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**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-K**

 

**ANNUALREPORT PURSUANT TO**

**SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 
| **(Mark One)**                                        |                                                                                                          |
|-------------------------------------------------------|---------------------------------------------------------------------------------------------------------------|
| **x**                                                 | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**     |
|                                                  |                                                                                                          |
| **For the fiscal year ended December 31,  2008** |
| ** **                                            |
| **OR**                                                |
| ** **                                            |
| **o**                                                 | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(f) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 

**For the transition periodfrom               to               **

 

**Commission file number 000-50439**

 

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**NITROMED, INC.**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**(State or other jurisdiction of incorporation or  organization)                               | ** ** | **22-3159793**(IRS Employer Identification No.) |
|-----------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|
| ** **                                                                                                | ** ** | ** **                                      |
| **45 Hayden Avenue, Suite 3000,  Lexington, Massachusetts**(Address of principal  executive offices) | ** ** | **02421**(Zip Code)                             |

 

Registrant’s telephone number, including areacode: **(781) 266-4000**

 

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

 
| **Title  of Each Class**               | ** ** | **Name of  Each Exchange on Which Registered** |
|----------------------------------------|------------|------------------------------------------------|
| Common Stock, $.01 par value per share |       | The NASDAQ Global Market                       |

 

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

**None**

 

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Indicate by check mark if the registrant is a well-known seasonedissuer, as defined in Rule 405 of the Securities Act. Yes o No x.

 

Indicate by check mark if the registrant is not required to filereports pursuant to Section 13 or 15(d) of the Act. Yes o No x.

 

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 x No o.

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not becontained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K. x

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See definitions of “large accelerated filer,” “accelerated filer,” and“smaller reporting company” in Rule 12b-2 of the Exchange Act.

 
| Large accelerated filer o                                              |   | Accelerated filer o         |
|-----------------------------------------------------------------------------|--------|----------------------------------|
|                                                                        |   |                             |
| Non-accelerated filer o (Do not check if a smaller reporting  company) |   | Smaller reporting company x |

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act). Yes o No x.

 

The aggregate market value of the registrant’s common stock held bynonaffiliates of the registrant was approximately $31,248,000, based on theprice at which the registrant’s common stock was last sold on June 30,2008.

 

As of March 17, 2009, there were 46,085,133 shares of the registrant’scommon stock outstanding.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

Specified portions of the registrant’s proxy statement for the annualmeeting of stockholders, which are to be filed pursuant to Regulation 14Awithin 120 days after the end of the registrant’s fiscal year ended December 31,2008, are incorporated by reference into Part III of this report.

 

 

 

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**NITROMED, INC.**

**ANNUAL REPORT**

**ON FORM 10-K**

 

**INDEX**

 
| ** **    | ** ** | ** **                                                                                                         | ** ** | **PAGE** |
|---------------|------------|--------------------------------------------------------------------------------------------------------------------|------------|----------|
| PART I   |       |                                                                                                               |       |     |
| Item 1.  |       | Business                                                                                                           |       | 1        |
| Item 1A. |       | Risk Factors                                                                                                       |       | 11       |
| Item 1B. |       | Unresolved Staff Comments                                                                                          |       | 24       |
| Item 2.  |       | Properties                                                                                                         |       | 24       |
| Item 3.  |       | Legal Proceedings                                                                                                  |       | 24       |
| Item 4.  |       | Submission of Matters to a Vote of Security  Holders                                                               |       | 24       |
| PART II  |       |                                                                                                               |       |     |
| Item 5.  |       | Market for Registrant’s Common Equity,  Related Stockholder Matters and Issuer Purchases of Equity Securities |       | 25       |
| Item 6.  |       | Selected Financial Data                                                                                            |       | 27       |
| Item 7.  |       | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                        |       | 28       |
| Item 7A. |       | Quantitative and Qualitative Disclosures  About Market Risk                                                        |       | 39       |
| Item 8.  |       | Financial Statements and Supplementary Data                                                                        |       | 40       |
| Item 9.  |       | Changes in and Disagreements with Accountants  on Accounting and Financial Disclosure                              |       | 65       |
| Item 9A. |       | Controls and Procedures                                                                                            |       | 65       |
| Item 9B. |       | Other Information                                                                                                  |       | 66       |
| PART III |       |                                                                                                               |       |     |
| Item 10. |       | Directors, Executive Officers and Corporate  Governance                                                            |       | 67       |
| Item 11. |       | Executive Compensation                                                                                             |       | 67       |
| Item 12. |       | Security Ownership of Certain Beneficial  Owners and Management and Related Stockholder Matters                    |       | 67       |
| Item 13. |       | Certain Relationships and Related  Transactions, and Director Independence                                         |       | 67       |
| Item 14. |       | Principal Accounting Fees and Services                                                                             |       | 68       |
| PART IV  |       |                                                                                                               |       |     |
| Item 15. |       | Exhibits, Financial Statement Schedules                                                                            |       | 68       |
| SIGNATURES    |       | 69                                                                                                                 |

 

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*This annual report on Form 10-K containsforward-looking statements that involve risks and uncertainties, as well asassumptions that, if they never materialize or prove incorrect, could cause ourresults to differ materially from those expressed or implied by suchforward-looking statements. All statements other than statements of historicalfact are statements that could be deemed forward-looking statements, includingany projections of revenue, expenses, earnings or losses from operations, orother financial items; any statements of the plans, strategies and objectivesof management for future operations; any statements concerning productdevelopment and commercialization timelines or outcomes; any statements ofexpectation or belief; and any statements of assumptions underlying any of theforegoing. The risks, uncertainties and assumptions referred to above includerisks that are described in “Item 1A—Risk Factors” and elsewhere in thisannual report and that are otherwise described from time to time in ourSecurities and Exchange Commission reports filed after this report.*

 

*The forward-looking statements included inthis annual report represent our estimates as of the date of this annualreport. We specifically disclaim any obligation to update these forward-lookingstatements in the future, except as specifically required by law or the rules ofthe Securities and Exchange Commission. These forward-looking statements shouldnot be relied upon as representing our estimates or views as of any datesubsequent to the date of this annual report.*

 

**PART I**

 

**ITEM 1. BUSINESS**

 

**Recent Development — Proposed Merger withDeerfield Management**

 

On January 27,2009, we entered into an agreement and plan of merger with certain entitiesaffiliated with Deerfield Management, a healthcare investment organization,which we refer to collectively as Deerfield Management. As of the date of themerger agreement, Deerfield Management owned approximately 11% of ouroutstanding common stock.

 

At theeffective time of the merger with Deerfield Management, each outstanding shareof our common stock will be converted into the right to receive $0.80 per sharein cash, subject to adjustment if our net cash balance at the closing of themerger is greater than or less than $12.3 million, as calculated pursuant tothe terms of the merger agreement. In addition, all outstanding options topurchase our common stock will become accelerated in full immediately prior tothe effective time of the merger. Any option not exercised prior to theeffective time of the merger will be converted automatically into the right toreceive cash in an amount equal to the excess, if any, of the mergerconsideration per share of common stock over the exercise price of the option,multiplied by the number of shares of common stock underlying the option. Themerger agreement includes a “go-shop” provision that allowed us to solicit,negotiate and evaluate competing acquisition proposals during a post-signingperiod that ended on February 26, 2009. We solicited, but did not receiveany alternative acquisition proposals prior to the termination of the go-shopperiod. We currently expect to complete the merger with Deerfield Management inthe second quarter of 2009 following the satisfaction or waiver of allconditions to the merger, including the adoption of the merger agreement by ourstockholders at a special meeting of stockholders, which is currently scheduledfor April 22, 2009.

 

Prior toentering into the merger agreement with Deerfield Management, we terminated ourpreviously announced purchase and sale agreement with JHP Pharmaceuticals, LLCand our previously announced agreement and plan of merger with Archemix Corp.in accordance with the terms of each of those agreements, including the paymentof termination fees. In connection with the termination of the JHP purchase andsale agreement, we paid a fee of approximately $900,000 to JHP. In connectionwith the termination of the Archemix merger agreement, we paid a fee of$1,500,000 to Archemix.

 

**BiDil**

 

We are the maker of BiDil, which is indicated for the treatment ofheart failure in self-identified black patients as an adjunct to currentstandard therapies. BiDil is an orally administered fixed-dose combination ofisosorbide dinitrate and hydralazine hydrochloride. The U.S. Food and DrugAdministration, or FDA, approved BiDil in June 2005 and we commerciallylaunched BiDil in July 2005.

 

In January 2008, we discontinued active promotional efforts forBiDil based upon our determination that the successful commercialization ofBiDil requires a magnitude of resources that we cannot allocate to the program,as well as our plans to conserve cash in order to pursue the development ofBiDil XR, an extended release formulation of BiDil. We concurrently implementeda restructuring plan in which we immediately and significantly reduced ourworkforce. Although we have discontinued active promotional efforts related toBiDil, we continue to contract for the manufacturing of, and to sell, BiDil andmaintain the product on the market for patients through normal wholesale andretail channels. We have also 

 

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conductedlimited advertising in select medical publications, and have utilized athird-party marketing firm to contact healthcare professionals on our behalf,in each case in an effort to maintain a limited market presence for BiDil.

 

Our January 2008 restructuring follows the elimination of ourdiscovery research program in March 2006 and the replacement of our salesforce with a small team of senior cardiovascular business managers in October 2006.The January 2008 restructuring also follows our efforts in August 2007to deploy an expanded field organization designed to focus on selectedprescriber targets.

 

**BiDil XR**

 

BiDil is anorally-administered medicine that is presently dosed three times daily. Inconnection with our efforts to develop BiDil XR as a once-daily formulation, inFebruary 2007 we entered into a license agreement with Elan PharmaInternational Limited, or Elan, pursuant to which Elan granted to us anexclusive worldwide royalty-bearing license to specified sustained-releasetechnology owned or controlled by Elan. In addition to our obligation to payElan a royalty on net sales, if any, we have also agreed to pay Elan specifiedamounts upon the achievement of specified development and commercializationmilestone events set forth in the agreement.

 

In December 2007, wemet with the FDA to discuss our proposed development plan for BiDil XR. The FDAagreed that our clinical development plan to conduct bioequivalence andpharmacodynamic studies comparing BiDil XR to the current commercial immediaterelease formulation of BiDil is acceptable. Our proposed plan could support FDAapproval to commercialize BiDil XR, if bioequivalence is demonstrated. Thebioequivalence study design compares the pharmacokinetics of the BiDil XRformulation to the pharmacokinetics of BiDil. Pharmacokinetics refers to themanner in which the body absorbs, distributes, metabolizes and excretes thestudy drug. The adequacy of the results will ultimately be determined by theFDA during the regulatory review period.

 

In conjunction withentering into the license agreement with Elan, we also entered into adevelopment agreement with an affiliate of Elan, pursuant to which we haveconducted the clinical studies on BiDil XR prototypes. Our pilot clinicaltrials have tested several BiDil XR prototypes and compared theirpharmacokinetic profile with BiDil tablets. In preliminary clinical studies inhealthy volunteers, we have demonstrated our ability to delay the release of isosorbidedinitrate and hydralazine hydrochloride by varying the amount of coating andratios of different polymers on beads in capsules. We have continued to developand refine BiDil XR prototypes as we seek a final formulation. However,additional clinical studies and trials will be required in order to finalizethe BiDil XR formulation prior to the commencement of bioequivalencetrials.  Based upon our activities in2008 related to our now terminated agreement with JHP for the purchase and saleof our BiDil and BiDil XR drug business, as well as our determination to enterinto a merger agreement with Deerfield Management, we have not yet commencedthe next set of clinical trials pursuant to our BiDil XR development plan. Weexpect to incur minimal expenses in 2009 in connection with BiDil XRdevelopment activities.

 

**Nitric Oxide-Enhancing Technologies**

 

In connection with our past research and development programs, wegenerated intellectual property rights relating to our nitric oxide-enhancingtechnologies. We are seeking to divest these proprietary technologies through asale of assets, exclusive license arrangement or other comparable transaction. SinceMarch 2006, we have not conducted any research, and do not have any plans toconduct future research with respect to these technologies.

 

**Company Information**

 

We were incorporated in Delaware in 1992. Our office is currentlylocated at 45 Hayden Avenue, Suite 3000, Lexington, Massachusetts 02421,and our telephone number is (781) 266-4000. Our Internet address iswww.nitromed.com. The information on our website is not incorporated byreference into this annual report on Form 10-K and should not beconsidered to be a part of this annual report. Our website address is includedin this annual report on Form 10-K as an inactive textual reference only.

 

When used in this annual report on Form 10-K, the terms“NitroMed,” “we,” “our” and “us” refer to NitroMed, Inc., unless otherwisespecified. We own the following registered U.S. trademarks: NitroMed, BiDil,NitroMed Cares, More Life to Live, and NitroMed’s logo “N.” In addition, wehave filed an application for BiDil XR. Other trademarks and service marksappearing in this annual report on Form 10-K are the property of theirrespective holders.

 

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**BiDil: Treatment for Heart Failure in AfricanAmericans**

 

*Heart Failure in African Americans*

 

Heart failure, also called congestive heart failure or dilatedcardiomyopathy, is a progressively worsening condition that occurs when theheart muscle weakens and cannot pump blood efficiently enough to meet themetabolic needs of the body. The loss of pump function is usually caused by anunderlying condition, such as hypertension or coronary artery disease, whichweakens the heart muscle and increases a person’s risk of heart failure. Themost common symptoms of heart failure include shortness of breath fromcongestion in the lungs, fatigue, sleeping problems due to the inability to layflat, sudden awakening with shortness of breath and swelling in the feet,ankles and other parts of the body.

 

Heart failure affects approximately five million Americans and there iscurrently no cure for the disease. After a patient is diagnosed with heartfailure, their prognosis is generally poor, with approximately 50 percentof patients dying within five years. Heart failure is the primary reason forhospitalizations among people over the age of 65 and is one of the mostexpensive diseases faced by Americans, costing more than all cancers combined.

 

An estimated 750,000 African Americans are currently diagnosed withheart failure. African Americans between the ages of 45 and 64 are 2.5 timesmore likely to die from heart failure than Caucasians in the same age range.The African American community is also more likely to be subject to the diseaseat a younger age than their Caucasian counterparts, resulting in earlierdisability and higher rates of both hospitalization and premature death. Ethnicdisparities in the prevalence of heart failure have been attributed to avariety of factors, including access to medical care, disease management,socioeconomic factors, lifestyle habits and a higher incidence of diabetes,hypertension and metabolic syndrome.

 

*African American Heart Failure Trial (A-HeFT)*

 

In 2001, we partnered with the Association of Black Cardiologists, Inc.to conduct the African American Heart Failure Trial, or A-HeFT, the first trialconducted in a heart failure population in which all of the participantsidentified themselves as black. A retrospective analysis of an earlier studywith a combination of isosorbide dinitrate and hydralazine hydrochloride hadsuggested a trend for improved survival in the subset of patients with mild tomoderate heart failure who self-identified themselves as black. The randomized,double-blind, placebo-controlled A-HeFT study enrolled 1,050 self-identifiedblack patients with New York Heart Association, or NYHA, class III or IVheart failure at 169 clinical research sites. The classification system meansthat patients had marked limitation of physical activity (class III) orwere unable to carry out any physical activity without discomfort(class IV). Participants in A-HeFT were required to be stable whilereceiving standard heart failure therapy at the time of the beginning of thetrial, per their physicians. The primary end point for the trial was acomposite score made up of weighted values for death from any cause, a firsthospitalization for heart failure, and change in the quality of life.

 

After a unanimous recommendation from the independent A-HeFT DataSafety Monitoring Board in July 2004, A-HeFT was halted early due to asignificant survival benefit seen with the drug. Patients taking BiDil inaddition to current therapies experienced a significant 43% decrease in therisk of mortality (p=0.012) (absolute mortality rate: BiDil, 6.2% vs. placebo,10.2%), a 39% reduction in the risk of first hospitalization for heart failure(p<0.001) (absolute first hospitalization rate: BiDil, 16.4% vs. placebo,24.4%) and a statistically significant improvement at most time points inresponse to the Minnesota Living with Heart Failure Questionnaire, which is aself-report of the patient’s functional status, versus patients taking placeboin addition to current standard therapies. Adverse events reported in the trialincluded symptoms of headache and dizziness, which were significantly morefrequent in the group given BiDil, and exacerbations of congestive heartfailure, both moderate and severe, which were significantly more frequent inthe placebo group.

 

*BiDil*

 

BiDil, an orally administered fixed-dose combination of isosorbidedinitrate and hydralazine hydrochloride, was approved by the FDA in June 2005for the treatment of heart failure in self-identified black patients. BiDil isindicated for the treatment of heart failure as an adjunct to standard therapyin self-identified black patients to improve survival, to prolong time tohospitalization for heart failure, and to improve patient-reported functionalstatus. There is little experience in patients with NYHA class IV heartfailure. Most patients in the A-HeFT clinical trial received, in addition toBiDil or placebo, concomitant therapy with one or more of the following otherheart failure medicines: a loop diuretic, an angiotensin converting enzymeinhibitor or an angiotensin receptor blocker, and a beta blocker. In addition,many patients also received a cardiac glycoside or an aldosterone antagonist.BiDil is a fixed-dose combination of isosorbide dinitrate, a vasodilator with 

 

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effects onarteries and veins, and hydralazine hydrochloride, a predominantly arterialvasodilator. The mechanism of action underlying the beneficial effects of BiDilin the treatment of heart failure has not been established.

 

In January 2008, we discontinued active promotional activities forBiDil based upon our determination that the successful commercialization ofBiDil requires a magnitude of resources that we cannot allocate to the program,as well as our plans to conserve cash in order to pursue the development ofBiDil XR. Although we have discontinued promotional activities related toBiDil, we continue to contract for the manufacture of, and to sell, BiDil andmaintain the product on the market for patients through normal wholesale andretail channels.

 

We are party to a five-year exclusive manufacturing and supplyagreement with Schwarz Pharma Manufacturing, Inc., or Schwarz Pharma,which is now a division of UCB S.A., for the three times daily immediaterelease dosage formulation of BiDil. As part of the manufacturing process, weorder bulk materials of hydralazine hydrochloride from Flavine International, Inc.,the U.S. representative of Sumitomo Corp., and isosorbide dinitrate fromDottikon ES Holding AG.

 

We estimate that a substantial majority of insured African Americanpatients over the age of 45 have access to BiDil at Tier II insurancereimbursement, a term generally used to denote a preferential level ofreimbursement at which patient co-pays range from approximately $15.00 to$30.00 per prescription. Our estimates are drawn from published databases,subscription databases and external consultants who have expertise in thisarea. Due to the fact that ethnicity data is not generally collected bycommercial and Medicare Part D insurers, exact figures cannot bedetermined.

 

*BiDil XR*

 

The current formulation of BiDil is an immediate-release tablet thatmust be taken three times daily. We have pursued the development of an extendedrelease formulation of BiDil, known as BiDil XR, which is designed to be takenonce a day. We believe that BiDil XR could enhance the BiDil market byfacilitating greater compliance by patients with their medications schedule, anissue which we believe is more pronounced in a patient population already on asubstantial number of concomitant medications. We commenced clinicaldevelopment of BiDil XR in October 2006, and preliminary clinical studieswith BiDil XR have demonstrated proof of principle.

 

**Nitric Oxide-Enhancing Intellectual Property**

 

In March 2006, we eliminated our discovery research programs, andwe do not have any plans to conduct future discovery research efforts withrespect to our nitric oxide-enhancing technologies. We are seeking to divestthese proprietary technologies through a sale of assets, exclusive licensearrangement or other comparable transaction. Prior to our March 2006restructuring, we utilized our nitric oxide expertise and proprietary positionto develop product candidates for a variety of medical conditions. Our previousefforts sought to produce nitric oxide-enhancing drug candidates by combiningan existing, marketed medicine with a nitric oxide donor, which is a moleculecapable of increasing nitric oxide levels in the body. The nitric oxide donorand the existing medicine can be combined together through either a chemicallinkage to potentially create a proprietary new chemical entity or through thedirect mixing of the medicine and the nitric oxide-enhancing compound topotentially create a patentable new use and dosage form. Our prior researchefforts did not result in any commercialized drug products.

 

**Research and Development**

 

Our current development activities have been solely directed to thecontinued development of BiDil XR. During the fiscal years ended December 31,2008, 2007 and 2006, our total company-sponsored research and developmentexpenses were $2.8 million, $12.2 million, and $17.0 million,respectively.

 

**Proprietary Rights and Licensing**

 

Our policy is to prosecute and enforce our patents and proprietarytechnology. We will be able to protect our proprietary technologies fromunauthorized use by third parties only to the extent that our proprietaryrights are covered by valid and enforceable patents or are effectivelymaintained as trade secrets.

 

*BiDil.*  As ofDecember 31, 2008, NitroMed has two issued U.S. patents that expirein 2020, which relate to co-administration of the components of BiDil. Thefirst U.S. patent covers methods for reducing mortality associated withchronic congestive heart failure, for improving the quality of life, forimproving oxygen consumption or for improving exercise tolerance in blackpatients. The second U.S. patent covers additional claims to specificindications and dosing ranges 

 

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for the treatment of heartfailure and other conditions in black patients. In addition, NitroMed has filed16 U.S. patent applications and 34 corresponding foreign patent applicationsthat could provide additional patent protection for BiDil.

 

*Nitric Oxide-EnhancingTechnologies*.  As of December 31, 2008, NitroMed has 31pending U.S. patent applications and 87 issued U.S. patents andNitroMed also has 37 issued patents and 103 pending patent applications incertain major industrial countries, including Canada, the major European marketcountries, Australia and Japan generally relating to its nitric oxide-enhancingtechnologies. These issued U.S. and foreign patents expire on variousdates through 2027.

 

**Corporate Collaborations and BusinessArrangements**

 

*Elan.*  In February 2007, in connection with ourefforts to develop BiDil XR, we entered into a license agreement with Elan.Pursuant to the agreement, Elan granted to us an exclusive worldwide license,for the term of the agreement, to certain know-how, patents and technology, andany improvements to any of the foregoing developed by either party during theterm of the agreement. Pursuant to this license, we have the right to import,use, offer for sale and sell the oral capsule formulation incorporatingspecified technology referred to in the agreement and containing, as its soleactive combination of ingredients, the combination of the active drugsubstances isosorbide dinitrate and hydralazine hydrochloride, including BiDilXR. In consideration for the grant of the license, we have agreed to pay Elanroyalties that are calculated by reference to annual net sales parameters setforth in the agreement. In addition, we have also agreed to pay Elan specifiedamounts upon the achievement of specified development and commercializationmilestone events set forth in the agreement.

 

The term of the agreement runs in the United States from the effectivedate of the agreement until the later of (a) the 20th anniversary ofthe date of the first sale of the product by us or a permitted sublicensee toan unaffiliated third party, which is referred to in the agreement as the firstin market sale, or (b) the expiration of the last-to-expire patent for theproduct listed in the FDA’s “Orange Book.” Elsewhere in the world, the termwill run on a country by country basis from the effective date of the agreementuntil the later of (a) the 20th anniversary of the date of the firstin market sale of the product in the country concerned or (b) theexpiration of the life of the last to expire patent included in the Elanintellectual property in that country. Following the expiration of the initialterm, the agreement shall continue automatically for rolling 3 yearperiods thereafter, unless the agreement has been terminated by either of theparties by serving 1 year’s written notice on the other party prior to theend of the initial term or any such additional 3 year period. Either Elanor we may terminate the agreement in the event of a material, uncured breach bythe other party, or if the other party goes into liquidation or becomesbankrupt or insolvent. In addition, we may terminate the agreement in the eventof a technical failure, which is defined as the inability to achieve apharmacokinetic profile for the product consistent with that of BiDiladministered three times daily (at 6 hour intervals). Elan may terminatethe agreement with respect to a particular country in the territory in the eventthat we do not meet certain obligations set forth in the agreement with respectto such country, provided that Elan must first consult with us and, ifapplicable, provide us with an opportunity to meet such obligations prior toexercising Elan’s termination rights.

 

*Schwarz Pharma Manufacturing, Inc.*  In February 2005, we entered into afive-year exclusive manufacturing and supply agreement with Schwarz Pharma forthe three times daily immediate release dosage formulation of BiDil. Under thesupply agreement, we have the right to engage a backup manufacturer but do notcurrently have any backup manufacturing agreement in place. The agreementrenews automatically upon the expiration of the then-current term forsuccessive one year terms unless either party provides written notice oftermination at least six months prior to the expiration of the then-currentterm. The agreement is also terminable upon the occurrence of certain specifiedevents. Schwarz Pharma is now a division of UCB S.A.

 

*Cardinal Health PTC, LLC.*  In June 2005, we entered into athree-year exclusive distribution agreement with Cardinal Health for thedistribution of BiDil in all formulations. We are obligated to pay CardinalHealth fees for the services provided under the agreement. Pursuant to theterms of the agreement, Cardinal Health has the right of first negotiation forany new pharmaceutical product to be sold by us during the term. The agreementrenews automatically unless either party provides written notice of terminationat least ninety days prior to the expiration of the then-current term. Theagreement may be terminated without cause upon 120 days notice. However, we areobligated to pay certain fees if we exercise this termination right during theinitial term of the agreement. The agreement is also terminable upon theoccurrence of certain specified events.

 

*Dr. Jay N. Cohn.*  In January 1999, as amended in August 2000,January 2001, March 2002 and September 2008, we entered into acollaboration and license agreement with Dr. Jay N. Cohn, which we referto as the collaboration agreement. Under the collaboration agreement, Dr. Cohnlicensed to us exclusive worldwide royalty-bearing rights to technology and 

 

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inventions owned or controlledby Dr. Cohn and that relate to BiDil for the treatment of cardiovasculardisease. We have made milestone payments and are currently making royaltypayments to Dr. Cohn upon sales of BiDil. During the years ended December 31,2008, 2007 and 2006, we incurred royalties to Dr. Cohn in the approximateamounts of $448,000, $450,000, and $364,000, respectively. The collaborationagreement imposes upon us an obligation to use reasonable best efforts todevelop and, upon receipt of regulatory approval, manufacture, market andcommercialize products based upon the licensed rights. If we fail to meet thisobligation, Dr. Cohn has the right to terminate the collaboration agreementand the license granted to us thereunder. Dr. Cohn also has the right toterminate the collaboration agreement if we materially breach the agreement andfail to remedy the breach within 30 days. We have the right to terminatethe collaboration agreement at any time upon 30 days prior written notice.Unless earlier terminated, the collaboration agreement continues in perpetuity.Pursuant to the collaboration agreement, Dr. Cohn was appointed to ourthen-current scientific advisory board, entered into a consulting agreementwith us and was granted an option to purchase 10,000 shares of our commonstock.

 

In September 2008,we entered into a letter agreement with Dr. Cohn, pursuant to which we andDr. Cohn clarified our understandings with respect to royalty paymentspursuant to the collaboration agreement and the related amendments. The letteragreement resolves certain disputes with regard to the amount of planned costsand excess costs, as those terms are defined and referred to in the 2001 and2002 amendments to the collaboration agreement. In addition, the letteragreement clarifies that we will pay Dr. Cohn a specified reduced royaltyon net sales of collaboration products (as defined in the collaborationagreement) until such time as the aggregate dollar amount retained by us andnot required to be paid to Dr. Cohn as a result of such reduced royaltyrate equals a specified aggregate dollar amount, which we refer to as themaximum amount. Once the maximum amount has been achieved, we will resumemaking royalty payments to Dr. Cohn at the rate specified in thecollaboration agreement. Additionally, the letter agreement clarifies thatshould we sublicense our rights under the collaboration agreement to a thirdparty, Dr. Cohn will receive a specified percentage of any royaltypayments we receive from the sublicense, and any such payments made to Dr. Cohnby us will also be subject to offset up to the maximum amount. Pursuant tothe terms of the letter agreement, the parties agreed to terminate theamendments to the collaboration agreement dated January 29, 2001 and March 15,2002. In consideration for agreeing to the terms of the letter agreement, wemade a one time cash payment to Dr. Cohn in the amount of $800,000. Thispayment has been included as a component of cost of product sales in ourstatement of operations for the year ended December 31, 2008.

 

*FoxKiser.*  In connection with our efforts to obtain theapproval of BiDil from the FDA, we entered into an agreement with the law firmof FoxKiser LLC, which we refer to as FoxKiser, for services related tothe regulatory approval process for BiDil. The agreement provided for paymentof legal consulting fees upon receipt of written FDA approval of BiDil. On June 23,2005, we received written FDA approval of BiDil, and in July 2005, we paid$2.4 million pursuant to the terms of this agreement. In addition, theagreement requires us to pay royalties to FoxKiser on commercial sales ofBiDil. The royalty term ends six months after the date of market introduction ofan FDA-approved generic version of BiDil. During the years ended December 31,2008, 2007 and 2006, we incurred royalties to FoxKiser in the approximateamounts of $448,000, $450,000 and $364,000, respectively.

 

**Trademarks, Trade Secrets and Other ProprietaryInformation**

 

We own the following registered U.S. trademarks:

 

·                  BiDil;

 

·                  NitroMed;

 

·                  NitroMed Cares;

 

·                  More Life to Live; and

 

·                  NitroMed “N” logo.

 

We have also filed applications for BiDil XR and HeartHealthHeritage.In addition, we depend upon trade secrets, know-how and continuingtechnological improvements to develop and maintain our competitive position. Tomaintain the confidentiality of trade secrets and proprietary information, werequire our employees, scientific advisors, consultants and collaborators, uponcommencement of a relationship with us, to execute confidentiality agreementsand, in the case of parties other than our research and developmentcollaborators, to agree to assign their inventions to us. These agreements aredesigned to protect our proprietary information and to grant us ownership oftechnologies that are developed in connection 

 

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with theirrelationship with us. These agreements may not, however, provide protection forour trade secrets in the event of unauthorized disclosure of such information.

 

**Competition**

 

We face intense competition from a wide range of pharmaceutical and lifescience companies, as well as academic and research institutions and governmentagencies. These competitors include organizations that are pursuing the same orsimilar technologies to those which constitute our technology platform andorganizations that are developing and commercializing pharmaceutical productsthat may be competitive with BiDil and, if successfully developed andcommercialized, BiDil XR.

 

We believe that competition for BiDil principally comes from companiescurrently marketing and selling therapeutics to treat heart failure in thegeneral population. These competitors include GlaxoSmithKline, plc, Merck & Co., Inc.,Pfizer Inc. and AstraZeneca plc. We also compete on the basis of theavailability in generic form and at substantially lower prices of theindividual components that constitute BiDil (isosorbide dinitrate, which isseparately marketed for angina, and hydralazine hydrochloride, which isseparately marketed for hypertension). Although these generic components arenot bioequivalent to BiDil, physicians have prescribed them in lieu ofprescribing BiDil and may continue to do so in the future. We expect to facesimilar competitive factors with respect to BiDil XR to the extent that BiDilXR is successfully developed and commercialized.

 

Principal competitive factors in our industry include:

 

·                  improved patient outcomes;

 

·                  cost-effectiveness;

 

·                  acceptance by patients, physicians,other health care providers and third-party public and private payors;

 

·                  the quality and breadth of anorganization’s technology;

 

·                  the skill of an organization’s employeesand its ability to recruit and retain skilled employees;

 

·                  an organization’s intellectualproperty protection;

 

·                  development, sales and marketingcapabilities; and

 

·                  the availability of substantialcapital resources to fund development and commercialization activities.

 

Companies with which we compete generally have financial and otherresources that are substantially greater than our own. Moreover, because wehave discontinued all promotional activities for BiDil and we have ceased allresearch and development activities related to our nitric oxide basedtechnologies, our ability to compete has been significantly adversely affected.

 

**Government Regulation and Reimbursement**

 

***FDA Requirements forNew Drug Compounds***

 

The research, testing, manufacture, import, export and marketing ofdrug products (including their components) are extensively regulated bynumerous governmental authorities in the United States and other countries. Inthe United States, drugs are subject to rigorous regulation by the FDA. TheFederal Food, Drug, and Cosmetic Act, and other federal and state statutes andregulations, govern, among other things, the research, development, testing,manufacture, storage, recordkeeping, labeling, promotion, sampling, marketingand distribution of pharmaceutical products. Failure to comply with applicableregulatory requirements may subject us to a variety of enforcement actions allof which could have a material effect.

