**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-K/A**

**AmendmentNo. 1**

 

**(Mark One)**

 
| **ý**                                                                                                                                            |   | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934**          |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------|
|                                                                                                                                                  |   |                                                                                                     |
| **For the fiscal year ended December 31,  2003**                                                                                                 |
|                                                                                                                                                  |
| **or**                                                                                                                                                |
|                                                                                                                                                  |
| **o**                                                                                                                                                 |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|                                                                                                                                                  |   |                                                                                                     |
| **For the transition period from            to           ** |

 

**Commission file number 000-30289**

 

**PRAECISPHARMACEUTICALS INCORPORATED**

(Exact name of registrant as specified in itscharter)

 

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

 

**Securities registered pursuant toSection 12(b) of the Act:**

**None**

(Title of Class)

 

**Securities registered pursuant toSection 12(g) of the Act:**

**Common Stock, par value $.01 per share**

(Title of Class)

 

**Preferred Stock Purchase Rights**

(Title of Class)

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past90 days. Yes ýNo o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K (§ 229.405 of this chapter) is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to thisForm 10-K. o

 

 

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Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Act). Yes ýNo o

 

The aggregate market value of voting and non-voting stock held bynon-affiliates of the registrant, based upon the last sale price of the commonstock, par value $.01 per share, reported on The Nasdaq National Market onJune 30, 2003, was $240,343,790.

 

The number of shares of common stock, par value $.01 per share,outstanding as of February 29, 2004 was 52,191,092.

 

**ExplanatoryNote**

 

This Amendment No. 1 (this “Amendment No. 1”) to the Annual Report onForm 10-K of PRAECIS PHARMACEUTICALS INCORPORATED (the “Company”) for thefiscal year ended December 31, 2003 (the “Form 10-K”) is being filedsolely for the purpose of reflecting the reclassification of certain debt securities formerly presentedas cash and cash equivalents to marketable securities.  This reclassification has no effect on theCompany’s available financial resources or working capital and has no impact onthe Company’s Consolidated Statements of Operations.  The reclassification affects the Company’sConsolidated Balance Sheets as of December 31, 2002 and 2003, ConsolidatedStatements of Cash Flows for the years then ended and Note 3 of theConsolidated Financial Statements.  Therelated discussion in Item 7 – Management’s Discussion and Analysis ofFinancial Condition and Results of Operation under Liquidity and CapitalResources has also been amended.

 

In accordance with Rule 12b-15 under the Securities Exchange Act of1934, as amended (the “Exchange Act”), the complete text of Items 7 and 8 asamended are set forth herein.  Inaddition, in connection with the filing of this Amendment No. 1 and pursuant toRule 12b-15, the Company is including currently dated certifications requiredby Rules 13a-14(a) and 13a-14(b) under the Exchange Act.  The Company is also filing an updatedConsent from Ernst & Young LLP, the Company’s independent auditors.  The Company has included an amended exhibitlist to list the certifications and Consent filed with this Amendment No 1.

 

The remainder of the Form 10-K is unchanged and is not reproduced inthis Amendment No. 1.  The informationin this Amendment No. 1 is as of the original filing date of the Form 10-K anddoes not reflect events occurring after such filing date, or otherwise modifythe information in the Form 10-K except as set forth herein.

 

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**PART II**

 

**ITEM 7.  MANAGEMENT’S DISCUSSON AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS.**

 

**General**

 

The following discussion and analysis of our financial condition andresults of operations should be read in conjunction with “Selected FinancialData” and our consolidated financial statements and notes thereto appearingelsewhere in this report. This discussion and analysis contains forward-lookingstatements that involve risks, uncertainties and assumptions. Our actualresults may differ substantially from those anticipated in these forward-lookingstatements.

 

**Overview**

 

Since our inception, we have been engaged in developing drugs for thetreatment of a variety of human diseases. Our lead program is the development of Plenaxis (abarelix for injectablesuspension), a drug for the treatment of diseases that respond to the loweringof certain hormone levels.  InNovember 2003, the FDA approved Plenaxis for the treatment of the symptomsof men with advanced prostate cancer for whom other hormonal therapies are notappropriate and who have refused surgical castration.  For safety reasons, Plenaxis was approved with marketingrestrictions.  Only physicians enrolledin the PLUS (PLenaxis User Safety) Program may prescribe Plenaxis.  We are promoting Plenaxis in the UnitedStates through our own dedicated marketing and sales team.

 

In June 2003, we initiated the regulatory submission process inthe European Union seeking approval to market Plenaxis for the treatment of abroad population of hormonally responsive prostate cancer patients.  We submitted a marketing authorizationapplication, or MAA, in Germany and, assuming a favorable action in Germany,plan to seek additional European Union member state approvals under the MutualRecognition Procedure, or MRP.  We believethat the German review process will be completed during 2004.  We are in discussions with potentialpartners for the commercialization of Plenaxis in Europe, as well as for thedevelopment and/or commercialization of Plenaxis in Japan and other areas ofthe world.

 

We are conducting clinical trials of Apan, our proprietary drugcandidate for the treatment of Alzheimer’s disease.  PPI-2458 is our proprietary compound in development for thepotential treatment of a wide range of cancers, as well as certain autoimmunediseases.  During the fourth quarter of2003, we initiated a phase I clinical trial to study PPI-2458 in patients withnon-Hodgkin’s lymphoma.  InMarch 2004, the FDA placed this trial on clinical hold.  We also have other programs in the researchor preclinical development stage.

 

Since our inception, we have had no revenues from product sales.  Substantially all of our expenditures todate have been for drug development and commercialization activities and forgeneral and administrative expenses.  Inthe past, a significant portion of our revenues was received undercollaboration agreements through which we converted the potential valueunderlying our Plenaxis program into a stream of upfront, milestone and expensereimbursement payments from corporate collaborators.  In 2001, we regained full ownership of our Plenaxis program and,as a result, all revenues and ongoing financial obligations under our formercollaboration agreements have ended.  Wehad entered into collaborations with Amgen and Sanofi-Synthélabo to develop andcommercialize our Plenaxis products. In September 2001, Amgen notified usthat it was terminating its agreement with us. In October 2001,Sanofi-Synthélabo notified us that it was terminating its agreement withus.  Both terminations were effective inDecember 2001.  As a result, all ofthe licenses for Plenaxis granted to Amgen and Sanofi-Synthélabo under theseagreements, and all rights of Amgen and Sanofi-Synthélabo in the Plenaxisprogram, have terminated.  In 2002, weentered into an agreement relating to the termination of these collaborationswith each of Amgen and Sanofi-Synthélabo.

 

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Due primarily to the costs associated with the commercialization ofPlenaxis in the United States, as well as other research and development andgeneral and administrative expenses, and our lack of revenues, we had a netoperating loss during 2003.  Ouraccumulated deficit as of December 31, 2003 was approximately $186.3million.  We expect to continue to havenet operating losses through 2005.  Webegan selling Plenaxis in the United States in January 2004.  Assuming the successful commercialization ofPlenaxis, partnering of clinical programs at opportune times and continuedprudent fiscal management, we believe that our existing cash and investmentswill be sufficient for us to execute our current operating plan and attainprofitability by 2006.

 

The market for currently available hormonal therapies to treat prostatecancer is approximately $1.2 billion in the United States.  We believe that the revenue opportunity forPlenaxis, based upon its approved indication, may represent 15% or more of thismarket.  However, our actual revenueswill depend upon the impact of our risk management program, physician andpatient acceptance of Plenaxis and the overall success of our commercializationefforts.

 

At December 31, 2003, we had 146 full-time employees, 99 of whomwere engaged in research and development activities, compared to 139 full-timeemployees at December 31, 2002, 110 of whom were engaged in research anddevelopment activities.

 

The termination of our collaboration agreement with Sanofi-Synthélabobecame effective as of December 31, 2001 and we received a finalreimbursement payment of approximately $1.0 million during the second quarterof 2002. Including this payment, we recognized a total of approximately $24.7million in non-refundable fees and performance-based payments, and a total ofapproximately $11.7 million in reimbursement for ongoing development costsunder this agreement.

 

The termination of our collaboration agreement with Amgen becameeffective as of December 17, 2001. Under the Amgen agreement, Amgen paidthe first $175.0 million of all authorized costs and expenses associated withthe research, development and commercialization of Plenaxis products in theUnited States. Amgen’s initial $175.0 million funding commitment was fulfilledduring the third quarter of 2000. Following Amgen’s completion of this funding,we became responsible for one-half of all subsequent United States research anddevelopment costs for Plenaxis products. Additionally, the agreement providedthat following Amgen’s completion of its $175.0 million funding commitment, wewere required to reimburse Amgen for one-half of the costs associated withestablishing a sales and marketing infrastructure for Plenaxis products in theUnited States. Through December 31, 2001, we recognized an aggregate ofapproximately $121.7 million of revenues under the Amgen agreement.

 

On August 19, 2002, we executed a termination agreement withAmgen.  In accordance with thisagreement, we made a final payment to Amgen of $13.0 million. This paymentrepresented full and complete satisfaction of our share of the expenses incurredunder the collaboration agreement, as well as consideration for the receiptfrom Amgen of full title to, and possession of, all materials inventorypurchased during the term of the collaboration.  As a result, we recognized a gain of $16.0 million during thethird quarter of 2002.

 

**Critical Accounting Policies**

 

In December 2001, the Securities and Exchange Commission requestedthat all registrants discuss their most “critical accounting policies” inManagement’s Discussion and Analysis of Financial Condition and Results ofOperations. The Commission indicated that a “critical accounting policy” is onewhich is both important to the portrayal of the Company’s financial conditionand results and requires management’s most difficult, subjective or complexjudgments, often as a result of the need to make estimates about the effect ofmatters that are inherently uncertain. While our significant accountingpolicies are more fully described in Note 2 to our consolidated financialstatements appearing elsewhere in this report, we believe the following accountingpolicies to be critical:

 

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*Use of Estimates.*  We prepare our financial statements inaccordance with accounting principles generally accepted in the United States.These principles require that we make estimates and use assumptions that affectthe reporting of our assets and our liabilities as well as the disclosures thatwe make regarding assets and liabilities and income and expense that arecontingent upon uncertain factors as of the reporting date.  The actual payments, and thus our actualresults, could differ from our estimates.

 

*Impairment or Disposal of Long-Lived Assets*.  Statement of Financial Accounting StandardsNo. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets,*or SFAS No.144, requires that if the sum of the undiscounted future cash flows expected toresult from a company’s asset, net of interest charges, is less than thereported value of the asset, an asset impairment must be recognized in thefinancial statements.   We evaluate ourproperty, plant and equipment for impairment whenever indicators of impairmentexist.  The amount of the impairment tobe recognized is calculated by subtracting the fair value of the asset from thereported value of the asset.

 

We believe that the application of SFAS No. 144 and the method used todetermine the impairment of our property, plant and equipment involve criticalaccounting estimates because they are highly susceptible to change from periodto period and because they require management to make assumptions about futurecash flows, including residual values. In addition, we believe that had alternative assumptions been used theimpact of recognizing an impairment on the assets reported on our balancesheet, as well as our net loss, may have been material.

 

We reviewed our building for impairment as of December 31,2003.  We have determined that theundiscounted sum of the expected future cash flows from the building exceededthe recorded value of the building.  Asa result, no impairment allowance was required in accordance with SFAS No. 144.

 

Management has discussed the development, selection and disclosure ofthese critical accounting policies with the audit committee of our board ofdirectors.

 

**Results of Operations**

 

***YearsEnded December 31, 2003 and 2002***

 

Revenues for the year ended December 31, 2003 were zero comparedto approximately $1.0 million in 2002. During 2002 our revenues were comprisedof a final reimbursement payment received in connection with the termination ofour agreement with Sanofi-Synthélabo.  We expect our only sources of revenues during 2004 to be from sales ofPlenaxis in the United States and potential payments under foreign Plenaxiscollaboration agreements, if consummated. We have previously forecast Plenaxis product revenues to be in the $10.0million to $20.0 million range in 2004. We anticipate that these revenues will be heavily weighted towards thesecond half of 2004.  Our actualrevenues will depend upon a number of factors, including the impact of our riskmanagement program, physician and patient acceptance of Plenaxis, the timing ofreimbursement coverage and the overall success of our commercializationefforts.

 

Research and development expenses for the year ended December 31,2003 decreased 26% to approximately $41.9 million, from approximately$56.4 million in 2002. The decrease in expenses reflects reduced spendingin our clinical and preclinical programs.  As a result of the resubmissionof the Plenaxis NDA in February 2003, spending on the prostate cancerclinical development program was reduced significantly.  We incurred nodirect expenses in connection with our endometriosis program during 2003pending a decision regarding further development, and do not expect anyadditional spending on this program for the foreseeable future.  During the second quarter of 2003, weinitiated a phase Ib clinical trial for Apan and expect to complete this studyduring the first half of 2004.  We initiated a phase I clinical trial forPPI-2458 in patients with non-Hodgkin’s lymphoma during the fourth quarter of2003.  In March 2004, the FDA placed this trial on clinicalhold.  Overall, we expect our researchand development expenses to increase in 2004 and thereafter, primarily due toadditional post-marketing studies for Plenaxis, preclinical and clinicalstudies for Apan and PPI-2458, and the expansion of our core technologyplatform, Direct Select.   Inaddition, we

 

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currently have several other ongoing research and development programs.

 

While we are generally able to forecast our overall spending onresearch and development, we are unable to predict the precise level ofspending on individual clinical programs due to the uncertain nature of clinicaldevelopment and the potential for future development partnerships.  Using industry estimates, typical drugdevelopment programs may last for ten or more years and may cost hundreds ofmillions of dollars to complete. As our programs progress, we will assess thepossibility of entering into corporate collaborations to offset a portion ofdevelopment costs. The ultimate success of our research and developmentprograms and the impact of these programs on our operations and financialresults cannot be accurately predicted and will depend, in large part, upon theoutcome and timing of many variables outside of our control.

 

Members of our research and development team typically work on a numberof projects concurrently. In addition, a substantial amount of our fixed costssuch as facility depreciation, utilities and maintenance are shared by ourvarious programs. Accordingly, we have not and do not plan to specificallyidentify all costs related to each of our research and development programs. Weestimate that during 2003 and 2002, the majority of our research anddevelopment expenses were related to manufacturing costs, clinical trial costs,salaries and lab supplies related to our prostate cancer, Alzheimer’s diseaseand non-Hodgkin’s lymphoma programs. The remaining research and developmentcosts consisted primarily of salaries and lab supplies for our other researchprograms.

 

We began our clinical program to develop Plenaxis for the treatment ofprostate cancer during 1996.  InDecember 2000, we submitted an NDA to the FDA for Plenaxis for thetreatment of hormonally responsive prostate cancer.  However, the FDA raised concerns over the occurrence ofimmediate-onset, systemic allergic reactions observed in approximately 1.1% ofall clinical trial patients dosed with Plenaxis.  In addition, the FDA expressed concern that the effectiveness ofPlenaxis in suppressing testosterone decreased with continued dosing in somepatients.  In November 2003, theFDA approved Plenaxis for the palliative treatment of men with advancedsymptomatic prostate cancer, in whom LHRH agonist therapy is not appropriateand who refuse surgical castration, and have one or more of the following: (1)risk of neurological compromise due to metastases, (2) ureteral or bladderoutlet obstruction due to local encroachment or metastatic disease, or (3)severe bone pain from skeletal metastases persisting on narcoticanalgesia.  Plenaxis is not indicatedfor use in women or children.  Forsafety reasons, Plenaxis was approved with marketing restrictions.  Only physicians enrolled in the PLUS Programmay prescribe Plenaxis.

 

In June 2003, we also submitted an MAA for Plenaxis inGermany.  We believe that the German regulatory authorities willcomplete their review of our MAA during 2004.  Assuming a favorableaction, we plan to subsequently seek further European Union approval forPlenaxis under the MRP to market Plenaxis for the treatment of a broadpopulation of hormonally responsive prostate cancer patients.  We are in discussions with potentialpartners for the commercialization of Plenaxis in Europe, as well as for thedevelopment and/or commercialization of Plenaxis in Japan and other areas ofthe world.  However, we cannot assureinvestors that we will be successful in obtaining approval abroad for thecommercialization of Plenaxis for the treatment of any portion of thehormonally responsive prostate cancer patient population or for any otherindication, or that we will be able to enter into collaboration agreements onfavorable terms, if at all.

