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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 Form 10-K
 (Mark One)
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2007
 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 0-31261
 AtheroGenics, Inc.
  Georgia(State or other jurisdiction of 
incorporation or organization)
    
    58-2108232(I.R.S. Employer Identification Number)8995 Westside Parkway,
    
    (678) 336-2500Alpharetta, Georgia 30004
    
    (Registrants telephone number, including area code)(Address of principal executive offices, including zip code)
  Common Stock, No Par Value
Common Stock Purchase Rights
  None
 
 o þ
 o þ
 þ o
 o
  Large accelerated filer  o
    
    Accelerated filer  þ
    
    Non-accelerated filer  o
(Do not check if a smaller reporting company)
    
    Smaller reporting company  o
 o þ
   Documents Incorporated by Reference:
 Portions of the proxy statement filed pursuant to Regulation 14A under the Securities Exchange
Act of 1934 with respect to the 2008 Annual Meeting of Shareholders are incorporated herein by
reference in Part II, Item 5 and Part III.




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##### 



ATHEROGENICS, INC
FORM 10-K
 INDEX
 PagePART IItem 1.
    
    Business
    
    
    1Item 1A.
    
    Risk Factors
    
    
    12Item 1B.
    
    Unresolved SEC Staff Comments
    
    
    23Item 2.
    
    Properties
    
    
    23Item 3.
    
    Legal Proceedings
    
    
    23Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    23PART IIItem 5.
    
    Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of
Equity Securities
    
    
    24Item 6.
    
    Selected Financial Data
    
    
    25Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    26Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    33Item 8.
    
    Financial Statements and Supplementary Data
    
    
    34Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    53Item  9A.
    
    Controls and Procedures
    
    
    53Item 9B.
    
    Other Information
    
    
    53PART IIIItem 10.
    
    Directors, Executive Officers and Corporate Governance
    
    
    53Item 11.
    
    Executive Compensation
    
    
    54Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
    
    
    54Item 13.
    
    Certain Relationships and Related Transactions, and Director Independence
    
    
    54Item 14.
    
    Principal Accountant Fees and Services
    
    
    54PART IVItem 15.
    
    Exhibits and Financial Statement Schedules
    
    
    54Signatures
    
    
    
    
    58EX-10.23 EMPLOYMENT AGREEMENT/RUSSELL M. MEDFORDEX-10.24 EMPLOYMENT AGREEMENT/MARK P. COLONNESEEX-10.25 EMPLOYMENT AGREEMENT/W. CHARLES MONTGOMERYEX-10.26 EMPLOYMENT AGREEMENT/JOSEPH M. GAYNOR, JR.EX-23.01 CONSENT OF ERNST & YOUNG LLPEX-24.01 POWERS OF ATTORNEYEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32 SECTION 906 CERTIFICATIONS OF THE CEO AND CFO
  i




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PART I
 
 Item 1. Business
 Overview
      1




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® ®
 Business Strategy
  
    
    Continue advancing the development program for AGI-1067.We intend to develop AGI-1067 for the treatment of patients with type 2 diabetes and
coronary heart disease with the goal of filing an NDA with the FDA.
    
    Expand our clinical product portfolio.We intend to acquire rights to other product
candidates and technologies that complement our existing product candidate line or that
enable us to capitalize on our scientific and clinical development expertise. We plan to
expand our product candidate portfolio by in-licensing or acquiring product candidates,
technologies or companies to help maximize the commercial opportunity and mitigate the risks
inherent in drug discovery and development. Our long-term strategy also includes developing
product candidates discovered by company scientists.
    
    Commercialize our products.We plan to collaborate with large pharmaceutical companies
to draw on their commercialization expertise in broad therapeutic categories and to maximize
the commercial potential of our product candidates. We also intend to develop an independent
sales force to help insure broader distribution of our products or to independently sell our
products that target narrow therapeutic markets and to build a sustainable business to
support our evolution into a commercial entity.
   2




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Inflammation, Oxidative Stress and Disease
   Type 2 Diabetes
    Atherosclerosis
   3




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V-Protectant® Technology
 ® ® ® ®
 Products
  V-Protectant®Therapeutic Program
    
    Disease/Indication
    
    Development StatusAGI-1067
    
    Type 2 diabetes
    
    Phase III clinical trialAGI-1067
    
    Atherosclerosis
    
    Phase III clinical trial completedAGI-1096
    
    Transplant rejection
    
    Phase I clinical trial completed
 AGI-1067
 ®
  4




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AGI-1096
 ® ®
 5




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Collaborations
 AstraZeneca Agreement
  Astellas Pharma Inc. (Formerly Known As Fujisawa Pharmaceutical Co., Ltd ) Agreement
  Discovery Research Program
  
    
    To discover and develop v-protectants® with enhanced potency and improved
therapeutic properties.
    
    To identify and develop new drug candidates based on promising therapeutic targets
identified by our or others drug discovery programs.
 Patents and Intellectual Property
  V-Protectant ® Technology
 ®
   6




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®
 AGI-1067 Patent Portfolio
  AGI-1096 Patent Portfolio
  Other V-Protectant ® Compounds
 ® ®
 MEKK Technology
    7




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Trademarks
  Manufacturing
  ®
 Sales and Marketing
  Competition
   8




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
    
    First, our scientists and their collaborators have pioneered the basic
discoveries and research methodologies linking oxidant signals to cell inflammation.
These discoveries and research methodologies form the foundation for our proprietary
drug discovery programs relating to chronic inflammation.
    
    Second, our scientific expertise, coupled with our expertise in clinical drug
development, has enabled us to be the first company to conduct clinical trials of an
orally-administered, small molecule v-protectant®.
    
    Third, we believe our scientific, development and licensing expertise strongly
positions us to acquire promising technologies and products discovered outside
AtheroGenics.
 Governmental Regulation
    
    
    Phase I clinical trials explore safety, blood levels, metabolism and the
potential for interaction with other drugs. Phase I typically proceeds from healthy
volunteers to patients with the target disease. The study population during Phase I can
include up to approximately 200 total subjects.
    
    Phase II clinical trials further support safety, and they establish the dose(s)
or strength(s) of the drug to be used in the more extensive clinical investigations to
be conducted during Phase III. These Phase II clinical trials may include hundreds of
patients who have the target disease and who are receiving a range of background
medications. In addition, Phase II clinical trials often verify the mechanisms of
action proposed pre-clinically.
    
    Phase III clinical trials usually include at least two adequate and well
controlled studies in the target population. For most chronic diseases, drug companies
study a few thousand patients to assure a broadly applicable assessment of safety and
efficacyAt the successful conclusion of Phase III, drug companies may submit a product license
application, called an NDA in the United States. The FDA, or non-U.S. regulatory
authorities, review the application for completeness, accuracy and adherence to
regulations. These authorities may use consultants to assist in the evaluation of the
data, and may convene an expert committee to advise on the safety, effectiveness and
usefulness of the proposed new product candidate prior to final regulatory judgment.
The final step to registration is development and approval of the prescribing
information that is incorporated in labeling, usually referred to as the package insert,
that accompanies the marketed drug. This labeling establishes conditions for the safe
and effective use of the drug and the content of drug company promotion and advertising
to physicians who may use the new drug. Approval of the NDA may be conditioned on the
conduct of post-approval studies, or Phase IV studies.
    