 

The steps ordinarily required before a new pharmaceutical product maybe marketed in the United States include pre-clinical laboratory tests, animaltests and formulation studies under the FDA’s good laboratory practiceregulations, or GLP; the submission to the FDA of a notice of claimedinvestigational exemption or an investigational new drug application, or IND,which must become effective before clinical testing may commence; adequate andwell-controlled clinical trials to 

 

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establish the safety andefficacy of the drug for each indication for which FDA approval is sought;submission to the FDA of a new drug application, or NDA; satisfactorycompletion of a FDA inspection of the manufacturing facility or facilities atwhich the product is produced to assess compliance with current goodmanufacturing practice, or cGMP, requirements; and FDA review and approval ofthe NDA. Satisfaction of FDA pre-market approval requirements typically takesseveral years, and the actual time required may vary substantially based uponthe type, complexity and novelty of the product or disease. Governmentregulation may delay or prevent marketing of potential product candidates for aconsiderable period of time and impose costly procedures upon a manufacturer’sactivities. Success in early stage clinical trials does not assure success inlater stage clinical trials. Data obtained from clinical activities is notalways conclusive and may be susceptible to varying interpretations that coulddelay, limit or prevent regulatory approval. Even if a product receivesregulatory approval, later discovery of previously unknown problems with aproduct, including new safety risks, may result in restrictions on the productor even complete withdrawal of the product from the market.

 

Clinicaltrials to support a NDA for marketing approval are typically conducted in threephases. In phase I, the drug is tested to assess safety, including sideeffects associated with increasing doses, metabolism, pharmacokinetics andpharmacological actions. Phase II usually involves trials in a limitedpatient population, to determine dosage tolerance and optimum dosage, identifypossible adverse effects and safety risks, and provide preliminary support forthe efficacy of the drug in the indication being studied. Phase III trialsare undertaken to further evaluate clinical efficacy and to further test forsafety within an expanded patient population. The FDA may requirebioequivalence, bioavailability, or other clinical studies to support approvalof new formulations of approved products, such as BiDil XR. All clinical trialsmust be conducted in compliance with patient protection laws and regulations,including requirements related to informed consent and institutional reviewboard, or IRB, review and approval.

 

Clinicaltesting of any product may not be completed successfully within any specifiedtime period, if at all. The FDA closely monitors the progress of clinicaltrials that are conducted under an IND and may, at its discretion, reevaluate,alter, suspend or terminate the testing based upon the data accumulated to thatpoint and the FDA’s assessment of the risk/benefit ratio to the patient. TheFDA, an IRB, or a clinical trial sponsor may suspend or terminate clinicaltrials at any time for various reasons, including a finding that the subjectsor patients are being exposed to an unacceptable health risk. The FDA can alsorequest additional clinical trials be conducted as a condition to productapproval.

 

Aftersuccessful completion of the required clinical testing, generally a NDA orsupplement to an existing NDA is prepared and submitted to the FDA. FDAapproval of the NDA or the NDA supplement is required before marketing of theproduct may begin in the United States. The cost of preparing and submitting aNDA or NDA supplement is substantial.

 

Following theFDA’s evaluations of the NDA or NDA supplement, including inspection of themanufacturing facilities, the FDA may issue an approval letter, an approvableletter, or a not approvable letter. A not approvable letter outlinesdeficiencies in the submission and often requires additional testing orinformation in order for the FDA to reconsider the application. An approvableletter generally contains a statement of specific conditions that must be metin order to secure final approval of the NDA. If and when those conditions havebeen met to the FDA’s satisfaction, the FDA will typically issue an approvalletter. An approval letter authorizes commercial marketing of the drug withspecific prescribing information for specific indications. As a condition ofNDA approval, the FDA may require post-approval commitments, including testingand surveillance to monitor the drug’s safety or efficacy, and may also imposeother conditions, including labeling restrictions which can materially impactthe potential market and profitability of the drug. Once granted, productapprovals may be withdrawn if compliance with regulatory standards is notmaintained or problems are identified following initial marketing.

 

Once the NDAor NDA supplement is approved, a product will be subject to certainpost-approval requirements, including requirements for adverse event reportingand submission of periodic reports and/or supplemental NDAs for approval ofchanges to the originally approved prescribing information, productformulation, and manufacturing and testing requirements. Following approval,drug products are required to be manufactured and tested for compliance withNDA and/or compendial specifications prior to release for commercialdistribution. The manufacture and testing must be performed in approvedmanufacturing and testing sites complying with current Good ManufacturingPractice, or cGMP, requirements and subject to FDA inspection authority. Drugmanufacturers and their subcontractors are required to register theirfacilities with the FDA and are subject to periodic unannounced inspections bythe FDA to assess compliance with cGMPs. Accordingly, after approvalmanufacturers must continue to expend time, money and effort in the area ofproduction and quality control, and employee training, to maintain compliancewith cGMPs and other aspects of regulatory compliance.

 

The FDAstrictly regulates the promotional claims that may be made about prescriptiondrug products, including direct-to-consumer advertising, industry-sponsoredscientific and educational activities, and promotional activities involving 

 

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the Internet. Approved drugproducts must be promoted in a manner which is consistent with their terms andconditions of approval and the statutory standards of the Food, Drug, andCosmetic Act. Failure to market consistent with the statutory and regulatorystandards may result in enforcement action by the FDA, which may includeproduct seizures, civil or criminal penalties, or regulatory letters, which mayrequire corrective advertising or other corrective communications to healthcareprofessionals. Failure to comply with FDA regulations can also result inDepartment of Justice investigation based on the False Claims Act and otherfederal laws governing reimbursement for drugs under the Medicare, Medicaid andother federally supported healthcare programs. Both the FDA and Department ofJustice enforcement may relate to previous marketing practices that we havesince suspended.

 

Once a NDA isapproved, the product covered thereby becomes a “listed drug” which can, inturn, be cited by potential competitors in support of approval of anabbreviated NDA, or ANDA. An approved ANDA provides for marketing of a drugproduct that has the same conditions of use, active ingredients, strength,dosage form, route of administration, and labeling as the listed drug and hasbeen shown through bioequivalence testing to be therapeutically equivalent tothe listed drug. There is no requirement, other than the requirement forbioequivalence testing, for an abbreviated NDA applicant to conduct or submitresults of pre-clinical or clinical tests to prove the safety or efficacy ofits drug product. Drugs approved in this way are commonly referred to as“generic equivalents” to the listed drug, are listed as such by the FDA, andcan often be substituted by pharmacists under prescriptions written for theoriginal listed drug.

 

Federal lawprovides for a period of three years of marketing exclusivity followingapproval of a listed drug that contains previously approved active ingredientsbut is approved in a new dosage, dosage form, route of administration orcombination, or for a new use, if the FDA deems that the approval of the drugwas required to be supported by new clinical trials (other than bioequivalencestudies) that were conducted by or for the sponsor. During this three-yearperiod, the FDA cannot grant final approval of an ANDA based on that listeddrug. Additionally, in the event that the sponsor of the listed drug hasproperly informed the FDA of patents covering its listed drug, applicantssubmitting an ANDA referencing that drug are required to certify whether theyintend to market their generic products prior to expiration of those patents.If an ANDA applicant certifies that it believes all listed patents are invalidor not infringed, it is required to provide notice of its filing to the NDAsponsor and the patent holder. If the patent holder then initiates a suit forpatent infringement against the ANDA sponsor within 45 days of receipt ofthe notice, the FDA cannot grant effective approval of the ANDA until either30 months has passed or there has been a court decision holding that thepatents in question are invalid, unenforceable or not infringed. If the ANDAapplicant certifies that it does not intend to market its generic productbefore some or all listed patents on the listed drug expire, then the FDAcannot grant effective approval of the ANDA until those patents expire.

 

From time totime, legislation is drafted and introduced in Congress that couldsignificantly change the statutory provisions governing the approval,manufacturing and marketing of drug products. In addition, FDA regulations andguidance are often revised or reinterpreted by the agency or the courts in waysthat may significantly affect our business and our product candidates. It isimpossible to predict whether legislative changes will be enacted, or FDAregulations, guidance or interpretations changed, or what the impact of suchchanges, if any, may be.

 

***Foreign Regulationof New Drug Compounds***

 

Approval of adrug product by comparable regulatory authorities will be necessary in all ormost foreign countries prior to the commencement of marketing of the product inthose countries, whether or not FDA approval has been obtained. The approvalprocedure varies among countries and can involve requirements for additionaltesting. The time required may differ than that required for FDA approval.

 

***Hazardous Materials***

 

Our previousresearch and development processes involved the controlled use of hazardousmaterials, chemicals and radioactive materials and produce waste products. Weare subject to federal, state and local laws and regulations governing the use,manufacture, storage, handling and disposal of hazardous materials and wasteproducts. We do not expect the cost of complying with these laws andregulations to be material.

 

***Reimbursement***

 

Our ability tocontinue to generate revenue through the sale of BiDil and any future productsdepends in part on the extent to which reimbursement for the costs of suchproducts will be available from government health administration authorities,private health insurers and other third-party payors. Significant uncertaintyexists as to the reimbursement status of newly-approved health care products,products used for indications not approved by the FDA and products which have 

 

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competitors for their approvedindications. If we are unable to maintain our level of preferentialreimbursement treatment for BiDil from governmental and other third-partypayors, our ability to sell and/or maintain acceptable pricing schemes forBiDil may be impaired, thereby reducing our revenue.

 

**Employees**

 

As of December 31,2008, we had five full-time employees, all of whom were engaged in management,administration, finance and regulatory functions. None of our employees arerepresented by a labor union or covered by a collective bargaining agreement,nor have we experienced work stoppages.

 

**Product Liability Insurance**

 

Theadministration of our products to humans, whether in clinical trials or aftermarketing approvals are obtained and the product is in use commercially, mayexpose us to liability claims. These claims might be made by customers,including corporate partners, clinical trial subjects, patients, pharmaceuticalcompanies or others. We maintain product liability insurance coverage forclaims arising from the use of our products, whether in clinical trials orapproved commercial usage. However, insurance coverage is becoming increasinglyexpensive, and our insurance may not provide sufficient coverage to fullyprotect us against liability. If we are unable to maintain sufficient levels ofinsurance due to increased costs or if our insurance does not providesufficient coverage against liability claims, a finding of liability coulddeplete our resources and reduce the assets available for our daily operations.

 

**Significant Customers**

 

Oursignificant customers in each of the last three years, and their percentage ofour total sales, are as follows:

 
| ** **                     | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------|------------|--------------------------------------------|------------|
| **Customer**                   | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| McKesson Corporation           |       | 38                                         | %          | 38 | % | 34 | % |
| Cardinal Health                |       | 35                                         | %          | 36 | % | 36 | % |
| Amerisource Bergen Corporation |       | 18                                         | %          | 17 | % | 18 | % |

 

Our sales ofBiDil are made to customers geographically located throughout the UnitedStates.

 

We recognized$750,000 in research and development revenue from the non-exclusive licensingof certain non-strategic intellectual property in 2007, and recognized noresearch and development revenue in 2008 and 2006. No other company accountedfor more than 10% of our total revenues in fiscal years 2008, 2007 or 2006.

 

**Raw Materials**

 

The activeingredients in BiDil are hydralazine hydrochloride, which we purchase fromFlavine International, Inc., the U.S. representative of Sumitomo Corp.,and isosorbide dinitrate, which we purchase from Dottikon ES Holding AG. Webelieve that Sumitomo is currently the only supplier that is qualified toprovide hydralazine hydrochloride for the manufacture of BiDil. We do not haveany agreement with Sumitomo regarding the supply of hydralazine hydrochloride.

 

**Segment Information**

 

During thethree years ended December 31, 2008, 2007 and 2006, we operated in onereportable business segment, developing nitric oxide-enhancing medicines, underthe management approach of Statement of Financial Accounting Standards No. 131,*Disclosures about Segments of an Enterpriseand Related Information.*

 

**Available Information**

 

Our internetwebsite address is http://www.nitromed.com. Through our website, we makeavailable, free of charge, our annual report on Form 10-K, quarterlyreports on Form 10-Q, current reports on Form 8-K and any amendmentsto those reports, proxy and registration statements, and all of our insider Section 16reports, as soon as reasonably practicable after such material iselectronically filed with, or furnished to, the Securities and ExchangeCommission, or SEC. These SEC reports can be accessed through the “Investors”section of our website. We also make available on our website the charters forour audit committee, compensation committee, and nominating and corporategovernance committee, as well as our code 

 

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of business conduct and ethics,and such information is available in print to any stockholder of NitroMed whorequests it. In addition, we intend to disclose on our website any amendmentsto, or waivers from, our code of business conduct and ethics that are requiredto be publicly disclosed pursuant to rules of the SEC and The NASDAQGlobal Market. The information found on our website is not part of this or anyother report we file with, or furnish to, the SEC.

 

**ITEM 1A. RISK FACTORS**

 

*You should carefully consider the following risk factors, in additionto other information included in this annual report, in evaluating NitroMed andour business. If any of the following risks occur, our business, financialcondition and operating results could be materially adversely affected.*

 

**Risks Relating to Our Proposed Merger with DeerfieldManagement**

 

**Our proposed merger with DeerfieldManagement may be delayed, enjoined by a court or not occur at all for avariety of reasons, including the possibility that the merger agreement isterminated prior to the completion of the merger.**

 

The merger agreement withDeerfield Management may be terminated at any time before the completion of themerger, by either us or Deerfield Management, if:

 
| · |   | the merger has not been completed by  June 30, 2009, provided that neither we nor Deerfield Management can  terminate the merger agreement if the failure of the merger to be completed  by that date is principally caused by our or Deerfield Management’s own  action or failure to act, respectively, and that action or failure to act  constitutes a breach of the merger agreement;                                  |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| · |   | a court of competent jurisdiction or other  governmental entity has issued a final and nonappealable order, decree or  ruling or taken any other action that permanently restrains, enjoins or  otherwise prohibits the merger; or                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| · |   | the required vote of our stockholders to  adopt the merger agreement is not obtained at the meeting of our stockholders  where that vote is taken, provided that we may not terminate the merger  agreement if the failure to obtain the required vote of our stockholders to  adopt the merger agreement was caused by our action or failure to act and  that action or failure to act is a material breach of the merger agreement. |

 

In addition, the merger agreement may beterminated by Deerfield Management at any time before the completion of themerger if, among other things:

 
| · |   | our board of directors withholds, amends, withdraws or modifies its  recommendation that our stockholders vote to adopt the merger agreement;                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| · |   | we fail to hold the special meeting of stockholders within 45 days after  the relevant proxy statement is first mailed to our stockholders; or                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| · |   | we breach any of our representations,  warranties, covenants or other agreements set forth in the merger agreement  or if any of our representations or warranties become inaccurate, in either  case such that the closing conditions of the merger would not be satisfied as  of the time of the breach or inaccuracy, provided that if the breach or  inaccuracy is curable, Deerfield Management may not terminate until the  earlier of the expiration of a 30-day notice period and our ceasing to  exercise commercially reasonable efforts to cure the breach, if the breach  has not already been cured. |

 

In the event that the proposed merger betweenus and Deerfield Management does not occur, we will review the strategicalternatives for our remaining business and assets, including the possibledissolution of our company and liquidation of our assets, the discharge of anyremaining liabilities, and the eventual distribution of remaining assets, ifany, to our stockholders. If we determine to dissolve and liquidate our assets,we will seek the approval of the holders of the majority of our thenoutstanding shares of common stock for that action, and we can not give anyassurances as to the amount or timing of the payment of liquidation proceedsthat might eventually be distributed to our stockholders.

 

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***Even if our proposed merger with DeerfieldManagement is completed, our stockholders may receive less consideration than$0.80 for each share of our common stock, depending on our net cash balance atthe closing of the merger.***

*** ***

The terms of our mergeragreement with Deerfield Management provide that the amount of the mergerconsideration that our stockholders will be entitled to receive for each shareof our common stock upon completion of the merger is $0.80 per share in cash,without interest, subject to the following adjustments:

 
| · |   | if our net cash at the closing of the merger exceeds $12.3 million,  the amount of the merger consideration per share will be increased by the  amount of such excess divided by the number of shares of our common stock  outstanding at the effective time of the merger;                                                                                                                                                 |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                        |
| · |   | if our net cash at the closing of the merger is less than $12.3  million, the amount of the merger consideration per share will be decreased  by the amount of such difference divided by the number of shares of our  common stock outstanding at the effective time of the merger;                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                        |
| · |   | if we complete a sale of our nitric oxide research technology  platform before the closing of the merger, the amount of the merger  consideration per share will be increased by the amount of the proceeds from  such a sale, not to exceed €2 million, divided by the number of shares of our  common stock outstanding at the effective time of the merger; and                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                        |
| · |   | if we are required, pursuant to the terms of the merger agreement, to  pay accountants expenses in connection with a dispute regarding the  calculation of our net cash balance at closing, the amount of the merger  consideration per share will be decreased by the amount of any such expenses  to be borne by us divided by the number of shares of our common stock outstanding  at the effective time of the merger. |

 

***Whetheror not our net cash at closing is greater than, equal to or less than $12.3million will depend on a variety of factors, including continued sales ofBiDil, operational costs related to maintaining BiDil on the market andtransactional costs related to completing the proposed merger with DeerfieldManagement. Many of the underlying forces that will determine our net cash atclosing are not within our control, and we can make no assurance that our net cashat closing will be equal to or greater than $12.3 million. Accordingly, ourshareholders may receive an amount of merger consideration that is less than$0.80 for each share of our common stock upon completion of the merger.***

*** ***

**During the pendency of the mergerwith Deerfield Management, we may not be able to enter into a businesscombination with another party because of restrictions in the merger agreement.**

 

Covenants in the merger agreement limit our ability to makeacquisitions or complete other transactions that are not in the ordinary courseof business pending completion of the merger with Deerfield Management. Whilethe merger agreement is in effect, and subject to limited exceptions, we areprohibited from soliciting, initiating, encouraging or taking actions designedto facilitate any inquiries or the making of any proposal or offer that couldlead to the entering into certain extraordinary transactions with any thirdparty, such as a sale of assets, other than the asset sale or a sale of ournitric oxide business other than in specified circumstances, an acquisition ofour common stock, a tender offer for our common stock, a merger or otherbusiness combination outside the ordinary course of business. Any suchtransactions could be favorable to our stockholders.

 

**Class action litigation could require usto incur significant costs and suffer management distraction, as well as delayand/or enjoin our potential merger with Deerfield Management.**

 

We are aware of a purported class actionlawsuit related to the merger with Deerfield Management that has been filedagainst us, each of our directors, our president and chief executive officerand certain of Deerfield Management’s affiliates in Suffolk County SuperiorCourt in Massachusetts. The lawsuit, *Mieczyslaw Stachnik et al.v. Kenneth Bate et al.*, Civil Action No. 09-0622-BLS, was filedon February 12, 2009 and alleges, among other things, that the mergerconsideration to be paid to our stockholders in the merger is unfair andundervalues our company. In addition, the complaint alleges that our directorsand our president and chief executive officer violated their fiduciary dutiesby, among other things, failing to maximize stockholder value and failing toengage in a fair sale process. The complaint seeks, among other relief, aninjunction preventing completion of the merger or, if the merger isconsummated, rescissory damages. We believe that this lawsuit is without meritand plan to defend it vigorously. However, we could incur substantial costs indefending this lawsuit. 

 

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In addition, even though we believe this lawsuit is without merit, ourpotential merger with Deerfield Management could be delayed and/or enjoined bya court of competent jurisdiction, any of which could substantially harm ourbusiness and require us to pursue alternative strategic options, including thedissolution of our company and liquidation of our assets.

 

**Risks Relating to Our Business, Strategy andFinancial Condition**

 

***We have discontinued active promotional activitiesrelated to our only commercially-available product, BiDil, which is likely tosignificantly adversely affect our future revenue and our ability to continueto fund our operations, including supporting continued sales of BiDil anddevelopment of BiDil XR.***

*** ***

In January 2008, we discontinued active promotional activities forBiDil based upon our determination that the successful commercialization ofBiDil requires a magnitude of resources that we cannot allocate to the program,as well as our plans at that time to conserve cash in order to pursue thedevelopment of BiDil XR. We concurrently implemented a restructuring plan thateliminated approximately 80 positions, and we currently employ fourfull-time individuals. Although we have discontinued our promotional activitiesfor BiDil, we continue to contract for the manufacturing of, and to sell, BiDiland maintain the product on the market for patients through normal wholesaleand retail channels. We have also conducted limited advertising in selectmedical publications, and have utilized a third-party marketing firm to contacthealthcare professionals on our behalf, in each case in an effort to maintain alimited market presence for BiDil.

 

Unless and until we complete the merger with Deerfield Management, weexpect to incur operating expenses going forward primarily related to keepingBiDil available on the market. We expect to fund a substantial portion of theseoperating expenses through ongoing BiDil sales. We believe that the eliminationof our sales force and discontinuation of our active promotional effortsrelated to BiDil is likely to result in a decline in BiDil prescriptions byhealthcare providers and could also adversely affect the willingness of thirdparty payors to provide reimbursement at favorable levels. If physicians do notcontinue to prescribe BiDil in sufficient quantities, and/or if managed careproviders remove BiDil from a preferential reimbursement tier on their planformularies, then our future revenue from sales of BiDil will declinesignificantly, we may not generate sufficient capital to support continuedsales of BiDil, and our ability to advance the development of BiDil XR will beadversely affected, in which case we may be required to further curtail orcease our operations.

 

**We have a history of operating losses and, ifwe are not able to complete the merger with Deerfield Management, we willrequire substantial additional amounts of cash to fund our operating plan,including our plans to support any continued sales of BiDil and seek to developand commercialize BiDil XR. If additional capital is not available, we may berequired to cease operations.**

 

We haveexperienced significant operating losses since our inception in 1992. For theyear ended December 31, 2008, we had a net loss of $5.9 million, andas of December 31, 2008, we had an accumulated deficit of$351.3 million. We have incurred loses in all but one quarter sinceinception, we have discontinued active promotion of BiDil, and we may incurlosses in future periods. Losses that we may incur in the future couldfluctuate from quarter to quarter, and these fluctuations may be substantial.

 

In January 2008,we ceased actively promoting sales of BiDil, which is our only significantsource of revenue. Pending the completion of our merger with DeerfieldManagement, we expect to incur operating expenses going forward primarilyrelated to keeping BiDil available on the market. We expect to also incurminimal additional expenses in 2009 related to the further development of BiDilXR. Whether or not the merger with Deerfield Management is completed, webelieve that our existing sources of liquidity and the cash expected to begenerated from future sales of BiDil, together with the significant reductionin expenditures as a result of our January 2008 restructuring, will besufficient to fund our operations for at least the next twelve months. However,our future capital requirements, and the period in which we expect our currentcash to support our operations, may vary due to a number of factors, includingthe following:

 
| · |   | our ability to successfully consummate the  proposed merger with Deerfield Management, or a comparable strategic  arrangement related to our business and assets, and the expenses related to  any such transaction; |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                 |
| · |   | the amount of future product sales of  BiDil;                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                 |
| · |   | the cost of manufacturing and selling  BiDil;                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                 |
| · |   | the timing of collections related to sales  of BiDil;                                                                                                                                                                |

 

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| · |   | the time and costs involved in completing  the clinical trials and further development of, and obtaining regulatory  approvals for, BiDil XR, if at all;                |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                    |
| · |   | the effect of competing technological and  market developments;                                                                                                         |
|   |   |                                                                                                                                                                    |
| · |   | the costs involved in preparing, filing,  prosecuting, maintaining and enforcing patent claims, and in meeting our  reporting obligations as a publicly traded company; |
|   |   |                                                                                                                                                                    |
| · |   | the cost of maintaining licenses to use  patented technologies;                                                                                                         |
|   |   |                                                                                                                                                                    |
| · |   | unfavorable conditions in the capital  markets, which may adversely affect the value and liquidity of its  investments; and                                             |
|   |   |                                                                                                                                                                    |
| · |   | general global and domestic economic  conditions, including inflation, recessionary risks and volatile energy  costs.                                                   |

 

While we intend to consummate the proposed mergerwith Deerfield Management, if the proposed merger with Deerfield Management isnot approved by our stockholders or is not completed for other reasons, we willreview the strategic alternatives available for our business, including thepossible dissolution of our company and liquidation of our assets, thedischarge of any remaining liabilities, and the eventual distribution ofremaining assets, if any, to our stockholders.

 

### **If we failto regain compliance with the requirements for continued listing on The NASDAQGlobal Market, our common stock could be delisted from trading, which wouldadversely affect the liquidity of our common stock and our ability to raiseadditional capital or enter into strategic transactions.**

###  

On September 16, 2008,we received a letter from the NASDAQ Stock Market’s Listing QualificationsDepartment providing notification that, for the last 30 consecutive businessdays, the bid price of our common stock had closed below the minimum $1.00 pershare requirement for continued inclusion on The NASDAQ Global Market, referredto as the minimum bid price rule. NASDAQ stated in such notification that, inaccordance with the NASDAQ Marketplace Rules, we have 180 calendar days, oruntil March 16, 2009, to regain compliance with the minimum bid pricerule. On October 22, 2008, we received an additional letter from NASDAQ toadvise us that it has suspended enforcement of the bid price requirements forall NASDAQ listed companies through January 19, 2009. On December 23, 2008, we received another letterfrom NASDAQ to advise us that NASDAQ had determined to extend the suspension ofthe bid price requirements for all NASDAQ listed companies, and thatenforcement of the bid price rules will be reinstated on April 20,2009. The letter further stated that prior to the resumption of the bid pricerules, NASDAQ will contact us to inform us of the number of calendar daysremaining in our compliance period. Based upon the first suspension letter, inwhich NASDAQ informed us that we still had 151 days remaining in our 180 daycompliance period as of the suspension date, upon reinstatement of the bidprice rules on April 20, 2009, we believe that we will still havethat number of days to regain compliance.

 

Prior to the end of theremaining time in our compliance period following the reinstatement of the bidprice rules, if the bid price of our common stock closes at $1.00 per share ormore for a minimum of 10 consecutive business days, NASDAQ will provide writtennotification that we have achieved compliance with the minimum bid price rule.However, NASDAQ may, in its discretion, require that we maintain a bid price ofin excess of $1.00 for a period in excess of 10 days, but generally no morethan 20 days, before determining that we have demonstrated the ability tomaintain long-term compliance. If we do not regain compliance with the minimumbid price rule prior to the end of the remaining time in our complianceperiod following the reinstatement of the bid price rules, NASDAQ will providewritten notification that our securities will be delisted from The NASDAQGlobal Market. At that time, we may appeal NASDAQ’s determination to delist oursecurities to a NASDAQ Listing Qualifications Panel. We cannot assure you thatany such appeal, if made, would be successful. Alternatively, in the event suchdelisting is based solely upon non-compliance with the minimum bid price rule,we could apply to transfer our securities to The NASDAQ Capital Market,provided that we satisfy the requirements for initial listing on such market,other than the minimum bid price rule. If such an application were approved andwe otherwise maintain the listing requirements for The NASDAQ Capital Market,other than the minimum bid price requirement, we would be afforded theremainder of The NASDAQ Capital Market’s second 180 calendar day grace periodin order to regain compliance with the minimum bid price rule.

 

In the event that ourproposed merger with Deerfield Management is delayed or not completed at all,any potential delisting of our common stock from The NASDAQ Global Market wouldmake it more difficult for our stockholders to sell our common stock in thepublic market and would likely result in decreased liquidity and increasedvolatility for our common stock. There are many factors that may adverselyaffect our minimum bid price, including those described throughout this 

 

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section titled“Risk Factors.” Many of these factors are outside of our control. As a result,we may not be able to sustain compliance with the minimum bid price rule inthe long term.

 

**Commercialization risks and other factors mayadversely affect our ability to maintain sales of BiDil and, if successfullydeveloped, BiDil XR.**

 

Factors thatwe believe may materially adversely affect continued sales of BiDil, and mayalso affect sales of BiDil XR, if it is successfully developed andcommercialized, include:

 
| · |   | the discontinuation of our active  promotional programs as a result of our January 2008 restructuring plan;                                                                                                                                                                                                                                                                         |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| · |   | the unavailability of favorable government  and third-party payor reimbursement;                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| · |   | our inability to manufacture and sell BiDil  at a competitive price;                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| · |   | the availability in generic form and at  substantially lower prices of the individual components that constitute BiDil  (isosorbide dinitrate, which is separately marketed for angina, and  hydralazine hydrochloride, which is separately marketed for hypertension) and  the misperception by physicians, patients and payors that these generic  components are equivalent to BiDil; |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| · |   | the requirement by potential large  purchasers of BiDil, such as hospitals or health maintenance organizations,  or by state formularies, other government agencies or private payors that  approve reimbursement for drugs, that the generic components of BiDil be  substituted for BiDil;                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| · |   | the failure of physicians, third-party  payors and patients to accept a product intended to improve therapeutic  results based on ethnicity or to accept BiDil as being safe, effective, easy  to administer and medically necessary; and                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| · |   | our inability to maintain the necessary  patent protection, licenses and regulatory approvals required to manufacture  and sell BiDil.                                                                                                                                                                                                                                                   |

 

**If the third-party manufacturer of BiDilencounters delays or difficulties in production, we may not be able to meetdemand for the product and we may lose potential revenue, which would adverselyaffect our financial results and our ability to execute our business plan.**

 

We do notphysically manufacture BiDil and have no plans to do so. We have engagedSchwarz Pharma under a five-year exclusive manufacturing and supply agreementsolely for the three times daily immediate release dosage formulation of BiDil.The terms of the supply agreement provide that it may be terminated by eitherus or Schwarz Pharma under specified circumstances, including a material breachof the supply agreement by either party, the occurrence of a payment default byus, our material impairment of the manufacturing licenses we have granted toSchwarz Pharma or a failure of Schwarz Pharma to supply conforming products. Inaddition, either party may terminate the supply agreement in the event the FDAtakes any action, the result of which is to permanently prohibit themanufacture, sale or use of the product.

 

Furthermore,Schwarz Pharma may encounter difficulties in production. These problems mayinclude, but are not limited to:

 
| · |   | difficulties with production costs and  yields;                                |
|--------|--------|--------------------------------------------------------------------------------|
|   |   |                                                                           |
| · |   | quality control and assurance;                                                 |
|   |   |                                                                           |
| · |   | difficulties obtaining ingredients for our  products;                          |
|   |   |                                                                           |
| · |   | shortages of qualified personnel;                                              |
|   |   |                                                                           |
| · |   | compliance with strictly enforced federal,  state and foreign regulations; and |
|   |   |                                                                           |
| · |   | lack of capital funding.                                                       |

 

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If we areunable to maintain a commercially reasonable manufacturing agreement for theproduction of BiDil with Schwarz Pharma, we have no back-up manufacturing facilityand thus we would not be able to manufacture and sell BiDil until anotherfacility was qualified. The number of third-party manufacturers with themanufacturing and regulatory expertise and facilities necessary to manufacturefinished products for us on a commercial scale is limited, and it would take asignificant amount of time to arrange, qualify, and receive necessaryregulatory approval for alternative arrangements. We may not be able tocontract for alternative manufacturing on acceptable terms, if at all.

 

If we areunable to successfully contract for third-party manufacturing, or if SchwarzPharma or any other third-party manufacturer of BiDil fails to deliver therequired commercial quantities of finished product on a timely basis and at commerciallyreasonable prices, we may be unable to meet the demand for our product and wemay lose potential revenues, all of which could cause the price of our commonstock to decline and would adversely affect our financial results and ourability to execute our business plan.

 

**We rely on a single supplier for one of thetwo active ingredients in BiDil, and the loss of this supplier could prevent orinterrupt the sale of BiDil, which would materially harm our business.**

 

We rely onSumitomo Corp. for our supply of hydralazine hydrochloride, one of the twoactive ingredients in BiDil. We believe that Sumitomo is currently the onlysupplier that is qualified to provide hydralazine hydrochloride for themanufacture of BiDil. We do not have any agreement with Sumitomo regarding thesupply of hydralazine hydrochloride. If Sumitomo stops manufacturing or isunable to manufacture hydralazine hydrochloride, or if we are unable to procurehydralazine hydrochloride from Sumitomo on commercially favorable terms, wewill need to identify, qualify, and obtain FDA approval of a new drugapplication, or NDA, supplement for an alternative manufacturer/supplier ofhydralazine hydrochloride. If we are unable or delayed in doing this, we may beunable to continue to sell BiDil on commercially viable terms, if at all, orthe supply of BiDil may be interrupted. Furthermore, because Sumitomo iscurrently the sole qualified supplier of hydralazine hydrochloride for themanufacture of BiDil, Sumitomo exercises control over the price of hydralazinehydrochloride that we purchase. Any increase in the price for hydralazinehydrochloride may reduce our gross margins and adversely affect our ability tosell BiDil at a favorable price,unless an alternative manufacturer/supplier can be identified and qualified, aNDA supplement for the use of this manufacturer/supplier can be approved by theFDA, and a favorable price can be negotiated.

