UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

Commission file number 000-49839

Idenix Pharmaceuticals, Inc.

(Exact Name of Registrant as Specified in its Charter)

Registrant’s telephone number, including area code:

(617) 995-9800

Securities registered pursuant to Section 12(b) of the Act:

NONE

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.001 par value

(Title of class)

     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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     þ

      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 aggregate market value of the voting common stock held by nonaffiliates of the registrant based, on the last reported sale price of the common stock on the NASDAQ Stock Market on March 4, 2005, was approximately $262,756,326.

      Number of shares outstanding of the registrant’s class of common stock as of March 4, 2005: 48,080,447 shares.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the Proxy Statement to be filed in connection with the solicitation of proxies for the Annual Meeting of Stockholders to be held on June 7, 2005 are incorporated by reference into Part III of this Annual Report on Form 10-K.

Idenix Pharmaceuticals, Inc.

Form 10-K

TABLE OF CONTENTS

Cautionary Statement Regarding Forward-Looking Statements

      This annual report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 concerning our business, operations and financial condition, including statements with respect to the expected timing and results of completion of phases of development of our product candidates, the safety, efficacy and potential benefits of our product candidates, expectations with respect to development and commercialization of our product candidates, the timing and results of the submission, acceptance and approval of regulatory filings, the scope of patent protection with respect to these product candidates and information with respect to the other plans and strategies for our business. All statements other than statements of historical facts included in this annual report on Form 10-K regarding our strategy, future operations, timetables for testing, regulatory approval and commercialization of product candidates, financial position, costs, prospects, plans and objectives of management are forward-looking statements. When used in this annual report on Form 10-K the words “expect”, “anticipate”, “intend”, “may”, “plan”, “believe”, “seek”, “estimate”, “projects”, “will”, “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Because these forward-looking statements involve risks and uncertainties, actual results could differ materially from those expressed or implied by these forward-looking statements for a number of important reasons, including those discussed under “Factors That May Affect Future Operating Results”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this annual report on Form 10-K.

      You should read these forward-looking statements carefully because they discuss our expectations regarding our future performance, future operating results or future financial condition, or state other “forward-looking” information. You should be aware that the occurrence of any of the events described under “Factors That May Affect Future Operating Results” and elsewhere in this annual report on Form 10-K could substantially harm our business, results of operations and financial condition and that upon the occurrence of any of these events, the price of our common stock could decline.

      We cannot guarantee any future results, levels of activity, performance or achievements. The forward-looking statements contained in this annual report on Form 10-K represent our expectations as of the date of this annual report on Form 10-K and should not be relied upon as representing our expectations as of any other date. Subsequent events and developments will cause our expectations to change. However, while we may elect to update these forward-looking statements, we specifically disclaim any obligation to do so, even if our expectations change.

PART I

The Company

      Idenix is a biopharmaceutical company engaged in the discovery, development and commercialization of drugs for the treatment of human viral and other infectious diseases. Since our inception in May 1998, our focus has been on the treatment of infections caused by hepatitis B virus, or HBV, hepatitis C virus, or HCV, and human immunodeficiency virus, or HIV. We believe that our product candidates will address substantial limitations that exist with currently approved therapies. Such limitations include inadequate antiviral potency, the emergence of viral strains resistant to drug therapies and patient non-compliance resulting from drug-related adverse side effects and inconvenient dosing regimens.

      We maintain a web site with the address www.idenix.com. We are not including the information contained on our web site as part of, or incorporating by reference into, this annual report. We make available free of charge on or through our web site our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. In addition, we intend to

disclose on our web site any amendments to, or waivers from, our code of business conduct and ethics that are required to be disclosed pursuant to rules of the Securities and Exchange Commission.

      We are an early stage company. All of our product candidates are being evaluated in clinical trials or are in early stages of development. To date, we have not obtained regulatory approval for or commercialized any products. We have incurred significant losses since our inception in May 1998. We expect to incur annual operating losses over the next several years as we expand our drug discovery, development and commercialization efforts. We do not expect any of our product candidates, if successfully developed, to become commercially available prior to 2006.

      We are a Delaware corporation. Our principal offices are located at 60 Hampshire Street, Cambridge, Massachusetts 02139. The telephone number of our principal executive offices is 617-995-9800.

Product Candidates in Clinical Trials

      Each of our current clinical product candidates is a nucleoside or nucleoside analog which is intended to have significant competitive advantages in one or more therapeutic areas, such as efficacy, safety, resistance profile or convenience of dosing, compared to currently approved treatments. Nucleosides and nucleoside analogs are classes of small molecule compounds that have a proven record of scientific development and commercial success as antiviral agents. Each of the product candidates that we are developing is selective and specific, may be administered orally once a day, and we believe may be used in combination with other therapeutic agents to improve clinical benefits.

      In May 2003, we licensed to Novartis Pharma AG, or Novartis, our hepatitis B product candidates, telbivudine and valtorcitabine, as part of a worldwide development and commercialization arrangement that we entered into with Novartis. At that time, in exchange for the license of our hepatitis B product candidates, we received a license fee in the amount of $75 million and the right to receive up to $35 million upon achievement of regulatory approval milestones as well as additional milestone payments based upon achievement of predetermined sales levels. Novartis reimburses us for expenses we incur with respect to the development of hepatitis B product candidates. While we licensed to Novartis the right to commercialize these product candidates in all areas of the world, we retained the right to co-promote or co-market in the United States, United Kingdom, France, Germany, Spain and Italy the licensed product candidates that we successfully develop.

      Telbivudine. Our lead product candidate, telbivudine, is being evaluated for the treatment of chronic hepatitis B, an inflammatory liver disease associated with chronic HBV infection. Currently, we are evaluating telbivudine in an international phase III clinical trial, which we refer to as the GLOBE study. The GLOBE study has been fully enrolled since April 2004 with more than 1,350 patients who had not been treated previously for chronic HBV infection. If the data from this phase III clinical trial are positive, we expect to submit a new drug application, or NDA, to the U.S. Food and Drug Administration, or FDA, in late 2005 for marketing approval of telbivudine as an oral, once-a-day treatment of chronic hepatitis B.

      In the GLOBE study, we are comparing 600 mg of telbivudine orally administered once a day to standard treatment with 100 mg of lamivudine orally administered once a day. The primary efficacy endpoint for this phase III clinical trial is a composite endpoint, which we refer to as the Therapeutic Response. Therapeutic Response is defined as viral suppression to less than 100,000 copies of HBV DNA in each milliliter of blood and either loss of serum e-antigen or liver enzyme normalization. We refer to the measurement of virus in the blood as copies/ml. The chosen level of HBV suppression, 100,000 copies/ml, corresponds to the level of HBV suppression recommended by the American Association for the Study of Liver Diseases, a leading U.S. professional society in the field of liver diseases.

      The GLOBE study is being conducted at approximately 135 clinical sites in 20 countries in North America, Europe and Asia. The design of this study, including the primary and secondary efficacy endpoints, was discussed and agreed with key regulatory agencies, including the FDA. We anticipate that the one-

year results from this clinical trial will be the basis of our worldwide marketing applications. Additionally, we are conducting a second phase III clinical trial in which we expect to enroll 240 patients who exhibit signs of liver failure due to advanced hepatitis B. We anticipate that the data derived from this clinical trial, while not required as a part of the NDA, will provide additional data in support of such application.

      In preparation for the anticipated launch of telbivudine, we have recently initiated two phase IIIb clinical trials. Phase IIIb clinical trials are principally designed to obtain additional data to further delineate a product candidate’s profile. Phase IIIb trials are not generally required for submission of an NDA. One trial, which is enrolling 120 patients, has been designed to assess the antiviral effects and clinical results of treatment for a 12 month period with telbivudine compared to treatment with adefovir dipivoxil, a product approved for the treatment of chronic hepatitis B. The second phase IIIb clinical trial is a clinical trial which we refer to as a “treatment switch” study. In this clinical trial, we are enrolling 230 patients with chronic hepatitis B who have no signs of liver disease and who have been previously treated with lamivudine for a period of three to 12 months. The patients in this 12 month clinical trial will, at random, either be switched to treatment with telbivudine or continued on treatment with lamivudine. This one year clinical trial is designed to assess and compare the antiviral effects and clinical benefits of these treatment regimens. In addition to the current phase IIIb clincial trials, during 2005, we anticipate initiating one or more additional phase IIIb clinical trials.

      In addition to the phase IIIb clinical trials, we have begun with Novartis commercialization activities in anticipation of the launch of telbivudine, which is expected to occur initially in the United States. We have established a joint commercialization committee that will oversee the co-promotion efforts in which we and Novartis engage in the United States. This committee is currently developing plans for the commercial launch, if approved, of telbivudine in 2006. Such plans include the anticipated establishment by us of a sales force to promote telbivudine.

      Valtorcitabine. While we anticipate that telbivudine will successfully treat a majority of patients with chronic hepatitis B, treatment with more than one therapeutic agent may be required to successfully treat a subset of the HBV patient population. For patients who do not experience optimal early antiviral effects with single-agent therapy, we are developing a second HBV product candidate, valtorcitabine, which, based on preclinical data, we believe may be effective in combination therapy with telbivudine. Currently, we are evaluating the combination of valtorcitabine with telbivudine in a phase IIb clinical trial. We anticipate that this phase IIb clinical trial will enroll 130 patients who have more than 100,000,000 copies/ml of HBV and who have not been previously treated for chronic HBV infection. This trial is designed to evaluate the safety of the combination treatment and determine whether the combination of valtorcitabine with telbivudine results in greater suppression of virus levels in the blood serum than that which is achieved with treatment with telbivudine alone.

      Similar to our HBV program, our HCV program is focused on the development of product candidates which, as single agents or in combination, are expected to offer significant improvements in efficacy, safety, resistance and convenience of dosing when compared to currently approved therapies. Our efforts are focused on the discovery of product candidates that we expect will be active against various strains of HCV including the genotype 1 strain of HCV, which is responsible for more than 70% of hepatitis C infections in the U.S. and Japan and almost 65% of hepatitis C infections in Europe.

      Our hepatitis C development program is initially seeking to address the large patient population, the majority of whom are infected with the genotype 1 strain of HCV, that has failed to respond to the current standard treatment, the combination of ribavirin and pegylated interferon. For this patient population, other treatment options are currently very limited, if available at all. We expect to subsequently target the treatment-naive patient population for whom treatment with the current standard of care is only successful in approximately 50% of patients with HCV genotype 1.

      Valopicitabine (NM283). Our lead hepatitis C product candidate, valopicitabine or NM283, is a nucleoside analog, that we are developing as a more effective alternative to ribavirin in a pegylated interferon-based treatment combination.

      Currently, we are evaluating NM283 in a phase IIb clinical trial comparing the safety and efficacy of the combination of NM283 plus pegylated interferon to the current standard of care, ribavirin in combination with pegylated interferon. In this phase IIb clinical trial, we are enrolling approximately 170 patients infected with the genotype 1 strain of HCV who have previously failed at least three months of treatment with the combination of pegylated interferon and ribavirin. We expect to analyze the interim data at weeks 12 and 24. If the 24-week data are positive, we anticipate extending the trial to one year.

      Additionally, we are currently conducting a six month phase IIa clinical trial of valopicitabine in treatment-naive patients. We have substantially completed enrollment of this 30 patient phase IIa clinical trial, which is designed to assess the safety, antiviral activity and pharmacokinetics of the combination of NM283 and pegylated interferon compared to NM283 alone. In January 2005, we announced interim results from the 19 patients who had completed 12 weeks of treatment. The patients receiving the combination of NM283 and pegylated interferon achieved a mean reduction in the level of HCV circulating in the patient’s blood, or serum viral level of 3.2 log₁₀, or 99.94 percent, at week 12. Nine of 12 patients receiving the combination treatment achieved a greater than 2 log10 decrease in levels of serum viral level, or an early viral response, at week 12. To date, tolerance of both treatment regimens has been satisfactory, with no serious adverse events reported.

      Novartis has the option to license NM283. If Novartis exercises such option, which it must do so prior to the commencement of a phase III clinical trial, Novartis would be required to pay us up to $525 million in license fees and milestone payments associated with regulatory filings and approvals as well as additional milestone payments based upon achievement of predetermined sales levels. Similar to the commercialization arrangements relating to the HBV product candidates licensed to Novartis, we have the right to co-promote or co-market with Novartis valopicitabine in the United States, United Kingdom, France, Germany, Spain and Italy. Novartis would have the right to commericalize valopicitabine in the rest of the world.

Drug Discovery

      In addition to valopicitabine, we are currently engaged in preclinical development of a second HCV product candidate that is also a nucleoside analog. We anticipate that this product candidate could be used in combination with valopicitabine and, if successfully developed, could become the backbone of a triple combination therapy for HCV, similar to the approach used today in HIV therapy. We envision that the third agent in this combination could be pegylated interferon or one of the many non-nucleoside or protease inhibitor product candidates that are in the very early stages of development in the industry. We believe that successful development of two or more nucleoside analogs that may be used in combination with other orally administered drugs will enable us to establish a franchise in this therapeutic area by offering treatments to the broadest possible hepatitis C patient population, including those patients that cannot be treated with interferon-based therapies or those for whom drug-related adverse side effects and inconvenient dosing regimens reduce compliance.

      In addition to our HBV and HCV product candidates, we are also developing a product candidate from the class of compounds known as non-nucleoside reverse transcriptase inhibitors, or NNRTIs, for treatment of HIV. We believe that large opportunities continue to exist for HIV drugs that address the limitations of currently approved therapies. We expect to file an investigational new drug application, or IND, in late 2005.

      Two of the viral enzymes that are required for HIV to replicate are the protease enzyme and the reverse transcriptase enzyme. There are several classes of drugs that inhibit these two enzymes, including NNRTIs, nucleoside reverse transcriptase inhibitors and protease inhibitors. We are focusing our efforts on the viral polymerase, in this case, reverse transcriptase. Based on screening our nucleoside, nucleoside analog and non-nucleoside libraries, we have identified two novel series of non-nucleoside inhibitors of reverse transcriptase. Nucleoside and nucleoside analog inhibitors of reverse transcriptase act at the active site of the enzyme. NNRTIs act at a conserved binding site outside the active site and apparently alter the conformation of the

enzyme in a detrimental way. The compounds we have identified are specific for their conserved binding site on reverse transcriptase, and therefore do not inhibit human or other viral polymerases. Marketed NNRTIs, efavirenz and nevirapine, have therapeutic limitations including cross resistance and other unwanted side effects. We believe that a drug that can be administered orally, which does not have significant drug interactions, has a safety profile superior to currently marketed NNRTIs, or is less likely to select for resistance during therapy, would fill a significant medical need in HIV therapy.

Antiviral Research

      We have successfully advanced three product candidates into clinical trials based on our understanding of virology and nucleoside chemistry. We have a highly developed set of skills in compound generation, target selection, screening and lead optimization and pharmacology and preclinical development. We are utilizing these skills and capabilities in our discovery and development of antiviral product candidates.

      Our Scientists. Our staff of scientists is engaged in drug discovery and preclinical drug development in laboratory facilities located in Cambridge, Massachusetts, Montpellier, France and Cagliari, Italy. These scientists have expertise in the areas of nucleoside/nucleotide chemistry, molecular virology and pharmacology, and our scientists have substantial experience in applying this expertise to the discovery and development of nucleoside and non-nucleoside compounds which target the viral polymerase enzyme and the viral replication cycle. Pursuant to arrangements we have entered into with each of the University of Cagliari in Italy and Le Centre National de la Recherche Scientifique, or CNRS, and University of Montpellier in France, our scientists in Italy and certain of our scientists in France occupy premises at these universities where they have access to well-equipped laboratories and other resources required to conduct most research activities. The work of our Idenix staff scientists is supplemented by research and development activities of independent third-party chemists located principally in Montpellier, France and independent third-party biologists specialized in antiviral drug research activities located principally in Cagliari, Italy. Pursuant to the arrangements we and Novartis have with CNRS and the University of Montpellier and the University of Cagliari, we and Novartis have rights to access certain results of the work of these groups of independent scientists. For a further description of these arrangements, see “— Collaborations.”

      Focused Compound Library. Our focused library contains a diverse set of structures which have been synthesized for the principal purpose of targeting and inhibiting viral replication. These structures consist of various nucleosides, nucleoside analogs, selected non-nucleosides and other small molecule compounds. Our nucleoside and nucleoside analog library contains both D- and L- compounds. D-nucleosides have a configuration similar to the chemical compounds that are the natural building blocks of DNA and RNA. L-nucleosides have structures that are the mirror image of D-nucleoside structures. L-nucleosides and L-nucleoside analogs are a class of therapeutic agents that have safety and potency profiles that may be better than the D-nucleoside analogs which are currently prescribed. For instance, lamivudine is an L-nucleoside that demonstrates antiviral activity coupled with an excellent safety profile.

      Target Selection. We focus on viral diseases representing large and growing market opportunities with significant unmet medical needs. Our selection of a particular therapeutic target within those viral diseases takes into consideration the experience and expertise of our scientific management team and the likelihood that our proprietary nucleoside, nucleoside analog and non-nucleoside libraries will yield a small molecule lead. The final selection is based on the probability of being able to generate a robust medicinal chemistry structure-activity relationships analysis to assist lead optimization and secure relevant intellectual property rights.

      Screening and Lead Optimization. We believe that our efficiency in selecting a lead chemical structure from our focused library distinguishes us from our competitors. Our ability to discover multiple compounds with antiviral activity, as exemplified by our HBV and HCV product candidates, enhances early progress toward lead optimization.

      Pharmacology and Preclinical Development. Once we have identified lead compounds, they are tested using in vitro and in vivo pharmacology studies and in vivo animal models of antiviral efficacy. Using in vitro studies, our scientists are able to ascertain the relevance of intracellular activation, metabolism and protein

binding. The in vivo pharmacokinetic studies identify the percentage of oral bioavailability and whole body metabolism of the compound. The animal models provide data on the efficacy of the compound and firmly establishes a proof of concept in a biologically relevant system.