    Phase IV clinical trials provide additional information to support marketing of
the drug for its approved indication. Phase IV clinical trials may generate data to
support promotion of the new drug in comparison with other approved drugs and to support
healthcare economics claims. In addition, every pharmaceutical company is responsible
for post-marketing surveillance for safety in the marketplace.
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10




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
    
    Good Manufacturing Practices (GMP), which govern the formulation, manufacture,
testing, labeling, packaging, release and monitoring of a drug throughout its life
cycle;
    
    Good Laboratory Practices, which govern the use of a drug in animal studies to
support establishment of safety or the disposition and metabolism of the administered
drug, and handling of human or other biological samples for drug assays; and
    
    Good Clinical Practices, which govern the exposure of human subjects under our
investigational protocols. Good Clinical Practices set standards for the constitution
and activities of institutional review boards and clinical investigators that are
charged with assuring that the appropriate person gives informed consent prior to study
participation, protecting patients whether they receive an experimental drug, an
approved drug or a placebo, controlling and accounting for investigational drug
products, and producing timely and accurate study records.
     Research and Development
  11




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Employees
  Available Information
 www.atherogenics.com
 
 Item 1A Risk Factors
 Forward-Looking Statements and Risks Related to Our Company and Business
 The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements made by or on behalf of AtheroGenics. AtheroGenics and its
representatives may from time to time make written or oral forward-looking statements, including
statements contained in this report and our other filings with the Securities and Exchange
Commission and in our reports to our shareholders. Generally, the words, believe, expect,
intend, estimate, anticipate, will and similar expressions identify forward-looking
statements. All statements which address operating performance, events or developments that we
expect or anticipate will occur in the future, including projections of our future results of
operations or of our financial condition, research, development and commercialization of our
product candidates, expected timing regarding the completion of our clinical trials and the related
release of results and anticipated trends in our business, are forward-looking statements within
the meaning of the Reform Act. The forward-looking statements are and will be based on our then
current views and assumptions regarding future events and operating performance, and speak only as
of their dates. We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
 The following are some of the factors that could affect our financial performance or could
cause actual results to differ materially from those expressed or implied in our forward-looking
statements:
 Risks Related to Our Financial Results, Liquidity and Need for Additional Financing
 We have $30.5 million of convertible notes maturing in September 2008 and will require
additional funds for operations in 2009. If we are unable to raise additional capital, enter
into a collaboration agreement for AGI-1067 or restructure these notes, we may seek relief under
the Bankruptcy Code at some point in the future.
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We may not maintain our qualification for continued listing on the Nasdaq Global Market or
another national securities exchange, which would allow the holders of our outstanding
convertible notes to require us to redeem the notes at face value, and effectively require us to
seek relief under the Bankruptcy Code.
     We have a history of operating losses, and we may not generate revenue or achieve profitability
in the future.
  Risks Related to Development and Commercialization of Product Candidates and Dependence on Third
Parties
 We depend heavily on the success of our most advanced internal product candidate, AGI-1067 for
diabetes, which is in clinical development. If we are unable to commercialize this product
candidate, or experience significant delays in doing so, our business will be materially harmed.
  13




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
    
    successful completion of clinical trials;
    
    receipt of marketing approvals from the FDA and similar foreign regulatory authorities;
    
    successfully preparing for, and sustaining, commercial manufacturing and distribution
arrangements with third party manufacturers, including our third party collaborators;
    
    commencing commercial sales of the product, in collaboration with third parties; and
    
    acceptance of the product in the medical community and with third party payors.
    If we do not successfully develop other product candidates, we will have limited ability to
generate revenue.
  If we fail to demonstrate adequately the safety and efficacy of a product candidate, we will not
be able to commercialize that product candidate.
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We may not be successful in establishing collaborations for product candidates we may seek to
commercialize, which could adversely affect our ability to discover, develop and commercialize
products.
   We expect to depend on collaborations with third parties to develop and commercialize some of
our product candidates. If a potential collaborator were to change its strategy or the focus of
its development and commercialization efforts with respect to our relationship, the success of
our product candidates and our operations could be adversely affected.
  
    
    a collaborator may develop and commercialize, either alone or with others, products and
services that are similar to or competitive with the products that are the subject of the
collaboration with us;
    
    a collaborator may change the focus of its development and commercialization efforts.
Pharmaceutical and biotechnology companies historically have re-evaluated their priorities
from time to time, including following mergers and consolidations, which have been common in
recent years in these industries;
    
    the ability of our product candidates and products to reach their potential could be
limited if our collaborators decrease or fail to increase spending relating to these
products;
    
    a collaborator may terminate a collaboration;
    
    a collaborator may fail to achieve or remain in regulatory compliance; and
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
    
    a collaborator may fail to maintain or defend our intellectual property rights.
  Third parties failure to synthesize and manufacture our product candidates to our
specifications could delay our clinical trials or hinder our commercialization prospects.
  
    
    A finding that a third party did not comply with applicable governmental regulations.
Manufacturers of pharmaceutical products are subject to continual review and periodic
inspections by regulatory agencies. Our present or future manufacturers may not be able to
comply with the FDAs current Good Manufacturing Practices regulations and other FDA
regulatory requirements or similar regulatory requirements outside the United States.
Failure of one of our third party manufacturers to comply with applicable regulatory
requirements, whether or not related to our product candidates, could result in sanctions
being imposed on us, including fines, injunctions, civil penalties, failure of regulatory
authorities to grant marketing approval of our product candidates, delays, suspension or
withdrawal of approvals, license revocation, seizures or recalls of product candidates or
products, operating restrictions and criminal prosecutions, any of which could significantly
and adversely affect supplies of our product candidates and products.
    
    A failure to synthesize and manufacture our product candidates in accordance with our
product specifications.We need to maintain a very low maximal amount of one of the
starting materials used in the manufacture of AGI-1067. The starting material, probucol,
was prescribed by physicians as a cholesterol-lowering agent until its manufacturer withdrew
the drug from the market for efficacy reasons. A failure by a third party manufacturer to
maintain an acceptable level of probucol in the manufacture of AGI-1067 may result in
chronic dosing of probucol, which is associated with the occurrence of a rare side effect.
    
    A failure to deliver product candidates in sufficient quantities or in a timely manner.
Any failure by a third party manufacturer to supply our requirements for clinical trial
materials or commercial product, or to supply these materials in a timely manner, could
jeopardize the initiation or completion of clinical trials or could have a material adverse
effect on our ability to commercialize any approved products and thereby generate revenue.
    
    Termination or nonrenewal of an agreement by a third party at a time that is costly or
inconvenient to us.Our product candidates and any products that we successfully develop
may compete with product candidates and products of others for access to the third partys
manufacturing facilities. In addition, because we do not have any internal manufacturing
capabilities, the termination of a supply or manufacturing agreement could severely impair
our ability to manufacture our products and could have a material adverse effect on our
financial condition and operating results.
 The commercial success of any products that we may develop will depend on the degree of market
acceptance by physicians, patients, healthcare payors and others in the medical community.
  
    
    the prevalence and severity of any side effects;
 16




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
    
    the efficacy and potential advantages over alternative treatments;
    
    the ability to offer our product candidates for sale at competitive prices;
    
    relative convenience and ease of administration;
    
    the willingness of the target patient population to try new therapies and of physicians
to prescribe these therapies;
    
    the strength of marketing and distribution support; and
    
    sufficient third party coverage or reimbursement.
 If our competitors develop and market products that are more effective, have fewer side effects
or are less expensive than our current or future product candidates, we may have limited
commercial opportunities.
  We have not previously sold, marketed or distributed any products and may not be able to
successfully commercialize AGI-1067, or other drug candidates.
  If we are unable to obtain adequate coverage and reimbursement from third party payors for any
products that we may develop or acceptable prices for those products, our revenues and prospects
for profitability will suffer.
  17




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If plaintiffs bring product liability lawsuits against us, we may incur substantial financial
loss or may be unable to obtain future product liability insurance at reasonable prices, if at
all, either of which could diminish our ability to commercialize our future products.
  
    
    decreased demand for any product candidates or products that we may develop;
    
    injury to our reputation;
    
    withdrawal of clinical trial participants;
    
    costs to defend the related litigation;
    
    substantial monetary awards to trial participants or patients;
    
    loss of revenue; and
    
    the inability to commercialize any products that we may develop.
  Risks Related to Our Intellectual Property
 Our failure to protect adequately or enforce our intellectual property rights or secure rights
to third party patents could materially adversely affect our proprietary position in the
marketplace or prevent the commercialization of our products.
  18




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If we infringe or are alleged to infringe intellectual property rights of third parties, it will
adversely affect our business.
    19




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If we fail to comply with our obligations in our intellectual property licenses with third
parties, we could lose license rights that are important to our business.
 ®
 If we are unable to protect the confidentiality of our proprietary information and know-how, the
value of our technology and products could be adversely affected.
  Risks Related to Regulatory Approval of Our Product Candidates
 Because we cannot predict whether or when we will obtain regulatory approval to commercialize
our product candidates, we cannot predict the timing of any future revenue from these product
candidates.
  We may experience delays in our clinical trials that could adversely affect our financial
results and our commercial prospects.
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Failure to obtain regulatory approval in international jurisdictions would prevent us from
marketing our products abroad.
  If we do not comply with applicable regulatory requirements in the manufacture and distribution
of our products, we may incur penalties that may inhibit our ability to commercialize our
products and adversely affect our revenue.
  Even if the FDA approves our product candidates, the approval will be limited to those
indications and conditions for which we are able to show clinical safety and efficacy.
  Risks Related to Our Operations
 Our failure to attract, retain and motivate skilled personnel and cultivate key academic
collaborations could materially adversely affect our research and development efforts.
  Our activities involve the use of hazardous materials, which subject us to regulation, related
costs and delays and potential liabilities.
  21