 

In 1998, we began our clinical program to develop Plenaxis for thetreatment of endometriosis. We completed a phase II study of Plenaxis for thetreatment of pain associated with endometriosis in March 2002.  Analysis of the results of this study indicatesthat patients treated with Plenaxis experienced more bone mineral density lossthan those treated with the comparator drug, and that this loss wasdose-related.  In order to betterunderstand the bone mineral density loss, during 2002 and 2003 we conducted apharmacokinetic study of Plenaxis for the treatment of endometriosis todetermine the appropriate dose and dosing schedule necessary to maximizethe benefit of the therapy for patients while minimizing attendant bone mineraldensity loss. The results of this study will be used as guidance for potentialfuture clinical studies.  We do notcurrently have any additional endometriosis studies planned and do not expectto conduct further studies without a corporate partner.  Any additional development in endometriosiswould

 

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also require consultation with the FDA.

 

We began our clinical program for Apan in 2000.  We have completeda normal volunteer, phase Ia dose escalation study of Apan and have identifieda maximum tolerated dose, or MTD, in healthy volunteers.  During thesecond quarter of 2003, we initiated a phase Ib trial of Apan in Alzheimer’sdisease patients.  In this trial, a single dose of Apan is administered,with the goal of establishing the MTD in patients.  We anticipatecompleting this study during the first half of 2004.  Upon completion ofthe phase Ib study and, assuming favorable FDA review of the study’s results,we intend to initiate a phase Ic trial examining multiple administrations of aselected Apan dose in Alzheimer’s disease patients.

 

We initiated our first clinical study for PPI-2458 during the fourthquarter of 2003 in which an oral formulation of PPI-2458 is being evaluated innon-Hodgkin’s lymphoma patients who are no longer benefiting from othertherapies.  In March 2004, the FDA placed this trial on clinical holduntil questions relating to a neuropathological abnormality observed in some ofthe animals tested in a recently completed three-month animal safety study havebeen satisfactorily resolved.  Theresults of this study were not available at the time that the clinical studywas initiated.  The FDA has indicatedthat we will need to submit a detailed plan in order to address thisfinding.  We intend to further explorethis finding to assess its potential implications and prepare a plan for theFDA.  While we intend to work diligentlywith the FDA to resolve this issue, we cannot currently predict when theclinical hold will be released.  Weintend to continue evaluating the potential utility of PPI-2458 for treatingcertain other cancers, as well as certain autoimmune diseases.

 

Sales and marketing expenses for the year ended December 31, 2003increased by approximately $3.4 million to approximately $5.2 million,from approximately $1.8 million in 2002. During 2003, we incurredincreased sales and marketing expenses in preparation for the launch ofPlenaxis in the United States.  This wasdue to increased costs related to pre-commercialization efforts, in particularfor market research, various physician and national meetings, pricing andreimbursement consulting, and sales force hiring and deploymentactivities.  We promote Plenaxis in the United States through our ownmarketing and sales team. With the recent FDA approval of Plenaxis, we expectour sales and marketing expenses will increase during 2004 and will includeexpenses relating to the building of a marketing infrastructure, the cost ofour sales force, commissions to the sales force on Plenaxis sales, and promotionaland marketing programs.

 

General and administrative expenses for the year endedDecember 31, 2003 increased 3% to approximately $10.0 million, fromapproximately $9.7 million in 2002. We expect that general and administrative expenses will increaseslightly during 2004 and thereafter based on normal hiring of additionaladministrative personnel to support continued growth of our commercializationinitiatives and our research and development activities.

 

Net interest income for the year ended December 31, 2003 decreased72% to approximately $1.3 million, from approximately $4.8 million in2002. The decrease in net interest income was due primarily to lower averagecash balances and reduced average interest rates.

 

The provision for income taxes for the years ended December 31,2003 and 2002 was zero.  We anticipatethat we will continue to be in a net operating loss carryforward position forthe next several years. Therefore, as in 2002, no benefit from our operatinglosses has been recognized. We account for income taxes under Statement ofFinancial Accounting Standards No. 109, *Accountingfor Income Taxes*. Realization of deferred tax assets is dependent onfuture earnings, if any, the timing and amount of which are uncertain.Accordingly, valuation allowances, in amounts equal to the net deferred taxassets as of December 31, 2003 and 2002, have been established in eachperiod to reflect these uncertainties.

 

At December 31, 2003, we had federal net operating losscarryforwards of $170.3 million that will expire in varying amountsthrough 2023, if not utilized. Utilization of net operating loss and tax creditcarryforwards will be subject to substantial annual limitations under theInternal Revenue Code of 1986, as amended. The annual limitations may result inthe expiration of the net operating loss and tax credit

 

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carryforwards before full utilization.

 

***YearsEnded December 31, 2002 and 2001***

 

Revenues for the year ended December 31, 2002 decreased toapproximately $1.0 million, from approximately $9.9 million in 2001. Thedecrease in revenues was the result of the termination during the fourthquarter of 2001 of our collaboration agreements with Amgen andSanofi-Synthélabo.  During 2001 ourrevenues were comprised principally of reimbursement revenues under theseagreements. During 2002 our revenues were comprised of a final reimbursementpayment received in connection with the termination of our agreement withSanofi-Synthélabo.   We will not receiveany additional revenues under these agreements.

 

Research and development expenses for the year ended December 31,2002 decreased 5% to approximately $56.4 million, from approximately$59.4 million in 2001. The slight decrease in expenses primarily reflectsreduced spending in our Plenaxis prostate cancer clinical program and, to alesser extent, the lack of spending on our clinical program for Latranal, anin-licensed compound that was in development for the treatment ofmusculoskeletal pain. Development of Latranal was discontinued during the thirdquarter of 2001. These decreases were partially offset by increased spending onpreclinical studies related to our experimental drug candidate PPI-2458.

 

Sales and marketing expenses for the year ended December 31, 2002decreased 79% to approximately $1.8 million, from approximately$8.7 million in 2001. During 2001, we incurred increased sales andmarketing expenses in preparation for the potential launch of Plenaxis for thetreatment of hormonally responsive advanced prostate cancer. The subsequentdecrease in sales and marketing expenses was due to the temporary suspension ofthe majority of marketing efforts resulting from the repositioning of ourprostate cancer program in response to issues raised by the FDA.

 

General and administrative expenses for the year endedDecember 31, 2002 increased 39% to approximately $9.7 million, fromapproximately $7.0 million in 2001. This increase was due primarily to higher facility-relatedexpenses.  In May 2001, we occupied ournew, larger facility and began incurring depreciation expense and increasedutilities, maintenance and tax expenses. In addition, higher personnel-related operating costs and increasedprofessional services expenses contributed to the increase in general andadministrative expenses.  General andadministrative expenses for 2002 and going forward fully reflect these newfacility-related expenses.

 

Net interest income for the year ended December 31, 2002 decreased48% to approximately $4.8 million, from approximately $9.1 million in2001. The decrease in net interest income was due primarily to lower averagecash balances and reduced average interest rates.

 

The provision for income taxes for the years ended December 31,2002 and 2001 was zero.  We anticipatethat we will continue to be in a net operating loss carryforward position forthe next several years. Therefore, no benefit from our operating losses inthese years has been recognized.

 

**Selected Quarterly Operating Results**

 

The following table sets forth our unaudited statement of operationsdata for each of the eight quarters ended December 31, 2003. Thisinformation has been derived from our unaudited financial statements. Theunaudited financial statements have been prepared on the same basis as theaudited financial statements appearing in this report and include alladjustments, consisting only of normal recurring accruals, that we considernecessary for a fair presentation of such information when read in conjunctionwith our annual audited financial statements and notes thereto appearingelsewhere in this report. You should not draw any conclusions from theoperating results for any quarter.

 

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|                                      |   | **Quarter  Ended**                         |   |
|-------------------------------------------|--------|--------------------------------------------|--------|
|                                      |   | **Mar. 31,  2002**                         |   | **June 30,  2002** |   | **Sept. 30,  2002(1)** |   | **Dec. 31,  2002** |   | **Mar. 31,  2003** |   | **June 30,  2003** |   | **Sept. 30,  2003** |   | **Dec. 31,  2003** |   |
|                                      |   | **(in  thousands, except per share data)** |   |
|                                      |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total revenues                            |   | $                                          | — |   | $ | 1,029 |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Operating loss                            |   | (13,890                                    | )      | (15,506 | ) | (22,585 | ) | (14,886 | ) | (11,831 | ) | (15,928 | ) | (13,093 | ) | (16,295 | ) |
| Net loss                                  |   | (12,686                                    | )      | (14,215 | ) | (5,568 | ) | (13,606 | ) | (11,415 | ) | (15,550 | ) | (12,785 | ) | (16,048 | ) |
| Basic and diluted net loss per share |   | $                                          | (0.25  | ) | $ | (0.27 | ) | $ | (0.11 | ) | $ | (0.26 | ) | $ | (0.22 | ) | $ | (0.30 | ) | $ | (0.25 | ) | $ | (0.31 | ) |

 

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(1)           InAugust 2002, we executed a termination agreement with Amgen and recognizeda gain on termination of $16.0 million.

 

We expect to experience significant fluctuations in our quarterlyoperating results in the future, and, therefore, we will continue to havedifficulty providing an accurate forecast of our quarterly revenues andoperating results. We believe that period-to-period comparisons of ouroperating results may not be meaningful, and you should not rely upon them asany indication of future performance. Operating results in one or more future quarters may be different fromthe expectations of securities analysts and investors. In the event that ouroperating results are lower than expectations, the trading price of our commonstock would likely decline.

 

**Liquidity and Capital Resources**

 

To date, our operations and capital requirements have been financedprimarily with the proceeds of public and private sales of common stock andpreferred stock, payments under research and development partnerships andcollaborative agreements, and investment income.

 

At December 31, 2003, we had cash, cash equivalents and marketablesecurities of approximately $143.2 million and working capital of approximately$133.0 million, compared to approximately $195.0 million and $185.5 million,respectively, at December 31, 2002. We expect our cash, cash equivalents and marketable securities atDecember 31, 2004 to range from approximately $60.0 million to $70.0million.  We believe that our existingcash and investments will be sufficient to meet our working capital and capitalexpenditure needs through approximately the end of 2005.  Assuming the successful commercialization ofPlenaxis in the United States, partnering of clinical programs at opportunetimes and continued prudent fiscal management, we believe that we should havesufficient financial resources to execute our operating plan and attainprofitability by 2006.

 

For the year ended December 31, 2003, net cash of approximately$50.9 million was used in operating activities, compared to approximately $69.9million used in operating activities during 2002. During the year endedDecember 31, 2003, our use of cash in operations was due principally toour net loss of approximately $55.8 million, partially offset by depreciationand amortization. During the year ended December 31, 2002, our use of cashin operations was due principally to our net loss of approximately $46.1million, and our payment of $13.0 million in connection with the Amgentermination agreement, partially offset by depreciation and amortization.  We expect our cash utilization to increaseduring 2004 as a result of an overall increase in operating expenses as wecontinue launch-related activities for Plenaxis, continue with clinical trialsfor Apan, continue preclinical and clinical trials for PPI-2458, and expand ourresearch and development initiatives. We also expect a significant use of cash in relation to the productionof inventory and buildup of accounts receivable related to Plenaxis.  We expect to continue to utilize cash toincrease the amount of inventory on hand through the end of fiscal year 2005 tosupport commercial sales of Plenaxis.**The actual amount of these expenditureswill depend on numerous factors, including the timing of expenses and thetiming and progress of our research, development, marketing and sales efforts.

 

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Net cash provided by investing activities of approximately $25.5million in 2003 consisted of net sales of marketable securities ofapproximately $26.6 million and purchases of property and equipment ofapproximately $1.0 million.  Thiscompares to net cash used in investing activities of approximately $10.9million during 2002.  Net cash used ininvesting activities in 2002 consisted of purchases of property and equipmentof approximately $1.8 million, and net purchases of marketable securities ofapproximately $33.2 million.

 

Our financing activities for the year ended December 31, 2003 consistedof approximately $0.6 million of proceeds received from the exercise of commonstock options and approximately $0.4 million in principal repayments under ouracquisition and construction loan agreement described below. Our financingactivities for the year ended December 31, 2002 consisted of approximately$1.0 million of proceeds received from the exercise of common stock options.

 

In July 2000, in connection with the purchase, through our whollyowned real estate subsidiary, of our corporate headquarters and researchfacility in Waltham, Massachusetts, the subsidiary entered into an acquisitionand construction loan agreement providing for up to $33.0 million in financingfor the acquisition of, and improvements to, the facility.  The loan is secured by the facility,together with all fixtures, equipment, improvements and other related items,and by all rents, income or profits received by our real estate subsidiary, andis unconditionally guaranteed by us.  Asof December 31, 2003, approximately $32.6 million was outstanding underthe loan agreement. Advances bear interest at a rate equal to the 30-day LIBORplus 2.0% (3.12% at December 31, 2003). Principal and interest are payablemonthly in arrears. In July, we exercised the first of two one-year extensionoptions, extending the maturity date of the loan until July 30, 2004.  As a result of this extension, inAugust 2003 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.  During 2004, we expect to either exercise the second one-yearextension option available to us or refinance the debt instrument for a longerterm.

 

In addition to our long-term debt, we have fixed purchase obligationsunder various supply agreements. As of December 31, 2003, our long-termdebt and fixed purchase obligations were as follows:

 
|                                   |   |                |   | **Payments  Due By Period** |   |
|----------------------------------------|--------|---------------------|--------|-----------------------------|--------|
| **Contractual Obligations**            |   | **Total**           |   | **Less  Than  1 Year**      |   | **1-3  Years** |   | **3-5  Years** |   | **After  5  Years** |   |
|                                   |   | **(in  thousands)** |   |
| Long-term debt obligations             |   | $                   | 32,627 |                        | $      | 747 |   | $ | 31,880 |   | $ | — |   | $ | — |   |
| Unconditional purchase obligations (1) |   | 3,117               |   | 1,167                       |   | 1,300 |   | 650 |   | — |   |
| Total                                  |   | $                   | 35,744 |                        | $      | 1,914 |   | $ | 33,180 |   | $ | 650 |   | $ | — |   |

 

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(1)   In January 2004, we agreedwith Cambrex Charles City, Inc. to a minimum purchase commitment of $792,000for 2004.  In addition, based upon thefirst commercial shipment of Plenaxis made in January 2004, our minimumannual purchase commitment from Baxter Pharmaceutical Solutions LLC willincrease to $650,000 in 2005.  Theseamounts are reflected in the table above.

 

At December 31, 2003, we had provided a valuation allowance of$86.5 million for our deferred tax assets. The valuation allowancerepresents the value of the deferred tax assets.  Due to anticipated operating losses in the future, we believethat it is more likely than not that we will not realize the net deferred taxassets in the future and we have provided an appropriate valuation allowance.

 

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**Recent Accounting Pronouncements**

 

On December 31, 2002, the Financial Accounting  Standards Board issued Statement of FinancialAccounting Standards No. 148, *Accounting for Stock-Based Compensation – Transitionand Disclosure,* or SFAS No. 148. SFAS No. 148 amends Statement of Financial Accounting Standards No. 123,*Accountingfor Stock-Based Compensation*, or SFAS No. 123, to providealternative methods of transition to the fair value method of accounting forstock-based employee compensation.  SFASNo. 148 also amends the disclosure provisions of SFAS No. 123 and AccountingPrinciples Board Opinion No. 28, *Interim Financial Reporting*, to includeincreased pro-forma disclosure of the effects of stock-based employeecompensation on the results of operations. SFAS No. 148 became effective for fiscal years ending afterDecember 15, 2002.  The Company haselected to continue to account for employee stock-based compensation using theintrinsic value method as described in Accounting Principles Board Opinion No.25, *Accountingfor Stock Issued to Employees*, and therefore, the adoption of SFASNo. 148 did not have a material impact on our consolidated results ofoperations in 2003.

 

In January 2003, the Financial Accounting Standards Board issuedFinancial Accounting  Standards BoardInterpretation No. 46, *Consolidation ofVariable Interest Entities*, or FIN No. 46.  FIN No. 46 sets forththe criteria used in determining whether an investment in a variable interestentity, or 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.  We do not have any VIE’s. Accordingly, the implementation of FIN No. 46 will not have any impact on ourconsolidated financial statements.

 

InMay 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting StandardsNo. 150, *Accounting for Certain Financial Instruments with Characteristics ofboth Liabilities and Equity*, or SFAS No. 150.  SFAS No. 150 establishes how a companyclassifies and measures certain financial instruments with characteristics ofboth liabilities and equity, including redeemable convertible preferred stock.This statement is effective for financial instruments entered into or modifiedafter May 31, 2003, and is otherwise effective at the beginning of theinterim period commencing July 1, 2003, except for mandatory redeemablefinancial instruments of nonpublic companies. The Financial AccountingStandards Board has indefinitely deferred implementation of some provisions ofSFAS No. 150. We believe that the adoption of SFAS No. 150 will nothave a material impact on our consolidated financial statements.