 

**BiDil is subject to ongoing regulatory reviewand oversight. If we fail to comply with continuing United States regulations,we could lose our approval to market BiDil and our business would be seriouslyharmed.**

 

Even afterapproval, any products we develop are subject to ongoing regulatory review andrestrictions, including the review of new clinical results and otherpost-marketing data. The FDA can propose to withdraw approval or placeadditional restrictions on indications for which we can market the product orthe manner in which we may distribute the product if new clinical data orexperience shows that a product is not safe for use under the approvedconditions of use.  In addition, we arerequired to report any serious and unexpected adverse experiences and certainquality problems with BiDil and make other periodic reports to the FDA.

 

The marketingclaims we are permitted to make in labeling or advertising regarding ourmarketed products must comply with FDA laws and regulations and are limited tothose specified in any FDA approval. Although we are not actively marketingBiDil, we could face liability for our previous marketing activities if the FDAbelieves that we have promoted our products for unapproved indications orotherwise failed to comply with the FDA’s promotional labeling or advertisingregulations, or guidelines regarding company support for continuing medicaleducation. Based on such allegations, the FDA could issue an untitled letter orwarning letter, or take other enforcement action including seizure of allegedlyviolative product, injunctions or civil or criminal prosecution against us andour officers or employees. In addition, the Department of Justice enforces lawsprohibiting kickbacks to healthcare providers and false claims in connectionwith government-funded reimbursement programs for drug purchases, such asMedicare and Medicaid, and any prior off-label marketing of BiDil could subjectus to civil or criminal prosecution, for which the government could seek torecover substantial monetary penalties, the imposition of restrictions on ourmarketing activities, and the exclusion of BiDil from eligibility forgovernment reimbursement programs.

 

In addition,the manufacturer and the manufacturing facilities we use to produce BiDil aresubject to periodic review and inspection by the FDA. We are required to reportany serious and unexpected adverse experiences and certain quality problemswith BiDil and make other periodic reports to the FDA. The discovery of anypreviously unknown problems with a product, manufacturer or facility may resultin restrictions on the product, manufacturer or manufacturing facility,including 

 

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withdrawal of the product fromthe market. Certain changes to an approved product often require prior FDAapproval before the product, as modified, may be marketed.

 

If we or ourthird-party manufacturers or service providers fail to comply with applicablefederal, state or foreign laws or regulations, we or they could be subject toenforcement actions which could affect our ability to develop, market and sellBiDil successfully and could harm our reputation and lead to lower acceptanceof BiDil by the market. These enforcement actions include product seizures;voluntary or mandatory recalls; patient or physician notifications, includingletters to healthcare professionals and corrective advertising; withdrawal ofproduct approvals; restrictions on, or prohibitions against, marketing ourproducts; operating restrictions; fines; restrictions on importation orexportation of our products; injunctions; debarments; civil and criminalpenalties; and suspension of review of, or refusal to approve, pendingapplications.

 

**Clinical testing of BiDil XR may not besuccessful, in which case we may be unable to commercialize BiDil XR and thevalue of our business will substantially decline.**

 

In order toobtain regulatory approvals for the commercial sale of BiDil XR, we will berequired to complete clinical trials in humans to demonstrate the safety andefficacy of BiDil XR. Clinical testing is expensive, difficult to design andimplement, can take many years to complete and is uncertain as to outcome. Afailure of one or more of our clinical trials of BiDil XR can occur at anystage of testing.

 

We met withthe FDA in December 2007, and the agency agreed that our clinicaldevelopment plan to conduct bioequivalence and pharmacodynamic studiescomparing BiDil XR to the current commercial immediate release formulation ofBiDil is acceptable. The agency indicated that such a plan could support FDAapproval to commercialize BiDil XR, if bioequivalence is demonstrated. Thebioequivalence study design compares the pharmacokinetics of the XR formulationto the pharmacokinetics of the immediate release formulation. Pharmacokineticsrefers to the manner in which the body absorbs, distributes, metabolizes andexcretes the study drug. The adequacy of the results will ultimately bedetermined by the FDA during the regulatory review period. Although we are encouragedby this meeting with the FDA, we may experience numerous unforeseen eventsduring, or as a result of, our planned clinical trials of BiDil XR that coulddelay or prevent our ability to receive regulatory approval for, orcommercialize, BiDil XR, including:

 

·                  conditions imposed on us by the FDAregarding the scope or design of our clinical trials;

 

·                  difficulty obtaining or maintainingIRB approval of studies;

 

·                  problems in finalizing theformulation of BiDil XR through our planned clinical studies;

 

·                  our clinical trials may producenegative or inconclusive results, and we may decide, or regulators may requireus, to conduct additional clinical trials, including testing alternativeformulations of BiDil XR;

 

·                  the number of patients required forour clinical trials may be larger than we anticipate, enrollment in ourclinical trials may be slower than we currently anticipate, or participants maydrop out of our clinical trials at a higher rate than we anticipate, any ofwhich would result in significant delays and increased costs;

 

·                  our third party contractors may failto comply with regulatory requirements or meet their contractual obligations tous in a timely manner;

 

·                  we might have to suspend or terminateone or more of our clinical trials if the participants are being exposed tounacceptable health risks;

 

·                  regulators may require that we hold,suspend or terminate clinical research for various reasons, includingnoncompliance with regulatory requirements;

 

·                  the cost of our clinical trials maybe greater than we anticipate;

 

·                  the supply or quality of BiDil XR orother materials necessary to conduct our clinical trials may be insufficient orinadequate; and

 

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·                  the effects of BiDil XR may not bethe desired effects or may include undesirable side effects or may have otherunexpected characteristics.

 

If we arerequired to conduct additional clinical trials or other testing of BiDil XRbeyond those that we currently contemplate, if we are unable to successfullycomplete our clinical trials or other testing, if the results of these trialsor tests are not positive or are only modestly positive or if there are safetyconcerns, we may:

 

·                  be delayed in obtaining marketingapproval for BiDil XR;

 

·                  not be able to obtain marketingapproval;

 

·                  obtain approval for an indicationthat is not as broad as intended; or

 

·                  have the product removed from themarket after obtaining marketing approval.

 

Our productdevelopment costs will also increase if we experience delays in testing orapprovals. We do not know whether future clinical trials will begin as planned,will need to be redesigned or will be completed on schedule, if at all.Significant clinical trial delays also could shorten any periods during whichwe may have the exclusive right to commercialize BiDil XR, or allow ourcompetitors to bring products to market before we do, which could impair ourability to commercialize BiDil XR and may harm our business and results ofoperations.

 

**If we are not able to obtain requiredregulatory approvals, we will not be able to commercialize BiDil XR and ourability to generate revenue will be materially impaired.**

 

BiDil XR, andthe activities associated with its development and commercialization, includingtesting, manufacture, safety, efficacy, recordkeeping, labeling, storage,approval, advertising, promotion, sale and distribution, are subject tocomprehensive regulation by the FDA and other regulatory agencies in the UnitedStates and by authorities in other countries. Failure to obtain regulatoryapproval for BiDil XR will prevent us from commercializing BiDil XR.

 

Securing FDAapproval may require the submission of extensive preclinical and clinical data,information about product manufacturing processes and inspection of facilitiesand supporting information to the FDA for each therapeutic indication toestablish the product candidate’s safety and efficacy. BiDil XR may not beeffective, may be only moderately effective or may prove to have undesirableside effects, toxicities or other characteristics that may preclude ourobtaining regulatory approval or prevent or limit commercial use.

 

The process ofobtaining regulatory approvals is expensive and often takes many years, if approvalis obtained at all, and can vary substantially based upon the type, complexityand novelty of the product candidate involved. Changes in the regulatoryapproval policy during the development period, changes in or the enactment ofadditional statutes or regulations, or changes in regulatory review for eachsubmitted product application, may cause delays in the approval or rejection ofan application. The FDA has substantial discretion in the approval process andmay refuse to accept any application or may decide that our data areinsufficient for approval and require additional preclinical, clinical or otherstudies. In addition, varying interpretations of the data obtained frompreclinical and clinical testing could delay, limit or prevent regulatoryapproval of a product candidate. Any regulatory approval we ultimately obtainmay be limited in scope or subject to restrictions or post-approval commitmentsthat render the product not commercially viable. If any regulatory approvalthat we obtain is delayed or is limited, we may decide not to commercializeBiDil XR after receiving that approval.

 

**The development and future commercializationof BiDil XR may be terminated or delayed, and the cost of development andfuture commercialization may increase, if third parties on whom we rely tomanufacture BiDil XR do not fulfill their obligations.**

 

We do not havemanufacturing capabilities for BiDil XR and have no current plans to developany such capacity in the future. In order to continue to develop BiDil XR,apply for regulatory approvals and commercialize this product, we plan to relyon our collaborative licensor, Elan Pharma International Limited, and itsaffiliate, Elan Drug Delivery, Inc., for the production of clinical andcommercial quantities of BiDil XR. In addition, contract manufacturers aresubject to ongoing periodic, unannounced inspection by the FDA andcorresponding state and foreign agencies or their designees to ensure strictcompliance with current Good Manufacturing Practices, or cGMP, and othergovernmental regulations and corresponding foreign standards. The cGMPrequirements govern, among other things, quality control of the manufacturingprocess and documentation of policies and procedures. Other than throughcontract, we do not have control over compliance by our 

 

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contract manufacturers withthese regulations and standards. Our present or future contract manufacturersmay not be able to comply with cGMP and other FDA requirements or similarregulatory requirements outside the United States. Any failure by our contractmanufacturers or us to comply with applicable regulations could result in sanctionsbeing imposed on us, including fines, injunctions, civil penalties, failure ofregulatory authorities to grant marketing approval of BiDil, delays, suspensionor withdrawal of approvals, seizures or recalls of such product candidate,operating restrictions, and criminal prosecutions, any of which couldsignificantly and adversely affect our business. We will depend upon thesethird parties to perform their obligations in a timely manner and in accordancewith applicable laws and regulations, including those related to qualitycontrol and quality assurance. To the extent that third-party manufacturerswith whom we contract fail to perform their obligations in accordance withapplicable laws and regulations, we may be adversely affected in a number of ways,including:

 

·                  we may not be able to initiate orcontinue clinical trials of BiDil XR;

 

·                  we may be delayed in submittingapplications for regulatory approvals for BiDil XR; and

 

·                  even if we successfully commercializeBiDil XR, we may be required to cease distribution and/or recall some or allbatches of the product and we may not be able to meet commercial demands forour products or achieve profitability.

 

**Risks Relating to Our Intellectual PropertyRights**

 

**Our patent protection for BiDil, theindividual components of which are available in generic form, is limited, andwe may be subject to generic substitution or competition and resulting pricingpressure.**

 

We have nocomposition of matter patent covering BiDil, our product for the treatment ofheart failure in self-identified black patients as an adjunct to currentstandard therapy. BiDil is a fixed-dose combination of two individualcomponents, isosorbide dinitrate and hydralazine hydrochloride, both of whichare available in generic form, which are approved and separately marketed, indosages similar to those we include in BiDil, for indications other than heartfailure, at prices below the prices we are charging for BiDil. We have twoissued method-of-use patents that expire in 2020. One patent covers the use of thecombination of isosorbide dinitrate and hydralazine hydrochloride to reducemortality associated with chronic congestive heart failure, for improving theoxygen consumption, for improving the quality of life or for improving exercisetolerance in a black patient. The other patent covers the use of thecombination of isosorbide dinitrate and hydralazine hydrochloride in certaindosage amounts for reducing mortality associated with heart failure in a blackpatient. Our method of use patent that covered the use of the combination ofisosorbide dinitrate and hydralazine hydrochloride to reduce the incidence ofmortality associated with chronic congestive heart failure expired inaccordance with its terms in April 2007.

 

We may not beable to enforce our method-of-use patents to prevent physicians fromprescribing isosorbide dinitrate and hydralazine hydrochloride separately forthe treatment of heart failure in black patients, even though neither drug isapproved for such use. We also may not be able to enforce these method-of-usepatents to prevent hospitals and pharmacies from supplying such patients withthese individual components separately in lieu of BiDil.

 

Other factorsmay also adversely affect our patent protection for BiDil. If we are successfulin marketing BiDil, manufacturers of generic drugs will have an incentive tochallenge our patent position. The combination therapy of isosorbide dinitrateand hydralazine hydrochloride for use in heart failure was developed throughlengthy, publicly-sponsored clinical trials conducted during the 1980s, priorto the filing of the patent application that resulted in the 2007 patent. TheU.S. Patent and Trademark Office, or U.S. patent office, considered publishedreports on these clinical trials and concluded that they did not constituteprior art that would prevent the issuance of the 2007 patent. The U.S. patentoffice also considered the question of whether the 2007 patent constitutedprior art with respect to the 2020 patents, and determined that the claims ofthe 2020 patents were non-obvious and patentable. A court considering thevalidity of the 2020 patents with respect to questions of prior art might bepresented with other alleged prior art or might reach conclusions differentthan those reached by the U.S. patent office. If the 2020 patents were to beinvalidated or if physicians were to prescribe isosorbide dinitrate andhydralazine hydrochloride separately for heart failure in black patients, ourBiDil revenue could be significantly reduced, we could fail to recover the costof developing BiDil and BiDil might not be a viable commercial product.

 

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**If we are not able to obtain and enforcepatent protection for our discoveries, our ability to divest our productcandidates and technologies will be harmed.**

 

Our successdepends, in part, on our ability to protect proprietary methods andtechnologies that we developed under the patent and other intellectual propertylaws of the United States and other countries, in order to prevent others fromusing our inventions and proprietary information. Because certain United Statespatent applications are confidential until patents issue, such as applicationsfiled prior to November 29, 2000, or applications filed after such datewhich will not be filed in foreign countries, third parties may have filedpatent applications for technology covered by our pending patent applications withoutour being aware of those applications, and our patent applications may not havepriority over patent applications of others.

 

The process ofseeking patent protection for our discoveries is expensive and time consuming,and we may not be able to prosecute all necessary or desirable patentapplications or maintain all issued patents at a reasonable cost. Despite ourefforts to protect our proprietary rights, unauthorized parties may be able toobtain and use information that we regard as proprietary. The mere issuance ofa patent does not guarantee that it is valid or enforceable; even if we haveobtained patents, they may not be valid or enforceable against third parties.

 

The issuedpatents and patent applications for our potential product candidates and nitricoxide technology include claims with respect to both the composition ofspecific products or compounds and specific methods of using these products orcompounds in therapeutic areas. In some cases, like BiDil, our only patentprotection is with respect to the method of using a product or compound.Method-of-use patents may provide less protection for our product candidatesand products. If another company gains FDA approval for an indication separatefrom the one claimed in our method-of-use patents, physicians may be able toprescribe that product for use in the approved indication. In addition,physicians may prescribe a product for which we or our potential strategicpartners have obtained approval for an unapproved indication for that product.As a practical matter, we or our potential strategic partners may not be ableto enforce our method-of-use patents against physicians prescribing productsfor such off-label use. Off-label use and any resulting off-label sales couldmake it more difficult to obtain the price we or our potential strategicpartners would otherwise wish to achieve for, or to successfully commercialize,our potential products. In addition, in those situations where we have onlymethod-of-use patent coverage for a product candidate, it may be more difficultto find a pharmaceutical company partner to license or support development ofour potential product candidates.

 

Our pendingpatent applications may not result in issued patents. The patent position ofpharmaceutical or biotechnology companies, including ours, is generallyuncertain and involves complex legal and factual considerations. The standardswhich the U.S. patent office and its foreign counterparts use to grant patentsare not always applied predictably or uniformly and can change over time. Thereis also no uniform, worldwide policy regarding the subject matter and scope ofclaims granted or allowable in pharmaceutical or biotechnology patents.Accordingly, we do not know the degree of future protection for our proprietaryrights or the breadth of claims allowed in any patents issued to us or toothers.

 

We also relyon trade secrets, know-how and technology, which are not protected by patents,to maintain our competitive position. If any trade secret, know-how or othertechnology not protected by a patent were to be disclosed to or independentlydeveloped by a competitor, our business and financial condition could bematerially adversely affected.

 

**If we become involved in patent litigation orother proceedings to enforce our patent rights, we would incur substantialcosts and expenses, could incur substantial liability for damages and could berequired to stop product development and commercialization efforts.**

 

A third partymay sue us for infringing on its patent rights. Likewise, we may need to resortto litigation to enforce a patent issued to us or to seek a declaratoryjudgment on the scope and validity of third-party proprietary rights. The costto us of any litigation or other proceedings relating to intellectual propertyrights, even if resolved in our favor, could be substantial, and the litigationwould divert management efforts. Some of our competitors may be able to sustainthe costs of complex patent litigation more effectively than we can becausethey have substantially greater resources. Uncertainties resulting fromlitigation could limit our ability to continue our operations.

 

If a thirdparty is able to successfully claim that the development or use by us ofproprietary technologies infringes upon that party’s intellectual propertyrights, we might be forced to pay damages, potentially including trebledamages, if we are found to have willfully infringed on such parties’ patentrights. In addition to any damages we might have to pay, a court could requireus to stop the infringing activity or obtain a license on terms that areunfavorable to us. In addition, some licenses may be non-exclusive, andtherefore our competitors may have access to the same technology licensed tous. If we 

 

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fail to obtain a requiredlicense or are unable to design around a patent, we may be unable toeffectively market some of our technology and product candidates, which couldlimit our ability to generate revenues or achieve profitability and possiblyprevent us from generating sufficient revenue to sustain our operations.

 

**We in-license a significant portion of ourprincipal proprietary technologies, and if we fail to comply with ourobligations under any of the related agreements, we could lose license rightsthat are necessary to commercializing BiDil and out-licensing our other productcandidates.**

 

We are a partyto several licenses that give us rights to third-party intellectual propertythat are necessary for our business. In particular, we have obtained theexclusive right to develop and commercialize BiDil pursuant to a licenseagreement with Dr. Jay N. Cohn, and some of our intellectual propertyrights relating to nitric oxide compounds have been obtained pursuant tolicense agreements with the Brigham and Women’s Hospital and Boston University.In addition, we may enter into additional licenses in the future. Theselicenses impose various development, commercialization, funding, royalty,diligence, and other obligations on us. If we breach these obligations, thelicensor may have the right to terminate the license or render the licensenon-exclusive, which could result in us being unable to develop, manufactureand sell products that are covered by the licensed technology.

 

**Risks Relating to Our Industry**

 

**We could be negatively impacted by theapplication or enforcement of federal and state fraud and abuse laws, includinganti-kickback laws and other federal and state anti-referral laws.**

 

We are subjectto various federal and state laws pertaining to healthcare fraud and abuse,including anti-kickback laws and physician self-referral laws. Violations ofthese laws are punishable by criminal and civil sanctions, including, in someinstances, imprisonment and exclusion from participation in federal and statehealthcare programs, including the Medicare, Medicaid and VeteransAdministration health programs. Because of the far-reaching nature of theselaws, we may be required to alter or discontinue one or more of our practicesto be in compliance with these laws. Healthcare fraud and abuse regulations arecomplex, and even minor irregularities can potentially give rise to claims thata statute or prohibition has been violated. Any violations of these laws, orany action against us for violation of these laws, even if we successfullydefend against it, could result in a material adverse effect on our business,financial condition and results of operations. Moreover, if there is a changein law, regulation or administrative or judicial interpretations, we may haveto change or discontinue our business practices or our existing businesspractices could be challenged as unlawful, which could have a material adverseeffect on our business, financial condition and results of operations.

 

In addition,we could become subject to false claims litigation under federal statutes,which can lead to treble damages based on the reimbursements by federal healthcareprograms, civil money penalties (including penalties levied on a per falseclaim basis), restitution, criminal fines and imprisonment, and exclusion fromparticipation in Medicare, Medicaid and other federal and state healthcareprograms. These false claims statutes include the False Claims Act, whichallows any person to bring suit on behalf of the federal government allegingthe submission of false or fraudulent claims, or causing to present such falseor fraudulent claims, under federal programs or contracts claims or otherviolations of the statute and to share in any amounts paid by the entity to thegovernment in fines or settlement. These suits against pharmaceutical andbiotechnology companies have increased significantly in recent years and haveincreased the risk that a healthcare company will have to defend a false claimaction, pay fines or restitution, or be excluded from the Medicare, Medicaid orother federal and state healthcare programs as a result of an investigationarising out of such action. It is possible that we could become subject to suchlitigation and, if we are not successful in defending against it, suchlitigation would have a material adverse effect on our business, financialcondition and results of operations. In addition, the cost of defending claimsor allegations under the False Claims Act, even if successful, would also havea material adverse effect on our business, financial condition and results ofoperations.

 

**We face significantcompetition and our ability to successfully compete has been significantlyadversely affected by our discontinuation of promotional activities for BiDil,which may result in others commercializing competitive products moresuccessfully.**

 

Thepharmaceutical industry is highly competitive and characterized by rapid andsignificant technological change. Moreover, because we have discontinued allpromotional activities for BiDil and we have ceased all research anddevelopment related to our nitric oxide-based product candidates, our ability toeffectively compete in the marketplace has been significantly adverselyaffected. Our principal competitors are large, multinational pharmaceuticalcompanies that have substantially greater financial and other resources than wedo and are conducting extensive research and development 

 

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activities on technologies andproduct candidates similar to or competitive with ours. Many of our competitorsare more experienced than we are in pharmaceutical development andcommercialization, obtaining regulatory approvals and product marketing andmanufacturing. As a result, our competitors may:

 

·                  develop and commercialize productsthat render BiDil and/or BiDil XR, if successfully developed andcommercialized, obsolete or non-competitive or that cause BiDil to be lessdesirable as a result of patent or non-patent exclusivity;

 

·                  develop product candidates and marketproducts that are less expensive or more effective than BiDil;

 

·                  initiate or withstand substantialprice competition more successfully than we can;

 

·                  have greater success in recruitingskilled scientific workers from the limited pool of available talent;

 

·                  more effectively negotiatethird-party licenses and strategic relationships; and

 

·                  take advantage of product acquisitionor other opportunities more readily than we can.

 

There are anumber of companies currently marketing and selling products to treat heart failurein the general population that compete with BiDil. These includeGlaxoSmithKline, plc, which currently markets Coreg®, Merck & Co., Inc.,which currently markets Vasotec® and AstraZeneca, plc, which currentlymarkets Toprol XL®. Wealso compete on the basis of the availability in generic form and atsubstantially lower prices of the individual components that constitute BiDil(isosorbide dinitrate, which is separately marketed for angina, and hydralazinehydrochloride, which is separately marketed for hypertension). Although thesegeneric components are not bioequivalent to BiDil, physicians have prescribedthem in lieu of prescribing BiDil and may continue to do so in the future.

 

We expect toface similar competitive factors with respect to BiDil XR to the extent thatBiDil XR is successfully developed and commercialized.

 

**We may be exposed to product liability claimsand may not be able to obtain or maintain adequate product liability insurance.**

 

Our businessexposes us to the risk of product liability claims that is inherent in theclinical testing, manufacturing and marketing of human therapeutic products.Our clinical trial and commercial product liability insurance is subject todeductibles and coverage limitations. We may not be able to obtain or maintaininsurance on acceptable terms, if at all. Moreover, any insurance that we doobtain may not provide adequate protection against potential liabilities, andour capital resources could be depleted as a result.

 

**Risks Relating to Our Common Stock**

 

**The price of our common stock is likely tocontinue to be volatile in the future.**

 

The stockmarket has from time to time experienced significant price and volumefluctuations that may be unrelated to the operating performance of particularcompanies. In addition, the market price of our common stock has been and maycontinue to be highly volatile. During the period from January 1, 2006 to March 1,2009, our stock price has ranged from a low of $0.15 per share on each of October 8and 10 and November 25, 2008 to a high of $14.90 per share January 9,2006. The following factors, among others, may affect the price of our commonstock:

 

·                  fluctuations in our financialresults, including with respect to sales of BiDil;

 

·                  announcements concerning fundamentalor material corporate transactions, restructuring or the like, or our failureto successfully consummate any such transaction, including the proposed mergerwith Deerfield Management;

 

·                  general market conditions, bothdomestic and international;

 

·                  announcements of technologicalinnovations or new commercial products by our competitors;

 

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·                  announcements of actual or potentialresults relating to our BiDil XR development program;

 

·                  governmental regulations andregulatory developments in both the U.S. and foreign countries affecting us orour competitors;

 

·                  disputes relating to patents or otherproprietary rights affecting us, our potential strategic partners or ourcompetitors;

 

·                  public concern as to the safety ofproducts developed by us or other biotechnology and pharmaceutical companies;

 

·                  fluctuations in price and volume inthe stock market in general, or in the trading of the stock ofbiopharmaceutical and biotechnology companies in particular, that are unrelatedto our operating performance;

 

·                  issuances of securities in equity,debt or other financings;

 

·                  sales of common stock by existingstockholders; and

 

·                  the perception that such issuances orsales could occur.

 

**Insiders have substantial control over us andcould delay or prevent a change in corporate control.**

 

As of March 17,2009, our directors and executive officer, together with their affiliates,owned, in the aggregate, approximately 33% of our outstanding common stock. Asa result, these stockholders, if acting together, may have the ability todetermine the outcome of most matters submitted to our stockholders forapproval, including the election and removal of directors and any merger,consolidation or sale of all or substantially all of our assets. In addition,these persons, if acting together, could have the ability to control themanagement and affairs of our company. Accordingly, this concentration ofownership may harm the market price of our common stock by:

 

·                  delaying, deferring or preventing achange in control of our company;

 

·                  impeding a merger, consolidation,takeover or other business combination involving our company; or

 

·                  discouraging a potential acquirerfrom making a tender offer or otherwise attempting to obtain control of ourcompany.

 

**Provisions in our charter documents and underDelaware law may prevent or frustrate attempts by stockholders to changecurrent management and hinder efforts to acquire a controlling interest in ourcompany.**

 

Provisions ofour restated certificate of incorporation and bylaws may discourage, delay orprevent a merger, acquisition or other change in control that stockholders mayconsider favorable, including transactions in which stockholders mightotherwise receive a premium for their shares. These provisions may prevent orfrustrate attempts by stockholders to replace or remove our current management.These provisions include:

 

·                  a prohibition on stockholder actionthrough written consent;

 

·                  a requirement that special meetingsof stockholders be called only by a majority of the board of directors, thechairman of the board or the chief executive officer;

 

·                  advance notice requirements forstockholder proposals and nominations;

 

·                  limitations on the ability ofstockholders to amend, alter or repeal our certificate of incorporation orbylaws; and

 

·                  the authority of the board ofdirectors to issue preferred stock with such terms as the board of directorsmay determine.

 

In addition, Section 203of the Delaware General Corporation Law prohibits a publicly held Delawarecorporation from engaging in a business combination with an interestedstockholder, generally defined as a person or entity which 

 

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together with its affiliatesowns or within the last three years has owned 15% of our voting stock, for aperiod of three years after the date of the transaction in which the personbecame an interested stockholder, unless the business combination is approvedin a prescribed manner. Accordingly, Section 203 may discourage, delay orprevent a change in control of our company.

 

**Substantially all of our outstanding commonstock may be sold into the market at any time. This could cause the marketprice of our common stock to drop significantly.**

 

Sales of asubstantial number of shares of our common stock in the public market couldoccur at any time. These sales, or the perception in the market that theholders of a large number of shares intend to sell shares, could reduce themarket price of our common stock. As of March 17, 2009, there were46,085,133 shares of common stock outstanding. Substantially all of theseshares may also be resold in the public market at any time. In addition, wehave a significant number of shares that are subject to outstanding options andrestricted stock awards. The sale of the common stock underlying these optionsand pursuant to these restricted stock awards after such time as the optionsand restricted stock awards have vested and become exercisable or free fromforfeiture, as the case may be, could cause a further decline in our stockprice. These sales also might make it difficult for us to sell equitysecurities in the future at a time and at a price that we deem appropriate.

 

**ITEM 1B. UNRESOLVED STAFF COMMENTS**

 

None.

 

**ITEM 2. PROPERTIES**

 

We sublease approximately4,000 square feet of office space at a facility located at 45 Hayden Avenuein Lexington, Massachusetts pursuant to a month-to-month sublease. We believethat our office space is adequate for our needs for the foreseeable future.

 

**ITEM 3. LEGAL PROCEEDINGS**

 

We are aware of apurported class action lawsuit related to the merger with Deerfield Managementthat has been filed against us, each of our directors, our president and chiefexecutive officer and certain of Deerfield Management’s affiliates in SuffolkCounty Superior Court in Massachusetts. The lawsuit, *MieczyslawStachnik et al. v. Kenneth Bate et al.*, Civil Action No. 09-0622-BLS,was filed on February 12, 2009 and alleges, among other things, that themerger consideration to be paid to our stockholders in the merger is unfair andundervalues our company. In addition, the complaint alleges that our directorsand our president and chief executive officer violated their fiduciary dutiesby, among other things, failing to maximize stockholder value and failing toengage in a fair sale process. The complaint seeks, among other relief, aninjunction preventing completion of the merger or, if the merger isconsummated, rescissory damages. We believe that this lawsuit is without meritand we plan to defend it vigorously.

 

**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

On December 15, 2008,we filed a proxy statement requesting approval at a special meeting ofstockholders, initially scheduled for January 14, 2009, for the sale ofsubstantially all of the assets related to our BiDil and BiDil XR drug businesspursuant to a purchase and sale agreement, dated October 22, 2008, betweenus and JHP Pharmaceuticals, LLC. In connection with the termination of thepurchase and sale agreement with JHP Pharmaceuticals and our subsequent entryinto a merger agreement with Deerfield Management, our board of directorscancelled this special meeting of stockholders.

 

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**PART II**

 

**ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS ANDISSUER PURCHASES OF EQUITY SECURITIES**

 

**Market Price of and Dividends on NitroMed’sCommon Stock and Related Stockholder Matters; Recent Sales of UnregisteredSecurities.**

 

*Market Price and Dividends*

 

Our commonstock is traded on The NASDAQ Global Market under the symbol “NTMD”. Thefollowing table sets forth the high and low sale prices per share of our commonstock as reported on The NASDAQ Global Market for the periods indicated.

 
| ** **                                   | ** ** | **Common stock price** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|
| ** **                                   | ** ** | **High**                         | ** ** | **Low** | ** ** |
| **Fiscal year ended December 31, 2008** |       |                             |       |   |   |
| First quarter                                |       | $                                | 1.25       |   | $ | 0.80 |   |
| Second quarter                               |       | $                                | 1.52       |   | $ | 0.81 |   |
| Third quarter                                |       | $                                | 1.12       |   | $ | 0.37 |   |
| Fourth quarter                               |       | $                                | 0.83       |   | $ | 0.15 |   |
| **Fiscal year ended December 31, 2007** |       |                             |       |   |   |
| First quarter                                |       | $                                | 4.44       |   | $ | 2.25 |   |
| Second quarter                               |       | $                                | 3.98       |   | $ | 2.11 |   |
| Third quarter                                |       | $                                | 2.52       |   | $ | 1.75 |   |
| Fourth quarter                               |       | $                                | 1.80       |   | $ | 1.00 |   |

 

On March 17,2009, the reported last sale price of our common stock on The NASDAQ GlobalMarket was $0.75 per share, and we had approximately 54 holders of record ofour common stock. This number does not include shareholders for whom shares areheld in a “nominee” or “street” name.

 

We have neverpaid or declared any cash dividends on our common stock. We currently intend toretain earnings, if any, to finance the growth and development of our business,and we do not expect to pay any cash dividends on our common stock in theforeseeable future. Payment of future dividends, if any, will be at thediscretion of our board of directors.

 

On September 16,2008, we received a letter from the NASDAQ Stock Market’s ListingQualifications Department providing notification that, for the last 30consecutive business days, the bid price of our common stock had closed belowthe minimum $1.00 per share requirement for continued inclusion on The NASDAQGlobal Market, referred to as the minimum bid price rule. NASDAQ stated in suchnotification that, in accordance with the NASDAQ Marketplace Rules, we have 180calendar days, or until March 16, 2009, to regain compliance with theminimum bid price rule.  On October 22,2008, we received an additional letter from NASDAQ to advise us that it hassuspended enforcement of the bid price requirements for all NASDAQ listedcompanies through January 19, 2009. On December 23,2008, we received another letter from NASDAQ to advise us that NASDAQ haddetermined to extend the suspension of the bid price requirements for allNASDAQ listed companies, and that enforcement of the bid price rules willbe reinstated on April 20, 2009. The letter further stated that prior tothe resumption of the bid price rules, NASDAQ will contact us to inform us ofthe number of calendar days remaining in our compliance period. Based upon thefirst suspension letter, in which NASDAQ informed us that we still had 151 daysremaining in our 180 day compliance period as of the suspension date, uponreinstatement of the bid price rules on April 20, 2009, we believethat we will still have that number of days to regain compliance.

