**UNITED STATES****SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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**FORM 10-Q**

 

| **(Mark One)**                                                                                                                                                                                                                             |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                       |
| **ý**                                                                                                                                                                                                                                 | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                                       |
| **For the quarterly period ended  March 31, 2003**                                                                                                                                                                                         |
|                                                                                                                                                                                                                                       |
| **OR**                                                                                                                                                                                                                                     |
|                                                                                                                                                                                                                                       |
| **o**                                                                                                                                                                                                                                      | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                                       |
| **For the transition period from                    to                  ** |

** **

**Commission File Number: 000-30289**

** **

**PRAECISPHARMACEUTICALS INCORPORATED**

(Exact name ofregistrant as specified in its charter)

** **

| **Delaware**                                                     |   | **04–3200305**                   |
|------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                             |
| **830 Winter Street, Waltham, MA  02451-1420**                   |
| (Address of  principal executive offices and zip code)           |
|                                                             |
| **(781) 795-4100**                                               |
| (Registrant’s  telephone number, including area code)       |

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.             Yes ý  No o

 

Indicate by check mark whether the registrant is an accelerated filer (asdefined in Rule 12b-2 of the Exchange Act).     Yes ý  No o

 

Asof April 30, 2003, there were 51,832,850 shares of the registrant’s commonstock, $.01 par value, outstanding.

 

 

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**PRAECISPHARMACEUTICALS INCORPORATEDFORM 10-Q**

 

**FOR THE QUARTER ENDED MARCH 31, 2003**

 

**INDEX**

 
| **PART I.**                                   | **FINANCIAL INFORMATION**                                                                      |
|-----------------------------------------------|------------------------------------------------------------------------------------------------|
|                                          |
| Item 1.                                       | Financial Statements  (Unaudited)                                                              |
|                                          |
|                                          | Condensed  Consolidated Balance Sheets - December 31,2002 and March 31, 2003                   |
|                                          |
|                                          | Condensed  Consolidated Statements of Operations - three months ended March 31, 2002 and  2003 |
|                                          |
|                                          | Condensed  Consolidated Statements of Cash Flows - three months ended March 31, 2002 and  2003 |
|                                          |
|                                          | Notes  to Condensed Consolidated Financial Statements                                          |
|                                          |
| Item  2.                                      | Management’s  Discussion and Analysis of Financial Condition and Results of Operations    |
|                                          |
| Item 3.                                       | Quantitative and Qualitative  Disclosures About Market Risk                                    |
|                                          |
| Item  4.                                      | Controls  and Procedures                                                                       |
|                                          |
| **PART II.**                                  | **OTHER INFORMATION**                                                                          |
|                                          |
| Item  6.                                      | Exhibits  and Reports on Form 8-K                                                              |
|                                          |
| **SIGNATURE**                                 |
|                                          |
| **CERTIFICATION OF  CHIEF EXECUTIVE OFFICER** |
|                                          |
| **CERTIFICATION  OF CHIEF FINANCIAL OFFICER** |
|                                          |
| **EXHIBIT INDEX**                             |

 

2

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**PART I.  FINANCIALINFORMATION**

 

**ITEM1.  FINANCIAL STATEMENTS.**

 

**PRAECISPHARMACEUTICALS INCORPORATEDCondensed Consolidated BalanceSheets(In thousands, except share data)(Unaudited)**

 
|                                                                                                                                           |   | **December 31,  2002** |    | **March 31,  2003** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|---------|---------------------|--------|
|                                                                                                                                           |   |                   |    |                |   |
| **Assets**                                                                                                                                     |   |                   |    |                |   |
| Current assets:                                                                                                                                |   |                   |    |                |   |
| Cash and cash  equivalents                                                                                                                     |   | $                      | 64,913  |                | $      | 90,441 |   |
| Marketable securities                                                                                                                          |   | 130,122                |    | 90,828              |   |
| Prepaid expenses and  other assets                                                                                                             |   | 848                    |    | 603                 |   |
|                                                                                                                                           |   |                   |    |                |   |
| Total current assets                                                                                                                           |   | 195,883                |    | 181,872             |   |
|                                                                                                                                           |   |                   |    |                |   |
| Property and equipment,  net                                                                                                                   |   | 71,252                 |    | 70,199              |   |
| Due from officer                                                                                                                               |   | 933                    |    | 908                 |   |
| Other assets                                                                                                                                   |   | 182                    |    | 115                 |   |
|                                                                                                                                           |   |                   |    |                |   |
| Total assets                                                                                                                                   |   | $                      | 268,250 |                | $      | 253,094 |   |
|                                                                                                                                           |   |                   |    |                |   |
| **Liabilities  and Stockholders’ Equity**                                                                                                 |   |                   |    |                |   |
| Current liabilities:                                                                                                                           |   |                   |    |                |   |
| Accounts payable                                                                                                                               |   | $                      | 3,285   |                | $      | 1,269 |   |
| Accrued expenses                                                                                                                               |   | 7,075                  |    | 5,153               |   |
|                                                                                                                                           |   |                   |    |                |   |
| Total current  liabilities                                                                                                                     |   | 10,360                 |    | 6,422               |   |
| Long-term debt                                                                                                                                 |   | 33,000                 |    | 33,000              |   |
|                                                                                                                                           |   |                   |    |                |   |
| Commitments and  contingencies                                                                                                                 |   |                   |    |                |   |
|                                                                                                                                           |   |                   |    |                |   |
| Stockholders’ equity:                                                                                                                     |   |                   |    |                |   |
| Common Stock, $0.01 par  value; 200,000,000 shares authorized; 51,801,423 shares in 2002 and  51,832,475 shares in 2003 issued and outstanding |   | 518                    |    | 518                 |   |
| Accumulated other  comprehensive income                                                                                                        |   | 203                    |    | 364                 |   |
| Additional paid-in  capital                                                                                                                    |   | 354,676                |    | 354,712             |   |
| Accumulated deficit                                                                                                                            |   | (130,507               | )       | (141,922            | )      |
|                                                                                                                                           |   |                   |    |                |   |
| Total stockholders’  equity                                                                                                               |   | 224,890                |    | 213,672             |   |
|                                                                                                                                           |   |                   |    |                |   |
| Total liabilities and  stockholders’ equity                                                                                               |   | $                      | 268,250 |                | $      | 253,094 |   |

 

*See accompanying notes.*

 

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**PRAECIS PHARMACEUTICALS INCORPORATEDCondensed Consolidated Statementsof Operations(In thousands, except per share data)(Unaudited)**

 
|                                                             |   | **Three Months Ended  March 31,** |       |
|------------------------------------------------------------------|--------|-----------------------------------|------------|
|                                                             |   | **2002**                          |       | **2003** |   |
|                                                             |   |                              |       |   |   |
| Revenue                                                          |   | $                                 | —     |   | $ | — |   |
|                                                             |   |                              |       |   |   |
| Costs and expenses:                                              |   |                              |       |   |   |
| Research and development                                         |   | 11,336                            |       | 8,679 |   |
| Sales and marketing                                              |   | 440                               |       | 1,028 |   |
| General and  administrative                                      |   | 2,114                             |       | 2,124 |   |
| Total costs and expenses                                         |   | 13,890                            |       | 11,831 |   |
|                                                             |   |                              |       |   |   |
| Operating loss                                                   |   | (13,890                           | )          | (11,831 | ) |
|                                                             |   |                              |       |   |   |
| Interest income, net                                             |   | 1,204                             |       | 416 |   |
|                                                             |   |                              |       |   |   |
| Net loss                                                         |   | $                                 | (12,686    | ) | $ | (11,415 | ) |
|                                                             |   |                              |       |   |   |
| Basic and diluted net  loss per share                            |   | $                                 | (0.25      | ) | $ | (0.22 | ) |
|                                                             |   |                              | ** ** |   | ** ** |
| Weighted average number  of basic and diluted shares outstanding |   | 51,415                            |       | 51,820 |   |

 

*See accompanying notes.*

 

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**PRAECISPHARMACEUTICALS INCORPORATEDCondensed Consolidated Statementsof Cash Flows(In thousands)(Unaudited)**

 
|                                                                     |   | **Three Months Ended  March 31,** |    |
|--------------------------------------------------------------------------|--------|-----------------------------------|---------|
|                                                                     |   | **2002**                          |    | **2003** |   |
| **Operating  activities:**                                               |   |                              |    |   |   |
| Net loss                                                                 |   | $                                 | (12,686 | ) | $ | (11,415 | ) |
| Adjustments to reconcile  net loss to cash used in operating activities: |   |                              |    |   |   |
| Depreciation and  amortization                                           |   | 1,173                             |    | 1,140 |   |
| Stock compensation                                                       |   | (193                              | )       | 30 |   |
| Changes in operating  assets and liabilities:                            |   |                              |    |   |   |
| Accounts receivable                                                      |   | 458                               |    | — |   |
| Prepaid expenses and  other assets                                       |   | (5                                | )       | 337 |   |
| Accounts payable                                                         |   | 2,761                             |    | (2,016 | ) |
| Accrued expenses                                                         |   | (7                                | )       | (1,922 | ) |
|                                                                     |   |                              |    |   |   |
| Net cash used in  operating activities                                   |   | (8,499                            | )       | (13,846 | ) |
|                                                                     |   |                              |    |   |   |
| **Investing  activities:**                                               |   |                              |    |   |   |
| Purchase of  available-for-sale securities                               |   | (28,622                           | )       | (17,529 | ) |
| Sales or maturities of  available-for-sale securities                    |   | 25,747                            |    | 56,984 |   |
| Purchase of property and  equipment                                      |   | (985                              | )       | (87 | ) |
|                                                                     |   |                              |    |   |   |
| Net cash (used in)  provided by investing activities                     |   | (3,860                            | )       | 39,368 |   |
|                                                                     |   |                              |    |   |   |
| **Financing  activities:**                                               |   |                              |    |   |   |
| Proceeds from exercises of  stock options                                |   | 784                               |    | 6 |   |
|                                                                     |   |                              |    |   |   |
| Net cash provided by  financing activities                               |   | 784                               |    | 6 |   |
|                                                                     |   |                              |    |   |   |
| Net (decrease) increase  in cash and cash equivalents                    |   | (11,575                           | )       | 25,528 |   |
| Cash and cash  equivalents, beginning of period                          |   | 144,685                           |    | 64,913 |   |
|                                                                     |   |                              |    |   |   |
| Cash and cash  equivalents, end of period                                |   | $                                 | 133,110 |   | $ | 90,441 |   |

 

*See accompanying notes.*

 

5

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**PRAECIS PHARMACEUTICALS INCORPORATEDNotes to Condensed ConsolidatedFinancial Statements(Unaudited)**

 

# **1.**                                      Basis of Presentation

 

The accompanying condensedconsolidated financial statements have been prepared by PRAECIS PHARMACEUTICALSINCORPORATED (the “Company”) in accordance with generally accepted accountingprinciples and pursuant to the rules and regulations of the Securities andExchange Commission (the “SEC”). Certain information and footnote disclosures normally included infinancial statements prepared in accordance with generally accepted accountingprinciples have been condensed or omitted pursuant to such rules andregulations.  It is suggested that thefinancial statements be read in conjunction with the audited financialstatements and the accompanying notes included in the Company’s Annual Reporton Form 10-K for the year ended December 31, 2002.