 

**Risk Factors that May Affect Future Results**

 

*The risks anduncertainties 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.*

 

**We have a history of losses and anticipatesignificant increases in our operating expenses over the next several years,and we may not be profitable in the future.**

 

We cannot assure you that we will be profitable in the future or, if weattain profitability, that it will be sustainable.  In November 2003, we received FDA approval to marketPlenaxis for the treatment of the symptoms of men with advanced prostate cancerfor whom other hormonal therapies are not appropriate and who have refusedsurgical castration.  All of our otherproduct candidates are in the research or development stage.  Sales of Plenaxis began inJanuary 2004.  Prior to the launchof Plenaxis, we had never marketed or sold any products, and we may not succeedin marketing or selling Plenaxis, or developing and marketing any product inthe future. To date, we have derived substantially all of our revenues frompayments under corporate collaboration and license agreements.  We expect to continue to spend significantamounts to further develop our commercial sales and marketing capabilities,continue clinical studies and seek regulatory approval for our other productcandidates. We also intend to spend substantial amounts to fund additionalresearch and development for other potential products, enhance our coretechnologies, and for general and administrative purposes.  As of December 31, 2003, we had anaccumulated deficit of

 

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approximately $186.3 million. We expect that our operating expenses will increase significantly dueprimarily to increased expenses related to continued commercializationactivities for Plenaxis, as well as the initiation and continuation of studiesas part of our other clinical programs, resulting in significant operatinglosses at least through 2005.  Wecurrently do not expect to achieve profitability until 2006 at theearliest.  Moreover, our ability toattain profitability by 2006 is dependent on numerous factors, including ourability to successfully commercialize Plenaxis in the United States, partneringof clinical programs at opportune times and continued prudent fiscalmanagement.  Even if we do becomeprofitable, we cannot assure you that we would be able to sustain or increaseprofitability on a quarterly or annual basis.

 

**Our business is dependent on the commercialsuccess of Plenaxis.  If Plenaxis failsto achieve market acceptance, it may never be commercially successful and wemay be unable to continue our operations as planned.**

 

The success of our business is dependent on the successfulcommercialization of Plenaxis.  Plenaxisis new to the market and may be unfamiliar to members of the medical communityand to patients. Market acceptance will depend largely on our ability todemonstrate, to the oncology and urology communities in particular, theefficacy and safety of Plenaxis as an alternative to currently marketedtherapies or surgical options. We cannot be certain that Plenaxis will providebenefits considered adequate by providers of oncology and urology services orthat enough providers will use the product to ensure its commercialsuccess.  Many factors may affect itsmarket acceptance and commercial success of Plenaxis, including:

 

•              the scope of thepatient population and the indication for which Plenaxis was approved;

•              the terms of therisk management program required by the FDA in connection with the approval ofPlenaxis;

•              the product labelingand product insert required by the FDA;

•              the effectiveness ofPlenaxis and the potential side effects, including the risk of immediate-onsetsystemic allergic reactions, as compared to alternative treatment methods;

•              the extent andsuccess of our marketing and sales efforts;

•              thecost-effectiveness of Plenaxis and the availability of insurance or otherthird-party reimbursement, in particular Medicare, for patients, and the rateof such reimbursement;

•              the competitivefeatures of Plenaxis as compared to other products or treatment options,including the frequency of administration of Plenaxis as compared to otherproducts, and doctor and patient acceptance of these features; and

•              unfavorablepublicity concerning Plenaxis or any similar products.

 

In addition, we must continually submit any labeling, advertising andpromotional material to the FDA for review and pre-approval.  There is risk that the FDA will prohibit useof the marketing material in the form we desire. Unfavorable outcomes resultingfrom factors such as those identified above could limit sales of Plenaxis orcause sales of Plenaxis to decline.  Inthose circumstances, we may have to find additional sources of funding or scaleback or cease operations. If Plenaxis is not commercially successful, we may be unable to continue our operationsas planned.

 

**We may be unable to establish marketing andsales capabilities necessary to successfully commercialize Plenaxis or ourother potential products.**

 

We have no experience in marketing or selling pharmaceutical productsand have limited marketing and sales resources. To achieve commercial successfor Plenaxis, or any other approved product, we must either develop a marketingand sales force, as well as the infrastructure to support it, or enter intoarrangements with others to market and sell our products.  We have determined to promote Plenaxis inthe United States through our own dedicated marketing and sales team.  Recruiting and retaining qualified salespersonnel is therefore critical to our success.  Competition for skilled personnel is intense, and we cannotassure you that we will be able to attract and retain a sufficient number ofqualified individuals to successfully launch Plenaxis.  Accordingly, we may be unable to establishmarketing, sales and distribution

 

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capabilities necessary to commercialize and gain market acceptance forPlenaxis.

 

In addition, establishing the expertise necessary to successfullymarket and sell Plenaxis, or any other product, will require a substantialcapital investment.  Our ability to makethat investment and also execute our current operating plan and attainprofitability by 2006 is dependent on numerous factors, including, as describedabove, partnering of clinical programs at opportune times and continued prudentfiscal management.  Accordingly, wecannot assure investors that we will have the funds to successfullycommercialize Plenaxis or any other potential product in the United States orelsewhere.

 

Moreover, Plenaxis competes, and our product candidates in developmentare likely to compete, with products of other companies that currently haveextensive and well-funded marketing and sales operations.  Because these companies are capable ofdevoting significantly greater resources to their marketing and sales efforts,our marketing and sales efforts may not compete successfully against theefforts of these other companies.

 

We have also announced our intention to market and sell Plenaxisoutside of the United States through one or more marketing partners uponreceipt of approval abroad.  We have notentered into any such arrangements and we cannot assure you that we will beable to enter into agreements with third parties on acceptable terms, if atall. In addition, co-promotion or other marketing arrangements with thirdparties to commercialize Plenaxis or any other potential products couldsignificantly limit the revenues we derive from these products, and these thirdparties may fail to commercialize Plenaxis or our other potential productssuccessfully. To the extent we enter into any such agreements, the parties tothose agreements may also market products that compete with our products,further limiting our potential revenue from product sales.

 

**Alternative treatment options exist and maybe more readily available or acceptable to physicians and patients, which mayimpair our ability to capture or maintain market share for Plenaxis.**

 

Alternative products and medical treatments exist or are underdevelopment to treat advanced symptomatic prostate cancer.  For example, the FDA has approved several drugsfor the treatment of prostate cancer that respond to changes in hormone levels,and there are other treatment alternatives available, including radiationtherapy and surgery.  The FDA’s approvalof Plenaxis is limited to use in a subset of advanced symptomatic prostatecancer patients, and distribution of Plenaxis will only be made in accordancewith our risk management program, which includes physician enrollment in aprescribing program and a signed patient consent form regarding the risks andbenefits of the therapy.  Due to thepotential risk of immediate-onset systemic allergic reactions, physicians mustalso monitor patients for 30 minutes following the injection of Plenaxis.  Prescribing physicians and patients may viewthese requirements as burdensome or may recommend or choose to use alternativetreatments that are more readily available or more acceptable to the doctorand/or the patient.  If, due to thesefactors, Plenaxis does not achieve broad market acceptance as a drug for thetreatment of the symptoms of men with advanced prostate cancer for whom otherhormonal therapies are not appropriate and who have refused surgicalcastration, we may be unable tocontinue our operations as planned.

 

**Our potential revenues will diminish if wefail to obtain adequate reimbursement coverage for Plenaxis or our otherproduct candidates from third-party payors.**

 

The continuing efforts of government and third-party payors to containor reduce the costs of health care may limit our commercial opportunity. Ifgovernment and other third-party payors do not provide appropriate coverage andadequate reimbursement for Plenaxis or our other product candidates, physiciansmay not prescribe them.  Additionally,physicians may not prescribe Plenaxis if we fail to provide adequate educationabout its benefits and uses.  In someforeign markets, pricing and profitability of prescription pharmaceuticals aresubject 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.

 

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Our ability to earn revenues from Plenaxis, or any other potentialproduct, alone or with collaborators, may depend in part on the availabilityand levels of reimbursement from:

 

•              government andhealth administration authorities, including Medicare and Medicaid;

•              private healthinsurers; and

•              other third-partypayors.

 

We cannot predict the availability of coverage or reimbursement fornewly approved drugs such as Plenaxis by Medicare or any other payor.  Third-party payors, including Medicare, areincreasingly challenging the prices charged for medical products and services.Government and other third-party payors increasingly are limiting both coverageand the level of reimbursement for new drugs and, in some cases, refusing toprovide coverage for a patient’s use of an approved drug for purposes notapproved by the FDA. Third-party insurance coverage may not be available topatients for Plenaxis or any of our other products.

 

**We may experiencepressure to lower the price of Plenaxis or our other potential products becauseof new and/or proposed federal legislation.**

 

New federal legislation, enacted inDecember 2003, has altered the way in which physician-administered drugscovered by Medicare are reimbursed, generally leading to lower reimbursementlevels.  The new legislation has alsoadded an outpatient prescription drug benefit to Medicare, effectiveJanuary 2006.  In the interim,Congress has established a discount drug card program for Medicarebeneficiaries.  Both benefits will beprovided primarily through private entities, which will attempt to negotiateprice concessions from pharmaceutical manufacturers.  These negotiations may increase pressures to lower prices.  While the new law specifically prohibits theUnited States government from interfering in price negotiations betweenmanufacturers and Medicare drug plan sponsors, some members of Congress arepursuing legislation that would permit the United States government to use itsenormous purchasing power to demand discounts from pharmaceutical companies,thereby creating de facto price controls on prescription drugs.  In addition, the new law contains triggersfor Congressional consideration of cost containment measures for Medicare inthe event Medicare cost increases exceed a certain level.  These cost containment measures could includesome sorts of limitations on prescription drug prices.

 

**As Plenaxis is used commercially, unintendedside effects or adverse reactions could occur that could result in additionalregulatory controls and reduced sales.**

 

During research and development, the use of pharmaceutical products,such as Plenaxis, is limited principally to clinical trial patients undercontrolled conditions and under the care of expert physicians. The widespreadcommercial use of Plenaxis could produce undesirable or unintended side effectsthat have not been evident in our clinical trials.  In addition, in patients who take multiple medications, druginteractions could occur that can be difficult to predict.  These events, among others, could result inthe imposition of additional regulatory controls that could limit thecircumstances under which Plenaxis is prescribed or even lead to the withdrawalof the product from the market.  Due tothe occurrence of immediate-onset systemic allergic reactions in patientstreated with Plenaxis during clinical trials, Plenaxis has been approved underregulations concerning drugs with certain safety profiles, under which the FDAhas established special restrictions to ensure safe use.  Post-marketing phase IV studies are alsorequired to evaluate the incidence of and further characterize such allergicreactions to the extent they occur.  Anyviolation of these special restrictions or unfavorable findings in the phase IVstudies could lead to the imposition of further restrictions or withdrawal of Plenaxisfrom the market.

 

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**If we fail to develop and maintain ourrelationships with third-party manufacturers, or if these manufacturers fail toperform adequately, we may be unable to commercialize Plenaxis or any of ourproduct candidates.**

 

Our ability to conduct, or continue to conduct, clinical trials andcommercialize Plenaxis or other product candidates, will depend in part on ourability to manufacture, or arrange for third-party manufacture of, our productson a large scale, at a competitive cost and in accordance with regulatoryrequirements. We must establish and maintain a commercial scale formulation andmanufacturing process for each of our potential products for which we seekmarketing approval. We or third-party manufacturers may encounter difficultieswith these processes at any time that could result in delays in clinicaltrials, regulatory submissions or in the commercialization of potentialproducts.

 

We have no experience in large-scale product manufacturing, nor do wehave the resources or facilities to manufacture products on a commercial scale.We will continue to rely upon contract manufacturers to produce Plenaxis andother compounds for later-stage preclinical, clinical and commercial purposesfor a significant period of time. Third-party manufacturers may not be able tomeet our needs as to timing, quantity or quality of materials. If we are unableto contract for a sufficient supply of needed materials on acceptable terms, orif we encounter delays or difficulties in our relationships with manufacturers,our clinical trials may be delayed, thereby preventing or delaying thesubmission of product candidates for, or the granting of, regulatory approvaland the commercialization of our potential products. Any such delays may lowerour revenues and delay or prevent our attaining or maintaining profitability.

 

If the third-party manufacturers upon which we rely fail to meet ourneeds for clinical or commercial supply, we may be required to supplement ourmanufacturing capacity by building our own manufacturing facilities. This wouldrequire substantial expenditures.  Also,we would need to hire and train significant numbers of employees to staff a newfacility. If we are required to build our own facility, we may not be able todevelop sufficient manufacturing capacity to produce drug materials forclinical trials or commercial use.

 

In addition, we and the third-party manufacturers that we use mustcontinually adhere to current good manufacturing practice requirements enforcedby the FDA through its facilities inspection program. If our facilities or thefacilities of third-party manufacturers cannot pass a pre-approval plantinspection, the FDA pre-market approval of our product candidates will not begranted. In complying with these regulations and foreign regulatoryrequirements, we and any of our third-party manufacturers will be obligated toexpend time, money and effort in production, record-keeping and quality controlto assure that our potential products meet applicable specifications and otherrequirements. If we or any of our third-party manufacturers fail to comply withthese requirements, we may be subject to regulatory sanctions, and thefacilities could be shut down.

 

Any of these factors could prevent, or cause delays in, obtainingregulatory approvals for our potential products, and the manufacturing,marketing or selling of Plenaxis, and could also result in significantly higheroperating expenses.

 

**The loss or failure of any of our third-partymanufacturers could substantially delay or impair our sale or continued sale ofPlenaxis.**

 

For each stage of Plenaxis production we have relied, and expect in thenear term to continue to rely, on a single third-party manufacturer, and wecurrently have not contracted, and in the near term do not expect to contract,with a second supplier for any of these production stages. Accordingly, theloss of one or more of these suppliers for any reason, including as a result offire, terrorism, acts of God or insolvency or bankruptcy, could result insubstantial delays in, or substantially impair our ability to complete,clinical trials and regulatory submissions or reviews, and could delay orimpair substantially our sale or continued sale of Plenaxis. Such delays orimpairment, and the associated costs and expenses, may lower our potentialrevenues and delay or prevent our attaining profitability. While we areevaluating the possibility of a second

 

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source of supply at certain stages of Plenaxis production, the numberof qualified alternative suppliers is limited, and we cannot assure investorsthat we will be able to locate alternative suppliers or negotiate second supplyagreements on reasonable terms. Furthermore, the process of engineering a newsupplier’s facility for the production of Plenaxis and obtaining the necessaryFDA approval of the facility would require substantial lead-time and could beextremely costly. We cannot assure investors that we will not lose one or moreof our suppliers, or that in such event we would be readily able to continuethe commercialization of Plenaxis without substantial and costly delays.

 

**We are subject to extensive governmentregulation that increases our costs and could prevent us from selling Plenaxisor our other potential products.**

 

The development and sale of Plenaxis, and our product candidates, issubject 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 place on clinical hold or terminate clinical trials, delay, withhold orwithdraw registration and marketing approval in the United States, andeffectively mandate product recalls. Failure to comply with regulatoryrequirements may result in criminal prosecution, civil penalties, recall orseizure of products, total or partial suspension of production or injunction,as well as other actions as to Plenaxis, our other potential products oragainst 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 foreign regulatoryauthorities for the commercial sale of any product, we must demonstrate inclinical trials, and satisfy the FDA and foreign regulatory authorities as to,the safety and efficacy of the product. If we develop a product to treat a long-lasting disease, such as canceror Alzheimer’s disease, we must gather data over an extended period of time.There are many risks associated with our clinical trials. For example, we maybe unable to achieve the same level of success in later trials as we did inearlier ones. Additionally, data we obtain from preclinical and clinicalactivities are susceptible to varying interpretations that could impederegulatory approval. Further, some patients in our prostate cancer, Alzheimer’sdisease and non-Hodgkin’s lymphoma programs have a high risk of death,age-related disease or other adverse medical events that may not be related toour products.  These events may affectthe statistical analysis of the safety and efficacy of our products. If weobtain regulatory approval for a product, the approval will be limited to thosediseases for which our clinical trials demonstrate the product is safe andeffective.