 

Prior to the end of theremaining time in our compliance period following the reinstatement of the bidprice rules, if the bid price of our common stock closes at $1.00 per share ormore for a minimum of 10 consecutive business days, NASDAQ will provide writtennotification that we have achieved compliance with the minimum bid price rule.However, NASDAQ may, in its discretion, require that we maintain a bid price ofin excess of $1.00 for a period in excess of 10 days, but generally no morethan 20 days, before determining that we have demonstrated the ability tomaintain long-term compliance

 

Informationregarding our equity compensation plans and the securities authorized forissuance there under is set forth in Note 6 in our Notes to FinancialStatements below.

 

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**Comparative Stock Performance Graph**

 

Thecomparative stock performance graph below compares the cumulative totalstockholder return (assuming reinvestment of dividends, if any) from investing$100 on December 31, 2003 and plotted at the close of the last trading dayof the fiscal years ended December 31, 2004, 2005, 2006, 2007 and 2008, ineach of (i) our common stock, (ii) The NASDAQ Global Stock MarketIndex of U.S. Companies, which we refer to as the NASDAQ Composite Index, and (iii) TheNASDAQ Global Stock Market Pharmaceutical Index, which we refer to as theNASDAQ Pharmaceutical Index.

 

**COMPARISONOF 5 YEAR CUMULATIVE TOTAL RETURN***

Among NitroMedInc., The NASDAQ Composite Index

And The NASDAQPharmaceutical Index

** **

 

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*$100 invested on 12/31/03 in stock & index-including reinvestmentof dividends. 

Fiscal year ending December 31.

 

**COMPARISON OF CUMULATIVE TOTAL RETURN**

AmongNitroMed Inc., The NASDAQ Composite Index

And The NASDAQ Pharmaceutical Index

 
| **Measurement Period  (Fiscal Year Covered)** | ** ** | **NitroMed, Inc.** | ** ** | **NASDAQ Composite  Index** | ** ** | **NASDAQ  Pharmaceutical Index** | ** ** |
|--------------------------------------------------------------|------------|-------------------------|------------|----------------------------------|------------|---------------------------------------|------------|
| 12/31/2003                                                   |       | $                       | 100.00     |                             | $          | 100.00                                |       | $ | 100.00 |   |
| 12/31/2004                                                   |       | $                       | 370.91     |                             | $          | 110.08                                |       | $ | 110.22 |   |
| 12/31/2005                                                   |       | $                       | 194.15     |                             | $          | 112.88                                |       | $ | 111.87 |   |
| 12/31/2006                                                   |       | $                       | 34.10      |                             | $          | 126.51                                |       | $ | 114.89 |   |
| 12/31/2007                                                   |       | $                       | 14.06      |                             | $          | 138.13                                |       | $ | 106.37 |   |
| 12/31/2008                                                   |       | $                       | 5.29       |                             | $          | 80.47                                 |       | $ | 97.32 |   |

 

The information included underthe heading “Comparative Stock Performance Graph” in this Item 5 of ourannual report on Form 10-K shall not be deemed to be “soliciting material”or subject to Regulation 14A or 14C, shall not be deemed “filed” forpurposes of Section 18 of the Securities Exchange Act of 1934, as amended,or otherwise subject to the liabilities of that section, nor shall it be deemedincorporated by reference in any filing under the Securities Act of 1933, asamended, or the Exchange Act.

 

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**ITEM 6. SELECTED FINANCIAL DATA**

 

You shouldread carefully the financial statements included in this report, including thenotes to the financial statements and “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.” The selected financial data inthis section are not intended to replace the financial statements.

 

We derived thestatement of operations data for the years ended December 31, 2008, 2007and 2006 and the balance sheet data as of December 31, 2008 and 2007 fromour audited financial statements, which are included elsewhere in this report.We derived the statement of operations data for the years ended December 31,2005 and 2004 and the balance sheet data as of December 31, 2006, 2005 and2004 from our audited financial statements, which are not included herein.Historical results are not necessarily indicative of future results. See thenotes to the financial statements for an explanation of the method used todetermine the number of shares used in computing basic and diluted net loss percommon share.

 
| ** **                                                    | ** ** | **Year Ended December 31,**                         | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                    | ** ** | **2008(1)**                                                        | ** ** | **2007(1)** | ** ** | **2006(1)** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                    | ** ** | **(in thousands, except per share data)** | ** ** |
| **Statement of Operations Data:**                             |       |                                                               |       |   |   |   |   |   |   |   |   |
| Revenue                                                       |       | $                                                                  | 14,920     |   | $ | 16,019 |   | $ | 12,086 |   | $ | 6,047 |   | $ | 16,458 |   |
| Cost and operating expenses:                                  |       |                                                               |       |   |   |   |   |   |   |   |   |
| Cost of product sales                                         |       | 3,451                                                              |       | 4,236 |   | 3,560 |   | 8,009 |   | — |   |
| Research and development                                      |       | 2,751                                                              |       | 12,185 |   | 17,029 |   | 31,340 |   | 27,401 |   |
| Sales, general and administrative                             |       | 12,137                                                             |       | 31,358 |   | 59,403 |   | 74,596 |   | 20,185 |   |
| Restructuring charges                                         |       | 2,724                                                              |       | 1,004 |   | 5,283 |   | — |   | — |   |
| Total costs and operating expenses                            |       | 21,063                                                             |       | 48,783 |   | 85,275 |   | 113,945 |   | 47,586 |   |
| Loss from operations                                          |       | (6,143                                                             | )          | (32,764 | ) | (73,189 | ) | (107,898 | ) | (31,128 | ) |
| Other income, net                                             |       | 226                                                                |       | 1,190 |   | 1,852 |   | 2,046 |   | 1,355 |   |
| Net loss attributable to common  stockholders                 |       | $                                                                  | (5,917     | ) | $ | (31,574 | ) | $ | (71,337 | ) | $ | (105,852 | ) | $ | (29,773 | ) |
| Net loss per common share:                                    |       |                                                               |       |   |   |   |   |   |   |   |   |
| Basic and diluted                                             |       | $                                                                  | (0.13      | ) | $ | (0.75 | ) | $ | (1.96 | ) | $ | (3.49 | ) | $ | (1.14 | ) |
| Weighted average basic and diluted common  shares outstanding |       | 45,976                                                             |       | 41,997 |   | 36,399 |   | 30,355 |   | 26,152 |   |

 

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| (1) |   | We include the expense associated with  employee stock options in the Statement of Operations beginning in 2006 upon  the adoption of Statement of Financial Accounting Standards No. 123(R),  which resulted in an aggregate of $0.5 million, $5.0 million and  $8.0 million recorded in the line items of research and development and  sales, general and administrative expenses for the years ended  December 31, 2008, 2007 and 2006, respectively. |
|-----|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
| ** **                                        | ** ** | **As of December 31,** | ** ** |
|---------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                        | ** ** | **2008**                              | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                        | ** ** | **(in thousands)**               | ** ** |
| **Balance Sheet Data:**                           |       |                                  |       |   |   |   |   |   |   |   |   |
| Cash, cash equivalents and marketable  securities |       | $                                     | 17,445     |   | $ | 31,400 |   | $ | 42,153 |   | $ | 61,541 |   | $ | 142,367 |   |
| Working capital                                   |       | 16,538                                |       | 21,722 |   | 31,041 |   | 39,924 |   | 133,238 |   |
| Total assets                                      |       | 22,329                                |       | 35,567 |   | 48,705 |   | 76,521 |   | 149,357 |   |
| Long-term debt                                    |       | —                                |       | — |   | 3,728 |   | 10,653 |   | — |   |
| Accumulated deficit                               |       | (351,299                              | )          | (345,382 | ) | (313,808 | ) | (242,471 | ) | (136,619 | ) |
| Total stockholders’ equity                   |       | $                                     | 18,004     |   | $ | 22,225 |   | $ | 29,079 |   | $ | 33,066 |   | $ | 137,012 |   |

 

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**ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS**

 

**Recent Development – Proposed Mergerwith Deerfield Management**

 

On January 27, 2009, we entered into an agreement and plan ofmerger with certain entities affiliated with Deerfield Management, a healthcareinvestment organization, which we refer to collectively as DeerfieldManagement. As of the date of the merger agreement, Deerfield Management ownedapproximately 11% of our outstanding common stock.

 

At the effective time of the merger with Deerfield Management, eachoutstanding share of our common stock will be converted into the right toreceive $0.80 per share in cash, subject to adjustment if our net cash balanceat the closing of the merger is greater than or less than $12.3 million, ascalculated pursuant to the terms of the merger agreement. In addition, alloutstanding options to purchase our common stock will become accelerated infull immediately prior to the effective time of the merger. Any option notexercised prior to the effective time of the merger will be convertedautomatically into the right to receive cash in an amount equal to the excess,if any, of the merger consideration per share of common stock over the exerciseprice of the option, multiplied by the number of shares of common stockunderlying the option. The merger agreement includes a “go-shop” provision thatallowed us to solicit, negotiate and evaluate competing acquisition proposalsduring a post-signing period that ended on February 26, 2009. Wesolicited, but did not receive any alternative acquisition proposals prior tothe termination of the go-shop period. We currently expect to complete themerger with Deerfield Management in the second quarter of 2009 following thesatisfaction or waiver of all conditions to the merger, including the adoptionof the merger agreement by our stockholders at a special meeting ofstockholders, which is currently scheduled for April 22, 2009.

 

                Themerger agreement with Deerfield Management contains customary representations,warranties and covenants including, among others, covenants relating to usingcommercially reasonable efforts to obtain the requisite stockholder approval ofthe merger and related transactions, as well as our conduct of business duringthe period between the date of signing the merger agreement and the closing ofthe merger. Our and Deerfield Management’s obligations to consummate the mergerare subject to the satisfaction or waiver of customary conditions, including (1) requisiteapproval of the merger by our stockholders, (2) the absence of any orderor injunction preventing the consummation of the merger or any legalrequirement that makes the consummation of the merger illegal, (3) obtainingany required governmental authorizations or consents and (4) determinationof our final net cash in accordance with the merger agreement. Each party’sobligation to consummate the merger is also subject to other specifiedcustomary conditions, including the accuracy of the representations andwarranties of the other party, subject to an overall material adverse effectqualification, and material compliance by the other party with its covenants.The merger agreement also provides us and Deerfield Management with specifiedtermination rights. If the merger agreement is terminated under specifiedcircumstances, we will be required to reimburse Deerfield Management for itsdocumented fees and expenses associated with the merger agreement and thetransactions contemplated thereby, up to a maximum of $750,000.

 

Prior to entering into the merger agreement with Deerfield Management,we terminated our previously announced purchase and sale agreement with JHPPharmaceuticals, LLC and our previously announced agreement and plan of mergerwith Archemix Corp. in accordance with the terms of each of those agreements,including the payment of termination fees. In connection with the terminationof the JHP purchase and sale agreement, we paid a fee of approximately $900,000to JHP. In connection with the termination of the Archemix merger agreement, wepaid a fee of $1,500,000 to Archemix.

 

**BiDil**

 

We are themaker of BiDil, which is indicated for the treatment of heart failure inself-identified black patients as an adjunct to current standard therapies.BiDil is an orally administered fixed-dose combination of isosorbide dinitrateand hydralazine hydrochloride. The FDA approved BiDil in June 2005 and wecommercially launched BiDil in July 2005. We are currently a party to anexclusive five-year manufacturing and supply agreement with Schwarz PharmaManufacturing, Inc., which is now a division of UCB S.A., for the threetimes daily immediate release dosage formulation of BiDil.

 

In January 2008, we discontinued active promotional activities forBiDil based upon our determination that the successful commercialization ofBiDil requires a magnitude of resources that we cannot allocate to the program,as well as our plans to conserve cash in order to pursue the developmentof BiDil XR, an extended release formulation of BiDil. We concurrentlyimplemented a restructuring plan that eliminated approximately 80 positions,and our reduced headcount currently stands at four full-time positions.Although we have discontinued active promotional efforts related to BiDil, wecontinue to contract for the manufacturing of, and to sell, BiDil and maintainthe product on the market forpatients through 

 

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normalwholesale and retail channels. We have also conducted limited advertising inselect medical publications, and have utilized a third-party marketing firm tocontact healthcare professionals on our behalf, in each case in an effort tomaintain a limited market presence for BiDil. In conjunction with implementingour January 2008 restructuring plan, we implemented a plan to pursuestrategic alternatives for our business, including the potential divestiture ofour BiDil and BiDil XR business and/or our nitric oxide intellectual propertyportfolio, a merger or consolidation with another company, or other comparablearrangements.

 

Our January 2008restructuring follows the elimination of our discovery research program in March 2006and the replacement of our sales force with a small team of seniorcardiovascular business managers in October 2006.  The January 2008 restructuring alsofollows our efforts in August 2007 to deploy an expanded fieldorganization designed to focus on selected prescriber targets.

 

**BiDil XR**

 

BiDil is anorally-administered medicine that is presently dosed three times daily. Inconnection with our efforts to develop BiDil XR as a once-daily formulation, inFebruary 2007 we entered into a license agreement with Elan PharmaInternational Limited, or Elan, pursuant to which Elan granted to us anexclusive worldwide royalty-bearing license to import, use, offer for sale andsell an oral capsule formulation incorporating specified technology owned orcontrolled by Elan and containing, as its sole active combination ofingredients, the combination of the active drug substances isosorbide dinitrateand hydralazine hydrochloride (which includes BiDil XR). In considerationfor the grant of the license, we have agreed to pay Elan royalties that arecalculated by reference to annual net sales parameters set forth in theagreement. In addition, we have also agreed to pay Elan specified amounts uponthe achievement of specified development and commercialization milestone eventsset forth in the agreement.

 

In December 2007, wemet with the FDA to discuss our proposed development plan for BiDil XR. The FDAagreed that our clinical development plan to conduct bioequivalence andpharmacodynamic studies comparing BiDil XR to the current commercial immediaterelease formulation of BiDil is acceptable. Our proposed plan could support FDAapproval to commercialize BiDil XR, if bioequivalence is demonstrated. Thebioequivalence study design compares the pharmacokinetics of the BiDil XRformulation to the pharmacokinetics of BiDil. Pharmacokinetics refers to themanner in which the body absorbs, distributes, metabolizes and excretes thestudy drug. The adequacy of the results will ultimately be determined by theFDA during the regulatory review period.

 

In conjunction withentering into the license agreement with Elan, we also entered into adevelopment agreement with an affiliate of Elan, pursuant to which we haveconducted the clinical studies on BiDil XR prototypes. Our pilot clinicaltrials have tested several BiDil XR prototypes and compared theirpharmacokinetic profile with BiDil tablets. In preliminary clinical studies inhealthy volunteers, we have demonstrated our ability to delay the release ofisosorbide dinitrate and hydralazine hydrochloride by varying the amount ofcoating and ratios of different polymers on beads in capsules. We havecontinued to develop and refine BiDil XR prototypes as we seek a finalformulation. However, additional clinical studies and trials will be requiredin order to finalize the BiDil XR formulation prior to the commencement ofbioequivalence trials.  Based upon ouractivities in 2008 related to our now terminated agreement with JHP for thepurchase and sale of our BiDil and BiDil XR drug business, as well as ourdecision to enter into a merger agreement with Deerfield Management, we havenot yet commenced the next set of clinical trials pursuant to our BiDil XRdevelopment plan. We expect to incur minimal expenses in 2009 in connectionwith BiDil XR development activities.

 

**Liquidity**

 

Since ourinception, we have mainly funded our operations through the sale of equitysecurities, debt financings, license fees, research and development funding,milestone payments from our collaborative partners, and more recently, sales ofBiDil. We have never been profitable and have incurred an accumulated deficitof $351.3 million as of December 31, 2008.

 

We estimatethat our operating expenses related to research and development and sales,general and administrative functions for the year ending December 31, 2009will be approximately $11.5 million to $13.5 million, includingshare-based compensation expense related to Statement of Financial AccountingStandards No. 123(R), but excluding cost of product sales.

 

At December 31,2008, our principal source of liquidity was $17.4 million of cash, cashequivalents and short-term marketable securities, which excludes approximately$1.6 million par value of auction rate securities classified as long-term 

 

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marketablesecurities due to liquidity constraints. Pending the completion of our mergerwith Deerfield Management, we expect to incur operating expenses going forwardprimarily related to keeping BiDil available on the market. We expect to incurminimal additional expenses in 2009 related to the further development of BiDilXR. Whether or not the merger with Deerfield Management is completed, webelieve that our existing sources of liquidity and the cash expected to begenerated from future sales of BiDil, together with the significant reductionin expenditures as a result of our January 2008 restructuring, will besufficient to fund our operations for at least the next twelve months. In theevent that the planned merger with Deerfield Management is significantlydelayed or is not completed at all, our future revenue from sales of BiDilcould decline significantly based on a number of factors, including a declinein BiDil prescriptions by healthcare providers and a decline in the willingnessof third party payors to provide reimbursement at favorable levels, in eachcase due, at least in part, to the prior elimination of our sales force anddiscontinuation of our active promotional efforts related to BiDil.

 

**Financial Operations Overview**

 

*Revenue.* Our first commercial product, BiDil, was launched in July 2005, andgenerated product sales of $14.9 million for the year ended December 31,2008. Prior to the launch of BiDil, all of our revenue had been derived fromlicense fees, research and development payments and milestone payments that wereceived from our corporate collaborators. We discontinued active promotion ofBiDil in January 2008.

 

*Research and Development.*  Research and development expense consists ofexpenses incurred in identifying, developing and testing product candidates.These expenses consist primarily of salaries and related expenses for personnel,fees paid to professional service providers for independent monitoring andanalysis of our clinical trials, costs of contract research and manufacturing,costs of facilities and BiDil medical support costs.

 

The followingsummarizes our primary research and development programs during the years endedDecember 31, 2008, 2007 and 2006. In some cases, we have not providedprogram costs because prior to 2000 we did not track and accumulate costinformation by research program.

 

·                  *BiDil.*  From May 2001 to July 2004, weenrolled 1,050 patients at 169 clinical sites in the United States in ourphase III clinical trial for BiDil. We halted the trial in July 2004due to a significant survival benefit in the preliminary data for patientstaking BiDil. The FDA approved BiDil on June 23, 2005, and we launchedBiDil in July 2005. The total cost for the BiDil A-HeFT trial wasapproximately $43.0 million.

 

·                  *BiDilXR.*  The current formulationof BiDil is an immediate-release tablet that must be taken three times daily.We have pursued the development of BiDil XR, an extended release formulation ofBiDil that could be taken once a day. To date, we have incurred approximately$11.0 million in connection with the development of BiDil XR. Preliminaryclinical studies of BiDil XR demonstrated proof of principle, and we commencedclinical development of BiDil XR in October 2006. Additional formulationstudies and trials will be required in order to finalize the formulation priorto the commencement of bioequivalence trials. Based upon our activities in 2008related to our now terminated agreement with JHP for the purchase and sale ofour BiDil and BiDil XR drug business, as well as our decision to enter into amerger agreement with Deerfield Management, we have not yet commenced the nextset of clinical trials pursuant to our BiDil XR development plan. We expect toincur minimal expenses in 2009 in connection with BiDil XR developmentactivities. Due to its stage of development, and the uncertainties inherent inpharmaceutical development generally, we may not be able to successfullydevelop and commercialize BiDil XR in the event that the merger with DeerfieldManagement is not completed.

 

·                  *OtherDiscovery Research.*  We haveused our know-how and expertise in nitric oxide to develop preclinical stagedrug candidates that are nitric oxide-enhancing versions of existing medicinesin the areas of cardiovascular, gastrointestinal/anti-inflammatory andpulmonary medicine. These studies have not progressed beyond a discovery stageof testing, and it remains speculative whether the addition of nitric oxidewill result in an improved clinical profile of these medicines. We continue toseek divestiture opportunities for the intellectual property rights associatedwith these technologies, and we have no plans to engage in any future researchand development activities with respect to these programs. We cannot be certainif we will be able to secure divestiture arrangements for our nitricoxide-based intellectual property on favorable terms, if at all.

 

*Sales, General and Administrative.*  Sales, general and administrative expense hashistorically consisted primarily of salaries and other related costs forpersonnel in sales and marketing, executive, finance, investor relations,accounting, business development and human resource functions. Other costsinclude facility costs not otherwise included in research and 

 

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development expense; costs forpublic relations, advertising and promotion services; professional fees forlegal and accounting services; and costs related to our former arrangementswith a contract sales organization.

 

*Non-Operating Income.*  Non-operating income includes interest earnedon our cash, cash equivalents and marketable securities, auction ratesecurities impairments, state taxes and interest expense associated with ourlong-term debt.

 

**Results of Operations**

 

***Years Ended December 31,2008, 2007 and 2006***

 

*Revenue.* Total revenue for the year ended December 31, 2008 was$14.9 million, compared to $16.0 million in 2007 and $12.1 millionin 2006. Product sales for the year ended December 31, 2008 were$14.9 million, compared to $15.3 million in 2007 and$12.1 million in 2006. The decrease in product sales is due to a reductionin prescriptions of BiDil in 2008 compared to 2007.

 

Research anddevelopment revenues were $-0- for the year ended December 31, 2008,compared to $0.8 million for 2007 and $-0- for 2006. The$0.8 million, or 100%, decrease in research and development revenues in2008 compared to 2007 was due to a one-time upfront payment received inconnection with our non-exclusive licensing of certain non-strategicintellectual property in October 2007 for which we have no continuingobligation.

 

*Cost of Product Sales.*  Cost of product sales for the year ended December 31,2008 was $3.5 million, compared to $4.2 million in 2007 and$3.6 million in 2006. The $0.7 million, or 19%, decrease in cost ofproduct sales in 2008 compared to 2007 is primarily due to a $1.7 milliondecrease in inventory impairment charges, offset by a $0.8 million increase inroyalties. The $0.6 million, or 19%, increase in cost of product sales in2007 compared with 2006 was primarily due to an increase of $0.8 millionin inventory impairment charges related to commercial trade inventory, patient sampleinventory and contractual purchase commitments. The charges were due to ourthen current estimate of inventory requirements based on our sales forecast.

 

*Research and Development.*  Research and development expense for the yearended December 31, 2008 was $2.8 million, compared to$12.2 million in 2007 and $17.0 million in 2006. The$9.4 million, or 77%, decrease in research and development expenses in2008 compared with 2007 was primarily the result of a decrease in payroll and benefitsdue to our restructuring in January 2008, decreases in the areas ofcontinuing medical education, clinical advisory boards, medical services fees,publications, stock-based compensation expense and other various contractedservices totaling $5.9 million, and a $3.5 million decrease in spendingrelated to BiDil and BiDil XR. The $4.8 million, or 28%, decrease inresearch and development expenses in 2007 compared with 2006 was primarily theresult of decreased clinical and medical expenses needed to support BiDil, adecrease in payroll and benefits due to our restructuring in March 2006,and decreases in the areas of continuing medical education, clinical advisoryboards, medical services fees, publications, stock-based compensation expenseand other various contracted services totaling $8.6 million, offset by anincrease of $3.8 million related to the development of BiDil XR.

 

The followingtable summarizes the primary components of our research and development expensefor our principal research and development programs for the fiscal years ended December 31,2008, 2007 and 2006.

 
| ** **                                          | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------|------------|-----------------------|------------|
| **Research and Development Program** | ** ** | **2008**              | ** ** | **2007** | ** ** | **2006** | ** ** |
| BiDil                                               |       | $                     | 1,106,000  |   | $ | 5,339,000 |   | $ | 9,603,000 |   |
| BiDil XR                                            |       | 1,619,000             |       | 6,581,000 |   | 2,774,000 |   |
| Other discovery research                            |       | 26,000                |       | 265,000 |   | 4,652,000 |   |
| Total research and development expense              |       | $                     | 2,751,000  |   | $ | 12,185,000 |   | $ | 17,029,000 |   |

 

*Sales, General and Administrative.*  Sales, general and administrative expense forthe year ended December 31, 2008 was $12.1 million, compared to$31.4 million in 2007 and $59.4 million in 2006. The$19.3 million, or 61%, decrease in sales, general and administrativeexpense in 2008 compared to 2007 was primarily due to a $8.4 millionreduction in salary and benefit expenses from our restructuring in January 2008,a $6.6 million reduction in advertising and promotional services andpublic relations, a $0.7 million reduction in rent expenses, and a$2.4 million reduction in stock-based compensation expense. The$28.0 million, or 47%, decrease in sales, general and administrativeexpense in 2007 compared to 2006 was primarily due to a $17.3 millionreduction in salary and benefit expenses from the restructuring of our sales 

 

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force in October 2006,offset by the hiring of a smaller sales force in mid-2007, a $5.1 millionreduction in advertising and promotional services and public relations, a$1.6 million reduction in rent expenses, a $1.4 million reduction instock-based compensation expense, and a $1.4 million reduction inconsulting expenses.

 

*Restructurings.*  In the first quarter of 2006, we recorded arestructuring charge of $2.0 million related to a restructuring of ourdiscovery research operations to better align costs with revenue and operatingexpectations. The restructuring charges pertained to employee severance andimpairment of assets and were recorded in accordance with Statement of FinancialAccounting Standards No. 146, *Accountingfor Costs Associated with Exit or Disposal Activities,* orSFAS 146, and Statement of Financial Accounting Standards No. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets,* or SFAS 144. In connection with therestructuring, we terminated 30 employees in our discovery research group, orapproximately 30% of our workforce, resulting in a charge of $1.4 million.All employees were terminated as of March 31, 2006. As a result ofterminating these employees, we recorded an impairment charge for certainresearch laboratory equipment, computer equipment, and furniture and fixturesaggregating $0.6 million, for which the future use was uncertain. Theseassets were written down to their fair value utilizing a third party appraiserto estimate the fair value of the assets based on current market quotes and thecurrent condition of the equipment, furniture and fixtures.

 

In the fourthquarter of 2006, we recorded a restructuring charge of $3.2 million, whichincludes severance benefits of $2.5 million and impairment charges of$0.7 million for certain research and development equipment, leaseholdimprovements, furniture and fixtures, and computers. The restructuring chargeswere recorded in accordance with SFAS 146 and SFAS 144. Thisrestructuring program included the elimination of 120 sales personnel and eightgeneral and administrative and research and development personnel. Theseemployees were terminated in October 2006, and no employee remainedemployed at December 31, 2006. Due to these actions, certain research anddevelopment equipment, leasehold improvements, furniture and fixtures andcomputers became impaired. These assets were written down to the fair valuebased on either a third-party quote, or the estimated discounted cash flowsthey would generate over the remaining economic life.

 

In the firstquarter of 2007, we recorded a restructuring charge of $1.0 millionrelated to vacating our former headquarters location. The charge was recordedpursuant to SFAS 146. In March 2007, we entered into an Assignment ofLease and Assumption Agreement, which we refer to as the Assignment Agreement,with Shire Human Genetic Therapies, Inc., or Shire, pursuant to which weassigned our lease for office and laboratory space located at 125 Spring Streetin Lexington, Massachusetts, which we refer to as the Spring Street Lease.Pursuant to the terms of the Assignment Agreement, we agreed to pay Shire theamount of approximately $1.2 million as consideration for Shire’s assumptionof the Spring Street Lease. In addition to this charge, we incurred$0.6 million in expenses primarily related to real estate brokerage feesand clean-up costs. Offsetting these charges was a reversal of$0.8 million in accrued rent related to the Spring Street Lease. Allamounts were paid as of June 30, 2007.

 

In the first quarter of 2008, we recordedrestructuring charges of $2.7 million, which includes severance benefitsof $2.6 million related to the reduction of our employee headcount fromapproximately 90 to approximately six positions, and impairment charges of$0.1 million for disposal of computer equipment. The severance benefitcharges were recorded in accordance with Statement of Financial AccountingStandards No. 112, *Employers’**Accounting for Postemployment Benefits*, or SFAS 112, for contractualtermination benefits for certain executives and SFAS 146 for one-timetermination benefits for the remainder of employees terminated. As of December 31,2008, we owed $24,000 for salary continuation payments.

 

*Stock-Based Compensation Expense.*  We follow the fair value recognitionprovisions of Statement of Financial Accounting Standards No. 123(R), *Share-Based Payment*, or SFAS 123R. Compensation cost recognized subsequent to December 31,2005 includes: (a) compensation cost for all stock-based payments grantedbut not yet vested as of January 1, 2006, based on the grant-date fairvalue estimated in accordance with the original provisions of Statement ofFinancial Accounting Standards No. 123, *Accountingfor Stock Based Compensation*, or SFAS 123, and (b) compensationcost for all stock-based payments granted subsequent to January 1, 2006,based on the grant-date fair value estimated in accordance with the provisionsof SFAS 123R. Such amounts have been reduced by our estimate offorfeitures of all unvested awards. Results for prior periods have not beenrestated.

 

Prior to theadoption of SFAS 123R, we accounted for share-based payments to employeesusing the intrinsic value method of Accounting Principles Board Opinion No. 25,*Accounting for Stock Issued to Employees*,or APB 25.

 

*Non-Operating Income.*  Non-operating income decreased to$0.2 million in 2008 compared to $1.2 million in 2007 and$1.9 million in 2006. The $1.0 million, or 81%, decrease in non-operatingincome in 2008 compared to 2007 was primarily related to a $1.2 milliondecrease in interest income due to lower average investment balances andimpairment 

 

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charges of $0.2 million, offsetby $0.6 million in lower interest expense associated with our debt, whichwas paid in full in June 2008. The $0.7 million, or 36%, decrease innon-operating income in 2007 compared to 2006 was primarily related to a$1.3 million decrease in interest income due to lower average investmentbalances, offset by $0.7 million in lower interest expense associated withour debt because the principal balance due on the debt was lower in 2007.

 

**Liquidity and Capital Resources**

 

Since ourinception, we have primarily funded our operations through the sale of equitysecurities, debt financings, license fees, research and development funding,milestone payments from our collaborative partners and, more recently, sales ofBiDil. As of December 31, 2008, we have received net proceeds of$321.2 million from the issuance of equity securities, primarily as theresult of:

 

·                  the sale of $99.1 million of ourredeemable convertible preferred stock;

 

·                  net proceeds of $60.1 millionfrom our initial public offering in November 2003;

 

·                  net proceeds of $81.8 millionfrom our follow-on public offering in December 2004;

 

·                  net proceeds of $58.5 millionfrom our registered direct offering in January 2006; and

 

·                  net proceeds of $18.2 millionfrom our registered direct offering in May 2007.

 

At December 31,2008, we had $17.4 million in cash, cash equivalents and marketablesecurities.

 

During theyear ended December 31, 2008, operating activities used cash of$9.2 million, primarily due to a net loss of $5.9 million and adecrease of $5.3 million in accounts payable and accrued expenses, offsetby impairment charges of $0.2 million, non-cash stock-based compensationexpense of $1.4 million and $0.1 million in depreciation andamortization. In 2007, operating activities used cash of $23.5 million,primarily due to a net loss in 2007 of $31.6 million and a$0.6 million increase in accounts receivable, offset by an increase of$1.4 million in accounts payable and accrued expenses, a decrease of $1.4million in inventory, and non-cash charges of $6.0 million fordepreciation expense and stock-based compensation expense.

 

During theyear ended December 31, 2008, investing activities added cash of$15.1 million, primarily due to net sales of marketable securities of$14.9 million. In 2007, investing activities used cash of$1.1 million, primarily due to net purchases of marketable securities of$2.1 million and capital expenditures of $0.2 million, offset by$0.5 million in cash received on the disposal of fixed assets and$0.6 million of restricted cash received by us due to the assignment ofthe Spring Street Lease.

 

During theyear ended December 31, 2008, financing activities used cash of$3.5 million due to $3.7 million in principal payments on long-termdebt. In 2007, financing activities provided cash of $11.7 million due tonet proceeds of $18.2 million from our registered direct offering, and$0.4 million from the issuance of common stock under our employee stockplans, offset by $6.9 million in principal payments on long-term debt.

 

In June 2005, we borrowed (i) $10.0 millionfrom Oxford Finance Corporation, or Oxford, and (ii) $10.0 millionfrom General Electric Capital Corporation, or GECC, pursuant to the terms ofpromissory notes made by us with both Oxford and GECC, respectively. The notesbore interest at a fixed rate of 9.95% per annum and were payable in 36consecutive monthly installments of principal and accrued interest, beginning July 1,2005. The notes were secured by a security interest in all our personalproperty and fixtures with the exception of any intellectual property orproducts acquired, whether by purchase, license or otherwise, on or after theexecution of the notes. As of June 30, 2008, the promissory notes had beenpaid in full.

 

As of December 31, 2008, all marketablesecurities held by us have maturity dates that range from 2009 to 2045.