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Risks Related to our Common Stock and Indebtedness
 Our stock price has been and may continue to be volatile.
 ,
 
    
    results of clinical trials of our product candidates, particularly AGI-1067, and those
of our competitors;
    
    our possible delisting from the Nasdaq Global Market;
    
    developments concerning any research and development, manufacturing and marketing
collaborations, including whether and when we achieve milestones;
    
    announcements of technological innovations or new commercial products by our
competitors or us;
    
    developments concerning proprietary rights, including patents;
    
    the addition or termination of research programs or funding support;
    
    publicity regarding actual or potential results relating to medicinal products under
development by our competitors or us;
    
    regulatory developments in the United States and other countries;
    
    litigation;
    
    economic and other external factors, including disasters or crises;
    
    our possible filing under the Bankruptcy Code;
    
    period-to-period fluctuations in financial results; and
    
    analysts recommendations.
  Conversion of our convertible notes will dilute the ownership interest of existing shareholders
and could adversely affect the market price of our common stock.
  22




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Our shareholder rights plan and anti-takeover provisions in our charter documents may make an
acquisition of us, which may benefit our shareholders, more difficult.
  
    
    allow our shareholders the right to acquire common stock from us at discounted prices
in the event a person acquires 15% or more of our common stock or announces an attempt to
do so without our board of directors prior consent;
    
    authorize the issuance of blank check preferred stock by our board of directors
without shareholder approval, which would increase the number of outstanding shares and
could thwart a takeover attempt;
    
    limit who may call a special meeting of shareholders;
    
    require shareholder action without a meeting by unanimous written consent;
    
    establish advance notice requirements for nominations for election to the board of
directors or for proposing matters that can be acted upon at shareholder meetings;
    
    establish a staggered board of directors whose members can only be dismissed for cause;
    
    adopt the fair price requirements and rules regarding business combinations with
interested shareholders set forth in Article 11, Parts 2 and 3 of the Georgia Business
Corporation Code; and
    
    require approval by the holders of at least 75% of the outstanding common stock to amend any
of the foregoing provisions.
 
 Item 1B. Unresolved SEC Staff Comments
  
 Item 2. Properties
   
 Item 3. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders
  23




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PART II
 
 Item 5. Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of
Equity Securities
 Common Stock Information
  Common StockHigh
    
    LowYear ended December 31, 2007First quarter
    
    $
    12.46
    
    
    $
    2.80Second quarter
    
    
    3.86
    
    
    
    2.10Third quarter
    
    
    3.00
    
    
    
    1.12Fourth quarter
    
    
    1.86
    
    
    
    0.36Year ended December 31, 2006First quarter
    
    $
    20.67
    
    
    $
    15.00Second quarter
    
    
    16.18
    
    
    
    12.53Third quarter
    
    
    14.17
    
    
    
    12.23Fourth quarter
    
    
    15.21
    
    
    
    9.91
  Dividend Policy
  Securities Authorized for Issuance Under Equity Compensation Plans
  24




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Item 6. Selected Financial Data
  Year Ended December 31,2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003Statement of Operations Data:Revenues:License fees
    
    $
    27,083,333
    
    
    $
    22,916,667
    
    
    $
    
    
    
    $
    
    
    
    $
    Research and development
    
    
    25,193,494
    
    
    
    8,758,178
    
    
    
    
    
    
    
    
    
    
    
    Total revenues
    
    
    52,276,827
    
    
    
    31,674,845
    
    
    
    
    
    
    
    
    
    
    
    Operating expenses:Research and development
    
    
    72,696,066
    
    
    
    82,855,340
    
    
    
    71,278,945
    
    
    
    59,235,833
    
    
    
    46,660,960Marketing, general and administrative
    
    
    13,936,132
    
    
    
    13,373,112
    
    
    
    9,050,290
    
    
    
    6,607,506
    
    
    
    5,930,675Restructuring and impairment costs
    
    
    9,996,332
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total operating expenses
    
    
    96,628,530
    
    
    
    96,228,452
    
    
    
    80,329,235
    
    
    
    65,843,339
    
    
    
    52,591,635Operating loss
    
    
    (44,351,703
    )
    
    
    (64,553,607
    )
    
    
    (80,329,235
    )
    
    
    (65,843,339
    )
    
    
    (52,591,635
    )Interest and other income
    
    
    6,007,678
    
    
    
    9,175,817
    
    
    
    6,691,965
    
    
    
    1,447,001
    
    
    
    1,258,216Interest expense
    
    
    (11,124,544
    )
    
    
    (8,423,346
    )
    
    
    (8,917,057
    )
    
    
    (5,192,894
    )
    
    
    (1,954,402
    )Other expense
    
    
    
    
    
    
    (3,521,236
    )
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    $
    (49,468,569
    )
    
    $
    (67,322,372
    )
    
    $
    (82,554,327
    )
    
    $
    (69,589,232
    )
    
    $
    (53,287,821
    )Basic and diluted net loss per share
    
    $
    (1.25
    )
    
    $
    (1.71
    )
    
    $
    (2.19
    )
    
    $
    (1.88
    )
    
    $
    (1.49
    )Shares used in computing basic and
diluted net loss per share
    
    
    39,500,154
    
    
    
    39,383,376
    
    
    
    37,774,203
    
    
    
    37,070,235
    
    
    
    35,770,994
  2007
    
    2006
    
    2005
    
    2004
    
    2003Balance Sheet Data:Cash, cash equivalents and
short-term investments
    
    $
    92,875,420
    
    
    $
    151,810,939
    
    
    $
    182,504,523
    
    
    $
    66,924,015
    
    
    $
    131,583,928Working capital
    
    
    50,229,551
    
    
    
    118,786,367
    
    
    
    173,164,668
    
    
    
    59,719,811
    
    
    
    124,848,687Total assets
    
    
    103,139,028
    
    
    
    178,339,664
    
    
    
    197,497,527
    
    
    
    74,462,327
    
    
    
    138,836,746Current portion of long-term debt
    
    
    35,968,750
    
    
    
    
    
    
    
    33,784
    
    
    
    83,622
    
    
    
    479,439Long-term debt
    
    
    252,163,102
    
    
    
    286,000,000
    
    
    
    300,053,796
    
    
    
    100,000,000
    
    
    
    100,083,622Accumulated deficit
    
    
    (411,465,815
    )
    
    
    (361,997,246
    )
    
    
    (294,674,874
    )
    
    
    (212,120,547
    )
    
    
    (142,531,315
    )Total shareholders (deficit) equity
    
    
    (195,594,625
    )
    
    
    (153,987,649
    )
    
    
    (115,436,216
    )
    
    
    (35,942,382
    )
    
    
    30,377,006
 25




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##### Table of Contents



Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
 The following discussion should be read in conjunction with our financial statements and
related notes included in this annual report. In this report, AtheroGenics, we, us and our
refer to AtheroGenics, Inc.
 This annual report contains forward-looking statements made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. These statements are subject
to certain factors, risks and uncertainties that may cause actual results, events and performances
to differ materially from those referred to in such statements. These risks include statements
which address operating performance, events or developments that we expect or anticipate will occur
in the future, such as projections about our future results of operations or financial condition,
research, development and commercialization of our product candidates, expectations regarding the
completion of our clinical trials and the related release of results, anticipated trends in our
business, and other risks that could cause actual results to differ materially. You should
carefully consider these risks, which are discussed in this annual report, including, without
limitation, in the sections entitled Risk Factors and Managements Discussion and Analysis of
Financial Condition and Results of Operations, and in AtheroGenics SEC filings.
 Overview
        26




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##### Table of Contents



®
  Year ended December 31,2007
    
    
    2006
    
    
    2005Direct external AGI-1067 costs
    
    $
    47,149,947
    
    
    $
    53,136,660
    
    
    $
    51,087,586Unallocated costs and other programs
    
    
    25,546,119
    
    
    
    29,718,680
    
    
    