 

In addition, many factors could delay or result in termination of ourongoing or future clinical trials. For example, results from ongoingpreclinical studies or analyses could raise concerns over the safety orefficacy of a product candidate.  TheFDA recently placed our phase I clinical trial of PPI-2458 on clinical hold dueto a neuropathological abnormality observed in some of the animals tested in arecently completed three-month animal safety study.  The FDA has indicated that we will need to submit a detailed planin order to address this finding.  Weintend to further explore this finding to assess its potential implications andprepare a plan for the FDA.  While weintend to work diligently with the FDA to resolve this issue, we cannotcurrently predict when the clinical hold will be released.  A clinical trial may also experience slowpatient enrollment or lack of sufficient drug supplies. Patients may experienceadverse medical events or side effects, and there may be a real or perceivedlack of effectiveness of, or of safety issues associated with, the drug we aretesting. Future governmental action or existing or changes in FDA policies orprecedents, may also result in delays or rejection of an application for marketingapproval.  The FDA has considerablediscretion in determining whether to grant marketing approval for a drug, andmay delay or deny approval even in circumstances where the applicant’s clinicaltrials have proceeded in compliance with FDA procedures and regulations andhave met the established end-points of the trials. Challenges to FDAdeterminations are generally time-consuming and costly, and rarely, if eversucceed.  In November 2003, wereceived FDA approval to market Plenaxis in the United States.  We can give no assurance that we will obtainmarketing approval for any of our other product candidates.

 

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Any regulatory approval may be conditioned upon significant labelingrequirements and, as in the case of the FDA approval of Plenaxis, marketingrestrictions and post-marketing study commitments.  Such labeling and marketing restrictions could materiallyadversely affect the marketability or value of a product, including Plenaxis,resulting in decreased sales.  In such acase, we may have insufficient funds to continue operations as currentlyplanned.

 

In addition, even after regulatory approval is obtained, our Company,product and the manufacturing facilities for our product will be subject to continualreview and periodic inspection. Later discovery of previously unknown problemswith a product, manufacturer or facility may result in restrictions on theproduct, the manufacturer or us, including withdrawal of the product from themarket. The FDA stringently applies regulatory standards. Our manufacturingfacilities will also be subject to FDA inspections for adherence to goodmanufacturing practices prior to marketing clearance and periodically duringthe manufacturing process. Failure to comply can, among other things, result infines, denial or withdrawal of regulatory approvals, product recalls orseizures, operating restrictions, injunctions and criminal prosecution.  If there are any modifications to a product,further regulatory approval will be required.

 

For safety reasons, Plenaxis was approved by the FDA with acomprehensive risk management program. This program includes educational outreach to patients and physiciansregarding the risks and benefits of Plenaxis, restricted distribution of theproduct only to physicians enrolled in a prescribing registry, a system forcollecting and reporting adverse events to the FDA and auditing requirements toevaluate the effectiveness of the program. We are also required to conduct several phase IV studies to evaluate therisk management program and the appropriate use of the drug in the indicatedpopulation.  Under the regulations underwhich Plenaxis was approved, the FDA has the authority to pre-approve allpromotional materials and has available to it an expedited market withdrawalprocedure if issues arise regarding the safe use of Plenaxis.  If approval for Plenaxis is withdrawn, wewill not be able to sell Plenaxis and may have insufficient funds to continueoperations as currently planned.

 

If we are unable to maintain FDA approval, or to obtain any foreignregulatory approval for Plenaxis, or to obtain or maintain regulatory approvalto market our other potential products, we may exhaust our available resourcessignificantly sooner than we had planned. If this were to happen, we would need to either raise additional fundsor seek partners to continue our currently planned research and developmentprograms. We cannot assure you that we would be able to raise the necessaryfunds or negotiate additional corporate collaborations on acceptable terms, ifat all.

 

**We rely upon alimited number of pharmaceutical specialty distributors that could impact theability to sell Plenaxis.**

 

In the United States, we rely upon a limited number of specialty distributorsto deliver Plenaxis to physicians and hospital pharmacies. There are arelatively small number of specialty distributors and wholesalers who providesuch services. These distributors must also distribute Plenaxis only tophysicians and hospital pharmacists enrolled in our risk managementprogram.  There can be no assurancesthat these distributors will adequately provide their services to either theend users or to the Company.

 

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

 

We have contracts with a limited number of research organizations todesign and conduct our laboratory testing and human clinical studies. If wecannot contract for testing activities on acceptable terms, or at all, we maynot complete our product development efforts in a timely manner. To the extentwe rely on third parties for laboratory testing and human clinical studies, wemay lose some control over these activities. For example, third parties may notcomplete testing activities on schedule or when we request them to do so.In addition, these third parties may conduct our clinical trials in a mannerinconsistent with

 

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regulatory requirements or otherwise in a manner that yields misleadingor unreliable data. This, or other failures of these third parties to carry outtheir duties, could result in significant additional costs and expenses andcould delay or prevent the development and commercialization of our productcandidates.

 

**Many of our competitors have substantiallygreater resources than we do and may be able to develop and commercializeproducts that make our potential products and technologies obsolete ornon-competitive.**

 

A biopharmaceutical company such as ours must keep pace with rapidtechnological change and faces intense competition. We compete withbiotechnology and pharmaceutical companies for funding, access to newtechnology, research personnel and in product research and development. Many ofthese companies have greater financial resources and more experience than we doin developing drugs, obtaining regulatory approvals, manufacturing, marketingand sales. We also face competition from academic and research institutions andgovernment agencies pursuing alternatives to our products and technologies. Weexpect that Plenaxis, and all of our products under development, will faceintense competition from existing or future drugs and other medical treatments.In addition, for each of our product candidates, we may face increasingcompetition from generic formulations or existing drugs whose active componentsare no longer covered by patents.

 

Our competitors may:

 

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

•              obtain approvalsfrom the FDA or foreign regulatory bodies more rapidly than we do;

•              develop productsthat are more effective, have fewer side effects or cost less than ourproducts; or

•              successfully marketand sell products that compete with our products.

 

The success of our competitors in any of these efforts would adverselyaffect our ability to promote Plenaxis and to develop and commercialize ourproduct candidates, and to ultimately attain and maintain profitability.

 

**If we are unable to obtain and enforce validpatents, we could lose any competitive advantage we may have.**

 

Our success will depend in part on our ability to obtain patents andmaintain adequate protection of our technologies and potential products. If wedo not adequately protect our intellectual property, competitors may be able touse our technologies and erode any competitive advantage we may have. Forexample, if we lose our patent protection for Plenaxis, another party couldproduce and market the compound in direct competition with us. Some foreigncountries lack rules and methods for defending intellectual property rights anddo not protect proprietary rights to the same extent as the United States. Manycompanies have had difficulty protecting their proprietary rights in foreigncountries.

 

Patent positions are sometimes uncertain and usually involve complexlegal and factual questions. We can protect our proprietary rights fromunauthorized use by third parties only to the extent that our proprietarytechnologies are covered by valid and enforceable patents or are effectivelymaintained as trade secrets. We currently own or have exclusively licensed 27issued United States patents. We have applied, and will continue to apply, forpatents covering both our technologies and products as we deem appropriate.Others may challenge our patent applications or our patent applications may notresult in issued patents. Moreover, any issued patents on our own inventions,or those licensed from third parties, may not provide us with adequateprotection, or others may challenge the validity of, or seek to narrow orcircumvent, these patents. Third-party patents may impair or block our abilityto conduct our business. Additionally, third parties may independently developproducts similar to our products, duplicate our unpatented products, or designaround any patented products we develop.

 

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**If we are unable to protect our trade secretsand proprietary information, we could lose any competitive advantage we mayhave.**

 

In addition to patents, we rely on a combination of trade secrets,confidentiality, nondisclosure and other contractual provisions, and securitymeasures to protect our confidential and proprietary information. Thesemeasures may not adequately protect our trade secrets or other proprietaryinformation. If these measures do not adequately protect our rights, thirdparties could use our technology, and we could lose any competitive advantagewe may have. In addition, others may independently develop similar proprietaryinformation or techniques, which could impair any competitive advantage we mayhave.

 

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

 

Our technologies, processes, product or product candidates may give riseto claims that they infringe patents or other intellectual property rights ofthird parties.  A third party couldforce us to pay damages, stop our use of these technologies or processes, orstop 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 willcontinue in our industry regarding patent and other intellectual propertyrights. If we become involved in litigation, it could consume a substantialportion of our resources. Even if legal actions were meritless, defending alawsuit could take significant time, be expensive and divert management’sattention from other business concerns.

 

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

 

We license some of our technology from third parties. Termination ofour licenses could force us to delay or discontinue some of our development andcommercialization programs. For example, if Advanced Research and TechnologyInstitute, Inc., the assignee of Indiana University Foundation, terminated ourlicense with them, we could have to discontinue the commercialization ofPlenaxis. We cannot assure you that we would be able to license substitutetechnology in the future. Our inability to do so could impair our ability toconduct our business because we may lack the technology, or the necessaryrights to technology, required to develop and commercialize our potentialproducts.

 

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

 

The administration of drugs to humans, whether in clinical trials orcommercially, can result in product liability claims whether or not the drugsare actually at fault for causing an injury. As Plenaxis is used more widely, the likelihood of an adverse drugreaction (both expected or unexpected) or unintended side effect willincrease.  Furthermore, Plenaxis or ourproduct candidates may cause, or may appear to have caused, adverse sideeffects (including death) or potentially dangerous drug interactions that wemay not learn about or understand fully until the drug has been administered topatients for some time.

 

Product liability claims can be expensive to defend and may result inlarge judgments or settlements against us, which could have a negative effecton our financial performance. The costs of product liability insurance haveincreased dramatically in recent years, and the availability of coverage hasdecreased.  Although the Company carriesinsurance that it regards as reasonably adequate to protect it from potentialclaims, there can be no assurance that the Company will be able to maintain itscurrent product liability insurance at a reasonable cost, or at all.  Our collaboration agreements with Amgen andSanofi-Synthélabo included, and the agreements with them regarding thetermination of those collaborations also include, an indemnification of themfor liabilities associated with the development and commercialization of

 

19

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Plenaxis.  If a third party,including a former collaborator, successfully sues us for any injury, or forindemnification for losses, there is no guarantee that the amount of the claimwould not exceed the limit of the Company’s insurance coverage.  Further, a successful claim could result inthe recall of Plenaxis, or could reduce revenues from sales of Plenaxis.  Even if a product liability claim is notsuccessful, the adverse publicity and time and expense of defending such aclaim may interfere with our business.

 

**Pharmaceuticalcompanies have been the target of lawsuits and investigations and there is noassurance that if we were to be involved in any such lawsuits or investigation,that our defense would be successful.**

 

Pharmaceutical companies have been the target of lawsuits andinvestigations including, in particular, claims asserting violations of theFederal False Claim Act, Anti-Kickback Act, the Prescription Drug Marketing Actor other violations in connection with Medicare and/or Medicaid reimbursement,and claims under state laws, including state anti-kickback and fraud laws.Public companies may also be the subject of certain other types of claims,including those asserting violations of securities laws or related toenvironmental matters. There is no assurance that if we were to be involved inany such lawsuits or investigation, that we would be successful in defendingourselves or in asserting our rights.

 

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

 

We depend substantially on the principal members of our management andscientific staff, including Malcolm L. Gefter, Ph.D., our Chief ExecutiveOfficer and Chairman of the Board, and William K. Heiden, our President andChief Operating Officer. We do not have employment agreements with any of ourexecutive officers. Any officer or employee can terminate his or herrelationship with us at any time and work for one of our competitors. The lossof these key individuals could result in competitive harm because we couldexperience delays in our product research, development and commercializationefforts without their expertise.

 

Recruiting and retaining qualified scientific personnel to performfuture research and development work also will be critical to our success.Competition for skilled personnel is intense and the turnover rate can be high.We compete with numerous companies and academic and other research institutionsfor experienced scientists. This competition may limit our ability to recruitand retain qualified personnel on acceptable terms. Failure to attract andretain qualified personnel would prevent us from continuing to develop ourpotential products, enhancing our technologies and launching our productscommercially. Our planned activities will require the addition of newpersonnel, including management and marketing and sales personnel, and thedevelopment of additional expertise by existing management personnel, inparticular in the area of product marketing and sales. The inability to attractand retain these people or to develop this expertise could prevent, or resultin delays in, the marketing and sale of Plenaxis or the research, developmentand commercialization of our product candidates.

 

**We use hazardous chemicals and radioactiveand biological materials in our business and any claims relating to thehandling, storage or disposal of these materials could be time consuming andcostly.**

 

Our research and development processes involve the controlled use ofhazardous materials, including chemicals and radioactive and biologicalmaterials, which may pose health risks. For example, the health risksassociated with accidental exposure to Plenaxis include temporary impotence orinfertility and harmful effects on pregnant women. Our operations also producehazardous waste products. We cannot completely eliminate the risk of accidentalcontamination or discharge from hazardous materials and any resultant injury.Federal, state and local laws and regulations govern the use, manufacture,storage, handling and disposal of hazardous materials. Compliance with healthand safety and environmental laws and regulations is necessary and expensive.Current or future health and safety and environmental regulations may impairour research, development or production efforts. We may be required to payfines, penalties or damages in the event of noncompliance or the exposure ofindividuals to hazardous materials.

 

20

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

 

**The market price of our common stock mayexperience extreme price and volume fluctuations.**

 

The market price of our common stock may fluctuate substantially due toa variety of factors, including, but not limited to:

 

•              our ability tosuccessfully commercialize Plenaxis in the United States;

•              failure or delay by third-partymanufacturers in performing their supply obligations or disputes or litigationregarding those obligations;

•              the availability ofreimbursement coverage for Plenaxis and changes in the reimbursement policiesof third-party insurance companies or government agencies;

•              our ability to enterinto foreign corporate collaborations for Plenaxis, or United States or foreigncorporate collaborations for our other product candidates, and the timing andterms of such collaborations;

•              the success rate of ourdiscovery efforts and clinical trials;

•              announcement of FDAapproval or disapproval of any of our product candidates, or of associatedlabeling requirements;

•              announcements oftechnological innovations or new products by us or our competitors;

•              developments ordisputes 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;

•              public concerns asto the safety of Plenaxis or our competitors’ products;

•              changes ingovernment regulation of the pharmaceutical or medical industry;

•              actual oranticipated fluctuations in our operating results;

•              changes in financialestimates or recommendations by securities analysts;

•              sales of largeblocks of our common stock;

•              changes inaccounting principles; and

•              the loss of any ofour key scientific or management personnel.

 

In addition, the stock market has experienced extreme price and volumefluctuations. The market prices of the securities of biotechnology companies,particularly companies like ours without current product revenues and earnings,have been highly volatile, and may continue to be highly volatile in thefuture. This volatility has often been unrelated to the operating performanceof particular companies. In the past, securities class action litigation hasoften been brought against companies that experience volatility in the marketprice of their securities. Whether or not meritorious, litigation broughtagainst us could result in substantial costs and a diversion of management’sattention and resources.

 

**We expect that our quarterly results ofoperations will fluctuate, and this fluctuation could cause our stock price todecline.**

 

Our quarterly operating results have fluctuated in the past and arelikely to do so in the future. These fluctuations could cause our stock priceto decline. Some of the factors that could cause our operating results tofluctuate include:

 

•              expected orunexpected fluctuations in Plenaxis revenues;

•              the timing and levelof expenses related to the commercialization of Plenaxis;

•              the timing and levelof expenses related to our other research and clinical development programs;and

 

21

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•              the timing of ourcommercialization of other products resulting in revenues.

 

Due to the possibility of fluctuations in our revenues and expenses, webelieve that quarter-to-quarter comparisons of our operating results are not agood indication of our future performance.

 

**If we engage in an acquisition, we will incura variety of costs and may never realize the anticipated benefits of theacquisition.**

 

If appropriate opportunities become available, we may attempt to acquirebusinesses, or acquire or in-license products or technologies, that we believeare a strategic fit with our business. We currently have no commitments oragreements for any acquisitions.  If wedo undertake any transaction of this sort, the process of integrating anacquired business, or an acquired or in-licensed product or technology, mayresult in unforeseen operating difficulties and expenditures and may absorbsignificant management attention that would otherwise be available for theongoing development of our business. Moreover, we may fail to realize theanticipated benefits of any transaction of this sort. To the extent we issuestock in a transaction, the ownership interest of our stockholders will bediluted. Transactions of this kind could also cause us to incur debt, expose usto future liabilities and result in expenses related to goodwill and otherintangible assets.

 

**Anti-takeover provisions in our charter andby-laws, our rights agreement and certain provisions of Delaware law may makean acquisition of us more difficult, even if an acquisition would be beneficialto our stockholders.**

 

Provisions in our certificate of incorporation and by-laws may delay orprevent an acquisition of us or a change in our management. Also, because weare incorporated in Delaware, we are governed by the provisions ofSection 203 of the Delaware General Corporation Law, which may prohibit ordelay large stockholders, in particular those owning 15% or more of ouroutstanding voting stock, from merging or combining with us. In addition, therights issued under our rights agreement may be a substantial deterrent to aperson acquiring 10% or more of our common stock without the approval of ourboard of directors. These provisions in our charter and by-laws, rights agreementand under Delaware law could reduce the price that investors might be willingto pay for shares of our common stock in the future and result in the marketprice being lower than it would be without these provisions.

