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 þ 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 þ

     The number of shares of registrant’s common stock outstanding on May 10, 2005 was 43,201,103.

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION

EYETECH PHARMACEUTICALS, INC.

See accompanying notes.

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EYETECH PHARMACEUTICALS, INC.

See accompanying notes.

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EYETECH PHARMACEUTICALS INC

See accompanying notes.

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1. Organization and Description of Business

Eyetech Pharmaceuticals, Inc., together with its wholly owned subsidiaries (collectively, “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. In December 2004, the Company received approval from the United States Food and Drug Administration (FDA) to market its first product, Macugen® (pegaptanib sodium injection), for the treatment of neovascular (wet) age-related macular degeneration, known as neovascular AMD. The Company began selling Macugen in the United States in January 2005. Macugen is being sold to a limited number of specialty distributors who in turn sell Macugen to physicians, a limited number of specialty pharmacy providers and federal government buying groups. The Company is also further developing Macugen for the treatment of neovascular AMD and developing Macugen for the treatment of diabetic macular edema, known as DME, which is a complication of diabetic retinopathy, retinal vein occlusion, known as RVO, and other indications.

The Company formed a wholly owned subsidiary in Ireland in 2002. There has been no activity in this subsidiary since its inception in 2002. In November 2004, concurrent with the acquisition of a potential second-source manufacturing facility for Macugen, the Company established a wholly owned subsidiary to hold these assets. The Company operates in a single business segment.

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 Quarterly Report on 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 period ended March 31, 2005 are not necessarily indicative of the results that may be expected for the entire fiscal year ending December 31, 2005. 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, 2004 filed with the Securities and Exchange Commission.

Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. At March 31, 2005 the Company had substantially all of its cash and cash equivalents deposited with one financial institution.

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’ equity.

Restricted Cash

Restricted cash of $5.9 million at March 31, 2005 and December 31, 2004 collateralizes $5.9 million of

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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

          Product Revenue

The Company sells Macugen primarily to distributors, who, in turn, sell to physicians, a limited number of specialty pharmacy providers and federal government buying groups. The Company does not recognize revenue from product sales until there is persuasive evidence of an arrangement, delivery has occurred, the price is fixed and determinable, the buyer is obligated to pay the Company, the obligation to pay is not contingent on resale of the product, the buyer has economic substance apart from the Company, the Company has no obligation to bring about sale of the product, the amount of returns can be reasonably estimated and collectibility is reasonably assured.

The Company reports product 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 Emerging Issues Task Force (“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 Inc., which include manufacture of product for sale in the United States, distribution, ownership of product inventory and credit risk from customers.

The Company records allowances for distribution fees, product returns and governmental rebates for products sold in the United States at the time of sale, and reports revenue net of such allowances. The Company must make significant judgments and estimates in determining these allowances. For instance:

	•	The Company’s distributors have a limited right of return for unopened product during a specified time period based on the product’s labeled expiration date. As a result, in calculating the allowance for product returns, the Company estimates the likelihood that product sold to distributors might be returned within a specific timeframe. The Company determines its estimates using actual product data from distributors, industry data on products with similar characteristics and the expiration dates of product sold.
	•	Certain government buying groups that purchase the Company’s product from wholesalers have the right to receive a discounted price from the Company. As a result, the Company estimates the amount of product which will ultimately be sold to these buying groups. The Company determines its estimates using actual product data from distributors and historical industry trends.

If actual results differ from the Company’s estimates, the Company will be required to make adjustments to these allowances in the future.

          Reimbursement of Development Costs and License Revenue

Revenues associated with the Company’s collaboration with Pfizer consist of non-refundable, up-front license fees and reimbursement of development expenses.

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The Company uses revenue recognition criteria outlined in Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial Statements” and EITF Issue 00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). Accordingly, revenues from licensing agreements are recognized based on the performance requirements of the agreement. Non-refundable up-front license fees, where the Company has an ongoing involvement or performance obligation, are recorded as deferred revenue in the balance sheet and amortized into license fees in the statement of operations over the term of the performance obligation

Revenues derived from reimbursements of costs associated with the development of Macugen are recorded in compliance with EITF Issue 99-19, “Reporting Revenue Gross as a Principal Versus Net as an Agent” (“EITF 99-19”), and EITF Issue 01-14, “Income Statement Characterization of Reimbursements Received For “Out-of-Pocket” Expenses Incurred” (“EITF 01-14”). According to the criteria established by these EITF Issues, in transactions where the Company acts as a principal, with discretion to choose suppliers, bears credit risk and performs part of the services required in the transaction, the Company has met the criteria to record revenue for the gross amount of the reimbursements.

Research and Development Costs

Research and development costs are expensed as incurred.

Inventory

Inventory is stated at the lower of cost or market value. Inventory is comprised of three components; raw materials, which are purchased directly by the Company, work in process, which is Macugen’s active pharmaceutical ingredient (API) where title has transferred from our contract manufacturer to the Company, and finished goods, which is packaged product ready for commercial sale. Prior to FDA approval of Macugen in December 2004, the Company purchased raw materials and manufactured API, the costs of which were expensed as research and development. Accordingly, cost of goods sold for the three months ended March 31, 2005 does not include costs associated with the manufacture of the API component of Macugen. There were no finished goods produced before the FDA approval.