 

As of December 31, 2008, we heldapproximately $1.6 million par value of auction rate securities. Theseauction rate securities are comprised of approximately $1.3 million ofpreferred stock closed-end fund auction rate securities and a $0.3 milliongovernment-backed student loan auction rate security. Auction rate securitiesare securities that are structured to allow for short-term interest rateresets, but with contractual maturity dates that can be well in excess of tenyears. Auctions have historically provided a liquid market for thesesecurities. However, beginning in February 2008, the majority of auction 

 

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rate securities in the marketplace failed at auction due to sell ordersexceeding buy orders. Such failures resulted in the interest rate on thesesecurities resetting to predetermined rates within the underlying loanagreement, which might be higher or lower than the current market rate ofinterest. Our ability to liquidate our auction rate securities and fullyrecover the carrying value of our investments in the near term may be limitedor not exist. In the event that we need to access our investments in theseauction rate securities, we will not be able to do so until a future auction ofthese investments is successful, the issuer redeems the outstanding securities,a buyer is found outside the auction process, or the securities mature, whichcould be in as many as 37 years. As a result of these factors, we recordedimpairment charges of $157,000 for the year ended December 31, 2008. Weestimated the fair value of our auction rate securities using a discounted cashflow analysis that considered the following key inputs: (a) the underlyingstructure of each security; (b) the present value of future principle andinterest payments discounted at rates considered to reflect the relevant riskassociated with each security; (c) the time horizon that the market valueof each security could return to its cost; and (d) other factors such asthe credit rating of the issuer and any other credit enhancements. We may berequired to record additional impairment charges on these investments from timeto time.

 

As of December 31, 2008, we classify ourauction rate securities as long-term marketable securities, reflectingmanagement’s determination that these securities may not be liquidated withinone year due to the auction failures described above. We did not experience anyrealized losses on sales of auction rate securities in 2008.

 

For the year ended December 31, 2008,the cumulative impairments recorded by us include an impairment of $32,000 onour government-backed student loan auction rate security and an impairment of$125,000 on our preferred stock closed-end fund auction rate securities.

 

**Payments Due by Period**

 

The followingtable summarizes our contractual obligations at December 31, 2008 and theeffects such obligations are expected to have on our liquidity and cash flowsin future periods:

 
| **Contractual Obligations**   | ** ** | **Total** | ** ** | **Less than one  year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than five  years** | ** ** |
|------------------------------------|------------|-----------|------------|-----------------------------------|------------|--------------------|------------|--------------------|------------|-------------------------------------|------------|
| Operating lease obligation (1)     |       | $         | —     |                              | $          | —             |       | $                  | —     |                                | $          | — |   | $ | — |   |
| Purchase obligations (2)           |       | 108,000   |       | 108,000                           |       | —             |       | —             |       | —                              |       |
| License milestones (3)             |       | —    |       | —                            |       | —             |       | —             |       | —                              |       |
| Total contractual cash obligations |       | $         | 108,000    |                              | $          | 108,000            |       | $                  | —     |                                | $          | — |   | $ | — |   |

 

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| (1)    |   | In May 2008, we entered into a sublease with Cubist  Pharmaceuticals, Inc., pursuant to which we agreed to sublease  approximately 4,000 square feet of office space at a rate of approximately  $9,200 per month. The initial term of this sublease was for three months  beginning on June 1, 2008. Upon the expiration of the initial term,  we elected to extend the sublease on a month-to-month basis subsequent to the  expiration of the initial term. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (2)    |   | In October 2008, we placed a binding  purchase order totaling $108,000 with Schwarz Pharma for production of BiDil  finished goods during the first quarter of 2009.                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (3)    |   | On February 9, 2007, we entered into a  License Agreement with Elan, pursuant to which we may be obligated to pay  certain milestone payments in the aggregate amount of $2,500,000, of which  $250,000 has been paid to date. We are uncertain as to the timing of any  future payments, if any, pursuant to the terms of the License Agreement and  accordingly no amounts are included in the above table.                                                                      |

 

In January 2008,we ceased actively promoting sales of BiDil, which is our only significantsource of revenue. Pending the completion of our merger with DeerfieldManagement, we expect to incur operating expenses going forward primarilyrelated to keeping BiDil available on the market. We expect to also incurminimal additional expenses in 2009 related to the further development of BiDilXR. Whether or not the merger with Deerfield Management is completed, webelieve that our existing sources of liquidity and the cash expected to begenerated from future sales of BiDil, together with the significant reductionin expenditures as a result of our January 2008 restructuring, will besufficient to fund our operations for at least the next twelve months. However,our future capital requirements, and the period in which we expect our currentcash to support our operations, may vary due to a number of factors, including thefollowing:

 

·                  our ability to successfullyconsummate the proposed merger with Deerfield Management, or a comparablestrategic arrangement related to our business and assets, and the expensesrelated to any such transaction;

 

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·                  the amount of future product sales ofBiDil;

 

·                  the cost of manufacturing and sellingBiDil;

 

·                  the timing of collections related tosales of BiDil;

 

·                  the time and costs involved incompleting the clinical trials and further development of, and obtainingregulatory approvals for, BiDil XR, if at all;

 

·                  the effect of competing technologicaland market developments;

 

·                  the costs involved in preparing, filing,prosecuting, maintaining and enforcing patent claims;

 

·                  the cost of maintaining licenses touse patented technologies;

 

·                  unfavorable conditions in the capitalmarkets, which may adversely affect the value and liquidity of its investments;and

 

·                  general global and domestic economicconditions, including inflation, recessionary risks and volatile energy costs.

 

Weintend to consummate the proposed merger with Deerfield Management. If theproposed merger with Deerfield Management is not approved by our stockholdersor is not completed for other reasons, we will review the strategicalternatives available for our business, including the possible dissolution ofour company and liquidation of our assets, the discharge of any remainingliabilities, and the eventual distribution of remaining assets, if any, to ourstockholders.

 

**Application of Critical Accounting Policiesand Estimates**

 

Our discussionand analysis of our financial condition and results of operations are based onour financial statements, which have been prepared in accordance with U.S.generally accepted accounting principles. The preparation of these financialstatements requires us to make estimates and judgments that affect the reportedamounts of assets and liabilities and the disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting periods. On an on-going basis, weevaluate our estimates and judgments, including those related to revenue, inventory,accrued expenses and the factors used to determine the fair value of our stockoptions. We base our estimates on historical experience, known trends andevents and various other factors that we believe to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparentfrom other sources. Actual results may differ from these estimates underdifferent assumptions or conditions. Changes in estimates are recorded in theperiod in which they become known.

 

We believe thefollowing critical accounting policies affect our more significant judgmentsand estimates used in the preparation of our consolidated financial statements.

 

**Revenue.**  Our principal source of revenue is the saleof BiDil, which began shipping in July of 2005. Other sources of revenueto date include license fees, research and development payments and milestonepayments that we have received from our corporate collaborators. We exercisesignificant judgment in determining the amount of revenue we can recognize inconnection with sales of our products and with respect to our corporatecollaborations. To the extent that actual facts and circumstances differ fromour initial judgments, our revenue recognition could change accordingly and anysuch change could affect our reported operating results.

 

*Product Sales/Deferred Revenue.*  We follow the provisions of SEC StaffAccounting Bulletin No. 104, *RevenueRecognition,* and recognize revenue from product sales upon deliveryof product to wholesalers or pharmacies when persuasive evidence of anarrangement exists, the fee is fixed or determinable, title to product andassociated risk of loss has passed to the wholesaler and collectibility of therelated receivable is reasonably assured. All revenues from product sales arerecorded net of applicable allowances for sales returns, wholesaler allowances,rebates, and discounts. For arrangements where the risk of loss has not passedto wholesalers or pharmacies, we defer the recognition of revenue by recordingdeferred revenue until such time that risk of loss has passed. In addition, weevaluate our level of shipments to wholesalers and pharmacies on a quarterlybasis compared to the estimated level of inventory in the channel, remainingshelf-life of the product shipped, weekly prescription data and quarterlyforecasted sales.

 

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*Sales Returns, Allowances, Rebates and Discounts.*  Our product sales are subject to returns,wholesaler allowances, rebates and cash and contract discounts that arecustomary in the pharmaceutical industry. A large portion of our product salesare made to pharmaceutical wholesalers for further distribution throughpharmacies to patients, who are consumers of the product. We determine theprovisions for sales returns, allowances, rebates and discounts based primarilyon estimates and contractual terms.

 

*Product Returns.*  Consistent with industry practice, we offercontractual return rights that allow customers to return product only duringthe period that is six months prior to, and twelve months after, productexpiration. Commercial product shipped during 2005 and the first half of 2006had a shelf-life of twelve months from date of manufacture with expirationdates ranging from April 2006 to May 2007. During the third quarterof 2006, we began shipping commercial product with an expiration date of18 months. During the second quarter of 2007, we began shipping commercialproduct with an expiration date of 24 months. During the fourth quarter of2008, we began shipping commercial product with an expiration date of 36months. Factors that are considered in our estimate of future product returnsinclude an analysis of the amount of product in the wholesaler and pharmacychannels, discussions with key wholesalers and other customers regardinginventory levels and shipment trends, review of consumer consumption data, andthe remaining time to expiration of our product. As a result of this ongoingevaluation, our product return reserve was $1.4 million and $0.9 millionat December 31, 2008 and 2007, respectively. For the years ended December 31,2008, 2007 and 2006, we recorded a reduction to revenue for product returns of$2.0 million, $1.0 million and $2.6 million, respectively. Thereturn rate and related reserve are evaluated on a quarterly basis, assessingeach of the factors described above, and adjusted accordingly. In developing areasonable estimate for the reserve for product returns, we consider thefactors in paragraph 8 of Statement of Financial Accounting Standards No. 48,*Revenue Recognition When a Right of ReturnExists.* The actual amount of product returns could varysignificantly from our estimates and could have a material effect on ourfinancial condition and results of operations in any reporting period. Due toan increase in the volume of returns related to commercial product with anexpiration date of 24 months, we revised our estimated product return reserveduring the fourth quarter of 2008. Prior to the fourth quarter of 2008, we hadestimated our provision for returns for commercial product with an expirationdate of 24 months using historical return data for commercial product withexpiration dates of 12 months and 18 months. Commercial product with anexpiration date of 24 months did not begin to expire until the fourth quarterof 2008. This revision to our estimate resulted in an increase to the provisionfor returns of approximately $1.0 million in the year ended December 31,2008, as compared to the year ended December 31, 2007.

 

*Sample Voucher and Co-Pay Card Program.*  Beginning in the third quarter of 2005, weinitiated a sample voucher program whereby we offered an incentive to patientsin the form of a free 30-day trial, or approximately 100 tablets, of BiDil. Wehave accounted for this program in accordance with Emerging Issues Task ForceIssue No. 01-09, *Accounting forConsideration Given by a Vendor to a Customer*. Initially, thesesample programs had quarterly expiration dates such that each sample voucherprogram was only active for one quarter at a time. As a result, at the end ofeach quarter we could determine the actual amount of reimbursement claimsreceived for the vouchers distributed during the quarter. The amount ofreimbursement is recorded as a reduction to revenue. During the third quarter2006, we initiated a six month co-pay program whereby we cover the co-pay foreligible insured patients for their BiDil prescriptions, including refills. Asa result of these programs, we recorded a reduction to revenue of$0.1 million, $0.1 million and $0.5 million for the years ended December 31,2008, 2007 and 2006, respectively.

 

*Sales Discounts, Rebates and Allowances.*  Sales discounts, rebates and allowancesresult primarily from sales under contract with healthcare providers,wholesalers, Medicare and Medicaid programs and other governmental agencies. Weestimate rebates and contractual allowances, cash and contract discounts andother rebates by considering the following factors: current contract prices andterms, sales volume, estimated customer and wholesaler inventory levels andcurrent average rebate rates. For the years ended December 31, 2008, 2007and 2006, we recorded cash discounts, rebates and other allowances of$6.1 million, $5.3 million and $1.5 million, respectively.

 

*License and Collaboration Revenue.*  We record collaboration revenue on an accrualbasis as it is earned and when amounts are considered collectible. Revenuesreceived in advance of performance obligations, or in cases where we have acontinuing obligation to perform services, are deferred and recognized over thecontractual or estimated performance period. Revenues from milestone paymentsthat represent the culmination of a separate earnings process are recorded whenthe milestone is achieved. Contract revenues are recorded as the services areperformed. When we are required to defer revenue, the period over which suchrevenue should be recognized is subject to estimates by management and maychange over the course of the collaborative agreement.

 

**Inventory.**  We review our estimates of the net realizablevalue of our inventory at each reporting period. Our estimate of the netrealizable value of inventory is subject to judgment and estimation. The actualnet realizable value could 

 

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vary significantly from ourestimates and could have a material effect on our financial condition andresults of operations in any reporting period. On a quarterly basis, we analyzeour current inventory levels and future irrevocable inventory purchasecommitments and write down inventory that has become un-saleable, inventorythat has a cost basis in excess of its expected net realizable value andirrevocable inventory purchase commitments that are in excess of expectedfuture inventory requirements based on our sales forecasts. For the year ended December 31,2008, we recorded inventory impairment charges of $0.5 million to cost ofsales related to commercial trade inventory, patient sample inventory andexcess raw materials. For the year ended December 31, 2007, we recordedinventory impairment charges of $2.3 million to cost of sales related tocommercial trade inventory, patient sample inventory, contractual purchasecommitments in excess of our sales forecast, and excess raw materials. For theyear ended December 31, 2006, we recorded inventory impairment charges of$1.5 million to cost of sales related to commercial trade inventory,patient sample inventory and contractual purchase commitments in excess of oursales forecast.

 

**AccruedExpenses.**  Aspart of the process of preparing financial statements, we are required toestimate accrued expenses. This process involves identifying services whichhave been performed on our behalf, and estimating the level of serviceperformed and the associated cost incurred for such service as of each balancesheet date in our financial statements. Examples of estimated expenses forwhich we accrue include fees such as amounts owed for clinical trials, salesand marketing data management, product development, contract manufacturers forthe production of finished goods, marketing and medical support, such asadvisory boards, and publications, marketing services and professionalservices, such as lawyers and accountants. In connection with such services,our estimates are most affected by our understanding of the status and timingof services provided relative to the actual levels of services incurred by suchservice providers. The majority of our service providers invoice us monthly inarrears for services performed. In the event that we do not identify certaincosts, which have begun to be incurred, or we over- or under-estimate the levelof services performed or the costs of such services, our reported expenses forsuch period would be too low or too high. The date on which certain servicescommence, the level of services performed on or before a given date and thecost of such services are often determined based on subjective judgments. Wemake these judgments based upon the facts and circumstances known to us inaccordance with generally accepted accounting principles.

 

**Stock-BasedCompensation.** Effective January 1, 2006, we adopted the fair value recognitionprovisions of SFAS 123R to recognize compensation cost associated withstock options issued to employees. Determining the amount of stock-basedcompensation expense to be recorded requires us to develop estimates to be usedin calculating the grant-date fair value of a stock option. The fair value ofeach stock award is estimated on the grant date using the Black-Scholesoption-pricing model. The use of the Black-Scholes option-pricing modelrequires us to make estimates for volatility, risk-free interest rate, expectedterm, and expected dividend yield. Volatility is determined exclusively usinghistorical volatility data of our common stock based on the period of timesince our common stock has been publicly traded. The risk-free interest rate isbased on the U.S. Treasury yield curve in effect at the time of grantcommensurate with the expected life assumption. The expected life of stockoptions granted is based exclusively on historical data and represents theweighted average period of time that stock options granted are expected to beoutstanding. The expected life is applied to the stock option grant group as awhole, as we do not expect substantially different exercise or post-vestingtermination behavior amongst our employee population.

 

Accounting forequity instruments granted or sold by us under APB 25, SFAS 123 andEmerging Issues Task Force No. 96-18, *Accountingfor Equity Instruments That Are Issued to Other Than Employees for Acquiring,or in Conjunction with Selling, Goods or Services*, requires fairvalue estimates of the equity instrument granted or sold. If our estimates ofthe fair value of these equity instruments are too high or too low, ourexpenses may be over or under stated. For equity instruments granted or sold inexchange for the receipt of goods or services, we estimate the fair value ofthe equity instruments based upon consideration of factors which we deem to berelevant at that time. Because shares of our common stock were not publiclytraded prior to the commencement of our public offering on November 5,2003, market factors historically considered in valuing stock and stock optiongrants include comparative values of public companies discounted for the riskand limited liquidity provided for in the shares we are issuing, pricing ofprivate sales of our redeemable convertible preferred stock, prior valuationsof stock grants and the effect of events that have occurred between the time ofsuch grants, economic trends, and the comparative rights and preferences of thesecurity being granted compared to the rights and preferences of our otheroutstanding equity.

 

Prior to ourinitial public offering, the fair value of our common stock was determined byour board of directors contemporaneously with the grant. In the absence of apublic trading market for our common stock, our board of directors considerednumerous objective and subjective factors in determining the fair value of ourcommon stock. At the time of option grants and other stock issuances, our boardof directors considered the liquidation preferences, dividend rights, votingcontrol and anti-dilution protection attributable to our then-outstandingredeemable convertible preferred stock, the status of private and publicfinancial markets, valuations of comparable private and public companies, thelikelihood of achieving a 

 

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liquidity event such as aninitial public offering, our existing financial resources, our anticipatedcontinuing operating losses and increased spending levels required to completeour clinical trials, dilution to common stockholders from anticipated futurefinancings and a general assessment of future business risks.

 

**Inflation**

 

We believe theeffects of inflation generally do not have a material adverse impact on ouroperations or financial condition.

 

**Off-Balance Sheet Arrangements**

 

We do not haveany material off-balance sheet arrangements.

 

**RecentlyIssued Accounting Pronouncements**

 

In September 2006, the FinancialAccounting Standards Board, or FASB, issued Statement of Financial AccountingStandards No. 157, *Fair ValueMeasurements*, or SFAS 157.SFAS 157 defines fair value, establishes a framework for measuring fairvalue and expands disclosures about fair value measurements. In February 2008,FASB issued Staff Position No. 157-2, or FSP 157-2, which delayed theeffective date of SFAS 157 for non-financial assets and non-financialliabilities. We adopted the provisions of SFAS 157 related to financialassets and liabilities and items that are recognized at fair value on arecurring basis on January 1, 2008. The partial adoption of SFAS 157related to financial assets and financial liabilities did not have a material impacton our results of operations, financial position or cash flows for the yearended December 31, 2008.

 

As permitted by FSP 157-2, we will not applythe provisions of SFAS 157 to property, plant and equipment until calendaryear 2009. We believe the impact of the adoption on January 1, 2009 of thedeferred provisions of SFAS 157 will not have a material impact on ourresults of operations, financial position or cash flows.

 

In February 2007, FASB issued Statementof Financial Accounting Standards No. 159, *The Fair Value Option for Financial Assets and FinancialLiabilities — Including an Amendment of FASB Statement No. 115*, or SFAS 159. SFAS 159 permitscompanies to choose to measure many financial instruments at fair value, whichare not currently required to be measured as such, at specified election datesunder SFAS 159’s fair value option. Unrealized gains and losses on items forwhich the fair value option has been elected are reported in earnings at eachsubsequent reporting date. SFAS 159 also establishes presentation anddisclosure requirements designed to facilitate comparisons between companiesthat choose different measurement attributes for similar types of assets andliabilities. We adopted the provisions of SFAS 159 on January 1,2008, but did not elect the fair value option for any of our financial assetsand financial liabilities.

 

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**ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We are exposedto market risk related to changes in interest rates. Our current investmentpolicy is to maintain an investment portfolio consisting mainly of U.S. moneymarket and high-grade corporate and U.S. government-related securities,directly or through managed funds, with maturities of two years or less. Inaddition, we hold auction rate securities that reset monthly. Our cash isdeposited in and invested through highly rated financial institutions in NorthAmerica. Our marketable securities are subject to interest rate risk and willfall in value if market interest rates increase. If market interest rates wereto increase immediately and uniformly by 10% from levels at December 31,2008 or December 31, 2007, we estimate that the fair value of ourinvestment portfolio would decline by an immaterial amount. We have the abilityto hold our fixed income investments until maturity, and therefore we do notexpect our operating results or cash flows to be affected to any significantdegree by the effect of a change in market interest rates on our investments.

 

The primaryobjective of our investment activities is to preserve principal while at thesame time maximizing the income we receive from our investments withoutsignificantly increasing risk. To achieve this objective, we maintain ourportfolio of cash equivalents and marketable securities in a variety ofsecurities, including U.S. government agencies, corporate notes and bonds,commercial paper, and money market funds. These securities are classified asavailable for sale and consequently are recorded on the balance sheet at fairvalue with unrealized gains or losses reported as a separate component ofaccumulated other comprehensive income (loss). If interest rates rise, themarket value of our investments may decline, which could result in a realizedloss if we are forced to sell an investment before its scheduled maturity. Wedo not utilize derivative financial instruments to manage our interest raterisks.

 

As of December 31, 2008, all marketablesecurities held by us have maturity dates that range from 2009 to 2045.

 

As of December 31, 2008, we heldapproximately $1.6 million par value of auction rate securities. Theseauction rate securities are comprised of approximately $1.3 million ofpreferred stock closed-end fund auction rate securities and a $0.3 milliongovernment-backed student loan auction rate security. Auction rate securitiesare securities that are structured to allow for short-term interest rateresets, but with contractual maturity dates that can be well in excess of tenyears. Auctions have historically provided a liquid market for thesesecurities. However, beginning in February 2008, the majority of auctionrate securities in the marketplace failed at auction due to sell ordersexceeding buy orders. Such failures resulted in the interest rate on thesesecurities resetting to predetermined rates within the underlying loanagreement, which might be higher or lower than the current market rate ofinterest. Our ability to liquidate our auction rate securities and fullyrecover the carrying value of our investments in the near term may be limitedor not exist. In the event that we need to access our investments in theseauction rate securities, we will not be able to do so until a future auction ofthese investments is successful, the issuer redeems the outstanding securities,a buyer is found outside the auction process, or the securities mature, whichcould be in as many as 37 years. As a result of these factors, we recordedimpairment charges of $157,000 for the year ended December 31, 2008. Weestimated the fair value of our auction rate securities using a discounted cashflow analysis that considered the following key inputs: (a) the underlyingstructure of each security; (b) the present value of future principle andinterest payments discounted at rates considered to reflect the relevant riskassociated with each security; (c) the time horizon that the market valueof each security could return to its cost; and (d) other factors such asthe credit rating of the issuer and any other credit enhancements. We may berequired to record additional impairment charges on these investments from timeto time.

 

As of December 31, 2008, we classify ourauction rate securities as long-term marketable securities, reflectingmanagement’s determination that these securities may not be liquidated withinone year due to the auction failures described above. We have not experiencedany realized losses on sales of auction rate securities in 2008.

 

For the year ended December 31, 2008,the cumulative impairments recorded by us include an impairment of $32,000 onour government-backed student loan auction rate security and an impairment of$125,000 on our preferred stock closed-end fund auction rate securities.

 

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

 

**INDEX TO FINANCIAL STATEMENTS**

 
| ** **                                                                                          | ** ** | **Page** |
|-----------------------------------------------------------------------------------------------------|------------|----------|
| Report of Independent Registered Public  Accounting Firm                                            |       | 41       |
| Financial Statements:                                                                               |       |     |
| Balance Sheets as of December 31, 2008  and 2007                                               |       | 42       |
| Statements of Operations for the Years  Ended December 31, 2008, 2007 and 2006                 |       | 43       |
| Statements of  Stockholders’ Equity for the Years Ended December 31, 2008, 2007 and  2006 |       | 44       |
| Statements of Cash Flows for the Years  Ended December 31, 2008, 2007 and 2006                 |       | 47       |
| Notes to Financial  Statements                                                                      |       | 48       |

 

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**Report of Independent Registered PublicAccounting Firm**

 

The Board of Directors andStockholders

NitroMed, Inc.

 

We haveaudited the accompanying balance sheets of NitroMed, Inc. as of December 31,2008 and 2007, and the related statements of operations, stockholders’ equity,and cash flows for each of the three years in the period ended December 31,2008. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conductedour audits in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. We were not engaged to perform anaudit of the Company’s internal control over financial reporting. Our auditsincluded consideration of internal control over financial reporting as a basisfor designing audit procedures that are appropriate in the circumstances, butnot for the purpose of expressing an opinion on the Company’s internal controlover financial reporting. Accordingly, we express no such opinion. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

In ouropinion, the financial statements referred to above present fairly, in allmaterial respects, the financial position of NitroMed, Inc. at December 31,2008 and 2007, and the results of its operations and its cash flows for each ofthe three years in the period ended December 31, 2008, in conformity withU.S. generally accepted accounting principles.

 

 
|                                       | /s/ Ernst & Young LLP |
|--------------------------------------------|-------------------------------------|
| Boston, Massachusetts  March 19, 2009 |                                |

 

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** **

**NITROMED, INC.**

 

**BALANCE SHEETS**

 

**(in thousands, except par value amounts)**

 
| ** **                                                                                                                                                            | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                            | ** ** | **2008**              | ** ** | **2007** | ** ** |
| **ASSETS**                                                                                                                                                            |       |                  |       |   |   |
| Current Assets:                                                                                                                                                       |       |                  |       |   |   |
| Cash and cash equivalents                                                                                                                                             |       | $                     | 10,635     |   | $ | 8,167 |   |
| Marketable securities                                                                                                                                                 |       | 6,810                 |       | 23,233 |   |
| Accounts receivable                                                                                                                                                   |       | 1,648                 |       | 1,929 |   |
| Inventories                                                                                                                                                           |       | 1,499                 |       | 1,401 |   |
| Prepaid expenses and other current assets                                                                                                                             |       | 271                   |       | 334 |   |
| Total current assets                                                                                                                                                  |       | 20,863                |       | 35,064 |   |
| Property and equipment, net                                                                                                                                           |       | 73                    |       | 312 |   |
| Long-term marketable securities                                                                                                                                       |       | 1,393                 |       | — |   |
| Restricted cash                                                                                                                                                       |       | —                |       | 191 |   |
| Total assets                                                                                                                                                          |       | $                     | 22,329     |   | $ | 35,567 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                         |       |                  |       |   |   |
| Current Liabilities:                                                                                                                                                  |       |                  |       |   |   |
| Accounts payable                                                                                                                                                      |       | $                     | 557        |   | $ | 3,235 |   |
| Accrued expenses                                                                                                                                                      |       | 3,744                 |       | 6,379 |   |
| Accrued restructuring                                                                                                                                                 |       | 24                    |       | — |   |
| Current portion of long-term debt                                                                                                                                     |       | —                |       | 3,728 |   |
| Total current liabilities                                                                                                                                             |       | 4,325                 |       | 13,342 |   |
| Commitments and contingencies  (Note 10)                                                                                                                         |       |                  |       |   |   |
| Stockholders’ Equity:                                                                                                                                            |       |                  |       |   |   |
| Preferred stock, $0.01 par value; 5,000  shares authorized; no shares issued or outstanding                                                                           |       | —                |       | — |   |
| Common stock, $0.01 par value; 65,000  shares authorized; 46,043 shares and 45,381 shares issued and outstanding as  of December 31, 2008 and 2007, respectively |       | 460                   |       | 454 |   |
| Additional paid-in capital                                                                                                                                            |       | 368,815               |       | 367,125 |   |
| Accumulated deficit                                                                                                                                                   |       | (351,299              | )          | (345,382 | ) |
| Accumulated other comprehensive income                                                                                                                                |       | 28                    |       | 28 |   |
| Total stockholders’ equity                                                                                                                                       |       | 18,004                |       | 22,225 |   |
| Total liabilities and stockholders’ equity                                                                                                                       |       | $                     | 22,329     |   | $ | 35,567 |   |

 

The accompanyingnotes are an integral part of the financial statements.

 

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**NITROMED, INC.**

 

**STATEMENTS OF OPERATIONS**

 

**(in thousands, except per share amounts)**

 
| ** **                                                     | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                     | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenues:                                                      |       |                                       |       |   |   |   |   |
| Product sales                                                  |       | $                                          | 14,920     |   | $ | 15,269 |   | $ | 12,086 |   |
| License and collaboration                                      |       | —                                     |       | 750 |   | — |   |
| Total revenues                                                 |       | 14,920                                     |       | 16,019 |   | 12,086 |   |
| Cost and operating expenses:                                   |       |                                       |       |   |   |   |   |
| Cost of product sales                                          |       | 3,451                                      |       | 4,236 |   | 3,560 |   |
| Research and development(1)                                    |       | 2,751                                      |       | 12,185 |   | 17,029 |   |
| Sales, general and administrative(1)                           |       | 12,137                                     |       | 31,358 |   | 59,403 |   |
| Restructuring charges                                          |       | 2,724                                      |       | 1,004 |   | 5,283 |   |
| Total cost and operating expenses                              |       | 21,063                                     |       | 48,783 |   | 85,275 |   |
| Loss from operations                                           |       | (6,143                                     | )          | (32,764 | ) | (73,189 | ) |
| Non-operating income:                                          |       |                                       |       |   |   |   |   |
| Interest income                                                |       | 667                                        |       | 1,884 |   | 3,204 |   |
| Interest expense                                               |       | (91                                        | )          | (694 | ) | (1.352 | ) |
| Other expense                                                  |       | (350                                       | )          | — |   | — |   |
|                                                           |       | 226                                        |       | 1,190 |   | 1,852 |   |
| Net loss                                                       |       | (5,917                                     | )          | (31,574 | ) | (71,337 | ) |
| Basic and diluted net loss per share                           |       | $                                          | (0.13      | ) | $ | (0.75 | ) | $ | (1.96 | ) |
| Shares used in computing basic and diluted  net loss per share |       | 45,976                                     |       | 41,997 |   | 36,399 |   |

 

----

(1)                                  Includesstock-based compensation expense as follows:

 
| Research and development          |   | $ | 81    |   | $ | 2,005 |   | $ | 2,795 |   |
|-----------------------------------|--------|---|-------|--------|---|-------|--------|---|-------|--------|
| Sales, general and administrative |   | $ | 1,352 |   | $ | 3,763 |   | $ | 5,119 |   |

 

Theaccompanying notes are an integral part of the financial statements.

 

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**NITROMED, INC.**

 

**STATEMENTS OF STOCKHOLDERS’ EQUITY**

 

**(in thousands)**

 
| ** **                                                                                      | ** ** | ** **            | ** ** | ** **         | ** ** | ** **               | ** ** | ** **       | ** ** | **Accumulated Other** | ** ** | **Total**              | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-----------------------|------------|--------------------|------------|--------------------------|------------|------------------|------------|----------------------------|------------|------------------------|------------|
| ** **                                                                                      | ** ** | **Common Stock** | ** ** | **Additional**     | ** ** | **Deferred Stock**  | ** ** | **Accumulated**  | ** ** | **Comprehensive**          | ** ** | **Stockholders’** | ** ** |
| ** **                                                                                      | ** ** | **Shares**            | ** ** | **Par Value** | ** ** | **Paid-in Capital** | ** ** | **Compensation** | ** ** | **Deficit**                | ** ** | **Loss**               | ** ** | **Equity** | ** ** |
| Balance at December 31, 2005                                                               |       | 30,512                |       | $                  | 305        |                     | $          | 276,510          |       | $                          | (1,208     | )                      | $          | (242,471 | ) | $ | (70 | ) | $ | 33,066 |   |
| Elimination of deferred stock compensation in accordance with the  adoption of SFAS 123(R) |       |                  |       |               |       | (1,208                   | )          | 1,208            |       |                       |       |                   |       | — |   |
| Exercise of stock options                                                                       |       | 461                   |       | 5                  |       | 688                      |       |             |       |                       |       |                   |       | 693 |   |
| Compensation expense associated with options issued to employees                                |       |                  |       |               |       | 8,042                    |       |             |       |                       |       |                   |       | 8,042 |   |
| Reversal of compensation expense associated with options issued to  non-employees               |       |                  |       |               |       | (239                     | )          |             |       |                       |       |                   |       | (239 | ) |
| Issuance of stock under employee stock purchase plan                                            |       | 32                    |       | —             |       | 93                       |       |             |       |                       |       |                   |       | 93 |   |
| Issuance of stock in connection with employee benefit plan                                      |       | 78                    |       | 1                  |       | 198                      |       |             |       |                       |       |                   |       | 199 |   |
| Sale of common stock in public offering (net of issuance costs of  $4,056)                      |       | 6,098                 |       | 61                 |       | 58,444                   |       |             |       |                       |       |                   |       | 58,505 |   |
| Unrealized gains on marketable securities                                                       |       |                  |       |               |       |                     |       |             |       |                       |       | 57                     |       | 57 |   |
| Net loss                                                                                        |       |                  |       |               |       |                     |       |             |       | (71,337                    | )          |                   |       | (71,337 | ) |
|                                                                                            |       |                  |       |               |       |                     |       |             |       |                       |       |                   |       |   |   |
| Comprehensive loss                                                                              |       |                  |       |               |       |                     |       |             |       |                       |       |                   |       | (71,280 | ) |
|                                                                                            |       |                  |       |               |       |                     |       |             |       |                       |       |                   |       |   |   |
| Balance at December 31, 2006                                                               |       | 37,181                |       | $                  | 372        |                     | $          | 342,528          |       | $                          | —     |                   | $          | (313,808 | ) | $ | (13 | ) | $ | 29,079 |   |

 

Theaccompanying notes are an integral part of the financial statements.

