UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Commission File Number: 000-50516

Eyetech Pharmaceuticals, Inc.

3 Times Square, 12th Floor
New York, New York 10036
(Address of Principal Executive Offices including Zip Code)

(212) 824-3100
(Registrant’s Telephone Number, Including Area Code)

No Change
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

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

     The number of shares of registrant’s common stock outstanding on November 8, 2004 was 41,553,904.

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION

ITEM 1. Financial Statements

EYETECH PHARMACEUTICALS, INC.

See accompanying notes.

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EYETECH PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes.

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EYETECH PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes.

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EYETECH PHARMACEUTICALS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Description of Business

Eyetech Pharmaceuticals, Inc., together with its wholly owned subsidiary (“Eyetech” or the “Company”), is a biopharmaceutical company that specializes in the development and commercialization of novel therapeutics to treat diseases of the eye. The Company’s initial focus is on diseases affecting the back of the eye, particularly the retina. The Company’s most advanced product candidate is Macugen™ (pegaptanib sodium injection), which it is developing in a collaboration with Pfizer Inc. (“Pfizer”) for the treatment of neovascular age-related macular degeneration, known as AMD, diabetic macular edema, known as DME, and retinal vein occlusion, known as RVO. In the second half of 2001, the Company initiated two Phase 2/3 pivotal clinical trials of Macugen for the treatment of AMD. Based on the results from the first year of these trials, the Company filed a new drug application with the United States Food and Drug Administration, or FDA, seeking marketing approval of Macugen for the treatment of AMD. The Company is also currently conducting a Phase 2 clinical trial for the use of Macugen in the treatment of DME and a Phase 2 clinical trial for use in the treatment of RVO.

The Company formed a wholly owned subsidiary in Ireland in 2002. There has been no activity in this company since inception in 2002. The Company operates in a single business segment.

Prior to February 2003, the Company operated as a development-stage company and did not generate any revenue. Effective February 2003, the Company exited the development stage when its several concurrent agreements with Pfizer became effective.

On February 4, 2004, the Company successfully completed an initial public offering of its common stock. The initial public offering consisted of the sale of 6,500,000 shares of common stock at a price of $21.00 per share. As part of the offering, the Company granted to the underwriters an option to purchase an additional 975,000 shares within 30 days of the initial public offering to cover over-allotments. This option was exercised in full in February 2004. Net proceeds from the initial public offering after deducting underwriters’ discounts and expenses were $142.9 million, including the exercise of the over-allotment option. In addition, 476,190 shares of common stock were purchased concurrently with the initial public offering by Pfizer for $10 million as part of its commitment under Pfizer’s collaboration with the Company.

The Company issued 5,073,435 warrants in connection with original issuances of preferred stock from April 2000 to August 2002 and the in-licensing of Macugen in April 2000. Prior to the closing of the Company’s initial public offering, 1,511,381 shares of preferred stock were issued in connection with warrant exercises providing $10.4 million in aggregate proceeds. Included in this amount were 73,581 shares issued pursuant to conditional exercises received during the quarter ended December 31, 2003 for proceeds of $0.5 million. An additional 1,867,124 shares of preferred stock were issued on a cashless basis to the holders of 2,728,721 preferred stock warrants, who surrendered 861,597 preferred stock warrants as payment for those shares. All outstanding shares of preferred stock, including those shares issued in connection with warrant exercises, were automatically converted to an equivalent number of shares of common stock upon the closing of the Company’s initial public offering. Additionally, warrants to purchase 833,333 shares of Series B preferred stock converted to an equal number of warrants to purchase an equal number of shares of common stock upon the closing of the initial public offering. These warrants were exercised during the quarter ended March 31, 2004 on a cashless basis, resulting in the issuance of 680,509 shares of common stock in exchange for the surrender of warrants to purchase 152,824 shares of common stock. No warrants are outstanding at September 30, 2004.

On June 2, 2004, the Company successfully completed a secondary public offering of its common stock. All shares sold in the offering were sold by existing stockholders, including employees, and employees through exercise of options. The secondary public offering consisted of the sale of 3,860,000 shares of common stock at a price of $38.50 per share. As part of the offering, the selling stockholders granted to the underwriters an option to purchase an additional

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579,000 shares within 30 days of the secondary public offering to cover over-allotments. This option was exercised in full in June 2004. Shares outstanding increased by 106,735 shares after the offering as a result of option exercises, which provided proceeds to the Company of $0.1 million. The costs associated with the offering, excluding underwriters’ discounts and commissions payable by the selling stockholders, were approximately $1.0 million and have been paid by the Company.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying financial statements include all adjustments considered necessary for a fair presentation of the Company’s financial position, results of operations, and cash flows for the periods presented.

The results of operations for the three-month and nine month periods ended September 30, 2004 are not necessarily indicative of the results that may be expected for the entire fiscal year ending December 31, 2004. These condensed consolidated financial statements should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 filed with the Securities and Exchange Commission.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Reclassification

Certain reclassifications have been made to prior period information to conform to the most recent 2004 presentation.

Cash Equivalents

The Company considers all highly-liquid investments with an original maturity of three months or less to be cash equivalents. At September 30, 2004, the Company had substantially all of its cash and cash equivalents in investment grade obligations. Cash and cash equivalents at September 30, 2004 consisted of $65.1 million in demand deposits, money market funds and money market instruments. Cash and cash equivalents at December 31, 2003 consisted of $25.0 million in demand deposits, money market funds and money market instruments. These investments are carried at cost, which approximates fair value.

Marketable Securities

Marketable securities are classified as “available-for-sale” and are carried at market value with unrealized gains and losses reported as other comprehensive income or loss, which is a separate component of stockholders’ (deficit) equity. At September 30, 2004, the Company held available for sale securities with fair value totaling $172.0 million. These available for sale securities included various certificates of deposit, corporate debt securities and United States government securities, $137.5 million of which mature within one year and $34.5 million of which mature in between one year and up to two years. At December 31, 2003, the Company held available for sale securities with fair value totaling $106.4 million. These available for sale securities included various certificates of deposit, corporate debt securities and United States government securities, $80.5 million of which mature within one year and $25.9 million of which mature in between one year and up to two years.

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Restricted Cash

Restricted cash collateralizes outstanding letters of credit associated with the leases of the Company’s office and laboratory facilities. The funds are invested in certificates of deposit.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash equivalents and marketable securities. The Company has established guidelines relating to diversification and maturities that allow the Company to manage risk.

Revenue Recognition

In accordance with criteria outlined in Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial Statements,” and Emerging Issues Task Force Issue 00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”), the Company records non-refundable license fees associated with its collaboration agreements with Pfizer as deferred license revenue when all contractual obligations have been satisfied and the related amounts become due. The deferred license revenue is recognized ratably over the Company’s performance period, which in the case of the Company’s collaboration agreements with Pfizer is the remaining term of the collaboration agreements. The Company continually reviews such estimates, which could result in a change in the amortization period and could impact the timing and the amount of revenue recognized. At September 30, 2004, deferred license revenue was $82.0 million with a remaining amortization period of 13 years and 4 months.

The Company also receives reimbursement from Pfizer of Pfizer’s share of the development cost of Macugen. In accordance with EITF Issue 01-14, “Income Statement Characterization of Reimbursements Received for “Out-of-Pocket” Expenses Incurred,” the Company reports the reimbursement as revenues because, among other factors, the Company has the primary obligation to conduct all clinical studies associated with Macugen and bears all the risk for selection of and payment to vendors. The Company records expenses for the costs incurred by Pfizer for which the Company is contractually liable. In addition, Pfizer has agreed to pay a portion of the costs associated with the purchase of certain equipment. When the Company receives payment from Pfizer for this equipment the Company records the reimbursement as deferred equipment revenue and amortizes it over the equipment’s expected useful life. At September 30, 2004, deferred equipment revenue was $2.5 million

Upon commercial availability and launch of Macugen, the Company plans to report revenue on a gross basis for sales in the United States. The Company has determined that it is qualified as a principal under the criteria set forth in EITF, Issue 99-19, “Reporting Gross Revenue as a Principal vs. Net as an Agent,” based on the Company’s responsibilities under the Company’s contracts with Pfizer to manage and assume responsibilities for obtaining FDA approvals for Macugen, including the Company’s separate contractual relationships and responsibilities to its clinical development contractors and its interaction with monitors and patients.

Research and Development Costs

Research and development costs are expensed as incurred.

Inventory

For all periods presented, the Company expensed all of its manufacturing costs as research and development. Upon any regulatory approval of Macugen, the Company will begin capitalizing all costs associated with the manufacturing of Macugen.

Stock-Based Compensation

In December 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of FASB Statement No. 123” (“SFAS 148”). SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation from the intrinsic value-based method of

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accounting prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). In addition, SFAS 148 amends the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). The Company adopted the disclosure requirements of SFAS 148 effective December 31, 2002. As allowed by SFAS 123, the Company has elected to continue to apply the intrinsic value-based method of accounting prescribed in APB 25 and, accordingly, does not recognize compensation expense for stock option grants made at an exercise price equal to or in excess of the fair market value of the stock at the date of grant.

Had compensation cost for the Company’s outstanding employee stock options been determined based on the fair value at the grant dates for those options consistent with SFAS 123, the Company’s net loss and basic and diluted net loss per share, would have been changed to the following pro forma amounts:

SFAS 123 pro forma information regarding net loss is required by SFAS 123, and has been determined as if the Company had accounted for its stock-based employee compensation under the fair value method prescribed in SFAS 123. The fair value of the options prior to completion of the Company’s initial public offering was estimated at the date of grant using the minimum value pricing model. Upon completion of the initial public offering in February 2004, the Company began using the Black-Scholes model to estimate fair value. The following assumptions were utilized for the calculations during each period:

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The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts. Pro forma compensation related to stock option grants is expensed over their respective vesting periods.

The Company accounts for options issued to non-employees under SFAS 123 and EITF Issue 96-18, “Accounting for Equity Investments that are Issued to Other than Employees for Acquiring or in Conjunction with Selling Goods or Services”. As such, the value of such unvested options is periodically re-measured and income or expense is recognized during their vesting terms.

In March 2004, the FASB issued an Exposure Draft of a proposed Statement of Financial Accounting Standards entitled “Share-Based Payment.” This proposed standard addresses accounting for stock-based compensation and would result in stock-based compensation costs, including options, being recognized as an expense in the financial statements. The proposed standard would eliminate the ability to account for stock based compensation transactions using APB 25, and generally would require that such transactions be accounted for using a fair value based method. In October 2004, the FASB elected to delay the effective date of this proposed standard. If the proposed standard is approved, it would be applied prospectively to public entities for periods beginning after June 15, 2005. The Company is still evaluating the impact of the proposed standards on our results of operations.

Income Taxes

The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized.

Recently Issued Accounting Pronouncements

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” “SFAS . 146”). This standard addresses financial accounting and reporting for costs associated with an exit or disposal activities and requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. This standard nullifies EITF Issue 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring.” This Standard is effective for exit or disposal activities initiated after December 31, 2002. Adoption of this statement resulted in the recognition of a loss of $1.5 million during the quarter ended June 30, 2004. The loss was incurred because the Company has not subleased its previous corporate offices at 500 Seventh Avenue in New York City and office equipment associated with that facility. The Company reevaluates its assumptions relating to this loss on a periodic basis and may be required to record additional losses in the future.

3. Net Loss Per Share

The Company computes net loss per share in accordance with SFAS No. 128, “Earnings per Share” (“SFAS 128”). Under the provisions of SFAS 128, basic net loss per common share (“Basic EPS”) is computed by dividing net loss by the weighted-average number of common shares outstanding. Diluted net loss per common share (“Diluted EPS”) is computed by dividing net loss by the weighted-average number of common shares and dilutive common share

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equivalents then outstanding. Common equivalent shares consist of the incremental common shares issuable upon the conversion of preferred stock, shares issuable upon the exercise of stock options and the conversion of preferred stock upon the exercise of warrants. Diluted EPS is identical to Basic EPS since common equivalent shares are excluded from the calculation, as their effect is anti-dilutive.

The following table sets forth the computation of basic and diluted net loss per share for the three-month and nine-month periods ended September 30, 2003 and 2004:

Pro forma basic and diluted net loss per share is computed using the weighted average number of common shares outstanding, including the pro forma effects of the automatic conversion of all outstanding convertible preferred stock into shares of the Company’s common stock effective upon the closing of the Company’s initial public offering, as if such conversion had occurred at the date of the original issuance. Accordingly, pro forma basic and diluted net loss per common share has been calculated assuming the preferred stock was converted as of the original date of issuance of the preferred stock.