 

The information furnishedreflects all adjustments which, in the opinion of management, are considerednecessary for a fair presentation of results for the interim periods.  Such adjustments consist only of normalrecurring items.  It should also benoted that results for the interim periods are not necessarily indicative ofthe results expected for the full year or any future period.

 

The preparation of thesefinancial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosures of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

 

# **2.**                                      Summary of Significant Accounting Principles

*** ***

***Principlesof Consolidation***

 

The accompanying consolidatedfinancial statements include the Company’s accounts and the accounts of itswholly owned real estate subsidiary. All significant intercompany account balances and transactions betweenthe companies have been eliminated.

*** ***

***Stock-Based Compensation***

 

TheCompany has elected to follow Accounting Principles Board (“APB”) OpinionNo. 25, *Accounting for Stock Issued toEmployees* (“APB No. 25”), in accounting for its stock-based employeecompensation plans using the intrinsic value method, rather than thealternative fair value accounting method provided for under Statement ofFinancial Accounting Standards (“SFAS”)No. 123, *Accounting for Stock-BasedCompensation* (“SFAS No. 123”), as SFAS No. 123 requiresthe use of option valuation models that were not developed for use in valuingemployee stock options. Under APB No. 25, when the exercise price of optionsgranted to employees under these plans equals the market price of theunderlying stock on the date of grant, no compensation expense is required.

 

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Thereconciliation of net loss and net loss per share, as reported, to pro formanet loss and net loss per share giving effect to employee stock-basedcompensation accounted for using the fair value accounting method, is asfollows (in thousands, except per share data):

 

|                                                                                                                                                                                                              |   | **Three Months Ended  March 31,** |    |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|---------|
|                                                                                                                                                                                                              |   | **2002**                          |    | **2003** |   |
|                                                                                                                                                                                                              |   |                              |    |   |   |
| Net loss, as reported                                                                                                                                                                                             |   | $                                 | (12,686 | ) | $ | (11,415 | ) |
|                                                                                                                                                                                                              |   |                              |    |   |   |
| Deduct/(add):  Stock compensation cost as computed under APB No. 25                                                                                                                                               |   | (193                              | )       | 30 |   |
|                                                                                                                                                                                                              |   |                              |    |   |   |
| Deduct:  Stock based employee compensation cost, net of related tax effects, that  would have been included in the determination of net loss as reported if the  fair value method had been applied to all awards |   | (2,386                            | )       | (2,798 | ) |
|                                                                                                                                                                                                              |   |                              |    |   |   |
| Pro  forma net loss                                                                                                                                                                                               |   | $                                 | (15,265 | ) | $ | (14,183 | ) |
|                                                                                                                                                                                                              |   |                              |    |   |   |
| Diluted  net loss per share, as reported                                                                                                                                                                          |   | $                                 | (0.25   | ) | $ | (0.22 | ) |
|                                                                                                                                                                                                              |   |                              |    |   |   |
| Diluted  net loss per share, pro forma                                                                                                                                                                            |   | $                                 | (0.30   | ) | $ | (0.27 | ) |

 

Thefair value of the stock options at the date of grant was estimated using theBlack-Scholes option pricing model with the following weighted averageassumptions: 

 
|                    |   | **2002** |   | **2003** |   |
|-------------------------|--------|----------|--------|----------|--------|
|                    |   |     |   |     |   |
| Risk-free interest rate |   | 4.0      | %      | 4.0      | %      |
| Expected life (years)   |   | 6        |   | 6        |   |
| Volatility              |   | 103      | %      | 103      | %      |

 

TheCompany has never declared or paid any cash dividends on any of its capitalstock and does not expect to do so in the foreseeable future.

 

***NetLoss Per Share***

 

Basic net loss per share is basedon the weighted average number of common shares outstanding.  For the three months ended March 31, 2002and 2003, diluted net loss per common share is the same as basic net loss percommon share as the inclusion of common stock equivalents, including the effectof stock options and warrants, would be antidilutive due to the Company’s netlosses for all periods presented.

 

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***ComprehensiveIncome***

 

SFAS No. 130, *ReportingComprehensive Income,*establishes standards for the reporting anddisplay of comprehensive income (loss) and its components in the consolidatedfinancial statements.  The Company’saccumulated other comprehensive income is comprised primarily of net unrealizedgains or losses on available-for-sale securities.  For the three months ended March 31, 2002 and 2003,respectively, comprehensive loss was as follows (in thousands):

 

|                                                  |   | **Three Months Ended  March 31,** |    |
|-------------------------------------------------------|--------|-----------------------------------|---------|
|                                                  |   | **2002**                          |    | **2003** |   |
| Net loss                                              |   | $                                 | (12,686 | ) | $ | (11,415 | ) |
| Changes in comprehensive  loss:                       |   |                              |    |   |   |
| Net unrealized holding  (losses) gains on investments |   | (636                              | )       | 161 |   |
| Total comprehensive loss                              |   | $                                 | (13,322 | ) | $ | (11,254 | ) |

 

***Recent Accounting Pronouncements***

 

OnDecember 31, 2002, the Financial Accounting Standards Board (“FASB”) issuedSFAS No. 148, *Accounting for Stock-Based Compensation – Transition and Disclosure*(“SFAS No. 148”).  SFAS No. 148 amendsSFAS No. 123 to provide alternative methods of transition to the fair valuemethod of accounting for stock-based employee compensation.  SFAS No. 148 also amends the disclosureprovisions of SFAS No. 123 and APB Opinion No. 28, *Interim Financial Reporting*toinclude increased pro-forma disclosure of the effects of stock-based employeecompensation on the results of operations. SFAS No. 148 became effective for fiscal years ending after December 15,2002.  The Company has elected tocontinue to account for employee stock-based compensation using the intrinsicvalue method as described in APB No. 25 and, therefore, the adoption of SFASNo. 148 did not have a material impact on the Company’s consolidated results ofoperations for the three months ended March 31, 2003.

 

In January2003, the FASB issued FASB Interpretation No. 46, *Consolidation of Variable InterestEntities* (“FIN No. 46”).  FINNo. 46 sets forth the criteria used in determining whether an investment in avariable interest entity (“VIE”) should be consolidated and is based on thegeneral premise that companies that control another entity through interestsother than voting interests should consolidate the controlled entity.  FIN No. 46 would require the consolidationof specified VIE’s created before February 1, 2003 in the Company’s September30, 2003 Quarterly Report on Form 10-Q. For specified VIE’s created after January 31, 2003, FIN No. 46 wouldrequire consolidation in this Quarterly Report on Form 10-Q.  The Company does not have any VIE’s.  Accordingly, the implementation of FIN No.46 will not have any impact on its consolidated financial statements.

# ** **

# **3.**                                     Due from Officer

 

InMay 2002, the Company extended a $1.0 million loan to an officer in connectionwith the officer’s acceptance of employment with the Company. The loan is fullrecourse, uncollateralized, bears no interest and becomes due and payable inMay of 2012. Under the terms of the promissory note (the “Note”) executed inconnection with the loan, 10% of the original loan principal will be forgivenannually on each anniversary date of the Note, provided that the officerremains an employee of the Company. The Company is not responsible for thepersonal income tax implications related to the forgiveness of this Note. Uponthe officer’s voluntary termination of employment with the Company, other thanfor Good Reason (as defined), and upon termination by the Company of theofficer’s employment for Cause (as defined), the Note becomes immediately dueand payable.

 

8

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# **4.**                                     Guarantees

 

In November 2002, theFASB issued FASB Interpretation No. 45 (“FIN No. 45”), *Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others, an interpretation of FASB StatementsNo. 5, 57, and 107 and Rescission of FASB Interpretation No. 34*.  FIN No. 45 elaborates on the disclosures tobe made by a guarantor in its interim and annual financial statements about itsobligations under certain guarantees that it has issued. It also requires thata guarantor recognize, at the inception of a guarantee, a liability for thefair value of certain guarantees. The initial recognition and measurementprovisions of FIN No. 45 are applicable on a prospective basis to guaranteesissued or modified after December 31, 2002.

 

Under its Amended andRestated Certificate of Incorporation (the “Charter”) and Third Amended andRestated By-Laws (the “By-Laws”), the Company has agreed to indemnify anyperson who is made a party to any action or threatened with any action as aresult of such person’s serving or having served as an officer or director ofthe Company or having served, at the Company’s request, as an officer ordirector of another company. The indemnification does not apply if the personis adjudicated not to have acted in good faith in the reasonable belief thathis or her actions were in the best interests of the Company. Theindemnification obligation survives termination of the indemnified party’sinvolvement with the Company but only as to those claims arising from suchperson’s role as an officer or director. The maximum potential amount of future payments that the Company couldbe required to make under the Charter and By-Law provisions is unlimited;however, the Company has director and officer insurance policies that may limitits exposure and enable it to recover a portion of any future amounts paid. Theestimated fair value of these indemnification provisions is minimal.  Most of these indemnification provisionswere grandfathered under the provisions of FIN No. 45 as they were in effectprior to December 31, 2002. Accordingly, the Company has no liabilitiesrecorded for these provisions as of March 31, 2003.