The major classes of inventory were as follows:

Stock-Based Compensation

In December 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of FASB Statement No. 123” (“SFAS No. 148”). SFAS No. 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 accounting prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”). In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123, “Accounting for

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Stock-Based Compensation” (“SFAS No. 123”). The Company adopted the disclosure requirements of SFAS No. 148 effective December 31, 2002. As allowed by SFAS No.123, the Company has elected to continue to apply the intrinsic value-based method of accounting prescribed in APB No. 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 No. 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 No. 123 pro forma information regarding net loss is required by SFAS No.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 No.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:

The effects of applying SFAS No. 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 No.123 and EITF Issue 96-18, “Accounting for Equity Investments that are Issued to Other than Employees for Acquiring or in

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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.

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

On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”), which is a revision of FASB Statement No. 123 (“SFAS No. 123”), “Accounting for Stock-Based Compensation”. SFAS No. 123(R) supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”), and amends SFAS No. 95, “Statement of Cash Flows” (“SFAS No. 95”). Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure will no longer be allowable.

SFAS No. 123(R) must be adopted no later than the beginning of the first fiscal year beginning after June 15, 2005, which in the case of the Company is January 1, 2006. Early adoption will be permitted in periods in which financial statements have not yet been issued. The Company is evaluating whether to adopt SFAS No. 123(R) prior to January 1, 2006. The Company expects to adopt the “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123(R) that remain unvested on the effective date.

As permitted by SFAS No. 123, the Company currently accounts for share-based payments to employees using APB No. 25’s intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of SFAS No. 123(R)’s fair value method will have a significant impact on the Company’s results of operations, although it will have no impact on the Company’s overall financial position. The impact of adoption of SFAS No. 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had the Company adopted SFAS No. 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income and earnings per share as disclosed above in “Stock Based Compensation.”

3. Net Loss Per Share

The Company computes net loss per share in accordance with SFAS No. 128, “Earnings per Share” (“SFAS No.128”). Under the provisions of SFAS No. 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 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.

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The following table sets forth the computation of basic and diluted net loss per share for the three-month periods ended March 31, 2005 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

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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 three months ended March 31, 2005 and 2004 are detailed below.

5. Pfizer Collaboration

In December 2002, Pfizer and the Company entered into several concurrent agreements to jointly develop and commercialize Macugen. Under the terms of the agreement, which became effective February 3, 2003 when 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, 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. Such $25 million of capital stock was purchased from the Company as follows: in February 2004, Pfizer purchased approximately $10 million of common stock (476,190 shares of common stock) at $21.00 per share in connection with the Company’s initial public offering and, in February 2005, Pfizer purchased $15 million of common stock (344,000 shares of common stock) at approximately $43.60 per share in connection with the approval of Macugen in the United States.

During 2004, the Company received an additional $15.5 million in license fees based on regulatory filings in the United States and European Union and in 2005 received $90 million in connection with the FDA approval of Macugen. These license fees are being amortized on a straight line basis over the remaining expected term of the agreement (currently estimated at approximately 13 years).

Based on the achievement of certain specified worldwide regulatory submission and approvals, the Company would be eligible to receive up to an additional $90 million in license payments. The Company also has the potential to receive up to an additional $450 million in milestone payments, which are

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contingent upon successful commercialization of Macugen and which are based on attainment of agreed-upon sales levels. Pfizer may terminate the collaboration relationship upon six to twelve months’ prior notice, depending on when such notice is given.

Following commercial launch in January 2005, Macugen is being co-promoted by the Company and Pfizer in the United States where the Company has an ophthalmology sales force, maintains the inventory and records as revenue 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, in connection with which the Company will be entitled to receive royalty income.

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.

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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 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 March 31, 2005, we had an accumulated deficit of $254.2 million.

In December 2002, we entered into agreements with Pfizer to jointly develop and commercialize Macugen. Macugen is the first and only FDA-approved therapy for the treatment of all types of neovascular AMD, without angiographic or demographic restrictions. We believe Macugen is a novel treatment that targets the underlying cause of the disease. We began selling Macugen in the United States in January 2005, after receiving approval from the FDA to market Macugen for the treatment of neovascular AMD including all lesion subtypes and sizes in December 2004. We sell Macugen primarily to distributors, who, in turn, sell to physicians, a limited number of specialty pharmacy providers and federal government buying groups.

We have a dedicated sales force promoting Macugen to our target audience, which comprises approximately 2,000 specialists that treat retinal disease in the United States. Our sales team consists of 60 people, covering sales, sales management, reimbursement issues and education of doctors. In addition, Pfizer has dedicated over 160 sales representatives to detail Macugen, targeting both general ophthalmologists and the retinal specialists.

We estimate that a large percentage of the cost of Macugen will be covered through Medicare plans. Medicare carriers of all 50 states have confirmed Macugen reimbursement, according to the FDA label, without restrictions. Additionally, CMS has determined that effective as of January 1, 2005, the allowable reimbursement for Macugen will be the manufacturer’s average sales price plus 6%.

We began recording revenues from the sale of Macugen starting in mid-January 2005 subsequent to its launch in the United States. In addition, a portion of our revenues as of March 31, 2005 has 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. Our agreements provide that we will co-promote Macugen with Pfizer in the United States through Pfizer’s and our own sales forces, and that 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, subject to regulatory approval, Pfizer

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will market the product under an exclusive license, for which we would be entitled to 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 September 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;
	•	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 January 2005, Pfizer paid us a $90 million license fee after the approval in December 2004 by the FDA of Macugen for the treatment of neovascular AMD; and
	•	In February 2005, Pfizer purchased 344,000 shares of our common stock at a purchase price of approximately $43.60 per share for total proceeds of $15 million after the approval by the FDA of Macugen for the treatment of neovascular AMD.

