Macugen, and such revenues may fluctuate from quarter to quarter based on
the buying patterns of these wholesalers If approved, we plan to sell Macugen primarily to a limited number of
national pharmaceutical wholesalers with distribution centers located
throughout the United States. Our reliance on this small number of wholesalers
could cause our revenues to fluctuate from quarter to quarter based on the
buying patterns of these wholesalers. In addition, if any of these wholesalers
fails to pay us on a timely basis or at all, our financial position and results
of operations could be materially adversely affected. If our clinical trials are unsuccessful, or if we experience significant delays
in these trials, our ability to commercialize Macugen and other future product
candidates will be impaired. We must provide the FDA and similar foreign regulatory authorities with
preclinical and clinical data that demonstrate that our product candidates are
safe and effective for each target indication before they can be approved for
commercial distribution. The preclinical testing and clinical trials of any
product candidates that we develop must comply with regulations by numerous
federal, state and local government authorities in the United States,
principally the FDA, and by similar agencies in other countries. Clinical
development is a long, expensive and uncertain process and is subject to
delays. We may encounter delays or rejections based on our inability to enroll
or keep enrolled enough patients to complete our clinical trials. Patient
enrollment depends on many factors, including the size of the patient
population, the nature of the trial protocol, the proximity of patients to
clinical sites and the eligibility criteria for the study. Our ongoing Phase 2/3 pivotal clinical trial for the use of Macugen in the
treatment of neovascular AMD and Phase 2 clinical trial for use of Macugen in
the treatment of DME are currently fully enrolled. We are also currently
enrolling patients in our Phase 2 clinical trial for the use of Macugen in the
treatment of RVO. To obtain marketing approval for the use of Macugen in
neovascular AMD, the FDA or other regulatory authorities may require us to
pursue additional clinical trials or other studies. We also may commence additional clinical trials in the future. Although we
have not to date experienced any significant delays in enrolling clinical trial
patients for our ongoing clinical trials, delays in patient enrollment for
future trials may result in increased costs and delays, which could have a
harmful effect on our ability to develop products. It may take several years to complete the testing of a product, and
failure can occur at any stage of testing. For example:  
    
    interim results of preclinical or clinical studies are not necessarily predictive of their final results, and acceptable
results in early studies might not be seen in later studies, in large part because earlier phases of studies are often
conducted on smaller groups of patients than later studies, and without the same trial design features, such as
randomized controls and long-term patient follow-up and analysis;
    
    potential products that appear promising at early stages of development may ultimately fail for a number of reasons,
including the possibility that the products may be ineffective, less effective than products of our competitors or cause
harmful side effects;
    
    any preclinical or clinical test may fail to produce results satisfactory to the FDA or foreign regulatory authorities;
    
    preclinical and clinical data can be interpreted in different ways, which could delay, limit or prevent regulatory 23




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approval;
    
    negative or inconclusive results from a preclinical study or clinical trial or adverse medical events during a clinical
trial could cause a preclinical study or clinical trial to be repeated or a program to be terminated, even if other
studies or trials relating to the program are successful;
    
    the FDA can place a hold on a clinical trial if, among other reasons, it finds that patients enrolled in the trial are or
would be exposed to an unreasonable and significant risk of illness or injury;
    
    we may encounter delays or rejections based on changes in regulatory agency policies during the period in which we
develop a drug or the period required for review of any application for regulatory agency approval; and
    
    our clinical trials may not demonstrate the safety and efficacy needed for our products to receive regulatory approval. In addition, as part of the drug approval process, we must conduct a
comprehensive assessment of the carcinogenic, or cancer causing, potential of
our product candidates. Our testing of Macugen to date indicates that the
products carcinogenic potential is low. In one test for carcinogenicity risk,
two potential Macugen metabolites showed, in one out of five bacterial strains
tested, a small increase in the number of altered bacteria, a potential
indicator of carcinogenicity risk. However, because this elevated proportion of
altered bacteria did not increase further as we increased the dose of the
metabolites, we do not believe the results from these tests indicate
carcinogenicity potential. Furthermore, no other test, including animal
studies, of Macugen and its metabolites showed carcinogenic potential. We have
requested that the FDA grant us a waiver from the requirement to perform full
animal carcinogenicity studies for the treatment of neovascular AMD based
primarily on the unmet medical need presented by neovascular AMD, low overall
systemic exposure to Macugen and the fact that this disease generally affects
older populations. However, the FDA may require us to conduct additional
carcinogenicity testing of Macugen. Based on our discussions with the FDA to
date, if we are required to conduct further carcinogenicity testing of Macugen
in connection with its use in the treatment of neovascular AMD, we believe that
the FDA will allow us to conduct any such testing as a post-NDA approval study.
However, we will not be certain of this until the NDA review process of Macugen
for this indication is completed. The FDA may require us to complete
satisfactory carcinogenicity testing of Macugen prior to any approval of the
use of Macugen in the treatment of DME. If we are required to conduct additional clinical trials or other studies
of Macugen beyond those that we currently contemplate, if we are unable to
successfully complete our clinical trials or other studies or if the results of
these trials or studies are not positive or are only modestly positive, we may
be delayed in obtaining marketing approval for Macugen, we may not be able to
obtain marketing approval or we may obtain approval for indications that are
not as broad as intended. Our product development costs will also increase if
we experience delays in testing or approvals. Significant clinical trial delays
could allow our competitors to bring products to market before we do and impair
our ability to commercialize our products or potential products. If any of this
occurs, our business will be materially harmed. Furthermore, our future products may not be effective, may be only
moderately effective or may prove to have undesirable or unintended side
effects, toxicities or other characteristics that may preclude our obtaining
regulatory approval or prevent or limit commercial use, which could have a
material adverse effect on our business. The FDA and other regulatory
authorities may not approve any product that we may develop. We face substantial competition with respect to sales of Macugen in the
treatment of neovascular AMD and drug development, which may result in others
discovering, developing or commercializing products before or more successfully
than we do. The commercialization and development of new drugs is highly competitive.
We will face competition with respect to Macugen and any products we may
commercialize or develop in the future from major pharmaceutical companies,
specialty pharmaceutical companies and biotechnology companies worldwide. Our
competitors may develop products or other novel technologies that are more
effective, safer or less costly than any that we are developing. Our
competitors may also obtain FDA or other regulatory approval for their products
more rapidly than we may obtain approval for ours. Macugen would compete against two therapies for the treatment of
neovascular AMD: photodynamic therapy, which was developed by QLT, Inc. and is
marketed by Novartis AG, and thermal laser treatment. In the United States,
photodynamic therapy is FDA-approved only for the predominantly classic subtype
of neovascular AMD. In the 24