 

The Company enters intoindemnification provisions under its agreements with other companies in itsordinary course of business, typically with corporate collaborators, contractorsand clinical investigators.  Under theseprovisions, the Company generally agrees to indemnify and hold harmless theindemnified party for losses suffered or incurred by the indemnified party as aresult of the Company’s activities. These indemnification provisions generallysurvive termination of the underlying agreement. The maximum potential amountof future payments the Company could be required to make under theseindemnification provisions is unlimited. The Company has not incurred materialcosts to defend lawsuits or settle claims related to these indemnificationagreements. As a result, the estimated fair value of these agreements isminimal.  Accordingly, the Company hasno liabilities recorded for these agreements as of March 31, 2003.

 

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| **ITEM 2.** |   | **MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF OPERATIONS.** |
|-------------|--------|--------------------------------------------------------------------------------------------------|

 

*Thefollowing discussion of our financial condition and results of operationsshould be read together with the condensed consolidated financial statementsand accompanying notes to those statements included elsewhere in this Form10-Q.  This Form 10-Q containsforward-looking statements within the meaning of Section 21E of the SecuritiesExchange Act of 1934, as amended, that involve risks and uncertainties.  All statements other than statements ofhistorical information set forth herein are forward-looking and may containinformation about financial results, economic conditions, trends and knownuncertainties.  Our actual results coulddiffer materially from those discussed in these forward-looking statements as aresult of a number of factors, which include those discussed in this sectionand elsewhere in this report, and the risks discussed in our other filings withthe Securities and Exchange Commission. Readers are cautioned not to place undue reliance on theseforward-looking statements, which reflect management’s analysis, judgment,belief or expectation only as of the date hereof.  PRAECIS undertakes no obligation to publicly reissue or modifythese forward-looking statements to reflect events or circumstances that ariseafter the date hereof.*

 

**Overview**

 

Since our inception, we have been engaged in developing drugs for the treatment of a variety of human diseases.  Our lead program is the development of PlenaxisTM (abarelix for injectable suspension), a drug for the treatment of diseases that respond to the lowering of certain hormone levels. We are developing Plenaxis for the treatment of hormonally responsive advanced prostate cancer and endometriosis.  We are seeking approval for Plenaxis in the United States for use in a defined sub-population of advanced prostate cancer patients for whom the use of existing hormonal therapies may not be appropriate.  The specific sub-population of patients will be determined through discussions with the FDA. We resubmitted our new drug application, or NDA, to the FDA on February 27, 2003 seeking approval for this indication and expect a response from the FDA by the end of August 2003.  We also intend to file, during the second quarter of 2003, a registration dossier in Europe seeking approval to market Plenaxis for the treatment of a broad population of hormonally responsive advanced prostate cancer patients.

 

We are conducting clinical trials of Apan, our proprietary drug candidate for the treatment of Alzheimer’s disease.  We have filed an investigational new drug application, or IND, for our proprietary compound, PPI-2458, in development for the treatment of non-Hodgkin’s lymphoma.  In addition, we have a number of other product candidates in the research or preclinical development stage.

 

Since our inception, wehave had no revenues from product sales. In the past, a significant portion of our revenues was received under collaborationagreements through which we converted the potential value underlying ourPlenaxis program into a stream of upfront, milestone and expense reimbursementpayments from corporate collaborators. In 2001, we regained full ownership of our Plenaxis program and, as aresult, revenues from collaborations have ended and we do not anticipatereceiving any additional revenues under any former collaborationagreements.  Substantially all of ourexpenditures to date have been for drug development and commercializationactivities and for general and administrative expenses.

 

Due to the costsassociated with the continued development and potential commercialization ofPlenaxis for the treatment of a defined sub-population of advanced prostatecancer patients, as well as other research and development and general andadministrative expenses, and our lack of revenues, we had a net operating lossfor the first quarter of 2003.  Weexpect to continue to have net operating losses at least through 2005.  We do not expect to generate operatingincome unless we receive FDA approval to market Plenaxis in the United Statesfor the treatment of a defined sub-population of advanced prostate cancerpatients.  Assuming receipt by the endof 2003 of such FDA approval, partnering of clinical programs at opportunetimes and continued conservative fiscal management, we believe that we shouldhave sufficient financial resources to execute our operating plan and attainprofitability by 2006 without returning to the capital markets.

 

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Our accumulated deficitas of March 31, 2003 was approximately $141.9 million.

 

At March 31, 2003, we had147 full-time employees, 116 of whom were engaged in research and developmentactivities, compared to 131 full-time employees at March 31, 2002, 102 of whomwere engaged in research and development activities.

 

**Results of Operations**

 

**Three Months Ended March 31, 2003 Compared To Three Months Ended March 31, 2002**

 

Revenues for the threemonths ended March 31, 2003 and 2002 were zero due to the termination of ourPlenaxis collaboration agreements during the fourth quarter of 2001.  If the FDA grants marketing approval forPlenaxis in the United States by the end of August 2003, we estimate that wewill begin to ship product in the fourth quarter of 2003.  If theFDA does not grant marketing approval for Plenaxis in the United States, or ifapproval is delayed, such denial or delay is likely to have a materiallyadverse impact on our future planned revenues.

 

Research and developmentexpenses for the three months ended March 31, 2003 decreased 23% toapproximately $8.7 million, from approximately $11.3 million for thecorresponding period in 2002.  Thedecrease in expenses reflects reduced spending in our clinical and preclinicalprograms.  As a result of theresubmission of our NDA in February 2003, spending on the clinical developmentof Plenaxis for the treatment of hormonally responsive advanced prostate cancerduring the first quarter of 2003 was reduced significantly.  We also reduced spending on ourendometriosis program during the first quarter 2003 pending final analysis ofstudy results and decisions regarding the next steps for development.  We plan to initiate during 2003 a phase Ibclinical trial for Apan and initiate a phase I clinical trial for PPI-2458 and,accordingly, will increase our spending in these areas.  Overall, we expect our research anddevelopment expenses for the remainder of 2003 to remain lower than 2002spending and then increase thereafter. We are unable to predict the precise level of spending on individualclinical programs due to the uncertain nature of clinical development.

 

We currently have severalother ongoing research and development programs. Using industry estimates,typical drug development programs may last for ten or more years and may costhundreds of millions of dollars to complete. As our programs progress, we willassess the possibility of entering into corporate collaborations to offset aportion of development costs. The ultimate success of our research anddevelopment programs and the impact of these programs on our operations andfinancial results cannot be accurately predicted and will depend, in largepart, upon the outcome and timing of many variables outside of our control.

 

We began our clinicalprogram to develop Plenaxis for the treatment of prostate cancer in 1996. InDecember 2000, we submitted an NDA to the FDA for Plenaxis for the treatment ofhormonally responsive prostate cancer. However, the FDA raised concerns overthe occurrence of immediate-onset, systemic allergic reactions in a smallsubset of clinical trial patients. In addition, the FDA expressed concern that,in a subset of patients treated beyond the three-month pivotal study time frame,fluctuations in testosterone levels were observed more frequently in patientstreated with Plenaxis than in patients treated with either Lupron Depot orLupron Depot plus Casodex.  We haveproposed various alternatives to the FDA to address these issues and improvethe risk/benefit profile of Plenaxis. As mentioned above, we resubmitted our NDA on February 27, 2003 andexpect a response from the FDA within six months of that date. However, wecannot assure investors that we will be successful in obtaining approval in theUnited States or abroad for Plenaxis for the treatment of any portion of thehormonally responsive advanced prostate cancer patient population or for anyother indication.

 

In 1998, we began ourclinical program to develop Plenaxis for the treatment of endometriosis. Wecompleted a phase II study of Plenaxis for the treatment of pain associatedwith endometriosis in March 2002. Results from this study have suggested thatwe may be able to utilize a lower dose and/or a more prolonged dosing intervalin future studies to reduce drug exposure and attendant bone mineral densityloss, a known consequence of hormonal therapies that lower estrogenlevels.  Accordingly, during 2002, weinitiated and completed both the dosing and observation phases of apharmacokinetic study of Plenaxis for the treatment of endometriosis to examinethe appropriate

 

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dose and dosingschedule.  Upon completion of our reviewof the results of this study, we will determine the next steps for development,which will include evaluating potential partnership opportunities.

 

We began our clinicalprogram for Apan in 2000.  We arecurrently conducting a normal volunteer, phase Ia dose escalation study of Apanand believe that we have determined a maximum tolerated dose, or MTD, inhealthy volunteers.  The FDA hasindicated that we may proceed with our proposed phase Ib trial in Alzheimer’sdisease patients.  The phase Ib studywill evaluate a single administration of Apan in a series of patient cohorts,escalating the dose in successive cohorts, with the goal of establishing theMTD in patients. We expect to initiate the phase Ib trial during the secondquarter of 2003.  Upon completion of thephase Ib study and, assuming favorable FDA review of the study’s results, weintend to initiate a phase Ic trial examining multiple administrations of aselected Apan dose in Alzheimer’s disease patients.

 

We plan to begin ourclinical program for PPI-2458 in the second half of 2003.  We recently announced the submission to theFDA of an IND to initiate a phase I clinical study of PPI-2458 in non-Hodgkin’slymphoma patients.  PPI-2458 is a novel,proprietary molecule based on the fumagillin class of compounds that have beenshown to prevent both abnormal cell growth and the formation of new bloodvessels, which contribute to aberrant tissue growth.  In the proposed study, we will evaluate an oral formulation ofPPI-2458 in non-Hodgkin’s lymphoma patients who are no longer deriving benefitsfrom other therapies.   In addition tonon-Hodgkin’s lymphoma, we also intend to continue evaluating the potentialutility of PPI-2458 for treating certain other cancers, as well as rheumatoidarthritis.