Our Product Candidates/ Background on Science

      Each of our current clinical product candidates is a nucleoside or nucleoside analog which is intended to have significant competitive advantages in one or more therapeutic areas, such as safety, efficacy, resistance profile or convenience of dosing, compared to currently approved treatments.

      Nucleosides are small, natural chemical compounds that function as the building blocks of human and viral genetic material, commonly referred to as deoxyribonucleic acid, or DNA, or ribonucleic acid, or RNA. Nucleoside analogs are synthetic compounds that are structurally similar to natural nucleosides. Each of these are small molecules that effectively target viral polymerases, the enzymes that replicate viral genetic information.

      Naturally occurring nucleosides are modified in cells to generate derivatives, termed nucleotides, that are utilized by polymerases as the basic building blocks of DNA and RNA genetic material. Antiviral nucleoside drugs are typically nucleoside analogs, molecules that are chemically modified versions of one of the natural nucleosides. Mimicking the role of natural nucleosides, antiviral nucleoside drugs are generally incorporated by viral polymerases into replicating viral genomes. This event impairs either the synthesis or the functionality of the resultant viral genome and therefore suppresses viral replication.

      As drugs, nucleosides and nucleoside analogs generally offer high selectivity, excellent potency, long duration of action, potential once-a-day oral administration and relatively straightforward scale-up and manufacture. As a result, nucleosides and nucleoside analogs are particularly well-suited for the extended treatment of chronic viral diseases.

      The benefits of nucleosides and nucleoside analogs are borne out by a proven track record of scientific, development and commercial success as antiviral treatments for hepatitis B, hepatitis C and HIV. Based upon published clinical trial results, it is estimated that approximately 90% of the nucleosides and nucleoside analogs developed as antiviral therapeutics that reach development stages beyond phase I clinical trials result in marketing approval. In the U.S., the nucleoside analog lamivudine has become the most widely prescribed treatment for hepatitis B. The standard of care for the treatment of hepatitis C is a combination of ribavirin, a nucleoside analog, in combination with pegylated interferon. In addition, the standard treatment for HIV infection includes two nucleoside analogs combined with a third drug from another class to form triple combination therapy. A total of seven nucleoside analogs have been approved for the treatment of HIV.

      NNRTIs are small molecules that attack the reverse transcriptase stage of HIV viral replication. NNRTIs effect such attack by directly interacting with an allosteric site of the reverse transcriptase enzyme in a manner that inactivates the enzyme itself and inhibits the viral replication cycle.

      NNRTIs have a high therapeutic index and have historically demonstrated limited unwanted side effects while constituting the most potent class of HIV antivirals. This class of drug has the potential for once a day oral administration and relative ease in scale-up and manufacturing. HIV resistance develops rapidly if these drugs are used on their own as monotherapy. It has been demonstrated that maximum benefit is derived if NNRTIs are used in combination with other classes of anti-HIV drugs. Neviripine and efavirnez, each NNRTIs, are among the most presrcibed treatments for HIV. A total of three NNRTIs have been approved for HIV treatment.

Research and Development Expenses

      Research and development expenses for the years ended December 31, 2004, 2003 and 2002 were $80.0 million, $51.5 million, and $29.3 million respectively, and represented 77%, 72% and 70%, respectively, of our total operating expenses.

Collaborations

Relationship with Novartis

Overview

      On May 8, 2003, we entered into a collaboration with Novartis which included the following agreements and transactions:

      In July 2004, to maintain its percentage equity interest at the closing of our initial public offering, Novartis purchased from us 5,400,000 shares of our common stock for an aggregate purchase price of $75.6 million. Additionally, in connection with the consummation of our initial public offering, we sold to Novartis 1,100,000 shares of common stock for a purchase price of $.001 per share in exchange for the termination of certain stock subscription rights held by Novarits.

      Currently, Novartis and its affiliate, Novartis BioVentures, collectively own approximately 57% of our outstanding common stock.

Development, License and Commercialization Agreement

      Under the development agreement, Novartis obtained certain rights to commercialize our lead product candidates for the treatment of HBV infection, telbivudine and valtorcitabine. Novartis will make payments to us of up to $35 million upon the achievement of regulatory approval milestones for our HBV product candidates, as well as additional milestone payments based upon achievement of predetermined sales levels. In addition, Novartis has the exclusive option to obtain rights to:

      The terms of these options, including license fees, milestone payments and payments in reimbursement of development expenses, vary according to the disease which the product candidate treats, the stage of development of the product candidate and Novartis’ ownership interest in Idenix. If Novartis exercises its option to obtain exclusive rights to NM283, Novartis would be required to pay us up to $525 million in license fees and regulatory milestone payments relating to NM283, as well as additional milestone payments based upon achievement of predetermined sales levels. In June 2004, we received from Novartis a $25 million milestone payment based on the results from our phase I clinical trial of NM283.

      For most of our product candidates, Novartis will have the right to approve, in its reasonable discretion, the development budget. We will develop each product in accordance with a development plan approved by a joint operating committee. The joint operating committee is comprised of an equal number of representatives of Idenix and Novartis. Novartis will be solely responsible for the development expenses incurred in accordance with approved development budgets for our lead HBV products and, if selected by Novartis, NM283 or a replacement HCV product candidate. If NM283 fails to obtain regulatory approval in the U.S., Novartis will pay the development expenses for a replacement HCV product candidate if it has approved the corresponding development budget, up to a specified maximum. The development expense payments for any replacement HCV product candidates will be credited against the first sales milestone payment payable by Novartis to us for our initial HCV product. Novartis will also be primarily responsible for the development expenses for any other product candidate for which it exercises its option to obtain commercialization rights.

      We have primary responsibility for preparing and filing regulatory submissions with respect to any licensed product in the U.S., and Novartis has primary responsibility for preparing and filing regulatory submissions with respect to any licensed product in all other countries in the world. Under certain circumstances, primary responsibilities for all or certain regulatory tasks in a particular country may be switched from one party to the other.

      Under the development agreement, we granted Novartis an exclusive, worldwide license to market and sell our lead HBV products, and we will grant Novartis such a license with respect to any other product candidates for which Novartis exercises its option, except that in each case we retained the right to co-promote or co-market all licensed products in the U.S., the U.K., France, Germany, Italy and Spain. We will share equally the resulting net benefit with Novartis from the co-promotion in the U.S. from the date of product launch and in the U.K., France, Germany, Italy and Spain, we will share equally the net benefit within three years after the date of product launch.

      In other countries, we will sell products to Novartis for their further sale to third parties. Novartis will pay us to acquire such products at a price that is determined in part by the volume of product net sales under the terms of the supply agreement described below.

      We have an option to obtain a license from Novartis, co-exclusive with Novartis, to develop and sell a sustained-release interferon as part of a combination therapy with our HCV products in the U.S., the U.K., France, Germany, Italy and Spain, but only if Novartis is able to provide such interferon to us before May 8, 2005. Currently, we are addressing with Novartis the possible extension of this option. Each party may also independently develop, market and sell in such countries one and only one other interferon product whose labeled usage for co-administration with our HCV products is covered by our intellectual property.

      Novartis has agreed that it will not market, sell or promote, or grant a license to any third party to market, sell or promote, certain competing products. However, if Novartis seeks to engage in such activities, it must first inform us of the competitive product opportunity and, at our election, enter into good faith negotiations with us concerning such opportunity. If we either do not elect to enter into negotiations with respect to such opportunity or are unable to reach agreement within a specified period, Novartis would be free to proceed with its plans with respect to such competing product. The competitive restrictions on Novartis terminate on a country-by-country basis on the earlier of May 8, 2008 or the termination of the development agreement with respect to each particular country as described below.

      Under the development agreement, we have agreed to indemnify Novartis and its affiliates against losses suffered as a result of our breach of representations and warranties in the development agreement. We made numerous representations and warranties to Novartis regarding our hepatitis C and hepatitis B product candidates, including representations regarding our ownership of the inventions and discoveries. If one or more of our representations or warranties were not true at the time we made them to Novartis, we would be in breach of this agreement. In the event of a breach by us, Novartis has the right to seek indemnification from us for damages suffered by Novartis as a result of such breach. The amounts for which we could be liable to Novartis may be substantial. For additional information on such indemnification rights, see “Stock Purchase Agreement”, “Factors That May Affect Future Results — Factors Related to Our Relationship with Novartis” and “— Factors Related to Patents and Licenses.”

      Novartis may terminate the development agreement with respect to a particular product, product candidate or country, in its sole discretion, by providing us with six months’ written notice. If either we or Novartis materially breach the development agreement and do not cure such breach within 30 days, or under certain circumstances, 120 days, or if such breach is uncurable, the non-breaching party may terminate the development agreement:

      Each party may also terminate the development agreement in its entirety upon 30 days’ written notice if the other party files for bankruptcy, insolvency, reorganization or the like. If Novartis terminates the development agreement for material breach by us, or for bankruptcy, insolvency or reorganization on our part, then Novartis may elect to retain licenses to product candidates or products, in which case it will remain obligated to make payments to us in amounts to be negotiated in good faith at the time of termination. If we terminate part or all of the development agreement for material breach by Novartis, or for bankruptcy, insolvency or reorganization on the part of Novartis, or if Novartis terminates the development agreement unilaterally in the absence of a breach by us, we may be obligated to make payments to Novartis in amounts to be negotiated in good faith at the time of termination.

Master Manufacturing and Supply Agreement

      Under the master manufacturing and supply agreement, dated as of May 8, 2003, between our subsidiary, Idenix (Cayman) Limited, or Idenix Cayman, and Novartis, which w refer to as the supply agreement, oIdenix Cayman, appointed Novartis to manufacture or have manufactured the clinical supply of the active pharmaceutical ingredient, or API, for each product candidate licensed under the development agreement and certain other product candidates. The cost of the clinical supply will be treated as a development expense, to be allocated in accordance with the development agreement. Idenix Cayman will appoint Novartis or a third party to manufacture the commercial supply of the API based on a competitive bid process under which Novartis has the right to match the best third-party bid. Novartis will perform the finishing and packaging of the APIs into the final form for sale.

      Idenix Cayman will pay Novartis for manufacturing the commercial supply of API, if Novartis manufactures the API, and finishing and packaging the products. Novartis will pay to Idenix Cayman a transfer price based on net sales of the products sold outside the co-commercialization countries. The parties will negotiate the transfer prices for the products, including, in some circumstances, the interferon, to be sold in the co-commercialization countries.

Stockholders’ Agreement

      In connection with Novartis’ purchase of our stock from our then existing stockholders, we and substantially all of our stockholders entered into a stockholders’ agreement with Novartis which was amended and restated in connection with our initial public offering. Under the terms of the amended and restated stockholders’ agreement, we have:

      Novartis has certain rights to acquire shares of our capital stock. Such rights are further described below under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates.”

Stock Purchase Agreement

      Under the stock purchase agreement, dated as of March 21, 2003, which we refer to as the stock purchase agreement, among us, Novartis and substantially all holders of our capital stock as of May 8,2003, Novartis purchased approximately 54% of our outstanding capital stock from our stockholders for $255 million in cash, with an additional aggregate amount of up to $357 million contingently payable to these stockholders if we achieve predetermined development milestones with respect to an HCV drug candidate. The future contingent payments are payable in cash or, under certain circumstances, Novartis AG American Depository Shares.

      Under the stock purchase agreement, we agreed to indemnify Novartis and its affiliates against losses suffered as a result of our breach of representations and warranties in the stock purchase agreement. In the stock purchase agreement, we and our stockholders who sold shares to Novartis, which include many of our directors and officers, made numerous representations and warranties. The stock purchase agreement representations and warrranties we made to Novartis regarding our hepatitis C and hepatitis B product candidates and our ownership of related inventions and discoveries are substantially the same as the representations and warrranties we made to Novartis in the development agreement. If one or more of our representations or warranties were not true at the time we made them to Novartis, we would be in breach of this agreement. In the event of a breach by us, Novartis has the right to seek indemnification from us and, under certain circumstances, us and our stockholders who sold shares to Novartis for damages suffered by Novartis as a result of such breach. The amounts for which we could be liable to Novartis may be substantial. For additional information on such indemnification rights, see “Development, License and Commercialization Agreement,” “Factors That May Affect Future Results — Factors Related to Our Relationship with Novartis” and “— Factors Related to Patents and Licenses.”

      Currently, Novartis and its affiliate, Novartis BioVentures, which was an existing stockholder at the time of the Novartis stock purchase, collectively own approximately 57% of our outstanding common stock.

Co-operative Laboratory Agreements

      In May 2003, we and Novartis entered into an amended and restated agreement with CNRS and L’Universite Montpellier, which we refer to as the University of Montpellier, pursuant to which we work in collaboration with scientists from CNRS and the University of Montpellier to discover and develop technologies relating to antiviral substances. The agreement includes provisions relating to ownership and commercialization of the technology which is discovered or obtained as part of the collaboration as well as rights regarding ownership and use of such technology upon termination of the agreement. This agreement amended and restated an agreement that our subsidiary, Idenix SARL, the University of Montpellier and CNRS had originally entered into in January 1999. Under the terms of the agreement, we make payments to the University of Montpellier for use of the facilities, certain improvements to the facilities and for supplies consumed in connection with research activities. In the event of termination of the agreement, Idenix will continue to retain rights to exploit the patents derived from the collaboration.

      We have entered into two agreements with the Universita degli Studi di Cagliari, which we refer to as the University of Cagliari, the co-owner of the patent applications covering our hepatitis C and our HIV NNRTI product candidates. One agreement covers our cooperative research program and the other agreement is an exclusive license under these patent applications to develop and sell the jointly created HCV and HIV product candidates. In May 2003, Novartis became a party to each of these agreements. The cooperative research agreement includes provisions with respect to cost sharing, ownership and commercialization of the technology which is discovered or obtained as part of the collaboration. Under the terms of the cooperative agreement, we make payments to the University of Cagliari for use of the facilities and for supplies consumed in connection with the research activities.

      Under the terms of the license agreement with the University of Cagliari, we have the exclusive worldwide right to make, use and sell our HCV product candidates and our NNRTI candidate for the treatment of HIV and the right to sublicense any of those rights. Under the terms of the agreement, we assume the costs and responsibility for filing, prosecuting, maintaining and defending the jointly owned patents. We must provide a fixed royalty payment to the University of Cagliari on worldwide sales of these drug products in accordance with the terms of the agreement. The license agreement terminates at the expiration of all royalty payment obligations, unless terminated earlier by us, by the mutual agreement of the parties, or by a material breach of the terms of the agreement.

Manufacturing

      We have developed the capacity to synthesize compounds in quantities ranging from milligrams to metric tons. Our medicinal bench chemists focus on small-scale synthesis that leads to the discovery of new nucleoside analogs and the analysis of structure-activity relationships for each identified compound series. In addition, these scientists aim to design efficient synthetic routes suitable for process chemistry scale up to the level of one-kilogram batches of the lead molecule. This material supports key preclinical studies, including proof of principle studies in animal models, early pharmacokinetic assays, initial toxicology studies and formulation development. The process chemistry facility we maintain in Cambridge, Massachusetts allows us to accelerate these key studies. This facility also allows us to provide non-cGMP materials in quantities up to one kilogram to support early toxicological studies and the initial development of formulations. These formulations could then be manufactured using current good manufacturing practices, or cGMP, material. We also contract with third parties, including Novartis, for the synthesis of material used in our toxicology studies and for formulation development.

      We contract with third parties, including Novartis, for the synthesis of cGMP material used in our clinical trials. To reduce costs and preserve manufacturing proprietary rights, we provide these manufacturers with only the required portion of the synthetic method and a sufficient quantity of the starting or intermediate material to prepare the quantity and quality of material necessary for the conduct of our clinical trials and

related nonclinical toxicology studies. We currently rely upon a number of third-party manufacturers for the supply of our product candidates in bulk quantities.

      We have selected manufacturers that we believe comply with cGMP and other regulatory standards. We are establishing a quality control and quality assurance program, including a set of standard operating procedures, analytical methods and specifications, designed to ensure that our product candidates are manufactured in accordance with cGMP and other domestic and foreign regulations.

      All of the materials that we require for manufacture of telbivudine are currently available from more than one qualified source. The process used for the manufacture of telbivudine is robust and has been repeated by different manufacturers on a multiple kilogram scale. We are currently pursuing the same result with respect to the other product candidates we currently have in clinical development.

      We rely upon Novartis as well as other third-party manufacturers for the dosage form of our product candidates. We do not expect to internally manufacture material for our clinical trials or undertake the commercial-scale manufacture of our drug products. Accordingly, we are discussing with our suppliers and other third-party manufacturers the long-term supply and manufacture of these and other product candidates we may develop and commercially launch.

Sales and Marketing

      We intend to establish our own sales and marketing capabilities to coincide with the regulatory approval of telbivudine. In accordance with the arrangements set forth in our development agreement with Novartis, we will co-promote or co-market with Novartis in the U.S., the U.K., France, Germany, Italy and Spain our HBV products and other products Novartis subsequently licenses from us. In markets outside of the U.S., the U.K., France, Germany, Italy and Spain, Novartis is responsible for the marketing, distribution and sale of telbivudine and valtorcitabine, as well as other products which it may license from us.

      In the U.S. and Western Europe, approximately 80% of patients receiving antiviral therapy for hepatitis B and hepatitis C are treated by medical specialists in the areas of gastroenterology, hepatology or infectious diseases. By using a specialized sales force, and offering treatments with substantial clinical benefits over other marketed products, we believe that we will achieve significant rates of market penetration at reasonable cost. We expect to utilize this specialized sales force in the U.S., the U.K., France, Germany, Italy and Spain for the co-promotion and co-marketing and sale of all hepatitis products that we may successfully develop.

Patents and Licenses

      Our policy is to pursue patents and to otherwise endeavor to protect our technology, inventions and improvements that are commercially important to the development of our business. We also rely upon trade secrets that may be important to the development of our business.