In the future, Pfizer may be obligated to make additional payments to us under the following circumstances:

	•	Up to $90 million in additional payments based on the achievement of additional worldwide regulatory submissions and approvals; and
	•	Up to $450 million in payments based upon attainment of specified sales levels of Macugen.

Outside the United States, Pfizer is responsible for seeking regulatory approvals of Macugen. Pfizer has filed new drug applications for Macugen with the European Medicines Evaluation Agency, which covers 25 countries, and an additional nine countries. In July 2004, the Pfizer-led bridging trial for the use of Macugen in the treatment of neovascular AMD began in Japan. In May 2005, we announced the approval of Macugen in Canada, to treat subfoveal choroidal neovascularization secondary to neovascular AMD.

We expect to continue to invest significant resources on the development of Macugen and other product candidates as we continue to market and sell Macugen in the United States. We also plan to continue to invest in research for additional applications of Macugen and to develop new drugs and drug delivery technologies and in building the appropriate infrastructure to support our business. 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.

In May 2004, we entered into a lease for new research and development space in Lexington, Massachusetts, that we anticipate will increase our annual facilities expenses by $1.6 million. In

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November 2004, we acquired most of the assets related to an oligonucleotide manufacturing facility in Boulder, Colorado, which we plan to develop as a second-source for commercial scale production of the active pharmaceutical ingredient in Macugen. We anticipate that we will invest significantly in this development over the next 12 to 15 months. Accordingly, we will need to generate significant revenues to achieve and then maintain profitability.

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 activities to third parties to maximize efficiency and minimize our internal overhead. We also outsource our global manufacturing development, but are planning to establish internal manufacturing capacity for the active pharmaceutical ingredient in Macugen. We expense our research and development costs as they are incurred.

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, the continued amortization of license fees and the reimbursement of a portion of our ongoing development costs for Macugen.

Planned and Ongoing Clinical Programs

In order to expand our pipeline of products to treat diseases of the eye with unmet medical need, we are actively pursuing a strategy to develop new drugs internally and to license or otherwise acquire rights to potential new drugs from third parties. We are also seeking to develop internally and acquire rights to alternative mechanisms for delivering ophthalmic drugs to the back of the eye. For example, since April 2004, we have had a research and collaboration agreement with Archemix that allows us to develop their current pipeline of aptamers in the field of ophthalmology. This agreement also provides us with the ability to have Archemix select new aptamers against our targets included in the research program for further development by us in ophthalmology. The following points summarize our material ongoing and planned trials and activities related to Macugen:

	•	We are continuing our Phase 2/3 clinical trial studying Macugen in neovascular AMD to gain longer term safety data.
	•	In the second half of 2005, we plan to start a Phase 2/3 DME clinical trial and our Phase 2 RVO clinical trial is currently enrolling patients. Both DME and RVO represent large unmet medical needs, where there is no approved pharmacological therapy.
	•	During the first half of 2006, we are planning to launch a Phase 4 clinical trial which will explore the safety and efficacy of the FDA approved 0.3 mg dose of Macugen versus two additional lower doses of Macugen in patients with subfoveal, neovascular AMD. This trial will also provide subsequent information on the potential degenerative effects on the neurosensory retina and adverse effects on the corneal endothelium.
	•	In the second quarter of 2005, we and Pfizer started enrolling patients in a Phase 4 combination trial with Macugen and Visudyne versus Macugen alone, to determine if patients with the predominantly classic form of AMD benefit from combination therapy.

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	•	We are conducting pre-clinical research on improving Macugen’s drug delivery, which if successful, may ultimately enable us to simplify the treatment for AMD patients. In addition, if extended release Macugen is ultimately successful, it may enable us to pursue the large prophylactic market for dry AMD.
	•	We are conducting pre-clinical research to develop agents designed for use in combination with Macugen to enhance its efficacy in the treatment of neovascular AMD. Specifically, we are developing an aptamer which targets platelet-derived growth factor (PDGF), a protein believed important in the disease process underlying neovascular AMD.

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 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 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. Our estimates would likely change if we used different assumptions or conditions and actual results may differ from our estimates.

     Revenue Recognition

We recognize revenue from the sale of our products, license fees earned, and reimbursements for development costs based on contractual arrangements.

We report revenue on a gross basis for product sales of Macugen in the United States. Revenue from product sales consists of sales of Macugen. We sell our product primarily to distributors, who, in turn, sell to physicians, a limited number of specialty pharmacy providers and federal government buying groups. We recognize revenue from product sales upon shipment to a distributor based on verified purchase orders. Additionally, the following must be present for a sale to be recognized:

	O	The price of the sales order is fixed and determinable, and the buyer is obligated to pay us;
	O	The obligation to pay is not contingent on resale of the product as the buyer has economic substance apart from us, thus we have no obligation to bring about sale of the product; and
	O	The amount of returns can be reasonably estimated and collectibility is reasonably assured.

We record allowances for product returns at the time of sale, and report revenue net of such allowances. We must make significant judgments and estimates in determining these allowances. For instance, our distributors have the right to return any damaged or defective product, patent or latent, as well as any unopened product during the nine-month period beginning three months prior to the labeled expiration date and ending six months after the labeled expiration date. As a result, in calculating the allowance for product returns, we must estimate the likelihood that product sold to distributors might contain a defect and/or remain in their inventory to within three months of expiration and determine if it will be returned. We base our estimates on information from distributors, current patterns of returns, industry data and the expiration dates of product currently being shipped.

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If actual results differ from our estimates, we will be required to make adjustments to these allowances in the future.

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. 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, and could impact the timing and the amount of revenue recognized.

