**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

----

 

**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  September 30, 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**                                                                                                    |

 

**PRAECIS PHARMACEUTICALS INCORPORATED**

(Exact name of registrantas 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 Actof 1934 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 90days.       Yes ý No o

 

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

 

As of October 31, 2003, there were 51,900,923 shares of theregistrant’s common stock, $.01 par value, outstanding.

 

 

----

 

**PRAECIS PHARMACEUTICALS INCORPORATED**

 

**FORM 10-Q**

 

**FOR THE QUARTER ENDED SEPTEMBER 30, 2003**

 

**INDEX**

 
| **PART I.**       | **FINANCIAL INFORMATION**                                                                                             |   |
|-------------------|-----------------------------------------------------------------------------------------------------------------------|--------|
|              |                                                                                                                  |   |
| Item  1.          | Financial  Statements (Unaudited)                                                                                     |   |
|              |                                                                                                                  |   |
|              | Condensed  Consolidated Balance Sheets –  December 31, 2002 and September 30, 2003                     |   |
|              |                                                                                                                  |   |
|              | Condensed  Consolidated Statements of Operations –  three and nine months ended September 30, 2002 and 2003 |   |
|              |                                                                                                                  |   |
|              | Condensed  Consolidated Statements of Cash Flows –  nine months ended September 30, 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**     |                                                                                                                  |
|              |                                                                                                                  |   |
| **EXHIBIT INDEX** |                                                                                                                  |

 

2

----

 

**PARTI****.  FINANCIALINFORMATION**

 

**ITEM 1****.  FINANCIAL STATEMENTS.**

 

**PRAECIS PHARMACEUTICALS INCORPORATED**

**Condensed Consolidated Balance Sheets**

**(In thousands, except share data)**

**(Unaudited)**

 
|                                                                                                                                           |   | **December 31,  2002** |       | **September 30,  2003** |       |
|------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|------------|------------------------------|------------|
|                                                                                                                                           |   |                        | ** ** |                         | ** ** |
| **Assets**                                                                                                                                     |   |                        |       |                         |       |
| Current assets:                                                                                                                                |   |                        |       |                         |       |
| Cash and cash equivalents                                                                                                                      |   | $                           | 64,913     |                         | $          | 89,446 |   |
| Marketable securities                                                                                                                          |   | 130,122                     |       | 67,240                       |       |
| Prepaid expenses and other assets                                                                                                              |   | 848                         |       | 1,135                        |       |
|                                                                                                                                           |   |                        |       |                         |       |
| Total current assets                                                                                                                           |   | 195,883                     |       | 157,821                      |       |
|                                                                                                                                           |   |                        |       |                         |       |
| Property and equipment, net                                                                                                                    |   | 71,252                      |       | 68,250                       |       |
| Due from officer                                                                                                                               |   | 933                         |       | 858                          |       |
| Other assets                                                                                                                                   |   | 182                         |       | 15                           |       |
|                                                                                                                                           |   |                        |       |                         |       |
| Total assets                                                                                                                                   |   | $                           | 268,250    |                         | $          | 226,944 |   |
|                                                                                                                                           |   |                        |       |                         |       |
| **Liabilities and  Stockholders’ Equity**                                                                                                 |   |                        |       |                         |       |
| Current liabilities:                                                                                                                           |   |                        |       |                         |       |
| Accounts payable                                                                                                                               |   | $                           | 3,285      |                         | $          | 1,124 |   |
| Accrued expenses                                                                                                                               |   | 7,075                       |       | 7,560                        |       |
| Current portion of long-term debt                                                                                                              |   | —                      |       | 747                          |       |
|                                                                                                                                           |   |                        |       |                         |       |
| Total current liabilities                                                                                                                      |   | 10,360                      |       | 9,431                        |       |
| Long-term debt                                                                                                                                 |   | 33,000                      |       | 32,067                       |       |
|                                                                                                                                           |   |                        |       |                         |       |
| Commitments and contingencies                                                                                                                  |   |                        |       |                         |       |
|                                                                                                                                           |   |                        |       |                         |       |
| Stockholders’ equity:                                                                                                                     |   |                        |       |                         |       |
| Common Stock, $0.01 par value; 200,000,000  shares authorized; 51,801,423 shares in 2002 and 51,900,197 shares in 2003  issued and outstanding |   | 518                         |       | 519                          |       |
| Accumulated other comprehensive income                                                                                                         |   | 203                         |       | 165                          |       |
| Additional paid-in capital                                                                                                                     |   | 354,676                     |       | 355,019                      |       |
| Accumulated deficit                                                                                                                            |   | (130,507                    | )          | (170,257                     | )          |
|                                                                                                                                           |   |                        |       |                         |       |
| Total stockholders’ equity                                                                                                                |   | 224,890                     |       | 185,446                      |       |
|                                                                                                                                           |   |                        |       |                         |       |
| Total liabilities and stockholders’ equity                                                                                                |   | $                           | 268,250    |                         | $          | 226,944 |   |

 

*See accompanying notes.*

 

3

----

 

**PRAECIS PHARMACEUTICALS INCORPORATED**

**Condensed Consolidated Statements of Operations**

**(In thousands, except per share data)**

**(Unaudited)**

 
|                                                             |   | **Three  Months Ended  September 30,** |   | **Nine  Months Ended  September 30,** |   |
|------------------------------------------------------------------|--------|---------------------------------------------|--------|--------------------------------------------|--------|
|                                                             |   | **2002**                                    |   | **2003**                                   |   | **2002** |   | **2003** |   |
|                                                             |   |                                        |   |                                       |   |   |   |   |   |
| Corporate collaboration revenue                                  |   | $                                           | — |                                       | $      | — |   | $ | 1,029 |   | $ | — |   |
|                                                             |   |                                        |   |                                       |   |   |   |   |   |
| Costs and expenses:                                              |   |                                        |   |                                       |   |   |   |   |   |
| Research and development                                         |   | 19,986                                      |   | 9,918                                      |   | 44,840 |   | 30,887 |   |
| Sales and marketing                                              |   | 325                                         |   | 732                                        |   | 1,039 |   | 2,794 |   |
| General and administrative                                       |   | 2,274                                       |   | 2,443                                      |   | 7,131 |   | 7,171 |   |
| Total costs and expenses                                         |   | 22,585                                      |   | 13,093                                     |   | 53,010 |   | 40,852 |   |
|                                                             |   |                                        |   |                                       |   |   |   |   |   |
| Operating loss                                                   |   | (22,585                                     | )      | (13,093                                    | )      | (51,981 | ) | (40,852 | ) |
|                                                             |   |                                        |   |                                       |   |   |   |   |   |
| Interest income, net                                             |   | 997                                         |   | 308                                        |   | 3,492 |   | 1,102 |   |
| Gain on termination of collaboration  agreement                  |   | 16,020                                      |   | —                                     |   | 16,020 |   | — |   |
|                                                             |   |                                        |   |                                       |   |   |   |   |   |
| Net loss                                                         |   | $                                           | (5,568 | )                                          | $      | (12,785 | ) | $ | (32,469 | ) | $ | (39,750 | ) |
|                                                             |   |                                        |   |                                       |   |   |   |   |   |
| Basic and diluted net loss per share                             |   | $                                           | (0.11  | )                                          | $      | (0.25 | ) | $ | (0.63 | ) | $ | (0.77 | ) |
|                                                             |   |                                        |   |                                       |   |   |   |   |   |
| Weighted average number of basic and  diluted shares outstanding |   | 51,782                                      |   | 51,883                                     |   | 51,643 |   | 51,838 |   |

 

*See accompanying notes.*

 

4

----

 