 

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**NITROMED, INC.**

 

**STATEMENTS OF STOCKHOLDERS’ EQUITY**

 

**(in thousands)**

 
| ** **                                                                                                | ** ** | **Common Stock** | ** ** | ** ** | ** ** | ** **               | ** ** | **Accumulated Other** | ** ** | ** **        | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|------------|------------|--------------------------|------------|----------------------------|------------|-------------------|------------|
| ** **                                                                                                | ** ** | ** **            | ** ** | **Par**    | ** ** | **Additional**           | ** ** | **Accumulated**            | ** ** | **Comprehensive** | ** ** | **Total Stockholders’** | ** ** |
| ** **                                                                                                | ** ** | **Shares**            | ** ** | **Value**  | ** ** | **Paid-in Capital** | ** ** | **Deficit**                | ** ** | **Incom (Loss)**  | ** ** | **Equity** | ** ** |
| Balance at December 31, 2006                                                                         |       | 37,181                |       | $          | 372        |                     | $          | 342,528                    |       | $                 | (313,808   | ) | $ | (13 | ) | $ | 29,079 |   |
| Exercise of stock options                                                                                 |       | 273                   |       | 3          |       | 309                      |       |                       |       |              |       | 312 |   |
| Compensation expense associated with options issued to employees                                          |       |                  |       |       |       | 4,993                    |       |                       |       |              |       | 4,993 |   |
| Reversal of compensation expense associated with options issued to  non-employees                         |       |                  |       |       |       | (26                      | )          |                       |       |              |       | (26 | ) |
| Issuance of stock under employee stock purchase plan                                                      |       | 74                    |       | 1          |       | 78                       |       |                       |       |              |       | 79 |   |
| Issuance of stock in connection with employee benefit plan                                                |       | 87                    |       | 1          |       | 279                      |       |                       |       |              |       | 280 |   |
| Issuance of common stock and related stock compensation expense in  connection with restricted stock plan |       | 166                   |       | 1          |       | 800                      |       |                       |       |              |       | 801 |   |
| Sale of common stock in public offering (net of issuance costs of  $1,485)                                |       | 7,600                 |       | 76         |       | 18,164                   |       |                       |       |              |       | 18,240 |   |
| Unrealized gains on marketable securities                                                                 |       |                  |       |       |       |                     |       |                       |       | 41                |       | 41 |   |
| Net loss                                                                                                  |       |                  |       |       |       |                     |       | (31,574                    | )          |              |       | (31,574 | ) |
|                                                                                                      |       |                  |       |       |       |                     |       |                       |       |              |       |   |   |
| Comprehensive loss                                                                                        |       |                  |       |       |       |                     |       |                       |       |              |       | (31,533 | ) |
|                                                                                                      |       |                  |       |       |       |                     |       |                       |       |              |       |   |   |
| Balance at December 31, 2007                                                                         |       | 45,381                |       | $          | 454        |                     | $          | 367,125                    |       | $                 | (345,382   | ) | $ | 28 |   | $ | 22,225 |   |

 

Theaccompanying notes are an integral part of the financial statements.

 

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**NITROMED, INC.**

 

**STATEMENTS OF STOCKHOLDERS’ EQUITY**

 

**(in thousands)**

 
| ** **                                                                                                | ** ** | **Common Stock** | ** ** | ** **     | ** ** | ** **                           | ** ** | **Accumulated Other** | ** ** | ** **                | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|----------------|------------|--------------------------------------|------------|----------------------------|------------|---------------------------|------------|
| ** **                                                                                                | ** ** | **Shares**            | ** ** | **Par  Value** | ** ** | **Additional  Paid-in Capital** | ** ** | **Accumulated  Deficit**   | ** ** | **Comprehensive  Income** | ** ** | **Total Stockholders’  Equity** | ** ** |
| Balance at December 31, 2007                                                                         |       | 45,381                |       | $              | 454        |                                 | $          | 367,125                    |       | $                         | (345,382   | ) | $ | 28 |   | $ | 22,225 |   |
| Exercise of stock options                                                                                 |       | 102                   |       | 1              |       | 72                                   |       |                       |       |                      |       | 73 |   |
| Compensation expense associated with options issued to employees                                          |       |                  |       |           |       | 454                                  |       |                       |       |                      |       | 454 |   |
| Reversal of compensation expense associated with options issued to  non-employees                         |       |                  |       |           |       | (5                                   | )          |                       |       |                      |       | (5 | ) |
| Issuance of stock in connection with employee benefit plan                                                |       | 192                   |       | 2              |       | 188                                  |       |                       |       |                      |       | 190 |   |
| Issuance of common stock and related stock compensation expense in  connection with restricted stock plan |       | 368                   |       | 3              |       | 981                                  |       |                       |       |                      |       | 984 |   |
| Unrealized gains on marketable securities                                                                 |       |                  |       |           |       |                                 |       |                       |       | —                    |       | — |   |
| Net loss                                                                                                  |       |                  |       |           |       |                                 |       | (5,917                     | )          |                      |       | (5,917 | ) |
|                                                                                                      |       |                  |       |           |       |                                 |       |                       |       |                      |       |   |   |
| Comprehensive loss                                                                                        |       |                  |       |           |       |                                 |       |                       |       |                      |       | (5,917 | ) |
|                                                                                                      |       |                  |       |           |       |                                 |       |                       |       |                      |       |   |   |
| Balance at December 31, 2008                                                                         |       | 46,043                |       | $              | 460        |                                 | $          | 368,815                    |       | $                         | (351,299   | ) | $ | 28 |   | $ | 18,004 |   |

 

Theaccompanying notes are an integral part of the financial statements.

 

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**NITROMED, INC.**

 

**STATEMENTS OF CASH FLOWS**

 

**(in thousands)**

 
| ** **                                                                   | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                   | ** ** | **2008**                                   | ** ** | **2007** |   | **2006** | ** ** |
| Cash flows from operating activities:                                        |       |                                       |       |   |   |   |   |
| Net loss                                                                     |       | $                                          | (5,917     | ) | $ | (31,574 | ) | $ | (71,337 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |       |                                       |       |   |   |   |   |
| Depreciation and amortization                                                |       | 118                                        |       | 285 |   | 798 |   |
| Non-cash restructuring charges                                               |       | 72                                         |       | — |   | 1,342 |   |
| Stock-based compensation expense                                             |       | 1,433                                      |       | 5,768 |   | 7,914 |   |
| Impairment charge on auction rate  securities                                |       | 157                                        |       | — |   | — |   |
| Changes in operating assets and  liabilities:                                |       |                                       |       |   |   |   |   |
| Accounts receivable                                                          |       | 281                                        |       | (559 | ) | 1,236 |   |
| Inventories                                                                  |       | (98                                        | )          | 1,445 |   | 401 |   |
| Prepaid expenses and other current assets                                    |       | 63                                         |       | 236 |   | 3,290 |   |
| Accounts payable                                                             |       | (2,678                                     | )          | 1,312 |   | (9,887 | ) |
| Accrued expenses                                                             |       | (2,635                                     | )          | 114 |   | (4,636 | ) |
| Accrued restructuring charge                                                 |       | 24                                         |       | (299 | ) | 299 |   |
| Deferred revenue                                                             |       | —                                     |       | (206 | ) | (1,773 | ) |
| Net cash used in operating activities                                        |       | (9,180                                     | )          | (23,478 | ) | (72,353 | ) |
| Cash flows from investing activities:                                        |       |                                       |       |   |   |   |   |
| Purchases of property and equipment                                          |       | —                                     |       | (162 | ) | (111 | ) |
| Proceeds from sale of equipment                                              |       | 49                                         |       | 528 |   | — |   |
| Purchases of marketable securities                                           |       | (16,147                                    | )          | (69,020 | ) | (150,092 | ) |
| Sales and maturities of marketable  securities                               |       | 31,020                                     |       | 66,907 |   | 179,520 |   |
| Restricted cash                                                              |       | 191                                        |       | 612 |   | — |   |
| Net cash provided by (used in) investing  activities                         |       | 15,113                                     |       | (1,135 | ) | 29,317 |   |
| Cash flows from financing activities:                                        |       |                                       |       |   |   |   |   |
| Proceeds from sale of common stock                                           |       | —                                     |       | 18,240 |   | 58,505 |   |
| Principal payments on long-term debt                                         |       | (3,728                                     | )          | (6,925 | ) | (6,272 | ) |
| Proceeds from employee stock plans                                           |       | 263                                        |       | 391 |   | 786 |   |
| Net cash (used in) provided by financing  activities                         |       | (3,465                                     | )          | 11,706 |   | 53,019 |   |
| Net increase (decrease) in cash and cash  equivalents                        |       | 2,468                                      |       | (12,907 | ) | 9,983 |   |
| Cash and cash equivalents, beginning  balance                                |       | 8,167                                      |       | 21,074 |   | 11,091 |   |
| Cash and cash equivalents, ending balance                                    |       | $                                          | 10,635     |   | $ | 8,167 |   | $ | 21,074 |   |
| Supplemental disclosure:                                                     |       |                                       |       |   |   |   |   |
| Cash paid during the year for interest                                       |       | $                                          | 122        |   | $ | 751 |   | $ | 1,403 |   |

 

Theaccompanying notes are an integral part of the financial statements.

 

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**NITROMED, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

**(all tabular amounts in thousands except pershare amounts)**

 

**1. The Company**

 

NitroMed, Inc.(the “Company”) is the maker of BiDil®. Since its inception, the Company hasfunded its operations mainly through the sale of equity securities, debtfinancings, license fees, research and development funding, milestone paymentsfrom its collaborative partners, and more recently, sales of BiDil. In June 2005,the U.S. Food and Drug Administration (“FDA”) approved the Company’s product,BiDil, for the treatment of heart failure in self-identified black patients asan adjunct to current standard therapies. BiDil is an orally administeredfixed-dose combination of isosorbide dinitrate and hydralazine hydrochloride.The Company commercially launched BiDil in July 2005, and has since generatedapproximately $46.7 million in product sales, including product sales of $3.2 millionduring the fourth quarter of 2008, and total product sales of $14.9 millionduring the year ended December 31, 2008.

 

Based upon the Company’s determination that the successfulcommercialization of BiDil requires a magnitude of resources that it cannotallocate to the program, as well as the Company’s plans to conserve cash inorder to pursue the development of an extended release formulation of BiDil,known as BiDil XRTM, in January 2008 the Company discontinued active promotionalefforts related to BiDil. The Company concurrently implemented a restructuringplan in which the Company immediately and significantly reduced its workforce.Although the Company has discontinued active promotional efforts related toBiDil, the Company continues to manufacture and sell BiDil and maintain theproduct on the market for patients through normal wholesale and retailchannels. The Company has also conducted limited advertising in select medicalpublications, and has utilized a third-party marketing firm to contacthealthcare professionals on the Company’s behalf, in each case in an effort tomaintain a limited market presence for BiDil. Based upon the Company’sactivities in 2008 related to its now terminated agreement with JHPPharmaceuticals, LLC for the purchase and sale of its BiDil and BiDil XR drugbusiness, as well as the Company’s decision to enter into a merger agreementwith Deerfield Management, the Company has not yet commenced the next set ofclinical trials pursuant to the Company’s BiDil XR development plan. TheCompany expects to incur minimal expenses in 2009 in connection with BiDil XRdevelopment activities.

 

As discussed below under Note 12, “Subsequent Events,” on January 27,2009, the Company entered into an agreement and plan of merger with certainentities affiliated with Deerfield Management. At the effective time of themerger with Deerfield Management, each outstanding share of the Company’scommon stock will be converted into the right to receive $0.80 per share incash, subject to adjustment if the Company’s net cash balance at the closing ofthe merger is greater than or less than $12.3 million, as calculated pursuantto the terms of the Merger Agreement. The Company currently expects to completethe merger with Deerfield Management in the second quarter of 2009 followingthe satisfaction or waiver of all the conditions to the merger, including theadoption of the merger agreement by the Company’s stockholders at a specialmeeting of stockholders, which is currently scheduled for April 22, 2009.

 

Pending the completion of the Company’s merger with DeerfieldManagement, the Company expects to incur operating expenses going forwardprimarily related to keeping BiDil available on the market. The Company expectsto also incur minimal additional expenses in 2009 related to the furtherdevelopment of BiDil XR. Whether or not the merger with Deerfield Management iscompleted, the Company believes that its existing sources of liquidity and thecash expected to be generated from future sales of BiDil will be sufficient tofund its operations for at least the next twelve months. In the event that theplanned merger with Deerfield Management is significantly delayed or is notcompleted at all, the Company’s future revenue from sales of BiDil coulddecline significantly based on a number of factors, including a decline inBiDil prescriptions by healthcare providers and a decline in the willingness ofthird party payors to provide reimbursement at favorable levels, in each casedue, at least in part, to the prior elimination of the Company’s sales forceand discontinuation of the Company’s active promotional efforts related toBiDil.

 

**2. Summary of Significant Accounting Policies**

 

**Cash Equivalents and Marketable Securities**

 

Cashequivalents are short-term, highly liquid investments with maturities of threemonths or less at the time of acquisition. Investments with maturities inexcess of three months at the time of acquisition are classified as marketablesecurities and designated as available-for-sale. Cash equivalents consist ofinstitutional money market funds. Available-for-sale securities, excludinginvestments in auction rate securities, are carried at fair market value, asreported by the custodian, and unrealized gains and losses are reported as aseparate component of accumulated other comprehensive income (loss) withinstockholders’ equity. Realized gains and losses were not material for the yearsended December 31, 2008, 2007 and 2006.

 

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**2. Summary ofSignificant Accounting Policies (Continued)**

 

**Fair Value of Financial Instruments**

 

Financialinstruments mainly consist of cash, cash equivalents, marketable securities andthe current portion of long-term debt. The carrying amounts of cash, cashequivalents, and marketable securities approximate their fair values. The fairvalue of long-term debt approximates its carrying value due to its remainingterm to maturity.

 

In September 2006,the Financial Accounting Standards Board issued Statement of FinancialAccounting Standards No. 157, *Fair ValueMeasurements* (“SFAS 157”). SFAS 157 defines fair value, establishesa framework for measuring fair value in accordance with generally acceptedaccounting principles and expands disclosures about fair value measurements.SFAS 157 codifies the definition of fair value as the price that would bereceived to sell an asset or paid to transfer a liability in an orderlytransaction between market participants at the measurement date, clarifies theprinciple that fair value should be based on the assumptions market participantswould use when pricing the asset or liability and establishes a fair valuehierarchy that prioritizes the information used to develop those assumptions.SFAS 157 is effective for fiscal years beginning after November 15, 2007 andinterim periods within those years. The Company adopted SFAS 157 on January 1,2008.

 

**Research and Development Expenses**

 

Research anddevelopment expenses primarily consist of salaries and related expenses forresearch and development personnel, fees paid to consultants and outsideservice providers and materials used in clinical trials. The Company chargesresearch and development expenses, including costs associated with acquiringpatents, to operations as incurred.

 

**Revenue Recognition**

 

The Company’sprincipal source of revenue is the sale of BiDil, which began shipping in July 2005.Other sources of revenue to date include license fees, research and developmentpayments and milestone payments that the Company has received from itscorporate collaborators.

 

*Product Sales/Deferred Revenue.*  The Company follows the provisions ofSecurities and Exchange Commission Staff Accounting Bulletin No. 104, *Revenue Recognition,* and recognizesrevenue from product sales upon delivery of product to wholesalers orpharmacies when persuasive evidence of an arrangement exists, the fee is fixedor determinable, title to product and associated risk of loss has passed to thewholesaler or pharmacy and collectibility of the related receivable isreasonably assured. All revenues from product sales are recorded net ofapplicable allowances for sales returns, wholesaler allowances, rebates, anddiscounts. For arrangements where the risk of loss has not passed towholesalers or pharmacies, the Company defers the recognition of revenue byrecording deferred revenue until such time that risk of loss has passed. Inaddition, the Company evaluates its level of shipments to wholesalers andpharmacies on a quarterly basis compared to the estimated level of inventory inthe channel, remaining shelf-life of the product shipped, weekly prescriptiondata and quarterly forecasted sales.

 

*Sales Returns, Allowances, Rebates andDiscounts*.  TheCompany’s product sales are subject to returns, wholesaler allowances, rebatesand cash and contract discounts that are customary in the pharmaceuticalindustry. A large portion of the Company’s product sales are made topharmaceutical wholesalers for further distribution through pharmacies topatients, who are consumers of the product. All revenues from product sales are recorded net of applicableallowances for sales returns, wholesaler allowances, rebates and cash andcontract discounts. The Company determines the provisions for salesreturns, allowances, rebates and discounts based primarily on historicalexperience, known trends and events, and contractual terms.

 

*                Product Returns.*  Consistent with industry practice, theCompany offers contractual return rights that allow customers to return productonly during the period that is six months prior to, and twelve months after, productexpiration. Commercial product shipped during 2005 and the first half of 2006had a shelf-life of twelve months from date of manufacture with expirationdates ranging from April 2006 to May 2007. During the third quarter of 2006,the Company began shipping commercial product with an expiration date of 18 months.During the second quarter of 2007, the Company began shipping commercialproduct with an expiration date of 24 months. During the fourth quarter of2008, the Company began shipping commercial product with an expiration date of36 months. Factors that are considered in the Company’s estimate of futureproduct returns include an analysis of the amount of product in the wholesalerand pharmacy channels, discussions with key wholesalers and other customersregarding inventory levels and shipment trends, review of consumer prescriptiondata, an estimate of the product used by hospitals and the remaining time toexpiration of the Company’s product. The Company’s product return reserve was$1.4 million and $0.9 million as of December 31, 2008 and 2007, respectively.For the years ended December 31, 2008, 2007 and 2006, the Company recorded areduction to revenue for product returns of $2.0 million, $1.0 million and $2.6million, respectively. The return rate and associated reserve are evaluated ona quarterly basis, assessing each of the factors described above, and adjustedaccordingly. In developing a reasonable estimate for the reserve for productreturns, the Company considers the factors in paragraph 8 of Statement ofFinancial Accounting Standards No. 48, *RevenueRecognition When a Right of Return Exists.* The

 

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**2. Summary ofSignificant Accounting Policies (Continued)**

 

**Revenue Recognition (Continued)**

 

actual amount of product returns could vary significantly from theCompany’s estimates and could have a material effect on the Company’s financialcondition and results of operations in any reporting period. Due to an increasein the volume of returns related to commercial product with an expiration dateof 24 months, the Company revised its estimated product return reserve duringthe fourth quarter of 2008. Prior to the fourth quarter of 2008, the Companyhad estimated its provision for returns for commercial product with anexpiration date of 24 months using historical return data for commercialproduct with expiration dates of 12 months and 18 months. Commercial productwith an expiration date of 24 months did not begin to expire until the fourthquarter of 2008. This revision to the Company’s estimate resulted in anincrease to the provision for returns of approximately $1.0 million in the yearended December 31, 2008, as compared to the year ended December 31, 2007.

 

*Sample Voucher and Co-Pay Card Program.*  Beginning in the third quarter of 2005, theCompany initiated a sample voucher program whereby the Company offered anincentive to patients in the form of a free 30-day trial of BiDil. The Companyaccounts for this program in accordance with Emerging Issues Task Force Issue No.01-09, *Accounting for Consideration Given bya Vendor to a Customer*. Initially, these sample programs hadquarterly expiration dates such that each sample voucher program was onlyactive for one quarter at a time. As a result, at the end of each quarter theCompany could determine the actual amount of reimbursement claims received forthe vouchers distributed during the quarter. The amount of reimbursement isrecorded as a reduction to revenue. During the third quarter of 2006, theCompany initiated a six month co-pay program whereby the Company covers theco-pay for eligible insured patients for their BiDil prescriptions, includingrefills. As a result of these programs, the Company recorded a reduction torevenue of $0.1 million, $0.1 million and $0.5 million for the years ended December31, 2008, 2007 and 2006, respectively.

 

*Sales Discounts, Rebates and Allowances.*  Sales discounts, rebates and allowancesresult primarily from sales under contract with healthcare providers,wholesalers, Medicare and Medicaid programs and other governmental agencies.The Company estimates rebates and contractual allowances, cash and contractdiscounts and other rebates by considering the following factors: currentcontract prices, terms, sales volume, estimated customer and wholesalerinventory levels, and current average rebate rates. For the years ended December31, 2008, 2007 and 2006, the Company recorded rebates, cash discounts, andother allowances of $6.1 million, $5.3 million and $1.5 million, respectively.

 

*License and Collaboration Revenue.*  The Company records collaboration revenue onan accrual basis as it is earned and when amounts are considered collectible.Revenues received in advance of performance obligations, or in cases where theCompany has a continuing obligation to perform services, are deferred andrecognized over the contractual or estimated performance period. Revenues frommilestone payments that represent the culmination of a separate earningsprocess are recorded when the milestone is achieved. Contract revenues arerecorded as the services are performed. When the Company is required to deferrevenue, the period over which such revenue should be recognized is subject toestimates by management and may change over the course of the collaborativeagreement. In October 2007, the Company entered into a license agreementpursuant to which the Company granted the licensee a non-exclusive licenseunder certain non-strategic patent rights owned and/or licensed by the Company.In consideration of this license, the licensee paid the Company an upfront feeof $750,000, which the Company recognized as revenue in the fourth quarter of2007 because the Company had no remaining deliverable at December 31, 2007.

 

**Accounts Receivable**

 

Accounts receivable consist of amounts duefrom wholesalers and pharmacies for the purchase of BiDil. Ongoing evaluationsof customer payment histories are performed and collateral is generally notrequired. As of December 31, 2008, the Company has not reserved any amount forbad debts related to the sale of BiDil. The Company continuously reviews allcustomer accounts to determine if an allowance for uncollectible accounts isnecessary. The Company currently provides substantially all of its customerswith payment terms of net 30 days. Through December 31, 2008, payments havegenerally been made in a timely manner.

 

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**2. Summary of Significant Accounting Policies(Continued)**

 

**Property andEquipment**

 

Property and equipment are recorded at costand depreciated using the straight-line method over their estimated usefullives, which range between three to five years. The Company reviews itsproperty and equipment for impairment whenever events or changes incircumstances indicate that the carrying amount of the assets may not be recoverableand recognizes an impairment loss when the estimated undiscounted cash flowsare less than the carrying value of the asset. The asset is written down to itsfair value, determined by either a quoted market price or by a discounted cashflow technique, whichever is more appropriate under the circumstances. During2008, the Company recorded impairment charges of $0.1 million (See Note 5).There were no impairment charges recorded during 2007. Property and equipmentconsist of the following:

 
| ** **                                      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|------------------|------------|
| ** **                                      | ** ** | **2008**         | ** ** | **2007** | ** ** |
| Laboratory furniture, fixtures and  equipment   |       | $                | 362        |   | $ | 362 |   |
| Office furniture, fixtures and equipment        |       | 5                |       | 162 |   |
|                                            |       | 367              |       | 524 |   |
| Less accumulated depreciation and  amortization |       | (294             | )          | (212 | ) |
| Total                                           |       | $                | 73         |   | $ | 312 |   |

 

In 2008, the Company sold certain office furniture and computerequipment previously used in sales, general and administrative activities andreceived proceeds in the amount of $54,000, which approximated the equipment’snet book value. In February 2007, the Company sold certain equipment previouslyused in research and development activities and received proceeds in the amountof $528,000, which approximated the equipment’s net book value.

 

**Inventories**

 

Inventoriesare stated at the lower of cost or market, with cost determined on a first-in,first-out basis. Inventories consisted of the following:

 
| ** **     | ** ** | **December 31,** | ** ** |
|----------------|------------|------------------|------------|
| ** **     | ** ** | **2008**         | ** ** | **2007** | ** ** |
| Raw materials  |       | $                | 218        |   | $ | 349 |   |
| Finished goods |       | 1,281            |       | 1,052 |   |
| Total          |       | $                | 1,499      |   | $ | 1,401 |   |

 

On a quarterlybasis, the Company analyzes its current inventory levels and writes downinventory that has become un-saleable or has a cost basis in excess of itsexpected net realizable value. In addition, the Company evaluates its futureirrevocable inventory purchase commitments compared to forecasted productsales, the current level of inventory, and its related product dating. For theyear ended December 31, 2008, the Company recorded inventory impairment chargesof $0.5 million to cost of sales for excess quantities, comprised of commercialtrade inventory, patient sample inventory and raw materials. For the year endedDecember 31, 2007, the Company recorded inventory impairment charges of $2.3 millionto cost of sales for excess quantities, comprised of commercial tradeinventory, patient sample inventory, contractual purchase commitments in excessof expected future inventory requirements based on the Company’s salesforecast, and raw materials. For the year ended December 31, 2006, the Companyrecorded inventory impairment charges of $1.5 million to cost of salescomprised of commercial trade inventory, patient sample inventory andcontractual purchase commitments in excess of expected future inventoryrequirements based on the Company’s sales forecast.

 

**Net Loss Per Share**

 

Basic net lossper share is computed by dividing net loss by the weighted average number ofshares of common stock outstanding during the period. Diluted net loss pershare is computed by dividing net loss by the weighted average number of sharesof common stock and the dilutive potential common stock equivalents thenoutstanding. Potential common stock equivalents consist of stock options andrestricted common stock. Since the Company has a net loss for all periodspresented, the

 

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**2. Summary of Significant Accounting Policies(Continued)**

 

**Net Loss Per Share (Continued)**

 

effect of all potentiallydilutive securities is antidilutive. Accordingly, basic net loss per share anddiluted net loss per share are the same.

 

Options topurchase 2,875,324, 4,747,755 and 4,935,930 shares of common stock for theyears ended December 31, 2008, 2007 and 2006, respectively, have been excludedfrom the computation of diluted net loss per share since their inclusion wouldbe antidilutive. In addition, 33,333 and 451,778 shares of unvested restrictedcommon stock issued and outstanding as of December 31, 2008 and December 31,2007, respectively, are also not included in the computation of diluted netloss per share since their inclusion would be antidilutive.

 

**Concentration of Credit Risk**

 

Statement ofFinancial Accounting Standards No. 105, *Disclosureof Information about Financial Instruments with Off-Balance-Sheet Risk andFinancial Instruments with Concentrations of Credit Risk*, requiresdisclosure of any significant off-balance-sheet and credit risk concentrations.Financial instruments that potentially subject the Company to concentration ofcredit risk consist principally of marketable securities and accountsreceivable. The Company has no off-balance-sheet or concentrations of creditrisk such as foreign exchange contracts, option contracts or other hedgingarrangements. The Company maintains its cash, cash equivalents and marketablesecurities balances with several high credit quality financial institutions.

 

The followingtable summarizes the number of trade customers that individually comprisegreater than 10% of product revenues and their respective percentage of theCompany’s total product revenues on a gross basis:

 
| ** **        | ** ** | **Number of  Significant** | ** ** | **Percentage of Total  Product Revenues  by Customer** | ** ** |
|-------------------|------------|----------------------------|------------|--------------------------------------------------------|------------|
| **Year ended:**   | ** ** | **Customers**              | ** ** | **A**                                                  | ** ** | **B** | ** ** | **C** | ** ** |
| December 31, 2008 |       | 3                          |       | 38                                                     | %          | 35 | % | 18 | % |
| December 31, 2007 |       | 3                          |       | 38                                                     | %          | 36 | % | 17 | % |
| December 31, 2006 |       | 3                          |       | 34                                                     | %          | 36 | % | 18 | % |

 

The tableabove excludes revenues from license and collaboration agreements. The Companyrecognized revenue in 2007 from an upfront payment in connection with a licenseagreement pursuant to which the Company granted the licensee a non-exclusivelicense under certain non-strategic patent rights owned and/or licensed by theCompany.

 

The followingtable summarizes the number of customers that individually comprise greaterthan 10% of total accounts receivable and their respective percentage of theCompany’s total accounts receivable:

 
| ** **        | ** ** | **Number of  Significant** | ** ** | **Percentage of Total  Accounts Receivable  by Customer** | ** ** |
|-------------------|------------|----------------------------|------------|-----------------------------------------------------------|------------|
| **As of:**        | ** ** | **Customers**              | ** ** | **A**                                                     | ** ** | **B** | ** ** | **C** | ** ** |
| December 31, 2008 |       | 3                          |       | 32                                                        | %          | 39 | % | 18 | % |
| December 31, 2007 |       | 3                          |       | 38                                                        | %          | 34 | % | 17 | % |

 

**Concentration of Other Risks**

 

The Companycurrently obtains one of the key active pharmaceutical ingredients for itscommercial requirements for BiDil from a single source. The Company alsoutilizes one manufacturer to produce BiDil. The disruption or termination ofthe contract with the manufacturer of BiDil or of the supply of the keypharmaceutical ingredient for BiDil or a significant increase in the cost ofthe key active pharmaceutical ingredient from this single source could have amaterial adverse effect on the Company’s business, financial position andresults of operations.

 

**Advertising Costs**

 

Alladvertising costs are expensed as incurred. Advertising expenses were $1.0 million,$7.7 million and $12.8 million for the years ended December 31, 2008, 2007 and2006, respectively.

 

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**2. Summary of Significant Accounting Policies(Continued)**

 

**Use of Estimates**

 

The preparationof financial statements in conformity with U.S. generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenue and expenses during the reporting period. Such estimatesrelate to product returns rates, contract rebates, the net realizable value ofinventory, useful lives of fixed assets, fair values of certain marketablesecurities, accrued liabilities, and stock-based compensation. Actual resultscould differ from those estimates, and such differences may be material to thefinancial statements.

 

**Accumulated Other Comprehensive Income (Loss)**

 

The Companypresents comprehensive income (loss) in accordance with Statement of FinancialAccounting Standards No. 130, *ReportingComprehensive Income*. Accumulated other comprehensive income (loss)is comprised entirely of unrealized gains and losses on available-for-salemarketable securities.

 

**Income Taxes**

 

Deferred taxassets and liabilities are determined based on differences between thefinancial reporting and income tax basis of assets and liabilities, as well asnet operating loss carryforwards and tax credits, and are measured using theenacted tax rates and laws that will be in effect when the differences areexpected to reverse. Deferred tax assets are reduced by a valuation allowanceto reflect the uncertainty associated with their ultimate realization.

 

**Segment Information**

 

During theyears ended December 31, 2008, 2007 and 2006, the Company operated in onereportable business segment, developing nitric oxide-enhancing medicines, underthe management approach of Statement of Financial Accounting Standards No. 131,*Disclosures about Segments of an Enterpriseand Related Information.*

 

**Stock-Based Compensation**

 

On January 1,2006, the Company adopted Statement of Financial Accounting Standards No. 123(R),*Share-Based Payment* (“SFAS 123R”),using the modified prospective transition method as permitted under SFAS 123R.Under this transition method, compensation cost recognized for the years endingDecember 31, 2008, 2007 and 2006 is comprised of: (a) compensation cost for allshare-based payments granted prior to but not yet vested as of December 31,2005, based on the grant-date fair value estimated in accordance with theprovisions of Statement of Financial Accounting Standards No. 123, *Accounting for Stock Based Compensation*(“SFAS 123”), and (b) compensation cost for all share-based payments grantedsubsequent to December 31, 2005, based on the grant-date fair value estimatedin accordance with the provisions of SFAS 123R.

 

See Note 6 foradditional information relating to stock-based compensation.

 

**New Accounting Standards**

 

In September 2006, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards No.157, *Fair Value Measurements* (“SFAS 157”). SFAS 157 defines fairvalue, establishes a framework for measuring fair value and expands disclosuresabout fair value measurements. In February 2008, FASB issued Staff Position No.157-2 (“FSP 157-2”), which delayed the effective date of SFAS 157 fornon-financial assets and non-financial liabilities. The Company adopted theprovisions of SFAS 157 related to financial assets and liabilities and itemsthat are recognized at fair value on a recurring basis on January 1, 2008. Thepartial adoption of SFAS 157 related to financial assets and financialliabilities did not have a material impact on the Company’s results ofoperations, financial position or cash flows for the year ended December 31,2008.

 

As permitted by FSP No. 157-2, the Companywill not apply the provisions of SFAS 157 to property, plant and equipmentuntil calendar year 2009. The Company believes the impact of the adoption on January1, 2009 of the deferred provisions of SFAS 157 will not have a material impacton the Company’s results of operations, financial position or cash flows.