 

**ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.**

 

The financial statements required by this Item are included on pagesF-1 through F-16 of this report. The supplementary financial informationrequired by this Item is included in the section of this report captioned“Management’s Discussion and Analysis of Financial Condition and Results ofOperations,” under the heading “Selected Quarterly Operating Results.”

 

22

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**PART III**

 

**ITEM 15. EXHIBITS, FINANCIAL STATEMENTSCHEDULES AND REPORTS ON FORM 8-K.**

 

*(a) 1.**      Financial Statements*

 

The financials statements filed as part of this report are listed onthe Index to Consolidated Financial Statements located on page F-1, whichimmediately follows the signature page of this report.

 

*2.**             Financial StatementSchedules*

 

All schedules for which provision is made in the applicable accountingregulations of the Securities and Exchange Commission are not required underthe related instructions or are inapplicable and therefore have been omitted.

 

*3.**             Exhibits*

 
| **Exhibit  No.** |   | **Exhibit**                                                                                                                                                                                                                                                                                                         |
|------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |   |                                                                                                                                                                                                                                                                                                                |
| 3.1              |   | Amended and Restated Certificate of Incorporation (2)                                                                                                                                                                                                                                                               |
| 3.2              |   | Third Amended and Restated By-Laws (11)                                                                                                                                                                                                                                                                             |
| 4.1              |   | Specimen certificate representing shares of common stock (1)                                                                                                                                                                                                                                                        |
| 4.2              |   | Specimen certificate representing shares of common stock (including  Rights Agreement Legend) (5)                                                                                                                                                                                                                   |
| 4.3              |   | Rights Agreement between PRAECIS and American Stock Transfer &  Trust Company, as Rights Agent (6)                                                                                                                                                                                                              |
| 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) (6)                                                                                                                                              |
| 4.5              |   | Form of Rights Certificate (attached as Exhibit B to the Rights  Agreement filed as Exhibit 4.3 hereto) (6)                                                                                                                                                                                                    |
| 10.1*            |   | Second Amended and Restated 1995 Stock Plan (3)                                                                                                                                                                                                                                                                     |
| 10.2*            |   | Amendment No. 1 to the Second Amended and Restated 1995 Stock Plan  (8)                                                                                                                                                                                                                                             |
| 10.3*            |   | Executive Management Bonus Plan, as amended and restated as of  September 12, 2002 (10)                                                                                                                                                                                                                        |
| 10.4*            |   | Amended and Restated Employee Stock Purchase Plan (12)                                                                                                                                                                                                                                                              |
| 10.5*            |   | Management Incentive Program (11)                                                                                                                                                                                                                                                                                   |
| 10.6*            |   | Amended and Restated Stockholders Agreement dated as of  April 30, 1998 by and among PRAECIS and certain stockholders referred to  therein, as amended by Amendment No. 1 dated as of May 14, 1998, Amendment  No. 2 dated as of July 21, 1998 and Amendment No. 3 dated as of  January 31, 2000 (1) |
| 10.7*            |   | Amendment No. 4 dated as of September 1, 2000 to Amended and  Restated Stockholders Agreement dated as of April 30, 1998 by and among  PRAECIS and certain stockholders referred to therein, as amended (4)                                                                                               |
| 10.8*            |   | Letter Agreement dated as of May 9, 2002 between PRAECIS and William  K. Heiden (9)                                                                                                                                                                                                                                 |
| 10.9*            |   | Promissory Note dated May 16, 2002 executed by William K. Heiden in  favor of PRAECIS (9)                                                                                                                                                                                                                           |
| 10.10*           |   | Letter Agreement dated as of May 9, 2002 between PRAECIS and Malcolm  L. Gefter, Ph.D. (9)                                                                                                                                                                                                                          |
| 10.11*           |   | Letter Agreement dated as of May 9, 2002 between PRAECIS and Kevin F.  McLaughlin (9)                                                                                                                                                                                                                               |
| 10.12*           |   | Letter Agreement dated as of May 9, 2002 between PRAECIS and Marc B.  Garnick, M.D. (9)                                                                                                                                                                                                                             |
| 10.13†      |   | License Agreement effective as of October 17, 1996 by and  between PRAECIS and Indiana University Foundation, as amended as of  June 3, 1998 (1)                                                                                                                                                          |
| 10.14†      |   | Supply Agreement dated as of July 23, 1998 by and between  PRAECIS and Salsbury Chemicals, Inc. (1)                                                                                                                                                                                                            |
| 10.15†      |   | Development and Supply Agreement effective as of June 21, 2000  by and between UCB S.A. and                                                                                                                                                                                                                    |

 

23

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|        |   | Amgen Inc., as amended by Amendment No. 1 thereto dated as of  March 26, 2002 (together with the Assignment of Development and Supply  Agreement entered into January 18, 2002 and effective as of  December 17, 2001 by and between Amgen Inc. and PRAECIS) (7) |
|-------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.16† |   | Commercial Supply Agreement dated December 4, 2002 and effective  as of June 1, 2002 by and between Baxter Pharmaceutical Solutions LLC  and PRAECIS (11)                                                                                                                  |
| 10.17       |   | Termination Agreement dated as of August 19, 2002 by and between  PRAECIS and Amgen Inc. (10)                                                                                                                                                                                   |
| 10.18       |   | Contract of Sale dated as of January 14, 2000 by and between  Best Property Fund, L.P. and PRAECIS, as amended as of February 7, 2000  (1)                                                                                                                                 |
| 10.19       |   | Acquisition and Construction Loan Agreement dated as of July 11,  2000 between 830 Winter Street LLC and Anglo Irish Bank Corporation plc  and related Loan and Security Agreements (3)                                                                                    |
| 10.20       |   | Guaranty of Costs and Completion dated as of July 11, 2000 (3)                                                                                                                                                                                                                  |
| 10.21       |   | Guaranty of Non-Recourse Exceptions dated as of July 11, 2000  (3)                                                                                                                                                                                                              |
| 10.22       |   | Environmental Compliance and Indemnity Agreement dated as of  July 11, 2000 executed by 830 Winter Street LLC and PRAECIS (3)                                                                                                                                                   |
| 10.23       |   | Lease Agreement dated as of July 11, 2000 between 830 Winter  Street LLC, as landlord, and PRAECIS, as tenant (3)                                                                                                                                                               |
| 21.1        |   | List of Subsidiaries of PRAECIS (13)                                                                                                                                                                                                                                                 |
| 23.1        |   | Consent of Ernst & Young LLP, Independent Auditors                                                                                                                                                                                                                               |
| 24.1        |   | Power of Attorney (13)                                                                                                                                                                                                                                                               |
| 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                                                                                                                        |

 

----

*              Represents a management contract orcompensatory plan or arrangement.

 

(1)           Incorporated by reference to RegistrationStatement on Form S-1 (Registration No. 333-96351) initially filedwith the Securities and Exchange Commission on February 8, 2000 anddeclared effective on April 26, 2000.

 

(2)           Incorporated by reference to QuarterlyReport on Form 10-Q for the quarter ended March 31, 2000 filed withthe Securities and Exchange Commission on June 7, 2000.

 

(3)           Incorporated by reference to QuarterlyReport on Form 10-Q for the quarter ended June 30, 2000 filed withthe Securities and Exchange Commission on August 14, 2000.

 

(4)           Incorporated by reference to QuarterlyReport on Form 10-Q for the quarter ended September 30, 2000 filedwith the Securities and Exchange Commission on November 13, 2000.

 

(5)           Incorporated by reference to RegistrationStatement on Form S-1 (Registration No. 333-54342) initially filedwith the Securities and Exchange Commission on January 26, 2001 anddeclared effective on February 14, 2001.

 

(6)           Incorporated by reference to RegistrationStatement on Form 8-A filed with the Securities and Exchange Commission onJanuary 26, 2001.

 

(7)           Incorporated by reference to QuarterlyReport on Form 10-Q for the quarter ended March 31, 2002 filed withthe Securities and Exchange Commission on May 8, 2002.

 

(8)           Incorporated by reference to RegistrationStatement on Form S-8 (Registration No. 333-90734) filed with the Securitiesand Exchange Commission on June 18, 2002.

 

24

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(9)           Incorporated by reference to QuarterlyReport on Form 10-Q for the quarter ended June 30, 2002 filed withthe Securities and Exchange Commission on August 12, 2002.

 

(10)         Incorporated by reference to Quarterly Reporton Form 10-Q for the quarter ended September 30, 2002 filed with theSecurities and Exchange Commission on November 13, 2002.

 

(11)         Incorporated by reference to Annual Report onForm 10-K for the year ended December 31, 2002 filed with the Securitiesand Exchange Commission on March 19, 2003.

 

(12)         Incorporated by reference to RegistrationStatement on Form S-8 (Registration No. 333-106012) filed with the Securitiesand Exchange Commission on June 11, 2003.

 

(13)         Incorporated by reference to Annual Report onForm 10-K for the year ended December 31, 2003 filed with the Securitiesand Exchange Commission on March 15, 2004.

 

†              Confidential treatment has been grantedfor certain portions of this exhibit. Omitted portions have been filedseparately with the Securities and Exchange Commission.

 

*(b)**          Reports onForm 8-K.*

 

On October 24, 2003, we furnished a Current Report on Form 8-K tofurnish under Item 12 (Results of Operations and Financial Condition) a copy ofour Press Release dated October 24, 2003.

 

On November 19, 2003, we furnished a Current Report on Form 8-K tofurnish under Item 9 (Regulation FD Disclosure) a copy of our Press Releasedated November 19, 2003.

 

On November 26, 2003, we furnished a Current Report on Form 8-K tofurnish under Item 9 (Regulation FD Disclosure) a copy of our Press Releasedated November 26, 2003.

 

On December 10, 2003, we furnished a Current Report on Form 8-K tofurnish under Item 9 (Regulation FD Disclosure) a copy of our Press Releasedated December 10, 2003.

 

25

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**SIGNATURE**

 

Pursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, as amended, the registrant has duly causedthis Report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
|                   |  PRAECIS PHARMACEUTICALS INCORPORATED            |
|------------------------|-------------------------------------------------------|
|                   |                                                  |
|                   |                                                  |
| Date  May 7, 2004 | By:                                                   | /s/ Kevin F. McLaughlin |
|                   | Kevin F. McLaughlin                                   |
|                   | *Chief Financial Officer, Executive Vice  President,* |
|                   | *Treasurer and Secretary*                             |

 

26

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**PRAECIS PHARMACEUTICALS INCORPORATED**

 

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

 
| Report of Independent Auditors                        |   |
|-------------------------------------------------------|--------|
| Consolidated Balance Sheets                           |   |
| Consolidated Statements of Operations                 |   |
| Consolidated Statements of Stockholders’  Equity |   |
| Consolidated Statements of Cash Flows                 |   |
| Notes to Consolidated Financial Statements            |   |

 

 

F-1

----

 

**Report of Independent Auditors**

 

Board of Directors and Stockholders

PRAECIS PHARMACEUTICALS INCORPORATED

 

We have audited the accompanying consolidated balance sheets of PRAECISPHARMACEUTICALS INCORPORATED as of December 31, 2002 and 2003, and therelated consolidated statements of operations, stockholders’ equity and cashflows for each of the three years in the period ended December 31, 2003.These financial statements are the responsibility of the Company’s management.Our responsibility is to express an opinion on these financial statements basedon our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States. Those standards require that we plan and performthe audit to obtain reasonable assurance about whether the financial statementsare free of material misstatement. An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the consolidated financial position ofPRAECIS PHARMACEUTICALS INCORPORATED at December 31, 2002 and 2003, andthe consolidated results of its operations and its cash flows for each of thethree years in the period ended December 31, 2003, in conformity withaccounting principles generally accepted in the United States.

 
|                  |   | /s/ ERNST & YOUNG LLP |
|-----------------------|--------|--------------------------------|
|                  |   |
| Boston, Massachusetts |   |
| January 23, 2004 |   |

 

F-2

----

 

**PRAECIS PHARMACEUTICALS INCORPORATED**

**Consolidated Balance Sheets**

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

 
|                                                                                                                                           |   | **December 31,** |    |
|------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------|---------|
|                                                                                                                                           |   | **2002**              |    | **2003** |   |
|                                                                                                                                           |   |                  |    |   |   |
| **Assets**                                                                                                                                     |   |                  |    |   |   |
| Current assets:                                                                                                                                |   |                  |    |   |   |
| Cash and cash equivalents                                                                                                                      |   | $                     | 40,847  |   | $ | 15,687 |   |
| Marketable securities                                                                                                                          |   | 154,188               |    | 127,505 |   |
| Prepaid expenses and other assets                                                                                                              |   | 848                   |    | 726 |   |
| Total current assets                                                                                                                           |   | 195,883               |    | 143,918 |   |
| Property and equipment, net                                                                                                                    |   | 71,252                |    | 67,713 |   |
| Due from officer                                                                                                                               |   | 933                   |    | 833 |   |
| Other assets                                                                                                                                   |   | 182                   |    | 14 |   |
| Total assets                                                                                                                                   |   | $                     | 268,250 |   | $ | 212,478 |   |
|                                                                                                                                           |   |                  |    |   |   |
| **Liabilities and  Stockholders’ Equity**                                                                                                 |   |                  |    |   |   |
| Current liabilities:                                                                                                                           |   |                  |    |   |   |
| Accounts payable                                                                                                                               |   | $                     | 3,285   |   | $ | 2,483 |   |
| Accrued expenses                                                                                                                               |   | 7,075                 |    | 7,707 |   |
| Current portion of long-term debt                                                                                                              |   | —                |    | 747 |   |
| Total current liabilities                                                                                                                      |   | 10,360                |    | 10,937 |   |
|                                                                                                                                           |   |                  |    |   |   |
| Long-term debt                                                                                                                                 |   | 33,000                |    | 31,880 |   |
|                                                                                                                                           |   |                  |    |   |   |
| Commitments and contingencies                                                                                                                  |   |                  |    |   |   |
|                                                                                                                                           |   |                  |    |   |   |
| Stockholders’ equity:                                                                                                                     |   |                  |    |   |   |
| Common Stock, $0.01 par value; 200,000,000  shares authorized; 51,801,423 shares in 2002 and 52,011,002 shares in 2003  issued and outstanding |   | 518                   |    | 520 |   |
| Additional paid-in capital                                                                                                                     |   | 354,676               |    | 355,373 |   |
| Accumulated other comprehensive income                                                                                                         |   | 203                   |    | 73 |   |
| Accumulated deficit                                                                                                                            |   | (130,507              | )       | (186,305 | ) |
| Total stockholders’ equity                                                                                                                |   | 224,890               |    | 169,661 |   |
| Total liabilities and stockholders’ equity                                                                                                |   | $                     | 268,250 |   | $ | 212,478 |   |

 

*See accompanying notes.*

 

F-3

----

 

**PRAECIS PHARMACEUTICALS INCORPORATED**

**Consolidated Statements of Operations**

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

 
|                                            |   | **Year Ended  December 31,** |    |
|-------------------------------------------------|--------|-----------------------------------|---------|
|                                            |   | **2001**                          |    | **2002** |   | **2003** |   |
|                                            |   |                              |    |   |   |   |   |
| Corporate collaboration revenue                 |   | $                                 | 9,907   |   | $ | 1,029 |   | $ | — |   |
| Costs and expenses:                             |   |                              |    |   |   |   |   |
| Research and development                        |   | 59,416                            |    | 56,383 |   | 41,907 |   |
| Sales and marketing                             |   | 8,737                             |    | 1,837 |   | 5,234 |   |
| General and administrative                      |   | 6,961                             |    | 9,676 |   | 10,006 |   |
| Total costs and expenses                        |   | 75,114                            |    | 67,896 |   | 57,147 |   |
| Operating loss                                  |   | (65,207                           | )       | (66,867 | ) | (57,147 | ) |
| Interest income                                 |   | 10,503                            |    | 6,113 |   | 2,508 |   |
| Interest expense                                |   | (1,398                            | )       | (1,341 | ) | (1,159 | ) |
| Gain on assignment of leasehold improvements    |   | 1,499                             |    | — |   | — |   |
| Gain on termination of collaboration  agreement |   | —                            |    | 16,020 |   | — |   |
| Net loss                                        |   | $                                 | (54,603 | ) | $ | (46,075 | ) | $ | (55,798 | ) |
|                                            |   |                              |    |   |   |   |   |
| Net loss per share:                             |   |                              |    |   |   |   |   |
| Basic and diluted                               |   | $                                 | (1.10   | ) | $ | (0.89 | ) | $ | (1.08 | ) |
|                                            |   |                              |    |   |   |   |   |
| Weighted average number of common shares:       |   |                              |    |   |   |   |   |
| Basic and diluted                               |   | 49,777                            |    | 51,678 |   | 51,869 |   |