      Our hepatitis B patent portfolio was initiated with two provisional applications filed on the use of telbivudine, LdC, and generically valtorcitabine, for the treatment of hepatitis B in the U.S. in August 1998 and April 1999. Subsequent U.S. patent applications were filed in 1999 and 2001 with four patents issuing in 2002 and 2003 for the treatment of hepatitis B. Such patents, which expire in 2019, are set forth below:

      An international patent application was filed in 1999 under the Patent Cooperation Treaty, and subsequently corresponding patent applications were filed regionally in Europe as well as nationally in 11

foreign countries. The patents are co-owned by us, CNRS and University of Montpellier, and under an agreement with these entities described under the caption “— Collaborations,” we have the exclusive right to exploit the technology. Our lead hepatitis B product candidate, telbivudine, and the biologically active form of valtorcitabine, LdC, were known compounds at the time scientists at the CNRS and University of Montpellier discovered that they are effective for the treatment of HBV-infected patients. Accordingly, we will not obtain claims directed to the composition of matter of telbivudine or LdC. We have, however, obtained patent claims directed to the method of treatment of HBV-infected patients with telbivudine and the biologically active LdC in the U.S. We will attempt to obtain similar patent claims directed to the use of telbivudine and the biologically active LdC outside of the U.S.

      In June 2000, a provisional application was filed on valtorcitabine and its use to treat hepatitis B in the U.S. and a subsequent U.S. patent application was filed in 2001. This application was recently allowed by the U.S. Patent Office and we expect a patent to issue shortly. This patent will expire in 2021. An international patent application was filed in 2001 under the Patent Cooperation Treaty, and subsequently, corresponding patent applications were filed regionally in Europe, Eurasia, the African Regional Industrial Property Office, or ARIPO, and the Organisation Africaine de la Propriete, Intellectuelle, or OAPI, as well as nationally in 20 foreign countries. Eurasia is a patent convention made up of a number of Asian countries, including China. Corresponding applications also were filed directly in 13 additional foreign countries. Since valtorcitabine, a prodrug of LdC, is a new compound, we will attempt to obtain patent claims covering the compound itself as well as patent claims directed to the use of the compound to treat HBV-infected patients.

      In June 1998, we entered into an exclusive license agreement, which we refer to as the UAB license agreement, with UABRF, pursuant to which we were granted an exclusive license to the rights that the University of Alabama at Birmingham, or UAB, an entity affiliated with UABRF, Emory University and CNRS, which we refer to collectively as the 1998 licensors, have to a 1995 U.S. patent application, which is a continuation in part of a 1993 patent application, and corresponding patent applications in Europe, Canada, Japan and Australia that cover the use of certain synthetic nucleosides for the treatment of hepatitis B. In January 2004 and February 2005, UABRF notified us that it believes that the claims of these patent applications can be amended in a manner that would enable the 1998 licensors to prosecute and obtain broad patent claims that would generally cover the method of using telbivudine to treat hepatitis B and, consequently, cover the use of telbivudine to treat hepatitis B.

      We disagree that the 1995 patent application or corresponding foreign applications provide an adequate basis for the issuance of a valid and enforceable patent claim covering the use of telbivudine to treat hepatitis B. It is possible, however, that we could be wrong and the 1998 licensors will obtain such patent claims. If the 1998 licensors pursue such patent claims, we believe that they will assert that the UAB license agreement covers our telbivudine technology and that we are obligated to make payments to the 1998 licensors in the amounts and manner specified in the license agreement. Such amounts include payments in the aggregate amount of $1.3 million due upon achievement of regulatory milestones, a 6% royalty on annual sales up to $50 million and a 3% royalty on annual sales greater than $50 million made by us or an affiliate of ours. Additionally, if we sublicense our rights to any entity other than one which holds or controls at least 50% of our capital stock, or if Novartis’s ownership interest in us declines below 50% of our outstanding shares of capital stock, we could be obligated to pay to UABRF 30% of all royalties received by us from sales by the sublicensee of telbivudine and 20% of all fees, milestone payments and other cash consideration we receive from the sublicensee with respect to telbivudine. All disputes under the UAB license agreement are required to be settled by binding arbitration, and the 1998 licensors are precluded from bringing any lawsuits that raise these issues.

      If the 1998 licensors amend the patent claims of the pending 1995 patent application and corresponding foreign patent applications, we believe that they will assert a claim to 20% of the $75 million license fee we received in May 2003 in connection with the license of our hepatitis B product candidates to Novartis. If UABRF asserts such a claim, we intend to dispute it. Under the terms of the license agreement, the dispute would be resolved by a panel of arbitrators if we are unable to reach agreement with UABRF after a period of negotiation and mediation.

      UABRF, acting for the 1998 licensors, may attempt to terminate the UAB license agreement or render the license to us non-exclusive if we fail to perform our material obligations under the UAB license agreement. We do not believe that we are in default of any of the material obligations to which we are subject under the UAB license agreement. Any attempt to terminate the agreement would be subject to binding arbitration. In the event UABRF is successful in terminating the license agreement as a result of a breach by us after a period of arbitration, and the 1998 licensors obtain a valid enforceable claim that generally covers the use of telbivudine to treat HBV, it would be necessary for us to obtain another license from the 1998 licensors. Such license may not be available to us on reasonable terms, on an exclusive basis or at all. This could materially adversely affect or preclude our ability to commercialize telbivudine.

      If the 1998 licensors were instead to render the UAB license agreement to us non-exclusive, we would not be prohibited from using telbivudine to treat hepatitis B, but a non-exclusive license could be granted to one or more of our competitors by one or more of the 1998 licensors. In the event that the 1998 licensors exclusively or nonexclusively license any claims covering the use of telbivudine to treat hepatitis B to a competitor, we believe that such a competitor would have to overcome substantial legal and commercial hurdles to successfully commercialize the product. For example, we have already obtained four U.S. patents covering the use of telbivudine to treat hepatitis B, which we believe a competitor would infringe if it sought to commercialize telbivudine. Our patent applications are also pending in Europe, Australia, Canada, and Japan, as well as numerous other countries. Additionally, since we are the first company that is taking telbivudine through clinical trials, we expect to benefit from a five year period of commercialization exclusivity in the U.S. that is granted by the FDA during which it will refuse to grant marketing approval to any competitor to sell telbivudine for the treatment of hepatitis B. We may also receive regulatory exclusivity periods in Europe and in other countries.

      If it is determined that the UAB license agreement between us and UABRF does cover our use of telbivudine to treat hepatitis B, or we must otherwise rely upon a license agreement granted by the 1998 licensors to commercialize telbivudine, we may be in breach of certain of the representations and warranties we made to Novartis under the development agreement and the stock purchase agreement. For a further description see “Collaborations — Relationship with Novartis — Development, License and Commercialization Agreement,” and “— Stock Purchase Agreement,” and “Factors That May Affect Future Results — Factors Related to Our Relationship with Novartis” and “— Factors Related to Patents and Licenses.”

      Our hepatitis C patent portfolio was initiated in May 2000 with one provisional U.S. patent application directed to the treatment of hepatitis C with nucleoside analogs. Additional U.S. provisional applications were filed in May 2000 and April 2001 directed generally to the treatment of flaviviruses and pestiviruses with the same compounds. Two U.S. patent applications corresponding to these two sets of provisional applications were filed in May 2001 in the U.S. One of these applications has recently been issued as U.S. Patent No. 6,812,219, covering the use of NM 107, its prodrugs and certain other nucleoside analogues to treat pestiviruses and flaviviruses, and the second application directed to the use of these compounds to treat hepatitis C has been allowed by the U.S. Patent Office and should issue shortly. The patents will expire in 2021. Two international patent applications were filed in 2001 under the Patent Cooperation Treaty, and subsequently corresponding patent applications were filed regionally in Europe, Eurasia, ARIPO and OAPI, as well as nationally in 20 foreign countries. Corresponding applications for these two sets of applications were also each filed directly in 13 additional foreign countries. We co-own these filings with the University of Cagliari, which has exclusively licensed its interest to us. The patent applications cover the use of NM107 and NM283 generically, to treat hepatitis C and other flaviviridae infections. NM283 is a prodrug of the biologically active molecule NM107.

      In June 2002 and April 2003, three U.S. provisional patent applications were filed to be directed to the use of prodrugs of branched nucleosides to treat hepatitis C and other flaviviridae infections. These applications generically and specifically describe NM283 and their use to treat these infections. In June 2003, three U.S. patent applications were filed, claiming priority to the provisional applications. If issued, these patents will expire in 2023. Also in June 2003, three international patent applications were filed under the

Patent Cooperation Treaty, and corresponding applications were filed directly in 12 additional countries and subsequently corresponding patent applications were filed regionally in Europe, Eurasia, ARIPO and OAPI, as well as nationally in 20 foreign countries. NM107 was a known compound at the time of the discovery of its activity against HCV. As a result, we will not obtain composition of matter claims for these compounds, but instead will attempt to obtain patent claims directed to the method of treatment of HCV-infected patients with these product candidates. Since we believe that NM283 is a new compound, we will attempt to obtain patent claims covering the compound itself as well as patent claims directed to the use of NM283 to treat HCV-infected patients.

      Our HIV patent portfolio covering our non-nucleoside reverse transcriptase inhibitor candidate, NV-05A, is based on a U.S. provisional application filed in 2001, which was filed as a U.S. patent application in 2002. This U.S. application has now been issued as U.S. Patent No. 6,710,068 which will expire in 2022, with claims directed to NV-05A and pharmaceutical compositions that include NV-05A. An international patent application was filed in 2002 under the Patent Cooperation Treaty and subsequently corresponding patent applications were filed regionally in Europe and nationally in three foreign countries. Corresponding applications also were filed directly in four additional foreign countries. A further provisional application was filed in 2002, directed to prodrugs of our NNRTI candidate. A U.S. patent application was filed in 2003, and the patent, if issued, will expire in 2023. An international patent application was filed in 2003 under the Patent Cooperation Treaty and directly in one other country. These applications are co-owned by us with the University of Cagliari, which has exclusively licensed its rights to us.

      We hold exclusive licenses from TherapX and Dr. Raymond Schinazi to one U.S. issued patent, U.S. Patent No. 5,750,493 entitled “Method to Improve the Biological and Antiviral Activity of Protease Inhibitors”, and five associated non-U.S. patent filings expiring on or before 2016 that cover a method of using roxythromycin, a generic compound, to enhance the antiviral activity of protease inhibitors.

Competition

      Our industry is highly competitive and subject to rapid technological change. Significant competitive factors in our industry include:

      Many of the companies competing against us have substantially greater financial and other resources. In addition, many of our competitors have significantly greater experience in testing pharmaceutical and other therapeutic products, obtaining FDA and other regulatory approvals of products for use in health care and marketing and selling those products. Accordingly, our competitors may be more successful than we will in obtaining FDA approval for products and achieving widespread market acceptance. If we obtain necessary regulatory approvals and commence significant commercial sales of our products, we will also be competing with respect to manufacturing efficiency and marketing capabilities, areas in which we may have substantially less experience than our competitors.

      Any product candidates that we successfully develop will compete with existing and future therapies. The key competitive factors affecting the commercial success of such products are likely to be its efficacy, safety profile, convenience of dosing and price. Many organizations, including large pharmaceutical and

biopharmaceutical companies as well as academic and research organizations and government agencies, are pursuing novel drug therapies that target the same viral diseases as those for which we are developing therapies. The principal pharmaceutical companies with which we expect to compete directly include Abbott Laboratories, Boehringer Ingelheim International GmbH, Bristol-Myers Squibb Company, F. Hoffman-LaRoche & Co., GlaxoSmithKline plc, Johnson & Johnson, Merck & Co., Inc., Pfizer Inc. and Schering-Plough Corporation. The principal biopharmaceutical companies with which we expect to compete directly include Chiron Corporation, Gilead Sciences, Inc., Human Genome Sciences, Inc., InterMune, Inc., Isis Pharmaceuticals, Inc., Ribapharm, Inc., a wholly-owned subsidiary of Valeant Pharmaceuticals International, SciClone Pharmaceuticals, Inc., Trimeris, Inc. and Vertex Pharmaceuticals Incorporated. Many of these companies and organizations, either alone or with their collaborative partners, have substantially greater financial, technical and human resources than we do. In addition, our competitors also include smaller private companies such as Pharmasset, Ltd.

      We believe that a significant number of drugs are currently under development and will become available in the future for the treatment of hepatitis B, hepatitis C and HIV. We are aware that the FDA is currently in the process of reviewing the NDA filed by Bristol-Myers Squibb Company with respect to entecavir, a nucleoside analog for the treatment of hepatitis B. We anticipate that we will face intense and increasing competition as new products enter the market and advanced technologies become available. Our competitors’ products may be more effective, or more effectively marketed and sold, than any product we may commercialize. Competitive products may render our product obsolete or non-competitive before we can recover the expenses of developing and commercializing any of our product candidates. We are also aware that the development of a cure or new treatment methods for the diseases we are targeting could render our products non-competitive or obsolete.

Pharmaceutical Pricing and Reimbursement

      In both domestic and foreign markets, sales of our products will depend in part upon the availability of reimbursement from third-party payors. Third-party payors include government health agencies, managed care providers, private health insurers and other organizations. These third-party payors are increasingly challenging drug prices and are examining the cost-effectiveness of medical products and services. In addition, significant uncertainty exists as to the reimbursement status of newly approved healthcare products. We may need to conduct pharmacoeconomic studies to demonstrate the cost-effectiveness of our products. Any product candidates we successfully develop may not be considered cost-effective. Adequate third-party reimbursement may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product development. The U.S. and foreign governments continue to propose and pass legislation designed to reduce the cost of healthcare. Accordingly, legislation and regulations affecting the pricing of pharmaceutical products may change before our product candidates are approved for marketing. Adoption of new legislation could further limit reimbursement for pharmaceutical products.

      The marketability of any products we successfully develop may suffer if the government and third-party payors fail to provide adequate coverage and reimbursement rates for such products. In addition, an increasing emphasis on managed care in the U.S. has and will continue to increase the pressure on pharmaceutical pricing.

Regulatory Matters

      The research, testing, manufacture and marketing of drug products are extensively regulated by numerous governmental authorities in the U.S. and other countries. In the U.S., drugs are subject to rigorous regulation by the FDA. The Federal Food, Drug and Cosmetic Act and other federal and state statutes and regulations govern, among other things, the research, development, testing, manufacture, storage, record keeping, labeling, promotion and marketing and distribution of pharmaceutical products. If we fail to comply with applicable regulatory requirements, we may be subject to a variety of administrative or judicially imposed sanctions.

      The steps ordinarily required before a new pharmaceutical product may be marketed in the U.S. include preclinical studies, animal tests and formulation studies, the submission to the FDA of an investigational new drug application, or IND, which must become effective before human clinical trials may commence in the U.S. and adequate and well-controlled human clinical trials to establish the safety and effectiveness of the drug for each indication for which it is being tested.

      Preclinical studies include laboratory evaluation of product chemistry and formulation, as well as in vitro and animal clinical trials to assess the potential safety and efficacy of the product candidate. The conduct of the preclinical studies and formulation of compounds for testing must comply with federal regulations and requirements. The results of preclinical studies are submitted to the FDA, as part of the IND to justify the administration of the product candidate to human subjects in the proposed clinical trial.

      A 30-day waiting period after the filing of each IND is required prior to the commencement of clinical testing in humans. If the FDA has not commented on or questioned the IND within this 30-day period, the proposed clinical trial may begin. If the FDA has comments or questions, the questions must be answered to the satisfaction of the FDA before initial clinical testing can begin. In addition, the FDA may, at any time, impose a clinical hold on ongoing clinical trials. If the FDA imposes a clinical hold, clinical trials cannot commence or recommence without FDA authorization and then only under terms authorized by the FDA. Additionally, if a clinical hold is imposed on an ongoing clinical trial, patients already in the trial would be taken off the product candidate unless their participation is specifically permitted by the FDA. In some instances, the IND process can result in substantial delay and expense.

      Clinical trials involve the administration of the product candidate to healthy volunteers or patients under the supervision of a qualified principal investigator. Clinical trials must be conducted in compliance with federal regulations and requirements, under protocols detailing the objectives of the clinical trial, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated. Each protocol must be submitted to the FDA as part of the IND. The study protocol and informed consent information for patients in clinical trials must also be approved by the institutional review board at each institution where the clinical trials will be conducted.

      Clinical trials to support NDAs for marketing approval are typically conducted in three sequential phases, but the phases may overlap. In phase I, the initial introduction of a product candidate into healthy human subjects or patients, a product candidate is tested to assess metabolism, pharmacokinetics and pharmacological actions and safety, including side effects associated with increasing doses. Phase II usually involves clinical trials in a limited subset of the intended patient population, to determine dosage tolerance and optimum dosage, identify possible adverse effects and safety risks and provide preliminary support for the efficacy of the product candidate in the indication being studied.

      If a product candidate is found to be effective and to have an acceptable safety profile in phase II evaluations, phase III clinical trials are undertaken to further evaluate clinical efficacy and to further test for safety within an expanded patient population at geographically dispersed clinical trial sites. There can be no assurance that phase I, phase II or phase III testing of our product candidates will be completed successfully within any specified time period, if at all.

      After completion of the required clinical testing, generally an NDA is prepared and submitted to the FDA. FDA approval of the NDA is required before marketing of the product may begin in the U.S. The NDA must include, among other things, the results of extensive clinical and preclinical studies and the compilation of data relating to the product’s chemistry, pharmacology, manufacture, safety and effectiveness. The cost of an NDA is substantial, both in terms of studies required to generate and compile the requisite data, as well as the mandatory user fees submitted with the application.

      The FDA has 60 days from its receipt of the NDA to determine whether the application will be accepted for filing based on the agency’s threshold determination that the NDA is sufficiently complete to permit substantive review. Once the submission is accepted for filing, the FDA may designate the submission for priority review. Priority review is granted to product candidates that demonstrate a significant improvement to approved products in terms of safety or efficacy in the treatment, diagnosis or prevention of serious or life-

threatening conditions. The FDA’s decision to grant priority review is driven solely by the data submitted and cannot be assured in advance. Under the Prescription Drug User Fee Act, or PDUFA, product candidates that are given a priority review designation have a 6-month FDA review timeline.