We receive reimbursement from Pfizer of Pfizer’s share of development costs for Macugen. In accordance with Emerging Issues Task Force (“EITF”) Issue 01-14, “Income Statement Characterization of Reimbursements Received for “Out-of-Pocket” Expenses Incurred, (”EITF Issue 01-14”) 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.

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

During the quarters ended March 31, 2005 and 2004, we recognized $3.1 million and $1.3 million, respectively, of license fee revenue. At March 31, 2005, we classified as current deferred revenue $13.4 million related to payments for licenses and equipment. The balance of $156.8 million is classified as long-term deferred revenue on our balance sheet with a remaining amortization period of 12 years and 10 months. Effective with Macugen approval, this deferred license fee revenue will be offset by the amortization of license fees paid in connection with the acquisition of Macugen and certain manufacturing technologies, which we capitalized upon regulatory approval.

     Inventory

Inventory is stated at the lower of cost or market value. Inventory is comprised of three components; raw materials, which are purchased directly by us, work in process, which is Macugen’s active pharmaceutical ingredient (API) where title has transferred from our contract manufacturer to us and finished goods, which is packaged product ready for commercial sale. Prior to FDA approval of Macugen in December 2004, the cost of raw materials purchased by us and API manufactured were expensed as research and development. Accordingly, cost of goods sold for the three months ended March 31, 2005 does not include costs associated with the manufacture of the API component of Macugen. There were no finished goods produced before the FDA approval.

     Stock-based Compensation

Stock-based compensation charges represent the difference between the exercise price of options and restricted stock awards granted to employees and directors and the fair value of our common stock on the date of grant for financial statement purposes in accordance with Accounting Principles Board Opinion

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No. 25 and its related interpretations. We recognize this compensation charge over the vesting periods of the shares issuable upon exercise of options or the lapsing of restrictions on restricted stock granted.

We recorded deferred stock-based compensation related to stock options and restricted stock awards granted to employees and directors through March 31, 2005 of $13.4 million, net of related amortization expense of $1.9 million for the quarter ended March 31, 2005. We expect to amortize $6 million of deferred stock-based compensation, with respect to stock options and restricted stock awards granted, through December 31, 2005. For periods after December 31, 2005, we will no longer be required to record deferred compensation and the related amortization expense due to the adoption of SFAS No. 123(R) which will require us to reverse any previously recorded deferred compensation, and recognize expenses currently.

     Accounting Pronouncements

On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payments” (“SFAS No. 123(R)”). SFAS No. 123(R) will require companies to measure all employee share-based compensation awards using a fair value method and record such expense in its consolidated financial statements. In addition, the adoption of SFAS No. 123(R) requires additional accounting and disclosure related to the income tax and cash flow effects resulting from share-based payment arrangements. SFAS No. 123(R) is effective no later than the beginning of the first fiscal year beginning after June 15, 2005 and we will be required to implement the standard beginning January 1, 2006. We anticipate that upon adoption we will elect to use the modified prospective method of calculating expense using the Black-Scholes pricing model. The impact of adoption of SFAS No. 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted SFAS No. 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income and earnings per share as disclosed in our footnotes to our financial statements.

Results of Operations

Quarter Ended March 31, 2005 and 2004

Revenue. For the first quarter of 2005, total revenues were $34.6 million.

Product Sales. Gross product revenue from Macugen sales was $25.4 million, while net product revenue was $23.7 million. Gross product revenue represents shipments to our wholesale distribution network. Net product revenue represents gross product revenue less distribution service fees, estimates for allowances and returns. At March 31, 2005, we estimate that our wholesale distribution network had less than two weeks of Macugen supply on hand based on current product demand.

License Fees, Reimbursements of Development Costs and Other Revenue . Collaboration revenue of $10.3 million for the quarter ended March 31, 2005 decreased from $11.7 million for the quarter ended March 31, 2004. Revenue comprised of license fees increased by $1.9 million due to amortization of higher deferred license revenue balances. Revenue from reimbursement of research and development costs decreased by $3.3 million. This decrease was primarily due to decreased reimbursement of expenditures related to preparation of our manufacturing capabilities for the commercial launch of Macugen. We also generated other revenue of $0.5 million from the production and delivery of certain material made at our recently purchased Boulder facility. These revenues relate to acquired production contracts that existed between the party that sold us

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the assets and a third party. We expect that these revenues will continue through the third quarter.

Cost of Goods Sold. Product cost of goods sold was $4.7 million for the quarter ended March 31, 2005. Cost of goods sold for the first quarter of 2005 includes costs associated with the manufacture of Macugen sold, royalty expense and certain other costs. Product manufacturing costs represent almost 5% of net product revenue in 2005 and primarily resulted from converting the API used in Macugen into finished commercial product. Prior to the approval of Macugen by the FDA in December 2004, we expensed all costs associated with the manufacture of the API and certain raw materials used in the production of Macugen. Therefore, cost of goods sold for the first quarter ended March 31, 2005 does not include costs associated with the manufacture of the API component of Macugen. We had manufactured approximately 6 months of API supply prior to FDA approval in December of 2004 and estimate that the margin from product sales will decrease approximately 1% to 2% when full API cost is included. Royalty expenses under our agreements with Gilead Sciences, Isis Pharmaceuticals and Nektar Therapeutics, are included in cost of goods sold and are based on net sales. There had been no cost of goods sold recorded for the quarter ended March 31, 2004 as we did not begin to sell Macugen until the quarter ended March 31, 2005.