 

*See accompanying notes.*

 

F-4

----

 

**PRAECISPHARMACEUTICALS INCORPORATED**

**ConsolidatedStatements of Stockholders’ Equity**

**(Inthousands, except share data)**

 
|                                                                                   |   | **Common  Stock** |   | **Additional  Paid-in  Capital** |   | **Accumulated  Other  Comprehensive  Income** |   | **Accumulated  Deficit** |   | **Total  Stockholders’  Equity** |   |
|----------------------------------------------------------------------------------------|--------|-------------------|--------|----------------------------------|--------|-----------------------------------------------|--------|--------------------------|--------|---------------------------------------|--------|
| **Shares**                                                                             |   | **Amount**        |
|                                                                                   |   |              |   |                             |   |                                          |   |                     |   |                                  |   |   |   |
| Balance at December 31, 2000                                                      |   | 42,284,199        |   | $                                | 423    |                                          | $      | 175,937                  |   |                                  |   | $ | (29,829 | ) | $ | 146,531 |   |
| Net loss                                                                               |   |              |   |                             |   |                                          |   |                     |   | (54,603                               | )      | (54,603 | ) |
| Unrealized gain on marketable securities                                               |   |              |   |                             |   |                                          |   | $                        | 730    |                                  |   |   | 730 |   |
| Total comprehensive loss                                                               |   |              |   |                             |   |                                          |   |                     |   |                                  |   | (53,873 | ) |
| Common Stock issued upon follow-on public  offering (net of $10,476 in offering costs) |   | 7,587,500         |   | 76                               |   | 175,816                                       |   |                     |   |                                  |   | 175,892 |   |
| Stock compensation                                                                     |   |              |   |                             |   | (265                                          | )      |                     |   |                                  |   | (265 | ) |
| Repurchase of Common Stock                                                             |   | (200,000          | )      | (2                               | )      | (51                                           | )      |                     |   |                                  |   | (53 | ) |
| Issuance of Common Stock                                                               |   | 1,444,436         |   | 14                               |   | 2,450                                         |   |                     |   |                                  |   | 2,464 |   |
| Balance at December 31, 2001                                                      |   | 51,116,135        |   | 511                              |   | 353,887                                       |   | 730                      |   | (84,432                               | )      | 270,696 |   |
| Net loss                                                                               |   |              |   |                             |   |                                          |   |                     |   | (46,075                               | )      | (46,075 | ) |
| Unrealized loss on marketable securities                                               |   |              |   |                             |   |                                          |   | (527                     | )      |                                  |   | (527 | ) |
| Total comprehensive loss                                                               |   |              |   |                             |   |                                          |   |                     |   |                                  |   | (46,602 | ) |
| Stock compensation                                                                     |   |              |   |                             |   | (185                                          | )      |                     |   |                                  |   | (185 | ) |
| Issuance of Common Stock                                                               |   | 685,288           |   | 7                                |   | 974                                           |   |                     |   |                                  |   | 981 |   |
| Balance at December 31, 2002                                                      |   | 51,801,423        |   | 518                              |   | 354,676                                       |   | 203                      |   | (130,507                              | )      | 224,890 |   |
| Net loss                                                                               |   |              |   |                             |   |                                          |   |                     |   | (55,798                               | )      | (55,798 | ) |
| Unrealized loss on marketable securities                                               |   |              |   |                             |   |                                          |   | (130                     | )      |                                  |   | (130 | ) |
| Total comprehensive loss                                                               |   |              |   |                             |   |                                          |   |                     |   |                                  |   | (55,928 | ) |
| Stock compensation                                                                     |   |              |   |                             |   | 148                                           |   |                     |   |                                  |   | 148 |   |
| Issuance of Common Stock                                                               |   | 209,579           |   | 2                                |   | 549                                           |   |                     |   |                                  |   | 551 |   |
| Balance at December 31, 2003                                                      |   | 52,011,002        |   | $                                | 520    |                                          | $      | 355,373                  |   | $                                     | 73     |   | $ | (186,305 | ) | $ | 169,661 |   |

 

*See accompanying notes.*

 

F-5

----

 

**PRAECIS PHARMACEUTICALS INCORPORATED**

**Consolidated Statements of Cash Flows**

**(In thousands)**

 

 
|                                                                           |   | **Year Ended  December 31,** |    |
|--------------------------------------------------------------------------------|--------|-----------------------------------|---------|
|                                                                           |   | **2001**                          |    | **2002** |   | **2003** |   |
| **Operating  activities:**                                                     |   |                              |    |   |   |   |   |
| Net loss                                                                       |   | $                                 | (54,603 | ) | $ | (46,075 | ) | $ | (55,798 | ) |
| Adjustments to reconcile net loss to cash  used in  operating activities: |   |                              |    |   |   |   |   |
| Depreciation and amortization                                                  |   | 3,500                             |    | 4,704 |   | 4,551 |   |
| Gain on assignment of leasehold  improvements                                  |   | (1,499                            | )       | — |   | — |   |
| Gain on termination of collaboration  agreement                                |   | —                            |    | (16,020 | ) | — |   |
| Stock compensation                                                             |   | (265                              | )       | (185 | ) | 148 |   |
| Changes in operating assets and  liabilities:                                  |   |                              |    |   |   |   |   |
| Accounts receivable                                                            |   | 621                               |    | 458 |   | — |   |
| Refundable income taxes                                                        |   | 4,853                             |    | — |   | — |   |
| Unbilled revenues                                                              |   | 1,493                             |    | — |   | — |   |
| Prepaid expenses and other assets                                              |   | 867                               |    | 221 |   | 290 |   |
| Due from officer                                                               |   | —                            |    | (933 | ) | 100 |   |
| Accounts payable                                                               |   | 17,887                            |    | (11,416 | ) | (802 | ) |
| Accrued expenses                                                               |   | 566                               |    | (633 | ) | 632 |   |
| Deferred revenue                                                               |   | (5,064                            | )       | — |   | — |   |
|                                                                           |   |                              |    |   |   |   |   |
| Net cash used in operating activities                                          |   | (31,644                           | )       | (69,879 | ) | (50,879 | ) |
| **Investing activities:**                                                      |   |                              |    |   |   |   |   |
| Purchase of available-for-sale securities                                      |   | (177,110                          | )       | (161,286 | ) | (88,786 | ) |
| Sales and maturities of available-for-sale  securities                         |   | 56,309                            |    | 128,102 |   | 115,339 |   |
| Proceeds from disposition of property and  equipment                           |   | 1,499                             |    | — |   | — |   |
| Purchase of property and equipment                                             |   | (23,879                           | )       | (1,756 | ) | (1,012 | ) |
|                                                                           |   |                              |    |   |   |   |   |
| Net cash (used in) provided by investing  activities                           |   | (143,181                          | )       | (34,940 | ) | 25,541 |   |
| **Financing  activities:**                                                     |   |                              |    |   |   |   |   |
| Follow-on public offering proceeds                                             |   | 175,892                           |    | — |   | — |   |
| Proceeds from debt issuance                                                    |   | 9,000                             |    | — |   | — |   |
| Repayments of debt                                                             |   | —                            |    | — |   | (373 | ) |
| Proceeds from the issuance of Common Stock,  options and warrants              |   | 2,464                             |    | 981 |   | 551 |   |
| Repurchase of Common Stock                                                     |   | (53                               | )       | — |   | — |   |
| Net cash provided by financing activities                                      |   | 187,303                           |    | 981 |   | 178 |   |
| Increase (decrease) in cash and cash  equivalents                              |   | 12,478                            |    | (103,838 | ) | (25,160 | ) |
| Cash and cash equivalents at beginning of  year                                |   | 132,207                           |    | 144,685 |   | 40,847 |   |
| Cash and cash equivalents at end of year                                       |   | $                                 | 144,685 |   | $ | 40,847 |   | $ | 15,687 |   |

 

*See accompanying notes.*

 

F-6

----

 

**PRAECISPHARMACEUTICALS INCORPORATED**

**Notesto Consolidated Financial Statements**

 

**1.****             Basis of Presentation**

 

***TheCompany***

 

PRAECIS PHARMACEUTICALS INCORPORATED (the “Company”) was incorporatedin July 1993 under the laws of the State of Delaware. The Company is adrug discovery and development company engaged in the development of drugs forthe treatment of human diseases.

 

***Useof Estimates***

 

The preparation of financial statements in accordance with accountingprinciples generally accepted in the United States requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of income and expenses duringthe reporting period. Actual results could differ from those estimates.

 

***Principlesof Consolidation***

 

The accompanying consolidated financial statements include theCompany’s accounts and the accounts of its wholly owned subsidiaries, 830Winter Street LLC and PRAECIS Europe Limited. All significant intercompanyaccount balances and transactions between the companies have been eliminated.

 

**2.****             SignificantAccounting Policies**

 

***CashEquivalents***

 

Cash equivalents consist principally of money market funds and otherinvestments with original maturities of three months or less at the date ofpurchase.

 

***MarketableSecurities***

 

The Company invests in marketable securities of highly rated financialinstitutions and investment-grade debt instruments and limits the amount ofcredit exposure with any one entity. The Company has classified its marketablesecurities as “available-for-sale” and, accordingly, carries such securities ataggregate fair value. Unrealized gains and losses, if any, are reported asother comprehensive income in stockholders’ equity. The amortized cost of debtsecurities in this category is adjusted for amortization of premiums andaccretion of discounts to maturity. Such amortization is included in interestincome. Realized gains and losses on available-for-sale securities are includedin interest income and expense. The cost of securities sold is based on thespecific identification method. Interest and dividends are included in interestincome. At December 31, 2003, the Company’s cash, cash equivalents andmarketable securities had a maximum estimated life of less than three yearswith an average estimated life of approximately three months.

 

***Concentrationsof Credit Risk***

 

Financial instruments that potentially subject the Company toconcentration of credit risk consist principally of cash, cash equivalents andmarketable securities. The Company places its cash, cash equivalents andmarketable securities with high credit quality financial institutions and, bypolicy, limits its credit exposure to any one financial instrument, sovereigntyor issuer.

 

***Derivativesand Hedging***

 

In June 1998, the Financial Accounting Standards Board (“FASB”)issued Statement of Financial Accounting Standards (“SFAS”) No. 133, *Accounting for Derivative Instruments and HedgingActivities* (“SFAS No. 133”), and its amendments SFASNo. 137 and No. 138, in June 1999 and June 2000,

 

F-7

----

 

respectively. SFAS No. 133 requires the Company to recognize allderivatives on the balance sheet at fair value.   Derivatives that are not hedges must be adjusted to fair valuethrough income. If the derivative is a hedge, depending on the nature of thehedge, changes in the fair value of derivatives are either offset against thechange in fair value of assets, liabilities, or firm commitments throughearnings or recognized in other comprehensive income until the hedged item isrecognized in earnings. The ineffective portion of a derivative’s change infair value will be immediately recognized in earnings.

 

***Propertyand Equipment***

 

Property and equipment are recorded at cost. Depreciation andamortization are calculated using the straight-line method over the estimateduseful life of the asset as follows:

 
| Building                        |   | 30 years                                                             |
|---------------------------------|--------|----------------------------------------------------------------------|
| Building improvements           |   | 30 years or the remaining life of the building, whichever is shorter |
| Laboratory and office equipment |   | 3-7 years or term of lease, whichever is shorter                     |

 

In accordance with SFAS No. 144,*Accounting for the Impairment or Disposal of Long-Lived Assets*,the Company reviews property, plant, and equipment for impairment wheneverevents or changes in circumstances indicate that the carrying amount of such anasset may not be recoverable. No revision to the estimated useful life orrecorded amount of property and equipment was required.

 

Interest capitalized in connection with facilities is recorded as partof the asset to which it relates and is amortized over the asset’s estimateduseful life. Interest capitalized into construction in progress during 2001 wasapproximately $0.6 million.

 

***RevenueRecognition***

 

Revenue is deemed earned when all of the following have occurred: allobligations of the Company relating to the revenue have been met and theearning process is complete; the monies received or receivable are notrefundable irrespective of research results; and there are neither futureobligations nor future milestones to be met by the Company with respect to suchrevenue.

 

*Corporate collaborations.*  Revenues are earned based upon researchexpenses incurred and milestones achieved. Non-refundable payments uponinitiation of contracts are deferred and amortized over the period in which theCompany is obligated to participate on a continuing and substantial basis inthe research and development activities outlined in each contract. Amountsreceived in advance of reimbursable expenses are recorded as deferred revenueuntil the related expenses are incurred. Milestone payments are recognized asrevenue in the period in which the parties agree that the milestone has beenachieved and it is deemed that no further obligations exist.

 

***IncomeTaxes***

 

The Company provides for income taxes under SFAS No. 109, *Accounting for Income Taxes.* Under thismethod, deferred taxes are recognized using the liability method, whereby taxrates are applied to cumulative temporary differences between carrying amountsof assets and liabilities for financial reporting purposes and the amounts usedfor income tax purposes based on when and how they are expected to affect thetax return.

 

***Researchand Development***

 

Research and development costs, including those associated withtechnology, licenses and patents, are expensed as incurred. Research anddevelopment costs include primarily costs related to ongoing clinical programs,manufacturing and materials inventory costs, salaries, lab supplies and otherfixed facility costs used in the Company’s research and development operations.

 

F-8

----

 

***Stock-BasedCompensation***

 

The Company has elected to follow Accounting Principles Board (“APB”)Opinion No. 25, *Accounting for Stock Issuedto Employees* (“APB No. 25”), in accounting for its stock-basedemployee compensation plans using the intrinsic value method, rather than thealternative fair value accounting method provided for under SFAS No. 123, *Accounting for Stock-Based Compensation*(“SFAS No. 123”), as SFAS No. 123 requires the use of optionvaluation models that were not developed for use in valuing employee stockoptions. Under APB No. 25, when the exercise price of options granted toemployees under these plans equals the market price of the underlying stock onthe date of grant, no compensation expense is required.

 

The reconciliation of net loss and net loss per share, as reported, topro forma net loss and net loss per share giving effect to employee stock-basedcompensation accounted for using the fair value accounting method, is asfollows:

 

 
|                                                                                                                                                                                                              |   | **Year Ended  December 31,** |    |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|---------|
|                                                                                                                                                                                                              |   | **2001**                          |    | **2002** |   | **2003** |   |
|                                                                                                                                                                                                              |   | **(in  thousands)**               |    |
| Net loss, as reported Building                                                                                                                                                                                    |   | $                                 | (54,603 | ) | $ | (46,075 | ) | $ | (55,798 | ) |
| Deduct/(add): Stock compensation cost as  computed under APB No. 25                                                                                                                                               |   | (265                              | )       | (185 | ) | 148 |   |
| 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 |   | (7,847                            | )       | (10,792 | ) | (10,136 | ) |
| Pro forma net loss                                                                                                                                                                                                |   | $                                 | (62,715 | ) | $ | (57,052 | ) | $ | (65,786 | ) |
| Diluted net loss per share, as reported                                                                                                                                                                           |   | $                                 | (1.10   | ) | $ | (0.89 | ) | $ | (1.08 | ) |
| Diluted net loss per share, pro forma                                                                                                                                                                             |   | $                                 | (1.26   | ) | $ | (1.10 | ) | $ | (1.27 | ) |

 

The fair value of the stock options at the date of grant was estimatedusing the Black-Scholes option pricing model with the following weightedaverage assumptions:

 
|                    |   | **2001** |   | **2002** |   | **2003** |   |
|-------------------------|--------|----------|--------|----------|--------|----------|--------|
|                    |   |     |   |     |   |     |   |
| Risk-free interest rate |   | 4.0      | %      | 4.0      | %      | 4.0      | %      |
| Expected life (years)   |   | 5        |   | 6        |   | 6        |   |
| Volatility              |   | 84       | %      | 103      | %      | 84       | %      |

 

The Company has never declared or paid any cash dividends on any of itscapital stock and does not expect to do so in the foreseeable future.