      After a submission is accepted for filing, the FDA begins an in-depth review of the NDA. Under federal law, the FDA has 180 days in which to review the application and respond to the applicant. In cases other than those in which a priority review designation has been granted, the review timeline is often significantly extended by FDA requests for additional information or clarification regarding information already provided in the submission. The FDA typically will refer the application to the appropriate advisory committee, typically a panel of clinicians and statisticians, for review, evaluation and a recommendation as to whether the application should be approved. The FDA is not bound by the recommendation of an advisory committee.

      If FDA evaluations of the NDA and the manufacturing facilities are favorable, the FDA may issue an approval letter, or, in some cases, an approvable letter followed by an approval letter. Approvable letters usually contain a number of conditions that must be met to secure final approval of the NDA. When and if those conditions have been met to the FDA’s satisfaction, the FDA will issue an approval letter. The approval letter authorizes commercial marketing of the drug for specific indications. As a condition of NDA approval, the FDA may require post-marketing testing and surveillance to monitor the drug’s safety or efficacy or impose other conditions. Once granted, product approvals may be withdrawn if compliance with regulatory standards is not maintained or problems occur following initial marketing.

      If the FDA’s evaluation of the NDA submission or manufacturing facilities is not favorable, the FDA may refuse to approve the NDA or issue a not approvable letter. The not approvable letter outlines the deficiencies in the submission and often requires additional testing or information. The FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval.

      Under the terms of our agreement with Novartis, we have primary responsibility for preparing and filing U.S. regulatory submissions with respect to any product candidate which Novartis has licensed from us; Novartis has primary responsibility for preparing and filing regulatory submissions with respect to any licensed product in all other countries in the world. Under certain circumstances, primary responsibilities for all or certain regulatory tasks in a particular country may be switched from one party to the other.

      In the European Union, which we refer to as the EU, investigational products are subject to extensive regulatory requirements. As in the U.S., the marketing of medicinal products has for many years been subject to the granting of marketing authorizations by relevant regulatory agencies. The grant of these marketing authorizations can involve testing in addition to that which the FDA requires and the time required may also differ from that required for FDA approval. In the EU, approval of new pharmaceutical products can be granted either through a mutual recognition procedure and decentralized approval or through a centralized procedure. The processes, which were updated in May 2004 to comply with pharmaceutical legislation enacted in connection with the enlargement of the EU, are described below.

      Mutual Recognition Procedure and Decentralized Approval. An applicant submits an application in one EU member state, known as the reference member state, and requests the reference member state to approve the drug. The reference member state will review the registration documents within 210 days after receipt of a valid application. With the approved dossier and the summary of product characteristics, the applicant then requests the mutual recognition in the concerned member states of the reference authorization of the reference member state. Within 90 days of receipt, the concerned member states shall approve the assessment report, summary of product characteristics, and labeling and package leaflet, and inform the reference member state accordingly. The reference member state shall record the agreement of all parties, close the procedure and inform the applicant accordingly.

      Each member state in which the application has been submitted shall adopt a decision in conformity with the approved assessment report, summary of product characteristics, and the labeling and package leaflet as approved, within 50 days after acknowledgement of the agreement. If a member state cannot approve the assessment report, summary of product characteristics, and the labeling and package leaflet on the grounds of potential serious risk to public health, it will give a detailed exposition of the reasons for its position to the reference member state, the other member states concerned, and to the applicant. The points of disagreement will be referred to a coordination group for resolution. Alternatively, the applicant could implement changes in the summary of product characteristics as requested by a country.

      Centralized Procedure. This procedure is currently mandatory for products developed by means of a biotechnological process and optional for certain new active substances. However medicinal products containing new active substances and for which the indication is treatment of AIDS, cancer, neurodegenerative disorder or diabetes must be submitted via the centralized process. Additionally, four years after the effective date of the regulation, it will no longer be possible to opt for the mutual recognition procedure for products which contain new active substance and for which the indication is treatment of auto-immune diseases and other immune dysfunctions, and viral diseases. Our product candidates fall into the last category. As a result, we anticipate relying on this centralized procedure to seek marketing application approval in the EU for any HBV, HCV and HIV product candidates that we successfully develop.

      Under the centralized procedure, an application is submitted to the European Medicines Agency. Two EU member states are appointed to conduct an initial evaluation of each application, the so-called rapporteur and co-rapporteur countries. The regulatory authorities in both the rapporteur and co-rapporteur country each prepare an assessment report. These reports become the basis of a scientific opinion of the renamed Committee for Medicinal Products for Human Use. If this opinion is favorable, it is sent to the European Commission which drafts a decision. After consulting with the member states, the European Commission adopts a decision and grants a marketing authorization which is valid throughout the EU and confers the same rights and obligations in each of the member states as a marketing authorization granted by that member state. Several other European countries outside the EU, such as Norway and Iceland, accept EU review and approval as a basis for their own national approval.

      Until recently, submissions to regulatory authorities in Asia for marketing authorization have been primarily based on using prior approvals in either the U.S. or the EU in addition to small, locally conducted studies. More and more companies are now performing key phase III clinical trials in several major Asian countries such as Japan, China, Taiwan and South Korea. Local clinical trial applications, equivalent to INDs, will be filed in several Asian countries including those listed above to permit the conduct of such key clinical trials in those regions. Marketing applications similar to the U.S. NDA will be submitted to the appropriate regulatory authorities upon completion of all clinical trials.

      As part of the ten-plus years of International Conference on Harmonization, or ICH, standardization initiatives spearheaded by the U.S., EU and Japan, future marketing applications in these regions will be submitted as a core global dossier known as the Common Technical Document, or CTD. While the FDA has not mandated that submissions be made in the CTD format, it has indicated that this is its preferable submission format. In the EU and Japan, the CTD is the required submission format. Electronic CTDs, or e-CTD, are currently being piloted and are the manner of submission preferred by the regulatory agencies requiring and recommending the CTD format. Non-ICH regions such as Eastern and Central Europe, Latin America and China have indicated that the CTD will be an acceptable submission format.

      Our research and development processes involve the controlled use of numerous hazardous materials, chemicals and radioactive materials and produce waste products. We are subject to federal, state and local

laws and regulations governing the use, manufacture, storage, handling and disposing of hazardous materials and waste products, including certain regulations promulgated by the U.S. Environmental Protection Agency, or EPA. The EPA regulations to which we are subject require that we register with the EPA as a generator of hazardous waste. We do not expect the cost of complying with these laws and regulations to be material. We do not maintain insurance for environmental liability or toxic tort claims that may be asserted against us as a result of our use or disposal of hazardous materials, chemicals and radioactive materials.

      As of December 31, 2004, we had 125 full time employees, 94 of whom were engaged in research, development and manufacturing functions and 31 of whom were engaged in administration, finance and commercialization activities. Of our employees, 44 hold either M.D. or Ph.D. degrees or both.

Factors that May Affect Future Results

      We have incurred significant losses since our inception in May 1998. We have not generated any revenue from the sale of products to date. We expect to incur annual operating losses over the next several years as we expand our drug discovery, development and commercialization efforts. To become profitable, we must successfully develop and obtain regulatory approval for our product candidates and effectively manufacture, market and sell any drug products we develop. Accordingly, we may never generate significant revenues and, even if we do generate significant revenues, we may never achieve profitability.

      We believe that the net proceeds from our initial public offering and concurrent private placement to Novartis which we received in July 2004, together with our current cash and cash equivalents, marketable securities and development expense funding by Novartis for our HBV product candidates, will be sufficient to satisfy our anticipated cash needs at least until mid 2006. However, we may need to seek additional funding within this period of time. Our drug development programs and the potential commercialization of our product candidates will require substantial additional cash to fund expenses that we will incur in connection with preclinical studies and clinical trials, regulatory review, manufacturing and sales and marketing efforts.

      Our need for additional funding will depend in large part on whether:

      In addition, although Novartis has agreed to pay for certain development expenses incurred under an approved development plan for our lead HBV product candidates and other product candidates which Novartis elects to license, Novartis has the right to terminate its license and the related funding obligations with respect to any product candidate by providing us with six months’ written notice.

      Our future capital needs will also depend generally on many other factors, including:

      We estimate that we will incur significant costs to complete the clinical trials and other studies required to enable us to file NDAs with the FDA for our existing HBV and HCV product candidates, assuming we continue our development of each of these product candidates. The time and cost to complete clinical development of these product candidates may vary as a result of a number of factors.

      We may seek additional capital through a combination of public and private equity offerings, debt financings and collaborative, strategic alliance and licensing arrangements. Such additional financing may not be available when we need it or may not be available on terms that are favorable to us.

      If we raise additional capital through the sale of our common stock, existing stockholders will be diluted and the terms of the financing may adversely affect the holdings or rights of our stockholders. If we are unable to obtain adequate financing on a timely basis, we could be required to delay, reduce or eliminate one or more of our drug development programs or to enter into new collaborative, strategic alliance or licensing arrangements that may not be favorable to us. These arrangements could result in the transfer to third parties of rights that we consider valuable.

      Our product candidates are under development and we have not yet begun to recruit sales personnel to establish a direct sales force for the markets in which we will co-promote or co-market drugs we successfully develop and for which we receive regulatory approval. Due to the promotion, marketing and sale of competitive and potentially competitive products within specialized markets by companies that have significantly greater resources and existing commercialization infrastructures, we believe that it may be difficult to recruit qualified personnel with experience in sales and marketing of viral and other infectious disease therapeutics. As a result, we may not be able to successfully hire and train qualified sales personnel to establish a direct sales force.

      We are engaged in segments of the pharmaceutical industry that are highly competitive and rapidly changing. Many large pharmaceutical and biotechnology companies, academic institutions, governmental agencies and other public and private research organizations are pursuing the development of novel drugs that target viral diseases, including the same diseases we are targeting. We face, and expect to continue to face, intense and increasing competition as new products enter the market and advanced technologies become available. In addition, we believe that a significant number of drugs are currently under development and will become available in the future for the treatment of hepatitis B, hepatitis C and HIV. We believe that a number of product candidates for the treatment of hepatitis B are in a more advanced stage of development than our hepatitis B product candidates and, like our product candidates, these other product candidates are based on nucleoside technology. If any of these product candidates are successfully developed, they may be

marketed before our product candidates. Our competitors’ products may be more effective, or better marketed and sold, than any of our products. Many of our competitors have:

      Under certain circumstances, Novartis has the right to compete with product candidates and drugs developed or licensed by us. Novartis has the right under certain circumstances to market and sell products that compete with the product candidates and products that we license to it, and any competition by Novartis could have a material adverse effect on our business.

      Competitive products may render our products obsolete or noncompetitive before we can recover the expenses of developing and commercializing our product candidates. Furthermore, the development of new treatment methods and/or the widespread adoption or increased utilization of vaccines for the diseases we are targeting could render our product candidates noncompetitive, obsolete or uneconomical.

      If we successfully develop and obtain approval for our product candidates, we will face competition based on the safety and effectiveness of our products, the timing and scope of regulatory approvals, the availability and cost of supply, marketing and sales capabilities, reimbursement coverage, price, patent position and other factors. Our competitors may develop or commercialize more effective or more affordable products, or obtain more effective patent protection, than we do. Accordingly, our competitors may commercialize products more rapidly or effectively than we do, which could adversely affect our competitive position and business.

      Biotechnology and related pharmaceutical technologies have undergone and continue to be subject to rapid and significant change. Our future will depend in large part on our ability to maintain a competitive position with respect to these technologies.

      Even if our product candidates are successfully developed, our success and growth will depend upon the acceptance of these candidates by physicians, healthcare professionals and third-party payers. Acceptance will be a function of our products being clinically useful and demonstrating superior therapeutic effect with an acceptable side effect profile as compared to existing or future treatments. Lamivudine and adefovir dipivoxil are small molecule therapeutics currently approved for the treatment of chronic hepatitis B. The current standard of care for the treatment of chronic hepatitis C is the combination of pegylated interferon and ribavirin. We are aware that a significant number of product candidates are currently under development and may become available in the future for the treatment of hepatitis B, hepatitis C and HIV. If our products do not achieve market acceptance, then we will not be able to generate sufficient revenue from product sales to maintain or grow our business. In addition, even if product candidates we successfully develop achieve market acceptance, we may not be able to maintain that market acceptance over time if:

      Our research and development programs, other than our programs for telbivudine, valtorcitabine and NM283, are at preclinical stages. Additional product candidates that we may develop will require significant research, development, preclinical studies and clinical trials, regulatory approval and commitment of resources before commercialization. We cannot predict whether our research will lead to the discovery of any additional product candidates that could generate revenues for us.

      We have experienced a period of rapid and substantial growth that has placed a strain on our administrative and operational infrastructure, and we anticipate that our continued growth will have a similar impact. As we advance our product candidates through clinical trials and regulatory approval processes, we will need to expand our development, regulatory, manufacturing, marketing and sales capabilities or contract with third parties to provide these capabilities for us. As our operations expand, we expect that we will need to manage additional relationships with various collaborative partners, suppliers and other third parties. Our ability to manage our operations and growth requires us to continue to improve our operational, financial and management controls, reporting systems and procedures. We may not be able to implement improvements to our management information and control systems in an efficient or timely manner and may discover deficiencies in existing systems and controls that could expose us to an increased risk of incurring financial or accounting irregularities or fraud.

      We highly depend upon our senior management and scientific staff. The loss of the service of any of the key members of our senior management may significantly delay or prevent the achievement of product development and other business objectives. Our ability to attract and retain qualified personnel, consultants and advisors is critical to our success. We face intense competition for qualified individuals from numerous pharmaceutical and biotechnology companies, universities, governmental entities and other research institutions. We may be unable to attract and retain these individuals, and our failure to do so would have an adverse effect on our business.

      Our business exposes us to significant potential product liability risks that are inherent in the development, manufacturing and marketing of human therapeutic products. Product liability claims could result in a recall of products or a change in the indications for which they may be used. Although we do not currently commercialize any products, product liability claims could be made against us based on the use of our product candidates in clinical trials. We currently have clinical trial insurance and will seek to obtain product liability insurance prior to marketing any of our product candidates. Our insurance may not provide adequate coverage against potential liabilities. Furthermore, clinical trial and product liability insurance is becoming increasingly expensive. As a result, we may be unable to maintain current amounts of insurance coverage, obtain additional insurance or obtain sufficient insurance at a reasonable cost to protect against losses that could have a material adverse effect on us.

      To date, we have not marketed, distributed or sold any products. The success of our business depends primarily upon our ability to develop and commercialize our product candidates successfully. Our most advanced product candidates are telbivudine, valtorcitabine and NM283. Currently, we are conducting phase III clinical trials of telbivudine and phase IIb clinical trials of both NM283 and the combination of valtorcitabine and telbivudine. Our other product candidates are in various earlier stages of development. Our product candidates must satisfy rigorous standards of safety and efficacy before they can be approved for sale. Safety standards include an assessment of the toxicology and carcinogenicity of the product candidates we are developing. To satisfy these standards, we must engage in expensive and lengthy testing and obtain regulatory approval of our product candidates. As a result of efforts to satisfy these regulatory standards, our product candidates may not:

      We do not expect any of our product candidates to be commercially available until at least 2006.

      To obtain regulatory approval for the commercial sale of our product candidates, we will be required to demonstrate through preclinical studies and clinical trials that our product candidates are safe and effective. Preclinical studies and clinical trials are lengthy and expensive and the historical rate of failure for product candidates is high. The results from preclinical studies of a product candidate may not predict the results that will be obtained in human clinical trials.

      We, the FDA or other applicable regulatory authorities may suspend clinical trials of a product candidate at any time if we or they believe the persons participating in such clinical trials are being exposed to unacceptable health risks or for other reasons. Among other things, adverse side effects of a product candidate on persons in a clinical trial could result in the FDA or foreign regulatory authorities refusing to approve a particular product candidate for any or all indications of use.

      Clinical trials require sufficient patient enrollment, which is a function of many factors, including the size of the patient population, the nature of the protocol, the proximity of patients to clinical sites, the availability of effective treatments for the relevant disease and the eligibility criteria for the clinical trial. Delays in patient enrollment can result in increased costs and longer development times.

      We cannot predict whether we will encounter problems with any of our completed, ongoing or planned clinical trials that will cause us or regulatory authorities to delay or suspend our clinical trials or delay the analysis of data from our completed or ongoing clinical trials.

      Any of the following could delay the completion of our ongoing and planned clinical trials:

      If the results of our ongoing or planned clinical trials for our product candidates are not available when we expect or if we encounter any delay in the analysis of data from our preclinical studies and clinical trials:

      Our product candidates are subject to extensive governmental regulations relating to development, clinical trials, manufacturing and commercialization. Rigorous preclinical studies and clinical trials and an extensive regulatory approval process are required in the U.S. and in many foreign jurisdictions prior to the commercial sale of our product candidates. Satisfaction of these and other regulatory requirements is costly, time consuming, uncertain and subject to unanticipated delays. It is possible that none of the product candidates we are developing will obtain the appropriate regulatory approvals necessary to permit commercial distribution.

      We have limited experience in conducting and managing the clinical trials necessary to obtain regulatory approvals, including approval by the FDA. The time required for FDA and other approvals is uncertain and typically takes a number of years, depending upon the complexity of the product candidate. Our analysis of data obtained from preclinical studies and clinical trials is subject to confirmation and interpretation by regulatory authorities, which could delay, limit or prevent regulatory approval. We may also encounter unanticipated delays or increased costs due to government regulation from future legislation or administrative action, changes in FDA policy during the period of product development, clinical trials and FDA regulatory review.

      Any delay in obtaining or failure to obtain required approvals could materially adversely affect our ability to generate revenues from a particular product candidate. Furthermore, any regulatory approval to market a product may be subject to limitations on the indicated uses for which we may market the product. These restrictions may limit the size of the market for the product.