 

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**2. Summary of Significant Accounting Policies(Continued)**

 

**New Accounting Standards (Continued)**

 

In February 2007, FASB issued Statementof Financial Accounting Standards No. 159, *The Fair Value Option for Financial Assets and FinancialLiabilities — Including an Amendment of FASB Statement No. 115* (“SFAS 159”). SFAS 159 permitscompanies to choose to measure many financial instruments at fair value, whichare not currently required to be measured as such, at specified election datesunder SFAS 159’s fair value option. Unrealized gains and losses on items forwhich the fair value option has been elected are reported in earnings at eachsubsequent reporting date. SFAS 159 also establishes presentation anddisclosure requirements designed to facilitate comparisons between companiesthat choose different measurement attributes for similar types of assets andliabilities. The Company adopted the provisions of SFAS 159 on January 1,2008, but did not elect the fair value option for any of the Company’sfinancial assets and financial liabilities.

 

**3. Cash Equivalents and Marketable Securities**

 

The primary objective of the Company’s investmentactivities is to preserve principal while at the same time maximizing theincome that the Company receives from the Company’s investments withoutsignificantly increasing risk. To achieve this objective, the Company maintainsits portfolio of cash equivalents and marketable securities in a variety ofsecurities, including U.S. government agencies, corporate notes and bonds,commercial paper, and money market funds. These securities are classified asavailable for sale and consequently are recorded on the balance sheet at fairvalue with unrealized gains or losses, other than those determined to beother-than-temporary impairments, reported as a separate component ofaccumulated other comprehensive income (loss). If interest rates rise, themarket value of the Company’s investments may decline, which could result in arealized loss if the Company is forced to sell an investment before itsscheduled maturity. The Company does not utilize derivative financialinstruments to manage its interest rate risks.

 

The followingis a summary of the fair market value of available-for-sale money market fundsand marketable securities the Company held at December 31, 2008 and 2007:

 
| **December 31, 2008**        | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated Fair  Value** | ** ** |
|----------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|--------------------------------|------------|
| Cash and money market funds            |       | $                   | 10,635     |                         | $          | —                        |       | $                              | —     |   | $ | 10,635 |   |
| U.S. Government agencies               |       |                |       |                         |       |                          |       |                           |       |
| Due in one year or less                |       | 255                 |       | —                       |       | —                        |       | 255                            |       |
| Corporate securities                   |       |                |       |                         |       |                          |       |                           |       |
| Due in one year or less                |       | 6,527               |       | 28                           |       | —                        |       | 6,555                          |       |
| Total short-term marketable securities |       | $                   | 6,782      |                         | $          | 28                            |       | $                              | —     |   | $ | 6,810 |   |
| Total long-term marketable securities  |       | $                   | 1,550      |                         | $          | —                        |       | $                              | (157       | ) | $ | 1,393 |   |

 
| **December 31, 2007** | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated Fair  Value** | ** ** |
|---------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|--------------------------------|------------|
| Cash and money market funds     |       | $                   | 8,167      |                         | $          | —                        |       | $                              | —     |   | $ | 8,167 |   |
| U.S. Government agencies        |       |                |       |                         |       |                          |       |                           |       |
| Due in one year or less         |       | 799                 |       | —                       |       | (3                            | )          | 796                            |       |
| Taxable auction securities      |       | 9,575               |       | —                       |       | —                        |       | 9,575                          |       |
| Tax-free auction securities     |       | 700                 |       | —                       |       | —                        |       | 700                            |       |
| Corporate securities            |       |                |       |                         |       |                          |       |                           |       |
| Due in one year or less         |       | 9,897               |       | 28                           |       | (1                            | )          | 9,924                          |       |
| Due in one to three years       |       | 2,234               |       | 4                            |       | —                        |       | 2,238                          |       |
| Total marketable securities     |       | $                   | 23,205     |                         | $          | 32                            |       | $                              | (4         | ) | $ | 23,233 |   |

 

The Company adopted SFAS 157 on January 1,2008. The three levels of the fair value hierarchy under SFAS 157 aredescribed below:

 

·                  Level1 – Observable inputs such as quoted prices in active markets that areaccessible at the measurement date for identical assets or liabilities. Thefair value hierarchy gives the highest priority to Level 1 inputs.

 

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**3. Cash Equivalents and Marketable Securities(Continued)**

 
| · |   | Level 2 - Other inputs that are observable,  directly or indirectly, such as quoted prices for similar assets and  liabilities or market corroborated inputs.                                                                                                                       |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                |
| · |   | Level 3 - Unobservable inputs used when  little or no market data is available and require the Company to develop its  own assumptions about how market participants would price the assets or  liabilities. The fair value hierarchy gives the lowest priority to Level 3  inputs. |

 

In determining fair value, the Company utilizes valuation techniquesthat maximize the use of observable inputs and minimize the use of unobservableinputs to the extent possible, and also considers counterparty credit risk inits assessment of fair value.

 

The following table sets forth, by levelwithin the fair value hierarchy, a summary of the fair market value ofavailable-for-sale securities classified as cash equivalents and marketablesecurities held at December 31, 2008:

 
| **December 31, 2008**                 | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
|-------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|-----------|------------|
| Cash equivalent available-for-sale  investments |       | $                | 8,628      |             | $          | —           |       | $         | —     |   | $ | 8,628 |   |
| U.S. Government agencies                        |       | $                | —     |             | $          | 255              |       | $         | —     |   | $ | 255 |   |
| Corporate securities                            |       | —           |       | 6,555            |       | —           |       | 6,555     |       |
| Total short-term marketable securities          |       | $                | —     |             | $          | 6,810            |       | $         | —     |   | $ | 6,810 |   |
| Long-term marketable securities (1)             |       | $                | —     |             | $          | —           |       | $         | 1,393      |   | $ | 1,393 |   |

 

----

(1)  The Company recorded impairmentcharges of $157,000 for the year ended December 31, 2008 related tocertain auction rate securities that are classified as Level 3 securities.

 

The reconciliation of the Company’s assetsmeasured at fair value on a recurring basis using unobservable inputs (Level 3)is as follows:

 
| ** **                                           | ** ** | **Auction Rate  Securities** | ** ** |
|------------------------------------------------------|------------|-----------------------------------|------------|
| Balance at January 1, 2008                      |       | $                                 | —     |   |
| Transfers to Level 3                                 |       | 1,550                             |       |
| Unrealized loss recorded in statement of  operations |       | (157                              | )          |
| Balance at December 31, 2008                    |       | $                                 | 1,393      |   |

 

For available-for-sale securities that utilize Level 1 and, ifapplicable, Level 2 inputs, the Company utilizes both direct and indirectobservable price quotes. Due to the lack of market quotes or other inputs thatare observable for certain of the auction rate securities held by the Company,the Company utilizes valuation models for these securities that relyexclusively on Level 3 inputs, including those that are based on expected cashflow streams and collateral values, such as assessments of counterparty creditquality, default risk underlying the security, discount rates and overallcapital market liquidity. The valuation of the auction rate securities held bythe Company is subject to uncertainties and, therefore, is difficult topredict. Factors that may impact the Company’s valuation for these securitiesinclude changes to credit ratings of the securities and to the underlyingassets supporting those securities, rates of default of the underlying assets,underlying collateral value, discount rates, counterparty risk and ongoingstrength and quality of market credit and liquidity.

 

As of December 31, 2008, all marketablesecurities held by the Company have maturity dates that range from 2009 to2045.

 

As of December 31, 2008, the Companyheld approximately $1.6 million of auction rate securities. These auctionrate

 

securities are comprised of approximately $1.3 million of preferredstock closed-end fund auction rate securities and a $0.3 milliongovernment-backed student loan auction rate security. Auction rate securitiesare securities that are structured to allow for short-term interest rateresets, but with contractual maturity dates that can be well in excess of tenyears. Auctions have historically provided a liquid market for thesesecurities. However, beginning in February 2008, the majority of auctionrate securities in the marketplace failed at auction due to sell ordersexceeding buy orders. Such failures resulted in the interest rate on thesesecurities resetting to predetermined rates within the underlying loanagreement, which might be higher or lower than the current market rate ofinterest. The Company’s ability to liquidate its auction rate securities andfully recover the carrying value of its investments in the near term may belimited or not exist. In the event that the Company needs to access itsinvestments in these auction rate securities, the Company will not be able todo so until a future auction of these investments is successful, the issuerredeems the outstanding securities, a buyer is found outside the auctionprocess, or the securities mature, which could be in as

 

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**3. Cash Equivalents and Marketable Securities(Continued)**

 

many as 37 years. As a result of these factors, the Company recordedimpairment charges of $157,000 for the year ended December 31, 2008,respectively. The Company estimated the fair value of its auction ratesecurities using a discounted cash flow analysis that considered the followingkey inputs: (a) the underlying structure of each security; (b) thepresent value of future principle and interest payments discounted at ratesconsidered to reflect the relevant risk associated with each security; (c) thetime horizon that the market value of each security could return to its cost;and (d) other factors such as the credit rating of the issuer and anyother credit enhancements. The Company may be required to record additional impairmentcharges on these investments from time to time.

 

As of December 31, 2008, the Companyclassifies its auction rate securities as long-term marketable securities,reflecting management’s determination that these securities may not beliquidated within one year due to the auction failures described above. TheCompany did not experience any realized losses on sales of auction ratesecurities in 2008.

 

For the year ended December 31, 2008,the cumulative impairments recorded by the Company include an impairment of$32,000 on its government-backed student loan auction rate security and animpairment of $125,000 on its preferred stock closed-end fund auction ratesecurities.

 

**4. Accrued Expenses**

 

Accruedexpenses consist of the following:

 
| ** **                                                        | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                        | ** ** | **2008**              | ** ** | **2007** | ** ** |
| Sales and marketing                                               |       | $                     | —     |   | $ | 304 |   |
| Compensation and related benefits                                 |       | 225                   |       | 1,955 |   |
| Reimbursements and rebates related to  managed care organizations |       | 1,025                 |       | 1,800 |   |
| Product returns reserve                                           |       | 1,381                 |       | 946 |   |
| Audit and legal fees                                              |       | 608                   |       | 310 |   |
| Other                                                             |       | 505                   |       | 1,064 |   |
| Total                                                             |       | $                     | 3,744      |   | $ | 6,379 |   |

 

**5. Restructuring Actions**

 

In the first quarter of 2008, the Companyrecorded restructuring charges of $2.7 million, which was comprised ofseverance benefits of $2.6 million and impairment charges of $0.1 millionfor disposed computer equipment. The severance benefits were recorded inaccordance with Statement of Financial Accounting Standards No. 112, *Employers’**Accounting forPostemployment Benefits* for contractual termination benefits forcertain executives and Statement of Financial Accounting Standards No. 146,*Accounting for Costs Associated with Exit orDisposal Activities*,for one-time termination benefits for the remainder of employees terminated. Inconjunction with the January 2008 restructuring, the Company eliminatedapproximately 80 positions and discontinued active promotional activitiesrelated to BiDil.

 

The following table summarizes the activityas of December 31, 2008 related to the January 2008 restructuringplan:

 
| ** **          | ** ** | **Charge** | ** ** | **Cash  Payments and  Write-offs** | ** ** | **Accrued at  December 31,  2008** | ** ** |
|---------------------|------------|------------|------------|-----------------------------------------|------------|----------------------------------------------|------------|
| Workforce reduction |       | $          | 2,652      |                                    | $          | (2,628                                       | )          | $ | 24 |   |
| Impairment          |       | 72         |       | (72                                     | )          | —                                       |       |
| Total               |       | $          | 2,724      |                                    | $          | (2,700                                       | )          | $ | 24 |   |

 

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**6. Stockholders’ Equity**

 

**PublicOfferings**

 

In May 2007,the Company completed a direct offering of shares of its common stockpreviously registered under its effective shelf registration statement. Pursuantto this offering, the Company sold 7.6 million shares of its common stockto selected institutional investors at a price of $2.60 per share. Proceeds tothe Company from this registered direct offering, net of offering expenses andplacement agency fees, totaled $18.2 million.

 

In January 2006,the Company completed a direct offering of shares of its common stockpreviously registered under its effective shelf registration statement.Pursuant to this offering, the Company sold approximately 6.1 millionshares of its common stock to selected institutional investors at a price of$10.25 per share. Proceeds to the Company from this offering, net of offeringexpenses and placement agency fees, totaled $58.5 million.

 

**Stock-Based Compensation**

 

The Company followsthe fair value recognition provisions of SFAS 123R. Compensation costrecognized subsequent to December 31, 2005 includes: (a) compensationcost for all stock-based payments granted but not yet vested as of January 1,2006, based on the grant-date fair value estimated in accordance with theoriginal provisions of SFAS 123, and (b) compensation cost for allstock-based payments granted subsequent to January 1, 2006, based on thegrant-date fair value estimated in accordance with the provisions of SFAS 123R.Such amounts have been reduced by the Company’s estimate of forfeitures of allunvested awards.

 

For stockoptions granted to non-employees, the Company recognizes compensation expensein accordance with the requirements of Emerging Issues Task Force No. 96-18,*Accounting for Equity Instruments That AreIssued to Other Than Employees for Acquiring, or in Conjunction with Selling,Goods or Services* (“EITF 96-18”)*.* EITF 96-18 requires companies to recognizecompensation expense based on the estimated fair value of options granted tonon-employees over their vesting period, which is generally the service period.The fair value of unvested non-employee stock awards is re-measured at eachreporting period.

 

*Stock Option Plans.*  The Company’s Amended and Restated 1993Equity Incentive Plan (the “1993 Plan”), which expired in accordance with itsterms in 2003, provided for the grant of incentive stock options, nonstatutorystock options and restricted stock awards to purchase up to 2,288,200 shares ofthe Company’s common stock. Officers, employees, directors, consultants andadvisors of the Company were eligible to receive grants of options under the1993 Plan at a price not less than 100% (or 110% in the case of incentive stockoptions granted to 10% or greater stockholders) of the fair market value of theCompany’s common stock, as determined by the Company’s Board of Directors, atthe time the option was granted. In May 2003, the Company’s stockholdersapproved the 2003 Stock Incentive Plan, under which 800,000 shares of commonstock were authorized for issuance. In October 2003, the stockholders ofthe Company approved an Amended and Restated 2003 Stock Incentive Plan (the“2003 Plan”) which provided, among other things, for an increase of sharesauthorized for issuance under the 2003 Plan to 2,500,000. In May 2005, thestockholders of the Company approved an amendment to the 2003 Plan whichprovided for an increase of shares authorized for issuance under the 2003 Planto 3,500,000, and the adoption of an “evergreen” provision that allows for anannual increase in the number of shares of the Company’s common stock availablefor issuance under the 2003 Plan. The evergreen provision provides for anannual increase to be added on the first day of each fiscal year of the Companyduring the period beginning in fiscal year 2006 and ending on the second day offiscal year 2013. The increase provided by the evergreen provision is equal tothe lesser of (i) 1,400,000 shares of the Company’s common stock, (ii) 4%of the outstanding shares on that date or (iii) an amount determined bythe Company’s Board of Directors. Pursuant to the evergreen provision, anadditional 1,219,679 shares of common stock were authorized for issuance underthe 2003 Plan in January 2006, and an additional 1,400,000 shares ofcommon stock were authorized for issuance under the 2003 Plan in each of January 2007,January 2008 and January 2009.

 

While theCompany may grant options to employees that become exercisable at differenttimes or within different periods, the Company generally has granted options toemployees that are exercisable in equal annual installments of 25% on each ofthe first four anniversary dates of the grant.

 

*Employee Stock Purchase Plan.*  On August 18, 2003, the Board of Directorsadopted the 2003 Employee Stock Purchase Plan (the “ESPP”), which allowseligible employees to purchase common stock at a price per share equal to 85%of the lower of the fair market value of the common stock at the beginning orend of each six month period during the term of the ESPP. The first offeringperiod began on January 1, 2004. In May 2006, the stockholders of theCompany approved an amendment to the ESPP, which provided for an increase ofshares available for issuance under the ESPP to 150,000, and the adoption of an“evergreen” provision that allows for an annual increase in the number ofshares of the Company’s common stock available for

 

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**6. Stockholders’ Equity (Continued)**

 

**Stock-Based Compensation (Continued)**

 

issuance under the ESPP. Theevergreen provision provides for an annual increase to be added on the firstday of each fiscal year of the Company during the period beginning in fiscalyear 2007 and ending on the last day of fiscal year 2010, such increase to beequal to the lesser of (i) 150,000 shares of the Company’s common stock or(ii) a lesser amount determined by the Company’s Board of Directors.Pursuant to the evergreen provision, an additional 150,000 shares of commonstock were authorized for issuance under the ESPP in each of January 2007,January 2008 and January 2009.

 

*                Grant-date Fair Value.*  The fair value of each stock award is estimatedon the grant date using the Black-Scholes option-pricing model. Informationpertaining to stock options and related assumptions are noted in the followingtable:

 
| ** **                                               | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------|------------|-----------------------|------------|
| ** **                                               | ** ** | **2008**              | ** ** | **2007** | ** ** | **2006** | ** ** |
| Options granted (in thousands)                           |       | 385                   |       | 960 |   | 3,833 |   |
| Weighted-average exercise price of stock  options        |       | $                     | 1.01       |   | $ | 2.62 |   | $ | 6.65 |   |
| Weighted-average grant date fair-value of  stock options |       | $                     | 0.67       |   | $ | 1.61 |   | $ | 4.14 |   |
| Assumptions:                                             |       |                  |       |   |   |   |   |
| Volatility                                               |       | 76                    | %          | 76 | % | 74 | % |
| Risk-free interest rate                                  |       | 3.1                   | %          | 4.8 | % | 4.7 | % |
| Expected lives                                           |       | 5.5 years             |       | 4.4 years |   | 5.4 years |   |
| Dividend                                                 |       | —                |       | — |   | — |   |

 

Volatility isdetermined exclusively using historical volatility data of the Company’s commonstock based on the period of time since the Company’s common stock has beenpublicly traded. The risk-free interest rate is based on the U.S. Treasuryyield curve in effect at the time of grant commensurate with the expected lifeassumption. The expected life of stock options granted is based exclusively onhistorical data and represents the weighted average period of time that stockoptions granted are expected to be outstanding. The expected life is applied tothe stock option grant group as a whole, as the Company does not expectsubstantially different exercise or post-vesting termination behavior amongstits employee population.

 

*Stock-Based Compensation Expense.*  The Company is using the straight-lineattribution method to recognize stock-based compensation expense. The amount ofstock-based compensation expense recognized during a period is based on thevalue of the portion of the awards that are ultimately expected to vest.SFAS 123R requires forfeitures to be estimated at the time of grant andrevised, if necessary, in subsequent periods if actual forfeitures differ fromthose estimates. The term “forfeitures” is distinct from “cancellations” or“expirations” and represents only the unvested portion of the surrenderedoption. The Company has applied an annual forfeiture rate of 7.1% to allunvested options as of December 31, 2008. This analysis will bere-evaluated quarterly and the forfeiture rate will be adjusted as necessary.Ultimately, the actual expense recognized over the vesting period will only befor those options that vest.

 

*Stock-Based Compensation Activity*. A summary of the activity under the Company’s stock options plans as of December 31,2008 and changes during the year then ended is presented below:

 
| ** **                                                       | ** ** | **Number of  Options** | ** ** | **Weighted-  Average Exercise Price  Per Share ($ )** | ** ** | **Weighted-  Average Remaining  Contractual Term in  Years** | ** ** | **Aggregate Intrinsic  Value ($ )** | ** ** |
|------------------------------------------------------------------|------------|-----------------------------|------------|--------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| Options outstanding at December 31,  2007                   |       | 4,748                       |       | 6.28                                                                           |       |                                                                        |       |                                               |       |
| Options granted                                                  |       | 385                         |       | 1.01                                                                           |       |                                                                        |       |                                               |       |
| Options exercised                                                |       | (102                        | )          | 0.72                                                                           |       |                                                                        |       |                                               |       |
| Options canceled                                                 |       | (2,156                      | )          | 6.76                                                                           |       |                                                                        |       |                                               |       |
| Options outstanding at December 31,  2008                   |       | 2,875                       |       | 5.41                                                                           |       |                                                                        |       | —                                             |       |
| Options vested or expected to vest at  December 31, 2008(1) |       | 2,771                       |       | 5.51                                                                           |       | 6.1                                                                         |       | —                                             |       |
| Options exercisable at December 31,  2008                   |       | 2,011                       |       | 6.38                                                                           |       | 5.2                                                                         |       | —                                             |       |

 

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(1)                                  Optionsexpected to vest is calculated by applying an estimated forfeiture rate tounvested options.

 

During theyear ended December 31, 2008, the total intrinsic value of optionsexercised (i.e., the difference between the market price at exercise andthe price paid by the employee to exercise the options) was $26,000, and thetotal amount of cash received from exercise of these options was $73,000. Thetotal grant-date fair value of stock options that vested during the year ended December 31,2008 was $2.1 million.

 

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**6. Stockholders’ Equity (Continued)**

 

**Stock-Based Compensation (Continued)**

 

During theyear ended December 31, 2007, the total intrinsic value of options exercised(i.e., the difference between the market price at exercise and the pricepaid by the employee to exercise the options) was $525,000, and the totalamount of cash received from exercise of these options was $311,000. The totalgrant-date fair value of stock options that vested during the year ended December 31,2007 was $5.7 million.

 

During theyear ended December 31, 2006, the total intrinsic value of optionsexercised (i.e., the difference between the market price at exercise andthe price paid by the employee to exercise the options) was $1,887,000, and thetotal amount of cash received from exercise of these options was $693,000. Thetotal grant-date fair value of stock options that vested during the year ended December 31,2006 was $3.7 million.

 

As of December 31,2008, there was $1.7 million of total unrecognized compensation costrelated to unvested stock options. This cost is expected to be recognized overa weighted average period of 1.6 years.

 

During 1999and 2000, the Company granted performance-based options to purchase 75,100 and100,000 shares of common stock, respectively, with an exercise price of $1.30,to certain employees, which allow for acceleration of the vesting period uponthe occurrence of certain defined events. Of the 100,000 options granted in2000, 5,000 options were forfeited in 2002. Based on the terms of thearrangements, the awards were required to be accounted for as variable, andcompensation expense was measured as the difference between the fair marketvalue of the Company’s common stock at the reporting period date and theexercise price of the award. Compensation expense is recognized over thevesting period. In connection with the adoption of SFAS 123R, these awardsbecame fixed and their associated expense is included in stock-basedcompensation expense for the years ended December 31, 2008, 2007 and 2006.

 

During 2003and 2002, the Company granted options to purchase 413,250 and 241,000 shares ofcommon stock, respectively, to employees at exercise prices below the deemedfair value for accounting purposes of the Company’s common stock. The weightedaverage exercise price of these options is $2.00 per share. The Companyrecorded deferred stock compensation expense related to these grants of$3,317,000 and $566,000 for the years ended December 31, 2003 and 2002,respectively. These amounts were being recognized as stock-based compensationexpense ratably over the vesting period of four years. In connection with theadoption of SFAS 123R in January 2006, the Company reversed theremaining deferred stock compensation balance of $1,208,000. The fair value ofthese awards is accounted for in accordance with SFAS 123R, and relatedstock compensation expense is included in the statement of operations for theyears ended December 31, 2008, 2007 and 2006.

 

Since 1999,the Company has granted options to purchase a total of 201,000 shares of commonstock to nonemployees at a weighted-average exercise price of $3.50 per share,of which 125,000 remained outstanding at December 31, 2008, and 2007. TheCompany has applied the recognition provisions of EITF 96-18 related tothese stock options and utilized the Black-Scholes option pricing model todetermine the fair value of these stock options at each reporting date. In connectionwith these awards, the Company recognized a reversal of stock basedcompensation expense of $5,000, $26,000 and $239,000 for the years ended December 31,2008, 2007 and 2006, respectively.

 

In January 2007,the Company modified the terms of certain vested stock option awards previouslygranted to the Company’s former interim president and chief executive officerin order to extend the term of the exerciseability of the vested portion of theoptions from three months following the cessation of employment to five yearsfollowing the cessation of employment. As a result of this modification in January 2007,the Company recorded a stock-based compensation charge of $459,000 in the firstquarter of 2007.

 

In May 2007,the Company entered into a Transition Agreement with L. Gordon Letts, Ph.D.,the Company’s former Chief Scientific Officer and Senior Vice President ofResearch and Development. Pursuant to the terms of the Transition Agreement,options previously granted by the Company to Dr. Letts will continue to vestduring a one-year transition period, during which time Dr. Letts willcontinue to be an employee of the Company. Pursuant to the terms of theTransition Agreement, the terms of stock option awards granted to Dr. Lettswere modified in order to extend the term of the exerciseability of the optionsfrom three months following the cessation of employment to two years followingthe cessation of the one-year transition period. As a result of thismodification, the Company incurred stock-based compensation charges of $168,000and $25,000 for the years ended December 31, 2007 and 2008, respectively.

 

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**6. Stockholders’ Equity (Continued)**

 

**Stock-Based Compensation (Continued)**

 

In March andApril 2007, the Company entered into restricted stock agreements withcertain executive officers and employees of the Company, pursuant to whichthese individuals were granted an aggregate of 734,790 shares of the Company’scommon stock under the 2003 Plan, which are subject to forfeiture to theCompany prior to vesting under certain circumstances, including voluntaryseparation or termination of employment for cause. The forfeiture provisionlapses as follows: 25% of the shares are no longer subject to forfeiture to theCompany, or “vest,” on the date that is six months after the grant date; 25%vest on the first anniversary of the grant date; and 50% vest on the secondanniversary of the grant date. Upon a change in control of the Company or upontermination of the employee’s employment without cause, all unvested restrictedshares shall immediately vest in full. The Company recognized stock-basedcompensation expense of $980,000 and $801,000 related to these restricted stockawards for the years ended December 31, 2008 and 2007, respectively. Onthe accompanying balance sheets, the number of shares of the Company’s commonstock outstanding as of December 31, 2008 does not include 33,333 sharesof unvested restricted common stock.

 

                A summary of the Company’s restricted stockaward activity as of December 31, 2008 and changes during the year thenended is presented below:

 
| ** **                                                   | ** ** | **Restricted Shares  Outstanding** | ** ** | **Weighted-Average  Grant Date Fair  Value Per Share ($)** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| **Non-vested shares outstanding at  December 31, 2007** |       | 452                                     |       | 3.22                                                                                |       |
| Awards granted                                               |       | —                                  |       | —                                                                              |       |
| Restrictions lapsed                                          |       | (313                                    | )          | 3.22                                                                                |       |
| Awards forfeited                                             |       | (106                                    | )          | 3.22                                                                                |       |
| **Non-vested shares outstanding at  December 31, 2008** |       | 33                                      |       | 3.22                                                                                |       |

 

As of December 31,2008, there was $22,000 of total unrecognized compensation cost related tounvested restricted shares, which will be recognized over the remaining vestingterm of 0.2 years.

 

**7. Sublease**

 

In May 2008, theCompany entered into an Assignment of Lease and Assumption Agreement (the“Assignment Agreement”) with Cubist Pharmaceuticals, Inc. (“Cubist”),pursuant to which the Company assigned to Cubist its lease of approximately19,815 square feet of office space in Lexington, Massachusetts (the “Premises”).  Concurrent with the execution of theAssignment Agreement, the Company entered into a Sublease (the “Sublease”) withCubist, pursuant to which the Company agreed to sublease approximately 4,000square feet of the Premises.  The initial term of the Sublease (the“Term”) was for three months beginning on June 1, 2008. Upon theexpiration of the Term, the Company has elected to extend the Sublease on amonth-to-month basis subsequent to the expiration of the Term. Pursuant to theterms of the Sublease, the Company is obligated to pay rent to Cubist in theamount of approximately $9,200 per month in advance.

 

**8. License, Manufacturing andCommercialization Agreements**

 

The Companyhas entered into various research, license and commercialization agreements tosupport its research and development and commercialization activities.

 

*Elan.* In February 2007, in connection with the Company’s efforts todevelop BiDil XR, the Company entered into a license agreement with Elan PharmaInternational Limited (“Elan”). Pursuant to the agreement, Elan granted to theCompany an exclusive worldwide license, for the term of the agreement, tocertain know-how, patents and technology, and any improvements to any of theforegoing developed by either party during the term of the agreement. Pursuantto this license, the Company has the right to import, use, offer for sale andsell the oral capsule formulation incorporating specified technology referredto in the agreement and containing, as its sole active combination of ingredients,the combination of the active drug substances isosorbide dinitrate andhydralazine hydrochloride, including BiDil XR. In consideration for the grantof the license, the Company has agreed to pay Elan royalties that arecalculated by reference to annual net sales parameters set forth in theagreement. In addition, the Company has also agreed to pay Elan specifiedamounts upon the achievement of specified development and commercializationmilestone events of up to $2.5 million of which $250,000 was paid in 2007.

 

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**8. License,Manufacturing and Commercialization Agreements (Continued)**

 

The term ofthe agreement runs in the United States from the effective date of theagreement until the later of (a) the 20th anniversary of the date ofthe first sale of the product by us or a permitted sublicensee to anunaffiliated third party, which is referred to in the agreement as the first inmarket sale, or (b) the expiration of the last-to-expire patent for theproduct listed in the FDA’s “Orange Book.” Elsewhere in the world, the termwill run on a country by country basis from the effective date of the agreementuntil the later of (a) the 20th anniversary of the date of the firstin market sale of the product in the country concerned or (b) theexpiration of the life of the last to expire patent included in the Elanintellectual property in that country. Following the expiration of the initialterm, the agreement shall continue automatically for rolling 3 yearperiods thereafter, unless the agreement has been terminated by either of theparties by serving 1 year’s written notice on the other party prior to theend of the initial term or any such additional 3 year period. Either Elanor the Company may terminate the agreement in the event of a material, uncuredbreach by the other party, or if the other party goes into liquidation orbecomes bankrupt or insolvent. In addition, the Company may terminate theagreement in the event of a technical failure, which is defined as theinability to achieve a pharmacokinetic profile for the product consistent withthat of BiDil administered three times daily (at 6 hour intervals). Elan mayterminate the agreement with respect to a particular country in the territoryin the event that the Company does not meet certain obligations set forth inthe agreement with respect to such country, provided that Elan must firstconsult with the Company and, if applicable, provide the Company with anopportunity to meet such obligations prior to exercising Elan’s terminationrights.

 

*Dr. Jay N. Cohn.*  In January 1999, as amended in August 2000,January 2001, March 2002 and September 2008, the Company enteredinto a collaboration and license agreement with Dr. Jay N. Cohn (the“Collaboration Agreement”). Under the Collaboration Agreement, Dr. Cohnlicensed to the Company exclusive worldwide royalty-bearing rights totechnology and inventions owned or controlled by Dr. Cohn and that relateto BiDil for the treatment of cardiovascular disease. The Company has mademilestone payments and is currently making royalty payments to Dr. Cohnupon sales of BiDil. During the years ended December 31, 2008, 2007 and2006, the Company incurred royalties to Dr. Cohn in the approximateamounts of $448,000, $450,000, and $364,000, respectively. The CollaborationAgreement imposes upon the Company an obligation to use reasonable best effortsto develop and, upon receipt of regulatory approval, manufacture, market andcommercialize products based upon the licensed rights. If the Company fails tomeet this obligation, Dr. Cohn has the right to terminate theCollaboration Agreement and the license granted to the Company thereunder. Dr. Cohnalso has the right to terminate the Collaboration Agreement if the Companymaterially breaches the Collaboration Agreement and fails to remedy the breachwithin 30 days. The Company has the right to terminate the CollaborationAgreement at any time upon 30 days prior written notice. Unless earlierterminated, the Collaboration Agreement continues in perpetuity. Pursuant tothe Collaboration Agreement, Dr. Cohn was appointed to the Company’sthen-current scientific advisory board, entered into a consulting agreementwith the Company and was granted an option to purchase 10,000 shares of theCompany’s common stock.

 

In September 2008,the Company entered into a letter agreement with Dr. Cohn (the “LetterAgreement”), pursuant to which the Company and Dr. Cohn clarified theirunderstandings with respect to royalty payments pursuant to the CollaborationAgreement and the related amendments. The Letter Agreement resolves certaindisputes with regard to the amount of planned costs and excess costs, as those termsare defined and referred to in the amendments to the Collaboration Agreementdated January 29, 2001 and March 15, 2002. In addition, the LetterAgreement clarifies that the Company will pay Dr. Cohn a specified reducedroyalty on net sales of collaboration products (as defined in the CollaborationAgreement) until such time as the aggregate dollar amount retained by theCompany and not required to be paid to Dr. Cohn as a result of suchreduced royalty rate equals a specified aggregate dollar amount (the “MaximumAmount”). Once the Maximum Amount has been achieved, the Company willresume making royalty payments to Dr. Cohn at the rate specified in theCollaboration Agreement.  Additionally, the Letter Agreement clarifiesthat should the Company sublicense its rights under the Collaboration Agreementto a third party, Dr. Cohn will receive a specified percentage of anyroyalty payments the Company receives from the sublicense, and any suchpayments made to Dr. Cohn by the Company will also be subject to offset upto the Maximum Amount. Pursuant to the terms of the Letter Agreement, theparties agreed to terminate the amendments to the Collaboration Agreement datedJanuary 29, 2001 and March 15, 2002. In consideration for agreeing tothe terms of the Letter Agreement, the Company made a one time cash payment to Dr. Cohnin the amount of $800,000. This payment has been included as a component ofcost of product sales in the Company’s statement of operations for the yearended December 31, 2008.