The following table shows dilutive common share equivalents outstanding on a weighted average basis, which are not included in the above historical calculations, as the effect of their inclusion is anti-dilutive during each period:

4. Comprehensive Loss

Comprehensive losses are primarily comprised of net losses and unrealized gains and losses on available for sales securities. Comprehensive losses for the nine months ended September 30, 2003 and 2004 are detailed below.

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5. Pfizer Collaboration

In December 2002, Pfizer and the Company entered into several concurrent agreements to jointly develop and commercialize Macugen.

Macugen will be co-promoted by the Company and Pfizer in the United States, where the Company and Pfizer will each use its own ophthalmology sales force, and the Company will maintain the inventory and record all United States product sales. The Company and Pfizer will share in profits and losses from the sale of Macugen products in the United States. Outside the United States, Pfizer will market the product exclusively under a license, for which the Company will receive royalty income.

At commencement of the collaboration, which became effective February 3, 2003 when U.S. government approval was obtained, Pfizer made initial payments of $100 million, which included the purchase of 2,747,253 shares of the Company’s Series D preferred stock for $24.7 million, net of issuance costs and a $75 million initial license fee which is being amortized over the expected term of the agreement (estimated at 15 years). In addition, the Company agreed to sell to Pfizer and Pfizer agreed to purchase from the Company, up to an additional $25 million of the Company’s capital stock at the then current market price upon the completion of certain events. Pursuant to this agreement, concurrent with the initial public offering, Pfizer purchased 476,190 shares of common stock at $21.00 per share, resulting in gross proceeds to the Company of approximately $10 million.

Under the terms of the agreement, both parties will expend funds related to the co-promotion and development of Macugen. Pfizer will generally fund a majority of the ongoing development costs incurred pursuant to an agreed upon development plan covering the development of Macugen for AMD, DME, RVO and other agreed upon ophthalmic indications. In certain instances, the Company will reimburse Pfizer for the Company’s share of costs that Pfizer incurs. This funding resulted in the recognition by the Company of $11.1 million in revenue during the three month period ended September 30, 2003 and $12.1 million in revenue during the three month period ended September 30, 2004. The Company recognized $27.6 million in revenue for the nine month period ended September 30, 2003 and $33.8 million in revenue for the nine month period ended September 30, 2004. Additionally during the three and nine month periods ended September 30, 2004 the Company recognized $2.6 million and $5.1 million in research and development and marketing expenses incurred by Pfizer on our behalf, under the terms of the agreement. At September 30, 2004, the Company had a collaboration receivable in the amount of $6.7 million.

In addition to the initial license fee received from Pfizer, the Company has also recorded $15.5 million in additional deferred license fees related to the completion of certain regulatory events for a total of $90.5 million from Pfizer through September 30, 2004. These additional deferred license fees will be amortized over the remaining term of the agreement. For the three month periods ended September 30, 2003 and 2004 amortization of license fees resulted in the recognition of $1.3 million and $1.4 million in license fee revenue, respectively. For the nine month periods ended September 30, 2003 and 2004 amortization of license fees resulted in the recognition of $3.3 million and $3.9 million in license fee revenue, respectively.

6. Subsequent Event

On November 11, 2004, the Company acquired from Transgenomic, Inc. most of the assets of the company’s oligonucleotide manufacturing facility in Boulder, Colorado, for $3.0 million in cash and the assumption of certain operating leases associated with acquired facilities. These acquired assets will be recorded at their purchase price in November, 2004.

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and the related notes appearing elsewhere in this report. Some of the information contained in this discussion and analysis or set forth elsewhere in this report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should review the “Risk Factors that May Affect Results” section of this report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

     We are a biopharmaceutical company that specializes in the development and commercialization of novel therapeutics to treat diseases of the eye. We commenced operations in April 2000. Since our inception, we have generated significant losses. As of September 30, 2004, we had an accumulated deficit of $209.1 million.

     In December 2002, we entered into several concurrent agreements with Pfizer to jointly develop and commercialize Macugen. As a result of our collaboration with Pfizer, we ceased to be a development-stage company in February 2003. As of September 30, 2004, all of our revenues have been generated from amortization of the non-refundable, license payments that we have received from Pfizer and reimbursement to us by Pfizer of a portion of the ongoing development costs for Macugen.

     Under the terms of our collaboration agreements with Pfizer, Pfizer has funded and is obligated to continue to fund a majority of the ongoing development costs incurred pursuant to an agreed upon development plan covering the development of Macugen for AMD, DME, RVO and other agreed upon ophthalmic indications. We will co-promote Macugen with Pfizer in the United States through Pfizer’s and our own sales forces, we will maintain the inventory and record as revenue all United States product sales. We and Pfizer will share in profits and losses from the sale of Macugen in the United States. Outside the United States, Pfizer will market the product under an exclusive license, for which we will receive royalty payments based on net sales.

     Pfizer has made the following payments and investments to date under our collaboration:

•		In February 2003, upon effectiveness of the collaboration arrangements, Pfizer paid us $100 million, consisting of a $75 million initial license fee and a $25 million equity investment;
•		In February 2004, Pfizer purchased an additional $10 million of our common stock at the closing of our initial public offering;
•		In August 2004, Pfizer paid us $10 million after the acceptance for review by the FDA of our new drug application for the use of Macugen in the treatment of neovascular AMD; and
•		In October 2004, Pfizer paid us $5.5 million after the European Medicines Agency’s acceptance of the filing of Pfizer’s marketing authorization application for Macugen for use in the treatment of neovascular AMD.

     In the future, Pfizer is obligated to make the following investments and payments under the following circumstances:

•		Pfizer is potentially obligated to purchase up to an additional $15 million of our common stock in specified circumstances;
•		Pfizer is potentially obligated to pay us up to $180 million in additional payments based on the achievement of additional worldwide regulatory submissions and approvals; and
•		Pfizer is potentially obligated to pay us up to $450 million in payments based upon attainment of agreed upon sales levels of Macugen.

     We can not sell Macugen in the United States unless we receive marketing approval from the FDA. In June 2004, we and Pfizer completed the filing of our NDA with the FDA seeking marketing approval for Macugen in the

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treatment of neovascular AMD. Macugen has been granted priority review status from the FDA for use in the treatment of neovascular AMD and our NDA has been filed and is being reviewed as a rolling submission. On August 27, 2004, the FDA’s Dermatologic and Ophthalmic Drugs Advisory Committee held a public meeting to review our NDA for Macugen. The FDA is expected to act on their review of our NDA by or on December 17, 2004.

     We are currently in active dialogue with the FDA regarding our NDA for Macugen. Our NDA consists of three components, pre-clinical, clinical, and chemistry, manufacturing and controls. We received a review letter from the FDA with respect to the preclinical and clinical components of our NDA. We believe we have addressed all items communicated to us to date on such components that we believe will have an impact on approval, but we can not assure you that the FDA shares our view. Administration of a drug, such as Macugen, via intravitreal injection is a new method for the potentially long-term treatment of chronic eye disease. As a result, we are in active dialogue with the FDA in connection with the chemistry, manufacturing and controls component of our NDA to develop appropriate standards for the safety, manufacturing, packaging and distribution of drugs using this mode of administration. For example, we are in active dialogue with the FDA to establish acceptable limits for sub-visible particulate matter appropriate for ophthalmologic treatments administered as ultra low-volume injectables. We are also in active dialogue with the FDA to agree an appropriate control environment for the outer packaging we propose for commercial sale. We also need to complete process validation on the finished product in the packaging we propose for commercial sale. It may be time consuming or expensive for us to comply with any new standards. Such standards could increase our commercialization costs, possibly materially, delay our obtaining marketing approval for Macugen, or even preclude us from obtaining such approval. The FDA may grant marketing approval but may not grant such approval by or on December 17, 2004. Even if we are granted marketing approval for Macugen, if we are not successful in manufacturing Macugen at commercial scale according to applicable specifications, are not successful in commercializing Macugen, or are significantly delayed in doing either, our business will be materially harmed.

     Assuming we receive approval to market Macugen for use in the treatment of neovascular AMD in the fourth quarter of 2004, we plan to begin selling Macugen in the United States for the treatment of neovascular AMD in the first half of 2005. Upon commercial launch, we intend to sell Macugen to a limited number of specialty distributors who will in turn sell Macugen to physicians, physician group practices, hospitals, federal government buying groups and clinics.

     Outside the United States, Pfizer is responsible for seeking regulatory approvals of Macugen. In July 2004, the Pfizer-led bridging trial for the use of Macugen in the treatment of neovascular AMD began in Japan. On September 20, 2004, we announced the completion of the filing of the new drug application for Macugen in Canada, where the application has been given priority review and that the European Medicines Agency accepted the filing of the marketing authorization application for Macugen for the use in the treatment of neovascular AMD.

     Our NDA for neovascular AMD is based on the results from the first year of our ongoing Phase 2/3 pivotal clinical trials for the use of Macugen in the treatment of neovascular AMD. On October 21, 2004, we announced positive data from the second year of these clinical trials. These data were previously submitted to the FDA. These two-year data showed that Macugen’s treatment effect extends for two years in patients with neovascular AMD. An additional treatment benefit was also seen for patients who received Macugen for two years compared to those receiving only one year of therapy. The safety profile of the second year data was similar to that of the first year with no new safety concerns identified.

     We expect to continue to invest significant resources on the development of Macugen and other product candidates. We expect to incur significantly greater commercialization costs as we continue to prepare for the commercial launch of Macugen. We also plan to continue to invest in research for additional applications of Macugen and to develop new drugs and drug delivery technologies and to build the appropriate infrastructure to support our business. In May 2004, we entered into a lease for new research and development space in Lexington, Massachusetts, that will increase our annual facilities expenses by $1.6 million. On November 11, 2004, we acquired most of the assets related to an oligonucleotide manufacturing facility in Boulder, Colorado, which we plan to develop by investing in appropriate infrastructure to prepare it as a second-source for commercial scale production of the active pharmaceutical ingredient in Macugen. Additionally, we plan to continue to evaluate possible acquisitions or licenses of rights to potential new drugs, drug targets and drug delivery technologies that would fit within our growth strategy. Accordingly, we will need to generate significant revenues to achieve and then maintain profitability.

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          Most of our expenditures to date have been for research and development activities and general and administrative expenses. Research and development expenses represent costs incurred for product acquisition, clinical trials and activities relating to regulatory filings and manufacturing development efforts. We outsource our foreign clinical trials and our global manufacturing development activities to third parties to maximize efficiency and minimize our internal overhead. We expense our research and development costs as they are incurred.

     Certain reclassifications have been made to prior period information to conform to the most recent 2004 presentation.

Business Strategy

     Our mission is to develop and commercialize novel therapeutics to treat diseases of the eye, with an initial focus on diseases of the back of the eye. The key elements of our strategy are to:

•		Maximize Commercial Potential of Macugen. We are devoting most of our efforts to preparing for the commercial launch of Macugen for the treatment of neovascular AMD and completing the clinical and regulatory development of Macugen. We are also exploring the application of Macugen to a range of additional ophthalmic indications, including DME and RVO. DME is a serious disease of the retina that can lead to severe vision loss and blindness. The FDA has given “fast track” designation to Macugen for the treatment of DME. In the United States, there are approximately 500,000 people suffering from DME, with approximately 75,000 new cases each year. RVO is a condition that is characterized by abnormal blood vessel growth and blood vessel leakage.
•		Develop Alternative Drug Delivery Technologies. We are working to develop and/or acquire alternative technologies for the administration of drugs to the back of the eye that could facilitate the use of Macugen and other drugs as chronic or even preventative treatments for various back of the eye diseases, including neovascular AMD and DME.
•		Identify New Ophthalmic Products. We have established an internal research program with the goal of discovering and validating new ophthalmic disease targets and developing novel therapies for the treatment of ophthalmic diseases. We are also seeking to license or otherwise acquire the rights to potential new drugs and drug targets for the treatment of ophthalmic disease. For example, in April 2004, we announced an agreement with Archemix Corp. to collaborate on the research and development of aptamers for ophthalmic indications.
•		Explore Additional Non-Ophthalmic Indications for Macugen. We are using our preclinical research expertise to evaluate whether the anti-VEGF characteristics of Macugen may make it an attractive local treatment for cancer.

In order to realize these objectives, we must, among other things, obtain marketing approval for Macugen from non-U.S. regulatory authorities and internally develop, license or otherwise acquire alternative drug delivery technologies and new therapies for the treatment of ophthalmic disease.