    20,191,359Total research and development
    
    $
    72,696,066
    
    
    $
    82,855,340
    
    
    $
    71,278,945
   
    
    announced the focus on diabetes as the next step in the development of AGI-1067 and
commenced a new Phase III clinical trial, called ANDES, studying the effect of AGI-1067 in
patients with diabetes;
    
    reduced AtheroGenics near term cash requirements by exchanging $38.0 million of the
4.5% convertible notes due September 2008 for $60.4 million of 4.5% convertible notes that
will be due in March 2011;
    
    reduced the workforce by approximately 50%, resulting in a staff of 67 employees at that
date; and
    
    implemented a retention/incentive program for key executive officers and employees.
 Risks
Related to Development and Commercialization of Product Candidates and Dependence on Third Parties Risks Related to Regulatory Approval of Our Product Candidates
  Critical Accounting Policies and Use of Estimates
  27




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##### Table of Contents



Research and Development Accrual
  Revenue Recognition
 Revenue Recognition in Financial Statements, Revenue
Recognition,
  Reporting Gross Revenue as a Principal vs. Net as an Agent.
 Stock-Based Compensation
 Share-Based Payment Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees Accounting for Equity Instruments that Are Issued to Other than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services.
 28




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##### Table of Contents



Results of Operations
 Comparison of Years Ended December 31, 2007 and 2006
 Revenues
  Expenses
 Research and Development.
  Marketing, General and Administrative.
 Restructuring and Impairment Costs.
 Interest and Other Income
  Interest Expense
  Other Expense
  29




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##### Table of Contents



Income Taxes
  Comparison of Years Ended December 31, 2006 and 2005
 Revenues
  Expenses
 Research and Development.
 Marketing, General and Administrative.
 Interest and Other Income
  Interest Expense
  Other Expense
  30




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##### Table of Contents



Income Taxes
  Liquidity and Capital Resources
        31




---



##### Table of Contents



Payments Due by PeriodTotal
    
    
    2008
    
    
    2009-2010
    
    
    2011-2012
    
    
    ThereafterContractual obligationsOperating leases
    
    $
    1,484,114
    
    
    $
    1,269,463
    
    
    $
    214,651
    
    
    $
    
    
    
    $
    Long-term debt (1)
    
    
    308,410,000
    
    
    
    35,968,750
    
    
    
    
    
    
    
    272,441,250
    
    
    
    Interest on long-term debt
    
    
    26,196,435
    
    
    
    7,607,910
    
    
    
    12,470,820
    
    
    
    6,117,705
    
    
    
    Total contractual obligations
    
    $
    336,090,549
    
    
    $
    44,846,123
    
    
    $
    12,685,471
    
    
    $
    278,558,955
    
    
    $
    
 
 (1)
    
    The long-term debt to be paid in 2011-2012 does not reflect the remaining discount of $20.3
million related to the debt extinguishment in July 2007 discussed above. Risk Factors
   the scope and results of our research, preclinical and clinical development activities;  the timing of, and the costs involved in, obtaining regulatory approvals;  the timing, receipt and amount of sales and royalties, if any, from our potential product
candidates;  our ability to maintain and establish collaborations and the financial terms of any
collaborations;  the cost of commercialization activities, including product marketing, sales and
distribution;  the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent
claims and other patent-related costs; and  the extent to which we acquire or invest in businesses, products and technologies.
 32




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##### Table of Contents



Item 7A. Quantitative and Qualitative Disclosures about Market Risk
   Value as ofDecember 31,2008
    
    
    2009-2010
    
    
    2011-2012
    
    
    Total
    
    
    2007Long-term debt  fixed rateMaturity
    
    $
    35,968,750
    
    
    $
    
    
    
    $
    272,441,250
    
    
    $
    308,410,000
    
    
    $
    39,830,450Weighted average interest rate
    
    
    4.5
    %
    
    
    
    
    
    
    2.3
    %
 
 (1)
    
    The long-term debt to be paid in 2011-2012 does not reflect the remaining discount of $20.3
million related to the debt extinguishment in July 2007 as discussed in Liquidity and Capital
Resourcesabove. 33




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##### Table of Contents



Item 8. Financial Statements and Supplementary Data
 ATHEROGENICS, INC.
INDEX TO FINANCIAL STATEMENTS
 ContentsManagements Annual Report on Internal Control Over Financial Reporting
    
    
    35Report of Independent Registered Public Accounting Firm on Internal Control
    
    
    36Report of Independent Registered Public Accounting Firm on Financial Statements
    
    
    37Balance Sheets
    
    
    38Statements of Operations
    
    
    39Statements of Shareholders Deficit
    
    
    40Statements of Cash Flows
    
    
    41Notes to Financial Statements
    
    
    42
 34




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##### Table of Contents



MANAGEMENTS ANNUAL REPORT ON
INTERNAL CONTROL OVER FINANCIAL REPORTING
  
    
    pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of AtheroGenics;
    
    provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with U.S. generally accepted
accounting principles, and that receipts and expenditures of AtheroGenics are being made
only in accordance with authorizations of management and directors of AtheroGenics; and
    
    provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of AtheroGenics assets that could have a material
effect on the financial statements.
     35




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL
      .
   
 36




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENTS
       
 37




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##### Table of Contents



ATHEROGENICS, INC.
 
 BALANCE SHEETS
 December 31,2007
    
    
    2006AssetsCurrent assets:Cash and cash equivalents
    
    $
    74,795,388
    
    
    $
    87,846,079Short-term investments
    
    
    18,080,032
    
    
    
    63,964,860Accounts receivable
    
    
    2,634,422
    
    
    
    6,537,892Prepaid expenses
    
    
    908,379
    
    
    
    4,038,419Interest receivable
    
    
    381,881
    
    
    
    643,097Total current assets
    
    
    96,800,102
    
    
    
    163,030,347Equipment and leasehold improvements, net of accumulated depreciation and amortization
    
    
    2,361,053
    
    
    
    9,684,965Debt issuance costs and other assets
    
    
    3,977,873
    
    
    
    5,624,352Total assets
    
    $
    103,139,028
    
    
    $
    178,339,664Liabilities and Shareholders DeficitCurrent liabilities:Accounts payable
    
    $
    781,119
    
    
    $
    3,183,511Accrued research and development
    
    
    3,765,745
    
    
    
    11,263,164Accrued interest
    
    
    2,876,150
    
    
    
    2,540,000Accrued compensation
    
    
    2,258,051
    
    
    
    1,465,644Accrued and other liabilities
    
    
    920,736
    
    
    
    791,661Current portion of convertible notes payable
    
    
    35,968,750
    
    
    
    Current portion of deferred revenue
    
    
    
    
    
    
    25,000,000Total current liabilities
    
    
    46,570,551
    
    
    
    44,243,980Convertible notes payable, net of current portion
    
    
    252,163,102
    
    
    
    286,000,000Long-term portion of deferred revenue
    
    
    
    
    
    
    2,083,333Shareholders deficit:Preferred stock, no par value: Authorized5,000,000 shares
    
    
    
    
    
    
    Common
stock, no par value: Authorized100,000,000 shares; issued and outstanding 
39,518,492 and 39,452,927 shares at December 31, 2007
and 2006, respectively
    
    
    215,243,310
    
    
    
    207,388,894Warrants
    
    
    613,021
    
    
    
    613,021Accumulated deficit
    
    
    (411,465,815
    )
    
    
    (361,997,246
    )Accumulated other comprehensive income
    
    
    14,859
    
    
    
    7,682Total shareholders deficit
    
    
    (195,594,625
    )
    
    
    (153,987,649
    )Total liabilities and shareholders deficit
    
    $
    103,139,028
    
    
    $
    178,339,664
 The accompanying notes are an integral part of these financial statements.
 38




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##### Table of Contents



ATHEROGENICS, INC.
 
 STATEMENTS OF OPERATIONS
 Year Ended December 31,2007
    
    
    2006
    
    
    2005Revenues:License fees
    
    $
    27,083,333
    
    
    $
    22,916,667
    
    
    $
    Research and development
    
    
    25,193,494
    
    
    
    8,758,178
    
    
    
    Total revenues
    
    
    52,276,827
    
    
    
    31,674,845
    
    
    
    Operating expenses:Research and development
    
    
    72,696,066
    
    
    
    82,855,340
    
    
    
    71,278,945Marketing, general and administrative
    
    
    13,936,132
    
    
    
    13,373,112
    
    
    
    9,050,290Restructuring and impairment costs
    
    
    9,996,332
    
    
    
    
    
    
    
    Total operating expenses
    
    
    96,628,530
    
    
    
    96,228,452
    
    
    
    80,329,235Operating loss
    
    
    (44,351,703
    )
    
    
    (64,553,607
    )
    
    
    (80,329,235
    )Interest and other income
    
    
    6,007,678
    
    
    
    9,175,817
    
    
    
    6,691,965Interest expense
    
    
    (11,124,544
    )
    
    
    (8,423,346
    )
    
    
    (8,917,057
    )Other expense
    
    
    
    
    
    
    (3,521,236
    )
    
    
    Net loss
    
    $
    (49,468,569
    )
    
    $
    (67,322,372
    )
    
    $
    (82,554,327
    )Net loss per sharebasic and diluted
    
    $
    (1.25
    )
    
    $
    (1.71
    )
    
    $
    (2.19
    )Weighted average shares outstandingbasic and diluted
    
    
    39,500,154
    
    
    
    39,383,376
    
    
    
    37,774,203
 The accompanying notes are an integral part of these financial statements.
 39




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##### Table of Contents



ATHEROGENICS, INC.
 