 

Sales and marketingexpenses for the three months ended March 31, 2003 increased 134% toapproximately $1.0 million, from approximately $0.4 million for thecorresponding period in 2002.  Theincrease in sales and marketing expenses was due to increased costs related topre-commercialization efforts, in particular for market research, variousphysician meetings, and sales force sizing and deployment activities, inconnection with the possible launch of Plenaxis in the United States.  We intend, upon FDA approval of our NDA, tomarket and sell Plenaxis in the United States through our own marketing andsales team.  Accordingly, assuming FDAapproval of Plenaxis, we expect our sales and marketing expenses to continue toincrease during 2003 and thereafter, and to include, but not be limited to,expenses relating to the building of a commercial infrastructure, the cost ofour sales force, and promotional and marketing programs.

 

General andadministrative expenses for the three months ended March 31, 2003 wereapproximately $2.1 million, which is consistent with general and administrativeexpenses for the corresponding period in 2002. We expect that general andadministrative expenses will increase slightly during 2003 and thereafter basedon normal hiring of additional administrative personnel to support  the continued growth of our research,development and commercialization initiatives.

 

Net interest income forthe three months ended March 31, 2003 decreased 65% to approximately $0.4million, from approximately $1.2 million for the corresponding period in 2002. The decrease in net interest income was dueprimarily to reduced average interest rates and lower average cash balances.

 

AtDecember 31, 2002, we had federal net operating loss carryforwards of$129.0 million that will expire in varying amounts through 2022, if notutilized. Utilization of net operating loss and tax credit carryforwards willbe subject to substantial annual limitations under the Internal Revenue Code of1986, as amended. The annual limitations may result in the expiration of thenet operating loss and tax credit carryforwards before full utilization.

 

**Liquidity and Capital Resources**

 

Todate, our operations and capital requirements have been financed primarily withthe proceeds of public and private sales of common stock and preferred stock,research and development partnerships, collaborative agreements and investmentincome.

 

At March 31, 2003, we hadcash, cash equivalents and marketable securities of approximately $181.3million and working capital of approximately $175.5 million, compared toapproximately $195.0 million and $185.5 million, respectively, at December 31,2002.  During 2003, we expect to useapproximately $75.0 million of our current cash and investments in ourbusiness.  We believe that our existingcash and investments will be sufficient to meet the working capital and capitalexpenditure needs under our current operating plan through approximately theend of 2005.  Assuming receipt by theend of 2003 of regulatory

 

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approval to marketPlenaxis in the United States for a defined sub-population of advanced prostatecancer patients, partnering of clinical programs at opportune times andcontinued conservative fiscal management, we believe that we should havesufficient financial resources to execute our operating plan and attainprofitability by 2006 without returning to the capital markets.

 

For the three monthsended March 31, 2003, net cash of approximately $13.8 million was used inoperating activities, compared to approximately $8.5 million used in operatingactivities during the three months ended March 31, 2002. During the threemonths ended March 31, 2003, our use of cash in operations was due principallyto our net loss of approximately $11.4 million and the reduction in accountspayable and accrued expenses of $3.9 million, partially offset by depreciationand amortization.  We expect our cashutilization to increase during 2003 as a result of an overall increase inoperating expenses as we prepare for thepossible commercial launch of Plenaxis in the United States, continue withclinical trials for Apan, initiate a new clinical program for PPI-2458 andexpand our research and development initiatives.  The actual amount of these expenditures will depend on numerous factors,including the timing of expenses and the timing and progress of our research,development, marketing and sales efforts.

 

Net cash provided byinvesting activities of approximately $39.4 million for the three months endedMarch 31, 2003 consisted primarily of net sales or maturities of marketablesecurities of approximately $57.0 million. This compares to net cash used in investing activities of approximately$3.9 million for the corresponding period in 2002.  Net cash used in investing activities for the three months endedMarch 31, 2002 was primarily related to purchases of marketable securities.

 

In July 2000, inconnection with the purchase, through our wholly owned real estate subsidiary,of our corporate headquarters and research facility in Waltham, Massachusetts,the subsidiary entered into an acquisition and construction loan agreementproviding for up to $33.0 million in financing for the acquisition of, andimprovements to, the facility. As of March 31, 2003, $33.0 million wasoutstanding under the loan agreement. Advances bear interest at a rate equal tothe 30-day LIBOR plus 2.0% (3.30% at March 31, 2003). Interest is payablemonthly in arrears. Principal is due and payable in full on July 30, 2003,subject to two one-year extension options. We have provided the lender with notice of our intention to exercise thefirst one-year extension option to extend the maturity date until July 30, 2004and we believe that we will be able to satisfy the conditions for thisextension set forth in the loan agreement. The loan is secured by the facility, together with all fixtures,equipment, improvements and other related items, and by all rents, income orprofits received by our real estate subsidiary, and is unconditionallyguaranteed by us. In addition to this financing, we have spent approximately$38.0 million of our own funds in connection with the build-out and occupancyof this facility. We have occupied this facility since May 2001 and, asplanned, are actively seeking to sublease a portion of the facility.

 

AtDecember 31, 2002, we had provided a valuation allowance of$64.1 million for our deferred tax assets. The valuation allowancerepresents the value of the deferred tax assets.  Due to anticipated operating losses in the future, we believethat it is more likely than not that we will not realize the net deferred taxassets in the future and we have provided an appropriate valuation allowance.

** **

**Recent Accounting Pronouncements**

 

In November 2002, the Financial Accounting Standards Board, or FASB,issued FASB Interpretation No. 45, *Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others, aninterpretation of FASB Statements No. 5, 57, and 107 and Rescission ofFASB Interpretation No. 34,*or FIN No. 45.  FIN No. 45 elaborates on the disclosures tobe made by a guarantor in its interim and annual financial statements about itsobligations under certain guarantees that it has issued. It also requires thata guarantor recognize, at the inception of a guarantee, a liability for thefair value of certain guarantees. The initial recognition and measurementprovisions of FIN No. 45 are applicable on a prospective basis to guaranteesissued or modified after December 31, 2002.  The implementation of FIN No. 45 did not have a material impacton our consolidated financial statements for the three months ended March 31,2003.

 

OnDecember 31, 2002, the FASB issued Statement of Financial AccountingStandards No. 148, *Accounting for Stock-Based Compensation– Transition and Disclosure*, or SFAS No. 148.  SFAS No. 148 amends Statement ofFinancial Accounting Standards No. 123, *Accountingfor Stock-Based Compensation*, or SFAS No. 123, to providealternative methods of transition to the fair value method of accounting forstock-based employee compensation.  SFASNo. 148 also amends the disclosure provisions of SFAS No. 123 and AccountingPrinciples Board Opinion No. 28, *Interim Financial*

 

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*Reporting*, to include increased pro-formadisclosure of the effects of stock-based employee compensation on the resultsof operations.  SFAS No. 148 becameeffective for fiscal years ending after December 15, 2002.  We have elected to continue to account foremployee stock-based compensation using the intrinsic value method as describedin Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued toEmployees,* and therefore, the adoption of SFAS No. 148 did not havea material impact on our consolidated results of operations for the threemonths ended March 31, 2003.

 

In January2003, the FASB issued FASB Interpretation No. 46, *Consolidation of Variable InterestEntities*, or FIN No. 46.  FINNo. 46 sets forth the criteria used in determining whether an investment in avariable interest entity, or VIE, should be consolidated and is based on thegeneral premise that companies that control another entity through interestsother than voting interests should consolidate the controlled entity.  FIN No. 46 would require the consolidationof specified VIE’s created before February 1, 2003 in our September 30, 2003Quarterly Report on Form 10-Q.  Forspecified VIE’s created after January 31, 2003, FIN No. 46 would require consolidationin this Quarterly Report on Form 10-Q. We do not have any VIE's. Accordingly, the implementation of FIN No. 46 will not have any impacton our consolidated financial statements.

 

**Risk Factors That May Affect Future Results**

 

*The risks and uncertainties described below are not the onlyones we face.  Additional risks anduncertainties not presently known to us or that are currently deemed immaterialmay also impair our business, financial condition and results of operations.  If any of these risks actually occur, ourbusiness, financial condition and results of operations could be materiallyadversely affected.*

** **

**Because we have not yet marketed or sold any productsand anticipate significant increases in our operating expenses over the nextseveral years, we may not be profitable in the future.**

 

We cannot assure you thatwe will be profitable in the future or, if we attain profitability, that itwill be sustainable. All of our potential products are in the research ordevelopment stage. We have not yet marketed or sold any products, and we maynot succeed in developing and marketing any product in the future. To date, wehave derived substantially all of our revenues from payments under corporatecollaboration and license agreements. Due to the termination of the Amgen andSanofi-Synthélabo agreements and the uncertainty regarding regulatory approvalfor our lead product candidate, Plenaxis, for the foreseeable future, we do notexpect to have any revenues, other than interest income. In addition, we expectto continue to spend significant amounts to develop commercial sales andmarketing capabilities, continue clinical studies, seek regulatory approval forour existing product candidates and continue further build-out of our facility.We also intend to spend substantial amounts to fund additional research anddevelopment for other potential products, enhance our core technologies, andfor general and administrative purposes. As of March 31, 2003, we had anaccumulated deficit of approximately $141.9 million. We expect that ouroperating expenses will increase significantly in the near term due primarilyto increased expenses related to the continued development andpre-commercialization activities for Plenaxis, resulting in significantoperating losses at least through 2005 and possibly thereafter.