**PRAECIS PHARMACEUTICALS INCORPORATED**

**Condensed Consolidated Statements of Cash Flows**

**(In thousands)**

**(Unaudited)**

 
|                                                                     |   | **Nine Months Ended  September 30,** |    |
|--------------------------------------------------------------------------|--------|-------------------------------------------|---------|
|                                                                     |   | **2002**                                  |    | **2003** |   |
| **Operating activities:**                                                |   |                                      |    |   |   |
| Net loss                                                                 |   | $                                         | (32,469 | ) | $ | (39,750 | ) |
| Adjustments to reconcile net loss to cash  used in operating activities: |   |                                      |    |   |   |
| Depreciation and amortization                                            |   | 3,535                                     |    | 3,416 |   |
| Stock compensation                                                       |   | (195                                      | )       | 114 |   |
| Changes in operating assets and  liabilities:                            |   |                                      |    |   |   |
| Accounts receivable                                                      |   | 458                                       |    | — |   |
| Prepaid expenses and other assets                                        |   | (133                                      | )       | (120 | ) |
| Due from officer                                                         |   | (1,000                                    | )       | 75 |   |
| Accounts payable                                                         |   | (25,526                                   | )       | (2,161 | ) |
| Accrued expenses                                                         |   | (536                                      | )       | 485 |   |
|                                                                     |   |                                      |    |   |   |
| Net cash used in operating activities                                    |   | (55,866                                   | )       | (37,941 | ) |
|                                                                     |   |                                      |    |   |   |
| **Investing activities:**                                                |   |                                      |    |   |   |
| Purchase of available-for-sale securities                                |   | (87,267                                   | )       | (35,936 | ) |
| Sales or maturities of available-for-sale  securities                    |   | 100,281                                   |    | 98,780 |   |
| Purchase of property and equipment                                       |   | (1,625                                    | )       | (414 | ) |
|                                                                     |   |                                      |    |   |   |
| Net cash provided by investing activities                                |   | 11,389                                    |    | 62,430 |   |
|                                                                     |   |                                      |    |   |   |
| **Financing activities:**                                                |   |                                      |    |   |   |
| Principal payments on debt                                               |   | —                                    |    | (186 | ) |
| Proceeds from exercises of stock options                                 |   | 930                                       |    | 230 |   |
|                                                                     |   |                                      |    |   |   |
| Net cash provided by financing activities                                |   | 930                                       |    | 44 |   |
|                                                                     |   |                                      |    |   |   |
| Net (decrease) increase in cash and cash  equivalents                    |   | (43,547                                   | )       | 24,533 |   |
| Cash and cash equivalents, beginning of  period                          |   | 144,685                                   |    | 64,913 |   |
|                                                                     |   |                                      |    |   |   |
| Cash and cash equivalents, end of period                                 |   | $                                         | 101,138 |   | $ | 89,446 |   |

 

*See accompanying notes.*

 

5

----

 

**PRAECIS PHARMACEUTICALS INCORPORATED**

**Notes to Condensed Consolidated Financial Statements**

**(Unaudited)**

 

**1.****                                      Basisof Presentation**

 

The accompanying condensed consolidated financialstatements have been prepared by PRAECIS PHARMACEUTICALS INCORPORATED (the“Company”) in accordance with generally accepted accounting principles andpursuant to the rules and regulations of the Securities and Exchange Commission(the “SEC”).  Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with generally accepted accounting principles have been condensed oromitted pursuant to such rules and regulations.  It is suggested that the financial statements be read inconjunction with the audited financial statements and the accompanying notesincluded in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2002.

 

The information furnished reflects all adjustmentswhich, in the opinion of management, are considered necessary for a fairpresentation of results for the interim periods.  Such adjustments consist only of normal recurring items.  It should also be noted that results for theinterim periods are not necessarily indicative of the results expected for thefull year or any future period.

 

The preparation of these financial statements inconformity with generally accepted accounting principles requires management tomake estimates and assumptions that affect the reported amounts of assets andliabilities and disclosures of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period.  Actualresults could differ from those estimates.

 

**2.****                                      Summaryof Significant Accounting Principles**

 

***Principles of Consolidation***

 

The accompanying consolidated financial statementsinclude the Company’s accounts and the accounts of its wholly ownedsubsidiaries, 830 Winter Street LLC and PRAECIS Europe Limited.  All significant intercompany accountbalances and transactions between the companies have been eliminated.

 

***Stock-Based Compensation***

 

The Company has elected to follow AccountingPrinciples Board Opinion No. 25*, Accountingfor Stock Issued to Employees* (“APB No. 25”), and relatedinterpretations, in accounting for its stock-based compensation plans. UnderAPB No. 25, when the exercise price of options granted to employees under theseplans equals the market price of the underlying stock on the date of grant, nocompensation expense is required.  TheCompany has adopted the disclosure-only provisions of Statement of FinancialAccounting Standards (“SFAS”) No. 148, *Accountingfor Stock-Based Compensation-Transition and Disclosure, an amendment ofFinancial Accounting Standards Board (“FASB”) Statement No. 123*(“SFASNo. 148”).

 

6

----

 

Accordingly, had compensation expense for theCompany’s stock option plans been determined based on the fair value at thegrant date for awards under these plans, consistent with the methodologyprescribed under SFAS No. 148, the Company’s net loss and net loss per sharewould have approximated the pro forma amounts indicated below (in thousands):

 
|                                                                                                                                                                                                             |   | **Three  Months Ended  September 30,** |   | **Nine  Months Ended  September 30,** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------|--------|--------------------------------------------|--------|
|                                                                                                                                                                                                             |   | **2002**                                    |   | **2003**                                   |   | **2002** |   | **2003** |   |
| Net loss, as reported                                                                                                                                                                                            |   | $                                           | (5,568 | )                                          | $      | (12,785 | ) | $ | (32,469 | ) | $ | (39,750 | ) |
| Deduct/(add): Stock compensation cost as computed under APB No. 25                                                                                                                                               |   | 1                                           |   | 46                                         |   | (195 | ) | 114 |   |
| 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 |   | (2,702                                      | )      | (2,963                                     | )      | (8,330 | ) | (8,531 | ) |
| Pro forma net loss                                                                                                                                                                                               |   | $                                           | (8,269 | )                                          | $      | (15,702 | ) | $ | (40,994 | ) | $ | (48,167 | ) |
| Diluted net loss per share, as reported                                                                                                                                                                          |   | $                                           | (0.11  | )                                          | $      | (0.25 | ) | $ | (0.63 | ) | $ | (0.77 | ) |
| Diluted net loss per share, pro forma                                                                                                                                                                            |   | $                                           | (0.16  | )                                          | $      | (0.30 | ) | $ | (0.79 | ) | $ | (0.93 | ) |

 

The fair value of thestock options at the date of grant was estimated using the Black-Scholes optionpricing model with the following weighted average assumptions:

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

 

The Company has never declared or paid any cashdividends on any of its capital stock and does not expect to do so in theforeseeable future.

 

***Net Loss Per Share***

 

Basic net loss per share is based on the weightedaverage number of common shares outstanding. For the three and nine months ended September 30, 2002 and 2003,diluted net loss per common share is the same as basic net loss per commonshare as the inclusion of common stock options would be antidilutive due to theCompany’s net losses for all periods presented.  Diluted net loss per common share excluded 6,926,270 and7,967,327 common stock options for the periods ended September 30, 2002and 2003, respectively.

 

7

----

 

***Comprehensive Income***

 

SFAS No. 130, *Reporting Comprehensive Income*,establishes standards for the reporting and display of comprehensive income(loss) and its components in the consolidated financial statements.  The Company’s accumulated othercomprehensive income is comprised primarily of net unrealized gains or losseson available-for-sale securities.  Forthe three and nine months ended September 30, 2002 and 2003, respectively,comprehensive loss was as follows (in thousands):

 
|                                         |   | **Three  Months Ended  September 30,** |   | **Nine Months  Ended  September 30,** |   |
|----------------------------------------------|--------|---------------------------------------------|--------|--------------------------------------------|--------|
|                                         |   | **2002**                                    |   | **2003**                                   |   | **2002** |   | **2003** |   |
| Net loss                                     |   | $                                           | (5,568 | )                                          | $      | (12,785 | ) | $ | (32,469 | ) | $ | (39,750 | ) |
| Changes in comprehensive loss:               |   |                                        |   |                                       |   |   |   |   |   |
| Net unrealized holding losses on investments |   | (326                                        | )      | (131                                       | )      | (598 | ) | (38 | ) |
| Total comprehensive loss                     |   | $                                           | (5,894 | )                                          | $      | (12,916 | ) | $ | (33,067 | ) | $ | (39,788 | ) |

 

***Recent Accounting Pronouncements***

 

In January 2003, the FASB issued FASBInterpretation No. 46, *Consolidation of Variable Interest Entities*(“FIN No. 46”).  FIN No. 46 sets forththe criteria used in determining whether an investment in a variable interestentity (“VIE”) should be consolidated and is based on the general premise thatcompanies that control another entity through interests other than votinginterests should consolidate the controlled entity.  FIN No. 46 would require the consolidation of specified VIE’screated before February 1, 2003 in our Annual Report on Form 10-K for theyear ended December 31, 2003.  Forspecified VIE’s created after January 31, 2003, FIN No. 46 would requireconsolidation 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 anyimpact on its consolidated financial statements.

 

**3.**                                      **MortgageFinancing**

 

On July 30, 2003, the Company exercised the firstof two one-year extension options on its acquisition and construction loanagreement, extending the maturity date until July 30, 2004.  On August 1, 2003, the Company began topay approximately $62,000 per month in principal in addition to the existinginterest payments on the loan.  Inconnection with this extension, the Company also entered into an interest ratecap agreement in order to reduce the potential impact of interest rateincreases on future income.

 

**4.**                                      **Gain onTermination of Collaboration Agreement**

 

In August 2002, the Company paid Amgen Inc.(“Amgen”) $13.0 million in full and complete satisfaction of all amountspayable under the Company’s previously terminated collaboration agreement withAmgen and in consideration of the transfer from Amgen to the Company of titleto, and possession of, any existing materials inventory. As a result of theCompany’s payment of this amount, plus certain related legal fees in connectionwith the termination agreement, the Company eliminated the excess of itspreviously accrued $29.1 million liability related to this collaborationagreement and recognized a gain of $16.0 million during the third quarter of2002.