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European Union, the only approved therapy is photodynamic therapy, which
is approved only for the predominantly classic and occult subtypes. In the
United States, however, the Centers for Medicare & Medicaid Services
implemented a decision in April 2004 to provide coverage for photodynamic
therapy to patients with neovascular AMD who have occult and minimally classic
lesions that are four disc areas or less in size and show evidence of recent
disease progression even though the FDA has not approved photodynamic therapy
for such treatment. The current therapies for the treatment of DME are thermal
laser treatment and steroid treatment administered by physicians on an
off-label basis. Unless additional therapies are approved, these existing
therapies would represent the principal competition for Macugen in neovascular
AMD and DME if Macugen is approved for marketing in such indications. Additional treatments for AMD and DME are in various stages of preclinical
or clinical testing. If approved, these treatments would also compete with
Macugen. Potential treatments in late stage clinical trials include drugs
sponsored by a collaboration of Genentech, Inc. and Novartis, Alcon, Inc.,
Allergan, Inc. through its acquisition of Oculex Pharmaceuticals, Inc., Eli
Lilly and Co., Bausch & Lomb Incorporated, a collaboration of Regeneron
Pharmaceuticals, Inc. and Aventis S.A., Miravant Medical Technologies, and
Genaera Corporation. Some of the sponsors of these potential products have
announced favorable results from Phase 1 or Phase 2 clinical trials. The
Genentech/Novartis collaboration is developing an anti-VEGF humanized antibody
fragment for intravitreal injection. This product candidate may be viewed as
particularly competitive with Macugen because of the similarity of its
mechanism of action. In addition, Alcon recently announced results of its Phase
3 clinical trial of anecortave acetate, an angiostatic compound, for the
treatment of neovascular AMD patients, that features a less invasive injectable
delivery that requires less frequent administration (every six months) and
plans to file an NDA in the fourth quarter of 2004. Further, Alcon is enrolling
patients in two Phase 3 clinical trials, one in South America and one in
Europe, comparing the safety and efficacy of Alcons compound against placebo
in patients with all subtypes of neovascular AMD. Other laser, surgical or
pharmaceutical treatments for AMD and DME may also compete against Macugen.
These competitive therapies may result in pricing pressure if we receive
marketing approval for Macugen even if Macugen is otherwise viewed as a
preferable therapy. Many of our competitors have substantially greater financial, technical
and human resources than we have. Additional mergers and acquisitions in the
pharmaceutical and biotechnology industries may result in even more resources
being concentrated by our competitors. Competition may increase further as a
result of advances made in the commercial applicability of technologies and
greater availability of capital for investment in these fields. There may be limited market acceptance of Macugen and other products we may
develop in the future that are based on new technologies. The commercial success of the products for which we may obtain marketing
approval from the FDA or other regulatory authorities will depend upon the
acceptance of these products by the medical community and third party payors as
clinically useful, cost-effective and safe. Even if a potential product
displays a favorable efficacy and safety profile in clinical trials, market
acceptance of the product will not be known until after it is commercially
launched. We expect that many of the products that we develop will be based
upon new technologies. For example, Macugen is partially composed of a
chemically synthesized aptamer, which is a type of nucleic acid, and, if
approved, may be the first aptamer to be approved as a pharmaceutical by the
FDA. As a result, it may be more difficult for us to achieve market acceptance
of our products, particularly the first products that we introduce to the
market based on new technologies. Our efforts to educate the medical community
about these potentially unique approaches may require greater resources than
would be typically required for products based on conventional technologies.
The safety, efficacy, convenience and cost-effectiveness of our products as
compared to competitive products will also affect market acceptance. We have only recently established our sales and marketing capabilities and have
never marketed or sold products as a company. We will need to work with our
partner, Pfizer, and integrate our marketing and sales infrastructures to
successfully commercialize any products that we may develop, acquire or
license. We have limited experience as a company in marketing and selling products.
We have a marketing team and specialty sales force with significant industry
experience to market and sell Macugen in the United States in collaboration
with Pfizer. We are in the process of preparing our sales force to detail
Xalatan and launch Macugen. If Macugen is approved for marketing, to achieve
commercial success for Macugen, our sales and marketing organization 25




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must work with our partner, Pfizer, to effectively integrate our sales and
marketing infrastructures and implement our sales and marketing efforts. If our
sales and marketing efforts are not successful our business will materially
suffer. We may not be successful in our efforts to expand our portfolio of products. A key element of our strategy is to commercialize a portfolio of new
ophthalmic drugs in addition to Macugen. We are seeking to do so through our
internal research programs and through licensing or otherwise acquiring the
rights to potential new drugs and drug targets for the treatment of ophthalmic
disease. A significant portion of the research that we are conducting involves new
and unproven technologies. Research programs to identify new disease targets
and product candidates require substantial technical, financial and human
resources whether or not we ultimately identify any candidates. Our research
programs may initially show promise in identifying potential product
candidates, yet fail to yield product candidates for clinical development for a
number of reasons, including:  
    
    the research methodology used may not be successful in identifying potential product candidates; or  
    
    potential product candidates may on further study be shown to have harmful side effects or other characteristics that
indicate they are unlikely to be effective drugs. We may be unable to license or acquire suitable product candidates or
products from third parties for a number of reasons. In particular, the
licensing and acquisition of pharmaceutical products is a competitive area. A
number of more established companies are also pursuing strategies to license or
acquire products in the ophthalmic field. These established companies may have
a competitive advantage over us due to their size, cash resources and greater
clinical development and commercialization capabilities. Other factors that may
prevent us from licensing or otherwise acquiring suitable product candidates
include the following:  
    
    we may be unable to license or acquire the relevant technology on terms that would allow us to make an appropriate return
from the product;  
    
    companies that perceive us to be their competitors may be unwilling to assign or license their product rights to us; or  
    
    we may be unable to identify suitable products or product candidates within our areas of expertise. If we are unable to develop suitable potential product candidates through
internal research programs or by obtaining rights to novel therapeutics from
third parties, our business will suffer. We expect to depend on collaborations with third parties to develop and
commercialize our products. Our business strategy includes entering into collaborations with corporate
and academic collaborators for the research, development and commercialization
of additional product candidates, such as our collaborations with Pfizer and
Archemix Corp. These arrangements may not be scientifically or commercially
successful. The termination of any of these arrangements might adversely affect
our ability to develop, commercialize and market our products. The success of our collaboration arrangements will depend heavily on the
efforts and activities of our collaborators. Our collaborators will have
significant discretion in determining the efforts and resources that they will
apply to these collaborations. The risks that we face in connection with these
collaborations, including our collaboration with Pfizer, include the following:  
    
    our collaboration agreements are, or are expected to be, for fixed
terms and subject to termination under various circumstances,
including, in many cases, on short notice without cause;  
    
    we expect to be required in our collaboration agreements not to
conduct specified types of research and development in the field that
is the subject of the collaboration. These agreements may have the
effect of limiting the areas of research and development that we may
pursue, either alone or in cooperation with third parties;  
    
    our collaborators may develop and commercialize, either alone or with
others, products and services that are similar to or competitive with
our products that are the subject of the collaboration with us; and 26