** **

**If our clinical trials are not successful, or if we areotherwise unable to obtain and maintain the regulatory approval required tomarket and sell our potential products, we would incur additional operatinglosses.**

 

The development and saleof our product candidates are subject to extensive regulation by governmentalauthorities. Obtaining and maintaining regulatory approval typically is costlyand takes many years. Regulatory authorities, most importantly, the FDA, havesubstantial discretion to terminate clinical trials, delay or withholdregistration and marketing approval in the United States, and mandate productrecalls. Failure to comply with regulatory requirements may result in criminalprosecution, civil penalties, recall or seizure of products, total or partialsuspension of production or injunction, as well as other actions as to ourpotential products or against us. Outside the United States, we can market aproduct only if we receive marketing authorization from the appropriate regulatoryauthorities. This foreign regulatory approval process includes all of the risksassociated with the FDA approval process, and may include additional risks.

 

To gain regulatoryapproval from the FDA and foreign regulatory authorities for the commercial saleof any product, we must demonstrate in clinical trials, and satisfy the FDA andforeign regulatory authorities as to, the safety and efficacy of theproduct.  If we develop a product totreat a

 

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long-lasting disease,such as cancer or Alzheimer’s disease, we must gather data over an extendedperiod of time. There are many risks associated with our clinical trials. Forexample, we may be unable to achieve the same level of success in later trialsas we did in earlier ones. Additionally, data we obtain from preclinical andclinical activities are susceptible to varying interpretations that couldimpede regulatory approval. Further, some patients in our prostate cancer andAlzheimer’s disease programs have a high risk of death, age-related disease orother adverse medical events that may not be related to our products. Theseevents may affect the statistical analysis of the safety and efficacy of ourproducts. If we obtain regulatory approval for a product, the approval will belimited to those diseases for which our clinical trials demonstrate the productis safe and effective.

 

In addition, many factorscould delay or result in termination of our ongoing or future clinical trials.For example, a clinical trial may experience slow patient enrollment or lack ofsufficient drug supplies. Patients may experience adverse medical events orside effects, and there may be a real or perceived lack of effectiveness of, orof safety issues associated with, the drug we are testing. Future governmentalaction or existing or changes in FDA policies or precedents, may also result indelays or rejection of an application for marketing approval.  The FDAhas considerable discretion in determining whether to grant marketing approvalfor a drug, and may delay or deny approval even in circumstances where theapplicant’s clinical trials have proceeded in compliance with FDA proceduresand regulations and have met the established end-points of the trials.Challenges to FDA determinations are generally time-consuming and costly. Wecan give no assurance that we will obtain marketing approval for Plenaxis,our drug candidate for the treatment of hormonally responsive advanced prostatecancer and endometriosis, or for any of our other product candidates, orregulatory approval may be conditioned upon significant labeling requirementswhich could adversely affect the marketability or value of the product.

 

To date, none of ourproduct candidates has received regulatory approval for commercial sale. InJune 2001, we received a letter from the FDA with respect to our NDA forPlenaxis for the treatment of hormonally responsive advanced prostate cancer,in which the FDA indicated that the information presented in the NDA wasinadequate for approval. The FDA raised concerns over the occurrence ofimmediate-onset, systemic allergic reactions in a small subset of clinicaltrial patients. In addition, the FDA expressed concern that, in a subset ofpatients treated beyond the three-month pivotal study time frame, fluctuationsin testosterone levels were observed more frequently in patients treated withPlenaxis than in patients treated with either Lupron Depot or Lupron Depot plusCasodex.  We have proposed variousalternatives to the FDA to address these issues and improve the risk/benefitprofile of Plenaxis. Based upon our discussions with the FDA, we are nowseeking approval for Plenaxis for use in a defined sub-population of advancedprostate cancer patients for whom the use of existing hormonal therapies maynot be appropriate. The specific sub-population of patients will be determinedthrough additional discussions with the FDA. In February 2003, we resubmittedto the FDA our NDA seeking approval for this indication.   We expect to receive a response from theFDA within six months.

 

The FDA actions describedabove have delayed, and otherwise adversely affected, our obtaining regulatoryapproval to market Plenaxis for the treatment of hormonally responsive advancedprostate cancer. Moreover, there could be further delays due to FDA review oraction, and the FDA could deny approval altogether. If we are further delayedin obtaining or are unable to obtain this regulatory approval, any foreignregulatory approval or regulatory approval to market our other potentialproducts, we may exhaust our available resources significantly sooner than wehad planned, particularly given the termination of the Amgen andSanofi-Synthélabo agreements. If this were to happen, we would need to eitherraise additional funds or seek alternative partners to complete development andcommercialization of Plenaxis and continue our currently planned research anddevelopment programs. We cannot assure you that we would be able to raise thenecessary funds or negotiate additional corporate collaborations on acceptableterms, if at all.

 

**The termination by our corporate collaborators of theiragreements with us could adversely affect the development and commercializationof Plenaxis.**

 

We depended upon ourformer corporate collaborators, Amgen and Sanofi-Synthélabo, to providesubstantial financial support for the development and commercialization ofPlenaxis.  We also relied on them tosome extent in seeking regulatory approval in the United States and abroad forPlenaxis for the treatment of hormonally responsive advanced prostatecancer.  In addition, under ouragreement with Amgen, they had assumed principal responsibility for themanufacture of Plenaxis, and under our agreements with Amgen andSanofi-Synthélabo, those parties were responsible for the marketing,distribution and sale of Plenaxis in their respective licensedterritories.  Accordingly, we

 

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have had, and willcontinue for the foreseeable future, to devote funds and other resources toPlenaxis development and commercialization that we had planned would beavailable from our collaborators. In addition, we have had, and in the futuremay have, to enter into new arrangements with third parties to support thePlenaxis program.  If we encounterunanticipated expenses or delays in the development and commercialization ofPlenaxis for the treatment of advanced prostate cancer patients in the UnitedStates or abroad, we may be required to curtail or terminate one or more of ourother drug development programs and/or seek additional funding.  We cannot assure investors that we would beable to raise such additional funds.

 

**We may be unable to establish marketing and salescapabilities necessary to successfully commercialize Plenaxis or our other ourpotential products.**

 

We have no experience inmarketing or selling pharmaceutical products and have very limited marketingand sales resources. To achieve commercial success for any approved product, wemust either develop a marketing and sales force, as well as the infrastructureto support it, or enter into arrangements with others to market and sell ourproducts. We may be unable to establish marketing, sales and distributioncapabilities necessary to commercialize and gain market acceptance for ourpotential products. We have announced our intention to independently market andsell Plenaxis in the United States if we receive FDA approval of this compoundfor use in a defined sub-population of advanced prostate cancer patients. Accordingly,we will need to hire a sales force with expertise in pharmaceutical sales.Recruiting and retaining qualified sales personnel will be critical to oursuccess. Competition for skilled personnel is intense, and we cannot assure youthat we will be able to attract and retain a sufficient number of qualifiedindividuals to successfully launch Plenaxis or any other potential product. Inaddition, establishing the expertise necessary to successfully market and sellPlenaxis, or any other product, will require a substantial capital investment.We cannot assure you that we will have the funds necessary to successfullycommercialize Plenaxis for the treatment of a defined sub-population ofadvanced prostate cancer patients or any other potential product.

 

In the event that wedecide to contract with third parties to provide sales force capabilities tomeet our needs for Plenaxis or any other product candidates, we cannot assureyou that we will be able to enter into such agreements on acceptable terms, ifat all. In addition, co-promotion or other marketing arrangements with thirdparties to commercialize potential products could significantly limit therevenues we derive from these potential products, and these third parties mayfail to commercialize our potential products successfully. To the extent weenter into any such agreements, the parties to those agreements may also marketproducts that compete with our products, further limiting our potential revenuefrom product sales.

 

**Even if we receive approval for the marketing and saleof Plenaxis or any of our other product candidates, they may fail to achievemarket acceptance and, accordingly, may never be commercially successful.**

 

Many factors may affectthe market acceptance and commercial success of Plenaxis or any of our otherpotential products, including:

 

•                                          the scope of the patient population and theindications for which Plenaxis or our other product candidates are approved;

 

•                                          the effectiveness of Plenaxis or any of our otherproduct candidates, including any potential side effects, as compared toalternative treatment methods;

 

•                                          the extent and success of our marketing and salesefforts relating to the marketing and sales of Plenaxis or other potentialproducts;

 

•                                          the product labeling or product insert required bythe FDA for Plenaxis and each of our other product candidates;

 

•                                          the rate at which Plenaxis or our other productcandidates are reimbursed by third-party payors, in particular Medicare;

 

•                                          the timing of market entry as compared to competitiveproducts;

 

•                                          the rate of adoption of Plenaxis or our otherproduct candidates by doctors and nurses and acceptance by the target patientpopulation;

 

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•                                          the competitive features of our products as comparedto other products, including the frequency of administration of Plenaxis ascompared to other products, and doctor and patient acceptance of thesefeatures;

 

•                                          the cost-effectiveness of Plenaxis or our otherproduct candidates and the availability of insurance or other third-partyreimbursement, in particular Medicare, for patients using our products; and

 

•                                          unfavorable publicity concerning Plenaxis or anyof our other product candidates or any similar products.

 

If our products are notcommercially successful, we may never become profitable.

 

**Our potential revenues will diminish if we fail toobtain acceptable prices or adequate reimbursement for Plenaxis or our otherproduct candidates from third-party payors.**

 

The continuing efforts ofgovernment and third-party payors to contain or reduce the costs of health caremay limit our commercial opportunity. If government and other third-partypayors do not provide adequate coverage and reimbursement for Plenaxis or ourother product candidates, physicians may not prescribe them. If we are unableto offer physicians comparable or superior financial motivation to use Plenaxisor our other product candidates, we may not be able to generate significantrevenues. In some foreign markets, pricing and profitability of prescriptionpharmaceuticals are subject to government control. In the United States, weexpect that there will continue to be federal and state proposals for similarcontrols. In addition, managed care initiatives in the United States willcontinue to put pressure on the pricing of pharmaceutical products. Costcontrol initiatives could decrease the price that we receive for any of ourproducts in the future. Further, cost control initiatives could impair ordiminish our ability or incentive, or the ability or incentive of potentialpartners, to commercialize Plenaxis or any of our other products, and ourability to earn revenues from this commercialization.