 

8

----

 

**ITEM 2****.****                  MANAGEMENT’SDISCUSSION 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 theSecurities Exchange Act of 1934, as amended, that involve risks anduncertainties.  All statements otherthan statements of historical information set forth herein are forward-lookingand may contain information about financial results, economic conditions,trends and known uncertainties.  Ouractual results could differ materially from those discussed in theseforward-looking statements as a result of a number of factors, which include thosediscussed in this section and elsewhere in this report, and the risksdiscussed in our other filings with the Securities and ExchangeCommission.  Readers are cautioned notto place undue reliance on these forward-looking statements, which reflect management’sanalysis, judgment, belief or expectation only as of the date hereof.  PRAECIS undertakes no obligation to publiclyreissue or modify these forward-looking statements to reflect events orcircumstances that arise after the date hereof.*

 

**Overview**

 

Since our inception, we have been engaged indeveloping drugs for the treatment of a variety of human diseases.  Our lead program is the development ofPlenaxisTM (abarelix for injectable suspension), a drug for the treatment ofdiseases that respond to the lowering of certain hormone levels. We aredeveloping Plenaxis for the treatment of hormonally responsive prostate cancerand endometriosis.  We are seekingapproval for Plenaxis in the United States for use in advanced symptomaticprostate cancer patients for whom the use of existing hormonal therapies maynot be appropriate.  We resubmitted ournew drug application, or NDA, to the FDA on February 27, 2003 seekingapproval for this indication.  InJuly 2003, the FDA indicated that the original action date ofAugust 27, 2003 would be extended by 90 days, and we now expect a responsefrom the FDA by November 26, 2003.

 

In June 2003, we initiated the regulatorysubmission process in the Europe Union seeking approval to market Plenaxis forthe treatment of a broad population of hormonally responsive prostate cancerpatients.  We submitted a marketingauthorization application, or MAA, in Germany and will seek broader EuropeanUnion approvals under the Mutual Recognition Procedure, or MRP.  We believe that the German review processwill be completed during 2004.  We arein discussions with potential partners for the commercialization of Plenaxis inEurope, as well as for the development and commercialization of Plenaxis inJapan.

 

We are conducting clinical trials of Apan, ourproprietary drug candidate for the treatment of Alzheimer’s disease.  PPI-2458 is our proprietary compound indevelopment for the potential treatment of a variety of inflammatory diseases,as well as a wide range of cancers.  Wehave filed an investigational new drug application, or IND, to study PPI-2458in patients with non-Hodgkin’s lymphoma and expect to initiate a clinical trialin this indication during the fourth quarter of 2003.  In addition, we have other programs in the research or preclinicaldevelopment stage.

 

Since our inception, we have had no revenues fromproduct sales.  In the past, asignificant portion of our revenues was received under collaboration agreementsthrough which we converted the potential value underlying our Plenaxis programinto a stream of upfront, milestone and expense reimbursement payments fromcorporate collaborators.  In 2001, weregained full ownership of our Plenaxis program and, as a result, all revenuesand ongoing financial obligations under our former collaboration agreementshave ended.  Substantially all of ourexpenditures to date have been for drug development and commercializationactivities and for general and administrative expenses.

 

Due to the costs associated with the continueddevelopment and potential commercialization of Plenaxis in the United Statesfor the treatment of advanced symptomatic prostate cancer patients, as well asother research and development and general and administrative expenses, and ourlack of revenues, we had a net operating loss for the first nine months of2003.  We expect to continue to have netoperating losses at least through 2005. Assuming receipt by the end of 2003 of FDA marketing approval forPlenaxis in the United States, partnering of clinical programs at opportunetimes and

 

9

----

 

continued prudent fiscal management, we believe that our existing cashand investments will be sufficient for us to execute our current operating planand attain profitability by 2006 without the need to return to the capitalmarkets.

 

The market for currently available hormonal therapiesto treat prostate cancer is approximately $1.2 billion in the UnitedStates.  We believe that the revenueopportunity for Plenaxis, if approved for the treatment of advanced symptomaticprostate cancer patients for whom the use of existing hormonal therapies maynot be appropriate, may represent 15% or more of this market.  However, our actual revenues will dependupon our approved labeling and risk management program, as well as the successof our commercialization efforts.

 

Our accumulated deficit as of September 30, 2003was approximately $170.3 million.

 

At September 30, 2003, we had 139 full-timeemployees, 106 of whom were engaged in research and development activities,compared to 133 full-time employees at September 30, 2002, 103 of whomwere engaged in research and development activities.

 

**Resultsof Operations**

 

**ThreeMonths Ended September 30, 2003 Compared To Three Months EndedSeptember 30, 2002**

 

We had no revenues for the three months endedSeptember 30, 2003.  If the FDAgrants marketing approval for Plenaxis in the United States by the end of 2003,we estimate that we will begin to ship product during the first quarter of2004.  If the FDA does not grantmarketing approval for Plenaxis in the United States, or if approval isdelayed, such denial or delay is likely to have a materially adverse impact onour expected revenues.

 

Research and development expenses for the three monthsended September 30, 2003 decreased 50% to approximately $9.9 million, fromapproximately $20.0 million for the corresponding period in 2002. The decreasein expenses reflects reduced spending in our clinical and preclinicalprograms.  As a result of theresubmission of the Plenaxis NDA in February 2003, spending on theprostate cancer clinical development program was reduced significantly.  During the second quarter of 2003, weinitiated a phase Ib clinical trial for Apan. We plan to initiate a phase I clinical trial for PPI-2458 in patientswith non-Hodgkin’s lymphoma during the fourth quarter of 2003.  Overall, we expect our research anddevelopment expenses for the remainder of 2003 to remain lower than 2002spending and then increase thereafter. While we are generally able to forecast our overall spending on researchand development, we are unable to predict the precise level of spending onindividual clinical programs due to the uncertain nature of clinicaldevelopment and the potential for future development partnerships.

 

We currently have several other ongoing research anddevelopment programs. Using industry estimates, typical drug developmentprograms may last for ten or more years and may cost hundreds of millions ofdollars to complete. As our programs progress, we will assess the possibility ofentering into corporate collaborations to offset a portion of developmentcosts. The ultimate success of our research and development programs and theimpact of these programs on our operations and financial results cannot beaccurately predicted and will depend, in large part, upon the outcome andtiming of many variables outside of our control.

 

We began our clinical program to develop Plenaxis forthe treatment of prostate cancer in 1996. In December 2000, we submittedan NDA to the FDA for Plenaxis for the treatment of hormonally responsiveprostate cancer. However, the FDA raised concerns regarding 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.  As mentionedabove, we resubmitted our NDA to the FDA on February 27, 2003 seekingapproval for use in advanced symptomatic prostate cancer patients for whom theuse of existing hormonal therapies may not be appropriate.  In July 2003, the FDA indicated thatour original action date of August 27, 2003 would be extended by 90 days.  We now expect a response from the FDAregarding the approvability of Plenaxis by November 26, 2003.  During this extension, the FDA is

 

10

----

 

reviewing previously received data requested by, and submitted to, theagency, as well as working with us to arrive at the appropriate risk managementprogram for Plenaxis.  Specifically, theFDA has indicated that our proposed risk management program must include someform of controlled or managed distribution. We are working with the FDA to finalize the details of our riskmanagement program, as well as other matters required for approval.

 

On June 23, 2003, we also submitted an MAA inGermany.  We will subsequently seekbroader European Union approval for Plenaxis under the MRP to market Plenaxisfor the treatment of a broad population of hormonally responsive prostatecancer patients.  We believe that theGerman regulatory authorities will complete their review of our MAA during2004.  We are in discussions withpotential partners for the commercialization of Plenaxis in Europe, as well asfor the development and commercialization of Plenaxis in Japan.

 

However, we cannot assure investors that we will besuccessful in obtaining approval in the United States or abroad for Plenaxisfor the treatment of any population of prostate cancer patients or for anyother indication.

 

In 1998, we began our clinical program to developPlenaxis for the treatment of endometriosis. We completed a phase II study ofPlenaxis for the treatment of pain associated with endometriosis in March 2002.Results from this study suggest that we may be able to utilize a lower doseand/or a more prolonged dosing interval in future studies to reduce drugexposure and attendant bone mineral density loss, a known consequence ofhormonal therapies that lower estrogen levels. Accordingly, during 2002, we initiated and completed a pharmacokineticstudy of Plenaxis for the treatment of endometriosis to examine the appropriatedose and dosing schedule.  Uponcompletion of our review of the results of this study, we will determine thenext steps for development, which will include evaluating partnershipopportunities.

 

We began our clinical program for Apan in 2000.  We have completed a normal volunteer, phaseIa dose escalation study of Apan and have determined a maximum tolerated dose,or MTD, in healthy volunteers.  Duringthe second quarter of 2003, we initiated a phase Ib trial of Apan inAlzheimer’s disease patients.  In thistrial, we are evaluating a single administration of Apan in a series of patientcohorts, escalating the dose in successive cohorts, with the goal ofestablishing the MTD in patients.  Weanticipate completing this study during the first half of 2004.  Upon completion of the phase Ib study and,assuming favorable FDA review of the study’s results, we intend to initiate aphase Ic trial examining multiple administrations of a selected Apan dose inAlzheimer’s disease patients.