Research and Development Expenses. Research and development expenses were $21.3 million for the quarter ended March 31, 2005 compared to $21.9 million for the quarter ended March 31, 2004. The change in research and development expenses was primarily attributable to a $3.7 million reduction in manufacturing related costs, which prior to the approval of Macugen had been included in research and development expenses, offset by an increase of $3.0 million in expenditures related to our clinical trials for the use of Macugen in the treatment of neovascular AMD, DME and RVO. We anticipate that research and development expenses will increase as we begin to devote additional resources to research and development related projects including targets in ophthalmology and other disease areas as well as drug delivery technologies.

Sales and Marketing Expenses. Sales and marketing expenses increased to $10.4 million for the quarter ended March 31, 2005 from $3.8 million for the quarter ended March 31, 2004. The increase in sales and marketing expenses of $6.6 million was primarily related to an increase of $3.8 million in expenses relating to our sales field force which began detailing Macugen to retinal specialists during the quarter and an increase of $2.7 million of promotional and marketing expenses, which was primarily comprised of amounts payable to Pfizer for our share of total marketing expenses related to Macugen. We and Pfizer are jointly responsible for the co-promotion of Macugen within the United States. We incur and record only the expenses relating to our sales force, and Pfizer is solely responsible for expenses and costs related to its sales force. Our sales team consists of 60 people, covering sales, sales management, reimbursement issues and education of doctors. Pfizer has an ophthalmic sales force of approximately 160 sales representatives detailing Macugen by targeting both general ophthalmologists and the retinal specialists. Marketing budgets and decisions related to Macugen are jointly decided by Pfizer and us with Pfizer being responsible for paying almost all non-personnel marketing expenses. As a result, we reimburse Pfizer for its share of marketing expenses related to United States Macugen sales.

General and Administrative Expenses. General and administrative expenses increased to $5.6 million for the quarter ended March 31, 2005 from $1.6 million for the quarter ended March 31, 2004. The increase of $4 million resulted from a one-time charge of approximately $2.6 million related to an officer’s resignation and employment agreement termination in March 2005. The one-time charge is primarily non-cash compensation expense in connection with the acceleration of certain employee stock options granted to the officer. In addition, general & administrative expenses increased by $0.3 million related to increases in staff salaries, $0.5 million of increased professional fees expense related to compliance initiatives, Sarbanes-Oxley Act Section 404 implementation and $0.3 million increase in non-cash compensation expense for stock awards to employees.

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Collaboration Profit Sharing. Collaboration profit sharing of $9.5 million represents Pfizer’s share of net product sales of Macugen less cost of goods sold within the United States.

Interest Income. Interest income increased to $1.7 million in the quarter ended March 31, 2005 from $0.7 million in the quarter ended March 31, 2004 as a result of higher levels of cash and marketable securities available for investment during 2005 plus a higher effective return on invested cash.

Net Loss. Net loss attributable to common stockholders decreased to $15.4 million for the quarter ended March 31, 2005 from $15.8 million in the same period of 2004. The decrease of $0.4 million in net loss was primarily due to increases of $6.6 million for costs incurred for sales and marketing expenses related to the launch and promotion of Macugen, $4.0 million of increased general & administrative expenses which includes $2.8 million of non-cash stock compensation expense. These increased costs were offset by $22.8 million in increased revenues from the launch of Macugen. Basic and diluted net loss per common share for the quarters ended March 31 was $0.36 in 2005, compared to $0.57 for the same period in 2004. Pro forma basic and diluted loss per common share for the quarter ended March 31 was $0.36 in 2005, compared to $0.44 for the same period in 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, and as of January 20, 2005, through product sales as well. Through March 31, 2005, we received net proceeds of $352.8 million from the issuance of shares of common stock. We have also received net proceeds from capital equipment financing of $2.4 million.

In connection with our collaboration with Pfizer, we received in 2003 a $25.0 million investment in our preferred stock and a $75.0 million initial license fee and subsequent license fee payments of $105.5 million. Pfizer purchased an additional $10 million of our common stock at the closing of our initial public offering in February 2004 and $15 million of our common stock in February 2005 in connection with the regulatory approval of Macugen. 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, RVO and other agreed upon ophthalmic indications. These obligations of Pfizer are contingent upon the achievement of milestones and are currently our only committed external source of funds.

As of March 31, 2005, we had $265.7 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, milestone payments and reimbursements from Pfizer under our collaboration, revenues from product sales and interest income will be sufficient to fund anticipated levels of operations through at least the end of 2006. We have made certain material capital commitments regarding software implementation and contractual obligations relating to our Boulder facility expansion during the quarter ended March 31, 2005.

     Income Taxes

As of December 31, 2004, we had net operating loss carryforwards for federal income taxes of $174.8

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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 carryforwards will begin to expire in 2020. To date, we have not recognized the potential tax benefit of our net operating losses.

At March 31, 2005, we had deferred tax assets representing the benefit of net operating loss carryforwards, deferred license fees received, deferred rent, and certain start-up costs capitalized for tax purposes. We did not record a benefit for the deferred tax assets because realization of the benefit was uncertain, and, accordingly, a full valuation allowance is provided to offset the deferred tax asset.

Though we do not expect to be profitable by December 31, 2005, we may incur federal and state alternative minimum tax depending on certain tax laws effecting our operations that are irrespective of the net operating loss carryforwards. To date we believe there are no taxable events that meet these criteria. Accordingly, we have not recorded any provision for income taxes during the quarter ended March 31, 2005.