 

Ourability to commercialize pharmaceutical products, alone or with collaborators,may depend in part on the availability of reimbursement for our products from:

 

•                                          government and health administration authorities;

 

•                                          private health insurers; and

 

•                                          other third-party payors, including Medicare andMedicaid.

 

We cannot predict theavailability of reimbursement for newly approved drugs. Third-party payors,including Medicare, are increasingly challenging the prices charged for medicalproducts and services. Government and other third-party payors increasingly arelimiting both coverage and the level of reimbursement for new drugs and, insome cases, refusing to provide coverage for a patient’s use of an approveddrug for purposes not approved by the FDA. Third-party insurance coverage maynot be available to patients for Plenaxis or any of our other products.

 

**If we fail to develop and maintain our relationshipswith third-party manufacturers, or if these manufacturers fail to performadequately, we may be unable to commercialize Plenaxis or any of our productcandidates.**

 

Our ability to conduct,or continue to conduct, clinical trials and commercialize our productcandidates, including Plenaxis, will depend in part on our ability tomanufacture, or arrange for third-party manufacture of, our products on a largescale, at a competitive cost and in accordance with regulatory requirements. Wemust establish and maintain a commercial scale formulation and manufacturingprocess for each of our potential products for which we seek marketingapproval. We or third-party manufacturers may encounter difficulties with theseprocesses at any time that could result in delays in clinical trials,regulatory submissions or in the commercialization of potential products.

 

We have no experience inlarge-scale product manufacturing, nor do we have the resources or facilitiesto manufacture products on a commercial scale. We will continue to rely uponcontract manufacturers to produce Plenaxis and other compounds for later-stagepreclinical, clinical and commercial purposes for a significant period of time.Third-party manufacturers may not be able to meet our needs as to timing,quantity or quality of materials. If we are unable to contract for a sufficientsupply of needed materials on acceptable terms, or if we encounter delays ordifficulties in our relationships with manufacturers, our clinical trials maybe delayed, thereby preventing or delaying the submission of product candidatesfor, or the granting of, regulatory approval and the commercialization

 

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of our potentialproducts. Any such delays may lower our revenues and delay or prevent ourattaining or maintaining profitability.

 

If the third-partymanufacturers upon which we rely fail to meet our needs for clinical orcommercial supply, we may be required to supplement our manufacturing capacityby building our own manufacturing facilities. This would require substantialexpenditures.  Also, we would need tohire and train significant numbers of employees to staff a new facility. If weare required to build our own facility, we may not be able to developsufficient manufacturing capacity to produce drug materials for clinical trialsor commercial use.

 

In addition, we and thethird-party manufacturers that we use must continually adhere to current goodmanufacturing practice regulations enforced by the FDA through its facilitiesinspection program. If our facilities or the facilities of third-partymanufacturers cannot pass a pre-approval plant inspection, the FDA pre-marketapproval of our product candidates will not be granted. In complying with theseregulations and foreign regulatory requirements, we and any of our third-partymanufacturers will be obligated to expend time, money and effort in production,record-keeping and quality control to assure that our potential products meetapplicable specifications and other requirements. If we or any of ourthird-party manufacturers fail to comply with these requirements, we may besubject to regulatory sanctions.

 

Any of these factorscould prevent, or cause delays in, obtaining regulatory approvals for, and themanufacturing, marketing or selling of, our potential products, includingPlenaxis, and could also result in significantly higher operating expenses.

 

Under our collaborationagreement with Amgen, Amgen had control over certain phases of themanufacturing process for Plenaxis and was itself performing certainmanufacturing processes.  Due to thetermination of our collaboration agreement with Amgen, to assure an adequatesupply of drug product for continued clinical studies and, if Plenaxis isapproved for marketing, for commercial sale, we were required to enter into anew agreement with a third party manufacturer to provide for the manufacturingfunctions that Amgen had been performing. Due to the use of a different manufacturer, we may be required toundergo additional regulatory review and compliance procedures which couldresult in additional expenses and further delay the regulatory review andpotential commercialization of Plenaxis for the treatment of a definedsub-population of advanced prostate cancer patients.

 

**The loss or failure of any of our third-partymanufacturers could substantially delay or impair our development, or our saleor continued sale, of Plenaxis products.**

 

For each stage ofPlenaxis production we have relied, and expect in the near term to continue torely, on a separate third-party manufacturer, and we currently have notcontracted, and in the near term do not expect to contract, with second-sourcesuppliers for any of these production stages. Accordingly, the loss of one ormore of these suppliers for any reason, including as a result of fire,terrorism, acts of God or insolvency or bankruptcy, could result in substantialdelays in, or substantially impair our ability to complete, clinical trials andregulatory submissions or reviews, and could delay or impair substantially oursale or continued sale of Plenaxis products. Such delays or impairment, and theassociated costs and expenses, may lower our potential revenues and delay orprevent our attaining profitability. While we intend to evaluate thepossibility of a second source of supply at each stage of Plenaxis production,the number of qualified alternative suppliers is limited, and we cannot assureinvestors that we will be able to locate alternative suppliers or negotiatesecond supply agreements on reasonable terms. Furthermore, the process ofengineering a new supplier’s facility for the production of Plenaxis andobtaining the necessary FDA approval of the facility would require substantiallead-time and could be extremely costly. We cannot assure investors that wewill not lose one or more of our suppliers, or that in such event we would bereadily able to continue the development and commercialization and sale ofPlenaxis products without substantial and costly delays.

 

**Alternative treatments are available which may impairour ability to capture market share for our potential products.**

 

Alternative productsexist or are under development to treat the diseases for which we are developingdrugs. For example, the FDA has approved several drugs for the treatment ofprostate cancer that responds to changes in hormone levels. Even if the FDAapproves Plenaxis for commercialization for the treatment of a definedsub-population of advanced prostate cancer patients, the approval is expectedto be limited to a particular group of patients or to administration over alimited period of time, and Plenaxis may not compete favorably with existingtreatments that already have an established market share. If Plenaxis does notachieve broad market acceptance as a drug for

 

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the treatment of adefined sub-population of advanced prostate cancer patients, we may not becomeprofitable.

 

**Because we depend on third parties to conductlaboratory testing and human clinical studies and assist us with regulatorycompliance, we may encounter delays in product development andcommercialization.**

 

We have contracts with alimited number of research organizations to design and conduct our laboratorytesting and human clinical studies. If we cannot contract for testingactivities on acceptable terms, or at all, we may not complete our productdevelopment efforts in a timely manner. To the extent we rely on third partiesfor laboratory testing and human clinical studies, we may lose some controlover these activities. For example, third parties may not complete testingactivities on schedule or when we request them to do so. In addition, thesethird parties may conduct our clinical trials in a manner inconsistent withregulatory requirements or otherwise in a manner that yields misleading orunreliable data. This, or other failures of these third parties to carry outtheir duties, could result in significant additional costs and expenses andcould delay or prevent the development and commercialization of our productcandidates.

 

**Many of our competitors have substantially greaterresources than we do and may be able to develop and commercialize products thatmake our potential products and technologies obsolete or non-competitive.**

 

A biotechnology companysuch as ours must keep pace with rapid technological change and faces intensecompetition. We compete with biotechnology and pharmaceutical companies forfunding, access to new technology, research personnel and in product researchand development. Many of these companies have greater financial resources andmore experience than we do in developing drugs, obtaining regulatory approvals,manufacturing and marketing. We also face competition from academic andresearch institutions and government agencies pursuing alternatives to ourproducts and technologies. We expect that all of our products under developmentwill face intense competition from existing or future drugs. In addition, foreach of our product candidates, we may face increasing competition from genericformulations or existing drugs whose active components are no longer covered bypatents.

 

Ourcompetitors may:

 

•                                          successfully identify drug candidates or developproducts earlier than we do;

 

•                                          obtain approvals from the FDA or foreignregulatory bodies more rapidly than we do;

 

•                                          develop products that are more effective, havefewer side effects or cost less than our products; or

 

•                                          successfully market and sell products that competewith our products.

 

The success of ourcompetitors in any of these efforts would adversely affect our ability todevelop, commercialize and market our product candidates and to attain andmaintain profitability.

 

**If we are unable to obtain and enforce valid patents, wecould lose any competitive advantage we may have.**

 

Our success will dependin part on our ability to obtain patents and maintain adequate protection ofour technologies and potential products. If we do not adequately protect ourintellectual property, competitors may be able to use our technologies anderode any competitive advantage we may have. For example, if we lose our patentprotection for Plenaxis, another party could produce and market the compound indirect competition with us. Some foreign countries lack rules and methods fordefending intellectual property rights and do not protect proprietary rights tothe same extent as the United States. Many companies have had difficultyprotecting their proprietary rights in foreign countries.

 

Patent positions aresometimes uncertain and usually involve complex legal and factual questions. Wecan protect our proprietary rights from unauthorized use by third parties onlyto the extent that our proprietary technologies are covered by valid andenforceable patents or are effectively maintained as trade secrets. Wecurrently own or have exclusively licensed 23 issued United States patents. Wehave applied, and will continue to apply, for patents covering both ourtechnologies and products as we deem appropriate. Others may challenge ourpatent applications or our patent applications may not result in issuedpatents. Moreover, any issued patents on our own inventions, or

 

19

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those licensed from thirdparties, may not provide us with adequate protection, or others may challengethe validity of, or seek to narrow or circumvent, these patents. Third-partypatents may impair or block our ability to conduct our business. Additionally,third parties may independently develop products similar to our products,duplicate our unpatented products, or design around any patented products wedevelop.

 

**If we are unable to protect our trade secrets andproprietary information, we could lose any competitive advantage we may have.**

 

In addition to patents,we rely on a combination of trade secrets, confidentiality, nondisclosure andother contractual provisions, and security measures to protect our confidentialand proprietary information. These measures may not adequately protect ourtrade secrets or other proprietary information. If these measures do notadequately protect our rights, third parties could use our technology, and wecould lose any competitive advantage we may have. In addition, others may independentlydevelop similar proprietary information or techniques, which could impair anycompetitive advantage we may have.