 

We plan to initiate our first clinical study forPPI-2458 during the fourth quarter of 2003. PPI-2458 is a novel, proprietary molecule based on the fumagillin classof compounds that have been shown to prevent both abnormal cell growth and theformation of new blood vessels, which contribute to aberrant tissuegrowth.  In the proposed study, we willevaluate an oral formulation of PPI-2458 in non-Hodgkin’s lymphoma patients whoare no longer benefiting from other therapies. The study will utilize an accelerated dosing regimen in one-monthtreatment cycles, with the option for patients to continue on the study for multipleone-month cycles.  The primary goal ofthe study is to establish the MTD of orally administered PPI-2458 in thispatient population.  The study will alsoutilize a proprietary pharmacodynamic assay to evaluate the inhibition of thetarget enzyme, MetAP2.  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 and psoriasis.

 

Sales and marketing expenses for the three months endedSeptember 30, 2003 increased to approximately $0.7 million, fromapproximately $0.3 million for the corresponding period in 2002.  This increase was due to increased costsrelated to pre-commercialization efforts in connection with the possible launchof Plenaxis in the United States, in particular for market research, variousnational meetings, and pricing and reimbursement consulting activities.  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 the remainder of 2003 and thereafter, and to include, but notbe limited to, expenses relating to the building of a commercialinfrastructure, the cost of our sales force, and educational, promotional andmarketing programs.

 

General and administrative expenses for the threemonths ended September 30, 2003 increased 7% to approximately $2.4million, from approximately $2.3 million for the corresponding period in 2002.We expect that general and administrative expenses will increase slightlyduring the

 

11

----

 

remainder of 2003 and thereafter based on normal hiring of additionaladministrative personnel to support the continued growth of our research,development and commercialization initiatives.

 

Net interest income for the three months endedSeptember 30, 2003 decreased 69% to approximately $0.3 million, fromapproximately $1.0 million for the corresponding period in 2002. The decreasein net interest income was due primarily to lower average cash and investmentbalances and lower average interest rates.

 

At December 31, 2002, we had federal netoperating loss carryforwards of $129.0 million that will expire in varyingamounts through 2022, if not utilized. Utilization of net operating loss andtax credit carryforwards will be subject to substantial annual limitationsunder the Internal Revenue Code of 1986, as amended. The annual limitations mayresult in the expiration of the net operating loss and tax credit carryforwardsbefore full utilization.

 

**NineMonths Ended September 30, 2003 Compared To Nine Months EndedSeptember 30, 2002**

 

We had no revenues for the nine months endedSeptember 30, 2003, compared to approximately $1.0 million for thecorresponding period in 2002.  Duringthe second quarter of 2002, we received a final reimbursement payment from aformer corporate collaborator.  We donot expect to receive any additional revenues under this former collaborationagreement.

 

Research and development expenses for the nine monthsended September 30, 2003 decreased 31% to approximately $30.9 million,from approximately $44.8 million for the corresponding period in 2002.  The decrease in expenses reflects reducedspending in our clinical and preclinical programs.  As a result of the resubmission of the Plenaxis NDA inFebruary 2003, spending on the prostate cancer clinical developmentprogram was reduced significantly.  Inaddition, pending final analysis of the results of certain clinical studies, wealso reduced spending on our endometriosis program during the first nine monthsof 2003.  During the second quarter of2003, we initiated a phase Ib clinical trial for Apan and we plan to initiate aphase I clinical trial for PPI-2458 in patients with non-Hodgkin’s lymphomaduring the fourth quarter of 2003 and, accordingly, will increase our spendingin these areas.

 

Sales and marketing expenses for the nine months endedSeptember 30, 2003 increased to approximately $2.8 million, fromapproximately $1.0 million for the corresponding period in 2002.  This increase was due to increased costsrelated to pre-commercialization efforts in connection with the possible launchof Plenaxis in the United States, in particular for market research, variousphysician and national meetings, pricing and reimbursement consulting and salesforce sizing and deployment activities.

 

General and administrative expenses for the ninemonths ended September 30, 2003 increased 1% to approximately $7.2million, from approximately $7.1 million for the corresponding period in 2002.We expect that general and administrative expenses will increase slightlyduring the remainder of 2003 and thereafter based on normal hiring ofadditional administrative personnel to support the continued growth of ourresearch, development and commercialization initiatives.

 

Net interest income for the nine months endedSeptember 30, 2003 decreased 68% to approximately $1.1 million, fromapproximately $3.5 million for the corresponding period in 2002. The decreasein net interest income was due primarily to lower average cash and investmentbalances and lower average interest rates.

 

**Liquidityand Capital Resources**

 

At September 30, 2003, we had cash, cashequivalents and marketable securities of approximately $156.7 million andworking capital of approximately $148.4 million, compared to approximately$195.0 million and $185.5 million, respectively, at December 31, 2002.  During 2003, we expect to use an aggregateof approximately $55.0 million to $60.0 million of our cash and investments tofund operations.  This reflects a $5.0million to $10.0 million reduction compared to our previous guidance ofapproximately $65.0 million.  Assumingreceipt by the end of 2003 of regulatory approval to market Plenaxis in theUnited States for advanced symptomatic prostate cancer patients, partnering ofclinical programs at opportune times and continued prudent fiscal management,we believe that our existing cash and investments will be sufficient for us toexecute our current operating plan and attain profitability by 2006 without theneed to return to the capital markets.

 

12

----

 

For the nine months ended September 30, 2003, netcash of approximately $37.9 million was used in operating activities, comparedto approximately $55.9 million used in operating activities during the ninemonths ended September 30, 2002. During the nine months ended September 30,2003, our use of cash in operations was due principally to our net loss ofapproximately $39.8 million and the reduction in accounts payable ofapproximately $2.2 million, partially offset by approximately $3.4 million ofdepreciation and amortization.  Weexpect our cash utilization to increase for the remainder of 2003 as a resultof an overall increase in operating expenses as we prepare for the expectedcommercial launch of Plenaxis, continue with clinical trials for Apan, initiatea clinical study for PPI-2458 and expand our research and developmentinitiatives.  The actual amount of theseexpenditures will depend on numerous factors, including the timing of expensesand the timing and progress of our research, development, marketing and sales efforts.

 

Net cash provided by investing activities ofapproximately $62.4 million for the nine months ended September 30, 2003consisted primarily of net sales or maturities of marketable securities ofapproximately $62.8 million.  Thiscompares to net cash provided by investing activities of approximately $11.4million for the corresponding period in 2002. Net cash provided by investing activities for the nine months endedSeptember 30, 2002 was primarily related to net sales or maturities ofmarketable securities of approximately $13.0 million.

 

In July 2000, in connection with the purchase,through our wholly owned real estate subsidiary, of our corporate headquartersand research facility in Waltham, Massachusetts, the subsidiary entered into anacquisition and construction loan agreement providing for up to $33.0 millionin financing for the acquisition of, and improvements to, the facility. As ofSeptember 30, 2003, approximately $32.8 million was outstanding under theloan agreement. Advances bear interest at a rate equal to the 30-day LIBOR plus2.0% (3.12% at September 30, 2003). Interest is payable monthly inarrears. In July, we exercised the first of two one-year extension options,extending the maturity date of the loan until July 30, 2004.  As a result of this extension, inAugust we started making monthly principal payments on the loan ofapproximately $62,000, in addition to interest payments.  In connection with this extension, we alsoentered into an interest rate cap agreement in order to reduce the potentialimpact of interest rate increases on future income.

 

The loan is secured by the facility, together with allfixtures, equipment, improvements and other related items, and by all rents,income or profits received by our real estate subsidiary, and isunconditionally guaranteed by us.  Wehave occupied this facility since May 2001 and, as planned, are activelyseeking to sublease a portion of the facility.

 

At December 31, 2002, we had provided a valuationallowance of $64.1 million for our deferred tax assets. The valuationallowance represents the value of the deferred tax assets.  Due to anticipated  future operating losses, we believe that it is more likely thannot that we will not realize the net deferred tax assets in the future and wehave provided an appropriate valuation allowance.

 

**Recent Accounting Pronouncements**

 

In January 2003, the Financial AccountingStandards Board, or FASB, issued FASB Interpretation No. 46, *Consolidationof Variable Interest Entities*, or FIN No. 46.  FIN No. 46 sets forth the criteria used indetermining whether an investment in a variable interest entity, or VIE, shouldbe consolidated and is based on the general premise that companies that controlanother entity through interests other than voting interests should consolidatethe controlled entity.  FIN No. 46 wouldrequire the consolidation of specified VIE’s created before February 1,2003 in our Annual Report on Form 10-K for the year ended December 31,2003.  For specified VIE’s created afterJanuary 31, 2003, FIN No. 46 would require consolidation in this QuarterlyReport on Form 10-Q. ** **Wedo not have any VIE’s.  Accordingly, theimplementation of FIN No. 46 will not have any impact on our consolidatedfinancial statements.