      We are also subject to numerous foreign regulatory requirements governing the conduct of clinical trials, manufacturing and marketing authorization, pricing and third party reimbursement. The foreign regulatory approval process includes all of the risks associated with FDA approval described above as well as risks attributable to the satisfaction of local regulations in foreign jurisdictions. Approval by the FDA does not assure approval by regulatory authorities outside the U.S. Many foreign regulatory authorities, including those in major markets such as China, have different approval procedures than those required by the FDA and may impose additional testing requirements for our product candidates.

      Approvals of our product candidates are subject to continuing regulatory review, including the review of clinical results, which are reported after our product candidates become commercially available. The manufacturer and the manufacturing facilities we use to make any of our product candidates, will be subject to periodic review and inspection by the FDA. The subsequent discovery of previously unknown problems with the product, manufacturer or facility may result in restrictions on the drug, manufacturer or facility, including withdrawal of the drug from the market. We do not have, and currently do not intend to develop, the ability to manufacture material for our clinical trials or at commercial scale. 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 manufacturer for regulatory compliance.

      If we fail to comply with applicable continuing regulatory requirements, we may be subject to civil penalties, suspension or withdrawal of regulatory approval, product recalls and seizures, injunctions, operating restrictions and criminal prosecutions and penalties. Because of these potential sanctions, we seek to monitor compliance with these regulations.

      The regulations governing drug product licensing, pricing and reimbursement vary widely from country to country. Some countries require approval of the sale price of a drug before it can be marketed. In many countries, the pricing review period begins after product licensing approval is granted. In some foreign markets, prescription pharmaceutical pricing remains subject to continuing governmental control even after initial approval is granted. Although we monitor these regulations, our product candidates are currently in the development stage and we will not be able to assess the impact of price regulations for at least several years. As a result, we may obtain regulatory approval for a product in a particular country, but then be subject to price regulations, which may delay the commercial launch of the product and may negatively impact the revenues we are able to derive from sales by us or Novartis of the product in that country.

      Successful commercialization of our products will also depend in part on the extent to which reimbursement for our products and related treatments will be available from government health administration authorities, private health insurers and other organizations. If we succeed in bringing one or more products to the market, these products may not be considered cost effective and reimbursement to the patient may not be available or sufficient to allow us to sell our products on a competitive basis. Because our product candidates are in the development stage, we are unable at this time to determine the cost effectiveness of these product candidates. We may need to conduct pharmacoeconomic studies in order to demonstrate their cost effectiveness. Sales of prescription drugs depend on the availability and level of reimbursement to the consumer from third-party payers, such as government and private insurance plans. These third-party payers frequently require that drug companies provide them with predetermined discounts from list prices, and third-party payers are increasingly challenging the prices charged for medical products. Because our product candidates are in the development stage, we do not know the level of reimbursement, if any, we will receive for products successfully developed. If the reimbursement we receive for any of our products is inadequate in light of our development and other costs, our profitability could be adversely affected.

      We believe that the efforts of governments and third-party payers to contain or reduce the cost of healthcare will continue to affect the business and financial condition of pharmaceutical and biopharmaceutical companies. A number of legislative and regulatory proposals to change the healthcare system in the U.S. and other major healthcare markets have been proposed in recent years. These proposals have resulted in prescription drug benefit legislation being enacted in the U.S. and healthcare reform legislation being enacted by certain states. Further federal and state legislative and regulatory developments are possible and we expect ongoing initiatives in the U.S. to increase pressure on drug pricing. Such reforms could have an adverse effect on anticipated revenues from product candidates that we may successfully develop.

      Our research and development activities involve the controlled use of hazardous materials, chemicals and various radioactive compounds. Although we believe that our safety procedures for handling and disposing of these materials comply with the standards prescribed by state and federal laws and regulations, the risk of accidental contamination or injury from these materials cannot be eliminated. If an accident occurs, we could be held liable for resulting damages, which could be substantial. We are also subject to numerous environmental, health and workplace safety laws and regulations, including those governing laboratory procedures, exposure to blood-borne pathogens and the handling of biohazardous materials. Although we maintain workers’ compensation insurance to cover us for costs we may incur due to injuries to our employees resulting from the use of these materials, this insurance may not provide adequate coverage against potential liabilities. We do not maintain insurance for environmental liability or toxic tort claims that may be asserted against us. Additional federal, state, foreign and local laws and regulations affecting our operations may be adopted in the future. We may incur substantial costs to comply with, and substantial fines or penalties if we violate, any of these laws or regulations.

      Novartis and its affiliate, Novartis BioVentures, presently hold approximately 57% of our outstanding common stock. For so long as Novartis owns at least a majority of our outstanding common stock, in addition to its contractual approval rights, Novartis has the ability to delay or prevent a change in control of Idenix that may be favored by other stockholders and otherwise exercise substantial control over all corporate actions requiring stockholder approval irrespective of how our other stockholders may vote, including:

      As long as Novartis and its affiliates own at least 19.4% of our voting stock, which we define below, we cannot take certain actions without the consent of Novartis. These actions include:

      Pursuant to the stockholders agreement, we are obligated to use our reasonable best efforts to nominate for election as a director at least two designees of Novartis for so long as Novartis and its affiliates own at least 35% of our voting stock and at least one designee of Novartis for so long as Novartis and its affiliates own at least 19.4% of our voting stock.

      Additionally, until such time as Novartis and its affiliates own less than 50% of our voting stock, Novartis’ consent is required for the selection and appointment of our Chief Financial Officer. If in Novartis’ reasonable judgment our Chief Financial Officer is not satisfactorily performing his duties, we are required to terminate the employment of our Chief Financial Officer.

      Furthermore, under the terms of the stock purchase agreement, dated as of March 21, 2003, among us, Novartis and substantially all of our then existing stockholders which we refer to as the stock purchase agreement, Novartis is required to make future contingent payments of up to $357 million to these stockholders if we achieve predetermined development milestones with respect to an HCV product candidate. As a result, in making determinations as to our annual operating plan and budget for the development of our HCV product candidates, the interests of Novartis may be different than the interests of our other stockholders, and Novartis could exercise its approval rights in a manner that may not be in the best interests of all of our stockholders.

      Under the stockholders’ agreement, voting stock means our outstanding securities entitled to vote in the election of directors, but does not include:

      Novartis has the ability to exercise substantial control over our strategic direction, our research and development focus and other material business decisions.

      In May 2003, we received a $75 million license fee from Novartis in connection with the license to Novartis of our HBV product candidates. Assuming we continue to successfully develop and commercialize these product candidates, under the terms of the development agreement, we are entitled to receive reimbursements of expenses we incur in connection with the development of these product candidates and

additional milestone payments from Novartis. In June 2004, we received a milestone payment from Novartis in the amount of $25 million based upon the results achieved in the phase I clinical trial of NM283, our lead HCV product candidate. Novartis has the option to license NM283 and additional product candidates from us. If it does so, we are entitled to receive additional license fees and milestone payments. We expect that we will derive substantially all of our near term revenues from Novartis. Novartis may terminate the development agreement in any country or with respect to any product or product candidate licensed under the development agreement for any reason on six months’ written notice. If the development agreement is terminated in whole or in part and we are unable to enter similar arrangements with other collaborators, our business would be materially adversely affected.

      In addition to its license of telbivudine and valtorcitabine, Novartis has the option under the development agreement to license our other product candidates, including NM283, our lead product candidate for the treatment of hepatitis C. Our drug development programs and potential commercialization of our product candidates will require substantial additional funding. If we are not successful in efforts to enter into a collaboration arrangement with respect to a product candidate not licensed by Novartis, we may not have sufficient funds to develop such product candidate internally. As a result, our business would be adversely affected. In addition, the negotiation of a collaborative agreement is time consuming, and could, even if successful, delay the development, manufacture and/or commercialization of a product candidate and the terms of the collaboration agreements may not be favorable to us.

      We have agreed to indemnify Novartis and its affiliates against losses suffered as a result of our breach of representations and warranties in the development agreement and the stock purchase agreement. Under the development agreement and stock purchase agreement, we made numerous representations and warranties to Novartis regarding our hepatitis C and hepatitis B product candidates, including representations regarding our ownership of the inventions and discoveries relating to such product candidates. If one or more of our representations or warranties were not true at the time we made them to Novartis, we would be in breach of these agreements. In the event of a breach by us, Novartis has the right to seek indemnification from us and, under certain circumstances, us and our stockholders who sold shares to Novartis, which include many of our directors and officers, for damages suffered by Novartis as a result of such breach. The amounts for which we could become liable to Novartis may be substantial.

      In 2004, we entered into a settlement agreement with UAB and UABRF relating to our ownership of our Chief Executive Officer’s inventorship interest in certain of our patents and patent applications, including patent applications covering our hepatitis C product candidates. Under the terms of the settlement agreement, we agreed to make payments to UABRF, including an initial payment paid in 2004 in the amount of $2 million, as well as regulatory milestone payments and payments relating to net sales of certain products. Novartis may seek to recover from us, and, under certain circumstances, us and our stockholders who sold shares to Novartis, which include many of our officers and directors, the losses it suffers as a result of any breach of the representations and warranties we made relating to our hepatitis C product candidates and may assert that such losses include the settlement payments.

      Novartis could also suffer losses in connection with any amounts we become obligated to pay relating to or under the terms of any license agreement, including the UAB Agreement, or other arrangements we may be required to enter into with the 1998 licensors to commercialize telbivudine. Novartis, may seek to recover from us, and, under certain circumstances, us and our stockholders who sold shares to Novartis such losses and other losses it suffers as a result of any breach of the representations and warranties we made relating to our hepatitis B product candidates.

      If we are required to rely upon the UAB license agreement to commercialize telbivudine, we will be obligated to make certain payments to UABRF and the other licensors. Such amounts would include payments in the aggregate amount of $1.3 million due upon achievement of regulatory milestones, a 6% royalty on annual sales up to $50 million and a 3% royalty on annual sales greater than $50 million made by us or an affiliate of ours. Additionally, if we sublicense our rights to a non-affiliate sublicenssee which is defined as any entity other than one which holds or controls at least 50% of our capital stock, or if Novartis’s ownership interest in us declines below 50% of our outstanding shares of capital stock, we could be obligated to pay to UABRF 30% of all royalties received by us from sales by the sublicensee of telbivudine and 20% of all fees, milestone payments and other cash consideration we receive from the sublicensee with respect to telbivudine.

      We have significant obligations to Novartis under the development agreement and our master manufacturing and supply agreement, dated as of May 8, 2003, between our subsidiary, Idenix Cayman and Novartis. We refer to the master manufacturing and supply agreement as the supply agreement. The obligations to which we are subject include the responsibility for developing and, in some countries, co-promoting or co-marketing the products licensed to Novartis in accordance with plans and budgets subject to Novartis’ approval. The covenants and agreements we made when entering into the development agreement and supply agreement include covenants relating to payment of our required portion of development expenses under the development agreement, compliance with certain third-party license agreements and the conduct of our clinical studies. If we materially breach one or both of these agreements and are unable within an agreed time period to cure such breach, the agreements may be terminated and we may be required to grant Novartis an exclusive license to develop, manufacture and/or sell such products. Although such a license would be subject to payment of a royalty by Novartis to be negotiated in good faith, we and Novartis have stipulated that no such payments would permit the breaching party to receive more than 90% of the net benefit it was entitled to receive before the agreements were terminated. Accordingly, if we materially breach our obligations under the development agreement or the supply agreement, we may lose our rights to develop or commercialize our product candidates and receive lower payments from Novartis than we had anticipated.

      Under the terms of the stockholders’ agreement, Novartis has the right to purchase at par value of $0.001 per share, such number of shares required to maintain its percentage ownership of our voting stock if we issue shares of capital stock in connection with the acquisition or in-licensing of technology through the issuance of up to 5% of our stock in any 24-month period. If Novartis elects to maintain its percentage ownership of our voting stock under the rights described above, Novartis will be buying such shares at a price, which is substantially below market value, which would cause dilution. This right of Novartis will remain in effect until the earlier of:

      In addition to the right to purchase shares of our common stock at par value as described above, Novartis has the right, subject to limited exceptions noted below, to purchase a pro rata portion of shares of capital stock that we issue. The price that Novartis pays for these securities would be the price that we offer such securities to third parties, including the price paid by persons who acquire shares of our capital stock pursuant

to awards granted under stock compensation plans. Novartis’ right to purchase a pro rata portion does not include:

      Novartis’ right to purchase shares includes a right to purchase securities that are convertible into, or exchangeable for, our common stock, provided that Novartis’ right to purchase stock in connection with options or other convertible securities issued to any of our directors, officers, employees or consultants pursuant to any stock compensation or equity incentive plan will not be triggered until the underlying equity security has been issued to the director, officer, employee or consultant.

      Under the development agreement, we will co-promote or co-market with Novartis in the U.S., the U.K., France, Germany, Italy and Spain, our lead hepatitis B drug products and other products that Novartis elects to license from us, which may include our hepatitis C drug products. Novartis will market and sell these drug products throughout the rest of the world. As a result, we depend upon the success of the efforts of Novartis to market and sell our drug products. However, we have limited control over the resources that Novartis may devote to its commercialization efforts under the development agreement and, if Novartis does not devote sufficient time and resources to such efforts, we may not realize the potential commercial benefits of the agreement, and our results of operations may be adversely affected.

      In addition, Novartis has the right to terminate the development agreement with respect to any product, product candidate or country with six months’ written notice to us. If Novartis were to breach or terminate this agreement with us, the development or commercialization of the affected product candidate or product could be delayed, curtailed or terminated because we may not have sufficient resources or capabilities, financial or otherwise, to continue development and commercialization of the product candidate, and we may not be successful in entering into a collaboration with another third party.

      Novartis has agreed that, except as set forth in the development agreement, it will not market, sell or promote certain competitive products except that:

      Accordingly, Novartis may under certain circumstances market, sell, promote or license, competitive products. Novartis has significantly greater financial, technical and human resources than we have and is better equipped to discover, develop, manufacture and commercialize products. In addition, Novartis has more extensive experience in preclinical studies and clinical trials, obtaining regulatory approvals and manufacturing and marketing pharmaceutical products. Moreover, any direct or indirect competition with Novartis with respect to products that we have licensed to them could result in confusion in the market. In the event that Novartis competes with us, our business could be materially and adversely affected.

      We have limited sales, marketing and distribution capabilities. Although we intend to build an internal sales force and expand our marketing capabilities, we may seek to further augment our sales, marketing and distribution capabilities through arrangements with third parties. We may not be successful in entering into any such arrangements and, if entered into, the terms of any such arrangements may not be favorable. We cannot be assured that any third party would devote the necessary time or attention to sell, market or distribute our products. If these arrangements are unsuccessful, we may be unable to successfully commercialize our products.

      Our drug development programs and potential commercialization of our product candidates will require substantial additional cash to fund expenses to be incurred in connection with these activities. We have entered into an agreement with Novartis for the development and commercialization of telbivudine and valtorcitabine, our lead HBV product candidates, and we have granted options to Novartis with respect to development and commercialization of our other product candidates. We may seek to enter into additional collaboration agreements with pharmaceutical companies to fund all or part of the costs of drug development and commercialization of product candidates that Novartis does not license. We may not be able to enter into collaboration agreements and the terms of the collaboration agreements, if any, may not be favorable to us. If we are not successful in our efforts to enter into a collaboration arrangement with respect to a product candidate, we may not have sufficient funds to develop this or any other product candidate internally.

      If we do not have sufficient funds to develop our product candidates, we will not be able to bring these product candidates to market and generate revenue. As a result, our business will be adversely affected. In addition, the inability to enter into collaboration agreements could delay or preclude the development, manufacture and/or commercialization of a product candidate and could have a material adverse effect on our financial condition and results of operations because:

      We have entered into the development agreement with Novartis and we may enter into additional collaborative arrangements in the future. If collaborative partners do not devote sufficient time and resources to any collaboration arrangement with us, we may not realize the potential commercial benefits of the arrangement, and our results of operations may be adversely affected. In addition, if Novartis or future collaboration partners were to breach or terminate their arrangements with us, the development and commercialization of the affected product candidate could be delayed, curtailed or terminated because we

may not have sufficient financial resources or capabilities to continue development and commercialization of the product candidate.

      We work with chemists and biologists at academic and other institutions who assist us in our research and development efforts. Telbivudine, valtorcitabine and NM283 were discovered with the research and development assistance of these chemists and biologists. Many of the scientists who have contributed to the discovery and development of our product candidates are not our employees and may have other commitments that would limit their future availability to us. Although our scientific advisors and collaborators generally agree not to do competing work, if a conflict of interest between their work for us and their work for another entity arises, we may lose their services.

      We have limited manufacturing experience and have the capability to manufacture only small quantities of compounds required in preclinical studies for our product candidates. We do not have, and do not intend to develop, the ability to manufacture material for our clinical trials or at commercial scale. To develop our product candidates, apply for regulatory approvals and commercialize any products, we need to contract for or otherwise arrange for the necessary manufacturing facilities and capabilities. Under the supply agreement, Novartis has agreed to manufacture or have manufactured for us the active pharmaceutical ingredients, or API, of product candidates that we license to Novartis for our clinical supply requirements. In addition, Novartis may manufacture or have manufactured for us the API for commercial supplies of these products, subject to the terms of the supply agreement. Under this agreement, if Novartis manufactures the API for a product, we would generally rely on Novartis for regulatory compliance and quality assurance for that product. If Novartis were to breach or terminate its manufacturing arrangements with us, the development or commercialization of the affected product or product candidate could be delayed, which could have an adverse affect on our business. In addition, any change in our manufacturers could be costly because the commercial terms of any such arrangement could be less favorable than the commercial terms we negotiate with Novartis.