 

**If our technologies, processes or potential productsconflict with the patents or other intellectual property rights of competitors,universities or others, we could have to engage in costly litigation and beunable to commercialize those products.**

 

Our technologies,processes or potential products may give rise to claims that they infringepatents or other intellectual property rights of third parties.  A third party could force us to pay damages,stop our use of these technologies or processes, or stop our manufacturing ormarketing of the affected products by bringing a legal action against us forinfringement. In addition, we could be required to obtain a license to continueto use the technologies or processes or manufacture or market the affectedproducts, and we may not be able to do so on acceptable terms or at all. Webelieve that significant litigation will continue in our industry regardingpatent and other intellectual property rights. If we become involved inlitigation, it could consume a substantial portion of our resources. Even iflegal actions were meritless, defending a lawsuit could take significant time,be expensive and divert management’s attention from other business concerns.

 

**If third parties terminate our licenses, we couldexperience delays or be unable to complete the development andcommercialization of our potential products.**

 

We license some of ourtechnology from third parties. Termination of our licenses could force us todelay or discontinue some of our development and commercialization programs.For example, if Advanced Research and Technology Institute, Inc., the assigneeof Indiana University Foundation, terminated our license with them, we couldhave to discontinue development and commercialization of our Plenaxis products.We cannot assure you that we would be able to license substitute technology inthe future. Our inability to do so could impair our ability to conduct ourbusiness because we may lack the technology, or the necessary rights totechnology, required to develop and commercialize our potential products.

 

**We may have substantial exposure to product liabilityclaims and may not have adequate insurance to cover those claims.**

 

We may be held liable ifany product we develop, or any product made by others using our technologies,causes injury. We have only limited product liability insurance coverage forour potential products in clinical trials. We intend to expand our productliability insurance coverage for any of our products for which we obtainmarketing approval. However, this insurance may be prohibitively expensive ormay not fully cover our potential liabilities. Our inability to obtain adequateinsurance coverage at an acceptable cost could prevent or inhibit thecommercialization of our products. Our collaboration agreements with Amgen andSanofi-Synthélabo included, and the agreements with them regarding thetermination of those collaborations also include, an indemnification of themfor liabilities associated with the development and commercialization ofPlenaxis. If a third party, including a former collaborator, sues us for anyinjury, or for indemnification for losses, arising out of products made by usor using our technologies, our liability could exceed our total assets.

** **

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**We may be unable to find suitable tenants for a portionof our facility.**

 

In May 2001, we moved toa new 175,000 square foot facility in Waltham, Massachusetts. We are currentlyseeking to sublease a portion of this facility. To date, we have not been ableto find suitable sub-tenants to occupy this space. If we are unable to findsuitable sub-tenants, we will not be able to offset with rental income any ofthe substantial mortgage payments and other operating expenses associated withour facility.

 

**If we lose our key personnel or are unable to attractand retain additional skilled personnel, we may be unable to pursue our productdevelopment and commercialization efforts.**

 

We depend substantiallyon the principal members of our management and scientific staff, includingMalcolm L. Gefter, Ph.D., our Chief Executive Officer and Chairman of theBoard, and William K. Heiden, our President and Chief Operating Officer. We donot have employment agreements with any of our executive officers. Any officeror employee can terminate his or her relationship with us at any time and workfor one of our competitors. The loss of these key individuals could result incompetitive harm because we could experience delays in our product research,development and commercialization efforts without their expertise.

 

Recruiting and retainingqualified scientific personnel to perform future research and development workalso will be critical to our success. Competition for skilled personnel isintense and the turnover rate can be high. We compete with numerous companiesand academic and other research institutions for experienced scientists. Thiscompetition may limit our ability to recruit and retain qualified personnel onacceptable terms. Failure to attract and retain qualified personnel wouldprevent us from continuing to develop our potential products, enhancing ourtechnologies and launching our products commercially. Our planned activitieswill require the addition of new personnel, including management and marketingand sales personnel, and the development of additional expertise by existingmanagement personnel, in particular in the area of product marketing and sales.The inability to retain these personnel or to develop this expertise couldprevent, or result in delays in, the research, development andcommercialization of Plenaxis or our other potential products.

 

**We use hazardous chemicals and radioactive andbiological materials in our business and any claims relating to the handling,storage or disposal of these materials could be time consuming and costly.**

 

Our research anddevelopment processes involve the controlled use of hazardous materials,including chemicals and radioactive and biological materials, which may posehealth risks. For example, the health risks associated with accidental exposureto Plenaxis include temporary impotence or infertility and harmful effects onpregnant women. Our operations also produce hazardous waste products. We cannotcompletely eliminate the risk of accidental contamination or discharge fromhazardous materials and any resultant injury. Federal, state and local laws andregulations govern the use, manufacture, storage, handling and disposal ofhazardous materials. Compliance with health and safety and environmental lawsand regulations is necessary and expensive. Current or future health and safetyand environmental regulations may impair our research, development orproduction efforts. We may be required to pay fines, penalties or damages inthe event of noncompliance or the exposure of individuals to hazardousmaterials.

 

From time to time,third-parties have also worked with hazardous materials in connection with ouragreements with them. We have agreed to indemnify our present and formercollaborators in some circumstances against damages and other liabilitiesarising out of development activities or products produced in connection withthese collaborations.

 

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**If we engage in an acquisition, we will incur a varietyof costs and may never realize the anticipated benefits of the acquisition.**

 

If appropriateopportunities become available, we may attempt to acquire businesses, oracquire or in-license products or technologies, that we believe are a strategicfit with our business. We currently have no commitments or agreements for anyacquisitions.  If we do undertake anytransaction of this sort, the process of integrating an acquired business, oran acquired or in-licensed product or technology, may result in unforeseenoperating difficulties and expenditures and may absorb significant managementattention that would otherwise be available for the ongoing development of ourbusiness. Moreover, we may fail to realize the anticipated benefits of anytransaction of this sort. To the extent we issue stock in a transaction, theownership interest of our stockholders will be diluted. Transactions of thiskind could also cause us to incur debt, expose us to future liabilities andresult in amortization expenses related to goodwill and other intangibleassets.

 

**The market price of our common stock may experienceextreme price and volume fluctuations.**

 

The market price of ourcommon stock may fluctuate substantially due to a variety of factors,including, but not limited to:

 

•                                          announcement of FDA approval or disapproval ofPlenaxis for the treatment of a defined sub-population of advanced prostatecancer patients or any of our other product candidates;

 

•                                          failure or delay by third-party manufacturers inperforming their supply obligations or disputes or litigation regarding thoseobligations;

 

•                                          our ability to commercialize, directly or withcollaborators, our product candidates and the timing of commercialization;

 

•                                          the success rate of our discovery efforts andclinical trials;

 

•                                          announcements of technological innovations or newproducts by us or our competitors;

 

•                                          developments or disputes concerning patents orproprietary rights, including claims of infringement, interference orlitigation against us or our licensors;

 

•                                          announcements concerning our competitors, or thebiotechnology or pharmaceutical industry in general;

 

•                                          public concerns as to the safety of our productsor our competitors’ products;

 

•                                          changes in government regulation of thepharmaceutical or medical industry;

 

•                                          changes in the reimbursement policies ofthird-party insurance companies or government agencies;

 

•                                          actual or anticipated fluctuations in ouroperating results;

 

•                                          changes in financial estimates or recommendationsby securities analysts;

 

•                                          sales of large blocks of our common stock;

 

•                                          changes in accounting principles; and

 

•                                          the loss of any of our key scientific ormanagement personnel.

 

In addition, the stockmarket has experienced extreme price and volume fluctuations. The market pricesof the securities of biotechnology companies, particularly companies like ourswithout current product revenues and earnings, have been highly volatile, andmay continue to be highly volatile in the future. This volatility has oftenbeen unrelated to the operating performance of particular companies. In thepast, securities class action litigation has often been brought againstcompanies that experience volatility in the market price of their securities.Whether or not meritorious, litigation brought against us could result insubstantial costs and a diversion of management’s attention and resources.

 

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**We expect that our quarterly results of operations willfluctuate, and this fluctuation could cause our stock price to decline.**

 

Our quarterly operatingresults have fluctuated in the past and are likely to do so in the future.These fluctuations could cause our stock price to decline. Some of the factorsthat could cause our operating results to fluctuate include:

 

•                                          the timing and level of expenses related to thedevelopment and commercialization of our Plenaxis products leading to revenuesfrom product sales;

 

•                                          the timing and level of expenses related to ourother research and development programs; and

 

•                                          the timing of our commercialization of otherproducts resulting in revenues.

 

Due to the possibility offluctuations in our revenues and expenses, we believe that quarter-to-quartercomparisons of our operating results are not a good indication of our futureperformance.

 

**Anti-takeover provisions in our charter and by-laws,our rights agreement and certain provisions of Delaware law may make an acquisitionof us more difficult, even if an acquisition would be beneficial to ourstockholders.**

 

Provisions in ourcertificate of incorporation and by-laws may delay or prevent an acquisition ofus or a change in our management. Also, because we are incorporated inDelaware, we are governed by the provisions of Section 203 of the DelawareGeneral Corporation Law, which may prohibit or delay large stockholders, inparticular those owning 15% or more of our outstanding voting stock, frommerging or combining with us. In addition, the rights issued under our rightsagreement may be a substantial deterrent to a person acquiring 10% or more ofour common stock without the approval of our board of directors. Theseprovisions in our charter and by-laws, rights agreement and under Delaware lawcould reduce the price that investors might be willing to pay for shares of ourcommon stock in the future and result in the market price being lower than itwould be without these provisions.