          We anticipate that our revenues for the foreseeable future will result primarily from sales in the United States of Macugen for the treatment of neovascular AMD, if approved, and the continued amortization of the license fees and the reimbursement of a portion of our ongoing development costs for Macugen.

Critical Accounting Policies and Significant Judgments and Estimates

     Our management’s discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments related to revenue recognition. We base our estimates on historical experience

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and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

     While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements appearing in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 filed with the Securities and Exchange Commission, we believe that the following accounting policies relating to revenue recognition, manufacturing development and inventory and stock-based compensation charges are most critical to aid you in fully understanding and evaluating our reported financial results.

          Revenue Recognition

          In connection with our collaboration with Pfizer, we are entitled to receive non-refundable license payments from Pfizer based on the achievement of certain events. We record deferred license revenue when all the contractual obligations related to a non-refundable payment have been satisfied. As of September 30, 2004, we have recorded a total of $90.5 million ($15.5 million in the quarter ended September 30, 2004) in deferred license fee revenue from Pfizer. We are amortizing deferred license revenue ratably over our performance period. Our performance period with respect to our collaboration agreement is the effective life of the agreement which was 15 years commencing in December 2002. Management estimates the performance period based upon critical factors contained within the agreement along with other relevant facts and circumstances. We periodically review our estimates, which could result in a change in the deferral period, which could impact the timing and the amount of revenue recognized.

          We also receive reimbursement from Pfizer of Pfizer’s share of the development cost of Macugen. In accordance with EITF Issue 01-14, “Income Statement Characterization of Reimbursements Received for “Out-of-Pocket” Expenses Incurred,” we report the reimbursement as revenues because among other factors, we have the primary obligation to conduct all clinical studies associated with Macugen and bear risk for selection of and payment to vendors. We record as expense the costs incurred by Pfizer for which we are contractually liable to Pfizer. In future periods we may be liable for costs incurred that do not meet the criteria to be classified as revenue. We would record these costs as expenses, and we may be required to reimburse Pfizer.

          We receive reimbursement from Pfizer for a portion of the costs associated with the purchase of certain equipment related to the development of Macugen. When we receive payment from Pfizer for this we record the reimbursement as deferred equipment revenue and amortize it over the equipment’s expected useful life.

          Upon commercial availability and launch of Macugen, we plan to report revenue on a gross basis for sales in the United States. We have determined that our responsibilities under our contracts with Pfizer to manage and assume responsibilities for obtaining FDA approvals for Macugen, including our separate contractual relationships and responsibilities to our clinical development contractors and our interaction with monitors and patients qualify us as principal under the criteria set forth in EITF, Issue 99-19, “Reporting Gross Revenue as a Principal vs. Net as an Agent.”

          During the nine months ended September 30, 2003 and 2004, we recognized $2.1 million and $2.5 million of license fee revenue, respectively. At September 30, 2004, we classified as current deferred revenue $6.5 million related to payments for licenses and equipment. The balance of $78.0 million is classified as long-term deferred revenue on our balance sheet with a remaining amortization period of 13 years and 4 months.

          Manufacturing Development and Inventory

          For all periods presented we expensed all of our manufacturing costs as research and development. Upon any regulatory approval of Macugen, we will begin capitalizing all costs associated with the manufacturing of Macugen.

          Stock-based Compensation

     Stock-based compensation charges represent the difference between the exercise price of options and restricted stock granted to employees and directors and the fair value of our common stock on the date of grant for financial statement

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purposes in accordance with Accounting Principles Board Opinion No. 25 and its related interpretations. We recognize this compensation charge over the vesting periods of the shares purchasable upon exercise of options or the lapsing of restrictions on restricted shares granted.

     We recorded deferred stock-based compensation related to stock options and restricted stock granted to employees and directors through September 30, 2004 of $12.2 million, net of related amortization expense of $4.0 million for the nine months ended September 30, 2004. We expect to amortize deferred stock-based compensation with respect to stock options and restricted stock awards granted through September 30, 2004 in future periods, including $1.1 million during the remainder of 2004, $4.4 million during 2005, $4.2 million during 2006 and $2.5 million during 2007.

Accounting Pronouncements

     In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This standard addresses financial accounting and reporting for costs associated with an exit or disposal activities and requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. This standard nullifies EITF Issue 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring.” This Standard is effective for exit or disposal activities initiated after December 31, 2002. Our adoption of this statement resulted in the recognition of a loss of $1.5 million during the quarter ended September 30, 2004. The loss was incurred because we have not subleased our previous corporate offices at 500 Seventh Avenue in New York City and office equipment associated with that facility. We reevaluate our assumptions relating to this loss on a periodic basis and may be required to record additional losses in the future.

Results of Operations

          Quarters ended September 30, 2003 and 2004

          The following table identifies our collaboration revenue for each of our major categories, for the three months ended September 30, 2003 and 2004.

Revenue

     Revenue. Collaboration revenue increased 9% from $12.4 million for the quarter ended September 30, 2003 to $13.5 million for the quarter ended September 30, 2004. In the current quarter, we recorded an additional $15.5 million of deferred license fee revenue from Pfizer due to the acceptance for review by the FDA of our new drug application for the use of Macugen in the treatment of neovascular AMD in August 2004 and the European Medicines Agency’s acceptance of the filing of Pfizer’s marketing authorization application for Macugen in September 2004. These payments resulted in total deferred revenue at September 30, 2004 of $84.5 million. Of this amount, $6.5 million is considered current, with the balance of $78 million classified as long-term. These license fees will be recognized ratably over the remaining period of the collaboration, currently estimated to be 13 years and 4 months. Revenue from license fees increased by $0.1 million while revenue from reimbursement of development costs increased by $1.0 million. Reimbursement of development costs increased due to the continued refinement and expansion of our manufacturing capabilities in preparation for commercial launch.

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     Research and Development Expenses. Research and development expenses increased 24% from $20.9 million for the quarter ended September 30, 2003 to $25.9 million for the quarter ended September 30, 2004. The increase in research and development expenses of $5.0 million was attributable to an increase of $3.9 million relating to the continued development of manufacturing capabilities and related costs, $3.0 million related to milestone payments made to Gilead Sciences, Inc. in connection with the filing of the Macugen marketing authorization application and an increase of $2.9 million relating to the continued expansion of research and development resources including additional staffing, raw materials and other related costs. These increases were partially offset by reductions in the cost of clinical trials for the use of Macugen in the treatment of AMD and DME of $3.9 million. We anticipate that research and development expenses will continue to increase as we further advance Macugen to commercialization and begin to devote additional resources to other research and development projects.

     Sales and Marketing Expenses. Sales and marketing expenses increased from $1.5 million for the quarter ended September 30, 2003 to $9.3 million for the quarter ended September 30, 2004. The increase in sales and marketing expenses of $7.8 million was primarily related to $3.1 million in higher personnel expenses, relating to the hiring and training of the sales field force, $4.7 million of costs for pre-launch activities, which includes $2.3 million representing our share of marketing expenses incurred by Pfizer. As of September 30, 2004, we had a trained sales force consisting of 49 Retina Account Managers and Sales Directors.

     General and Administrative Expenses. General and administrative expenses increased from $3.3 million for the quarter ended September 30, 2003 to $4.0 million for the quarter ended September 30, 2004.

     Interest Income. Interest income increased from $0.5 million in the quarter ended September 30, 2003 to $1.0 million in the quarter ended September 30, 2004 as a result of higher levels of cash and marketable securities available for investment during 2004 compared to 2003.

     Net Loss Net loss attributable to common stockholders increased from $16.6 million in the third quarter of 2003 to $24.7 million for the same period in 2004. The increase in net loss is primarily a result of $4.7 million of costs incurred for pre-launch activities, $3.9 million of costs incurred for the continued development of manufacturing capabilities and related costs and includes $1.1 million of non-cash stock compensation expense. Basic and diluted net loss per common share in the third quarter was $0.60 in 2004, compared to $4.12 for the same period in 2003. Pro forma basic and diluted loss per common share in the third quarter for 2003 was $0.59. The pro forma basic and diluted loss per common share gives effect to the automatic conversion of our outstanding convertible preferred stock into shares of common stock upon completion of our initial public offering in February 2004.

          Nine months ended September 30, 2003 and 2004

          The following table identifies our collaboration revenue for each of our major categories, for the nine months ended September 30, 2003 and 2004.

Revenue

     Revenue. Collaboration revenue increased 22% from $30.9 million for the nine months ended September 30, 2003 to $37.7 million for the nine months ended September 30, 2004. Revenue from license fees increased by $0.6 million due to amortization of higher deferred revenue balances and an additional month of amortization in 2004 versus 2003. Revenue from reimbursement of research and development costs increased by $6.2 million. This increase was primarily due to increased reimbursement of expenditures related to preparations of our manufacturing capabilities for the

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expected commercial launch of Macugen.

     Research and Development Expenses. Research and development expenses increased from $52.2 million for the nine months ended September 30, 2003 to $81.7 million for the nine months ended September 30, 2004. The increase in research and development expenses of $29.5 million was attributable to an increase of $16.7 million related to the continued development of manufacturing capabilities and related costs, including additional staffing, pre-approval readiness, raw materials and other related costs, an increase of $12.8 million related to milestone payments incurred in connection with the filing of our NDA in the U.S. for Macugen, the marketing approval application filed with the European Medicines Agency and payments in connection with the licensing of technologies from third parties, primarily Archemix, and an increase of $2.9 million relating to additional research and development resources. These increases in cost were partially offset by a $0.9 million reduction in expenditures related to our clinical trials for the use of Macugen in the treatment of AMD and DME and a $2.0 million reduction in expenditures associated with the development of drug delivery technologies and related costs. We anticipate that research and development expenses will continue to increase as we further advance Macugen to commercialization and begin to devote additional resources to other research and development projects.

     Sales and Marketing Expenses. Sales and marketing expenses increased from $2.8 million for the nine months ended September 30, 2003 to $19.3 million for the nine months ended September 30, 2004. The increase in sales and marketing expenses of $16.5 million was primarily related to $8.6 million in higher personnel expenses, relating to the hiring and training of the sales field force, and $7.9 million of marketing related costs for pre-launch activities which also includes $4.4 million of expenses representing our share of marketing expenses incurred by Pfizer to prepare for the commercial launch of Macugen.

     General and Administrative Expenses. General and administrative expenses increased from $4.8 million for the nine months ended September 30, 2003 to $9.9 million for the nine months ended September 30, 2004. The increase of $5.1 million resulted from a $2.8 million increase in expenses related to facilities and infrastructure to support our growth and our Pfizer collaboration, a $1.5 million charge related to our former New York headquarters and a $0.8 million increase related to the cost of being a public company comprised primarily of professional services fees and Directors and Officers liability insurance.

     Interest Income. Interest income increased from $1.6 million in the nine months ended September 30, 2003 to $2.6 million in the nine months ended September 30, 2004 as a result of higher levels of cash and marketable securities available for investment during 2004 compared to 2003.

     Net Loss Net loss attributable to common stockholders increased from $35.6 million for the nine-month period ended September 30, 2003 to $71.6 million in the same period of 2004. The increase of $36.0 million in net loss is primarily a result of $16.7 million of costs incurred for the continued development of manufacturing capabilities, $12.8 million of costs incurred in connection milestone and license payments and includes $6.0 million of non-cash stock compensation expense. Basic and diluted net loss per common share for the nine-month period ended September 30, was $1.97 in 2004, compared to $9.11 for the same period in 2003. Pro forma basic and diluted loss per common share for the nine-month period ended September 30, was $1.83 in 2004, compared to $1.28 for the same period in 2003. The pro forma basic and diluted loss per common share gives effect to the automatic conversion of our outstanding convertible preferred stock into shares of common stock upon completion of our initial public offering in February 2004.

Liquidity and Capital Resources

     Sources of Liquidity

     Since our inception, we have financed our operations through public sales and private placements of our capital stock, the initial and subsequent license fee payments that we received from Pfizer as part of our Macugen collaboration, reimbursement of development costs from Pfizer and the receipt of interest income. Through September 30, 2004, we have received net proceeds of $334.1 million from the issuance of shares of common stock, convertible preferred stock and warrants. In connection with our initial public offering, all shares of preferred stock and related warrants were converted to common stock prior to September 30, 2004. We have also received net proceeds from capital equipment financing of $2.4 million. The table below summarizes our initial issuances of convertible preferred stock and warrants.

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     On February 4, 2004, we completed an initial public offering of our common stock of 6,500,000 shares at a price of $21.00 per share. As part of the offering, we granted to the underwriters an option to purchase an additional 975,000 shares within 30 days of the initial public offering to cover over-allotments. This option was exercised in February 2004. Net proceeds from our initial public offering after deducting underwriters’ discounts and expenses were $142.9 million, including the exercise of the over-allotment option. In addition, 476,190 shares of common stock were purchased concurrently with the initial public offering by Pfizer for $10 million as part of its commitment under our collaboration with Pfizer.