      We have relied upon third parties to produce material for preclinical and clinical studies and may continue to do so in the future. Although we believe that we will not have any material supply issues, we cannot be certain that we will be able to obtain long term supply arrangements of those materials on acceptable terms, if at all. We also expect to rely upon other third parties to produce materials required for clinical trials and for the commercial production of certain of our products if we succeed in obtaining necessary regulatory approvals. If we are unable to arrange for third-party manufacturing, or to do so on commercially reasonable terms, we may not be able to complete development of our products or market them.

      Reliance on Novartis and third-party manufacturers entails risks to which we would not be subject if we manufactured products ourselves, including reliance on Novartis or the third party for regulatory compliance and quality assurance, the possibility of breach by Novartis or the third party of agreements related to supply because of factors beyond our control and the possibility of termination or nonrenewal of the agreement by Novartis or the third party, based on its own business priorities, at a time that is costly or damaging to us.

      In addition, the FDA and other regulatory authorities require that our products be manufactured according to current good manufacturing practice regulations. Any failure by us, Novartis or our third-party manufacturers to comply with current good manufacturing practices and/or our failure to scale up our manufacturing processes could lead to a delay in, or failure to obtain, regulatory approval. In addition, such failure could be the basis for action by the FDA to withdraw approvals for product candidates previously granted to us and for other regulatory action.

      We may in the future elect to manufacture certain of our products in our own manufacturing facilities. If we do so, we will require substantial additional funds and need to recruit qualified personnel in order to build or lease and operate any manufacturing facilities.

      Our success will depend in part on our ability to obtain patent protection both in the U.S. and in other countries for our product candidates. The patents and patent applications in our patent portfolio are either owned by us, exclusively licensed to us, or co-owned by us and others and exclusively licensed to us. Our ability to protect our product candidates from unauthorized or infringing use by third parties depends substantially on our ability to obtain and maintain valid and enforceable patents. Due to evolving legal standards relating to the patentability, validity and enforceability of patents covering pharmaceutical inventions and the scope of claims made under these patents, our ability to obtain and enforce patents is uncertain and involves complex legal and factual questions. Accordingly, rights under any issued patents may not provide us with sufficient protection for our product candidates or provide sufficient protection to afford us a commercial advantage against our competitors or their competitive products or processes. In addition, we cannot guarantee that any patents will be issued from any pending or future patent applications owned by or licensed to us. Even if patents have been issued or will be issued, we cannot guarantee that the claims of these patents are, or will be, valid or enforceable, or provide us with any significant protection against competitive products or otherwise be commercially valuable to us.

      We may not have identified all patents, published applications or published literature that affect our business either by blocking our ability to commercialize our drugs, by preventing the patentability of our drugs to us or our licensors or co-owners, or by covering the same or similar technologies that may affect our ability to market our product candidates. For example, patent applications in the U.S. are maintained in confidence for up to 18 months after their filing. In some cases, however, patent applications remain confidential in the U.S. Patent and Trademark Office, which we refer to as the U.S. Patent Office, for the entire time prior to issuance as a U.S. patent. Patent applications filed in countries outside the U.S. are not typically published until at least 18 months from their first filing date. Similarly, publication of discoveries in the scientific or patent literature often lags behind actual discoveries. Therefore, we cannot be certain that we or our licensors or co-owners were the first to invent, or the first to file, patent applications on our product candidates or for their use as antiviral drugs. In the event that a third party has also filed a U.S. patent application covering our product candidates or a similar invention, we may have to participate in an adversarial proceeding, known as an interference, declared by the U.S. Patent Office to determine priority of invention in the U.S. The costs of these proceedings could be substantial and it is possible that our efforts could be unsuccessful, resulting in a loss of our U.S. patent position. The laws of some foreign jurisdictions do not protect intellectual property rights to the same extent as in the U.S. and many companies have encountered significant difficulties in protecting and defending such rights in foreign jurisdictions. If we encounter such difficulties in protecting or are otherwise precluded from effectively protecting our intellectual property rights in foreign jurisdictions, our business prospects could be substantially harmed. Our hepatitis B product candidate, telbivudine, was a known compound before the filing of our patent applications covering the use of this product candidate to treat hepatitis B. As a result, we cannot obtain patent protection on telbivudine itself, and we will be limited to relying upon patents granted on the method of using telbivudine in medical therapy for the treatment of hepatitis B.

      Our other hepatitis B product candidate, valtorcitabine, is a prodrug of the L-nucleoside ß-L-2’- deoxycytidine, or LdC, because it is converted into biologically active LdC in the body. We believe that valtorcitabine is a new compound. The U.S. Patent Office has recently allowed our patent claims on valtorcitabine itself, as well as claims on pharmaceutical compositions that include valtorcitabine and we expect this allowed patent application to issue shortly. Claims to the method to treat hepatitis B using valtorcitabine are pending. We will not, however, be able to obtain patent protection on the biologically active form of LdC itself, because it was a known compound at the time the patent applications covering LdC were filed. Instead, our patent protection will be limited to patents covering the method of using LdC in medical therapy for the treatment of hepatitis B.

      Pursuant to the UAB license agreement, we were granted an exclusive license to the rights that UABRF, Emory University and the CNRS, which we collectively refer to as the 1998 licensors, have to a 1995 U.S. patent application and corresponding patent applications in Europe, Canada, Japan and Australia that cover the use of certain synthetic nucleosides for the treatment of hepatitis B. In January 2004 and February 2005, UABRF notified us that it believes that the claims included in this 1995 patent application, which is a continuation in part of a 1993 patent application, can be amended in a manner that would enable the 1998 licensors to prosecute and obtain generic patent claims that would generally cover the method of using telbivudine to treat hepatitis B and, consequently, cover the use of telbivudine to treat hepatitis B.

      If the 1998 licensors pursue such patent claims, we believe that they will assert that the UAB license agreement covers our telbivudine technology and that we are obligated to make payments to the 1998 licensors in the amounts and manner specified in the UAB license agreement. Such amounts include payments in the aggregate amount of $1.3 million due upon achievement of regulatory milestones, a 6% royalty on annual sales up to $50 million and a 3% royalty on annual sales greater than $50 million made by us or an affiliate of ours. Additionally, if we sublicense our rights to any entity other than one which holds or controls at least 50% of our capital stock, or if Novartis’ ownership interest in us declines below 50% of our outstanding shares of capital stock, we could be obligated to pay to the 1998 licensors 30% of all royalties received by us from sales by the sublicensee of telbivudine and 20% of all fees, milestone payments and other cash consideration we receive from the sublicensee with respect to telbivudine.

      If the 1998 licensors amend the patent claims of the pending 1995 patent application and corresponding foreign patent applications, we believe that they will assert a claim to 20% of the $75 million license fee we received in May 2003 in connection with the license of our hepatitis B product candidates to Novartis. If UABRF asserts such a claim, we intend to dispute that such amount is owed. Under the terms of the UAB license agreement, the dispute would be resolved by a panel of arbitrators if we are unable to reach agreement with UABRF after a period of negotiation and mediation.

      If we fail to perform our material obligations under the UAB license agreement, the agreement may be terminated or UABRF could, on its own behalf and on behalf of the other licensors, render the license to us non-exclusive. In the event UABRF is successful in terminating the license agreement as a result of a breach by us after a period of arbitration, and the 1998 licensors obtain a valid enforceable claim that generically covers the use of telbivudine to treat hepatitis B, it would be necessary for us to obtain another license from the 1998 licensors. Such license may not be available to us on reasonable terms, on an exclusive basis, or at all. This could materially adversely affect or preclude our ability to commercialize telbivudine.

      If the 1998 licensors were instead to render the UAB license agreement to us non-exclusive, we would not be prohibited from using telbivudine to treat hepatitis B, but a non-exclusive license could be granted to one or more of our competitors by one or more of the 1998 licensors.

      If it is determined that the UAB license agreement does cover our use of telbivudine to treat hepatitis B, or we must otherwise rely upon a license agreement granted by the 1998 licensors to commercialize telbivudine, we may be in breach of certain of the representations and warranties we made to Novartis under the development agreement and the stock purchase agreement. Pursuant to the terms of the development agreement and the stock purchase agreement, if there is a breach Novartis has the right to seek indemnification from us, and, under certain circumstances, us and our stockholders who sold shares to Novartis, for the losses Novartis incurs as a result of the breach. The amounts for which we could be liable to Novartis may be substantial.

      Our initial hepatitis C clinical product candidate, NM283, is a prodrug of the active molecule NM107, because it is converted into biologically active NM107 in the body. We believe that NM283 may be a new compound, and therefore we are attempting to obtain patent protection on NM283 itself, as well as a method to treat hepatitis C with NM283. NM107 was a known compound at the time that the patent applications covering the use of this active form of NM283 to treat hepatitis C were filed. As a result, although claims for the method of use of NM107 have been allowed by the U.S. Patent Office, we cannot obtain patent protection on NM107.

      Despite the fact that NM107 is a known compound, we are aware that a number of companies have recently filed patent applications attempting to cover NM107 specifically as a compound, as well as NM283, as members of broad classes of compounds. Companies have also filed patent applications covering the use of NM107, specifically, and NM283, generically, to treat hepatitis C, or more generally Flaviviridae infection. Hepatitis C is a virus in the Flaviviridae virus family. These companies include Merck & Co., Inc. together with Isis Pharmaceuticals, Inc., Ribapharm, Inc., a wholly-owned subsidiary of Valeant Pharmaceuticals International, and Genelabs Technologies, Inc. We believe that we were the first to file patent applications covering the use of these product candidates to treat hepatitis C. Patents in countries outside the U.S. are awarded to the first to file on an invention, and we believe that we are entitled to patent protection in these countries. Notwithstanding this, a foreign country may grant patent rights covering our product candidates to one or more other companies, either because it is not aware of our patent filings or because the country does not interpret our patent filing as a bar to issuance of the other company’s patent in that country. If that occurs, we may need to challenge the third-party patent to establish our proprietary rights, and if we do not or are not successful, we will need to obtain a license that may not be available at all or on commercially reasonable terms. In the U.S., a patent is awarded to the first to invent the subject matter. The U.S. Patent Office could initiate an interference between us and Merck/ Isis, Ribapharm, Genelabs or another company to determine the priority of invention of the use of these compounds to treat hepatitis C. If such an interference is initiated and it is determined that we were not the first to invent the target use of these compounds under U.S. law, we would need to obtain a license that may not be available at all or on commercially reasonable terms.

      A number of companies have filed patent applications and have obtained patents covering general methods for the treatment of hepatitis B, hepatitis C and HIV that could materially affect our ability to develop our product candidates or sell our products. For example, we are aware that Chiron Corporation has obtained broad patents covering hepatitis C proteins, nucleic acids, diagnostics and drug screens. If we need to use these patented materials or methods to develop our hepatitis C product candidates or sell these products, we will need to buy these products from a licensee of Chiron authorized to sell such products or we will require a license from Chiron, which may not be available to us on reasonable terms or at all. This could materially affect or preclude our ability to develop our hepatitis C product candidates and sell our products.

      If we find during clinical evaluation that our hepatitis B, hepatitis C or HIV product candidates should be used in combination with a product covered by a patent held by another company or institution, and that a labeling instruction is required in product packaging recommending that combination, we could be accused of, or held liable for, infringement or inducement of infringement of the third-party patents covering the product recommended for co-administration with our product. In that case, we may be required to obtain a license from the other company or institution to provide the required or desired package labeling, which may not be available on commercially reasonable terms or at all.

      Our success will depend in part on our ability to uphold and enforce patents or patent applications owned or co-owned by us or licensed to us, which cover our product candidates. Such litigation could take place in the U.S. in a federal court or in the U.S. Patent Office. The litigation could also take place in a foreign country, in either the court or the patent office of that country. Proceedings involving our patents or patent applications could result in adverse decisions regarding:

      Even if we are successful in these proceedings, we may incur substantial cost and divert management time and attention in pursuing these proceedings, which could have a material adverse effect on us.

      In May 2004, we and our Chief Executive Officer, Dr. Sommadossi, entered into a settlement agreement with UAB and UABRF resolving a dispute regarding ownership of inventions and discoveries made by Dr. Sommadossi during the period from November 1999 to November 2002, at which time Dr. Sommadossi was on sabbatical and then unpaid leave from his position at UAB. The patent applications we filed with respect to such inventions and discoveries include the patent applications covering our hepatitis C product candidates. Under the terms of the settlement agreement, we agreed to make a $2 million initial payment to UABRF, as well as other potential contingent payments based upon the commercial launch of products discovered or invented by Dr. Sommadossi during his sabbatical and unpaid leave. In addition, UAB and UABRF have each agreed that neither of them has any right, title or ownership interest in these inventions and discoveries. Under the development agreement and stock purchase agreement, we made numerous representations and warranties to Novartis regarding our hepatitis C product candidates, including representations regarding our ownership of the inventions and discoveries. If one or more of our representations or warranties were not true at the time we made them to Novartis, we would be in breach of these agreements. In the event of a breach by us, Novartis has the right to seek indemnification from us and, under certain circumstances, us and our stockholders who sold shares to Novartis, which include many of our directors and officers, for damages suffered by Novartis as a result of such breach. The amounts for which we could be liable to Novartis may be substantial.

      Our success will also depend in part on our ability to avoid infringement of the patent rights of others. If it is determined that we do infringe a patent right of another, we may be required to seek a license, defend an infringement action or challenge the validity of the patents in court. Patent litigation is costly and time consuming. We may not have sufficient resources to bring these actions to a successful conclusion. In addition, if we are not successful in infringement litigation and we do not license or develop non-infringing technology, we may:

      To protect our proprietary technology and processes, we also rely in part on confidentiality agreements with our corporate partners, employees, consultants, outside scientific collaborators and sponsored researchers and other advisors. These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover our trade secrets and proprietary information, and in such cases we could not assert any trade secret rights against such parties. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

      We, together with Novartis, have entered into an amended and restated agreement with CNRS and the University of Montpellier, co-owners of the patent applications covering our hepatitis B product candidates. This agreement covers both the cooperative research program and the terms of our exclusive right to exploit the results of the cooperative research, including our hepatitis B product candidates. We, together with Novartis, have also entered into two agreements with the University of Cagliari, the co-owner of the patent applications covering our hepatitis C product candidates and our NNRTI HIV product candidate. One

agreement with the University of Cagliari covers our cooperative research program and the other agreement is an exclusive license to develop and sell the jointly created HCV and HIV product candidates. Under the amended and restated agreement with CNRS and the University of Montpellier and the license agreement, as amended, with the University of Cagliari, we obtained from our co-owners the exclusive right to exploit these product candidates. Subject to certain rights afforded to Novartis, these agreements can be terminated by either party in circumstances such as the occurrence of an uncured breach by the non-terminating party. The termination of our rights under the agreement with CNRS and the University of Montpellier or the license agreement with the University of Cagliari would have a material adverse effect on our business and could prevent us from developing a product candidate or selling a product. In addition, these agreements provide that we pay the costs of patent prosecution, maintenance and enforcement. These costs could be substantial. Our inability or failure to pay these costs could result in the termination of the agreements or certain rights under them.

      Under our amended and restated agreement with CNRS and the University of Montpellier and our license agreement with the University of Cagliari, we and Novartis have the right to exploit and license our co-owned product candidates without the permission of the co-owners. However, our agreements with CNRS and the University of Montpellier and with the University of Cagliari are currently governed by, and will be interpreted and enforced under, French and Italian law, respectively, which are different in substantial respects from U.S. law, and which may be unfavorable to us in material respects. Under French and Italian law, co-owners of intellectual property cannot exploit, assign or license their individual rights without the permission of the co-owners. Accordingly, if our agreements with the University of Cagliari terminate, we may not be able to exploit, license or otherwise convey to Novartis or other third parties our rights in our product candidates for a desired commercial purpose without the consent of the co-owner, which could materially affect our business and prevent us from developing our product candidates and selling our products.

      Under U.S. law, a co-owner has the right to prevent the other co-owner from suing infringers by refusing to join voluntarily in a suit to enforce a patent. Our amended and restated agreement with CNRS and the University of Montpellier and our license agreement, as amended, with the University of Cagliari provide that such parties will cooperate to enforce our jointly owned patents on our product candidates. If these agreements terminate or their cooperation is not given or is withdrawn, or they refuse to join in litigation that requires their participation, we may not be able to enforce these patent rights or protect our markets.

      Our cooperative research agreement with the University of Cagliari, as amended grants us the exclusive right to directly or indirectly use or license to Novartis or other third parties the results of research obtained from the cooperative effort, in exchange for a fixed royalty. If the cooperative research agreement is terminated, our exclusive right to use the research results will also terminate, unless those rights are also granted under a separate license agreement, as has been done with respect to the patent applications covering our HCV product candidates and our NNRTI HIV product candidate. Our cooperative agreement with the University of Cagliari currently expires in January 2007 and can only be renewed by the written consent of both parties. If the agreement is not renewed, there is no guarantee that the University of Cagliari will agree to transfer rights to any of the research results into a separate license agreement on termination of the research program, or that it will agree to do so on reasonable commercial terms. If we are not able to obtain a license to research results in the event of a termination of the cooperative research agreement, we will be unable to develop the research results.

      The price of our common stock could decline if there are substantial sales of our common stock and if there is a large number of shares of our common stock available for sale. As of March 4, 2005, we had outstanding 48,080,447 shares of common stock, of which 10,267,904 shares, or 21.4%, are currently restricted. Subject to satisfaction of certain requirements of the federal securities laws, these shares will be saleable on July 21, 2005.

      The holders of an aggregate of 36,614,321 shares of common stock, have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. Additionally, we have filed a registration statement covering the shares of common stock that we may issue under our employee benefit plans. Subject to the restrictions included within the lockup agreements executed by employee benefit plan participants in connection with our initial public offering, these shares when issued can be freely sold in the public market.

      Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock.

      Our quarterly operating results have fluctuated in the past and are likely to fluctuate in the future. A number of factors, many of which are not within our control, could subject our operating results and stock price to volatility, including:

      Due to the possibility of significant fluctuations, we do not believe that quarterly comparisons of our operating results will necessarily be indicative of our future operating performance. If our quarterly operating results fail to meet the expectations of stock market analysts and investors, the price of our common stock may decline, resulting in losses to you.