 

13

----

 

**Risk Factors That May Affect Future Results**

 

*Therisks and uncertainties described below are not the only ones we face.  Additional risks and uncertainties notpresently known to us or that are currently deemed immaterial may also impairour 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 orsold any products and anticipate significant increases in our operatingexpenses over the next several years, we may not be profitable in the future.**

 

We cannot assure you that we will be profitable in thefuture or, if we attain profitability, that it will be sustainable. All of ourpotential products are in the research or development stage. We have not yetmarketed or sold any products, and we may not succeed in developing andmarketing any product in the future. To date, we have derived substantially allof our revenues from payments under corporate collaboration and licenseagreements. We do not expect to have any revenues, other than interest income,until 2004 at the earliest.  Inaddition, we expect to continue to spend significant amounts to developcommercial sales and marketing capabilities, continue clinical studies and seekregulatory approval for our existing product candidates. We also intend tospend substantial amounts to fund additional research and development for otherpotential products, enhance our core technologies, and for general andadministrative purposes.  As ofSeptember 30, 2003, we had an accumulated deficit of approximately $170.3million.  We expect that our operatingexpenses will increase significantly due primarily to increased expensesrelated to continued pre-commercialization activities for Plenaxis, as well asthe initiation and continuation of studies as part of our other clinicalprograms, resulting in significant operating losses at least through 2005 andpossibly thereafter.

 

**If our clinical trials are notsuccessful, or if we are otherwise unable to obtain and maintain the regulatoryapproval required to market and sell our potential products, we would incuradditional operating losses.**

 

The development and sale of our product candidates aresubject to extensive regulation by governmental authorities. Obtaining andmaintaining regulatory approval typically is costly and takes many years.Regulatory authorities, most importantly, the FDA, have substantial discretionto terminate clinical trials, delay or withhold registration and marketingapproval in the United States, and mandate product recalls. Failure to complywith regulatory requirements may result in criminal prosecution, civilpenalties, recall or seizure of products, total or partial suspension ofproduction or injunction, as well as other actions as to our potential productsor against us. Outside the United States, we can market a product only if wereceive marketing authorization from the appropriate regulatory authorities.This foreign regulatory approval process includes all of the risks associatedwith the FDA approval process, and may include additional risks.

 

To gain regulatory approval from the FDA and foreignregulatory authorities for the commercial sale of any product, we mustdemonstrate in clinical trials, and satisfy the FDA and foreign regulatoryauthorities as to, the safety and efficacy of the product.  If we develop a product to treat along-lasting disease, such as cancer or Alzheimer’s disease, we must gatherdata over an extended period of time. There are many risks associated with ourclinical trials. For example, we may be unable to achieve the same level ofsuccess in later trials as we did in earlier ones. Additionally, data we obtainfrom preclinical and clinical activities are susceptible to varyinginterpretations that could impede regulatory approval. Further, some patientsin our prostate cancer, Alzheimer’s disease and non-Hodgkin’s lymphoma programshave a high risk of death, age-related disease or other adverse medical eventsthat may not be related to our products. These events may affect the statistical analysis of the safety andefficacy of our products. If we obtain regulatory approval for a product, theapproval will be limited to those diseases for which our clinical trialsdemonstrate the product is safe and effective.

 

In addition, many factors could delay or result intermination of our ongoing or future clinical trials. For example, a clinicaltrial may experience slow patient enrollment or lack of sufficient drugsupplies. Patients may experience adverse medical events or side effects, andthere may be a real or perceived lack of effectiveness of, or of safety issuesassociated with, the drug we are testing. Future governmental action orexisting or changes in FDA policies or precedents, may also result in delays orrejection of an application for marketing approval.  The FDA has considerable discretion in determining whether togrant marketing approval for a drug, and may delay or deny approval even incircumstances where the applicant’s clinical trials have proceeded incompliance with FDA procedures and regulations and have met the establishedend-points of the trials. Challenges to FDA determinations are generallytime-consuming and costly.  We can giveno assurance that we will obtain marketing approval for

 

14

----

 

Plenaxis, our drug candidate for the treatment of hormonally responsiveprostate cancer and endometriosis, or for any of our other productcandidates.  Also, regulatory approvalmay be conditioned upon significant labeling requirements and, as describedbelow, in the case of FDA approval of Plenaxis, will require that we agree withthe FDA on and implement some form of controlled or managed distributionprogram.  Such labeling or distributionrequirements could  materially adverselyaffect the marketability or value of the product.

 

To date, none of our product candidates has receivedregulatory approval for commercial sale. In June 2001, we received aletter from the FDA with respect to our NDA for Plenaxis for the treatment ofhormonally responsive advanced prostate cancer, in which the FDA indicated thatthe information presented in the NDA was inadequate for approval. The FDAraised concerns regarding the occurrence of immediate-onset, systemic allergicreactions in a small subset of clinical trial patients. In addition, the FDAexpressed concern that, in a subset of patients treated beyond the three-monthpivotal study time frame, fluctuations in testosterone levels were observedmore frequently in patients treated with Plenaxis than in patients treated witheither Lupron Depot or Lupron Depot plus Casodex.  We have proposed various alternatives to the FDA to address theseissues and improve the risk/benefit profile of Plenaxis. Based upon ourdiscussions with the FDA, we are now seeking approval for Plenaxis for use inadvanced symptomatic prostate cancer patients for whom the use of existinghormonal therapies may not be appropriate. In February 2003, we resubmitted to the FDA our NDA seekingapproval for this indication.  InJuly 2003, the FDA indicated that our original action date ofAugust 27, 2003 would be extended by 90 days.  We now expect a response from the FDA regarding the approvabilityof Plenaxis by November 26, 2003. During the extension, the FDA is reviewing data requested by, andsubmitted to, the agency, as well as working with us to arrive at theappropriate risk management program for Plenaxis.  Specifically, the FDA has indicated that our proposed riskmanagement program must include some form of controlled or manageddistribution.  We are working with theFDA to finalize our risk management program, as well as other matters requiredfor approval.

 

In June 2003, we also submitted an MAA in Germanyand will seek broader approvals under the MRP to market Plenaxis in theEuropean Union for the treatment of a broad population of hormonally responsiveprostate cancer patients.  We believethat the German regulatory authorities will complete their review of our MAAduring 2004.

 

The FDA actions described above have delayed, andotherwise adversely affected, our obtaining regulatory approval to marketPlenaxis in the United States for the treatment of advanced symptomaticprostate cancer.  There could be furtherdelays due to FDA review or action, and the FDA could deny approvalaltogether.  If we are further delayedin obtaining or are unable to obtain FDA approval, any foreign regulatoryapproval or regulatory approval to market our other potential products, we mayexhaust our available resources significantly sooner than we had planned,particularly given the termination of the Amgen and Sanofi-Synthélaboagreements. If this were to happen, we would need to either raise additionalfunds 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.

 

**We may be unable to establishmarketing and sales capabilities necessary to successfully commercializePlenaxis or our other potential products.**

 

We have no experience in marketing or sellingpharmaceutical products and have very limited marketing and sales resources. Toachieve commercial success for any approved product, we must either develop amarketing and sales force, as well as the infrastructure to support it, orenter into arrangements with others to market and sell our products. We may beunable to establish marketing, sales and distribution capabilities necessary tocommercialize and gain market acceptance for our potential products. We haveannounced our intention to independently market and sell Plenaxis in the UnitedStates if we receive FDA approval of this product for use in advancedsymptomatic prostate cancer patients. Accordingly, we will need to hire a salesforce with expertise in pharmaceutical sales. Recruiting and retainingqualified sales personnel will be critical to our success. Competition forskilled personnel is intense, and we cannot assure you that we will be able toattract and retain a sufficient number of qualified individuals to successfullylaunch Plenaxis or any other potential product. In addition, establishing theexpertise necessary to successfully market and sell Plenaxis, or any otherproduct, will require a substantial capital investment. Our ability tosuccessfully commercialize Plenaxis in the United States for the treatment ofadvanced symptomatic prostate cancer patients and to otherwise execute ourcurrent operating plan and attain profitability by 2006,

 

15

----

 

without the need to raise additional capital, is dependent on numerousfactors, including, as described above, our receipt by the end of 2003 ofregulatory approval to market Plenaxis in the United States for advancedsymptomatic prostate cancer patients, partnering of clinical programs atopportune times and continued prudent fiscal management.  Accordingly, we cannot assure investors thatwe will have the funds to successfully commercialize Plenaxis or any otherpotential product in the United States or elsewhere.