     Cash Flows

For the quarter ended March 31, 2005, we received net cash of $42.9 million from operating activities. This consisted primarily of a net loss for the period of $15.4 million, offset by a net decrease in deferred revenue and collaboration receivable of $82.3 million, and an increase in accounts receivable of $25.5 million. We believe that our current sales growth will result in continued increases of our accounts receivable for the next 12 months. We used $29.5 million for investing activities for the quarter ended March 31, 2005, which consisted primarily of net purchases of marketable securities. We received net cash of $15.8 million from financing activities during the quarter ended March 31, 2005, principally relating to the issuance of common stock, resulting in net proceeds, after transaction costs, of $16.8 million, offset by the purchase of treasury stock for $0.6 million and 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 continued commercialization of Macugen for the treatment of neovascular AMD, other future products and other uses for Macugen. Our funding requirements will depend on numerous factors, including:

	•	the success of our collaboration with Pfizer to further develop and commercialize Macugen;
	•	the scope and results of our clinical trials;
	•	the cost of manufacturing activities including the expansion of our Boulder facility;
	•	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 additional regulatory approvals;

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	•	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.

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;
	•	our accounts receivable growth and collections cycle; 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, commitments to purchase capital assets 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 March 31, 2005.

Under our agreements with Gilead Sciences, Inc., Nektar Therapeutics, and Isis Pharmaceuticals, Inc., we

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are obligated to make payments aggregating up to $36.3 million, of which $10.5 million has been expensed through March 31, 2005 and $13.0 million has been capitalized through March 31, 2005, upon achieving specified milestones relating to the development and regulatory approval of Macugen and to pay royalties based on net sales of Macugen. The $13.0 million capitalized at March 31, 2005 includes $3.0 million of prepaid royalties and $10.0 million which has been capitalized and will be amortized ratably over the remaining life of the agreements along with all payments made in connection with the achievement of future milestones. Future events that trigger the milestone payments include filing of a new drug application (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.

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 that sub-sublease was $0.8 million in the first quarter of 2005. However, due to 2005 rent abatements, we had no cash expenditures for this property through March 31, 2005. As security for the sub-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 subleased 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. Through December 31, 2004, we have recorded a loss of $1.9 million on this facility. We will continue to re-evaluate the recoverability of this lease and may be required to record additional expense of up to $0.5 million in future periods.

We have not been able to sublease our previous laboratory space in Woburn, Massachusetts and as a result, we have been required under generally accepted accounting principles to assess 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. Through December 31, 2004 we have recorded a loss of $0.8 million on this facility. We will continue to re-evaluate the recoverability of this lease and may be required to record additional expense of up to $0.3 million in future periods.

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RISK FACTORS THAT MAY AFFECT RESULTS

Risks Relating to Our Business

We depend heavily on the success of our one product, Macugen, which the FDA recently approved for use in the treatment of neovascular AMD and we began selling in the United States in January 2005.

In December 2004, the FDA granted marketing approval for the use of our first product, Macugen, in the treatment of neovascular AMD. We began selling Macugen in the United States in January 2005. Our ability to continue generating product revenue in the foreseeable future will depend solely on the commercialization of Macugen. The commercial success of Macugen will depend on several factors, including the following:

	•	acceptance of the product in the medical community, by patients receiving therapy and by third party payors;
	•	supplying sufficient quantities of Macugen to meet market demand;
	•	successfully building and sustaining manufacturing capacity to meet future demand;
	•	the competitive landscape for approved and developing therapies that will compete with Macugen;
	•	Macugen’s efficacy and safety profile as demonstrated in a broad patient population continuing to be consistent with that shown in clinical trials;
	•	receipt of marketing approvals from non-U.S. regulatory authorities;
	•	our ability to expand the indications for which we can market Macugen;
	•	continued positive data from our clinical trials; and
	•	implementation of our post-approval commitments to the FDA in a timely fashion.

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.

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.

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Our product revenues are substantially dependent on a limited number of wholesale distributors to which we sell Macugen. Product revenues may fluctuate from quarter to quarter based on the buying patterns of these distributors.

We sell Macugen primarily to three national pharmaceutical wholesale distributors located throughout the United States: McKesson Specialty, Priority Healthcare and Besse Medical. 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 fail to pay us on a timely basis or at all, our financial position and results of operations could be materially adversely affected.

We face substantial competition with respect to sales of Macugen or other drugs that we may develop or commercialize, which may result in others discovering, developing or commercializing competing 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 competes against two therapies for the treatment of neovascular AMD: photodynamic therapy with verteporfin, 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, which we estimate to represent up to 25% of the market for subfoveal neovascular AMD. In the 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 via intravitreal injection, by physicians, usually in combination with photodynamic therapy, on an off-label basis. Unless additional therapies are approved, these existing therapies would represent the principal competition for Macugen in neovascular AMD and, if Macugen is approved for DME, for DME.

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, Regeneron Pharmaceuticals, Inc., 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. Preliminary results of Phase 3 clinical trials for this product candidate will likely be released this year. In addition, in November 2004, Alcon filed an NDA for approval of anecortave acetate, an angiostatic compound, for the treatment of predominately classic neovascular AMD patients and received fast track, Pilot 1 program designation. This compound features a less invasive injectable delivery and requires less frequent administration (every six months). Further, Alcon is enrolling patients in two additional Phase 3 clinical trials, one in South America and one in Europe, comparing the safety and efficacy of Alcon’s compound

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against placebo in patients with all subtypes of neovascular AMD. Bausch & Lomb recently received FDA approval for a device surgically implanted inside the eye which slowly releases a dose of corticosteroid for use in the treatment of chronic non-infectious uveitis. This devise is also being developed in the treatment of DME. Other laser, surgical or pharmaceutical treatments for AMD and DME may also compete against Macugen. These competitive therapies may affect product pricing even if Macugen is otherwise viewed as a preferable therapy. Future competitive products may have superior efficacy, improved safety and convenience or reduced frequency of administration compared to Macugen. Because Macugen is currently our only approved product, any product that arises with superior efficacy, improved safety and convenience or reduced frequency of administration compared to Macugen may have a material adverse affect on our business. Even the expectation that a competitive product may gain marketing approval to compete with Macugen may have a negative effect on the trading price of our common stock.