 STATEMENTS OF SHAREHOLDERS DEFICIT
 AccumulatedDeferred
    
    
    
    
    
    
    Other
    
    
    TotalCommon Stock
    
    
    
    
    
    
    Stock
    
    
    Accumulated
    
    
    Comprehensive
    
    
    ShareholdersShares
    
    
    Amount
    
    
    Warrants
    
    
    Compensation
    
    
    Deficit
    
    
    (Loss) Income
    
    
    DeficitBalance at January 1, 2005
    
    
    37,368,658
    
    
    $
    175,713,265
    
    
    $
    828,804
    
    
    $
    (324,607
    )
    
    $
    (212,120,547
    )
    
    $
    (39,297
    )
    
    $
    (35,942,382
    )Issuance of common stock for exercise of stock options
at $.10 to $14.86 per share
    
    
    727,178
    
    
    
    2,989,844
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,989,844Issuance of common stock for exercise of warrants
    
    
    47,842
    
    
    
    154,768
    
    
    
    (154,768
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Adjustments to market value for variable stock options
and warrants issued to non-employees
    
    
    
    
    
    
    (27,456
    )
    
    
    (53,813
    )
    
    
    81,269
    
    
    
    
    
    
    
    
    
    
    
    Amortization of deferred stock compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    184,293
    
    
    
    
    
    
    
    
    
    
    
    184,293Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (82,554,327
    )
    
    
    
    
    
    
    (82,554,327
    )Unrealized loss on available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (113,644
    )
    
    
    (113,644
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (82,667,971
    )Balance at December 31, 2005
    
    
    38,143,678
    
    
    
    178,830,421
    
    
    
    620,223
    
    
    
    (59,045
    )
    
    
    (294,674,874
    )
    
    
    (152,941
    )
    
    
    (115,436,216
    )Issuance of common stock for exercise of stock options
at $.30 to $16.52 per share
    
    
    224,249
    
    
    
    1,762,357
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,762,357Issuance of common stock for debt conversion
    
    
    1,085,000
    
    
    
    17,562,557
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,562,557Adjustments to market value for variable stock options
and warrants issued to non-employees
    
    
    
    
    
    
    (5,433
    )
    
    
    (7,202
    )
    
    
    12,635
    
    
    
    
    
    
    
    
    
    
    
    Amortization
of non-employee deferred stock compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46,410
    
    
    
    
    
    
    
    
    
    
    
    46,410Stock-based compensation
    
    
    
    
    
    
    9,238,992
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,238,992Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (67,322,372
    )
    
    
    
    
    
    
    (67,322,372
    )Unrealized gain on available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    160,623
    
    
    
    160,623Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (67,161,749
    )Balance at December 31, 2006
    
    
    39,452,927
    
    
    
    207,388,894
    
    
    
    613,021
    
    
    
    
    
    
    
    (361,997,246
    )
    
    
    7,682
    
    
    
    (153,987,649
    )Issuance of common stock for exercise of stock options
at $.30 to $.38 per share
    
    
    65,565
    
    
    
    23,075
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,075Stock-based compensation
    
    
    
    
    
    
    7,831,341
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,831,341Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (49,468,569
    )
    
    
    
    
    
    
    (49,468,569
    )Unrealized gain on available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,177
    
    
    
    7,177Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (49,461,392
    )Balance at December 31, 2007
    
    
    39,518,492
    
    
    $
    215,243,310
    
    
    $
    613,021
    
    
    $
    
    
    
    $
    (411,465,815
    )
    
    $
    14,859
    
    
    $
    (195,594,625
    )
 The accompanying notes are an integral part of these financial statements.
 40




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##### Table of Contents



ATHEROGENICS, INC.
 
 STATEMENTS OF CASH FLOWS
 Year Ended December 31,2007
    
    
    2006
    
    
    2005Operating activitiesNet loss
    
    $
    (49,468,569
    )
    
    $
    (67,322,372
    )
    
    $
    (82,554,327
    )Adjustments
to reconcile net loss to net cash used in operating activities:Asset impairment costs
    
    
    9,005,153
    
    
    
    
    
    
    
    Amortization of deferred revenue
    
    
    (27,083,333
    )
    
    
    (22,916,667
    )
    
    
    Stock-based compensation
    
    
    7,831,341
    
    
    
    9,285,402
    
    
    
    184,293Loss on debt conversion
    
    
    
    
    
    
    3,521,236
    
    
    
    Amortization of discount on 4.5% convertible notes due 2011
    
    
    2,131,852
    
    
    
    
    
    
    
    Amortization of debt issuance costs
    
    
    1,646,479
    
    
    
    1,483,169
    
    
    
    1,504,172Depreciation and amortization
    
    
    911,124
    
    
    
    972,009
    
    
    
    808,599Changes in operating assets and liabilities:Accounts receivable
    
    
    3,903,470
    
    
    
    (6,518,499
    )
    
    
    Prepaid expenses
    
    
    3,130,040
    
    
    
    (1,398,519
    )
    
    
    (5,603
    )Interest receivable
    
    
    261,216
    
    
    
    237,702
    
    
    
    (351,787
    )Accounts payable
    
    
    (2,402,392
    )
    
    
    995,050
    
    
    
    (649,592
    )Accrued research and development
    
    
    (7,497,419
    )
    
    
    6,262,136
    
    
    
    (136,924
    )Accrued interest
    
    
    336,150
    
    
    
    68,250
    
    
    
    1,250,000Accrued compensation
    
    
    792,407
    
    
    
    (1,183,996
    )
    
    
    1,410,393Accrued and other liabilities
    
    
    129,075
    
    
    
    (519,431
    )
    
    
    755,076Deferred revenue
    
    
    
    
    
    
    50,000,000
    
    
    
    Net cash used in operating activities
    
    
    (56,373,406
    )
    
    
    (27,034,530
    )
    
    
    (77,785,700
    )Investing activitiesSales and maturities of short-term investments
    
    
    110,008,090
    
    
    
    138,814,368
    
    
    
    151,882,055Purchases of short-term investments
    
    
    (64,116,085
    )
    
    
    (102,945,761
    )
    
    
    (200,633,447
    )Purchases of equipment and leasehold improvements
    
    
    (2,592,365
    )
    
    
    (5,494,454
    )
    
    
    (2,977,050
    )Net cash provided by (used in) investing activities
    
    
    43,299,640
    
    
    
    30,374,153
    
    
    
    (51,728,442
    )Financing activitiesProceeds from the sale of convertible notes
    
    
    
    
    
    
    
    
    
    
    193,566,977Proceeds from the exercise of common stock options
    
    
    23,075
    
    
    
    1,762,357
    
    
    
    2,989,844Payments on equipment loan
    
    
    
    
    
    
    (87,580
    )
    
    
    (99,919
    )Net cash provided by financing activities
    
    
    23,075
    
    
    
    1,674,777
    
    
    
    196,456,902(Decrease) increase in cash and cash equivalents
    
    
    (13,050,691
    )
    
    
    5,014,400
    
    
    
    66,942,760Cash and cash equivalents at beginning of year
    
    
    87,846,079
    
    
    
    82,831,679
    
    
    
    15,888,919Cash and cash equivalents at end of year
    
    $
    74,795,388
    
    
    $
    87,846,079
    
    
    $
    82,831,679Supplemental disclosures of cash flow informationInterest paid
    
    $
    7,010,062
    
    
    $
    6,871,927
    
    
    $
    6,162,886
 The accompanying notes are an integral part of these financial statements.
 41