 

We have also announced our intention to market andsell Plenaxis outside of the United States through one or more marketingpartners.  We have not entered into anysuch arrangements and we cannot assure you that we will be able to enter intoagreements with third parties on acceptable terms, if at all. In addition,co-promotion or other marketing arrangements with third parties tocommercialize Plenaxis or any other potential products could significantlylimit the revenues we derive from these products, and these third parties mayfail to commercialize Plenaxis or our other potential products successfully. Tothe extent we enter into any such agreements, the parties to those agreementsmay also market products that compete with our products, further limiting ourpotential revenue from product sales.

 

**Even if we receive approval for themarketing and sale of Plenaxis or any of our other product candidates, they mayfail to achieve market acceptance and, accordingly, may never be commerciallysuccessful.**

 

Many factors may affect the market acceptance andcommercial success of Plenaxis or any of our other potential products,including:

 

•                                          thescope of the patient population and the indications for which Plenaxis or ourother product candidates are approved;

 

•                                          theterms of any risk management and/or controlled or managed distribution programrequired by the FDA in connection with the approval of Plenaxis or any of ourother product candidates;

 

•                                          theproduct labeling or product insert required by the FDA for Plenaxis and each ofour other product candidates;

 

•                                          theeffectiveness of Plenaxis or any of our other product candidates, including anypotential side effects, as compared to alternative treatment methods;

 

•                                          theextent and success of our marketing and sales efforts relating to the marketingand sale of Plenaxis or other potential products;

 

•                                          therate at which Plenaxis or our other product candidates are reimbursed bythird-party payors, in particular Medicare;

 

•                                          thecompetitive features of our products as compared to other products, includingthe frequency of administration of Plenaxis as compared to other products, anddoctor and patient acceptance of these features;

 

•                                          thecost-effectiveness of Plenaxis or our other product candidates and theavailability of insurance or other third-party reimbursement, in particularMedicare, for patients using our products;

 

•                                          thetiming of market entry as compared to competitive products; and

 

•                                          unfavorablepublicity concerning Plenaxis or any of our other product candidates or anysimilar products.

 

If Plenaxis is not commercially successful, we maynever become profitable.

 

**Our potential revenues will diminishif we fail to obtain acceptable prices or adequate reimbursement for Plenaxisor our other product candidates from third-party payors.**

 

The continuing efforts of government and third-partypayors to contain or reduce the costs of health care may limit our commercialopportunity. If government and other third-party payors do not provide adequatecoverage and reimbursement for Plenaxis or our other product candidates,physicians may not prescribe them. If we are unable to offer physicianscomparable or superior financial motivation to use Plenaxis or our otherproduct candidates, we may not be able to generate significant revenues. Insome foreign markets, pricing and profitability of prescription pharmaceuticalsare subject

 

16

----

 

to government control. In the United States, we expect that there willcontinue to be federal and state proposals for similar controls. In addition,managed care initiatives in the United States will continue to put pressure onthe pricing of pharmaceutical products. Cost control initiatives could decreasethe price that we receive for any of our products in the future. Further, costcontrol initiatives could impair or diminish our ability or incentive, or theability or incentive of potential partners, to commercialize Plenaxis or any ofour other products, and accordingly, our ability to earn revenues from this commercialization.

 

Our ability to commercialize Plenaxis, or any otherpotential product, alone or with collaborators, may depend in part on theavailability of reimbursement from:

 

•                                          governmentand health administration authorities;

 

•                                          privatehealth insurers; and

 

•                                          otherthird-party payors, including Medicare and Medicaid.

 

We cannot predict the availability of reimbursementfor newly approved drugs such as Plenaxis. Third-party payors, including Medicare, are increasingly challenging theprices charged for medical products and services. Government and otherthird-party payors increasingly are limiting both coverage and the level ofreimbursement for new drugs and, in some cases, refusing to provide coveragefor a patient’s use of an approved drug for purposes not approved by the FDA.Third-party insurance coverage may not be available to patients for Plenaxis orany of our other products.

 

**If we fail to develop and maintainour relationships with third-party manufacturers, or if these manufacturersfail to perform adequately, we may be unable to commercialize Plenaxis or anyof our product candidates.**

 

Our ability to conduct, or continue to conduct,clinical trials and commercialize our product candidates, including Plenaxis,will depend in part on our ability to manufacture, or arrange for third-partymanufacture of, our products on a large scale, at a competitive cost and inaccordance with regulatory requirements. We must establish and maintain acommercial scale formulation and manufacturing process for each of ourpotential products for which we seek marketing approval. We or third-partymanufacturers may encounter difficulties with these processes at any time thatcould result in delays in clinical trials, regulatory submissions or in thecommercialization of potential products.

 

We have no experience in large-scale productmanufacturing, nor do we have the resources or facilities to manufactureproducts on a commercial scale. We will continue to rely upon contractmanufacturers 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 of ourpotential products. Any such delays may lower our revenues and delay or preventour attaining or maintaining profitability.

 

If the third-party manufacturers upon which we relyfail to meet our needs for clinical or commercial supply, we may be required tosupplement our manufacturing capacity by building our own manufacturingfacilities. This would require substantial expenditures.  Also, we would need to hire and trainsignificant numbers of employees to staff a new facility. If we are required tobuild our own facility, we may not be able to develop sufficient manufacturingcapacity to produce drug materials for clinical trials or commercial use.

 

In addition, we and the third-party manufacturers thatwe use must continually adhere to current good manufacturing practiceregulations enforced by the FDA through its facilities inspection program. Ifour facilities or the facilities of third-party manufacturers cannot pass apre-approval plant inspection, the FDA pre-market approval of our productcandidates will not be granted. In complying with these regulations and foreignregulatory requirements, we and any of our third-party manufacturers will beobligated to expend time, money and effort in production, record-keeping andquality control to assure that our potential products meet applicablespecifications and other requirements. If we or any of our third-partymanufacturers fail to comply with these requirements, we may be subject to regulatorysanctions.

 

17

----

 

Any of these factors could prevent, or cause delaysin, obtaining regulatory approvals for, and the manufacturing, marketing orselling of, our potential products, including Plenaxis, and could also resultin significantly higher operating expenses.

 

Under our collaboration agreement with Amgen, Amgenhad control over certain phases of the manufacturing process for Plenaxis andwas itself performing certain manufacturing processes.  Due to the termination of our collaborationagreement with Amgen, to assure an adequate supply of drug product forcontinued clinical studies and, if Plenaxis is approved for marketing, forcommercial sale, we were required to enter into a new agreement with a thirdparty manufacturer to provide for the manufacturing functions that Amgen hadbeen performing.  Due to the use of adifferent manufacturer, we may be required to undergo additional regulatoryreview and compliance procedures in the United States or abroad which couldresult in additional expenses and further delay the regulatory review andpotential commercialization of Plenaxis.

 

**The loss or failure of any of ourthird-party manufacturers could substantially delay or impair our development,or our sale or continued sale, of Plenaxis products.**

 

For each stage of Plenaxis production we have relied,and expect in the near term to continue to rely, on a single third-partymanufacturer, and we currently have not contracted, and in the near term do notexpect to contract, with a second supplier for any of these production stages.Accordingly, the loss of one or more of these suppliers for any reason,including as a result of fire, terrorism, acts of God or insolvency orbankruptcy, could result in substantial delays in, or substantially impair ourability to complete, clinical trials and regulatory submissions or reviews, andcould delay or impair substantially our sale or continued sale of Plenaxisproducts. Such delays or impairment, and the associated costs and expenses, maylower our potential revenues and delay or prevent our attaining profitability.While we are evaluating the possibility of a second source of supply at eachstage of Plenaxis production, the number of qualified alternative suppliers islimited, and we cannot assure investors that we will be able to locatealternative suppliers or negotiate second supply agreements on reasonableterms. Furthermore, the process of engineering a new supplier’s facility forthe production of Plenaxis and obtaining the necessary FDA approval of thefacility would require substantial lead-time and could be extremely costly. Wecannot assure investors that we will not lose one or more of our suppliers, orthat in such event we would be readily able to continue the development andcommercialization and sale of Plenaxis products without substantial and costlydelays.

 

**Alternative treatment options existand may be more readily available or acceptable, which may impair our abilityto capture or maintain market share for our potential products.**

 

Alternative products and medical treatments exist orare under development to treat the diseases for which we are developing drugs.For example, the FDA has approved several drugs for the treatment of prostatecancer that respond to changes in hormone levels, and there are other treatmentalternatives available, including radiation therapy and surgery.  Even if the FDA approves Plenaxis forcommercialization for the treatment of advanced symptomatic prostate cancerpatients, the approval will be limited to a particular subset of patients anddistribution of Plenaxis will be controlled or managed in some manner, whichprescribing physicians may view as burdensome. Moreover, Plenaxis may not compete favorably with existing treatmentsthat already have an established market share. Accordingly, it may be difficult for doctors to obtain Plenaxis or theyor their patients may choose to use alternative treatments that are morereadily available or more acceptable to the doctor and/or the patient.  If Plenaxis does not achieve broad marketacceptance as a drug for the treatment of advanced symptomatic prostate cancerpatients, we may not become profitable.