 

***AccountingPronouncements***

 

On December 31, 2002, the FASB issued SFAS No. 148, *Accounting forStock-Based Compensation – Transition and Disclosure* (“SFAS No.148”).  SFAS No. 148 amends SFAS No. 123to provide alternative methods of transition to the fair value method ofaccounting for stock-based employee compensation.  SFAS No. 148 also amends the disclosure provisions of SFAS No.123 and APB Opinion No. 28, *Interim Financial Reporting*(“APB No.28”), to include increased pro-forma disclosure of the effects of stock-basedemployee compensation on the results of operations.  SFAS No. 148 became effective for fiscal years ending afterDecember 15, 2002.  The Company haselected to continue to account for employee stock-based compensation using theintrinsic value method as described in APB No. 25 and therefore, the adoptionof SFAS No. 148 did not have a material impact on the Company’s consolidatedresults of operations in 2003.

 

F-9

----

 

In January 2003, the FASB issued FASB Interpretation No. 46, *Consolidation of Variable Interest Entities*(“FINNo. 46”).  FIN No. 46 sets forth the criteria used in determining whetheran investment in a variable interest entity (“VIE”), should be consolidated andis based on the general premise that companies that control another entitythrough interests other than voting interests should consolidate the controlledentity.  The Company does not have any VIE’s.  Accordingly, theimplementation of FIN No. 46 will not have any impact on the Company’sconsolidated financial statements.

 

In May 2003, the FASB issued SFAS No. 150, *Accounting for Certain Financial Instrumentswith Characteristics of both Liabilities and Equity* (“SFAS No. 150”). SFAS No. 150establishes how a company classifies and measures certain financial instrumentswith characteristics of both liabilities and equity, including redeemableconvertible preferred stock. This statement is effective for financialinstruments entered into or modified after May 31, 2003, and is otherwiseeffective at the beginning of the interim period commencing July 1, 2003,except for mandatory redeemable financial instruments of nonpublic companies.The FASB has indefinitely deferred implementation of some provisions ofSFAS No. 150. The Company believes that the adoption of SFAS No. 150will not have a material impact on the Company’s consolidated financial statements.

 

***ComprehensiveLoss***

 

Comprehensive loss consists of net loss and unrealized gains or losseson marketable securities and is reflected in the consolidated statements ofstockholders’ equity.

 

***NetLoss Per Share***

 

Basic net loss per share is based on the weighted average number ofshares of common stock, par value $.01 per share (“Common Stock”) outstanding.For all years presented, diluted net loss per common share is the same as basicnet loss per common share as the inclusion of Common Stock equivalents, includingthe effect of stock options and warrants, would be antidilutive due to theCompany’s net loss position for all periods presented.

 

**3.****             Marketable Securities**

 

In connection with the filing of this Amendment No. 1 to its AnnualReport on Form 10-K for the fiscal year ended December 31, 2003, theCompany has reclassified all auctionrate debt securities formerly presented as cash and cash equivalents tomarketable securities.  TheCompany’s marketable securities, which are classified as available-for-sale,are as follows (in thousands):

 
|                                 |   | **December 31,  2003** |    |
|--------------------------------------|--------|-----------------------------|---------|
|                                 |   | **Amortized  Cost**         |    | **Gross  Unrealized  Gains** |   | **Gross  Unrealized  Losses** |   | **Estimated  Fair  Value** |   |
| U.S. government agencies:            |   |                        |    |   |   |   |   |   |   |
| Estimated life of one year or less   |   | $                           | 5,126   |   | $ | 14 |   | $ | — |   | $ | 5,140 |   |
| Estimated life of one to three years |   | 10,068                      |    | 17 |   | — |   | 10,085 |   |
| U.S. auction rate debt securities:   |   |                        |    |   |   |   |   |   |   |
| Estimated life of one to three years |   | 71,843                      |    | — |   | — |   | 71,843 |   |
| U.S. corporate securities:           |   |                        |    |   |   |   |   |   |   |
| Estimated life of one year or less   |   | 8,766                       |    | — |   | (9 | ) | 8,757 |   |
| Estimated life of one to three years |   | 31,629                      |    | 77 |   | (26 | ) | 31,680 |   |
| Total marketable securities          |   | $                           | 127,432 |   | $ | 108 |   | $ | (35 | ) | $ | 127,505 |   |

 

F-10

----

 
|                                 |   | **December 31,  2002** |    |
|--------------------------------------|--------|-----------------------------|---------|
|                                 |   | **Amortized  Cost**         |    | **Gross  Unrealized  Gains** |   | **Gross  Unrealized  Losses** |   | **Estimated  Fair  Value** |   |
| U.S. government agencies:            |   |                        |    |   |   |   |   |   |   |
| Estimated life of one year or less   |   | $                           | 3,089   |   | $ | 10 |   | $ | — |   | $ | 3,099 |   |
| Estimated life of one to three years |   | 33,999                      |    | 140 |   | (2 | ) | 34,137 |   |
| U.S. auction rate debt securities:   |   |                        |    |   |   |   |   |   |   |
| Estimated life of one to three years |   | 54,036                      |    | — |   | — |   | 54,036 |   |
| U.S. corporate securities:           |   |                        |    |   |   |   |   |   |   |
| Estimated life of one year or less   |   | 31,153                      |    | 158 |   | (109 | ) | 31,202 |   |
| Estimated life of one to three years |   | 31,708                      |    | 54 |   | (48 | ) | 31,714 |   |
| Total marketable securities          |   | $                           | 153,985 |   | $ | 362 |   | $ | (159 | ) | $ | 154,188 |   |

 

**4.****             Due from Officer**

 

In May 2002, the Company extended a $1.0 million loan to an officer inconnection with the officer’s acceptance of employment with the Company. Theloan is full recourse, uncollateralized, bears no interest and becomes due andpayable in May of 2012. Under the terms of the promissory note (the “Note”)executed in connection with the loan, 10% of the original loan principal willbe forgiven annually on each anniversary date of the Note, provided that theofficer remains an employee of the Company. The Company is not responsible forthe personal income tax implications related to the forgiveness of this Note.Upon the officer’s voluntary termination of employment with the Company, withcertain exceptions, and upon termination by the Company of the officer’semployment for cause, the Note becomes immediately due and payable.

 

**5.****             Property andEquipment**

 

Property and equipment consist of thefollowing:

 
|                                             |   | **December 31,** |   |
|--------------------------------------------------|--------|-----------------------|--------|
|                                             |   | **2002**              |   | **2003** |   |
|                                             |   | **(in  thousands)**   |   |
|                                             |   |                  |   |   |   |
| Building                                         |   | $                     | 56,784 |   | $ | 57,010 |   |
| Land                                             |   | 10,500                |   | 10,500 |   |
| Laboratory and office equipment                  |   | 15,306                |   | 16,384 |   |
| Construction in progress                         |   | 292                   |   | — |   |
|                                             |   | 82,882                |   | 83,894 |   |
| Less: accumulated depreciation and  amortization |   | 11,630                |   | 16,181 |   |
|                                             |   | $                     | 71,252 |   | $ | 67,713 |   |

 

**6.****             Accrued Expenses**

 

Accrued expenses consist of the following:

 
|                 |   | **December 31,** |   |
|----------------------|--------|-----------------------|--------|
|                 |   | **2002**              |   | **2003** |   |
|                 |   | **(in  thousands)**   |   |
|                 |   |                  |   |   |   |
| Clinical trial costs |   | $                     | 2,644  |   | $ | 2,642 |   |
| Accrued compensation |   | 1,357                 |   | 1,833 |   |
| Unvouchered invoices |   | 683                   |   | 1,054 |   |
| Other                |   | 2,391                 |   | 2,178 |   |
|                 |   | $                     | 7,075  |   | $ | 7,707 |   |

 

F-11

----

 

**7.****             Stockholders’ Equity**

 

***Public Offerings***

 

In February 2001, the Company completeda follow-on public offering of its Common Stock. The Company sold 7,587,500shares of Common Stock resulting in net proceeds to the Company ofapproximately $175.9 million.

 

***Convertible Preferred Stock***

 

Under the Company’s amended and restatedcertificate of incorporation, the Company is authorized to issue 200,000,000shares of Common Stock and 10,000,000 shares of preferred stock, par value $.01per share (“Preferred Stock”). The Preferred Stock is issuable in one or moreclasses or series, each of such classes or series to have such rights andpreferences, including voting rights, dividend rights, conversion rights,redemption privileges and liquidation preferences, as may be determined by theBoard of Directors. No shares of Preferred Stock have been issued.

 

***Rights Plan***

 

In January 2001, the Company adopted aRights Agreement (the “Rights Agreement”), commonly known as a “poison pill.”Under the Rights Agreement, the Company distributed certain rights to acquireshares of the Company’s Series A junior participating preferred stock (the“Rights”) as a dividend for each share of Common Stock held of record as ofFebruary 5, 2001. Each share of Common Stock issued after theFebruary 5, 2001 record date has an attached Right. Under certainconditions involving an acquisition by any person or group of 10% or more ofthe Common Stock, each Right permits the holder (other than the 10% holder) topurchase Common Stock having a value equal to twice the exercise price of theRight, upon payment of the exercise price of the Right. In addition, in theevent of certain business combinations after an acquisition by a person orgroup of 10% or more of the Common Stock, each Right entitles the holder (otherthan the 10% holder) to receive, upon payment of the exercise price, CommonStock having a value equal to twice the exercise price of the Right. The Rightshave no voting privileges and, unless and until they become exercisable, areattached to, and automatically trade with, the Company’s Common Stock. TheRights will terminate upon the earlier of the date of their redemption or tenyears from the date of issuance.

 

***Employee Stock Purchase Plan***

 

Under the Company’s Amended and RestatedEmployee Stock Purchase Plan (the “ESPP”) eligible employees may purchaseshares of Common Stock at a price per share equal to 85% of the lower of thefair market value per share of the Common Stock at the beginning or the end ofeach six month period during the term of the ESPP.  Participation is limited to the lesser of 10% of the employee’scompensation or $25,000 in any calendar year. On March 13, 2003, the Board of Directors approved an amendment tothe ESPP extending the term of this plan through 2005 and increasing the numberof shares authorized for issuance from 160,000 to 400,000, subject tostockholder approval.  In May 2003, thestockholders of the Company approved this amendment.  During 2001, 2002 and 2003, the Company issued 35,532, 53,571 and55,866 shares of Common Stock, respectively, under the ESPP.

 

***Stock Option Plan***

 

The Second Amended and Restated 1995 StockPlan, as amended (the “Plan”), allows for the granting of incentive andnonqualified options and awards to purchase shares of Common Stock.  Incentive options granted to employees underthe Plan generally vest at 20% on the first anniversary of the date of grant,with the remaining shares vesting equally over four years following suchanniversary date. Nonqualified options issued to consultants under the Plangenerally vest over the period of service with the Company.  At December 31, 2003, a total of14,375,000 shares of Common Stock were approved for issuance under the Plan.

 

F-12

----

 

Information regarding options under the Planis summarized below (in thousands, except per share data):

 
|                                     |   | **2001**   |   | **2002**                               |   | **2003**   |   |
|------------------------------------------|--------|------------|--------|----------------------------------------|--------|------------|--------|
|                                     |   | **Shares** |   | **Weighted  Average  Exercise  Price** |   | **Shares** |   | **Weighted  Average  Exercise  Price** |   | **Shares** |   | **Weighted  Average  Exercise  Price** |   |
|                                     |   |       |   |                                   |   |       |   |   |   |   |   |   |   |
| Options outstanding at January 1,   |   | 8,235      |   | $                                      | 6.74   |       | 6,659  |   | $ | 8.54 |   | 7,061 |   | $ | 7.82 |   |
| Granted                                  |   | 1,087      |   | 11.75                                  |   | 1,779      |   | 3.30 |   | 1,596 |   | 5.15 |   |
| Exercised                                |   | (1,209     | )      | 1.74                                   |   | (632       | )      | 1.31 |   | (154 | ) | 2.39 |   |
| Cancelled                                |   | (1,454     | )      | 6.38                                   |   | (745       | )      | 9.07 |   | (146 | ) | 9.14 |   |
|                                     |   |       |   |                                   |   |       |   |   |   |   |   |   |   |
| Options outstanding at December 31, |   | 6,659      |   | $                                      | 8.54   |       | 7,061  |   | $ | 7.82 |   | 8,357 |   | $ | 7.33 |   |
|                                     |   |       |   |                                   |   |       |   |   |   |   |   |   |   |
| Options exercisable at December 31, |   | 3,274      |   | $                                      | 4.73   |       | 3,330  |   | $ | 6.70 |   | 4,632 |   | $ | 6.82 |   |

 

The weighted average per share fair value ofoptions granted was $10.05 in 2001, $2.75 in 2002, and $3.70 in 2003. AtDecember 31, 2003, there were 10,090,370 shares of Common Stock reservedfor the exercise of stock options and for issuances under the ESPP, including1,487,759 options available for future grant under the Plan.

 

The following table presents weighted averageexercise price and weighted average remaining contractual life informationabout significant option groups outstanding at December 31, 2003 (optionamounts in thousands):

 
| **Exercise Price** |   | **Options  Outstanding** |   | **Weighted-  Average  Remaining  Contractual  Life (Years)** |   | **Weighted-  Average  Exercise  Price** |   | **Options  Exercisable** |   | **Weighted-  Average  Exercise  Price** |   |
|--------------------|--------|--------------------------|--------|--------------------------------------------------------------|--------|-----------------------------------------|--------|--------------------------|--------|-----------------------------------------|--------|
|               |   |                     |   |                                                         |   |                                    |   |                     |   |                                    |   |
| $0.13-$1.60        |   | 1,150                    |   | 2.6                                                          |   | $                                       | 0.54   |                     | 968    |                                    | $      | 0.59 |   |
| $1.61-$6.38        |   | 4,699                    |   | 6.9                                                          |   | $                                       | 4.41   |                     | 2,547  |                                    | $      | 4.64 |   |
| $6.39-$16.25       |   | 1,562                    |   | 7.7                                                          |   | $                                       | 9.66   |                     | 672    |                                    | $      | 11.40 |   |
| $16.26-$42.00      |   | 947                      |   | 6.9                                                          |   | $                                       | 26.23  |                     | 445    |                                    | $      | 25.94 |   |
|               |   |                     |   |                                                         |   |                                    |   |                     |   |                                    |   |
|               |   | 8,357                    |   |                                                         |   |                                    |   | 4,632                    |   |                                    |   |

 

On October 3, 2001, an executive officerof the Company exercised an option to purchase 200,000 shares of Common Stockat an exercise price of $0.27 per share. On November 30, 2001, this optionexercise was rescinded, and accordingly, the officer returned to the Companythe 200,000 shares of Common Stock acquired upon the exercise of the option,the Company returned to the officer the option exercise price and the option topurchase 200,000 shares of Common Stock was restored. During 2001, the Companyrecognized approximately $256,000 in compensation expense related to thistransaction.

 

**8.****             Income Taxes**

 

The Company has reported no income taxprovision or benefit in 2001, 2002 or 2003 due to the significant net operatinglosses in these years as well as limitations on the recognition of deferred taxassets for financial reporting purposes.

 

F-13

----

 

A reconciliation of the Company’s income taxprovision to the statutory federal provision is as follows:

 
|                                 |   | **Year Ended  December 31,** |    |
|--------------------------------------|--------|-----------------------------------|---------|
|                                 |   | **2001**                          |    | **2002** |   | **2003** |   |
|                                 |   | **(in  thousands)**               |    |
|                                 |   |                              |    |   |   |   |   |
| Statutory federal income tax benefit |   | $                                 | (18,565 | ) | $ | (15,614 | ) | $ | (18,971 | ) |
| Increase in valuation allowance      |   | 18,565                            |    | 15,570 |   | 18,921 |   |
| Other                                |   | —                            |    | 44 |   | 50 |   |
|                                 |   |                              |    |   |   |   |   |
| Income tax provision                 |   | $                                 | —  |   | $ | — |   | $ | — |   |

 

Significant components of the Company’sdeferred tax assets are as follows:

 
|                                 |   | **December 31,** |   |
|--------------------------------------|--------|-----------------------|--------|
|                                 |   | **2002**              |   | **2003** |   |
|                                 |   | **(in  thousands)**   |   |
| Deferred tax assets:                 |   |                  |   |   |   |
| Net operating losses                 |   | $                     | 51,943 |   | $ | 69,531 |   |
| Property and equipment               |   | 2,651                 |   | 9,793 |   |
| Accrued expenses                     |   | 1,813                 |   | 1,066 |   |
| Research and development tax credits |   | 7,640                 |   | 5,953 |   |
| Other                                |   | 74                    |   | 113 |   |
|                                 |   |                  |   |   |   |
| Total deferred tax assets            |   | 64,121                |   | 86,456 |   |
| Valuation allowance                  |   | (64,121               | )      | (86,456 | ) |
|                                 |   |                  |   |   |   |
|                                 |   | $                     | — |   | $ | — |   |

 

At December 31, 2002 and 2003, theCompany has provided a valuation allowance for the value of the deferred taxassets.  The valuation allowanceincreased by $21.6 million in 2002 and $22.3 million in 2003 dueprimarily to the increase in net operating losses and tax credit carryforwards.The Company has federal net operating loss carryforwards in the amount ofapproximately $170.3 million, which expire through 2023. Due to anticipatedoperating losses in the future, the Company believes that it is more likelythan not that it will not realize the net deferred tax assets in the future andhas provided an appropriate valuation allowance.