 

**ITEM 3.  QUANTITATIVE****AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.**

 

Theprimary objective of our investment activities is to preserve principal whileat the same time maximizing the income we receive from our investments withoutsignificantly increasing risk.  We havenot entered into any instruments for trading purposes.  Some of the securities that we invest in mayhave market risk. This means that an increase in prevailing interest rates maycause the principal amount of the investment to decrease. To minimize this riskin the future, we maintain our portfolio of cash equivalents and short-terminvestments in a variety of securities, including commercial paper, moneymarket funds and government and non-government debt securities. An immediatehypothetical 100 basis point increase in interest rates would have resulted inan approximate $0.6 million decrease in the fair value of our investments as ofMarch 31, 2003.  The same hypotheticalincrease in interest rates as of March 31, 2002 would have resulted in anapproximate $0.6 million decrease in the fair value of our investments.  Due to the conservative nature andrelatively short duration of our investments, interest rate risk is mitigated.As of March 31, 2003, approximately 85**%** of our total investments will mature inone year or less, with the remainder maturing in less than three years.

 

Inconnection with the purchase of our new facility in July 2000, our whollyowned real estate subsidiary executed an acquisition and construction loanagreement that provides for up to $33.0 million in borrowings at afloating interest rate indexed to 30-day LIBOR. Concurrent with thattransaction, the subsidiary also entered into an interest rate cap agreementwhich limits exposure to interest rate increases above a certain threshold. Dueto the decrease in interest rates since we entered into this interest rate cap,we currently do not believe that there is material interest rate risk exposurewith respect to the loan agreement. In addition, we believe that we havemitigated our risk relating to significant adverse fluctuations in interestrates with respect to borrowings under the loan agreement, and we do notbelieve that a 10% change in interest rates would have a material impact on ourresults of operations or cash flows.

 

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**ITEM 4.****       CONTROLS****AND PROCEDURES.**

 

*(a)*                               *Evaluation of Disclosure Controls andProcedures*.

 

Our chief executiveofficer and chief financial officer have evaluated the effectiveness of theCompany’s disclosure controls and procedures (as such term is defined in Rules13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended(the “Exchange Act”)) as of a date within 90 days prior to the filing date ofthis quarterly report, referred to as the evaluation date.  Based on this evaluation, these officershave concluded that, as of the evaluation date, the Company’s disclosurecontrols and procedures are effective in alerting them on a timely basis tomaterial information relating to the Company required to be included in theCompany’s reports filed or submitted under the Exchange Act.

 

*(b)**                               Changesin Internal Controls.*

* *

Since the evaluationdate, there have not been any significant changes in the Company’s internalcontrols or in other factors that could significantly affect these controls.There were no significant deficiencies or material weaknesses, and therefore,there were no corrective actions required or undertaken.

 

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**PART II.  OTHER INFORMATION**

 

**ITEM6.  EXHIBITS** AND REPORTSON FORM 8-K.

** **

(a)                                  Exhibits

 
| ***Exhibit Number*** |   | ***Exhibit***                                                                                                                                                          |
|----------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |   |                                                                                                                                                                   |
| 3.1                  |   | Amended and Restated  Certificate of Incorporation (2)                                                                                                                 |
|                 |   |                                                                                                                                                                   |
| 3.2                  |   | Third Amended and  Restated By-Laws (5)                                                                                                                                |
|                 |   |                                                                                                                                                                   |
| 4.1                  |   | Specimen certificate  representing shares of common stock (1)                                                                                                          |
|                 |   |                                                                                                                                                                   |
| 4.2                  |   | Specimen certificate  representing shares of common stock (including Rights Agreement Legend) (3)                                                                      |
|                 |   |                                                                                                                                                                   |
| 4.3                  |   | Rights Agreement  between the Registrant and American Stock Transfer & Trust Company, as  Rights Agent (4)                                                         |
|                 |   |                                                                                                                                                                   |
| 4.4                  |   | Form of Certificate of  Designations of Series A Junior Participating Preferred Stock (attached as  Exhibit A to the Rights Agreement filed as Exhibit 4.3 hereto) (4) |
|                 |   |                                                                                                                                                                   |
| 4.5                  |   | Form of Rights  Certificate (attached as Exhibit B to the Rights Agreement filed as Exhibit  4.3 hereto) (4)                                                           |
|                 |   |                                                                                                                                                                   |
| 99.1                 |   | Certification of  Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                    |
|                 |   |                                                                                                                                                                   |
| 99.2                 |   | Certification of  Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002                    |

 

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(1)                                  Incorporatedby reference to Registration Statement on Form S-1 (Registration No. 333-96351)initially filed with the Securities and Exchange Commission on February 8, 2000and declared effective on April 26, 2000.

 

(2)                                  Incorporatedby reference to Quarterly Report on Form 10-Q for the quarter ended March 31,2000 filed with the Securities and Exchange Commission on June 7, 2000.

 

(3)                                  Incorporatedby reference to Registration Statement on Form S-1 (Registration No. 333-54342)initially filed with the Securities and Exchange Commission on January 26, 2001and declared effective on February 14, 2001.

 

(4)                                  Incorporatedby reference to Registration Statement on Form 8-A filed with the Securities andExchange Commission on January 26, 2001.

 

(5)                                  Incorporatedby reference to Annual Report on Form 10-K for the year ended December 31, 2002filed with the Securities and Exchange Commission on March 19, 2003.

 

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(b)                                 Reports Submitted on Form 8-K

 

On January 31, 2003, we filed a Current Report on Form8-K to file under Item 5 (Other Events) a copy of our Press Release datedJanuary 31, 2003.

 

On February 6, 2003, we filed a Current Report on Form8-K to file under Item 5 (Other Events) a copy of our Press Release datedFebruary 6, 2003.

 

On February 26, 2003, we filed a Current Report onForm 8-K to file under Item 5 (Other Events) a copy of our Press Release datedFebruary 26, 2003.

 

On March 12, 2003, we filed a Current Report on Form8-K to file under Item 5 (Other Events) a copy of our Press Release dated March12, 2003.

 

On March 26, 2003, we filed a Current Report on Form8-K to file under Item 5 (Other Events) a copy of our Press Release dated March26, 2003.

 

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**SIGNATURE**

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, as amended, the Registrant has duly causedthis report to be signed on its behalf by the undersigned hereunto dulyauthorized.

 

 
|                    | PRAECIS PHARMACEUTICALS  INCORPORATED |
|-------------------------|---------------------------------------|
|                    |
|                    |
| Date:  May 9, 2003 | By                                    | /s/ Kevin F. McLaughlin |   |
|                    |                                  | Kevin F. McLaughlin |
|                    |                                  | Chief Financial Officer, Senior  Vice President,  Treasurer and Secretary*(Duly  Authorized Officer and Principal Financial and  Accounting Officer)* |

 

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**CERTIFICATIONS**

 

I, Malcolm L. Gefter,certify that:

 

1.                                       Ihave reviewed this quarterly report on Form 10-Q of PRAECIS PHARMACEUTICALSINCORPORATED;

 

2.                                       Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.                                       Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a) designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b) evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the “EvaluationDate”); and

 

c) presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                                       Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a) all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b) any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officer and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

 
| Date: May 9, 2003       |
|-------------------------|
|                    |
|                    |
| /s/ Malcolm L. Gefter   |   |
| Malcolm L. Gefter       |
| Chief Executive Officer |

 

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I, Kevin F. McLaughlin, certify that:

 

1.                                       Ihave reviewed this quarterly report on Form 10-Q of PRAECIS PHARMACEUTICALSINCORPORATED;

 

2.                                       Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.                                       Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a) designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b) evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c) presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                                       Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a) all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b) any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officer and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

 
| Date: May 9, 2003       |
|-------------------------|
|                    |
|                    |
| /s/ Kevin F. McLaughlin |   |
| Kevin F. McLaughlin     |
| Chief Financial Officer |

 

# **29**

# ****

#  

# **EXHIBIT INDEX**

 
| ***Exhibit Number*** |   | ***Exhibit***                                                                                                                                                          |
|----------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |   |                                                                                                                                                                   |
| 3.1                  |   | Amended and Restated  Certificate of Incorporation (2)                                                                                                                 |
|                 |   |                                                                                                                                                                   |
| 3.2                  |   | Third Amended and  Restated By-Laws (5)                                                                                                                                |
|                 |   |                                                                                                                                                                   |
| 4.1                  |   | Specimen certificate  representing shares of common stock (1)                                                                                                          |
|                 |   |                                                                                                                                                                   |
| 4.2                  |   | Specimen certificate  representing shares of common stock (including Rights Agreement Legend) (3)                                                                      |
|                 |   |                                                                                                                                                                   |
| 4.3                  |   | Rights Agreement  between the Registrant and American Stock Transfer & Trust Company, as  Rights Agent (4)                                                         |
|                 |   |                                                                                                                                                                   |
| 4.4                  |   | Form of Certificate of  Designations of Series A Junior Participating Preferred Stock (attached as  Exhibit A to the Rights Agreement filed as Exhibit 4.3 hereto) (4) |
|                 |   |                                                                                                                                                                   |
| 4.5                  |   | Form of Rights  Certificate (attached as Exhibit B to the Rights Agreement filed as Exhibit  4.3 hereto) (4)                                                           |
|                 |   |                                                                                                                                                                   |
| 99.1                 |   | Certification of  Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                    |
|                 |   |                                                                                                                                                                   |
| 99.2                 |   | Certification of  Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                    |

 

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(1)                                  Incorporatedby reference to Registration Statement on Form S-1 (Registration No. 333-96351)initially filed with the Securities and Exchange Commission on February 8, 2000and declared effective on April 26, 2000.

 

(2)                                  Incorporatedby reference to Quarterly Report on Form 10-Q for the quarter ended March 31,2000 filed with the Securities and Exchange Commission on June 7, 2000.

 

(3)                                  Incorporatedby reference to Registration Statement on Form S-1 (Registration No. 333-54342)initially filed with the Securities and Exchange Commission on January 26, 2001and declared effective on February 14, 2001.

 

(4)                                  Incorporatedby reference to Registration Statement on Form 8-A filed with the Securitiesand Exchange Commission on January 26, 2001.

 

(5)                                  Incorporatedby reference to Annual Report on Form 10-K for the year ended December 31, 2002filed with the Securities and Exchange Commission on March 19, 2003.

 

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