     We issued 5,073,435 warrants in connection with original issuances of preferred stock from April 2000 to August 2002 and the in-licensing of Macugen in April 2000. Prior to the closing of our initial public offering, 1,511,381 shares of preferred stock were issued in connection with warrant exercises providing $10.4 million in aggregate proceeds. An additional 1,867,124 shares of preferred stock were issued on a cashless basis to the holders of 2,728,721 preferred stock warrants, who surrendered 861,597 preferred stock warrants as payment for those shares. All outstanding shares of preferred stock, including those shares issued in connection with warrant exercises, were automatically converted to an equivalent number of shares of common stock upon the closing of our initial public offering. Additionally, warrants to purchase 833,333 shares of Series B preferred stock converted to an equal number of warrants to purchase an equal number of shares of common stock upon the closing of the initial public offering. These warrants were exercised during the quarter ended March 31, 2004 on a cashless basis, resulting in the issuance of 680,509 shares of common stock in exchange for the surrender of warrants to purchase 152,824 shares of common stock. No warrants remain outstanding at September 30, 2004.

     In connection with our collaboration with Pfizer, we received a $25.0 million investment in our series D preferred stock, a $75.0 million initial license fee and subsequent license fee payments of $15.5 million. Pfizer has also agreed generally to fund a majority of the ongoing development costs incurred pursuant to an agreed development plan covering the development of Macugen for AMD, DME, retinal vein occlusion and other agreed upon ophthalmic indications. Pfizer purchased an additional $10 million of our common stock at the closing of our initial public offering in February 2004 and is obligated to purchase up to an additional $15 million of our common stock and make additional payments in specified circumstances. These obligations of Pfizer are contingent upon the achievement of milestones and are currently our only committed external source of funds.

     On June 2, 2004, we completed a secondary public offering of our common stock. The secondary public offering consisted of the sale of 3,860,000 shares of common stock at a price of $38.50 per share. As part of the offering, the selling stockholders granted to the underwriters an option to purchase an additional 579,000 shares within 30 days of the secondary public offering to cover over-allotments. This option was exercised in full in June 2004. All shares sold were offered by existing stockholders, including employees, and employees exercising options. Our shares outstanding increased by 106,735 shares after the offering as a result of option exercises, which provided proceeds to us of $0.1 million. The costs associated with the offering, excluding underwriters’ discounts and commissions which were payable by the selling stockholders, were approximately $1.0 million and have been paid by us.

     As of September 30, 2004, we had $237.0 million in cash, cash equivalents and marketable securities. Also as of that date, we had pledged $5.9 million of restricted cash as collateral for letters of credit for certain of our leased facilities. We believe that our available cash, cash equivalents and marketable securities, together with expected license and milestone payments and reimbursements from Pfizer under our collaboration and interest income will be sufficient to

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fund anticipated levels of operations through at least the end of 2005. We had no material capital expenditures during the quarter ended September 30, 2004 and expect to have no material capital expenditures during the remainder of 2004.

     On November 11, 2004, we acquired from Transgenomic, Inc. most of the assets of the company’s oligonucleotide manufacturing facility in Boulder, Colorado, for $3.0 million in cash and the assumption of certain operating leases associated with acquired facilities. These acquired assets will be recorded at their purchase price in November, 2004. We plan to invest significantly in appropriate infrastructure at this facility to develop the facility to become a second source for commercial scale production of the active pharmaceutical ingredient in Macugen.

     Income Taxes

     As of December 31, 2003, we had net operating loss carryforwards for federal income taxes of $43.3 million. Our utilization of the net operating loss and tax credit carryforwards may be subject to annual limitations pursuant to Section 382 of the Internal Revenue Code, and similar state provisions, as a result of changes in our ownership structure. The annual limitations may result in the expiration of net operating losses and credits prior to utilization. If not utilized, federal net operating loss carry-forwards will begin to expire in 2020. To date, we have not recognized the potential tax benefit of our net operating losses on our balance sheets or statements of operations.

     At December 31, 2003 we had deferred tax assets representing the benefit of net operating loss carryforwards, deferred license fees received and certain start up costs capitalized for tax purposes. We did not record a benefit for the deferred tax asset because realization of the benefit was uncertain and, accordingly, a full valuation allowance is provided to offset the deferred tax asset.

     We have not recorded any provision for taxes during the nine months ended September 30, 2004. However, if we receive approval for Macugen in the fourth quarter of 2004, we will receive certain license fee payments that may subject us to the alternative minimum tax. For the year ended December 31, 2003, we incurred $1.6 million for the alternative minimum tax as a result of the receipt of license fees from Pfizer.

     Cash Flows

     For the nine months ended September 30, 2004, we used net cash of $46.3 million in operating activities. This consisted primarily of a net loss for the period of $70.8 million, offset by an increase in accounts payable and accrued expenses of $6.6 million, an increase in deferred revenue of $14.0 million, an increase in other liabilities of $3.3 million and $6.0 million in non-cash stock-based compensation. We used $72.3 million for investing activities for the quarter ended September 30, 2004, which consisted primarily of net purchases of marketable securities. We received net cash of $158.6 million from financing activities during the nine months ended September 30, 2004, principally relating to the issuance of common stock in our initial public offering and other issuances of common stock, resulting in net proceeds, after transaction costs, of $156.4 million and the issuance of convertible preferred stock upon the exercise of warrants for net proceeds of $2.6 million, offset by the repayment of capital leases of $0.4 million.

     Funding Requirements

     We expect to devote substantial resources to continue our research and development efforts and to expand our sales, marketing and manufacturing programs associated with the commercialization and launch of Macugen and other future products. Our funding requirements will depend on numerous factors, including:

•		the success of our collaboration with Pfizer to develop and commercialize Macugen;
•		the scope and results of our clinical trials;
•		the cost of manufacturing activities;
•		the cost of commercialization activities, including product marketing, sales and distribution;
•		advancement of other product candidates into development;
•		potential acquisition or in-licensing of other products or technologies;
•		the timing of, extent of, and the costs involved in, obtaining regulatory approvals;
•		the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and other patent-

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		related costs, including litigation costs and the results of such litigation; and
•		our ability to establish and maintain additional collaborative arrangements.

     We do not expect to generate significant additional funds, other than payments that we receive from our collaboration with Pfizer, until we successfully obtain marketing approval for, and begin selling, Macugen. We believe that the key factors that will affect our internal and external sources of cash are:

•		our ability to commercially launch Macugen in the United States and to obtain marketing approval outside the United States;
•		the receptivity of the capital markets to financings by biotechnology companies;
•		the success of our other preclinical and clinical development programs; and
•		our ability to enter into additional strategic collaborations with corporate and academic collaborators and the success of such collaborations.

     If our existing resources are insufficient to satisfy our liquidity requirements or if we acquire or license rights to additional product candidates, we may need to raise additional external funds through the sale of additional equity or debt securities. The sale of additional equity securities may result in additional dilution to our stockholders. Additional financing may not be available in amounts or on terms acceptable to us or at all. If we are unable to obtain additional financing, we may be required to reduce the scope of, delay or eliminate some or all of our planned business expansion, research, development and commercialization activities, which could harm our financial condition and operating results.

Contractual Obligations

     Our major outstanding contractual obligations relate to our capital leases from equipment financings, facilities leases and obligations under a number of our collaboration and alliance agreements to pay milestone payments and royalties to the other parties to these agreements.

     We have summarized in the table below our fixed contractual cash obligations as of September 30, 2004.

     Under our agreements with Gilead Sciences, Inc., Nektar Therapeutics, and Isis Pharmaceuticals, Inc., we are obligated to make payments aggregating up to $36.3 million, of which $10.5 million has been accrued at September 30, 2004, upon achieving specified milestones relating to the development and regulatory approval of Macugen and to pay royalties based on net sales of Macugen. The events that trigger the milestone payments include filing of a new drug application, or NDA, with the FDA, making similar filings with foreign regulatory authorities, receiving marketing approval for Macugen by the FDA or similar foreign regulatory authorities and the first commercial sale of Macugen in various countries. These contingent milestone and royalty payment obligations are not included in the above table. The above table also excludes approximately $2.0 million in minimum fixed site fees payable to one of our contract manufacturers on a quarterly basis.

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     In January 2004, we entered into a sub-sublease arrangement for new corporate headquarters, clinical, safety and regulatory space in New York City. Our rent expense under the lease is expected to be $3.2 million in 2004. However, due to 2004 rent abatements, we expect cash expenditures for this property in 2004 to be $0.1 million. As security for the sublease, we have named the sub-landlord as beneficiary under a secured bank letter of credit in the amount of $3.0 million, which is included in restricted cash on the balance sheet.

     We have not sub-leased our former corporate offices at 500 Seventh Avenue, New York, New York, and as a result, under generally accepted accounting principles we have assessed the recoverability of the carrying value of our lease. We have determined that the amounts due under the lease will not be recoverable, and have recorded a loss in connection with this lease. The loss of $1.5 million was recorded in the second quarter of 2004 and includes the write down of certain office equipment. In connection with our cessation of use of this facility, we had previously accelerated the recognition of amortization and depreciation expenses in connection with certain leasehold improvements and furniture and fixtures used at this facility. This resulted in an increase of $0.3 million to amortization and depreciation expense during the nine months ended September 30, 2004.

     In May 2004, we entered into a lease agreement for new research and development space to replace our Woburn research facility. Payments related to this new space are included in the table above listing our contractual obligations and are expected to result in approximately $1.6 million of additional expense annually. If we do not sub-lease our space at 42 Cummings Park, Woburn, Massachusetts, we will be required under generally accepted accounting principles to assess the recoverability of the carrying value of our lease. If it is determined that the amounts due under the lease will not be recoverable, we will record a loss in connection with this lease. The loss could be up to approximately $1.1 million and will be recorded during the fourth quarter of 2004.

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RISK FACTORS THAT MAY AFFECT RESULTS

Risks Relating to Our Business

We depend heavily on the success of our lead product candidate, Macugen, which is still under development. If we are unable to commercialize Macugen, or experience significant delays in doing so, our business will be materially harmed.

     We have invested a significant portion of our time and financial resources since our inception in the development of Macugen. We anticipate that in the near term our ability to generate revenues will depend solely on the successful development and commercialization of Macugen. The commercial success of Macugen will depend on several factors, including the following:

•		receipt of marketing approvals from the FDA and similar foreign regulatory authorities;
•		producing batches of finished drug product in sufficient commercial quantities through a validated process;
•		supplying sufficient quantities of Macugen in compliance with required specifications to meet anticipated market demand for our planned commercial launch in the first half of 2005;
•		successfully launching commercial sales of the product in collaboration with Pfizer;
•		successfully building and sustaining manufacturing capacity to meet anticipated future demand;
•		the competitive landscape for approved and developing therapies that will compete with Macugen;
•		achieving acceptance of the product by the medical community, by patients receiving therapy and by third party payors; and
•		receiving continued positive data from our clinical trials.

     Based on the results from the first year of our ongoing Phase 2/3 pivotal clinical trials for the use of Macugen in the treatment of neovascular AMD, in June 2004, we and Pfizer completed the filing of a new drug application with the FDA as a rolling submission to seek marketing approval for Macugen in the treatment of neovascular AMD. The FDA accepted our NDA for review and held a public advisory committee meeting in which it reviewed our NDA. We also recently submitted to the FDA and announced positive data from the second year of our ongoing Phase 2/3 pivotal clinical trials for the use of Macugen in the treatment of neovascular AMD. The FDA may still request additional information from us, including additional data from our clinical trials or data from additional clinical trials. Furthermore, new information may arise from our continuing analysis of the data from our clinical trials that may be less favorable than currently anticipated. Clinical data often are susceptible to varying interpretations and many companies that have believed that their products performed satisfactorily in clinical trials have nonetheless failed to obtain FDA approval for their products. The FDA may not grant marketing approval for Macugen. The FDA may grant marketing approval but may not grant such approval to the extent we have requested in our NDA. Even if we are granted marketing approval for Macugen, if we are not successful in manufacturing Macugen at commercial scale according to applicable specifications, commercializing Macugen, or are significantly delayed in doing either, our business will be materially harmed and we may need to curtail or cease operations.

We depend heavily on our collaboration with Pfizer, which involves a complex sharing of control over decisions, responsibilities and costs and benefits. Any loss of Pfizer as a collaborator, or adverse development in the collaboration, would materially harm our business.