 

Any subsequent recognized tax benefitsrelating to a reduction in the valuation allowance for deferred tax assets asof December 31, 2003 would be allocated as follows (in thousands):

 
| Reported in the statement of operations |   | $     | 81,688 |   |
|-----------------------------------------|--------|-------|--------|--------|
| Reported in additional paid-in capital  |   | 4,768 |   |
|                                    |   | $     | 86,456 |   |

 

**9.****             CorporateCollaborations**

 

***Sanofi-Synthélabo Agreement***

 

In May 1997, the Company entered into alicense agreement with Synthélabo S.A., which subsequently merged with SanofiS.A. forming Sanofi-Synthélabo S.A. (“Sanofi-Synthélabo”), for the developmentand commercialization of the Company’s Plenaxis products. Upon initiation, theCompany received a one-time, non-refundable payment of $4.7 million. Thisinitiation fee was recognized into revenue through 2001, which was the periodduring which the Company was obligated under the agreement to participate on acontinuing and substantial basis in the research, development and manufacturingprocess development activities.

 

In October 2001, Sanofi-Synthélabonotified the Company that it was terminating the Sanofi-Synthélabo agreementeffective December 31, 2001. As a result of the termination of theSanofi-Synthélabo agreement, all licenses for Plenaxis granted toSanofi-Synthélabo under the agreement,

 

F-14

----

 

and all rights of Sanofi-Synthélabo in the Plenaxis program, haveterminated.  In addition, in connectionwith the termination of the Sanofi-Synthélabo agreement, the Company receivedin 2002 a final reimbursement payment from Sanofi-Synthélabo of approximately$1.0 million for collaboration expenses incurred by the Company.

 

The Company recognized revenues in 2001, 2002and 2003 of approximately $2.1 million, $1.0 million and zero,respectively, under the Sanofi-Synthélabo agreement.

 

***Amgen Agreement***

 

In March 1999, the Company entered intoa binding agreement in principle (the “License Agreement”) with Amgen Inc.(“Amgen”) for the development and commercialization of the Company’s Plenaxisproducts. In accordance with the License Agreement, the Company received fromAmgen a $10.0 million, one-time, non-refundable payment upon initiation.This initiation fee was recognized into revenue through 2001, which was theperiod during which the Company was obligated under the License Agreement toparticipate on a continuing and substantial basis in the research, developmentand manufacturing process development activities. In addition to the signingpayment, Amgen paid the first $175.0 million of all authorized costs andexpenses associated with the development and commercialization of Plenaxisproducts, including the cost of materials, in the United States.  Following Amgen’s completion of this fundingduring the third quarter of 2000, the Company became responsible for one-halfof all subsequent United States research and development costs for Plenaxisproducts through the launch period. Additionally, the Company was to reimburseAmgen for one-half of the costs associated with establishing a sales and marketinginfrastructure for Plenaxis products in the United States.

 

In September 2001, Amgen notified theCompany that it was terminating the License Agreement effectiveDecember 17, 2001. As a result of the termination of the LicenseAgreement, all licenses for Plenaxis granted to Amgen under the LicenseAgreement, and all rights of Amgen in the Plenaxis program, haveterminated.  At that time, the Companyaccrued an estimate of its potential liability of approximately $29.1 millionunder the License Agreement.

 

In 2002, the Company assumed all of Amgen’srights and obligations under the Development and Supply Agreement with UCB S.A.(“UCB”) and finalized a termination agreement with respect to the terminationby Amgen of the License Agreement (the “Termination Agreement”).  Under the terms of the TerminationAgreement, the Company paid to Amgen $13.0 million in full and completesatisfaction of all amounts payable under the License Agreement and inconsideration of the transfer from Amgen to the Company of title to, andpossession of, any existing materials inventory.  As a result, the Company recognized a gain of $16.0 millionduring the third quarter of 2002.

 

The Company recognized revenues in 2001, 2002and 2003 of approximately $7.8 million, zero and zero, respectively, underthe Amgen agreement.

 

**10.****          Building and RelatedMortgage Financing**

 

In July 2000, in connection with thepurchase of the Company’s corporate headquarters and research facility inWaltham, Massachusetts for approximately $41.3 million, the Company’swholly owned real estate subsidiary entered into an acquisition andconstruction loan agreement providing for up to $33.0 million in financing forthe acquisition of, and improvements to, the facility. Advances bear interestat a rate equal to the 30-day LIBOR plus 2.0% (3.12% at December 31,2003).  Principal and interest arepayable monthly in arrears.  InJuly 2003, the Company exercised the first of two one-year extensionoptions, extending the maturity date of the loan until July 30, 2004.  As a result of this extension, in 2003 theCompany started making monthly principal payments on the loan of approximately$62,000, in addition to interest payments. Principal payments are being amortized over a 25-year term.  Principal is due and payable in full onJuly 30, 2004, subject to a one-year extension option, exercisable at theCompany’s option. Since the Company has the ability and intent to exercise theextension option to extend the maturity date until July 30, 2005, the loanhas been classified as long-term debt in the accompanying consolidated balancesheet. The loan is secured by the facility, together with all fixtures,equipment, improvements and other related items, and by all rents, income orprofits received by the Company’s real estate subsidiary and is unconditionallyguaranteed by the Company.  The Company

 

F-15

----

 

occupied this facility during May 2001 and may sublease a portion ofthe facility.

 

The Company has entered into an interest ratecap agreement (the “Interest Rate Cap Agreement”) in order to reduce thepotential impact of interest rate increases on future income. AtDecember 31, 2003, the notional amount and fair market value under theInterest Rate Cap Agreement were $32.6 million and zero, respectively.  Interest paid under the loan agreementapproximated interest expense in 2001, 2002 and 2003.

 

During September 2001, the Companyterminated the lease for, and all future obligations with respect to, itsCambridge, Massachusetts facility and recorded a gain.  In October 2001, the Company assignedto a third party the Company’s right, title and interest in and to theCompany’s lease for its New Jersey facility and the third party has assumed allobligations thereunder.

 

**11.****          Commitments**

 

***Indiana University Foundation (“IUF”) LicenseAgreement***

 

The Company has a license agreement with IUF,which was assigned by IUF to IUF’s Advanced Research and Technology Institute,Inc., with respect to rights to Plenaxis and certain related technology. Inexchange for the license, the Company agreed to pay (a) fees of$0.3 million, (b) up to an additional $4.3 million uponachievement of specific milestones and (c) a royalty percentage of netsales of licensed products, if any. The Company made milestone payments of $1.0million in 2003 under the IUF agreement. As of December 31, 2003, $2.5 million in milestones remainedsubject to future achievement.

 

***BaxterPharmaceutical Solutions LLC (“Baxter”)***

 

On December 4, 2002, the Company signeda five-year commercial supply agreement (the “Baxter Agreement”) with Baxterrelated to the fill and finish steps of the manufacturing process forPlenaxis.  Under the terms of the BaxterAgreement, the Company is required to purchase a minimum of $375,000 of productfrom Baxter during 2004.  InJanuary 2005, the first anniversary of the first commercial shipment ofPlenaxis, the minimum annual purchase commitment will increase to$650,000.  The Company made payments ofapproximately $1.8 million in 2003 under the Baxter Agreement.

 

***CambrexCharles City, Inc. (“Cambrex”)***

 

In July 1998, the Company entered into aseven-year supply agreement with Cambrex (formerly SalsburyChemicals, Inc.).  Under thisagreement, Cambrex has agreed to manufacture for us the commercial depot formulationsof Plenaxis. The Company contributed approximately $6.0 million towardCambrex’s construction and outfitting of a dedicated manufacturingfacility.  The Company retains allrights in manufacturing technology developed in connection with thisagreement.  During 2003, the Company paidCambrex approximately $632,000 toward minimum purchase commitments and facilitymaintenance and its minimum purchase commitment for 2004 is $792,000.

 

F-16

----

 

**ExhibitIndex**

 
| **Exhibit No.** |   | **Exhibit**                                                                                                                                                                                                                                                                                                                                                                            |
|-----------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                                                                                                                                                                                                                                                                                   |
|  3.1       |   | Amended and Restated Certificate of Incorporation (2)                                                                                                                                                                                                                                                                                                                                  |
|  3.2       |   | Third Amended and Restated By-Laws (11)                                                                                                                                                                                                                                                                                                                                                |
|  4.1       |   | Specimen certificate representing shares of common stock (1)                                                                                                                                                                                                                                                                                                                           |
|  4.2       |   | Specimen certificate representing shares of common stock (including  Rights Agreement Legend) (5)                                                                                                                                                                                                                                                                                      |
|  4.3       |   | Rights Agreement between PRAECIS and American Stock Transfer &  Trust Company, as Rights Agent (6)                                                                                                                                                                                                                                                                                 |
|  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) (6)                                                                                                                                                                                                                 |
|  4.5       |   | Form of Rights Certificate (attached as Exhibit B to the Rights  Agreement filed as Exhibit 4.3 hereto) (6)                                                                                                                                                                                                                                                                       |
| 10.1*           |   | Second Amended and Restated 1995 Stock Plan (3)                                                                                                                                                                                                                                                                                                                                        |
| 10.2*           |   | Amendment No. 1 to the Second Amended and Restated 1995 Stock Plan  (8)                                                                                                                                                                                                                                                                                                                |
| 10.3*           |   | Executive Management Bonus Plan, as amended and restated as of  September 12, 2002 (10)                                                                                                                                                                                                                                                                                           |
| 10.4*           |   | Amended and Restated Employee Stock Purchase Plan (12)                                                                                                                                                                                                                                                                                                                                 |
| 10.5*           |   | Management Incentive Program (11)                                                                                                                                                                                                                                                                                                                                                      |
| 10.6*           |   | Amended and Restated Stockholders Agreement dated as of April 30,  1998 by and among PRAECIS and certain stockholders referred to therein, as  amended by Amendment No. 1 dated as of May 14, 1998, Amendment No. 2 dated as  of July 21, 1998 and Amendment No. 3 dated as of January 31, 2000  (1)                                                                    |
| 10.7*           |   | Amendment No. 4 dated as of September 1, 2000 to Amended and  Restated Stockholders Agreement dated as of April 30, 1998 by and among  PRAECIS and certain stockholders referred to therein, as amended (4)                                                                                                                                                                  |
| 10.8*           |   | Letter Agreement dated as of May 9, 2002 between PRAECIS and William K.  Heiden (9)                                                                                                                                                                                                                                                                                                    |
| 10.9*           |   | Promissory Note dated May 16, 2002 executed by William K. Heiden in  favor of PRAECIS (9)                                                                                                                                                                                                                                                                                              |
| 10.10*          |   | Letter Agreement dated as of May 9, 2002 between PRAECIS and Malcolm  L. Gefter, Ph.D. (9)                                                                                                                                                                                                                                                                                             |
| 10.11*          |   | Letter Agreement dated as of May 9, 2002 between PRAECIS and Kevin F.  McLaughlin (9)                                                                                                                                                                                                                                                                                                  |
| 10.12*          |   | Letter Agreement dated as of May 9, 2002 between PRAECIS and Marc B.  Garnick, M.D. (9)                                                                                                                                                                                                                                                                                                |
| 10.13†     |   | License Agreement effective as of October 17, 1996 by and  between PRAECIS and Indiana University Foundation, as amended as of  June 3, 1998 (1)                                                                                                                                                                                                                             |
| 10.14†     |   | Supply Agreement dated as of July 23, 1998 by and between  PRAECIS and Salsbury Chemicals, Inc. (1)                                                                                                                                                                                                                                                                               |
| 10.15†     |   | Development and Supply Agreement effective as of June 21, 2000  by and between UCB S.A. and Amgen Inc., as amended by Amendment No. 1  thereto dated as of March 26, 2002 (together with the Assignment of  Development and Supply Agreement entered into January 18, 2002 and  effective as of December 17, 2001 by and between Amgen Inc. and PRAECIS)  (7) |
| 10.16†     |   | Commercial Supply Agreement dated December 4, 2002 and effective  as of June 1, 2002 by and between Baxter Pharmaceutical Solutions LLC  and PRAECIS (11)                                                                                                                                                                                                                    |
| 10.17           |   | Termination Agreement dated as of August 19, 2002 by and between  PRAECIS and Amgen Inc. (10)                                                                                                                                                                                                                                                                                     |
| 10.18           |   | Contract of Sale dated as of January 14, 2000 by and between  Best Property Fund, L.P. and PRAECIS, as amended as of February 7, 2000  (1)                                                                                                                                                                                                                                   |
| 10.19           |   | Acquisition and Construction Loan Agreement dated as of July 11,  2000 between 830 Winter Street LLC and Anglo Irish Bank Corporation plc  and related Loan and Security Agreements (3)                                                                                                                                                                                      |
| 10.20           |   | Guaranty of Costs and Completion dated as of July 11, 2000 (3)                                                                                                                                                                                                                                                                                                                    |
| 10.21           |   | Guaranty of Non-Recourse Exceptions dated as of July 11, 2000  (3)                                                                                                                                                                                                                                                                                                                |
| 10.22           |   | Environmental Compliance and Indemnity Agreement dated as of  July 11, 2000 executed by 830 Winter Street LLC and PRAECIS (3)                                                                                                                                                                                                                                                     |
| 10.23           |   | Lease Agreement dated as of July 11, 2000 between 830 Winter  Street LLC, as landlord, and PRAECIS, as tenant (3)                                                                                                                                                                                                                                                                 |
| 21.1            |   | List of Subsidiaries of PRAECIS (13)                                                                                                                                                                                                                                                                                                                                                   |
| 23.1            |   | Consent of Ernst & Young LLP, Independent Auditors                                                                                                                                                                                                                                                                                                                                 |
| 24.1            |   | Power of Attorney (13)                                                                                                                                                                                                                                                                                                                                                                 |

 

43

----

 
| 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 |

 

----

*              Represents amanagement contract or compensatory plan or arrangement.

 

(1)           Incorporated byreference to Registration Statement on Form S-1 (RegistrationNo. 333-96351) initially filed with the Securities and Exchange Commissionon February 8, 2000 and declared effective on April 26, 2000.

 

(2)           Incorporated byreference to Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2000 filed with the Securities and Exchange Commission onJune 7, 2000.

 

(3)           Incorporated byreference to Quarterly Report on Form 10-Q for the quarter endedJune 30, 2000 filed with the Securities and Exchange Commission onAugust 14, 2000.

 

(4)           Incorporated byreference to Quarterly Report on Form 10-Q for the quarter endedSeptember 30, 2000 filed with the Securities and Exchange Commission onNovember 13, 2000.

 

(5)           Incorporated byreference to Registration Statement on Form S-1 (RegistrationNo. 333-54342) initially filed with the Securities and Exchange Commissionon January 26, 2001 and declared effective on February 14, 2001.

 

(6)           Incorporated byreference to Registration Statement on Form 8-A filed with the Securitiesand Exchange Commission on January 26, 2001.

 

(7)           Incorporated byreference to Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2002 filed with the Securities and Exchange Commission on May 8,2002.

 

(8)           Incorporated byreference to Registration Statement on Form S-8 (Registration No. 333-90734)filed with the Securities and Exchange Commission on June 18, 2002.

 

(9)           Incorporated byreference to Quarterly Report on Form 10-Q for the quarter endedJune 30, 2002 filed with the Securities and Exchange Commission onAugust 12, 2002.

 

(10)         Incorporated by referenceto Quarterly Report on Form 10-Q for the quarter ended September 30,2002 filed with the Securities and Exchange Commission on November 13,2002.

 

(11)         Incorporated by referenceto Annual Report on Form 10-K for the year ended December 31, 2002 filedwith the Securities and Exchange Commission on March 19, 2003.

 

(12)         Incorporated by referenceto Registration Statement on Form S-8 (Registration No. 333-106012) filed withthe Securities and Exchange Commission on June 11, 2003.

 

(13)         Incorporated by referenceto Annual Report on Form 10-K for the year ended December 31, 2003 filedwith the Securities and Exchange Commission on March 15, 2004.

 

 †             Confidential treatment has been grantedfor certain portions of this exhibit. Omitted portions have been filedseparately with the Securities and Exchange Commission.

 

44

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