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
    
    our collaborators may change the focus of their development and
commercialization efforts. Pharmaceutical and biotechnology companies
historically have re-evaluated their priorities following mergers and
consolidations, which have been common in recent years in these
industries. The ability of our products to reach their potential could
be limited if our collaborators decrease or fail to increase spending
relating to such products. Collaborations with pharmaceutical companies and other third parties often are
terminated or allowed to expire by the other party. Such terminations or
expirations can adversely affect us financially as well as harm our business
reputation. We may not be successful in establishing additional collaborations, which could
adversely affect our ability to develop and commercialize products and
services. An important element of our business strategy is entering into
collaborations for the development and commercialization of products when we
believe that doing so will maximize product value. If we are unable to reach
agreements with suitable collaborators, we may fail to meet our business
objectives for the affected product or program. We face significant competition
in seeking appropriate collaborators. Moreover, these collaboration
arrangements are complex to negotiate and time consuming to document. We may
not be successful in our efforts to establish additional collaborations or
other alternative arrangements. The terms of any additional collaborations or
other arrangements that we establish may not be favorable to us. Moreover,
these collaborations or other arrangements may not be successful. We currently have no operational manufacturing facilities and a limited number
of manufacturing personnel. We will depend on third parties to manufacture
Macugen and future products. If these manufacturers fail to meet our
requirements, our product development and commercialization efforts may be
materially harmed. We have a limited number of personnel with experience in, and we do not
own or lease operating facilities for, manufacturing any products. We recently
acquired a manufacturing facility in Boulder, Colorado, that we eventually plan
to use as a second source of supply for the active pharmaceutical ingredient in
Macugen, but that facility is not currently operational for such purpose.
Accordingly, we will depend on third parties to manufacture Macugen and any
future products that we may develop. For our clinical trials of Macugen, we engaged a third party manufacturer
to produce the active pharmaceutical ingredient used in Macugen. We have
entered into an agreement and completed the transfer of the manufacturing
technology and process with an affiliate of this third party for commercial
supply of the active pharmaceutical ingredient used in Macugen. For our
clinical trials of Macugen, we also engaged a separate fill and finish
manufacturer for the finished drug product to formulate the active
pharmaceutical ingredient from a solid into a solution and to fill the solution
into syringes. We have entered into an agreement with this manufacturer to
provide these finished product services for commercial supply. These
manufacturers of Macugen will be single source suppliers to us for a
significant period of time. We also expect to continue to rely on a single
source of supply for the PEGylation reagent used in the manufacture of Macugen. In order to sustain Macugen supply at the quantities we believe will be
necessary to meet anticipated future market demand, we and our contract
manufacturer will need to increase the manufacturing capacity for the active
pharmaceutical ingredient of Macugen. Assuming Macugen is approved by the FDA
for the 0.3 mg dose of Macugen and that we can manufacture Macugen to required
specifications, we believe we will have sufficient capacity to supply the
active pharmaceutical ingredient and to manufacture Macugen to meet anticipated
demand for our planned commercial launch in the first half of 2005 and for
approximately 24 months thereafter. We initially intend to increase
manufacturing capacity for the active pharmaceutical ingredient by duplicating
a portion of our manufacturing lines at the contract manufacturers facility.
We also intend to invest in appropriate infrastructure at the manufacturing
facility that we recently acquired in Boulder, Colorado, to prepare the
facility to become a second source for commercial scale production of the
active pharmaceutical ingredient in Macugen. We will also continue to explore
other alternatives for increasing manufacturing capacity. If we are unable to
increase our manufacturing capacity or are delayed in doing so, we may not be
able to produce Macugen in a sufficient quantity to meet future requirements to
sustain supply of the product to meet anticipated future demand. In addition,
the cost of increasing manufacturing capacity may be expensive. Our revenues
and gross margins could be adversely affected by any inability to meet demand
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Reliance on third party manufacturers entails risks to which we would not
be subject if we manufactured products ourselves, including:  
    
    reliance on the third party for regulatory compliance and quality assurance;  
    
    the possible breach of the manufacturing agreement by the third party because of factors beyond our control; and  
    