      The market price of our common stock may be subject to substantial volatility as a result of announcements by us or other companies in our industry. Announcements which may subject the price of our common stock to substantial volatility include announcements regarding:

      The stock market in general has recently experienced extreme price and volume fluctuations. In addition, the market prices of securities of companies in the biotechnology industry have been extremely volatile and have experienced fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. These fluctuations could adversely affect the market price of our common stock. In the past, securities class action litigation has often been brought against companies following periods of volatility in the market prices of their securities. We may be the target of similar litigation in the future. Securities litigation could result in substantial costs and divert our management’s attention and resources, which could cause serious harm to our business, operating results and financial condition.

      We lease approximately 44,000 square feet of office and laboratory space. Our leased properties are described below:

      In December 2004, we entered into an agreement that provides us with the right to lease up to approximately 35,000 square feet of additional office and laboratory space in Montpellier, France. We expect to initiate our lease of and transition into this space in April 2005.

      We are currently not a party to any legal proceedings.

      None.

PART II

Market Information

      Our common stock has been traded on the NASDAQ National Market under the symbol “IDIX” since our initial public offering in July 2004. The following table sets forth for the periods subsequent to our initial public offering the high and low sales prices per share of our common stock on the NASDAQ National Market.

      Information regarding our equity compensation plans will be included in our proxy statement in connection with our 2005 annual meeting of stockholders, under the caption “Equity Plan Compensation Information.” That portion of our proxy statement is incorporated herein by reference.

Stockholders

      On March 4, 2005, we had approximately 94 stockholders of record.

Dividends

      We have never declared or paid cash dividends on our common stock. We currently intend to reinvest our future earnings, if any, for use in the business and do not expect to declare or pay cash dividends.

Initial Public Offering and Use of Proceeds from the Sale of Registered Securities

      We registered shares of our common stock in connection with our initial public offering under the Securities Act. Our Registration Statement on Form S-1 (Reg. No. 333-111157) in connection with our initial public offering was declared effective by the SEC on July 21, 2004. The offering commenced as of July 21, 2004 and did not terminate before any securities were sold. As of the date of the filing of this annual report on Form 10-K, the offering has terminated and 4,600,000 shares of our common stock were registered and sold in the initial public offering by us and an additional 1,200,000 shares were registered and sold by the selling stockholders named in our Registration Statement, all of such shares being sold at a price to the public of $14.00 per share. The aggregate purchase price of shares of our common stock sold in the offering by us was $64,400,000 and the net proceeds to us was approximately $57,000,000.

      We completed our initial public offering on July 27, 2004. The net proceeds of the initial public offering are invested in investment grade securities with the dollar weighted average effective maturity of the portfolio less than nine months and no security with an effective maturity in excess of 18 months. To date, we have not used any of the net proceeds of the initial public offering and there has been no material change in the planned use of proceeds from our initial public offering as described in our final prospectus filed with the SEC pursuant to Rule 424(b).

Repurchase of Securities

      None.

      The following unaudited selected consolidated financial data for each of the five years in the period ended December 31, 2004 are derived from our audited consolidated financial statements. This data should be read in conjunction with our audited consolidated financial statements and related notes which are included elsewhere in this Annual Report on Form 10-K, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 below.

      The following discussion and analysis of financial condition and results of operations should be read together with “Selected Consolidated Financial Data,” and our consolidated financial statements and related notes appearing elsewhere in this document. This discussion contains forward-looking statements based on current expectations related to future events and our future financial performance that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many important factors, including those set forth under “Factors That May Affect Future Results” and elsewhere in this document.

Overview

      Idenix is a biopharmaceutical company engaged in the discovery, development and commercialization of drugs for the treatment of human viral and other infectious diseases. Our current focus is on the treatment of infections caused by HBV, HCV, and HIV. Each of our current product candidates is a small molecule antiviral compound which is intended to have significant competitive advantages in one or more areas, such as safety, efficacy, resistance profile or convenience of dosing compared to currently approved treatments.

      The following table summarizes key information regarding our pipeline of product candidates:

      In May 2003, we entered into a collaboration with Novartis relating to the worldwide development and commercialization of our drug candidates. Novartis paid us a license fee of $75 million for our lead HBV drug candidates, telbivudine and valtorcitabine, has agreed to provide full development funding for these HBV product candidates and will make milestone payments, which could total up to $35 million upon the achievement of specific regulatory approvals, as well as additional milestone payments based upon achievement of predetermined sales levels.

      Novartis also acquired an option to license our HCV and other product candidates. If Novartis exercises its option to collaborate with us on NM283, our initial HCV product candidate, it would be required to provide development funding and pay us up to $525 million in license fees and regulatory milestone payments, as well as additional milestone payments based upon achievement of predetermined sales levels. We will co-promote or co-market with Novartis in the United States, the United Kingdom, France, Germany, Italy and Spain all products Novartis licenses from us that are successfully developed. Novartis has the exclusive right to promote and market such products in the rest of the world. In June 2004, we received a $25 million milestone payment from Novartis based upon the results from our phase I clinical trial of NM283.

      In addition to the collaboration described above, Novartis purchased approximately 54% of our outstanding capital stock from our then existing stockholders for $255 million in cash, with an additional aggregate amount of up to $357 million contingently payable to these stockholders if we achieve predetermined development milestones relating to an HCV drug candidate. As of December 31, 2004, Novartis and its affiliate, Novartis BioVentures, collectively own approximately 57% of our outstanding common stock.

      Novartis has the right to purchase from us that number of shares of our common stock as is required to enable Novartis and its affiliates, other than Novartis BioVentures, to maintain Novartis’ percentage ownership in our company. Novartis also has a contractual right to exercise control over corporate actions that may not require stockholder approval as long as it holds at least 19.4% of our voting stock. We have also agreed that, until such time as Novartis and its affiliates own less than 50% of our voting stock, Novartis’

consent is required for the selection and appointment of our Chief Financial Officer. If in Novartis’ reasonable judgment our Chief Financial Officer is not satisfactorily performing his duties, we are required to terminate the employment of our Chief Financial Officer.

      All of our product candidates are currently in preclinical or clinical development. To commercialize our product candidates, we will be required to successfully complete preclinical studies and clinical trials to obtain required regulatory approvals. We do not expect to submit an NDA to the FDA for a product candidate we are developing prior to late 2005. Any delay in obtaining or failure to obtain required approvals will materially adversely affect our ability to generate revenues from commercial sales relating to our product candidates. Accordingly, we expect our sources of funding for the next several years to include the reimbursement of expenses we may incur in connection with the development of licensed product candidates, license fees relating to NM283 and other product candidates we may successfully develop and license and milestone payments under existing and future collaborative arrangements.

      Through December 31, 2004, we have recognized revenues from license fees, development expense reimbursements received from our collaborators and government grants. We derived 99.6% of our total revenues from Novartis for the year ended December 31, 2004. We derived 99.6% of our total revenues for the year ended December 31, 2003 from our collaboration arrangements with Novartis and Sumitomo. We anticipate recognizing additional revenues from our collaboration with Novartis, including additional development expense funding for our HBV product candidates and other product candidates Novartis subsequently licenses from us, regulatory and commercialization milestones and revenues derived from sales by us or Novartis of our licensed product candidates.

      Revenues recognized from Novartis during the year ended December 31, 2004 included $60.9 million in reimbursements in connection with Novartis’ obligation to fund expenses we incur in connection with the development of the product candidates that Novartis has licensed from us, $25.0 million in milestone revenue on our HCV product candidate and $9.1 million related to license fees. Revenues recognized from Novartis during the year ended December 31, 2003 included $26.4 million in reimbursements in connection with Novartis’ obligation to fund expenses we incurred in connection with the development of our product candidates and $6.9 million related to license fees. We expect that the amount of revenue we will recognize on a quarterly basis relating to Novartis’ reimbursement of development expenses will vary based on the level of activity and expenses that we incur in such quarter for development of product candidates licensed to Novartis. We are recognizing the $75.0 million license fee and the other up-front payment in the amount of $5.0 million from Novartis as revenue over the estimated development period during which we expect to complete our performance obligations under our development agreement with Novartis. We have estimated such period to be approximately six and one-half years from the effective date of the development agreement until December 2009. The amount of revenue we recognize each quarter is subject to adjustment. Such adjustments may result from changes in the anticipated length of the development period and our issuance of shares of stock which are subject to the stock subscription rights held by Novartis. The amount will also be subject to adjustment if Novartis exercises its option to license NM283 or any of our other product candidates and we receive additional license fees. For a discussion of our revenue recognition policies, see “— Critical Accounting Policies and Estimates — Collaborative Research and Development Revenue.”

      We have incurred significant losses since our inception in May 1998 and expect losses to continue in the foreseeable future. Historically, we have generated losses principally from costs associated with research and development expenses, including clinical trial costs, and general and administrative activities. As a result of planned expenditures for future discovery, development and commercialization activities and the expansion of our operational and administrative infrastructure, we expect to incur additional operating losses for the foreseeable future.

      Our research and development expenses consist primarily of salaries and payroll-related expenses for research and development personnel, including stock-based compensation, fees paid to clinical research organizations and other professional service providers in conjunction with our clinical trials, fees paid to research organizations in conjunction with animal studies, costs of material used in research and development, costs of contract manufacturing consultants, occupancy costs associated with the use of our research facilities

and equipment, consulting and license fees paid to third parties, and depreciation of property and equipment related to research and development. The majority of our research and development spending is incurred on clinical, preclinical and manufacturing activity with third-party contractors relating to the development of our HBV and HCV product candidates. We expense internal and external research and development costs as incurred. We expect our research and development expenses to increase as we continue to engage in research activities, further develop our potential product candidates and advance our clinical trials.

      Set forth below are the direct third-party research and development expenses incurred during the period from May 1, 1998 through December 31, 2001, the years ended December 31, 2002, 2003 and 2004 in connection with our preclinical studies and clinical trials of our lead HBV and HCV product candidates.

      We anticipate that we will incur significant additional direct third-party research and development expenses prior to the commercial launch of our HBV and HCV product candidates. We expect such amounts to approximate those set forth below:

      Our current estimates of additional direct third-party research and development expenses do not include the cost of phase IIIb clinical trials and other clinical trials that are not required for regulatory approval. We use our employees and our infrastructure resources across several projects, including our product discovery efforts. We do not allocate our infrastructure costs on a project-by-project basis. As a result, we are unable to estimate the internal costs incurred to date for our product candidates on a project-by-project basis.

      Pursuant to our development agreement with Novartis, after it licenses a product candidate, Novartis is obligated to fund development expenses that we incur in accordance with development plans agreed upon by us and Novartis. The option we have granted to Novartis with respect to its right to license our product candidates generally requires that Novartis exercise the option for each such product candidate prior to the commencement of phase III clinical trials. The expenses associated with phase III clinical trials generally are the most costly component in the development of a successful new drug.

      Our current estimates for additional research and development expenses are subject to risks and uncertainties associated with research, development, clinical trials and the FDA and foreign regulatory review and approval processes. The time and cost to complete clinical development of our product candidates may vary significantly and depends upon a number of factors, including the success of our clinical trials, the availability of financial resources, our collaboration with Novartis and its participation in the manufacturing and clinical development of our drug candidates.

Results of Operations

Comparison of Years Ended December 31, 2004 and 2003

      Total revenues were $95.4 million for the year ended December 31, 2004 as compared with $29.6 million for the year ended December 31, 2003.

      Total revenues for the year ended December 31, 2004 were comprised of:

      Total revenues for the year ended December 31, 2003 were comprised of:

      The increase in revenues of $65.8 million for the year ended December 31, 2004 in comparison with the prior reporting period was primarily due to increased reimbursements from Novartis of expenses attributable to the development of our HBV product candidates and the achievement of a $25.0 million milestone payment on our lead HCV product candidate, NM283, during the year ended December 31, 2004.

      Research and development expenses were $80.0 million for the year ended December 31, 2004 as compared with $51.5 million for the year ended December 31, 2003. The increase of $28.5 million was primarily due to an increase of:

      These increases were offset by a decrease in research and development expenses resulting from:

      We expect our research and development expenses to increase in future periods as we continue to devote substantial resources to our research and development activities and we engage in a greater number of later stage clinical trials.

      General and administrative expenses were $17.1 million for the year ended December 31, 2004 as compared with $18.2 million for the year ended December 31, 2003. The decrease of $1.1 million was primarily due to a decrease of:

      These decreases were offset by increased general and administrative expenses primarily for salary and other payroll-related expenses to support our growing operations.

      We expect that our general and administrative expenses will increase in the future as we incur additional costs associated with our operation as a public company, including costs related to expanding our finance and accounting staff, additional directors’ and officers’ liability insurance, implementing investor relations activities and increased professional fees.

      Sales and marketing expenses were $6.5 million for the year ended December 31, 2004 as compared with $2.0 million for the year ended December 31, 2003. The increase of $4.5 million was primarily due to an increase of:

      We expect that sales and marketing expenses will increase significantly in the future as we expand marketing activities, build a commercial infrastructure, hire additional marketing staff and recruit a specialized sales force in the U.S. and Europe in anticipation of our expected submission to the FDA of an NDA for telbivudine in late 2005 and, if successfully developed and approved for commercialization, the subsequent commercial introduction of telbivudine and any other product candidates which we may commercialize in the future.

      Net investment income was $1.4 million for the year ended December 31, 2004 as compared with $0.4 million for the year ended December 31, 2003. The increase of $1.0 million was due to higher cash and marketable securities balances held during 2004 due to the receipt of net proceeds of $132.6 million, after deducting underwriting discounts and offering expenses, from the initial public offering and concurrent private placement of our common stock completed in July 2004.

      Income tax benefit was $0.6 million for the year ended December 31, 2004 compared with income tax expense of $0.2 million for the year ended December 31, 2003. The income tax benefit for the year ended December 31, 2004 was due to amounts our French subsidiary has received or is expected to receive for certain research and development credits. The income tax expense for the year ended December 31, 2003 was due to alternative minimum income tax expense incurred in the U.S. Our income tax expense in 2004 and

2003 consists of income tax expenses incurred by our U.S., French and Dutch subsidiaries. In both 2004 and 2003, our U.S. and French subsidiaries performed services for us and were reimbursed for these costs, plus a profit margin.

Comparison of Years Ended December 31, 2003 and 2002

      Total revenues were $29.6 million for the year ended December 31, 2003 as compared with $3.5 million for the year ended December 31, 2002.

      Total revenues for the year ended December 31, 2003 were comprised of:

      Total revenues for the year ended December 31, 2002 were comprised of:

      The increase in revenues of $26.1 million for the year ended December 31, 2003 in comparison with the year ending December 31, 2002 was due to the initiation of the Novartis collaboration in May 2003 in which we started recognizing revenue from a license fee and reimbursement of development costs.

      Research and development expenses were $51.5 million for the year ended December 31, 2003 as compared with $29.3 million for the year ended December 31, 2002. The increase of $22.2 million was primarily due to an increase of:

      General and administrative expenses were $18.2 million for the year ended December 31, 2003 as compared with $11.7 million for the year ended December 31, 2002. The increase of $6.5 million was primarily due to an increase of:

      Sales and marketing expenses were $2.0 million for the year ended December 31, 2003 as compared with $1.0 million for the year ended December 31, 2002. The increase of $1.0 million was primarily due to an increase in consulting expenses, primarily attributable to hepatitis B market research studies and salaries and other payroll-related expenses.

      Investment income, net was $0.4 million for the year ended December 31, 2003 as compared with $0.3 million for the year ended December 31, 2002. The increase of $0.1 million was due to higher average cash balances in 2003 as a result of cash receipts from our Novartis collaboration.

      Income tax expense was $0.2 million for the year ended December 31, 2003 as compared with $39,000 for the year ended December 31, 2002. The increase of $0.1 million was primarily due to alternative minimum income tax expense incurred in the U.S. Our income tax expense consists of tax expense incurred by our U.S., French and Dutch subsidiaries. Our U.S. and French subsidiaries performed services for us and were reimbursed for these costs, plus a profit margin.

Liquidity and Capital Resources

      Since our inception in 1998, we have financed our operations with proceeds obtained in connection with license and development arrangements and equity financings. These proceeds include license, milestone and other payments from Novartis, reimbursements from Novartis for costs we have incurred subsequent to May 8, 2003 in connection with the development of our HBV product candidates, net proceeds from Sumitomo for reimbursement of development costs, net proceeds from private placements of our convertible preferred stock, net proceeds from an initial public offering and concurrent private placement of our common stock and proceeds from the exercise of stock options.

      In July 2004, we completed an initial public offering and concurrent private placement in which we issued and sold 4,600,000 shares of common stock in the public offering and 5,400,000 shares of common stock to Novartis in the private placement. In connection with the initial public offering and concurrent private placement, we received approximately $132.6 million in net proceeds, after deducting underwriting discounts and offering expenses.

      We had $42.1 million, $43.5 million and $8.5 million in cash and cash equivalents as of December 31, 2004, 2003 and 2002, respectively. We also invest our excess cash balances in short-term and long-term marketable debt securities. All of our marketable securities are classified as available for sale. Our investments have an effective maturity not greater than 18 months and investments with maturities greater than 12 months are classified as non-current marketable securities. As of December 31, 2004, we have $38.4 million in current marketable securities and $76.8 million in non-current marketable securities. We had no investments in marketable securities as of December 31, 2003.