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 some time after it is commercially launched. We expect that many of the products that we develop will be based upon 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 that began to market and sell Macugen in the United States in January 2005 in collaboration with Pfizer. To achieve commercial success for Macugen, our sales and marketing organization 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 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 and other diseases.

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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 and other fields. These established companies may have a competitive advantage over us due to their size, cash resources and greater clinical development and commercial 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. 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;

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	•	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
	•	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 for Macugen and a limited number of manufacturing personnel. We depend on third parties to manufacture Macugen. 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 commercial manufacturing, and we do not own or lease any facilities that currently manufacture Macugen or any component of Macugen. In November 2004, we acquired a manufacturing facility in Boulder, Colorado that we plan to develop to use as a second source of supply for the active pharmaceutical ingredient of Macugen, but that facility is not currently operational for such purpose. Accordingly, unless or until we develop or acquire manufacturing capabilities, we will depend on third parties to manufacture Macugen and any future products that we may develop.

We rely on separate single sources for the active pharmaceutical ingredient used in Macugen, the fill and finish for the finished drug product and the PEGylation reagent. While such suppliers and services providers provided similar products and services for our clinical trials and are providing services for our current commercial supply of Macugen, there is no assurance that these manufacturers will continue to meet our requirements. Other sources for these products and services could be available to us, but may be available on terms less favorable to us and may delay our manufacturing activities.

We believe we will have sufficient capacity to supply the active pharmaceutical ingredient and to manufacture Macugen to meet anticipated demand through the first quarter of 2007. 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. We initially intend to increase manufacturing capacity for the active pharmaceutical ingredient of Macugen at our contract manufacturing facility. We also intend to

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invest in appropriate infrastructure at our Boulder manufacturing facility to prepare the facility to become a second source for commercial scale production of the active pharmaceutical ingredient of Macugen.

We will also continue to explore other alternatives for increasing manufacturing capacity. We are currently working to increase the capacity for finished product manufacturing and to improve the related packaging operation. 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.

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 (including in connection with the development of our Boulder manufacturing facility) 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, as part of our application filed by Pfizer for the use of Macugen in the treatment of neovascular AMD in Europe, the facilities used at each stage of the manufacturing process for Macugen may go through a pre-approval inspection like that which was required by the FDA.

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, 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 or the use of a facility to manufacture a product. For example, if after the development of our Boulder manufacturing facility, we move the manufacturing of the active pharmaceutical ingredient for Macugen to our facility in Boulder and 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 manufacture the active pharmaceutical ingredient in Boulder. In addition, if we elect to manufacture products at the facility of another third party, we would need to ensure that the new facility and the

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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. Foreign regulatory agencies have similar requirements.

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 affect our business. For example, as a result of a post-approval commitment to the FDA to improve the control and environment for our finished drug product, we may need to change the final presentation or packaging for Macugen. Such a change may lead to an increase in cost of goods.

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. In February 2005, CMS determined that, effective January 1, 2005, Macugen’s Medicare reimbursement will be average sales price plus six percent. By February 28, 2005, Medicare carriers of all 50 states confirmed Macugen reimbursement, according to the FDA label, without restrictions. However, our business could be materially adversely affected if the Medicare program, local Medicare carriers or fiscal intermediaries were to subsequently 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. Also, if the local contractors that administer the Medicare program are slow to reimburse physicians for Macugen, the demand for Macugen may decrease and our business could be adversely affected.

We also will need to obtain approvals for reimbursement of 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

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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, or the MMA, 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. Effective January 2004, Medicare prescription drug coverage legislation, the MMA., 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 reimbursement. In addition, beginning in January 2006, the legislation directs the Secretary of the Department of Health and Human Services, or HHS, 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, CMS, the agency within HHS that administers Medicare and is 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 have adequate insurance coverage.

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 liability arising from our clinical trials and product sold up to a $20 million annual aggregate limit. Insurance coverage is increasingly expensive. We may not have and we may not be able to maintain adequate protection against potential liabilities. If we are unable to maintain 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.

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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 Executive Vice President, Research and Development. 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 a single 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 significant and continued product or other revenues to cover our anticipated growing 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.

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, protocols and regulatory standards for good clinical practice 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 and commercialization of additional indications for Macugen and future product candidates.

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Regulatory Risks

If our clinical trials generate data that are not as favorable as historical data, our clinical trials are viewed as unsuccessful, or if we experience significant delays in these trials, our ability to further commercialize Macugen and our 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, especially as new competitors are approved to enter into the market. 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.

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. For example, we are enrolling patients in a Phase 2 clinical trial for the use of Macugen in the treatment of RVO and a Phase 4 combination trial with Macugen and Visudyne versus Macugen alone. We may also commence additional clinical trials.

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 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;
	•	our clinical trials may not demonstrate the safety and efficacy needed for our products to receive regulatory approval; and

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•

our FDA-required post-marketing safety trials may identify new, more frequent, or more serious adverse events than those previously characterized, which may limit product acceptance.