    the possibility of termination or non-renewal of the agreement by the third party, based on its own business priorities, at
a time that is costly or inconvenient for us. The manufacture and packaging of pharmaceutical products such as Macugen are
subject to the requirements of the FDA and similar foreign regulatory bodies.
If we or our third party manufacturers fail to satisfy these requirements, our
product development and commercialization efforts may be materially harmed. The manufacture and packaging of pharmaceutical products, such as Macugen
and our future product candidates, are regulated by the FDA and similar foreign
regulatory bodies and must be conducted in accordance with the FDAs current
good manufacturing practices and comparable requirements of foreign regulatory
bodies. There are a limited number of manufacturers that operate under these
current good manufacturing practices regulations who are both capable of
manufacturing Macugen and willing to do so. Failure by us or our third party
manufacturers to comply with applicable regulations, requirements, or
guidelines could result in sanctions being imposed on us, including fines,
injunctions, civil penalties, failure of regulatory authorities to grant
marketing approval of our products, delays, suspension or withdrawal of
approvals, license revocation, seizures or recalls of product, operating
restrictions and criminal prosecutions, any of which could significantly and
adversely affect our business. For example, if the facilities used for the
manufacturing and testing of a product are delayed in passing FDA pre-approval
inspection to ensure compliance with FDA standards or if we are not able to
manufacture Macugen to required specifications, we may be delayed in launching
the product and our anticipated future revenues and financial results may be
materially adversely affected. Changes in the manufacturing process or procedure, including a change in
the location where the product is manufactured or a change of a third party
manufacturer, may require prior FDA review and/or approval of the manufacturing
process and procedures in accordance with the FDAs current good manufacturing
practices. There are comparable foreign requirements. This review may be costly
and time consuming and could delay or prevent the launch of a product. For
example, our third party contract manufacturer changed the site used to
manufacture the active pharmaceutical ingredient of Macugen. We have completed
the transfer of the relevant manufacturing technology and the manufacturing
process to the new site, have used the new site to supply the active
pharmaceutical ingredient of Macugen for use in our clinical trials and plan to
continue to use this site to produce commercial quantities of the active
pharmaceutical ingredient of Macugen. If we cannot establish, to the
satisfaction of the FDA, that the products manufactured at the new site are
comparable to those manufactured at the initial site, we may not obtain or may
be delayed in obtaining approval to launch Macugen. In addition, if we elect to
manufacture products in our own facility or at the facility of another third
party, we would need to ensure that the new facility and the manufacturing
process are in substantial compliance with current good manufacturing
practices. Any such change in facility would be subject to a pre-approval
inspection by the FDA and would again require us to demonstration product
comparability to the FDA. Furthermore, in order to obtain approval of our products, including
Macugen, by the FDA and foreign regulatory agencies, we will be required to
consistently produce the active pharmaceutical ingredient and the finished
product in commercial quantities and of specified quality on a repeated basis
and document our ability to do so. This requirement is referred to as process
validation. We have completed the validation process for the active
pharmaceutical ingredient. We need to complete process validation on the
finished product in the packaging we propose for commercial sales. This
includes testing of stability, measurement of impurities and testing of other
product specifications by validated test methods. If the FDA does not consider
the result of the process validation or required testing to be satisfactory, we
may not obtain approval to launch the product or approval or launch may be
delayed. The FDA and similar foreign regulatory bodies may also implement new
standards, or change their interpretation and enforcement of existing standards
and requirements, for manufacture, packaging or testing of products at any
time. If we are unable to comply, we may be subject to regulatory, civil
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affect our business. Macugen and our other potential products may not be commercially viable if we
fail to obtain an adequate level of reimbursement for these products by
Medicare and other third party payors. The markets for our products may also be
limited by the indications for which their use may be reimbursed or the
frequency in which they may be administered. The availability and levels of reimbursement by governmental and other
third party payors affect the market for products such as Macugen and others
that we may develop. These third party payors continually attempt to contain or
reduce the costs of healthcare by challenging the prices charged for medical
products and services. In some foreign countries, particularly Canada and the
countries of the European Union, the pricing of prescription pharmaceuticals is
subject to governmental control. In these countries, pricing negotiations with
governmental authorities can take six to twelve months or longer after the
receipt of regulatory marketing approval for a product. To obtain reimbursement
or pricing approval in some countries, we may be required to conduct a clinical
trial that compares the cost-effectiveness of our products, including Macugen,
to other available therapies. If reimbursement for our products is unavailable
or limited in scope or amount or if pricing is set at unsatisfactory levels,
our business could be materially harmed. Because most persons suffering from neovascular AMD are elderly, we expect
that coverage for Macugen in the United States will be primarily through the
Medicare program. Although drugs that are not usually self-administered are
ordinarily covered by Medicare, the Medicare program has taken the position
that it can decide not to cover particular drugs if it determines that they are
not reasonable and necessary for Medicare beneficiaries. Limitations on
coverage could also be imposed at the local Medicare carrier level or by fiscal
intermediaries. Our business could be materially adversely affected if the
Medicare program, local Medicare carriers or fiscal intermediaries were to make
such a determination and deny or limit the reimbursement of Macugen. Our
business also could be adversely affected if physicians are not reimbursed by
Medicare for the cost of the procedure in which they administer Macugen on a
basis satisfactory to the administering physicians. If the local contractors
that administer the Medicare program are slow to reimburse physicians for
Macugen, the physicians may pay us more slowly, which would adversely affect
our working capital requirements. We also will need to obtain approvals for payment for Macugen from private
insurers, including managed care organizations. We expect that private insurers
will consider the efficacy, cost-effectiveness and safety of Macugen in
determining whether and at what level to approve reimbursement for Macugen
therapy. Obtaining these approvals can be a time consuming and expensive
process. Our business would be materially adversely affected if we do not
receive approval for reimbursement of Macugen from private insurers on a
satisfactory basis. Our business could also be adversely affected if the Medicare program or
other reimbursing bodies or payors limit the indications for which Macugen will
be reimbursed to a smaller set than we believe it is effective in treating or
establish a limitation on the frequency with which Macugen may be administered
that is less often than we believe would be effective. We expect to experience pricing pressures in connection with the sale of
Macugen and our future products due to the trend toward programs aimed at
reducing healthcare costs, the increasing influence of health maintenance
organizations and additional legislative proposals. The 2003 Medicare prescription drug coverage legislation, The Medicare
Prescription Drug Improvement and Modernization Act, and future legislative or
regulatory reform of the healthcare system may affect our ability to sell our
products profitably. In both the United States and some non-U.S. jurisdictions, there have been
a number of legislative and regulatory proposals to change the healthcare
system in ways that could affect our ability to sell our products profitably.
In the United States, new legislation may be proposed at the federal and state
levels that would result in significant changes to the healthcare system,
either nationally or at the state level. In December 2003, President Bush
signed into law new Medicare prescription drug coverage legislation, The
Medicare Prescription Drug Improvement and Modernization Act. Effective January
2004, the legislation changed the methodology used to calculate reimbursement
for drugs such as Macugen that are administered in physicians offices in a
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reimbursement. In addition, beginning in January 2006, the legislation
directs the Secretary of Health and Human Services to contract with procurement
organizations to purchase physician-administered drugs from the manufacturers
and provides physicians with the option to obtain drugs through these
organizations as an alternative to purchasing from the manufacturers, which
some physicians may find advantageous. These changes may also cause private
insurers to reduce the amounts that they will pay for physician-administered
drugs. In addition, the Centers for Medicare & Medicaid Services, or CMS, the
agency within the Department of Health and Human Services that administers
Medicare and will be responsible for reimbursement of the cost of Macugen, has
asserted the authority of Medicare not to cover particular drugs if it
determines that they are not reasonable and necessary for Medicare
beneficiaries or to cover them at a lesser rate, comparable to that for drugs
already reimbursed that CMS considers to be therapeutically comparable. Further
federal and state proposals and healthcare reforms are likely. Our results of
operations could be materially adversely affected by the Medicare prescription
drug coverage legislation, by the possible effect of this legislation on
amounts that private insurers will pay and by other healthcare reforms that may
be enacted or adopted in the future. We face the risk of product liability claims and may not be able to obtain
insurance. Our business exposes us to the risk of product liability claims that is
inherent in the manufacturing, testing and marketing of drugs and related
products. Claims that one or more of our products harms people, regardless of
the merits, could be costly, divert our managements attention and adversely
affect our reputation and demand for our products. We currently have product liability insurance that covers our clinical
trials up to a $10 million annual aggregate limit. We may expand our product
liability insurance coverage. However, insurance coverage is increasingly
expensive. We may not be able to obtain or maintain adequate protection against
potential liabilities. If we are unable to obtain insurance at acceptable cost
or otherwise protect against potential product liability claims, we will be
exposed to significant liabilities, which may materially and adversely affect
our business and financial position. These liabilities could prevent or
interfere with our product development and commercialization efforts. We depend on our key personnel. If we are not able to retain them or recruit
additional technical personnel, our business will suffer. We are highly dependent on the principal members of our management and
scientific staff, particularly Dr. David R. Guyer, our co-founder and Chief
Executive Officer, and Dr. Anthony P. Adamis, our scientific pioneer, Chief
Scientific Officer and Senior Vice President, Research. Our employment
agreements with these and our other executive officers are terminable on short
or no notice. We do not carry key man life insurance on any of our key
personnel. The loss of service of any of our key employees could harm our
business. In addition, our growth will require us to hire a significant number of
qualified technical, commercial and administrative personnel. There is intense
competition from other companies and research and academic institutions for
qualified personnel in the areas of our activities. If we cannot continue to
attract and retain, on acceptable terms, the qualified personnel necessary for
the continued development of our business, we may not be able to sustain our
operations or grow. We are growing rapidly, and if we fail to adequately manage that growth, our
business could be adversely impacted. Our aggressive growth plan has included substantial and increasing
investments in research and development, sales and marketing, and facilities.
We plan to continue to grow, and our plan has a number of risks, some of which
we cannot control. For example:  
    
    we have no current source of product revenue, a fixed amount of cash and predetermined anticipated milestone payments that
may be due to us, so we will need to generate product or other revenues to cover our continually higher level of operating
expenses;  
    
    we will need to continue to assimilate a large number of new employees in different functions throughout the company;  
    
    we will need to manage complexities associated with a larger and faster growing organization; and  
    
    we will need to accurately anticipate demand for our products and maintain adequate manufacturing capacity, and our ability
to do so may depend on factors that we do not control. 30