 

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** **

**9. Income Taxes**

 

A reconciliation of federal statutory income tax provision to theCompany’s actual provision is as follows:

 
| ** **                            | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------|------------|--------------------------------------------|------------|
| ** **                            | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Benefit at federal statutory tax rate |       | $                                          | (1,946     | ) | $ | (10,735 | ) | $ | (24,255 | ) |
| State taxes, net of federal benefit   |       | (201                                       | )          | (1,980 | ) | (4,473 | ) |
| Non-deductible expenses               |       | 17                                         |       | 37 |   | 910 |   |
| Unbenefited operating losses          |       | 2,130                                      |       | 12,678 |   | 27,818 |   |
| Income tax provision                  |       | $                                          | —     |   | $ | — |   | $ | — |   |

 

The significant components of the Company’s deferred tax assets are asfollows:

 
| ** **                                       | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | **2008**              | ** ** | **2007** | ** ** |
| Deferred tax assets:                             |       |                  |       |   |   |
| Net operating loss carryforwards                 |       | $                     | 89,887     |   | $ | 93,535 |   |
| Capitalized research costs, net of  amortization |       | 22,400                |       | 27,049 |   |
| Tax credit carryforwards                         |       | 7,753                 |       | 7,509 |   |
| Deferred revenue                                 |       | —                |       | — |   |
| Depreciation                                     |       | 1                     |       | (30 | ) |
| Accrued expenses                                 |       | 112                   |       | 410 |   |
| Other                                            |       | 5,034                 |       | 5,571 |   |
|                                             |       | 125,187               |       | 134,044 |   |
| Valuation allowance                              |       | (125,187              | )          | (134,044 | ) |
| Net deferred tax assets                          |       | $                     | —     |   | $ | — |   |

 

The Company has decreased its valuation allowance by approximately$8.9 million in 2008 as a result of the expiration of certain netoperating loss carryforwards in 2008. At December 31, 2008, the Companyhad unused net operating loss carryforwards of approximately $250 millionavailable to reduce federal taxable income expiring in 2010 through 2025 andapproximately $240 million available to reduce state taxable incomeexpiring in 2008 through 2010. The Company also has federal and state researchtax credits of approximately $9.0 million available to offset federal andstate income taxes; these credits expire beginning in 2010. No income taxpayments were made in 2008, 2007 or 2006.

 

Utilization of the net operating losses, (“NOLs”) and research anddevelopment credit carryforwards may be subject to a substantial annuallimitation under Section 382 of the Internal Revenue Code of 1986 due toownership change limitations that have occurred previously or that could occurin the future. These ownership changes may limit the amount of NOLs andresearch and development credit carryforwards that can be utilized annually tooffset future taxable income and tax, respectively. The Company has notcurrently completed a study to assess whether an ownership change has occurred,or whether there have been multiple ownership changes since its formation, dueto the significant complexity and related cost associated with such study.There also could be additional ownership changes in the future which may resultin additional limitations in the utilization of the carryforward NOLs andcredits.

 

In June 2006, FASB issued Interpretation No. 48, *Accounting for Uncertainty in Income Taxes, aninterpretation of FAS 109* (“FIN 48”). This statementclarifies the criteria that an individual tax position must satisfy for some orall of the benefits of that position to be recognized in a company’s financialstatements. The Company adopted FIN 48 on January 1, 2007. Theimplementation of FIN 48 did not have a material impact on the Company’sconsolidated financial statements, results of operations or cash flows. At theadoption date of January 1, 2007, and also at December 31, 2007 and December 31,2008, the Company had no unrecognized tax benefits. The Company has not, asyet, conducted a study of its research and development credit carryforwards.This study may result in an increase or decrease to the Company’s research anddevelopment credit carryforwards. However, until a study is completed and anyadjustment is known, no amounts are being presented as an uncertain taxposition under FIN 48. A full valuation allowance has been providedagainst the Company’s research and development credits and, if an adjustment isrequired, this adjustment would be offset by an adjustment to the valuationallowance. As a result, there would be no impact to the consolidated balancesheet, statement of operations or cash flows if an adjustment were required.

 

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**10. Commitments and Contingencies**

 

In connection with the Company’s efforts to obtain the approval ofBiDil from the FDA, the Company contracted with the law firm ofFoxKiser LLC (“FoxKiser”) for services related to the regulatory approvalprocess for BiDil. The agreement provided for payment of legal consulting feesupon receipt of written FDA approval of BiDil. In addition, the agreementrequires the Company to pay royalties to FoxKiser on commercial sales of BiDil.The royalty term ends six months after the date of market introduction of anFDA-approved generic version of BiDil. During the years ended December 31,2008, 2007 and 2006, the Company recorded charges of $-0-, $-0-, and$0.9 million, respectively, pertaining to the legal consulting fees, and$448,000, $450,000, and $364,000, respectively, pertaining to royalty expensesrelated to this agreement.

 

On February 16, 2005, the Company engaged Schwarz PharmaManufacturing, Inc. (“Schwarz Pharma”) under a five-year exclusivemanufacturing and supply agreement solely for the three times daily immediaterelease dosage formulation of BiDil. Schwarz Pharma is now a division ofUCB S.A. Under the supply agreement, the Company has the right to engage **a**backup manufacturer. At December 31,2008, the Company has outstanding binding purchase orders of $0.1 millionfor production of BiDil finished goods.

 

**11. Retirement Plan**

 

The Company sponsors a 401(k) plan covering substantially allemployees. The plan provides for salary deferral contributions by participantsof up to 75% of eligible wages not to exceed Federal requirements. Thoseemployees over 50 years old are permitted to contribute an additionalamount per Federal limits ($5,000 per year for 2008). In October 2005, theBoard of Directors approved an employee match in the form of shares of theCompany’s common stock equal to 50% of employee contributions, limited to thefirst 6% of salary contributed to the 401(k) plan. For the years ended December 31,2008, 2007, and 2006, the Company recorded expenses of $26,000, $189,000 and$411,000, respectively, related to the plan.

 

**12. Subsequent Events**

 

*Proposed Merger with Deerfield Management*

 

On January 27,2009, the Company entered into an agreement and plan of merger (the “MergerAgreement”) with Deerfield Private Design Fund, L.P., Deerfield PrivateDesign International, L.P., Deerfield Special Situations Fund, L.P.,Deerfield Special Situations Fund International Limited, NTMD ParentAcquisition Corp. and NTMD Acquisition Corp. (collectively, “DeerfieldManagement”). As of the date of the Merger Agreement, Deerfield Managementowned approximately 11% of the Company’s outstanding common stock. At theeffective time of the merger with Deerfield Management, each outstanding shareof the Company’s common stock will be converted into the right to receive $0.80per share in cash, subject to adjustment if the Company’s net cash balance atthe closing of the merger is greater than or less than $12.3 million, ascalculated pursuant to the terms of the Merger Agreement. In addition, alloutstanding options to purchase the Company’s common stock will becomeaccelerated in full immediately prior to the effective time of the merger. Anyoption not exercised prior to the effective time of the merger will beconverted automatically into the right to receive cash in an amount equal tothe excess, if any, of the merger consideration per share of common stock overthe exercise price of the option, multiplied by the number of shares of commonstock underlying the option. The Merger Agreement includes a “go-shop”provision that allowed the Company to solicit, negotiate and evaluate competingacquisition proposals during a post-signing period that ended on February 26,2009. The Company solicited, but did not receive any alternative acquisitionproposals prior to the termination of the go-shop period. The Company currentlyexpects to complete the merger with Deerfield Management in the second quarterof 2009 following the satisfaction or waiver of all conditions to the merger,including the adoption of the Merger Agreement by the Company’s stockholders ata special meeting of stockholders, which is currently scheduled for April 22,2009.

 

The MergerAgreement contains customary representations, warranties and covenantsincluding, among others, covenants relating to using commercially reasonableefforts to obtain the requisite stockholder approval of the merger and relatedtransactions, as well as the Company’s conduct of business during the periodbetween the date of signing the Merger Agreement and the closing of the merger.The Company’s and Deerfield Management’s obligations to consummate the mergerare subject to the satisfaction or waiver of customary conditions, including (1) requisiteapproval of the merger by the Company’s stockholders, (2) the absence ofany order or injunction preventing the consummation of the merger or any legalrequirement that makes the consummation of the merger illegal, (3) obtainingany required governmental authorizations or consents and (4) determinationof the Company’s final net cash in accordance with the Merger Agreement. Eachparty’s obligation to consummate the merger is also subject to other specifiedcustomary conditions, including the accuracy of the representations andwarranties of the other party, subject to an overall material adverse effectqualification, and material compliance by the other party with its covenants.The Merger Agreement also provides the Company and Deerfield Management withspecified termination rights. If the Merger Agreement is terminated underspecified circumstances, the Company will be required to reimburse DeerfieldManagement for its documented fees and expenses associated with the MergerAgreement and the transactions contemplated thereby, up to a maximum of$750,000.

 

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**12. Subsequent Events (Continued)**

 

*Terminationof Proposed JHP and Archemix Transactions*

 

Prior toentering into the Merger Agreement, the Company terminated its previouslyannounced Purchase and Sale Agreement (the “JHP Agreement”) with JHPPharmaceuticals, LLC (“JHP”) and its previously announced Agreement and Plan ofMerger (the “Archemix Agreement”) with Archemix Corp. (“Archemix”) inaccordance with the terms of each of those agreements, including the payment oftermination fees. In connection with the termination of the JHP Agreement, theCompany paid a fee of approximately $900,000 to JHP. In connection with thetermination of the Archemix Agreement, the Company paid a fee of $1,500,000 toArchemix.

 

*Litigation*

 

The Company is aware of apurported class action lawsuit related to the merger with Deerfield Managementthat has been filed against the Company, each of its directors, its presidentand chief executive officer and certain of Deerfield Management’s affiliates inSuffolk County Superior Court in Massachusetts. The lawsuit, *Mieczyslaw Stachnik et al. v. Kenneth Bate et al.*, CivilAction No. 09-0622-BLS, was filed on February 12, 2009 and alleges,among other things, that the merger consideration to be paid to the Company’sstockholders in the merger is unfair and undervalues the Company. In addition,the complaint alleges that the Company’s directors and its president and chiefexecutive officer violated their fiduciary duties by, among other things,failing to maximize stockholder value and failing to engage in a fair saleprocess. The complaint seeks, among other relief, an injunction preventingcompletion of the merger or, if the merger is consummated, rescissory damages.The Company believes that this lawsuit is without merit and plans to defend itvigorously.

 

**13. Quarterly Results of Operations(Unaudited)**

 

The following table presents unaudited quarterly financial data of theCompany:

 
| ** **                                                          | ** ** | **Year Ended December 31, 2008** | ** ** |
|---------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                          | ** ** | **First Quarter**                               | ** ** | **Second   Quarter** | ** ** | **Third Quarter** | ** ** | **Fourth   Quarter** | ** ** |
| Net revenues                                                        |       | $                                                    | 3,933      |   | $ | 3,831 |   | $ | 4,003 |   | $ | 3,153 |   |
| Gross profit                                                        |       | 2,954                                                |       | 3,295 |   | $ | 2,574 |   | $ | 2,646 |   |
| Net (loss) income                                                   |       | (5,184                                               | )          | 982 |   | (390 | ) | (1,325 | ) |
| Basic and diluted net loss per share                                |       | $                                                    | (0.11      | ) | $ | 0.02 |   | $ | (0.01 | ) | $ | (0.03 | ) |
| Weighted average common shares used to  compute net loss per share: |       |                                                 |       |   |   |   |   |   |   |
| Basic                                                               |       | 45,792                                               |       | 46,029 |   | 46,042 |   | 46,042 |   |
| Diluted                                                             |       | 45,792                                               |       | 46,033 |   | 46,042 |   | 46,042 |   |

 
| ** **                                                         | ** ** | **Year Ended December 31, 2007** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                         | ** ** | **First Quarter**                               | ** ** | **Second   Quarter** | ** ** | **Third Quarter** | ** ** | **Fourth   Quarter** | ** ** |
| Net revenues                                                       |       | $                                                    | 3,568      |   | $ | 3,715 |   | $ | 3,759 |   | $ | 4,977 |   |
| Gross profit                                                       |       | 2,614                                                |       | 3,078 |   | 3,199 |   | 2,892 |   |
| Net loss                                                           |       | (10,114                                              | )          | (6,236 | ) | (8,354 | ) | (6,870 | ) |
| Basic and diluted net loss per share                               |       | $                                                    | (0.27      | ) | $ | (0.16 | ) | $ | (0.18 | ) | $ | (0.15 | ) |
| Weighted average common shares used to  compute net loss per share |       | 37,263                                               |       | 40,100 |   | 45,180 |   | 45,322 |   |

 

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**ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL DISCLOSURE**

 

None.

 

**ITEM 9A. CONTROLS AND PROCEDURES**

 

(a) *Evaluation of Disclosure Controls and Procedures.*  Our chief executive officer and interim chieffinancial officer evaluated the effectiveness of our disclosure controls and proceduresas of December 31, 2008. The term “disclosure controls and procedures,” asdefined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act,means controls and other procedures of a company that are designed to ensurethat information required to be disclosed by a company in the reports that itfiles or submits under the Exchange Act is recorded, processed, summarized andreported, within the time periods specified in the SEC’s rules and forms.Disclosure controls and procedures include, without limitation, controls andprocedures designed to ensure that information required to be disclosed by acompany in the reports that it files or submits under the Exchange Act isaccumulated and communicated to the company’s management, including itsprincipal executive and principal financial officers, as appropriate to allowtimely decisions regarding required disclosure. Management recognizes that anycontrols and procedures, no matter how well designed and operated, can provideonly reasonable assurance of achieving their objectives and managementnecessarily applies its judgment in evaluating the cost-benefit relationship ofpossible controls and procedures. Based on the evaluation of our disclosurecontrols and procedures as of December 31, 2008, our chief executiveofficer and interim chief financial officer concluded that, as of such date,our disclosure controls and procedures were effective at the reasonableassurance level.

 

(b) *Management’s Report on Internal Control OverFinancial Reporting.*

 

**Management’s Report on Internal Control OverFinancial Reporting**

 

Our management is responsible for establishing and maintaining adequateinternal control over financial reporting. Internal control over financialreporting is defined in Rule 13a-15(f) or 15d-15(f) promulgatedunder the Exchange Act as a process designed by, or under the supervision of,the company’s principal executive officer and principal financial officer andeffected by the company’s board of directors, management and other personnel,to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles and includes thosepolicies and procedures that:

 

·                  pertain to the maintenance of recordsthat, in reasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company;

 

·                  provide reasonable assurance thattransactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, andthat receipts and expenditures of the company are being made only in accordancewith authorizations of management and directors of the company; and

 

·                  provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition, use ordisposition of the company’s assets that could have a material effect on thefinancial statements.

 

Because of its inherent limitations, internal control over financialreporting may not prevent or detect misstatements. Projections of anyevaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate.

 

Our management assessed the effectiveness of our internal control overfinancial reporting as of December 31, 2008. In making this assessment,the company’s management used the criteria set forth by the Committee ofSponsoring Organizations of the Treadway Commission (COSO) in InternalControl-Integrated Framework.

 

Based on this assessment, our management concluded that, as of December 31,2008, our internal control over financial reporting is effective based on thosecriteria.

 

This report does not include an attestation report of our independentregistered public accounting firm regarding internal control over financialreporting. Management’s report was not subject to attestation by ourindependent registered public accounting firm pursuant to temporary rules ofthe Securities and Exchange Commission that permit us to provide onlymanagement’s report in this annual report.

 

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*(c)  Changes in Internal Controls.*

 

No change in our internal control over financial reporting occurredduring the fiscal year ending December 31, 2008 that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

 

**ITEM 9B. OTHER INFORMATION**

 

None.

 

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**PART III**

 

**ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE**

 

**Directors and Executive Officers**

 

Information regarding our directors and executive officers may be foundunder the captions “Election of Directors,” “Executive Officers” and “CorporateGovernance” in the Proxy Statement for our 2009 Annual Meeting of Stockholders.Such information is incorporated herein by reference.

 

**Audit Committee**

 

We have a separately-designated standing Audit Committee established inaccordance with Section 3(a)(58)(A) of the Exchange Act. Additionalinformation regarding the Audit Committee may be found under the captions“Board of Directors Meetings, Committees and Attendance” and “Report of theAudit Committee” in the Proxy Statement for our 2009 Annual Meeting ofStockholders. Such information is incorporated herein by reference.

 

**Audit Committee Financial Expert**

 

The Board of Directors has determined that it has at least one “AuditCommittee Financial Expert” (as defined by Item 407(d)(5) ofRegulation S-K of the Exchange Act) on the Audit Committee of the Board ofDirectors, Davey S. Scoon. The Board of Directors has further determined that Mr. Scoonis “independent” from management within the meaning of Item 7(d)(3)(iv) ofSchedule 14A under the Exchange Act.

 

**Section 16(a) Beneficial OwnershipReporting Compliance**

 

Information regarding Section 16(a) Beneficial OwnershipReporting Compliance may be found under the caption “Section 16(a) BeneficialOwnership Reporting Compliance” in the Proxy Statement for our 2009 AnnualMeeting of Stockholders. Such information is incorporated herein by reference.

 

**Code of Business Conduct and Ethics**

 

We have adopted a code of business conduct and ethics, which applies toall of our officers, directors and employees, including our principal executiveofficer, principal financial officer, principal accounting officer orcontroller, or persons performing similar functions. Our code of businessconduct and ethics was filed with the SEC as an exhibit to our annual report onForm 10-K for the fiscal year ended December 31, 2003. In addition,we intend to post on our website, which is located at www.nitromed.com, alldisclosures that are required by law or NASDAQ Stock Market listing standardsconcerning any amendments to, or waivers from, any provision of our code ofbusiness conduct and ethics.

 

**ITEM 11. EXECUTIVE COMPENSATION**

 

Information with respect to this item may be found under the caption“Compensation of Executive Officers and Directors,” including but not limitedto the sub-captions “Compensation Discussion and Analysis,” “Compensation ofDirectors,” and “Compensation Committee Interlocks and Insider Participation,”in the Proxy Statement for our 2009 Annual Meeting of Stockholders. Suchinformation is incorporated herein by reference.

 

**ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ANDRELATED STOCKHOLDER MATTERS**

 

Information with respect to this item may be found under the caption“Stock Ownership of Certain Beneficial Owners and Management” in the ProxyStatement for our 2009 Annual Meeting of Stockholders. Such information isincorporated herein by reference.

 

**ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTORINDEPENDENCE**

 

Information with respect to this item may be found under the captions“Transactions with Related Persons,” “Policies and Procedures for RelatedPerson Transactions,” and “Board Determination of Independence” in the ProxyStatement for our 2009 Annual Meeting of Stockholders. Such information isincorporated herein by reference.

 

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| **ITEM 14.** |   | **PRINCIPAL ACCOUNTING FEES AND SERVICES** |
|--------------|--------|--------------------------------------------|

 

Information with respect to this item may be found under the caption“Audit Fees” in the Proxy Statement for our 2009 Annual Meeting ofStockholders. Such information is incorporated herein by reference.

 

**PART IV**

 
| **ITEM 15.** |   | **EXHIBITS, FINANCIAL STATEMENT SCHEDULES**                                                                                                                                                                          |
|--------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |   |                                                                                                                                                                                                                 |
| (a)(1)       |   | Financial  Statements.                                                                                                                                                                                               |
|         |   | For a list of the financial information included herein, see “Index  to Financial Statements” on page 50.                                                                                             |
| (a)(2)       |   | Financial  Statement Schedules.                                                                                                                                                                                      |
|         |   | All schedules are omitted because they are not applicable or the  required information is shown in the Financial Statements or Notes thereto.                                                                        |
| (a)(3)       |   | Exhibits.  The list of Exhibits filed as a part of this Annual Report on Form 10-K  are set forth on the Exhibit Index immediately preceding such Exhibits,  and is incorporated herein by this reference. |

 

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned.

 
|                       | NITROMED, INC. |
|----------------------------|---------------------|
| Date:  March 19, 2009 | By:                 | /s/ KENNETH  M. BATE |
|                       |                | Kenneth M.  Bate   President, Chief Executive Officer and Interim Chief Financial Officer |

 

Pursuant to the requirements of the Securities Act of 1933, this reporthas been signed by the following persons in the capacities and on the datesindicated.

 
| **Signature**                      | ** ** | **Title**                                                                   | ** ** | **Date**            |
|------------------------------------|------------|-----------------------------------------------------------------------------|------------|---------------------|
|                               |       |                                                                        |       |                |
| /s/ KENNETH  M. BATE               |       | President,  Chief Executive Officer, Interim Chief Financial Officer        |       | March 19, 2009 |
| Kenneth M.  Bate                   |       | and Director  (Principal Executive Officer and Principal Financial Officer) |       |                |
|                               |       |                                                                        |       |                |
| /s/ ROBERT  S. COHEN               |       | Director                                                                    |       | March 19, 2009 |
| Robert S.  Cohen                   |       |                                                                        |       |                |
|                               |       |                                                                        |       |                |
| /s/ FRANK L.  DOUGLAS, M.D., PH.D. |       | Director                                                                    |       | March 19, 2009 |
| Frank L.  Douglas, M.D., Ph.D.     |       |                                                                        |       |                |
|                               |       |                                                                        |       |                |
| /s/ ZOLA  HOROVITZ, PH.D.          |       | Director                                                                    |       | March 19, 2009 |
| Zola  Horovitz, Ph.D.              |       |                                                                        |       |                |
|                               |       |                                                                        |       |                |
| /s/ ARGERIS KARABELAS, PH.D.       |       | Director                                                                    |       | March 19, 2009 |
| Argeris Karabelas, Ph.D.           |       |                                                                        |       |                |
|                               |       |                                                                        |       |                |
| /s/ MARK  LESCHLY                  |       | Director                                                                    |       | March 19, 2009 |
| Mark Leschly                       |       |                                                                        |       |                |
|                               |       |                                                                        |       |                |
| /s/ JOHN W.  LITTLECHILD           |       | Director                                                                    |       | March 19, 2009 |
| John W.  Littlechild               |       |                                                                        |       |                |
|                               |       |                                                                        |       |                |
| /s/ JOSEPH  LOSCALZO, M.D., PH.D.  |       | Director                                                                    |       | March 19, 2009 |
| Joseph  Loscalzo, M.D., Ph.D.      |       |                                                                        |       |                |
|                               |       |                                                                        |       |                |
| /s/ DAVEY S.  SCOON                |       | Director                                                                    |       | March 19, 2009 |
| Davey S.  Scoon                    |       |                                                                        |       |                |
|                               |       |                                                                        |       |                |
| /s/  CHRISTOPHER J. SOBECKI        |       | Director                                                                    |       | March 19, 2009 |
| Christopher  J. Sobecki            |       |                                                                        |       |                |

 

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**EXHIBIT INDEX**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|----------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1                  |       | Agreement and Plan of  Merger, dated as of January 27, 2009, by and among NitroMed, Inc.,  Deerfield Private Design Fund, L.P., Deerfield Private Design  International, L.P., Deerfield Special Situations Fund, L.P.,  Deerfield Special Situations Fund International Limited, NTMD Parent  Acquisition Corp. and NTMD Acquisition Corp. (Incorporated by reference to  the exhibits to NitroMed, Inc.’s Current Report on Form 8-K filed  on January 28, 2009 (File No. 000-50439)) |
| 3.1                  |       | Restated Certificate of  Incorporation of NitroMed, Inc. (Incorporated by reference to the  exhibits to NitroMed, Inc.’s Registration Statement on Form S-1  (File No. 333-108104))                                                                                                                                                                                                                                                                                                                              |
| 3.2                  |       | Amended and Restated  Bylaws of NitroMed, Inc. (Incorporated by reference to the exhibits to  NitroMed, Inc.’s Registration Statement on Form S-1 (File  No. 333-108104))                                                                                                                                                                                                                                                                                                                                        |
| *10.1                |       | Amended and Restated 1993  Equity Incentive Plan (Incorporated by reference to the exhibits to  NitroMed, Inc.’s Registration Statement on Form S-1 (File  No. 333-108104))                                                                                                                                                                                                                                                                                                                                           |
| *10.2                |       | Amended and Restated 2003  Stock Incentive Plan, as amended (Incorporated by reference to the exhibits  to NitroMed, Inc.’s Annual Report on Form 10-K for the year ended  December 31, 2006 (File No. 000-50439))                                                                                                                                                                                                                                                                                               |
| *10.3                |       | Form of Incentive  Stock Option Agreement Granted Under Amended and Restated 2003 Stock  Incentive Plan (Incorporated by reference to the exhibits to  NitroMed, Inc.’s Annual Report on Form 10-K for the year ended  December 31, 2004 (File No. 000-50439))                                                                                                                                                                                                                                              |
| *10.4                |       | Form of Nonstatutory  Stock Option Agreement Granted Under Amended and Restated 2003 Stock  Incentive Plan (Incorporated by reference to the exhibits to  NitroMed, Inc.’s Annual Report on Form 10-K for the year ended  December 31, 2004 (File No. 000-50439))                                                                                                                                                                                                                                           |
| *10.5                |       | Form of Restricted  Stock Agreement Granted Under Amended and Restated 2003 Stock Incentive Plan  entered into between NitroMed, Inc. and certain of NitroMed, Inc.’s  executive officers, together with a schedule of such officers (Incorporated  by reference to the exhibits to NitroMed, Inc.’s Current Report on  Form 8-K filed on March 22, 2007 (File No. 000-50439))                                                                                                               |
| *10.6                |       | 2003 Employee Stock  Purchase Plan, as amended (Incorporated by reference to the exhibits to  NitroMed, Inc.’s Annual Report on Form 10-K for the year ended  December 31, 2006 (File No. 000-50439))                                                                                                                                                                                                                                                                                                            |
| 10.7†           |       | Collaboration and License  Agreement between NitroMed, Inc. and Professor Jay N. Cohn dated  January 22, 1999, as amended January 29, 2001 and March 15,  2002 (Incorporated by reference to the exhibits to NitroMed, Inc.’s  Registration Statement on Form S-1 (File No. 333-108104))                                                                                                                                                                                                          |
| 10.8                 |       | Amendment No. 1 to  Collaboration and License Agreement between NitroMed, Inc. and Professor  Jay N. Cohn dated August 10, 2000 (Incorporated by reference to the  exhibits to NitroMed, Inc.’s Annual Report on Form 10-K for the  year ended December 31, 2004 (File No. 000-50439))                                                                                                                                                                                                            |
| 10.9†           |       | Letter Agreement  between NitroMed, Inc. and Jay N. Cohn, M.D., dated as of  September 5, 2008 (Incorporated by reference to the exhibits to NitroMed, Inc.’s  Quarterly Report on Form 10-Q for the quarter ended September 30,  2008 (File No. 000-50439))                                                                                                                                                                                                                                           |
| 10.10†          |       | Agreement between  NitroMed, Inc. and FoxKiser dated April 26, 2001 (Incorporated by  reference to the exhibits to NitroMed, Inc.’s Registration Statement on  Form S-1 (File No. 333-108104))                                                                                                                                                                                                                                                                                                              |
| 10.11†          |       | Supply Agreement between  NitroMed, Inc. and Schwarz Pharma Manufacturing, Inc. dated as of  February 16, 2005 (Incorporated by reference to the exhibits to  NitroMed, Inc.’s Annual Report on Form 10-K for the year ended  December 31, 2004 (File No. 000-50439))                                                                                                                                                                                                                             |
| *10.12               |       | Amended and Restated  Executive Severance Benefit Plan (Incorporated by reference to the exhibits  to NitroMed, Inc.’s Current Report on Form 8-K filed on  December 31, 2008 (File No. 000-50439))                                                                                                                                                                                                                                                                                                              |
| *10.13               |       | Employment Offer Letter  between NitroMed, Inc. and Kenneth M. Bate, dated as of January 19,  2007 (Incorporated by reference to the exhibits to NitroMed, Inc.’s  Current Report on Form 8-K filed on January 25, 2007 (File  No. 000-50439))                                                                                                                                                                                                                                                         |
| *10.14               |       | Retention Agreement  between NitroMed, Inc. and Kenneth M. Bate, dated as of January 23,  2007 (Incorporated by reference to the exhibits to NitroMed, Inc.’s  Current Report on Form 8-K filed on January 25, 2007 (File  No. 000-50439))                                                                                                                                                                                                                                                             |
| *10.15               |       | Severance Agreement  between NitroMed, Inc. and Kenneth M. Bate, dated as of January 23,  2007 (Incorporated by reference to the exhibits to NitroMed, Inc.’s  Current Report on Form 8-K filed on January 25, 2007 (File  No. 000-50439))                                                                                                                                                                                                                                                             |
| *10.16               |       | Retention Agreement  between NitroMed, Inc. and Kenneth M. Bate, dated as of January 15,  2008 (Incorporated by reference to the exhibits to NitroMed, Inc.’s  Current Report on Form 8-K filed on January 17, 2008 (File  No. 000-50439))                                                                                                                                                                                                                                                             |
| *10.17               |       | Letter Agreement between  NitroMed, Inc. and Kenneth M. Bate, dated as of December 29, 2008  (Incorporated by reference to the exhibits to NitroMed, Inc.’s Current  Report on Form 8-K filed on December 31, 2008 (File  No. 000-50439))                                                                                                                                                                                                                                                              |
| *10.18               |       | Letter Agreement between  NitroMed, Inc. and Kenneth M. Bate, dated as of February 23, 2009  (Incorporated by reference to the exhibits to NitroMed, Inc.’s Current  Report on Form 8-K filed on February 26, 2009 (File  No. 000-50439))                                                                                                                                                                                                                                                              |

 

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Table of Contents

 
| *10.19      |   | Consulting Agreement  between NitroMed, Inc. and Jane A. Kramer, dated as of October 31,  2008 (Incorporated by reference to the exhibits to NitroMed, Inc.’s  Quarterly Report on Form 10-Q for the quarter ended September 30,  2008 (File No. 000-50439))                  |
|-------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.20† |   | License Agreement between  NitroMed, Inc. and Elan Pharma International Limited, dated as of  February 9, 2007 (Incorporated by reference to the exhibits to  NitroMed, Inc.’s Annual Report on Form 10-K for the year ended  December 31, 2006 (File No. 000-50439))         |
| 10.21       |   | Assignment of Lease and  Assumption Agreement between NitroMed, Inc. and Cubist  Pharmaceuticals, Inc., dated as of May 29, 2008 (Incorporated by  reference to the exhibits to NitroMed, Inc.’s Current Report on  Form 8-K filed on June 3, 2008 (File No. 000-50439)) |
| 10.22       |   | Sublease between  NitroMed, Inc. and Cubist Pharmaceuticals, Inc., dated as of  May 29, 2008 (Incorporated by reference to the exhibits to  NitroMed, Inc.’s Current Report on Form 8-K filed on June 3,  2008 (File No. 000-50439))                                     |
| 10.23       |   | Form of  Stockholder Agreement and a schedule of signatories thereto (Incorporated by  reference to the exhibits to NitroMed, Inc.’s Current Report on  Form 8-K filed on January 28, 2009 (File No. 000-50439))                                                                   |
| 14.1        |   | Code of Business Conduct  and Ethics (Incorporated by reference to the exhibits to  NitroMed, Inc.’s Annual Report on Form 10-K for the year ended  December 31, 2003 (File No. 000-50439))                                                                                             |
| 21.1        |   | Subsidiaries of  NitroMed, Inc.                                                                                                                                                                                                                                                                             |
| 23.1        |   | Consent of  Ernst & Young LLP, Independent Registered Public Accounting  Firm                                                                                                                                                                                                                      |
| 31.1        |   | Certification of the Chief  Executive Officer and Interim Chief Financial Officer pursuant to  Rule 13a-14(a) and 15d-14 of the Securities Exchange Act of 1934,  as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                            |
| 32.1        |   | Certification of the Chief  Executive Officer and Interim Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                                           |

 

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*                                         Managementcontract or compensation plan or arrangement required to be filed as an exhibitpursuant to Item 15(c) of Form 10-K

 

†                                          Confidentialtreatment requested as to certain portions, which portions have been filedseparately with the Securities and Exchange Commission

 

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