     In December 2002, we entered into our collaboration with Pfizer to develop and commercialize Macugen for the prevention and treatment of diseases of the eye. The collaboration involves a complex sharing of control over decisions, responsibilities and costs and benefits. For example, with respect to the sharing of costs and benefits, Pfizer will co-promote Macugen with us in the United States and will share with us in profits and losses. Outside the United States, Pfizer will commercialize Macugen pursuant to an exclusive license and pay us a royalty on net sales. In addition, Pfizer generally is required to fund a majority of ongoing development costs incurred pursuant to an agreed upon development plan. Our collaboration is governed by a joint operating committee, consisting of an equal number of representatives of Pfizer and us who control decisions and responsibilities. There are also subcommittees with equal representation from both parties that have responsibility over development, regulatory, manufacturing and commercialization matters.

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     Ultimate decision-making authority is vested in us as to some matters and in Pfizer as to other matters. A third category of decisions requires the approval of both Pfizer and us. Outside the United States, ultimate decision-making authority as to most matters is vested in Pfizer. Pfizer may terminate the collaboration relationship without cause upon six to twelve months’ prior notice, depending on when such notice is given. Any loss of Pfizer as a collaborator in the development or commercialization of Macugen, dispute over the terms of, or decisions regarding, the collaboration or other adverse development in our relationship with Pfizer would materially harm our business and might accelerate our need for additional capital.

If Macugen is approved in the United States, our product revenues will be substantially dependent on a limited number of wholesalers to which we plan to sell Macugen, and such revenues may fluctuate from quarter to quarter based on the buying patterns of these wholesalers

     If approved, we plan to sell Macugen primarily to a limited number of national pharmaceutical wholesalers with distribution centers located throughout the United States. Our reliance on this small number of wholesalers could cause our revenues to fluctuate from quarter to quarter based on the buying patterns of these wholesalers. In addition, if any of these wholesalers fails to pay us on a timely basis or at all, our financial position and results of operations could be materially adversely affected.

If our clinical trials are unsuccessful, or if we experience significant delays in these trials, our ability to commercialize Macugen and other future product candidates will be impaired.

     We must provide the FDA and similar foreign regulatory authorities with preclinical and clinical data that demonstrate that our product candidates are safe and effective for each target indication before they can be approved for commercial distribution. The preclinical testing and clinical trials of any product candidates that we develop must comply with regulations by numerous federal, state and local government authorities in the United States, principally the FDA, and by similar agencies in other countries. Clinical development is a long, expensive and uncertain process and is subject to delays. We may encounter delays or rejections based on our inability to enroll or keep enrolled enough patients to complete our clinical trials. Patient enrollment depends on many factors, including the size of the patient population, the nature of the trial protocol, the proximity of patients to clinical sites and the eligibility criteria for the study.

     Our ongoing Phase 2/3 pivotal clinical trial for the use of Macugen in the treatment of neovascular AMD and Phase 2 clinical trial for use of Macugen in the treatment of DME are currently fully enrolled. We are also currently enrolling patients in our Phase 2 clinical trial for the use of Macugen in the treatment of RVO. To obtain marketing approval for the use of Macugen in neovascular AMD, the FDA or other regulatory authorities may require us to pursue additional clinical trials or other studies.

     We also may commence additional clinical trials in the future. Although we have not to date experienced any significant delays in enrolling clinical trial patients for our ongoing clinical trials, delays in patient enrollment for future trials may result in increased costs and delays, which could have a harmful effect on our ability to develop products.

     It may take several years to complete the testing of a product, and failure can occur at any stage of testing. For example:

•		interim results of preclinical or clinical studies are not necessarily predictive of their final results, and acceptable results in early studies might not be seen in later studies, in large part because earlier phases of studies are often conducted on smaller groups of patients than later studies, and without the same trial design features, such as randomized controls and long-term patient follow-up and analysis;
•		potential products that appear promising at early stages of development may ultimately fail for a number of reasons, including the possibility that the products may be ineffective, less effective than products of our competitors or cause harmful side effects;
•		any preclinical or clinical test may fail to produce results satisfactory to the FDA or foreign regulatory authorities;
•		preclinical and clinical data can be interpreted in different ways, which could delay, limit or prevent regulatory

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		approval;
•		negative or inconclusive results from a preclinical study or clinical trial or adverse medical events during a clinical trial could cause a preclinical study or clinical trial to be repeated or a program to be terminated, even if other studies or trials relating to the program are successful;
•		the FDA can place a hold on a clinical trial if, among other reasons, it finds that patients enrolled in the trial are or would be exposed to an unreasonable and significant risk of illness or injury;
•		we may encounter delays or rejections based on changes in regulatory agency policies during the period in which we develop a drug or the period required for review of any application for regulatory agency approval; and
•		our clinical trials may not demonstrate the safety and efficacy needed for our products to receive regulatory approval.

     In addition, as part of the drug approval process, we must conduct a comprehensive assessment of the carcinogenic, or cancer causing, potential of our product candidates. Our testing of Macugen to date indicates that the product’s carcinogenic potential is low. In one test for carcinogenicity risk, two potential Macugen metabolites showed, in one out of five bacterial strains tested, a small increase in the number of altered bacteria, a potential indicator of carcinogenicity risk. However, because this elevated proportion of altered bacteria did not increase further as we increased the dose of the metabolites, we do not believe the results from these tests indicate carcinogenicity potential. Furthermore, no other test, including animal studies, of Macugen and its metabolites showed carcinogenic potential. We have requested that the FDA grant us a waiver from the requirement to perform full animal carcinogenicity studies for the treatment of neovascular AMD based primarily on the unmet medical need presented by neovascular AMD, low overall systemic exposure to Macugen and the fact that this disease generally affects older populations. However, the FDA may require us to conduct additional carcinogenicity testing of Macugen. Based on our discussions with the FDA to date, if we are required to conduct further carcinogenicity testing of Macugen in connection with its use in the treatment of neovascular AMD, we believe that the FDA will allow us to conduct any such testing as a post-NDA approval study. However, we will not be certain of this until the NDA review process of Macugen for this indication is completed. The FDA may require us to complete satisfactory carcinogenicity testing of Macugen prior to any approval of the use of Macugen in the treatment of DME.

     If we are required to conduct additional clinical trials or other studies of Macugen beyond those that we currently contemplate, if we are unable to successfully complete our clinical trials or other studies or if the results of these trials or studies are not positive or are only modestly positive, we may be delayed in obtaining marketing approval for Macugen, we may not be able to obtain marketing approval or we may obtain approval for indications that are not as broad as intended. Our product development costs will also increase if we experience delays in testing or approvals. Significant clinical trial delays could allow our competitors to bring products to market before we do and impair our ability to commercialize our products or potential products. If any of this occurs, our business will be materially harmed.

     Furthermore, our future products may not be effective, may be only moderately effective or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may preclude our obtaining regulatory approval or prevent or limit commercial use, which could have a material adverse effect on our business. The FDA and other regulatory authorities may not approve any product that we may develop.

We face substantial competition with respect to sales of Macugen in the treatment of neovascular AMD and drug development, which may result in others discovering, developing or commercializing products before or more successfully than we do.

     The commercialization and development of new drugs is highly competitive. We will face competition with respect to Macugen and any products we may commercialize or develop in the future from major pharmaceutical companies, specialty pharmaceutical companies and biotechnology companies worldwide. Our competitors may develop products or other novel technologies that are more effective, safer or less costly than any that we are developing. Our competitors may also obtain FDA or other regulatory approval for their products more rapidly than we may obtain approval for ours.

     Macugen would compete against two therapies for the treatment of neovascular AMD: photodynamic therapy, which was developed by QLT, Inc. and is marketed by Novartis AG, and thermal laser treatment. In the United States, photodynamic therapy is FDA-approved only for the predominantly classic subtype of neovascular AMD. In the

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European Union, the only approved therapy is photodynamic therapy, which is approved only for the predominantly classic and occult subtypes. In the United States, however, the Centers for Medicare & Medicaid Services implemented a decision in April 2004 to provide coverage for photodynamic therapy to patients with neovascular AMD who have occult and minimally classic lesions that are four disc areas or less in size and show evidence of recent disease progression even though the FDA has not approved photodynamic therapy for such treatment. The current therapies for the treatment of DME are thermal laser treatment and steroid treatment administered by physicians on an off-label basis. Unless additional therapies are approved, these existing therapies would represent the principal competition for Macugen in neovascular AMD and DME if Macugen is approved for marketing in such indications.

     Additional treatments for AMD and DME are in various stages of preclinical or clinical testing. If approved, these treatments would also compete with Macugen. Potential treatments in late stage clinical trials include drugs sponsored by a collaboration of Genentech, Inc. and Novartis, Alcon, Inc., Allergan, Inc. through its acquisition of Oculex Pharmaceuticals, Inc., Eli Lilly and Co., Bausch & Lomb Incorporated, a collaboration of Regeneron Pharmaceuticals, Inc. and Aventis S.A., Miravant Medical Technologies, and Genaera Corporation. Some of the sponsors of these potential products have announced favorable results from Phase 1 or Phase 2 clinical trials. The Genentech/Novartis collaboration is developing an anti-VEGF humanized antibody fragment for intravitreal injection. This product candidate may be viewed as particularly competitive with Macugen because of the similarity of its mechanism of action. In addition, Alcon recently announced results of its Phase 3 clinical trial of anecortave acetate, an angiostatic compound, for the treatment of neovascular AMD patients, that features a less invasive injectable delivery that requires less frequent administration (every six months) and plans to file an NDA in the fourth quarter of 2004. Further, Alcon is enrolling patients in two Phase 3 clinical trials, one in South America and one in Europe, comparing the safety and efficacy of Alcon’s compound against placebo in patients with all subtypes of neovascular AMD. Other laser, surgical or pharmaceutical treatments for AMD and DME may also compete against Macugen. These competitive therapies may result in pricing pressure if we receive marketing approval for Macugen even if Macugen is otherwise viewed as a preferable therapy.

     Many of our competitors have substantially greater financial, technical and human resources than we have. Additional mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated by our competitors. Competition may increase further as a result of advances made in the commercial applicability of technologies and greater availability of capital for investment in these fields.

There may be limited market acceptance of Macugen and other products we may develop in the future that are based on new technologies.

     The commercial success of the products for which we may obtain marketing approval from the FDA or other regulatory authorities will depend upon the acceptance of these products by the medical community and third party payors as clinically useful, cost-effective and safe. Even if a potential product displays a favorable efficacy and safety profile in clinical trials, market acceptance of the product will not be known until after it is commercially launched. We expect that many of the products that we develop will be based upon new technologies. For example, Macugen is partially composed of a chemically synthesized aptamer, which is a type of nucleic acid, and, if approved, may be the first aptamer to be approved as a pharmaceutical by the FDA. As a result, it may be more difficult for us to achieve market acceptance of our products, particularly the first products that we introduce to the market based on new technologies. Our efforts to educate the medical community about these potentially unique approaches may require greater resources than would be typically required for products based on conventional technologies. The safety, efficacy, convenience and cost-effectiveness of our products as compared to competitive products will also affect market acceptance.

We have only recently established our sales and marketing capabilities and have never marketed or sold products as a company. We will need to work with our partner, Pfizer, and integrate our marketing and sales infrastructures to successfully commercialize any products that we may develop, acquire or license.

     We have limited experience as a company in marketing and selling products. We have a marketing team and specialty sales force with significant industry experience to market and sell Macugen in the United States in collaboration with Pfizer. We are in the process of preparing our sales force to detail Xalatan and launch Macugen. If Macugen is approved for marketing, to achieve commercial success for Macugen, our sales and marketing organization

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must work with our partner, Pfizer, to effectively integrate our sales and marketing infrastructures and implement our sales and marketing efforts. If our sales and marketing efforts are not successful our business will materially suffer.

We may not be successful in our efforts to expand our portfolio of products.

     A key element of our strategy is to commercialize a portfolio of new ophthalmic drugs in addition to Macugen. We are seeking to do so through our internal research programs and through licensing or otherwise acquiring the rights to potential new drugs and drug targets for the treatment of ophthalmic disease.

     A significant portion of the research that we are conducting involves new and unproven technologies. Research programs to identify new disease targets and product candidates require substantial technical, financial and human resources whether or not we ultimately identify any candidates. Our research programs may initially show promise in identifying potential product candidates, yet fail to yield product candidates for clinical development for a number of reasons, including:

•

the research methodology used may not be successful in identifying potential product candidates; or

•

potential product candidates may on further study be shown to have harmful side effects or other characteristics that indicate they are unlikely to be effective drugs.