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. As part of our approval process with the FDA for the use of Macugen in the treatment of neovascular AMD, we were not required to conduct further carcinogenicity testing of Macugen. We do not currently anticipate that we will be required to conduct additional carcinogenicity testing of Macugen prior to any approval of Macugen’s use in the treatment of DME.

If we are required to conduct additional clinical trials or other studies of Macugen for use in the treatment of DME or RVO 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 for such indications, we may not be able to obtain marketing approval for such indications or we may obtain approval that is 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 future product that we may develop. The FDA may not approve Macugen for any additional indications.

The “fast track” designation for development of Macugen in DME 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” 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 obtained, and received marketing approval from the FDA after, a fast track designation from the FDA for Macugen in the treatment of neovascular AMD. We also have a fast track designation from the FDA for Macugen in the treatment of DME. However, 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. Further, we may not experience a faster development process, review or approval with respect to any application we may file with respect to the use of Macugen in the treatment of DME compared to conventional FDA procedures.

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We may not be able to obtain marketing approval for any other product resulting from our development efforts. Failure to obtain additional approvals could materially harm our business.

Although we were not required to conduct additional research and development prior to the approval of Macugen in the United States 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 and regulatory approval prior to commercial launch. 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. While we have received regulatory approval to market Macugen in the United States for use in the treatment of neovascular AMD, failure to obtain required regulatory approvals for other uses of Macugen or for other products could materially harm our business.

We may need to successfully address a number of technological challenges in order to complete the development of Macugen for other indications 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, as we experienced with the FDA prior to the approval of Macugen in the United States, regulatory agencies may apply new standards for safety, manufacturing, packaging and distribution of drugs using this mode of administration. It may be time consuming or expensive for us to comply with these standards. Non-U.S. regulatory authorities may also apply new standards, which may preclude Macugen from being approved in other jurisdictions. This could also increase our commercialization costs, possibly materially.

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 develop.

Macugen and any future products 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 after approval.

Macugen, or any other 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 continual requirements, review and periodic inspections by the FDA and other regulatory bodies. Even if regulatory approval of a product is granted, such as the FDA’s approval of Macugen in December 2004 for the treatment of neovascular AMD, the approval may be subject to limitations on the indicated uses for which the product may be marketed or to the conditions of approval, or contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product. For example, as part of the FDA’s approval of Macugen for use in the treatment of neovascular AMD, the FDA asked us to:

•

provide subsequent information on the potential degenerative effects on the neurosensory retina based on a study of at least two years and adverse effects on the corneal endothelium based on a study of at least one year;

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	•	provide safety and efficacy data from a clinical study of at least two years of at least two additional doses of Macugen below the approved dose of 0.3 mg for neovascular AMD; and
	•	strengthen controls relative to the Macugen packaging components and operations.

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, such as the post-approval commitments outlined above, may result in:

	•	restrictions on such products or manufacturing processes;
	•	withdrawal of the products from the market;
	•	voluntary or mandatory recall;
	•	fines;
	•	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 depend on Pfizer to obtain these approvals. Pfizer has filed new drug applications for Macugen with the European Medicines Evaluation Agency, which covers 25 countries, and with an additional nine countries. 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 market. The failure to obtain these approvals could materially adversely affect our business, financial condition and results of operations.

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

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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 could be determined to 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, 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 could be determined to 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,

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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.

Sales of Macugen in the United States are currently our only source of product revenue. We have a limited operating history and began selling Macugen in the United States in January 2005. To date, we have focused primarily on the development of Macugen, preparation for its commercialization, and its commercial launch. We began operations in 2000, and we have not been profitable in any quarter since inception. As of March 31, 2005, we had an accumulated deficit of approximately $254.2 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.

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. Even if we assume that revenues will continue to grow, 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;
	•	changes in wholesaler buying patterns;

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	•	increased competition from new or existing products;
	•	delays in approvals for new 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 for at least 12 months. However, our future capital requirements will depend on many factors, including:

	•	the success of our collaboration with Pfizer to commercialize and further develop Macugen;
	•	the scope and results of our clinical trials;
	•	the cost of manufacturing activities including the expansion of our Boulder facility;
	•	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 cost of manufacturing activities;
	•	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

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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 39% of our capital stock as of March 1, 2005. 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.

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 May 10, 2005, the trading price of our common stock has ranged from $21.75 to $49.12 per share. The stock market in general and the market for biotechnology companies in particular have experienced extreme volatility that

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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:

	•	failure of Macugen or any of our product candidates, if approved, to achieve commercial success;
	•	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;
	•	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 products;
	•	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.

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 March 31, 2005, 5,270,250 shares were subject to outstanding options and 242,042 outstanding restricted stock grants, 1,442,750 of which were vested. Of the outstanding options, options for 2,586,994 shares were immediately exercisable, but we had the right to repurchase at the initial exercise price all but 1,177,754 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 Disclosure 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.

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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 forms. 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 our management, including our chief executive officer and chief financial officer as appropriate, to allow timely decisions regarding required disclosure.

As required by Rule 13a-15 under the Exchange Act, as of the end of the period covered by this report, 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 March 31, 2005, our disclosure controls and procedures were effective to ensure that material information relating to us required to be included in our reports filed under the Exchange Act 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 occurred during the period covered by this report 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.

In February 2005, we issued in a private placement 344,000 shares of our common stock to an affiliate of Pfizer Inc. at a per share price of approximately $43.60 for total proceeds of $15.0 million in connection with the approval by the FDA of Macugen for the treatment of neovascular AMD.

Item 3. Defaults Upon Senior Securities.

None

Item 4. Submission to a Vote of Security Holders.

None

Item 5. Other Information.

None

Item 6. Exhibits.

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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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