 

**Because we depend on third parties toconduct laboratory testing and human clinical studies and assist us withregulatory compliance, we may encounter delays in product development andcommercialization.**

 

We have contracts with a limited number of researchorganizations to design and conduct our laboratory testing and human clinicalstudies. If we cannot contract for testing activities on acceptable terms, orat all, we may not complete our product development efforts in a timely manner.To the extent we rely on third parties for laboratory testing and humanclinical studies, we may lose some control over these activities. For example,third parties may not complete testing activities on schedule or when werequest them to do so. In addition, these third parties may conduct ourclinical trials in a manner inconsistent with regulatory requirements orotherwise in a manner that yields misleading or unreliable data. This, or otherfailures of these third parties to carry out their duties, could result in

 

18

----

 

significant additional costs and expenses and could delay or preventthe development and commercialization of our product candidates.

 

**Many of our competitors havesubstantially greater resources than we do and may be able to develop andcommercialize products that make our potential products and technologiesobsolete or non-competitive.**

 

A biotechnology company such as ours must keep pacewith rapid technological change and faces intense competition. We compete withbiotechnology and pharmaceutical companies for funding, access to new technology,research personnel and in product research and development. Many of thesecompanies have greater financial resources and more experience than we do indeveloping drugs, obtaining regulatory approvals, manufacturing and marketing.We also face competition from academic and research institutions and governmentagencies pursuing alternatives to our products and technologies. We expect thatall of our products under development, including Plenaxis, will face intensecompetition from existing or future drugs. In addition, for each of our productcandidates, we may face increasing competition from generic formulations orexisting drugs whose active components are no longer covered by patents.

 

Our competitors may:

 

•                                          successfullyidentify drug candidates or develop products earlier than we do;

 

•                                          obtainapprovals from the FDA or foreign regulatory bodies more rapidly than we do;

 

•                                          developproducts that are more effective, have fewer side effects or cost less than ourproducts; or

 

•                                          successfullymarket and sell products that compete with our products.

 

The success of our competitors in any of these effortswould adversely affect our ability to develop, commercialize and market ourproduct candidates and to attain and maintain profitability.

 

**If we are unable to obtain andenforce valid patents, we could lose any competitive advantage we may have.**

 

Our success will depend in part on our ability toobtain patents and maintain adequate protection of our technologies andpotential products. If we do not adequately protect our intellectual property,competitors may be able to use our technologies and erode any competitiveadvantage we may have. For example, if we lose our patent protection forPlenaxis, another party could produce and market the compound in directcompetition 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 are sometimes uncertain and usuallyinvolve complex legal and factual questions. We can protect our proprietaryrights from unauthorized use by third parties only to the extent that ourproprietary technologies are covered by valid and enforceable patents or areeffectively maintained as trade secrets. We currently own or have exclusivelylicensed 24 issued United States patents. We have applied, and will continue toapply, for patents covering both our technologies and products as we deemappropriate. Others may challenge our patent applications or our patentapplications may not result in issued patents. Moreover, any issued patents onour own inventions, or those licensed from third parties, may not provide us withadequate protection, or others may challenge the validity of, or seek to narrowor circumvent, these patents. Third-party patents may impair or block ourability to conduct our business. Additionally, third parties may independentlydevelop products similar to our products, duplicate our unpatented products, ordesign around any patented products we develop.

 

**If we are unable to protect our tradesecrets and proprietary information, we could lose any competitive advantage wemay have.**

 

In addition to patents, we rely on a combination oftrade secrets, confidentiality, nondisclosure and other contractual provisions,and security measures to protect our confidential and proprietary information.These measures may not adequately protect our trade secrets or otherproprietary information. If these measures do not adequately protect ourrights, third parties could use our technology, and we could lose anycompetitive advantage we may have. In addition, others may

 

19

----

 

independently develop similar proprietary information or techniques,which could impair any competitive advantage we may have.

 

**If our technologies, processes orpotential products conflict with the patents or other intellectual propertyrights of competitors, universities or others, we could have to engage incostly litigation and be unable to commercialize those products.**

 

Our technologies, processes or potential products maygive rise to claims that they infringe patents or other intellectual propertyrights of third parties.  A third partycould force us to pay damages, stop our use of these technologies or processes,or stop our manufacturing or marketing of the affected products by bringing alegal action against us for infringement. In addition, we could be required toobtain a license to continue to use the technologies or processes or tomanufacture or market the affected products, and we may not be able to do so onacceptable terms or at all. We believe that significant litigation will continuein our industry regarding patent and other intellectual property rights. If webecome involved in litigation, it could consume a substantial portion of ourresources. Even if legal actions were meritless, defending a lawsuit could takesignificant time, be expensive and divert management’s attention from otherbusiness concerns.

 

**If third parties terminate ourlicenses, we could experience delays or be unable to complete the developmentand commercialization of our potential products.**

 

We license some of our technology from third parties.Termination of our licenses could force us to delay or discontinue some of ourdevelopment and commercialization programs. For example, if Advanced Researchand Technology Institute, Inc., the assignee of Indiana University Foundation,terminated our license with them, we could have to discontinue development andcommercialization of our Plenaxis products. We cannot assure you that we wouldbe able to license substitute technology in the future. Our inability to do so couldimpair our ability to conduct our business because we may lack the technology,or the necessary rights to technology, required to develop and commercializeour potential products.

 

**We may have substantial exposure toproduct liability claims and may not have adequate insurance to cover thoseclaims.**

 

We may be held liable if any product we develop, orany product made by others using our technologies, causes injury. We have onlylimited product liability insurance coverage for our potential products in clinicaltrials. We intend to expand our product liability insurance coverage for any ofour products for which we obtain marketing approval. However, this insurancemay be prohibitively expensive or may not fully cover our potentialliabilities. Our inability to obtain adequate insurance coverage at anacceptable cost could prevent or inhibit the commercialization of our products.Our collaboration agreements with Amgen and Sanofi-Synthélabo included, and theagreements with them regarding the termination of those collaborations alsoinclude, an indemnification of them for liabilities associated with thedevelopment and commercialization of Plenaxis. If a third party, including aformer collaborator, sues us for any injury, or for indemnification for losses,arising out of products made by us or using our technologies, our liabilitycould exceed our total assets.

 

**We may be unable to find suitabletenants for a portion of our facility.**

 

In May 2001, we moved to a new 175,000 squarefoot facility in Waltham, Massachusetts. We are currently seeking to sublease aportion of this facility. To date, we have not been able to find suitablesub-tenants to occupy this space. If we are unable to find suitablesub-tenants, we will not be able to offset with rental income any of thesubstantial mortgage payments and other operating expenses associated with ourfacility.

 

**If we lose our key personnel or areunable to attract and retain additional skilled personnel, we may be unable topursue our product development and commercialization efforts.**

 

We depend substantially on the principal members ofour management and scientific staff, including Malcolm L. Gefter, Ph.D., ourChief Executive Officer and Chairman of the Board, and William K. Heiden, ourPresident and Chief Operating Officer. We do not have employment agreementswith any of our executive officers. Any officer or employee can terminate hisor her relationship with us at any time and work for one of our competitors.The loss of these key individuals could result in competitive harm because wecould experience delays in our product research, development andcommercialization efforts without their expertise.

 

20

----

 

Recruiting and retaining qualified scientificpersonnel to perform future research and development work also will be criticalto our success. Competition for skilled personnel is intense and the turnoverrate can be high. We compete with numerous companies and academic and otherresearch institutions for experienced scientists. This competition may limitour ability to recruit and retain qualified personnel on acceptable terms.Failure to attract and retain qualified personnel would prevent us fromcontinuing to develop our potential products, enhancing our technologies andlaunching our products commercially. Our planned activities will require theaddition of new personnel, including management and marketing and salespersonnel, and the development of additional expertise by existing managementpersonnel, in particular in the area of product marketing and sales. Theinability to attract and retain these people 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 andradioactive and biological materials in our business and any claims relating tothe handling, storage or disposal of these materials could be time consumingand costly.**

 

Our research and development processes involve thecontrolled use of hazardous materials, including chemicals and radioactive andbiological materials, which may pose health risks. For example, the healthrisks associated with accidental exposure to Plenaxis include temporaryimpotence or infertility and harmful effects on pregnant women. Our operationsalso produce hazardous waste products. We cannot completely eliminate the riskof accidental contamination or discharge from hazardous materials and anyresultant injury. Federal, state and local laws and regulations govern the use,manufacture, storage, handling and disposal of hazardous materials. Compliancewith health and safety and environmental laws and regulations is necessary andexpensive. Current or future health and safety and environmental regulationsmay impair our research, development or production efforts. We may be requiredto pay fines, penalties or damages in the event of noncompliance or theexposure of individuals to hazardous materials.

 

From time to time, third-parties have also worked withhazardous materials in connection with our agreements with them. We have agreedto indemnify our present and former collaborators in some circumstances againstdamages and other liabilities arising out of development activities or productsproduced in connection with these collaborations.