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Of course, there may be other risks unknown to us and we cannot guarantee
that we will be able to successfully manage these or other risks. We depend on third parties in the conduct of our clinical trials for Macugen
and any failure of those parties to fulfill their obligations could adversely
affect our development and commercialization plans. We depend on independent clinical investigators, contract research
organizations and other third party service providers in the conduct of our
ongoing clinical trials for Macugen and expect to do so with respect to other
product candidates. We rely heavily on these parties for successful execution
of our clinical trials, but do not control many aspects of their activities.
For example, the clinical investigators are not our employees. However, we are
responsible for ensuring that each of our clinical trials is conducted in
accordance with the general investigational plan and protocols for the trial.
Third parties may not complete activities on schedule, or may not conduct our
clinical trials in accordance with regulatory requirements or our stated
protocols. The failure of these third parties to carry out their obligations
could delay or prevent the development, approval and commercialization of
Macugen and future product candidates. Regulatory Risks We may not be able to obtain marketing approval for any of the products
resulting from our development efforts, including Macugen. Failure to obtain
these approvals could materially harm our business. Although we may not be required to conduct additional research and
development for the approval of Macugen for the treatment of neovascular AMD,
the use of Macugen for the treatment of other indications and other products
that we are developing or may develop in the future will require additional
research and development. The research and development work that we must
perform will include extensive preclinical studies and clinical trials. We will
be required to obtain an investigational new drug application, or IND, prior to
initiating human clinical trials in the United States and must obtain
regulatory approval prior to any commercial distribution. This process is
expensive, uncertain and lengthy, often taking a number of years until a
product is approved for commercial distribution. We have only one product,
Macugen, that has advanced to clinical trials. We have not received regulatory
approval to market Macugen in any jurisdiction. Failure to obtain required
regulatory approvals could materially harm our business. We may need to successfully address a number of technological challenges
in order to complete the development of Macugen or any of our future products,
such as manufacturing process validation and product specification testing. In addition, administration of a drug via intravitreal injection is a new
method for the potentially long-term treatment of chronic eye disease. As a
result, the FDA and other regulatory agencies may apply new standards for
safety, manufacturing, packaging and distribution of drugs using this mode of
administration, including Macugen. We are working with the FDA in connection
with its development of appropriate standards for drugs using this mode of
administration. As part of this process, we also support efforts by the United
States Pharmacopoeia, which works with the FDA to establish standards, to devise a sub-visible
particulate limit appropriate for ophthalmologic treatments administered as
ultra low-volume injectables. We are also working with the FDA to agree on an
appropriate control environment for the outer packaging we propose for commercial
sale. It may be time consuming or expensive for us to comply with these
standards. This could result in delays in our obtaining marketing approval for
Macugen, or possibly preclude us from obtaining such approval. This could also
increase our commercialization costs, possibly materially. Furthermore, Macugen and any of our future products may not be effective,
may be only moderately effective or may prove to have undesirable or unintended
side effects, toxicities or other characteristics that may preclude our
obtaining regulatory approval or prevent or limit commercial use, which could
have a material adverse effect on our business. The FDA and other regulatory
authorities may not approve any product that we develop. The fast track designation for development of Macugen may not actually lead
to a faster development or regulatory review or approval process. If a drug is intended for the treatment of a serious or life-threatening
condition and the drug demonstrates the potential to address unmet medical
needs for this condition, the drug sponsor may apply for FDA fast track 31




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designation. The fast track classification does not apply to the product
alone, but applies to the combination of the product and the specific
indication or indications for which it is being studied. The FDAs fast track
programs are designed to facilitate the clinical development and evaluation of
the drugs safety and efficacy for the fast track indication or indications.
Marketing applications filed by sponsors of products in fast track development
may qualify for expedited review under policies or procedures offered by the
FDA, but the fast track designation does not assure such qualification. We have
obtained a fast track designation from the FDA for Macugen for the treatment of
both neovascular AMD and DME. We have also received priority review status for
our NDA for neovascular AMD and have been entered into the Pilot 1 program,
which allows the FDA to complete reviews of individual reviewable units within
six months of submission and provide early feedback on the pre-submissions.
Also, the FDAs Dermatologic and Ophthalmic Drugs Advisory Committee reviewed
our NDA with respect to the use of Macugen in the treatment of neovascular AMD
on August 27, 2004. However, we may not continue to experience a faster
development process, review or approval compared to conventional FDA
procedures. Further, our fast track designation with respect to DME may be
withdrawn by the FDA if it believes that the designation is no longer supported
by data from our clinical development program. Our products, when and if any of them are approved, could be subject to
restrictions or withdrawal from the market and we may be subject to penalties
if we fail to comply with regulatory requirements, or if we experience
unanticipated problems with our products. Any product for which we obtain marketing approval, along with the
manufacturing processes, post-approval clinical data, advertising and
promotional activities for such product, will be subject to continuing
requirements, review and periodic inspections by the FDA and other regulatory
bodies. Even if regulatory approval of a product is granted, the approval may
be subject to limitations on the indicated uses for which the product may be
marketed or subject to the conditions of approval, or contain requirements for
costly post-marketing testing and surveillance to monitor the safety or
efficacy of the product. Furthermore, new information may arise from our
ongoing or new clinical trials or continuing analysis of the data from our
clinical trials that may be viewed as less favorable than previous data. Later
discovery of previously unknown problems with our products, manufacturer or
manufacturing processes, or failure to comply with regulatory requirements, may
result in:  
    
    restrictions on such products or manufacturing processes;  
    
    withdrawal of the products from the market;  
    
    voluntary or mandatory recall;  
    
    fines;  
    
    suspension of regulatory approvals;  
    
    requests from the FDA or other agencies for additional information
from us or data from additional clinical trials;  
    
    product seizure; and  
    
    injunctions or the imposition of civil or criminal penalties. We may be slow to adapt, or we may never adapt, to changes in existing
regulatory requirements or adoption of new regulatory requirements or policies. Failure to obtain regulatory approval in foreign jurisdictions would prevent us
from marketing our products abroad. We intend to have our products marketed outside the United States. In
order to market our products in the European Union and many other non-U.S.
jurisdictions, we must obtain separate regulatory approvals and comply with
numerous and varying regulatory requirements. In the case of Macugen, Pfizer
has responsibility to obtain regulatory approvals outside the United States,
and we will depend on Pfizer to obtain these approvals. The approval procedure
varies among countries and can involve additional testing. The time required to
obtain approval may differ from that required to obtain FDA approval. The
foreign regulatory approval process may include all of the risks associated
with obtaining FDA approval. We may not obtain foreign regulatory approvals on
a timely basis, if at all. Approval by the FDA does not ensure approval by
regulatory authorities in other countries, and approval by one foreign
regulatory authority does not ensure approval by regulatory authorities in
other foreign countries or by the FDA. We and our collaborators may not be able
to file for regulatory approvals and may not receive necessary approvals to
commercialize our products in any 32