     We may be unable to license or acquire suitable product candidates or products from third parties for a number of reasons. In particular, the licensing and acquisition of pharmaceutical products is a competitive area. A number of more established companies are also pursuing strategies to license or acquire products in the ophthalmic field. These established companies may have a competitive advantage over us due to their size, cash resources and greater clinical development and commercialization capabilities. Other factors that may prevent us from licensing or otherwise acquiring suitable product candidates include the following:

•

we may be unable to license or acquire the relevant technology on terms that would allow us to make an appropriate return from the product;

•

companies that perceive us to be their competitors may be unwilling to assign or license their product rights to us; or

•

we may be unable to identify suitable products or product candidates within our areas of expertise.

If we are unable to develop suitable potential product candidates through internal research programs or by obtaining rights to novel therapeutics from third parties, our business will suffer.

We expect to depend on collaborations with third parties to develop and commercialize our products.

     Our business strategy includes entering into collaborations with corporate and academic collaborators for the research, development and commercialization of additional product candidates, such as our collaborations with Pfizer and Archemix Corp. These arrangements may not be scientifically or commercially successful. The termination of any of these arrangements might adversely affect our ability to develop, commercialize and market our products.

     The success of our collaboration arrangements will depend heavily on the efforts and activities of our collaborators. Our collaborators will have significant discretion in determining the efforts and resources that they will apply to these collaborations. The risks that we face in connection with these collaborations, including our collaboration with Pfizer, include the following:

•

our collaboration agreements are, or are expected to be, for fixed terms and subject to termination under various circumstances, including, in many cases, on short notice without cause;

•

we expect to be required in our collaboration agreements not to conduct specified types of research and development in the field that is the subject of the collaboration. These agreements may have the effect of limiting the areas of research and development that we may pursue, either alone or in cooperation with third parties;

•

our collaborators may develop and commercialize, either alone or with others, products and services that are similar to or competitive with our products that are the subject of the collaboration with us; and

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•

our collaborators may change the focus of their development and commercialization efforts. Pharmaceutical and biotechnology companies historically have re-evaluated their priorities following mergers and consolidations, which have been common in recent years in these industries. The ability of our products to reach their potential could be limited if our collaborators decrease or fail to increase spending relating to such products.

Collaborations with pharmaceutical companies and other third parties often are terminated or allowed to expire by the other party. Such terminations or expirations can adversely affect us financially as well as harm our business reputation.

We may not be successful in establishing additional collaborations, which could adversely affect our ability to develop and commercialize products and services.

     An important element of our business strategy is entering into collaborations for the development and commercialization of products when we believe that doing so will maximize product value. If we are unable to reach agreements with suitable collaborators, we may fail to meet our business objectives for the affected product or program. We face significant competition in seeking appropriate collaborators. Moreover, these collaboration arrangements are complex to negotiate and time consuming to document. We may not be successful in our efforts to establish additional collaborations or other alternative arrangements. The terms of any additional collaborations or other arrangements that we establish may not be favorable to us. Moreover, these collaborations or other arrangements may not be successful.

We currently have no operational manufacturing facilities and a limited number of manufacturing personnel. We will depend on third parties to manufacture Macugen and future products. If these manufacturers fail to meet our requirements, our product development and commercialization efforts may be materially harmed.

     We have a limited number of personnel with experience in, and we do not own or lease operating facilities for, manufacturing any products. We recently acquired a manufacturing facility in Boulder, Colorado, that we eventually plan to use as a second source of supply for the active pharmaceutical ingredient in Macugen, but that facility is not currently operational for such purpose. Accordingly, we will depend on third parties to manufacture Macugen and any future products that we may develop.

     For our clinical trials of Macugen, we engaged a third party manufacturer to produce the active pharmaceutical ingredient used in Macugen. We have entered into an agreement and completed the transfer of the manufacturing technology and process with an affiliate of this third party for commercial supply of the active pharmaceutical ingredient used in Macugen. For our clinical trials of Macugen, we also engaged a separate fill and finish manufacturer for the finished drug product to formulate the active pharmaceutical ingredient from a solid into a solution and to fill the solution into syringes. We have entered into an agreement with this manufacturer to provide these finished product services for commercial supply. These manufacturers of Macugen will be single source suppliers to us for a significant period of time. We also expect to continue to rely on a single source of supply for the PEGylation reagent used in the manufacture of Macugen.

     In order to sustain Macugen supply at the quantities we believe will be necessary to meet anticipated future market demand, we and our contract manufacturer will need to increase the manufacturing capacity for the active pharmaceutical ingredient of Macugen. Assuming Macugen is approved by the FDA for the 0.3 mg dose of Macugen and that we can manufacture Macugen to required specifications, we believe we will have sufficient capacity to supply the active pharmaceutical ingredient and to manufacture Macugen to meet anticipated demand for our planned commercial launch in the first half of 2005 and for approximately 24 months thereafter. We initially intend to increase manufacturing capacity for the active pharmaceutical ingredient by duplicating a portion of our manufacturing lines at the contract manufacturer’s facility. We also intend to invest in appropriate infrastructure at the manufacturing facility that we recently acquired in Boulder, Colorado, to prepare the facility to become a second source for commercial scale production of the active pharmaceutical ingredient in Macugen. We will also continue to explore other alternatives for increasing manufacturing capacity. If we are unable to increase our manufacturing capacity or are delayed in doing so, we may not be able to produce Macugen in a sufficient quantity to meet future requirements to sustain supply of the product to meet anticipated future demand. In addition, the cost of increasing manufacturing capacity may be expensive. Our revenues and gross margins could be adversely affected by any inability to meet demand and the increased cost in increasing manufacturing capacity.

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     Reliance on third party manufacturers entails risks to which we would not be subject if we manufactured products ourselves, including:

•

reliance on the third party for regulatory compliance and quality assurance;

•

the possible breach of the manufacturing agreement by the third party because of factors beyond our control; and

•

the possibility of termination or non-renewal of the agreement by the third party, based on its own business priorities, at a time that is costly or inconvenient for us.

The manufacture and packaging of pharmaceutical products such as Macugen are subject to the requirements of the FDA and similar foreign regulatory bodies. If we or our third party manufacturers fail to satisfy these requirements, our product development and commercialization efforts may be materially harmed.

     The manufacture and packaging of pharmaceutical products, such as Macugen and our future product candidates, are regulated by the FDA and similar foreign regulatory bodies and must be conducted in accordance with the FDA’s current good manufacturing practices and comparable requirements of foreign regulatory bodies. There are a limited number of manufacturers that operate under these current good manufacturing practices regulations who are both capable of manufacturing Macugen and willing to do so. Failure by us or our third party manufacturers to comply with applicable regulations, requirements, or guidelines could result in sanctions being imposed on us, including fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing approval of our products, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of product, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect our business. For example, if the facilities used for the manufacturing and testing of a product are delayed in passing FDA pre-approval inspection to ensure compliance with FDA standards or if we are not able to manufacture Macugen to required specifications, we may be delayed in launching the product and our anticipated future revenues and financial results may be materially adversely affected.

     Changes in the manufacturing process or procedure, including a change in the location where the product is manufactured or a change of a third party manufacturer, may require prior FDA review and/or approval of the manufacturing process and procedures in accordance with the FDA’s current good manufacturing practices. There are comparable foreign requirements. This review may be costly and time consuming and could delay or prevent the launch of a product. For example, our third party contract manufacturer changed the site used to manufacture the active pharmaceutical ingredient of Macugen. We have completed the transfer of the relevant manufacturing technology and the manufacturing process to the new site, have used the new site to supply the active pharmaceutical ingredient of Macugen for use in our clinical trials and plan to continue to use this site to produce commercial quantities of the active pharmaceutical ingredient of Macugen. If we cannot establish, to the satisfaction of the FDA, that the products manufactured at the new site are comparable to those manufactured at the initial site, we may not obtain or may be delayed in obtaining approval to launch Macugen. In addition, if we elect to manufacture products in our own facility or at the facility of another third party, we would need to ensure that the new facility and the manufacturing process are in substantial compliance with current good manufacturing practices. Any such change in facility would be subject to a pre-approval inspection by the FDA and would again require us to demonstration product comparability to the FDA.

     Furthermore, in order to obtain approval of our products, including Macugen, by the FDA and foreign regulatory agencies, we will be required to consistently produce the active pharmaceutical ingredient and the finished product in commercial quantities and of specified quality on a repeated basis and document our ability to do so. This requirement is referred to as process validation. We have completed the validation process for the active pharmaceutical ingredient. We need to complete process validation on the finished product in the packaging we propose for commercial sales. This includes testing of stability, measurement of impurities and testing of other product specifications by validated test methods. If the FDA does not consider the result of the process validation or required testing to be satisfactory, we may not obtain approval to launch the product or approval or launch may be delayed.

     The FDA and similar foreign regulatory bodies may also implement new standards, or change their interpretation and enforcement of existing standards and requirements, for manufacture, packaging or testing of products at any time. If we are unable to comply, we may be subject to regulatory, civil actions or penalties which could significantly and adversely

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affect our business.

Macugen and our other potential products may not be commercially viable if we fail to obtain an adequate level of reimbursement for these products by Medicare and other third party payors. The markets for our products may also be limited by the indications for which their use may be reimbursed or the frequency in which they may be administered.

     The availability and levels of reimbursement by governmental and other third party payors affect the market for products such as Macugen and others that we may develop. These third party payors continually attempt to contain or reduce the costs of healthcare by challenging the prices charged for medical products and services. In some foreign countries, particularly Canada and the countries of the European Union, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take six to twelve months or longer after the receipt of regulatory marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our products, including Macugen, to other available therapies. If reimbursement for our products is unavailable or limited in scope or amount or if pricing is set at unsatisfactory levels, our business could be materially harmed.

     Because most persons suffering from neovascular AMD are elderly, we expect that coverage for Macugen in the United States will be primarily through the Medicare program. Although drugs that are not usually self-administered are ordinarily covered by Medicare, the Medicare program has taken the position that it can decide not to cover particular drugs if it determines that they are not “reasonable and necessary” for Medicare beneficiaries. Limitations on coverage could also be imposed at the local Medicare carrier level or by fiscal intermediaries. Our business could be materially adversely affected if the Medicare program, local Medicare carriers or fiscal intermediaries were to make such a determination and deny or limit the reimbursement of Macugen. Our business also could be adversely affected if physicians are not reimbursed by Medicare for the cost of the procedure in which they administer Macugen on a basis satisfactory to the administering physicians. If the local contractors that administer the Medicare program are slow to reimburse physicians for Macugen, the physicians may pay us more slowly, which would adversely affect our working capital requirements.

     We also will need to obtain approvals for payment for Macugen from private insurers, including managed care organizations. We expect that private insurers will consider the efficacy, cost-effectiveness and safety of Macugen in determining whether and at what level to approve reimbursement for Macugen therapy. Obtaining these approvals can be a time consuming and expensive process. Our business would be materially adversely affected if we do not receive approval for reimbursement of Macugen from private insurers on a satisfactory basis.

     Our business could also be adversely affected if the Medicare program or other reimbursing bodies or payors limit the indications for which Macugen will be reimbursed to a smaller set than we believe it is effective in treating or establish a limitation on the frequency with which Macugen may be administered that is less often than we believe would be effective.

     We expect to experience pricing pressures in connection with the sale of Macugen and our future products due to the trend toward programs aimed at reducing healthcare costs, the increasing influence of health maintenance organizations and additional legislative proposals.

The 2003 Medicare prescription drug coverage legislation, The Medicare Prescription Drug Improvement and Modernization Act, and future legislative or regulatory reform of the healthcare system may affect our ability to sell our products profitably.

     In both the United States and some non-U.S. jurisdictions, there have been a number of legislative and regulatory proposals to change the healthcare system in ways that could affect our ability to sell our products profitably. In the United States, new legislation may be proposed at the federal and state levels that would result in significant changes to the healthcare system, either nationally or at the state level. In December 2003, President Bush signed into law new Medicare prescription drug coverage legislation, The Medicare Prescription Drug Improvement and Modernization Act. Effective January 2004, the legislation changed the methodology used to calculate reimbursement for drugs such as Macugen that are administered in physicians’ offices in a manner intended to reduce the amount that is subject to

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reimbursement. In addition, beginning in January 2006, the legislation directs the Secretary of Health and Human Services to contract with procurement organizations to purchase physician-administered drugs from the manufacturers and provides physicians with the option to obtain drugs through these organizations as an alternative to purchasing from the manufacturers, which some physicians may find advantageous. These changes may also cause private insurers to reduce the amounts that they will pay for physician-administered drugs. In addition, the Centers for Medicare & Medicaid Services, or CMS, the agency within the Department of Health and Human Services that administers Medicare and will be responsible for reimbursement of the cost of Macugen, has asserted the authority of Medicare not to cover particular drugs if it determines that they are not “reasonable and necessary” for Medicare beneficiaries or to cover them at a lesser rate, comparable to that for drugs already reimbursed that CMS considers to be therapeutically comparable. Further federal and state proposals and healthcare reforms are likely. Our results of operations could be materially adversely affected by the Medicare prescription drug coverage legislation, by the possible effect of this legislation on amounts that private insurers will pay and by other healthcare reforms that may be enacted or adopted in the future.