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##### Table of Contents



NOTES TO FINANCIAL STATEMENTS
 1. Description of Business and Significant Accounting Policies
 Description of Business
  Use of Estimates
  Cash and Cash Equivalents
  Short-Term Investments
  Accounting for Certain Investments in Debt and Equity Securities
 Fair Value of Financial Instruments and Concentration of Credit Risk
  Accounts Receivable
 F O C U S
 Equipment and Leasehold Improvements
  42




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##### Table of Contents



Research and Development Accrual
  Revenue Recognition
 Revenue Recognition in Financial Statements, Revenue Recognition,
  Reporting Gross
Revenue as a Principal vs. Net as an Agent .
 Research and Development and Patent Costs
  Restructuring and Impairment Costs
 Accounting for Costs Associated with Exit or
Disposal Activities,
 Accounting for the Impairment or Disposal of Long-Lived Assets,
 43




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##### Table of Contents



Stock-Based Compensation
 Share-Based Payment,
   2007
    
    2006Expected life
    
    4  years
    
    
    5  yearsRisk-free interest rate
    
    
    4.3
    %
    
    
    4.7
    %Volatility
    
    
    83.70
    %
    
    
    64.92
    %Fair value of grants
    
    $
    0.94
    
    
    $
    7.58
 Accounting for Stock-Based Compensation  Transition and
Disclosure,
  2005Net loss, as reported
    
    $
    (82,554,327
    )Add: Stock-based employee compensation expense included
in reported net loss
    
    
    Deduct: Total stock-based employee compensation expense
determined under fair value based method for
all awards
    
    
    (8,764,619
    )Pro forma net loss
    
    $
    (91,318,946
    )Net loss per share:Basic and diluted, as reported
    
    $
    (2.19
    )Basic and diluted, pro forma
    
    $
    (2.42
    )
 44




---



##### Table of Contents



2005Expected life
    
    5  yearsRisk-free interest rate
    
    
    4.2
    %Volatility
    
    
    77.75
    %Fair value of grants
    
    $
    8.80
 Income Taxes
  Comprehensive Income (Loss)
 Reporting
Comprehensive Income
 Recently Issued Accounting Standards
 Fair
Value Measurements,
 The Fair Value Option for Financial Assets and
Financial Liabilities,
 2. Collaborations
 A R I S E
   45




---



##### Table of Contents



3. Short-Term Investments
  December 31,2007
    
    
    2006Commercial paper
    
    $
    12,301,963
    
    
    $
    22,715,730Corporate notes
    
    
    3,776,569
    
    
    
    12,509,175Government agency notes
    
    
    2,001,500
    
    
    
    28,739,955Total
    
    $
    18,080,032
    
    
    $
    63,964,860
  4. Equipment and Leasehold Improvements
  December 31,2007
    
    
    2006Construction-in-progress
    
    $
    
    
    
    $
    5,429,178Laboratory equipment
    
    
    3,316,350
    
    
    
    3,382,243Leasehold improvements
    
    
    3,107,353
    
    
    
    3,244,412Computer and office equipment
    
    
    2,702,639
    
    
    
    2,349,7979,126,342
    
    
    
    14,405,630Accumulated depreciation and amortization
    
    
    (6,765,289
    )
    
    
    (4,720,665
    )Net equipment and leasehold improvements
    
    $
    2,361,053
    
    
    $
    9,684,965
   5. Convertible Notes Payable
  46




---



##### Table of Contents



Induced Conversion of Convertible Debt
 Debtors Accounting for a Modification or Exchange of Debt Instruments.
    Classification of Short-Term Obligations Expected to Be
Refinanced
    47




---



##### Table of Contents



4.5% convertible notes due 2008
    
    $
    35,968,7504.5% convertible notes due 2011
    
    
    72,441,2501.5 % convertible notes due 2012
    
    
    200,000,000Face value of convertible notes due 2011 and 2012
    
    
    272.441.250Discount on the notes due 2011
    
    
    (20,278,148
    )Total 2011 Notes and 2012 Notes
    
    $
    252,163,102
 6. Net Loss Per Share
 Earnings per Share,
  Year Ended December 31,2007
    
    
    2006
    
    
    2005Shares underlying convertible notes
    
    
    14,783,194
    
    
    
    13,322,307
    
    
    
    14,234,953Options
    
    
    6,600,816
    
    
    
    6,521,524
    
    
    
    4,375,632Warrants
    
    
    82,436
    
    
    
    82,436
    
    
    
    82,436Total
    
    
    21,466,446
    
    
    
    19,926,267
    
    
    
    18,693,021Weighted average conversion price of shares underlying
convertible notes
    
    $
    20.86
    
    
    $
    21.47
    
    
    $
    22.39Weighted average exercise price of options
    
    $
    8.56
    
    
    $
    11.73
    
    
    $
    11.17Weighted average exercise price of warrants
    
    $
    5.64
    
    
    $
    5.64
    
    
    $
    5.64
  7. Common Stock
   48




---



##### Table of Contents



8. Stock Options and Warrants
     WeightedAverageWeighted
    
    Remaining
    
    AggregateNumber of
    
    Average
    
    Contractual
    
    IntrinsicShares
    
    Exercise Price
    
    Life
    
    ValueOutstanding at January 1, 2005
    
    
    4,955,801
    
    
    $
    10.20Granted
    
    
    317,900
    
    
    
    13.46Exercised
    
    
    (727,178
    )
    
    
    4.11Canceled
    
    
    (170,891
    )
    
    
    17.49Outstanding at December 31, 2005
    
    
    4,375,632
    
    
    
    11.17Granted
    
    
    2,548,347
    
    
    
    12.84Exercised
    
    
    (224,249
    )
    
    
    7.86Canceled
    
    
    (178,206
    )
    
    
    18.71Outstanding at December 31, 2006
    
    
    6,521,524
    
    
    
    11.73Granted
    
    
    1,829,196
    
    
    
    1.56Exercised
    
    
    (65,565
    )
    
    
    .35Canceled
    
    
    (1,684,339
    )
    
    
    13.53Outstanding at December 31, 2007
    
    
    6,600,816
    
    
    $
    8.56
    
    
    
    6.45
    
    
    $
    18,440Vested and expected to vest at December 31, 2007
    
    
    6,148,930
    
    
    $
    8.76
    
    
    
    6.28
    
    
    $
    18,440Exercisable at December 31, 2007
    
    
    3,880,652
    
    
    $
    9.92
    
    
    
    4.89
    
    
    $
    18,440
 49




---



##### Table of Contents



Options Outstanding
    
    Options ExercisableNumber
    
    Weighted Average
    
    Weighted Average
    
    Number
    
    Weighted AverageExercise Price
    
    Outstanding
    
    Remaining Years
    
    Exercise Price
    
    Exercisable
    
    Exercise Price$.30- $2.14
    
    
    1,696,617
    
    
    
    5.58
    
    
    $
    .45
    
    
    
    896,450
    
    
    $
    .412.41 - 7.41
    
    
    1,705,695
    
    
    
    6.37
    
    
    
    4.40
    
    
    
    957,644
    
    
    
    5.967.55 - 14.86
    
    
    1,813,674
    
    
    
    7.02
    
    
    
    11.81
    
    
    
    1,115,250
    
    
    
    12.5314.93 - 32.95
    
    
    1,384,830
    
    
    
    6.86
    
    
    
    19.39
    
    
    
    911,308
    
    
    
    20.24.30 - 32.95
    
    
    6,600,816
    
    
    
    6.45
    
    
    $
    8.56
    
    
    
    3,880,652
    
    
    
    9.92
  9. Employee Benefit Plan
  10. Income Taxes
  December 31,2007
    
    
    2006
    
    
    2005Incomes tax benefit at statutory rate
    
    $
    (16,819,314
    )
    
    $
    (22,889,606
    )
    
    $
    (28,068,471
    )Incentive stock options
    
    
    1,713,073
    
    
    
    2,132,144
    
    
    
    State income tax benefit net of federal tax benefit
    
    
    (1,758,635
    )
    
    
    (2,416,408
    )
    
    
    (3,269,151
    )General business credit
    
    
    (1,583,721
    )
    
    
    (2,663,331
    )
    
    
    (2,965,400
    )Loss on debt conversion
    
    
    1,121,880
    
    
    
    
    
    
    
    Other
    
    
    137,635
    
    
    
    9,695
    
    
    
    (136,356
    )Valuation allowance
    
    
    17,189,082
    
    
    
    25,827,506
    
    
    
    34,439,378Income tax expense
    
    $
    
    
    