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market. The failure to obtain these approvals could materially adversely
affect our business, financial condition and results of operations. We have only limited experience in regulatory affairs, and some of our products
may be based on new technologies. These factors may affect our ability or the
time we require to obtain necessary regulatory approvals. We have only limited experience as a company in filing and prosecuting the
applications necessary to gain regulatory approvals. Moreover, some of the
products that are likely to result from our product development, licensing and
acquisition programs may be based on new technologies that have not been
extensively tested in humans. The regulatory requirements governing these types
of products may be less well defined or more rigorous than for conventional
products. As a result, we may experience a longer regulatory review in
connection with obtaining regulatory approvals of any products that we develop,
license or acquire. Risks Relating to Intellectual Property If we are unable to obtain and maintain protection for the intellectual
property incorporated into our products, the value of our technology and
products will be adversely affected. Our success will depend in large part on our ability or the ability of our
licensors to obtain and maintain protection in the United States and other
countries for the intellectual property incorporated into our products. The
patent situation in the field of biotechnology and pharmaceuticals generally is
highly uncertain and involves complex legal and scientific questions. Neither
we nor our licensors may be able to obtain additional issued patents relating
to our technology. Even if issued, patents may be challenged, narrowed,
invalidated, or circumvented, which could limit our ability to stop competitors
from marketing similar products or limit the length of term of patent
protection we may have for our products. In addition, our patents and our
licensors patents also may not afford us protection against competitors with
similar technology. Because patent applications in the United States and many
foreign jurisdictions are typically not published until 18 months after filing,
or in some cases not at all, and because publications of discoveries in the
scientific literature often lag behind actual discoveries, neither we nor our
licensors can be certain that we or they were the first to make the inventions
claimed in issued patents or pending patent applications, or that we or they
were the first to file for protection of the inventions set forth in these
patent applications. If we fail to comply with our obligations in the agreements under which we
license development or commercialization rights to products or technology from
third parties, we could lose license rights that are important to our business. We are a party to a number of technology licenses that are important to
our business and expect to enter into additional licenses in the future. For
example, we hold licenses from Gilead Sciences, Nektar Therapeutics and Isis
Pharmaceuticals under patents relating to Macugen. These licenses impose
various commercialization, milestone payment, royalty, insurance and other
obligations on us. If we fail to comply with these obligations, the licensor
may have the right to terminate the license, in which event we would not be
able to market products, such as Macugen, that may be covered by the license. If we are unable to protect the confidentiality of our proprietary information
and know-how, the value of our technology and products could be adversely
affected. In addition to patented technology, we rely upon unpatented proprietary
technology, processes, and know-how. We seek to protect this information in
part by confidentiality agreements with our employees, consultants and third
parties. These agreements may be breached, and we may not have adequate
remedies for any such breach. In addition, our trade secrets may otherwise
become known or be independently developed by competitors. Third parties may own or control patents or patent applications that would be
infringed by our technologies, drug targets or potential products. This could
cause us to become involved in expensive patent litigation or other
proceedings, which could result in our incurring substantial costs and expenses
and liability for damages. This could also require us to seek licenses, which
could increase our development and commercialization costs. In either case, 33




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this could require us to stop some of our development and commercialization
efforts. We may not have rights under some patents or patent applications that
would be infringed by technologies that we use in our research, drug targets
that we select or product candidates that we seek to develop and commercialize.
Third parties may own or control these patents and patent applications in the
United States and abroad. These third parties could bring claims against us or
our collaborators that would cause us to incur substantial expenses and, if
successful against us, could cause us to pay substantial damages. Further, if a
patent infringement suit were brought against us or our collaborators, we or
they could be forced to stop or delay research, development, manufacturing or
sales of the product or product candidate that is the subject of the suit. As a result of patent infringement claims, or in order to avoid potential
claims, we or our collaborators may choose to seek, or be required to seek, a
license from the third party and would most likely be required to pay license
fees or royalties or both. These licenses may not be available on acceptable
terms, or at all. Even if we or our collaborators were able to obtain a
license, the rights may be nonexclusive, which would give our competitors
access to the same intellectual property. Ultimately, we could be prevented
from commercializing a product, or be forced to cease some aspect of our
business operations if, as a result of actual or threatened patent infringement
claims, we or our collaborators are unable to enter into licenses on acceptable
terms. This could harm our business significantly. There has been substantial litigation and other proceedings regarding the
patent and other intellectual property rights in the pharmaceutical and
biotechnology industries. In addition to the possibility of infringement claims
against us, we may become a party to other patent litigation and other
proceedings, including interference proceedings declared by the United States
Patent and Trademark Office and opposition proceedings in the European Patent
Office, regarding intellectual property rights with respect to our products and
technology. The cost to us of any patent litigation or other proceeding, even
if resolved in our favor, could be substantial. Some of our competitors may be
able to sustain the costs of such litigation or proceedings more effectively
than we can because of their substantially greater financial resources.
Uncertainties resulting from the initiation and continuation of patent
litigation or other proceedings could have a material adverse effect on our
ability to compete in the marketplace. Patent litigation and other proceedings
may also absorb significant management time. Risks Relating to Our Financial Results and Need for Financing We have a limited operating history and have incurred losses since inception.
If we do not generate significant revenues, we will not be able to achieve
profitability. We have no current source of product revenue. We have a limited operating
history and have not yet commercialized any products. To date, we have focused
primarily on the development of Macugen. We began operations in 2000, and we
have not been profitable in any quarter since inception. As of September 30,
2004, we had an accumulated deficit of approximately $209.1 million. We expect
to increase our spending significantly as we continue to expand our
infrastructure, development programs and commercialization activities. As a
result, we will need to generate significant revenues to pay these costs and
achieve profitability. We do not know whether or when we will become profitable
because of the significant uncertainties with respect to our ability to
generate revenues from the sale of our products and from our existing and
potential future collaborations. If we receive approval to market products, our revenues and operating
results may fluctuate, and this fluctuation could cause financial results to be
below expectations. Our operating results may fluctuate from period to period for a number of
reasons. If we begin to sell products, we may assume that revenues will
continue to grow; however, some of our operating expenses are fixed in the
short term. Because of this, even a relatively small revenue shortfall may
cause a periods results to be below our expectations or projections. A revenue
shortfall could arise from any number of factors, some of which we cannot
control. For example, we may face:  
    
    lower than expected demand for our products;  
    
    inability to provide adequate supply of our products;  
    
    changes in the governments or private payors reimbursement policies for our products; 34