We face the risk of product liability claims and may not be able to obtain insurance.

     Our business exposes us to the risk of product liability claims that is inherent in the manufacturing, testing and marketing of drugs and related products. Claims that one or more of our products harms people, regardless of the merits, could be costly, divert our management’s attention and adversely affect our reputation and demand for our products.

     We currently have product liability insurance that covers our clinical trials up to a $10 million annual aggregate limit. We may expand our product liability insurance coverage. However, insurance coverage is increasingly expensive. We may not be able to obtain or maintain adequate protection against potential liabilities. If we are unable to obtain insurance at acceptable cost or otherwise protect against potential product liability claims, we will be exposed to significant liabilities, which may materially and adversely affect our business and financial position. These liabilities could prevent or interfere with our product development and commercialization efforts.

We depend on our key personnel. If we are not able to retain them or recruit additional technical personnel, our business will suffer.

     We are highly dependent on the principal members of our management and scientific staff, particularly Dr. David R. Guyer, our co-founder and Chief Executive Officer, and Dr. Anthony P. Adamis, our scientific pioneer, Chief Scientific Officer and Senior Vice President, Research. Our employment agreements with these and our other executive officers are terminable on short or no notice. We do not carry key man life insurance on any of our key personnel. The loss of service of any of our key employees could harm our business.

     In addition, our growth will require us to hire a significant number of qualified technical, commercial and administrative personnel. There is intense competition from other companies and research and academic institutions for qualified personnel in the areas of our activities. If we cannot continue to attract and retain, on acceptable terms, the qualified personnel necessary for the continued development of our business, we may not be able to sustain our operations or grow.

We are growing rapidly, and if we fail to adequately manage that growth, our business could be adversely impacted.

     Our aggressive growth plan has included substantial and increasing investments in research and development, sales and marketing, and facilities. We plan to continue to grow, and our plan has a number of risks, some of which we cannot control. For example:

•

we have no current source of product revenue, a fixed amount of cash and predetermined anticipated milestone payments that may be due to us, so we will need to generate product or other revenues to cover our continually higher level of operating expenses;

•

we will need to continue to assimilate a large number of new employees in different functions throughout the company;

•

we will need to manage complexities associated with a larger and faster growing organization; and

•

we will need to accurately anticipate demand for our products and maintain adequate manufacturing capacity, and our ability to do so may depend on factors that we do not control.

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     Of course, there may be other risks unknown to us and we cannot guarantee that we will be able to successfully manage these or other risks.

We depend on third parties in the conduct of our clinical trials for Macugen and any failure of those parties to fulfill their obligations could adversely affect our development and commercialization plans.

     We depend on independent clinical investigators, contract research organizations and other third party service providers in the conduct of our ongoing clinical trials for Macugen and expect to do so with respect to other product candidates. We rely heavily on these parties for successful execution of our clinical trials, but do not control many aspects of their activities. For example, the clinical investigators are not our employees. However, we are responsible for ensuring that each of our clinical trials is conducted in accordance with the general investigational plan and protocols for the trial. Third parties may not complete activities on schedule, or may not conduct our clinical trials in accordance with regulatory requirements or our stated protocols. The failure of these third parties to carry out their obligations could delay or prevent the development, approval and commercialization of Macugen and future product candidates.

Regulatory Risks

We may not be able to obtain marketing approval for any of the products resulting from our development efforts, including Macugen. Failure to obtain these approvals could materially harm our business.

     Although we may not be required to conduct additional research and development for the approval of Macugen for the treatment of neovascular AMD, the use of Macugen for the treatment of other indications and other products that we are developing or may develop in the future will require additional research and development. The research and development work that we must perform will include extensive preclinical studies and clinical trials. We will be required to obtain an investigational new drug application, or IND, prior to initiating human clinical trials in the United States and must obtain regulatory approval prior to any commercial distribution. This process is expensive, uncertain and lengthy, often taking a number of years until a product is approved for commercial distribution. We have only one product, Macugen, that has advanced to clinical trials. We have not received regulatory approval to market Macugen in any jurisdiction. Failure to obtain required regulatory approvals could materially harm our business.

     We may need to successfully address a number of technological challenges in order to complete the development of Macugen or any of our future products, such as manufacturing process validation and product specification testing.

     In addition, administration of a drug via intravitreal injection is a new method for the potentially long-term treatment of chronic eye disease. As a result, the FDA and other regulatory agencies may apply new standards for safety, manufacturing, packaging and distribution of drugs using this mode of administration, including Macugen. We are working with the FDA in connection with its development of appropriate standards for drugs using this mode of administration. As part of this process, we also support efforts by the United States Pharmacopoeia, which works with the FDA to establish standards, to devise a sub-visible particulate limit appropriate for ophthalmologic treatments administered as ultra low-volume injectables. We are also working with the FDA to agree on an appropriate control environment for the outer packaging we propose for commercial sale. It may be time consuming or expensive for us to comply with these standards. This could result in delays in our obtaining marketing approval for Macugen, or possibly preclude us from obtaining such approval. This could also increase our commercialization costs, possibly materially.

     Furthermore, Macugen and any of our future products may not be effective, may be only moderately effective or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may preclude our obtaining regulatory approval or prevent or limit commercial use, which could have a material adverse effect on our business. The FDA and other regulatory authorities may not approve any product that we develop.

The “fast track” designation for development of Macugen may not actually lead to a faster development or regulatory review or approval process.

     If a drug is intended for the treatment of a serious or life-threatening condition and the drug demonstrates the potential to address unmet medical needs for this condition, the drug sponsor may apply for FDA “fast track”

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designation. The fast track classification does not apply to the product alone, but applies to the combination of the product and the specific indication or indications for which it is being studied. The FDA’s fast track programs are designed to facilitate the clinical development and evaluation of the drug’s safety and efficacy for the fast track indication or indications. Marketing applications filed by sponsors of products in fast track development may qualify for expedited review under policies or procedures offered by the FDA, but the fast track designation does not assure such qualification. We have obtained a fast track designation from the FDA for Macugen for the treatment of both neovascular AMD and DME. We have also received priority review status for our NDA for neovascular AMD and have been entered into the “Pilot 1” program, which allows the FDA to complete reviews of individual reviewable units within six months of submission and provide early feedback on the pre-submissions. Also, the FDA’s Dermatologic and Ophthalmic Drugs Advisory Committee reviewed our NDA with respect to the use of Macugen in the treatment of neovascular AMD on August 27, 2004. However, we may not continue to experience a faster development process, review or approval compared to conventional FDA procedures. Further, our fast track designation with respect to DME may be withdrawn by the FDA if it believes that the designation is no longer supported by data from our clinical development program.

Our products, when and if any of them are approved, could be subject to restrictions or withdrawal from the market and we may be subject to penalties if we fail to comply with regulatory requirements, or if we experience unanticipated problems with our products.

     Any product for which we obtain marketing approval, along with the manufacturing processes, post-approval clinical data, advertising and promotional activities for such product, will be subject to continuing requirements, review and periodic inspections by the FDA and other regulatory bodies. Even if regulatory approval of a product is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed or subject to the conditions of approval, or contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product. Furthermore, new information may arise from our ongoing or new clinical trials or continuing analysis of the data from our clinical trials that may be viewed as less favorable than previous data. Later discovery of previously unknown problems with our products, manufacturer or manufacturing processes, or failure to comply with regulatory requirements, may result in:

•

restrictions on such products or manufacturing processes;

•

withdrawal of the products from the market;

•

voluntary or mandatory recall;

•

fines;

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suspension of regulatory approvals;

•

requests from the FDA or other agencies for additional information from us or data from additional clinical trials;

•

product seizure; and

•

injunctions or the imposition of civil or criminal penalties.

     We may be slow to adapt, or we may never adapt, to changes in existing regulatory requirements or adoption of new regulatory requirements or policies.

Failure to obtain regulatory approval in foreign jurisdictions would prevent us from marketing our products abroad.

     We intend to have our products marketed outside the United States. In order to market our products in the European Union and many other non-U.S. jurisdictions, we must obtain separate regulatory approvals and comply with numerous and varying regulatory requirements. In the case of Macugen, Pfizer has responsibility to obtain regulatory approvals outside the United States, and we will depend on Pfizer to obtain these approvals. The approval procedure varies among countries and can involve additional testing. The time required to obtain approval may differ from that required to obtain FDA approval. The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval. We may not obtain foreign regulatory approvals on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or by the FDA. We and our collaborators may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize our products in any

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market. The failure to obtain these approvals could materially adversely affect our business, financial condition and results of operations.

We have only limited experience in regulatory affairs, and some of our products may be based on new technologies. These factors may affect our ability or the time we require to obtain necessary regulatory approvals.

     We have only limited experience as a company in filing and prosecuting the applications necessary to gain regulatory approvals. Moreover, some of the products that are likely to result from our product development, licensing and acquisition programs may be based on new technologies that have not been extensively tested in humans. The regulatory requirements governing these types of products may be less well defined or more rigorous than for conventional products. As a result, we may experience a longer regulatory review in connection with obtaining regulatory approvals of any products that we develop, license or acquire.

Risks Relating to Intellectual Property

If we are unable to obtain and maintain protection for the intellectual property incorporated into our products, the value of our technology and products will be adversely affected.

     Our success will depend in large part on our ability or the ability of our licensors to obtain and maintain protection in the United States and other countries for the intellectual property incorporated into our products. The patent situation in the field of biotechnology and pharmaceuticals generally is highly uncertain and involves complex legal and scientific questions. Neither we nor our licensors may be able to obtain additional issued patents relating to our technology. Even if issued, patents may be challenged, narrowed, invalidated, or circumvented, which could limit our ability to stop competitors from marketing similar products or limit the length of term of patent protection we may have for our products. In addition, our patents and our licensors’ patents also may not afford us protection against competitors with similar technology. Because patent applications in the United States and many foreign jurisdictions are typically not published until 18 months after filing, or in some cases not at all, and because publications of discoveries in the scientific literature often lag behind actual discoveries, neither we nor our licensors can be certain that we or they were the first to make the inventions claimed in issued patents or pending patent applications, or that we or they were the first to file for protection of the inventions set forth in these patent applications.

If we fail to comply with our obligations in the agreements under which we license development or commercialization rights to products or technology from third parties, we could lose license rights that are important to our business.

     We are a party to a number of technology licenses that are important to our business and expect to enter into additional licenses in the future. For example, we hold licenses from Gilead Sciences, Nektar Therapeutics and Isis Pharmaceuticals under patents relating to Macugen. These licenses impose various commercialization, milestone payment, royalty, insurance and other obligations on us. If we fail to comply with these obligations, the licensor may have the right to terminate the license, in which event we would not be able to market products, such as Macugen, that may be covered by the license.

If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and products could be adversely affected.

     In addition to patented technology, we rely upon unpatented proprietary technology, processes, and know-how. We seek to protect this information in part by confidentiality agreements with our employees, consultants and third parties. These agreements may be breached, and we may not have adequate remedies for any such breach. In addition, our trade secrets may otherwise become known or be independently developed by competitors.

Third parties may own or control patents or patent applications that would be infringed by our technologies, drug targets or potential products. This could cause us to become involved in expensive patent litigation or other proceedings, which could result in our incurring substantial costs and expenses and liability for damages. This could also require us to seek licenses, which could increase our development and commercialization costs. In either case,

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this could require us to stop some of our development and commercialization efforts.

     We may not have rights under some patents or patent applications that would be infringed by technologies that we use in our research, drug targets that we select or product candidates that we seek to develop and commercialize. Third parties may own or control these patents and patent applications in the United States and abroad. These third parties could bring claims against us or our collaborators that would cause us to incur substantial expenses and, if successful against us, could cause us to pay substantial damages. Further, if a patent infringement suit were brought against us or our collaborators, we or they could be forced to stop or delay research, development, manufacturing or sales of the product or product candidate that is the subject of the suit.