      Net cash used in operating activities was $16.4 million for the year ended December 31, 2004. Net cash provided by operating activities was $38.4 million for the year ended December 31, 2003. Net cash used in operating activities was $30.9 million for the year ended December 31, 2002. The net cash used in operating activities for the year ended December 31, 2004 was due primarily to the net loss for the period, excluding stock-based compensation and decrease in deferred revenue due to the amortization of our license fee received from Novartis in 2003. The net cash provided by operating activities for the year ended December 31, 2003 was due primarily to an increase in deferred revenue resulting from the receipt of a $75.0 million license fee

from Novartis, an increase in accounts payable and accrued expenses due to greater research and development activity and an increase in long-term liabilities due to a one time fee that we incurred to obtain a license to manufacturing technology that we used in connection with our development of telbivudine. These increases were offset by a net loss for the period excluding stock-based compensation expense, an increase in accounts receivable from Novartis for the reimbursement of certain research and development costs and deposit payments made to vendors on contracts associated with our phase III telbivudine clinical trials.

      Net cash used in investing activities was $119.4 million, $3.9 million and $0.3 million for the years ended December 31, 2004, 2003 and 2002, respectively. The net cash used in investing activities for the year ended December 31, 2004 was principally due to the investment of a portion of the net proceeds from our initial public offering and concurrent private placement in marketable securities and capital expenditures primarily on leasehold improvements in Cambridge, Massachusetts and Cagliari, Italy. The net cash used in investing activities for the year ended December 31, 2003 was due primarily to capital expenditures relating to the acquisition of scientific equipment, leasehold improvements at a medicinal chemistry laboratory facility we opened in France in August 2003 and leasehold improvements for our new corporate headquarters and laboratory facilities in Cambridge, Massachusetts to which we began our relocation in December 2003. Upon entering into the lease agreement for our new corporate and laboratory facility, we were required to obtain a commercial letter of credit for $0.7 million in October 2003 that was collateralized by cash to be held as a restricted deposit.

      Net cash provided by financing activities was $134.3 million, $0.3 million and $0.9 million for the years ended December 31, 2004, 2003 and 2002, respectively. The net cash provided by financing activities for the year ended December 31, 2004 was primarily due to net proceeds from the initial public offering and concurrent private placement completed in July 2004. The net cash provided by financing activities for the year ended December 31, 2003 was primarily due to the issuance of common stock upon the exercise of vested stock options held by employees and directors.

      Set forth below is a description of our contractual cash obligations as of December 31, 2004.

      We have certain potential milestone payment obligations under our license agreement with UABRF entered into in June 1998, and subsequently amended in June 1998 and July 1999, our settlement agreement with Sumitomo, and our settlement agreement with UABRF entered into in connection with the resolution of matters relating to certain of our hepatitis C product candidates. The license agreement with UABRF provides for aggregate milestone payments of $1.3 million for each disease indication for which the licensed technology is used. Of this aggregate amount, $0.3 million is payable upon submission of an IND for a product candidate that is covered by claims in patents or patent applications licensed from UABRF and $1.0 million is payable upon approval of an NDA for a drug candidate that is covered by claims in patents or patent applications licensed from UABRF. We do not believe that any of the product candidates we are currently developing or those which we currently expect to develop will trigger payments or otherwise result in future obligations under the UAB license agreement. However, if our belief is wrong, the licensors may assert claims to these milestone payments and to additional amounts. The settlement agreement which we have entered into with Sumitomo provides for a $5.0 million milestone payment to Sumitomo if and when the first commercial sale of telbivudine occurs in Japan. The settlement agreement with UABRF, which we entered into in connection with the resolution of matters relating to certain of our hepatitis C product candidates, provides for a milestone payment of $1 million to UABRF upon receipt of regulatory approval in the U.S. to market and sell certain

hepatitis C products invented or discovered by our Chief Executive Officer during the period from November 1, 1999 to November 1, 2000.

      In December 2004, we entered into an offer to lease office and laboratory space in Montpellier, France. We expect to enter into a lease agreement on April 15, 2005 if all conditions precedent have been satisfied by the landlord as of such date. If the conditions are satisfied and we elect not to enter into the lease agreement, we will be liable for a payment to the landlord in the approximate amount of 0.5 million Euros ($0.6 million as of December 31, 2004). The term of the lease will be for a period of 12 years with expiry in April 2017. Expected payments under the lease agreement are included in the contractual obligations table above. The lease agreement will also include an option entitling us to purchase the building in which the leased space is located at any time after April 15, 2011 until the expiration of the lease term.

      We believe that our current cash and cash equivalents and marketable securities together with funding we expect to receive from Novartis relating to the development of our HBV product candidates, will be sufficient to satisfy our cash needs until at least mid 2006. At any time, it is possible that we may seek additional financing. We may seek such financing through a combination of public or private financing, collaborative relationships and other arrangements. Additional funding may not be available to us or, if available, may not be on terms favorable to us. Further, any additional equity financing may be dilutive to stockholders and debt financing, if available, may involve restrictive covenants. Our failure to obtain financing when needed may harm our business and operating results.

Off-Balance Sheet Transactions

      We currently have no off-balance sheet transactions.

Critical Accounting Policies and Estimates

      Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of the financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, accrued expenses and the fair value of stock related to stock-based compensation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

      While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements included in this document, we believe the following accounting policies to be the most critical in understanding the judgments and estimates we use in preparing our financial statements:

      We recognize revenues relating to our collaborative research and development arrangements in accordance with the SEC’s Staff Accounting Bulletin No. 104, or SAB 104, “Revenue Recognition in Financial Statements.” Revenues under such collaborative research and development arrangements may include non-refundable license fees, milestones and research and development payments from collaborative partners.

      Where we have continuing performance obligations under the terms of a collaborative arrangement, we recognize non-refundable license fees as revenue over the specified development period during which we complete our performance obligations. When our level of effort is relatively constant over the performance period, the revenue is recognized on a straight-line basis. The determination of the performance period involves judgment on the part of our management. If this estimated performance period changes, then we will adjust the periodic revenue we are recognizing and will record the remaining unrecognized non-refundable license fees over the remaining period during which our performance obligations will be completed. Significant

judgments and estimates are involved in determining the estimated development period and different assumptions could yield materially different results.

      Novartis has the right to purchase, at par value of $0.001 per share, such number of shares as is required to maintain its percentage ownership of our voting stock if we issue shares of capital stock in connection with the acquisition or in-licensing of technology through the issuance of up to 5% of our stock in any 24-month period. These purchase rights of Novartis remain in effect until the earlier of the date that Novartis and its affiliates own less than 19.4% of our voting stock or the date that Novartis becomes obligated to make contingent payments of $357,000,000 to those holders of the our stock who sold shares to Novartis on May 8, 2003.

      Additionally, if we issue any shares of its capital stock, other than in certain situations, Novartis has the right to purchase such number of shares required to maintain its percentage ownership of our voting stock for the same consideration per share paid by others acquiring our stock. Subject to certain exceptions, upon the grant of options and stock awards under stock incentive plans, with the exception of the 1998 Equity Incentive Plan, the fair value of the our common stock that would be issuable to Novartis, less the exercise price, if any, payable by the option or award holder, will be recorded as a reduction of the upfront license fee and payments received from Novartis in May 2003. The amount will be attributed proportionately between cumulative revenue recognized as of that date and the remaining amount of deferred revenue. These amounts will be adjusted through the date of option exercise or, in the case of stock awards, full vesting based upon changes in the value of the our common stock and in Novartis’ percentage ownership. These adjustments will also be attributed proportionately between cumulative revenue recognized through the measurement date and the remaining deferred revenue.

      To date, we have received $75.0 million from Novartis as a license fee for our HBV product candidates and a $5.0 million reimbursement for reacquiring product rights from Sumitomo to develop and commercialize telbivudine in certain markets in Asia. We have included this reimbursement as part of our up-front license fee for accounting purposes because Novartis required the repurchase of these rights as a condition of entering into the development agreement with us. We are recognizing these payments from Novartis as revenue over the estimated period during which we expect to complete our performance obligations under our development agreement. We have estimated such period to be approximately six and one-half years from the effective date of the agreement until December 2009.

      In connection with the closing of our initial public offering in July 2004, Novartis terminated a common stock subscription right with respect to 1,399,106 shares of common stock issuable pursuant to the 1998 Equity Incentive Plan in connection with the exercise of stock options granted after May 8, 2003. In exchange for Novartis’ termination of such right, we issued 1,100,000 shares of our common stock to Novartis for a purchase price of $0.001 per share. The fair value of these shares was determined to be $15.4 million at the time of issuance. As a result of the issuance to Novartis of these shares, Novartis rights to purchase additional shares as a result of future option grants and stock issuances under the 1998 Equity Incentive Plan were terminated and no additional adjustments to revenue and deferred revenue will be required. Prior to the termination of the stock subscription rights under the 1998 Equity Incentive Plan, as we granted options that were subject to Novartis’ stock subscription right, the fair value of our common stock that would be issuable to Novartis, less par value, was recorded as an adjustment of the license fee and payments received from Novartis in May 2003. We are still subject to potential revenue adjustments relating to future grants of options and stock awards under other stock incentive plans.

      As of December 31, 2004, the license fee has been reduced by $15.4 million and reclassified to additional paid-in capital. Of this amount, $12.8 million has been recorded as a reduction of deferred revenue as of December 31, 2004 with the remaining amount of $2.6 million recorded as a reduction of revenue. We recorded $1.8 million and $0.8 million of this reduction of revenue during the years ended December 31, 2004 and 2003, respectively.

      In March 2003, we entered into a final settlement agreement with Sumitomo under which the rights to develop and commercialize telbivudine in Japan, China, South Korea and Taiwan previously granted to Sumitomo were returned to us. This agreement with Sumitomo became effective upon consummation of our

collaboration with Novartis in May 2003. We repurchased these product rights for $5.0 million. The repurchase of these rights resulted in a $4.6 million reversal of revenue that we previously recognized under our original arrangements with Sumitomo. We recorded the remaining amount of $0.4 million as a reduction of deferred revenue. We have also included $4.3 million in deferred revenue on our consolidated balance sheet at December 31, 2004 representing amounts received from Sumitomo that we have not included in our revenue to date. We are required to pay an additional $5.0 million to Sumitomo upon the first commercial sale of telbivudine in Japan. This payment will be recorded first as a reduction of the remaining $4.3 million of deferred revenue, with the excess recorded as an expense. If and when we determine that we will not seek regulatory approval for telbivudine in Japan, we would have no further obligations under the settlement agreement with Sumitomo and, therefore, the $4.3 million of remaining deferred revenue would be recognized as revenue at that time.

      We recognize payments received from collaborative partners for research and development efforts that we perform or others perform on our behalf as revenue as the related costs are incurred. We recognize such revenue only if we believe that collection of these amounts is reasonably assured. This assessment involves judgment on our part. If we do not believe that collection of amounts billed, or amounts to be billed to our collaborators, is reasonably assured, then we defer revenue recognition.

      We recognize revenues from milestones related to arrangements under which we have continuing performance obligations upon achievement of the milestone if the milestone is deemed substantive. Milestones are considered substantive if all of the following conditions are met:

      In June 2004, we recognized a $25 million milestone payment from Novartis based upon results of phase I clinical trial. Since the milestone was determined to be substantive, this amount was recognized as revenue when it became payable.

      Where we have no continuing involvement under a collaborative arrangement, we record non-refundable license fee revenue when we have a contractual right to receive the payment, in accordance with the terms of the license agreement, and we record milestones when we receive appropriate notification from the collaborative partner of achievement of the milestones.

      In November 2002, the Emerging Issues Task Force, or EITF, reached a consensus on EITF No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables,” which we refer to as EITF No. 00-21. EITF No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF No. 00-21 apply to revenue arrangements entered into on or after July 1, 2003.

      As part of the process of preparing our financial statements, we are required to estimate accrued expenses. This process involves identifying services that third parties have performed on our behalf and estimating the level of service performed and the associated cost incurred on these services as of each balance sheet date in our financial statements. Examples of estimated accrued expenses include contract service fees, such as amounts due to clinical research organizations, professional service fees, such as attorneys and accountants and investigators in conjunction with preclinical and clinical trials, and fees paid to contract manufacturers in conjunction with the production of materials related to our product candidates. Accruals for amounts due to clinical research organizations are among our most significant estimates. In connection with these service fees, our estimates are most affected by our understanding of the status and timing of services provided relative to the actual level of services incurred by the service providers. In the event that we do not

identify certain costs that have been incurred or we under- or over-estimate the level of services or the costs of such services, our reported expenses for a reporting period could be overstated or understated. The date on which certain services commence, the level of services performed on or before a given date, and the cost of services is often subject to our judgment. We also record estimates of our tax liabilities for the jurisdictions in which we operate. Determination of the tax effects involving our U.S. and foreign operations involves judgment on our part and our positions could be challenged by the tax authorities of these jurisdictions. We make these judgments based upon the facts and circumstances known to us and account for these estimates in accordance with accounting principles involving accrued expenses and income tax liabilities generally accepted in the U.S.

      In connection with the grant of stock options, we recorded as a part of stockholders’ deficit an aggregate amount of $0.2 million and $0.1 million in deferred stock compensation for the years ended December 31, 2004 and 2003, respectively. These stock options were considered compensatory because the deemed fair value of the underlying common stock was greater than the exercise price on the date of grant. The determination of the fair value of our common stock involved significant judgment on our part because our shares prior to the completion of our initial public offering in July 2004 were not publicly traded. In determining the fair value, our Board of Directors considered the price at which we sold shares of convertible preferred stock to investors, the purchase price per share, including the initial cash payment and the discounted present value of the contingent payments, paid by Novartis in May 2003 to acquire shares of our common stock from our existing stockholders, the development stage of our product candidates and general economic and market conditions. We had an aggregate of $2.0 million of deferred stock compensation remaining to be amortized as of December 31, 2004. We expect to incur additional stock compensation expense related to stock options granted as of December 31, 2004 and future stock option grants as we adopt the provisions of SFAS No. 123 (revised 2004) “Share Based Payment.” We are amortizing deferred stock compensation for employees and directors over the vesting period of the related stock options, under the provisions of Accounting Principles Board Opinion, or APB No. 25, “Accounting for Stock Issued to Employees.” We are amortizing deferred stock compensation for nonemployee consultants over the vesting period of the related stock options, under the provisions of Statement of Financial Accounting Standard, or SFAS, No. 123, “Accounting for Stock Compensation.” The amount of stock compensation actually recognized in future periods could decrease if unvested stock options for which accrued compensation expense has been recorded are forfeited.

      For purposes of our consolidated statements of operations, we have allocated stock-based compensation to expense categories based on the nature of the service provided by the recipients of the stock option and restricted stock grants. We expect to continue to grant options to purchase common stock in the future.

Recent Accounting Pronouncements

      In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment”. This Statement replaces SFAS No. 123 and supercedes APB No. 25. SFAS No. 123 (revised 2004) eliminates the ability to account for share-based compensation transactions using the intrinsic method currently used by us. SFAS No. 123 (revised 2004) requires such transactions to be accounted using a fair value based method that would result in expense being recognized in our financial statements. We will be required to adopt SFAS No. 123 (revised 2004) beginning in the first quarter after June 15, 2005 and have not yet determined the impact of adoption on the consolidated financial position or results of operations.

      Market risk represents the risk of loss that may impact our financial position, operating results or cash flows due to changes in interest rates. The primary objective of our investment activities is to preserve capital, while maintaining liquidity, until it is required to fund operations. To minimize risk, we maintain our operating cash in commercial bank accounts. We invest our excess cash in high quality financial instruments, primarily money market funds, U.S. government guaranteed debt obligations, repurchase agreements with major financial instititutions and certain corporate debt securities with the dollar weighted average effective maturity

of the portfolio less than nine months and no security with an effective maturity in excess of 18 months. Since our investments are short term in duration, we believe that we are not subject to any material credit market or foreign exchange risk exposure. We do not have any derivative financial instruments.

      The financial statements required by this item are incorporated by reference to the financial statements listed in Item 15(a) of Part IV of this Annual Report on Form 10-K.

      There have been no disagreements with our independent registered public accounting firm on accounting and financial disclosure matters.

      Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act) as of December 31, 2004. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and our management necessarily applied its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our CEO and CFO concluded that, as of December 31, 2004, our disclosure controls and procedures were (1) designed to ensure that material information relating to us, including our consolidated subsidiaries, is made known to our CEO and CFO by others within those entities, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

      Changes in Internal Controls. No change in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act) occurred during the fiscal quarter ended December 31, 2004 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

      None

PART III

Items 10-14.

      The information required for Part III, Items 10-14 of this report is incorporated by reference from our definitive proxy statement for our 2004 Annual Meeting of Stockholders. Such information will be contained in the sections of such proxy statement captioned “Stock Ownership of Certain Beneficial Owners and Management,” “Proposal 1 — Election of Directors,” “Board and Committee Meetings,” “Compensation of Directors,” “Compensation of Executive Officers,” “Compensation of Executive Officers — Equity Compensation Plan Information,” “Certain Relationships and Related Transactions,” “Employment Agreements,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Audit Fees,” “Audit-Related Fees,” “All Other Fees” and “Pre-Approval Policies.”

      We have adopted a written code of business conduct and ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or persons performing similar functions. We have posted to our website our code of business conduct and ethics. We intend to disclose any amendments to, or waivers from, the code on our website, which is located at www.idenix.com.

PART IV

      (a)(1) Financial Statements: The financial statements required to be filed as part of this annual report on Form 10-K are as follows:

      (a)(2) Financial Statement Schedules. The financial statements have been omitted as the information required is inapplicable or the information is presented in the consolidated financial statements or the related notes.

      (a)(3) Exhibits. The Exhibits have been listed in the Exhibit Index immediately preceding the Exhibits filed as part of this annual report on Form 10-K and incorporated herein by reference.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Idenix Pharmaceuticals, Inc.:

      In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Idenix Pharmaceuticals, Inc. and its subsidiaries at December 31, 2004 and 2003 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PRICEWATERHOUSECOOPERS LLP

Boston, Massachusetts
March 11, 2005

IDENIX PHARMACEUTICALS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

The accompanying notes are an integral part of these consolidated financial statements.

IDENIX PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

The accompanying notes are an integral part of these consolidated financial statements.

IDENIX PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

AND COMPREHENSIVE LOSS

For the Years Ended December 31, 2002, 2003, 2004

(in thousands, except share data)