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
    
    changes in wholesaler buying patterns;  
    
    increased competition from new or existing products;  
    
    fluctuations in foreign currency exchange rates; and  
    
    changes in our product pricing strategies. Of these, we would only have control over changes in our product pricing
strategies and, of course, there may be other factors that affect our revenues
in any given period. We may need additional financing, which may be difficult to obtain. Our failure
to obtain necessary financing or obtaining financing on unattractive terms
could adversely affect our development programs and other operations. We will require substantial funds to conduct development, including
preclinical testing and clinical trials, of our potential products. We will
also require substantial funds to meet our obligations to our licensors and
maximize the prospective benefits to us from our licensors, and manufacture and
market products that are approved for commercial sale in the future, including
Macugen. We currently believe that our available cash, cash equivalents and
marketable securities, expected milestone payments and reimbursements from
Pfizer under our collaboration and interest income will be sufficient to fund
our anticipated levels of operations through at least the end of 2005. However,
our future capital requirements will depend on many factors, including:  
    
    the success of our collaboration with Pfizer to develop and commercialize Macugen;
    
    the scope and results of our clinical trials;
    
    advancement of other product candidates into development;
    
    potential acquisition or in-licensing of other products or technologies;
    
    the timing of, extent of, and the costs involved in, obtaining regulatory approvals;
    
    the cost of manufacturing activities;
    
    the cost of commercialization activities, including product marketing, sales and distribution;
    
    the costs involved in preparing, filing, prosecuting, maintaining and
enforcing patent claims and other patent-related costs, including
litigation costs and the results of such litigation; and
    
    our ability to establish and maintain additional collaborative
arrangements. Additional financing may not be available to us when we need it or it may not
be available on favorable terms. If we are unable to obtain adequate financing
on a timely basis, we may be required to significantly curtail one or more of
our development, licensing or acquisition programs. We could be required to
seek funds through arrangements with collaborators or others that may require
us to relinquish rights to some of our technologies, product candidates or
products that we would otherwise pursue on our own. If we raise additional
funds by issuing equity securities, our then-existing stockholders will
experience dilution and the terms of any new equity securities may have
preferences over our common stock. General Company Related Risks Our executive officers, directors and major stockholders will maintain the
ability to control all matters submitted to stockholders for approval. Our executive officers, directors and stockholders who own more than 5% of
our outstanding common stock, in the aggregate, beneficially owned shares
representing approximately 45% of our capital stock as of November 1, 2004. As
a result, if these stockholders were to choose to act together, they would be
able to substantially influence all matters submitted to our stockholders for
approval, as well as our management and affairs. For example, these persons, if
they choose to act together, would substantially influence the election of
directors and approval of any merger, consolidation or sale of all or
substantially all of our assets. This concentration of voting power could delay
or prevent an acquisition of our company on terms that other stockholders may
desire. 35




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Provisions in our charter documents and under Delaware law may prevent or
frustrate attempts by our stockholders to change our management and hinder
efforts to acquire a controlling interest in us. Provisions of our corporate charter and bylaws may discourage, delay or
prevent a merger, acquisition or other change in control that stockholders may
consider favorable, including transactions in which you might otherwise receive
a premium for your shares. These provisions may also prevent or frustrate
attempts by our stockholders to replace or remove our management. These
provisions include:  
    
    a classified board of directors;
    
    limitations on the removal of directors;
    
    advance notice requirements for stockholder proposals and nominations;
    
    the inability of stockholders to act by written consent or to call special meetings; and
    
    the ability of our board of directors to designate the terms of and
issue new series of preferred stock without stockholder approval. The affirmative vote of the holders of at least 75% of our shares of
capital stock entitled to vote is necessary to amend or repeal the above
provisions of our certificate of incorporation. In addition, absent approval of
our board of directors, our bylaws may only be amended or repealed by the
affirmative vote of the holders of at least 75% of our shares of capital stock
entitled to vote. In addition, Section 203 of the Delaware General Corporation Law prohibits
a publicly held Delaware corporation from engaging in a business combination
with an interested stockholder, generally a person which together with its
affiliates owns or within the last three years has owned 15% of our voting
stock, for a period of three years after the date of the transaction in which
the person became an interested stockholder, unless the business combination is
approved in a prescribed manner. Accordingly, Section 203 may discourage, delay
or prevent a change in control of our company. Our stock price is volatile; purchasers of our common stock could incur
substantial losses. Our stock price is volatile. From our initial public offering in January
2004 through November 12, 2004, the trading price of our common stock has
ranged from $29.25 to $49.12 per share. The stock market in general and the
market for biotechnology companies in particular have experienced extreme
volatility that has often been unrelated to the operating performance of
particular companies. As a result of this volatility, investors may not be able
to sell their common stock at or above their respective purchase prices. The
market price for our common stock may be influenced by many factors, including:  
    
    results of our clinical trials or those of our competitors;
    
    the regulatory status of Macugen and our other potential products;
    
    the regulatory status of potentially competitive products;
    
    failure of any of our product candidates, if approved, to achieve commercial success;
    
    developments concerning our collaborators, including Pfizer;
    
    regulatory developments in, and outside of, the United States;
    
    developments or disputes concerning patents or other proprietary rights;
    
    our ability to manufacture products to commercial standards;
    
    public concern over our drugs;
    
    litigation;
    
    the departure of key personnel;
    
    future sales of our common stock;
    
    variations in our financial results or those of companies that are perceived to be similar to us;
    
    changes in the structure of healthcare payment systems;
    