     As a result of patent infringement claims, or in order to avoid potential claims, we or our collaborators may choose to seek, or be required to seek, a license from the third party and would most likely be required to pay license fees or royalties or both. These licenses may not be available on acceptable terms, or at all. Even if we or our collaborators were able to obtain a license, the rights may be nonexclusive, which would give our competitors access to the same intellectual property. Ultimately, we could be prevented from commercializing a product, or be forced to cease some aspect of our business operations if, as a result of actual or threatened patent infringement claims, we or our collaborators are unable to enter into licenses on acceptable terms. This could harm our business significantly.

     There has been substantial litigation and other proceedings regarding the patent and other intellectual property rights in the pharmaceutical and biotechnology industries. In addition to the possibility of infringement claims against us, we may become a party to other patent litigation and other proceedings, including interference proceedings declared by the United States Patent and Trademark Office and opposition proceedings in the European Patent Office, regarding intellectual property rights with respect to our products and technology. The cost to us of any patent litigation or other proceeding, even if resolved in our favor, could be substantial. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their substantially greater financial resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace. Patent litigation and other proceedings may also absorb significant management time.

Risks Relating to Our Financial Results and Need for Financing

We have a limited operating history and have incurred losses since inception. If we do not generate significant revenues, we will not be able to achieve profitability.

     We have no current source of product revenue. We have a limited operating history and have not yet commercialized any products. To date, we have focused primarily on the development of Macugen. We began operations in 2000, and we have not been profitable in any quarter since inception. As of September 30, 2004, we had an accumulated deficit of approximately $209.1 million. We expect to increase our spending significantly as we continue to expand our infrastructure, development programs and commercialization activities. As a result, we will need to generate significant revenues to pay these costs and achieve profitability. We do not know whether or when we will become profitable because of the significant uncertainties with respect to our ability to generate revenues from the sale of our products and from our existing and potential future collaborations.

If we receive approval to market products, our revenues and operating results may fluctuate, and this fluctuation could cause financial results to be below expectations.

     Our operating results may fluctuate from period to period for a number of reasons. If we begin to sell products, we may assume that revenues will continue to grow; however, some of our operating expenses are fixed in the short term. Because of this, even a relatively small revenue shortfall may cause a period’s results to be below our expectations or projections. A revenue shortfall could arise from any number of factors, some of which we cannot control. For example, we may face:

•

lower than expected demand for our products;

•

inability to provide adequate supply of our products;

•

changes in the government’s or private payors’ reimbursement policies for our products;

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•

changes in wholesaler buying patterns;

•

increased competition from new or existing products;

•

fluctuations in foreign currency exchange rates; and

•

changes in our product pricing strategies.

     Of these, we would only have control over changes in our product pricing strategies and, of course, there may be other factors that affect our revenues in any given period.

We may need additional financing, which may be difficult to obtain. Our failure to obtain necessary financing or obtaining financing on unattractive terms could adversely affect our development programs and other operations.

     We will require substantial funds to conduct development, including preclinical testing and clinical trials, of our potential products. We will also require substantial funds to meet our obligations to our licensors and maximize the prospective benefits to us from our licensors, and manufacture and market products that are approved for commercial sale in the future, including Macugen.

     We currently believe that our available cash, cash equivalents and marketable securities, expected milestone payments and reimbursements from Pfizer under our collaboration and interest income will be sufficient to fund our anticipated levels of operations through at least the end of 2005. However, our future capital requirements will depend on many factors, including:

•		the success of our collaboration with Pfizer to develop and commercialize Macugen;
•		the scope and results of our clinical trials;
•		advancement of other product candidates into development;
•		potential acquisition or in-licensing of other products or technologies;
•		the timing of, extent of, and the costs involved in, obtaining regulatory approvals;
•		the cost of manufacturing activities;
•		the cost of commercialization activities, including product marketing, sales and distribution;
•		the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and other patent-related costs, including litigation costs and the results of such litigation; and
•		our ability to establish and maintain additional collaborative arrangements.

Additional financing may not be available to us when we need it or it may not be available on favorable terms. If we are unable to obtain adequate financing on a timely basis, we may be required to significantly curtail one or more of our development, licensing or acquisition programs. We could be required to seek funds through arrangements with collaborators or others that may require us to relinquish rights to some of our technologies, product candidates or products that we would otherwise pursue on our own. If we raise additional funds by issuing equity securities, our then-existing stockholders will experience dilution and the terms of any new equity securities may have preferences over our common stock.

General Company Related Risks

Our executive officers, directors and major stockholders will maintain the ability to control all matters submitted to stockholders for approval.

     Our executive officers, directors and stockholders who own more than 5% of our outstanding common stock, in the aggregate, beneficially owned shares representing approximately 45% of our capital stock as of November 1, 2004. As a result, if these stockholders were to choose to act together, they would be able to substantially influence all matters submitted to our stockholders for approval, as well as our management and affairs. For example, these persons, if they choose to act together, would substantially influence the election of directors and approval of any merger, consolidation or sale of all or substantially all of our assets. This concentration of voting power could delay or prevent an acquisition of our company on terms that other stockholders may desire.

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Provisions in our charter documents and under Delaware law may prevent or frustrate attempts by our stockholders to change our management and hinder efforts to acquire a controlling interest in us.

     Provisions of our corporate charter and bylaws may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management. These provisions include:

•		a classified board of directors;
•		limitations on the removal of directors;
•		advance notice requirements for stockholder proposals and nominations;
•		the inability of stockholders to act by written consent or to call special meetings; and
•		the ability of our board of directors to designate the terms of and issue new series of preferred stock without stockholder approval.

     The affirmative vote of the holders of at least 75% of our shares of capital stock entitled to vote is necessary to amend or repeal the above provisions of our certificate of incorporation. In addition, absent approval of our board of directors, our bylaws may only be amended or repealed by the affirmative vote of the holders of at least 75% of our shares of capital stock entitled to vote.

     In addition, Section 203 of the Delaware General Corporation Law prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder, generally a person which together with its affiliates owns or within the last three years has owned 15% of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. Accordingly, Section 203 may discourage, delay or prevent a change in control of our company.

Our stock price is volatile; purchasers of our common stock could incur substantial losses.

     Our stock price is volatile. From our initial public offering in January 2004 through November 12, 2004, the trading price of our common stock has ranged from $29.25 to $49.12 per share. The stock market in general and the market for biotechnology companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, investors may not be able to sell their common stock at or above their respective purchase prices. The market price for our common stock may be influenced by many factors, including:

•		results of our clinical trials or those of our competitors;
•		the regulatory status of Macugen and our other potential products;
•		the regulatory status of potentially competitive products;
•		failure of any of our product candidates, if approved, to achieve commercial success;
•		developments concerning our collaborators, including Pfizer;
•		regulatory developments in, and outside of, the United States;
•		developments or disputes concerning patents or other proprietary rights;
•		our ability to manufacture products to commercial standards;
•		public concern over our drugs;
•		litigation;
•		the departure of key personnel;
•		future sales of our common stock;
•		variations in our financial results or those of companies that are perceived to be similar to us;
•		changes in the structure of healthcare payment systems;
•		investors’ perceptions of us; and
•		general economic, industry and market conditions.

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If there are substantial sales of our common stock, our stock price could decline.

          If our existing stockholders sell a large number of shares of our common stock or the public market perceives that existing stockholders might sell shares of common stock, the market price of our common stock could decline significantly. All of the shares sold in our initial public offering in January 2004 and secondary public offering in May 2004 are freely tradable without restriction or further registration under the federal securities laws, unless purchased by our “affiliates” as that term is defined in Rule 144 under the Securities Act. Substantially all other shares of our common stock are saleable under Rule 144 under the Securities Act. Also, some stockholders maintain rights with respect to the registration of the sale of their shares of common stock with the Securities and Exchange Commission.

          We have registered approximately 9,543,000 shares of common stock that are authorized for issuance under our stock plans. As of September 30, 2004, 5,517,756 shares were subject to outstanding options, 3,713,011 of which were immediately exercisable, but with respect to which we had the right to repurchase at the initial exercise price all but 1,844,013 of the shares issuable upon exercise of these options. Because they are registered, the shares authorized for issuance under our stock plans can be freely sold in the public market upon issuance, subject to our repurchase rights and the restrictions imposed on our affiliates under Rule 144.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

          Our exposure to market risk is confined to our cash, cash equivalents and marketable securities. We invest in high-quality financial instruments, primarily money market funds, federal agency notes, asset backed securities, corporate debt securities and United States treasury notes, with the effective duration of the portfolio less than nine months and no security with an effective duration in excess of two years, which we believe are subject to limited credit risk. We currently do not hedge interest rate exposure. Due to the short-term nature of our investments, we do not believe that we have any material exposure to interest rate risk arising from our investments.

          Most of our transactions are conducted in United States dollars, although we do have some development and commercialization agreements with vendors located outside the United States. Transactions under certain of these agreements are conducted in United States dollars, subject to adjustment based on significant fluctuations in currency exchange rates. Transactions under certain other of these agreements are conducted in the local foreign currency. If the exchange rate undergoes a change of 10%, we do not believe that it would have a material impact on our results of operations or cash flows.

Item 4. Controls and Procedures.

          Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our chief executive officer and chief financial officer as appropriate, to allow timely decisions regarding disclosure.

          As required by Rule 13a-15 under the Exchange Act, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. This evaluation was carried out under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer. Based on that evaluation, these officers have concluded that, as of September 30, 2004, our disclosure controls and procedures were adequate and designed to ensure that material information relating to us would be made known to them by others. There have been no changes in our internal controls over financial reporting (as defined in Rules 13a-15(b) and 15(d)-15(f) under the Exchange Act) or in other factors that has materially affected or is reasonably likely to materially affect internal controls over financial reporting.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

     We are currently not a party to any material legal proceedings.

Item 2. Unregistered Sale of Equity Securities and Use of Proceeds.

     None

Item 3. Defaults Upon Senior Securities.

     None

Item 4. Submission to a Vote of Security Holders.

     None

Item 5. Other Information.

     On August 20, 2004 and November 15, 2004, we entered into an Amended and Restated Amendment to Employment Agreement with each of Anthony Adamis, our Chief Scientific Officer and Senior Vice President, Research, and Glenn Sblendorio, our Chief Financial Officer and Senior Vice President, Finance, respectively. Each amendment provides that upon any change in control of our company, 50% of all of such executive’s unvested equity rights in our company will immediately vest, and if we terminate such executive’s employment without cause or if he terminates his employment for good reason within three months before or 12 months following the change in control, 100% of such executive’s unvested equity rights in our company will immediately vest. The effect of the amendments is to make the treatment of equity compensation in connection with a change in control consistent among our executive officers.

Item 6. Exhibits and Reports on Form 8-K.

(a) Exhibits:

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(b) Reports on Form 8-K:

     (i) On July 23, 2004, we filed a Form 8-K dated July 23, 2004, furnishing under Item 12, “Results of Operations and Financial Condition,” Eyetech’s press release announcing financial results for the three and six months ended June 30, 2004.

     (ii) On August 18, 2004, we filed a Form 8-K dated August 17, 2004, furnishing under Item 9, “Regulation FD Disclosure,” a press release in which Eyetech and Pfizer Inc. announced the acceptance by the U.S. Food and Drug Administration of our complete new drug application for the use of Macugen(™) (pegaptanib sodium injection) in the treatment of neovascular age-related macular degeneration.

     (iii) On August 27, 2004, we filed a Form 8-K dated August 27, 2004, furnishing under Item 8.01, “Other Events,” a press release in which Eyetech and Pfizer Inc. announced the conclusion of the FDA’s Dermatologic & Opthalmic Drugs Advisory Committee in connection with the review by the FDA of the investigational drug Macugen™ (pegaptanib sodium injection) for the treatment of neovascular age-related macular degeneration.

     (iv) On August 30, 2004, we filed a Form 8-K dated August 27, 2004, furnishing under Item 7.01, “Regulation FD Disclosure,” presentation slides used by the Eyetech and Pfizer Inc. to present to the U.S. Food and Drug Administration’s (FDA) Dermatologic & Ophthalmic Drugs Advisory Committee in connection with the review by the FDA of the investigational drug Macugen™ (pegaptanib sodium injection) for the treatment of neovascular age-related macular degeneration.

     (v) On September 20, 2004, we filed a Form 8-K dated September 20, 2004, furnishing under Item 7.01, “Regulation FD Disclosure,” a press release in which Eyetech and Pfizer Inc. provided a regulatory update on the use of Macugen(™) (pegaptanib sodium injection) in the treatment of neovascular age-related macular degeneration.

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SIGNATURES

     Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.

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EXHIBIT INDEX