    $
    
    
    
    $
    
 50




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##### Table of Contents



December 31,2007
    
    
    2006Net operating loss carryforwards
    
    $
    146,807,285
    
    
    $
    125,480,818Research credits
    
    
    13,607,265
    
    
    
    12,023,544Impairment reserve
    
    
    3,414,258
    
    
    
    Deferred stock compensation
    
    
    2,355,798
    
    
    
    1,380,850Deferred revenue
    
    
    
    
    
    
    10,280,833Other
    
    
    633,067
    
    
    
    462,546Total deferred tax assets
    
    
    166,817,673
    
    
    
    149,628,591Valuation allowance
    
    
    (166,817,673
    )
    
    
    (149,628,591
    )Net deferred tax assets
    
    $
    
    
    
    $
    
  December 31,2007
    
    
    2006Deferred tax valuation allowance at beginning of year
    
    $
    149,628,591
    
    
    $
    123,801,085Change in cumulative tax differences
    
    
    17,189,082
    
    
    
    25,827,506Deferred tax valuation allowance at end of year
    
    $
    166,817,673
    
    
    $
    149,628,591
  Accounting for Uncertainty in Income
Taxes-an Interpretation of FASB Statement No. 109
 11. Commitments and Contingencies
  51




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##### Table of Contents



2008
    
    $
    1,269,4622009
    
    
    212,8972010
    
    
    1,755Thereafter
    
    
    $
    1,484,114
   12. Subsequent Events
  13. Quarterly Results of Operations (Unaudited)
  Year Ended December 31, 20071stQuarter
    

2ndQuarter
    

3rdQuarter
    

4thQuarterRevenues
    
    $
    11,461,252
    
    
    $
    30,258,704
    
    
    $
    7,438,867
    
    
    $
    3,118,004Operating loss
    
    
    (12,448,526
    )
    
    
    (5,655,021
    )
    
    
    (12,466,120
    )
    
    
    (13,782,036
    )Net loss
    
    
    (12,652,624
    )
    
    
    (6,138,681
    )
    
    
    (14,675,467
    )
    
    
    (16,001,797
    )Net loss per share data:Basic and diluted
    
    
    (0.32
    )
    
    
    (0.16
    )
    
    
    (0.37
    )
    
    
    (0.40
    )
 Year Ended December 31, 20061stQuarter
    

2ndQuarter
    

3rdQuarter
    

4thQuarterRevenues
    
    $
    4,166,667
    
    
    $
    6,250,000
    
    
    $
    10,292,683
    
    
    $
    10,965,495Operating loss
    
    
    (15,801,288
    )
    
    
    (13,369,049
    )
    
    
    (14,625,330
    )
    
    
    (20,757,940
    )Net loss
    
    
    (19,224,807
    )
    
    
    (13,056,223
    )
    
    
    (14,373,320
    )
    
    
    (20,668,022
    )Net loss per share data:Basic and diluted
    
    
    (0.49
    )
    
    
    (0.33
    )
    
    
    (0.36
    )
    
    
    (0.52
    )
  52




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##### Table of Contents



Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  
 Item 9A. Controls and Procedures
 Managements annual report on internal control over financial reporting.
 Evaluation of disclosure controls and procedures.
 Changes in internal control over financial reporting.
 
 Item 9B. Other Information
  
 PART III
 
 Item 10. Directors, Executive Officers and Corporate Governance
  Code of Ethics
 http:// www.atherogenics.com
 
 53




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##### Table of Contents



Item 11. Executive Compensation
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder
Matters
  
 Item 13. Certain Relationships and Related Transactions, and Director Independence
  
 Item 14. Principal Accountant Fees and Services
  
 PART IV
 
 Item 15. Exhibits and Financial Statement Schedules
 (1)
    
    Financial Statements, filed as part of this reportReport of Independent Registered Public Accounting Firm on Internal ControlReport of Independent Registered Public Accounting Firm on Financial StatementsBalance Sheets as of December 31, 2007 and 2006Statements of Operations for the years ended December 31, 2007, 2006 and 2005Statements Shareholders Deficit for the years ended December 31, 2007, 2006 and
2005Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005Notes to Financial Statements(2)
    
    Financial Statement SchedulesNo financial statement schedules are provided, because the information called for
is not required or is shown either in the financial statements or the notes
thereto.
 54




---



##### Table of Contents



(3)
    
    Listing of Exhibits
 Exhibit No.
    
    
    
    Description3.01
    
    
    
    Fourth Amended and Restated Articles of Incorporation
of AtheroGenics, Inc. (filed as Exhibit 3.01 to
Amendment No. 1 to AtheroGenics Annual Report on
Form 10-K for the year ended December 31, 2004 on
April 6, 2005 and incorporated herein by reference).3.02
    
    
    
    Third Amended and Restated Bylaws of AtheroGenics,
Inc., as amended (filed as Exhibit 3.02 to
AtheroGenics Annual Report on Form 10-K for the year
ended December 31, 2001 and incorporated herein by
reference).3.03
    
    
    
    Amendment No. 1 to Third Amended and Restated Bylaws
of AtheroGenics, Inc. (filed as Exhibit 3.02 to
AtheroGenics Current Report on Form 8-K on December
8, 2006 and incorporated herein by reference).4.01
    
    
    
    Form of Common Stock Certificate (filed as Exhibit
4.01 to Amendment No. 4 to AtheroGenics Registration
Statement on Form S-1, Registration No. 333-31140, on
August 4, 2000 and incorporated herein by reference).4.02
    
    
    
    Rights Agreement dated as of November 9, 2001 between
AtheroGenics, Inc. and American Stock Transfer &
Trust Company, as Rights Agent (filed as Exhibit 4.4
of AtheroGenics Form 8-K on November 19, 2001 and
incorporated herein by reference).4.03
    
    
    
    Indenture dated August 19, 2003 between AtheroGenics,
Inc. and The Bank of New York Trust Company of
Florida N.A., as Trustee (filed as Exhibit 4.1 to
AtheroGenics Registration Statement on Form S-3,
Registration No. 333-110160, on October 31, 2003 and
incorporated herein by reference).4.04
    
    
    
    Global 41/2% Convertible Note Due 2008 (filed as
Exhibit 4.04 to Amendment No. 1 to AtheroGenics
Annual Report on Form 10-K for the year ended
December 31, 2004 on April 6, 2005 and incorporated
herein by reference).4.05
    
    
    
    Indenture dated January 12, 2005 between
AtheroGenics, Inc. and The Bank of New York Trust
Company of Florida N.A., as Trustee, including the
form of Global 1.50% Convertible Note Due 2012 filed
as Exhibit A thereto (filed as Exhibit 4.5 to
AtheroGenics Registration Statement on Form S-3,
Registration No. 333-123895, on April 6, 2005 and
incorporated herein by reference).4.06
    
    
    
    Indenture dated July 11, 2007 between AtheroGenics,
Inc. and The Bank of New York Trust Company of
Florida N.A., as Trustee (filed as Exhibit 4.1 to
AtheroGenics Current Report on Form 8-K, on July 12,
2007 and incorporated herein by reference).10.01
    
    
    
    Amended and Restated Master Rights Agreement dated
October 31, 1995, as amended by First Amendment dated
November 1, 1995; Second Amendment dated July 30,
1996; Third Amendment dated April 13, 1999; Fourth
Amendment dated May 11, 1999; and Fifth Amendment
dated August 30, 1999 (filed as Exhibit 4.02 to
AtheroGenics Registration Statement on Form S-1,
Registration No. 333-31140, on February 25, 2000 and
incorporated herein by reference).10.02+
    
    
    
    Exclusive License Agreement dated July 17, 1998
between The Regents of the University of California
and AtheroGenics, Inc. (filed as Exhibit 10.02 to
Amendment No. 4 to AtheroGenics Registration
Statement on Form S-1, Registration No. 333-31140, on
August 4, 2000 and incorporated herein by reference).10.03+
    
    
    
    License Agreement dated January 11, 1995 between
Emory University and AtheroGenics, Inc. (filed as
Exhibit 10.03 to Amendment No. 2 to AtheroGenics
Registration Statement on Form S-1, Registration No.
333-31140, on July 13, 2000 and incorporated herein
by reference).10.04+
    
    
    