    investors perceptions of us; and
    
    general economic, industry and market conditions. 36




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If there are substantial sales of our common stock, our stock price could
decline. If our existing stockholders sell a large number of shares of our common
stock or the public market perceives that existing stockholders might sell
shares of common stock, the market price of our common stock could decline
significantly. All of the shares sold in our initial public offering in January
2004 and secondary public offering in May 2004 are freely tradable without
restriction or further registration under the federal securities laws, unless
purchased by our affiliates as that term is defined in Rule 144 under the
Securities Act. Substantially all other shares of our common stock are saleable
under Rule 144 under the Securities Act. Also, some stockholders maintain
rights with respect to the registration of the sale of their shares of common
stock with the Securities and Exchange Commission. We have registered approximately 9,543,000 shares of common stock that are
authorized for issuance under our stock plans. As of September 30, 2004,
5,517,756 shares were subject to outstanding options, 3,713,011 of which were
immediately exercisable, but with respect to which we had the right to
repurchase at the initial exercise price all but 1,844,013 of the shares
issuable upon exercise of these options. Because they are registered, the
shares authorized for issuance under our stock plans can be freely sold in the
public market upon issuance, subject to our repurchase rights and the
restrictions imposed on our affiliates under Rule 144. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk. Our exposure to market risk is confined to our cash, cash equivalents and
marketable securities. We invest in high-quality financial instruments,
primarily money market funds, federal agency notes, asset backed securities,
corporate debt securities and United States treasury notes, with the effective
duration of the portfolio less than nine months and no security with an
effective duration in excess of two years, which we believe are subject to
limited credit risk. We currently do not hedge interest rate exposure. Due to
the short-term nature of our investments, we do not believe that we have any
material exposure to interest rate risk arising from our investments. Most of our transactions are conducted in United States dollars, although
we do have some development and commercialization agreements with vendors
located outside the United States. Transactions under certain of these
agreements are conducted in United States dollars, subject to adjustment based
on significant fluctuations in currency exchange rates. Transactions under
certain other of these agreements are conducted in the local foreign currency.
If the exchange rate undergoes a change of 10%, we do not believe that it would
have a material impact on our results of operations or cash flows. 
 Item 4. Controls and Procedures. Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed in our reports
filed under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SECs rules and regulations.
Disclosure controls and procedures include controls and procedures designed to
ensure that information required to be disclosed in our reports filed under the
Exchange Act is accumulated and communicated to management, including our chief
executive officer and chief financial officer as appropriate, to allow timely
decisions regarding disclosure. As required by Rule 13a-15 under the Exchange Act, we carried out an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act. This evaluation was carried out under the supervision and with
the participation of our management, including our chief executive officer and
our chief financial officer. Based on that evaluation, these officers have
concluded that, as of September 30, 2004, our disclosure controls and
procedures were adequate and designed to ensure that material information
relating to us would be made known to them by others. There have been no
changes in our internal controls over financial reporting (as defined in Rules
13a-15(b) and 15(d)-15(f) under the Exchange Act) or in other factors that has
materially affected or is reasonably likely to materially affect internal
controls over financial reporting. 37




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PART II  OTHER INFORMATION 
 Item 1. Legal Proceedings. We are currently not a party to any material legal proceedings. 
 Item 2. Unregistered Sale of Equity Securities and Use of Proceeds. None 
 Item 3. Defaults Upon Senior Securities. None 
 Item 4. Submission to a Vote of Security Holders. None 
 Item 5. Other Information. On August 20, 2004 and November 15, 2004, we entered into an Amended and
Restated Amendment to Employment Agreement with each of Anthony Adamis, our
Chief Scientific Officer and Senior Vice President, Research, and Glenn
Sblendorio, our Chief Financial Officer and Senior Vice President, Finance,
respectively. Each amendment provides that upon any change in control of our
company, 50% of all of such executives unvested equity rights in our company
will immediately vest, and if we terminate such executives employment without
cause or if he terminates his employment for good reason within three months
before or 12 months following the change in control, 100% of such executives
unvested equity rights in our company will immediately vest. The effect of the
amendments is to make the treatment of equity compensation in connection with a
change in control consistent among our executive officers. 
 Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: Exhibit No.
    
    Description10.1
    
    Amended and Restated Amendment to Employment Agreement, dated as of
August 20, 2004, by and between the Registrant and Anthony Adamis10.2
    
    Amended and Restated Amendment to Employment Agreement, dated as of
November 15, 2004, by and between the Registrant and Glenn P. Sblendorio31.1
    
    Rule 13a-14(a) Certification of Principal Executive Officer31.2
    
    Rule 13a-14(a) Certification of Principal Financial Officer32.1
    
    Rule 1350 Certification of Chief Executive Officer32.2
    
    Rule 1350 Certification of Chief Financial Officer
 38




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(b) Reports on Form 8-K: (i) On July 23, 2004, we filed a Form 8-K dated July 23, 2004, furnishing
under Item 12, Results of Operations and Financial Condition, Eyetechs press
release announcing financial results for the three and six months ended June
30, 2004. (ii) On August 18, 2004, we filed a Form 8-K dated August 17, 2004,
furnishing under Item 9, Regulation FD Disclosure, a press release in which
Eyetech and Pfizer Inc. announced the acceptance by the U.S. Food and Drug
Administration of our complete new drug application for the use of
Macugen()
(pegaptanib sodium injection) in the treatment of neovascular age-related
macular degeneration. (iii) On August 27, 2004, we filed a Form 8-K dated August 27, 2004,
furnishing under Item 8.01, Other Events, a press release in which Eyetech
and Pfizer Inc. announced the conclusion of the FDAs Dermatologic & Opthalmic
Drugs Advisory Committee in connection with the review by the FDA of the
investigational drug Macugen (pegaptanib sodium injection) for the treatment
of neovascular age-related macular degeneration. (iv) On August 30, 2004, we filed a Form 8-K dated August 27, 2004,
furnishing under Item 7.01, Regulation FD Disclosure, presentation slides
used by the Eyetech and Pfizer Inc. to present to the U.S. Food and Drug
Administrations (FDA) Dermatologic & Ophthalmic Drugs Advisory Committee in
connection with the review by the FDA of the investigational drug Macugen
(pegaptanib sodium injection) for the treatment of neovascular age-related
macular degeneration. (v) On September 20, 2004, we filed a Form 8-K dated September 20, 2004,
furnishing under Item 7.01, Regulation FD Disclosure, a press release in
which Eyetech and Pfizer Inc. provided a regulatory update on the use of
Macugen() (pegaptanib sodium injection) in the treatment of neovascular
age-related macular degeneration. 39




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SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this Report on Form 10-Q to be signed on its
behalf by the undersigned, thereunto duly authorized. EYETECH PHARMACEUTICALS, INC.(Registrant)Dated: November 15, 2004By:
    
    /s/ DAVID R. GUYERDavid R. Guyer, M.D.Chief Executive OfficerBy:
    
    /s/ GLENN P. SBLENDORIOGlenn P. SblendorioChief Financial Officer
 40




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EXHIBIT INDEX Exhibit No.
    
    Description10.1
    
    Amended and Restated Amendment to Employment Agreement, dated as of August 20, 2004, by and between the Registrant and Anthony Adamis10.2
    
    Amended and Restated Amendment to Employment Agreement, dated as of November 15, 2004, by and between the Registrant and Glenn P. Sblendorio31.1
    
    Rule 13a-14(a) Certification of Principal Executive Officer31.2
    
    Rule 13a-14(a) Certification of Principal Financial Officer32.1
    
    Rule 1350 Certification of Chief Executive Officer32.2
    
    Rule 1350 Certification of Chief Financial Officer