 

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

 

If appropriate opportunities become available, we mayattempt to acquire businesses, or acquire or in-license products ortechnologies, that we believe are a strategic fit with our business. Wecurrently have no commitments or agreements for any acquisitions.  If we do undertake any transaction of thissort, the process of integrating an acquired business, or an acquired orin-licensed product or technology, may result in unforeseen operatingdifficulties and expenditures and may absorb significant management attentionthat would otherwise be available for the ongoing development of our business.Moreover, we may fail to realize the anticipated benefits of any transaction ofthis sort. To the extent we issue stock in a transaction, the ownershipinterest of our stockholders will be diluted. Transactions of this kind couldalso cause us to incur debt, expose us to future liabilities and result inexpenses related to goodwill and other intangible assets.

 

**The market price of our common stockmay experience extreme price and volume fluctuations.**

 

The market price of our common stock may fluctuatesubstantially due to a variety of factors, including, but not limited to:

 

•                                          announcementof FDA approval or disapproval of Plenaxis for the treatment of advancedsymptomatic prostate cancer patients or any of our other product candidates, orof associated labeling or controlled or managed distribution requirements;

 

•                                          failureor delay by third-party manufacturers in performing their supply obligations ordisputes or litigation regarding those obligations;

 

•                                          ourability to commercialize, directly or with collaborators, Plenaxis or our otherproduct candidates and the timing of commercialization;

 

•                                          changesin the reimbursement policies of third-party insurance companies or governmentagencies;

 

21

----

 

•                                          thesuccess rate of our discovery efforts and clinical trials;

 

•                                          announcementsof technological innovations or new products by us or our competitors;

 

•                                          developmentsor disputes concerning patents or proprietary rights, including claims ofinfringement, interference or litigation against us or our licensors;

 

•                                          announcementsconcerning our competitors, or the biotechnology or pharmaceutical industry ingeneral;

 

•                                          publicconcerns as to the safety of our products or our competitors’ products;

 

•                                          changesin government regulation of the pharmaceutical or medical industry;

 

•                                          actualor anticipated fluctuations in our operating results;

 

•                                          changesin financial estimates or recommendations by securities analysts;

 

•                                          salesof large blocks of our common stock;

 

•                                          changesin accounting principles; and

 

•                                          theloss of any of our key scientific or management personnel.

 

In addition, the stock market has experienced extremeprice and volume fluctuations. The market prices of the securities ofbiotechnology companies, particularly companies like ours without currentproduct revenues and earnings, have been highly volatile, and may continue tobe highly volatile in the future. This volatility has often been unrelated tothe operating performance of particular companies. In the past, securitiesclass action litigation has often been brought against companies thatexperience volatility in the market price of their securities. Whether or notmeritorious, litigation brought against us could result in substantial costsand a diversion of management’s attention and resources.

 

**We expect that our quarterly resultsof operations will fluctuate, and this fluctuation could cause our stock priceto decline.**

 

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

 

•                                          thetiming and level of expenses related to the development and commercializationof our Plenaxis products leading to revenues from product sales;

 

•                                          thetiming and level of expenses related to our other research and clinicaldevelopment programs; and

 

•                                          thetiming of our commercialization of other products resulting in revenues.

 

Due to the possibility of fluctuations in our revenuesand expenses, we believe that quarter-to-quarter comparisons of our operatingresults are not a good indication of our future performance.

 

**Anti-takeover provisions in ourcharter and by-laws, our rights agreement and certain provisions of Delawarelaw may make an acquisition of us more difficult, even if an acquisition wouldbe beneficial to our stockholders.**

 

Provisions in our certificate of incorporation andby-laws may delay or prevent an acquisition of us or a change in ourmanagement. Also, because we are incorporated in Delaware, we are governed bythe provisions of Section 203 of the Delaware General Corporation Law,which may prohibit or delay large stockholders, in particular those owning 15%or more of our outstanding voting stock, from merging or combining with us. Inaddition, the rights issued under our rights agreement may be a substantialdeterrent to a person acquiring 10% or more of our common stock without theapproval of our board of directors. These provisions in our charter andby-laws, rights agreement and under Delaware law could reduce the price thatinvestors might be willing to pay for shares of our common stock in the futureand result in the market price being lower than it would be without theseprovisions.

 

22

----

 

**ITEM 3****.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK.**

 

The primary objective of our investment activities isto preserve principal while at the same time maximizing the income we receivefrom our investments without significantly increasing risk.  We have not entered into any instruments fortrading purposes.  Some of thesecurities that we invest in may have market risk. This means that an increasein prevailing interest rates may cause the principal amount of the investmentto decrease. To minimize this risk in the future, we maintain our portfolio ofcash equivalents and short-term investments in a variety of securities,including commercial paper, money market funds and government andnon-government debt securities. An immediate hypothetical 100 basis pointincrease in interest rates would have resulted in an approximate $0.4 milliondecrease in the fair value of our investments as of September 30, 2003.  The same hypothetical increase in interestrates as of December 31, 2002 would have resulted in an approximate $0.8million 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 September 30, 2003, approximately 91% of our total investments willmature in one year or less, with the remainder maturing in less than two years.

 

In connection with the purchase of our new facility inJuly 2000, our wholly owned real estate subsidiary executed an acquisitionand construction loan agreement that provides for up to $33.0 million inborrowings at a floating interest rate indexed to 30-day LIBOR. InJuly 2003, we exercised the first of two one-year extension optionsextending the maturity date of the loan until July 30, 2004.  In connection with this extension, thesubsidiary has entered into an interest rate cap agreement which limitsexposure to interest rate increases above a certain threshold.  Due to the current interest rate environmentand the relatively short duration of the loan agreement extension, we currentlydo not believe that there is material interest rate risk exposure with respectto the loan agreement. In addition, we believe that we have mitigated our riskrelating to significant adverse fluctuations in interest rates with respect toborrowings under the loan agreement, and we do not believe that a 10% change ininterest rates would have a material impact on our results of operations orcash flows.

 

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

 

*(a)*          *Disclosure Controls and Procedures*.

 

The Company’s management, with the participation ofthe Company’s Chief Executive Officer and Chief Financial Officer, hasevaluated the effectiveness of the Company’s disclosure controls and procedures(as such term is defined in Rules 13a-15(e) and 15d-15(e) under the SecuritiesExchange Act of 1934, as amended) as of the end of the period covered by thisreport.  Based on such evaluation, theCompany’s Chief Executive Officer and Chief Financial Officer have concludedthat, as of the end of such period, the Company’s disclosure controls andprocedures are effective in recording, processing, summarizing and reporting,on a timely basis, information required to be disclosed by the Company in thereports that it files or submits under the Exchange Act.

 

*(b)**                               InternalControl Over Financial Reporting*.

 

There have not been any changes in the Company’sinternal control over financial reporting (as such term is defined in Rules13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter towhich this report relates that have materially affected, or are reasonablylikely to materially affect, the Company’s internal control over financialreporting.

 

23

----

 

**PARTII****.  OTHERINFORMATION**

 

**ITEM 6****.  EXHIBITS ANDREPORTS ON 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)                                                            |
|                 |   |                                                                                                                                                                   |
| 31.1                 |   | Certification of Chief Executive Officer                                                                                                                               |
|                 |   |                                                                                                                                                                   |
| 31.2                 |   | Certification of Chief Financial Officer                                                                                                                               |
|                 |   |                                                                                                                                                                   |
| 32.1                 |   | 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          |
|                 |   |                                                                                                                                                                   |
| 32.2                 |   | 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          |

 

----

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

 

(2)                                  Incorporatedby reference to Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2000 filed with the Securities and Exchange Commission onJune 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 26,2001 and 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 31,2002 filed with the Securities and Exchange Commission on March 19, 2003.

 

(b)                                 ReportsSubmitted on Form 8-K

 

On July 21, 2003, wefurnished a Current Report on Form 8-K to furnish under Item 12 (Results ofOperations and Financial Condition) a copy of our Press Release datedJuly 21, 2003.

 

On September 15,2003, we furnished a Current Report on Form 8-K to furnish under Item 9(Regulation FD Disclosure) a copy of our Press Release dated September 15,2003.

 

24

----

 

**SIGNATURE**

 

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, as amended, the Registrant has duly caused this report tobe signed on its behalf by the undersigned hereunto duly authorized.

 
|                           |   | PRAECIS PHARMACEUTICALS INCORPORATED |
|--------------------------------|--------|--------------------------------------|
|                           |   |                                 |   |
|                           |   |                                 |   |
| Date:   November 14, 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)* |

 

25

----

 

**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)                                                            |
|                 |   |                                                                                                                                                                   |
| 31.1                 |   | Certification of Chief Executive Officer                                                                                                                               |
|                 |   |                                                                                                                                                                   |
| 31.2                 |   | Certification of Chief Financial Officer                                                                                                                               |
|                 |   |                                                                                                                                                                   |
| 32.1                 |   | 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          |
|                 |   |                                                                                                                                                                   |
| 32.2                 |   | 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          |

 

----

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

 

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

 

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

 

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

 

26

----