    Patent Purchase Agreement dated April 26, 1995
between AtheroGenics, Inc. and Sampath Parthasarathy,
together with Services Agreement dated April 26, 1995
between AtheroGenics, Inc. and Sampath Parthasarathy
(filed as Exhibit 10.04 to Amendment No. 2 to
AtheroGenics Registration Statement on Form S-1,
Registration No. 333-31140, on July 13, 2000 and
incorporated herein by reference).10.05+
    
    
    
    Sponsored Research Agreement dated October 14, 1996
between Emory University and AtheroGenics, Inc.
(filed as Exhibit 10.05 to Amendment No. 2 to
AtheroGenics Registration Statement on Form S-1,
Registration No. 333-31140, on July 13, 2000 and
incorporated herein by reference).
 55




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##### Table of Contents



10.06#
    
    
    
    AtheroGenics, Inc. 1997 Equity Ownership Plan, as amended by Amendment No. 1 and
Amendment No. 2 (filed as Exhibit 10.08 to Amendment No. 2 to AtheroGenics Registration
Statement on Form S-1, Registration No. 333-31140, on July 13, 2000 and incorporated
herein by reference).10.07
    
    
    
    Preferred Shares Purchase Warrant dated August 24, 1998 between AtheroGenics, Inc. and
certain Lenders named therein (filed as Exhibit 10.09 to AtheroGenics Registration
Statement on Form S-1, Registration No. 333-31140, on February 25, 2000 and incorporated
herein by reference).10.08
    
    
    
    Series C Convertible Preferred Stock Purchase Warrants of AtheroGenics, Inc. (filed as
Exhibit 10.10 to AtheroGenics Registration Statement on Form S-1, Registration No.
333-31140, on February 25, 2000 and incorporated herein by reference).10.09++
    
    
    
    Lease Agreement dated June 19, 1998 between Cousins Properties, Inc. and AtheroGenics,
Inc. (filed as Exhibit 10.12 to AtheroGenics Registration Statement on Form S-1,
Registration No. 333-31140, on February 25, 2000 and incorporated herein by reference).10.10+
    
    
    
    Exclusive License Agreement dated as of June 29, 2001 between AtheroGenics, Inc. and
National Jewish Medical and Research Center (filed as Exhibit 10.17 to Amendment No. 1
to AtheroGenics Registration Statement on Form S-1, Registration No. 333-64228, on
July 23, 2001 and incorporated herein by reference).10.11#
    
    
    
    AtheroGenics, Inc. 2004 Equity Ownership Plan (filed as Appendix B to the proxy
statement on Schedule 14A for AtheroGenics 2004 Annual Shareholders Meeting as filed
on March 26, 2004 and incorporated herein by reference).10.12#
    
    
    
    AtheroGenics, Inc. 2004 Equity Ownership Plan form of incentive equity ownership
agreement and form of directors nonqualified equity ownership agreement (filed as
Exhibit 10.33 to AtheroGenics Annual Report on Form 10-K for the year ended December
31, 2004 on March 16, 2005 and incorporated herein by reference).10.13#
    
    
    
    Summary of non-employee director compensation (filed as the first paragraph under the
caption Director Compensation in the proxy statement on Schedule 14A for AtheroGenics
2005 Annual Meeting of Shareholders as filed with the SEC on March 28, 2005 and
incorporated herein by reference).10.14#
    
    
    
    Summary of non-employee directors compensation and 2005 executive officers target cash
incentive (filed under Item 1.01 of AtheroGenics, Inc. Form 8-K on April 29, 2005 and
incorporated herein by reference).10.15+
    
    
    
    First Amendment dated August 3, 2005 to License Agreement dated January 11, 1995 between
AtheroGenics, Inc. and Emory University (filed as Exhibit 10.1 to AtheroGenics
Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 and incorporated
herein by reference).10.16
    
    
    
    Registration Rights Agreement dated January 12, 2005 among AtheroGenics, Inc., as
Issuer, and Morgan Stanley & Co. Incorporated, Lehman Brothers, Inc., JPMorgan
Securities, Inc. and Lazard Freres & Co., as Initial Purchasers (filed as Exhibit 99.1
to AtheroGenics Current Report on Form 8-K on January 13, 2005 and incorporated herein
by reference).10.17+
    
    
    
    License and Collaboration Agreement between AtheroGenics, Inc and IPR Pharmaceuticals,
LP, dated December 22, 2005 (filed as Exhibit 10.35 to AtheroGenics Annual Report on
Form 10-K for the year ended December 31, 2005 and incorporated herein by reference).10.18+
    
    
    
    Co-Promotion Agreement by and between AstraZeneca Pharmaceuticals LP and AtheroGenics,
Inc., dated as of December 22, 2005 (filed as Exhibit 10.36 to AtheroGenics Annual
Report on Form 10-K for the year ended December 31, 2005 and incorporated herein by
reference).10.19+
    
    
    
    Transition Services Agreement, by and between IPR Pharmaceuticals, LP and AtheroGenics,
Inc., dated December 22, 2005 (filed as Exhibit 10.37 to AtheroGenics Annual Report on
Form 10-K for the year ended December 31, 2005 and incorporated herein by reference).10.20#
    
    
    
    AtheroGenics, Inc. 2004 Equity Ownership Plan form of nonqualified equity ownership
agreement (filed as Exhibit 10.02 to AtheroGenics Current Report on Form 8-K on March
10, 2006 and incorporated herein by reference).10.21
    
    
    
    Form of Indemnification Agreement dated July 5, 2006 (filed as Exhibit 10.1 to
AtheroGenics Current Report on Form 8-K on July 6, 2006 and incorporated herein by
reference).10.22#
    
    
    
    Employment Agreement dated September 25, 2006 between AtheroGenics, Inc. and Robert A.D.
Scott (filed as Exhibit 10.3 to AtheroGenics Current Report on Form 8-K on September
29, 2006 and incorporated herein by reference).
 56




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##### Table of Contents



10.23*#
    
    
    
    Employment Agreement dated December 14. 2007 between AtheroGenics, Inc. and Russell M.
Medford.10.24*#
    
    
    
    Employment Agreement dated December 14, 2007 between AtheroGenics, Inc. and Mark P.
Colonnese.10.25*#
    
    
    
    Employment Agreement dated February 13, 2008 between AtheroGenics, Inc. and W. Charles
Montgomery.10.26*#
    
    
    
    Employment Agreement dated February 13, 2008 between AtheroGenics, Inc. and Joseph M.
Gaynor, Jr23.01*
    
    
    
    Consent of Ernst & Young LLP.24.01*
    
    
    
    Powers of Attorney.31.1*
    
    
    
    Certifications of Chief Executive Officer under Rule 13a-14(a).31.2*
    
    
    
    Certifications of Chief Financial Officer under Rule 13a-14(a).32*
    
    
    
    Certifications of Chief Executive Officer and Chief Financial Officer under Section 1350.
 
 *
    
    Filed herewith.+
    
    Certain confidential information contained in this document has been
omitted and filed separately with the Commission pursuant to a request
for confidential treatment under Rule 406 of the Securities Act of
1933, as amended.++
    
    We agree to furnish supplementally to the Commission a copy of any
omitted schedule or exhibit to this agreement upon request by the
Commission.#
    
    Management contract or compensatory plan or arrangement. 57




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##### Table of Contents



SIGNATURES
  ATHEROGENICS, INC.By:
    /s/RUSSELL M. MEDFORDRussell M. Medford, M.D., Ph.D.President and Chief Executive Officer  Name
    
    Title
    
    DatePrincipal Executive Officer:/s/RUSSELL M. MEDFORD

Russell M. Medford
    
    President and Chief Executive
Officer, Director
    
    March 3, 2008Principal Financial and Principal
Accounting Officer:/s/MARK P. COLONNESE

Mark P. Colonnese
    
    Executive Vice President,
Commercial Operations
and Chief Financial Officer*
    
    Director
    
    March 3, 2008Michael A. Henos*
    
    Director
    
    March 3, 2008R. Wayne Alexander*
    
    Director
    
    March 3, 2008Samuel L. Barker*
    
    Director
    
    March 3, 2008David Bearman*
    
    Director
    
    March 3, 2008Vaughn D. Bryson*
    
    Director
    
    March 3, 2008T. Forcht Dagi*
    
    Director
    
    March 3, 2008Margaret E. Grayson*
    
    Director
    
    March 3, 2008Arthur M. Pappas*
    
    Director
    
    March 3, 2008William A. Scott
 *By:
    
    /s/JOSEPH M. GAYNOR, JR.Joseph M. Gaynor, Jr.Attorney-in-Fact
 58