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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

(Mark One)

40 Landsdowne Street, Cambridge, Massachusetts 02139
(Address of principal executive offices) (zip code)

(617)  679-7000
(Registrant's telephone number, including area code)

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

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

Number of shares of the registrant's Common Stock, $0.001 par value, outstanding on May 6, 2004: 304,749,995

MILLENNIUM PHARMACEUTICALS, INC.

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2004

TABLE OF CONTENTS

The following Millennium trademarks are used in this Quarterly Report on Form 10-Q: Millennium®, the Millennium “M” logo and design (registered), Millennium Pharmaceuticals™, VELCADE® (bortezomib) for Injection, and INTEGRILIN® (eptifibatide) Injection. All are covered by registrations or pending applications for registration in the U.S. Patent and Trademark Office and many other countries. CAMPATH® is a registered trademark of ILEX Pharmaceuticals, L.P., ReoPro® (abciximab) is a trademark of Eli Lilly & Company, Aggrastat® (tirofiban) is a trademark of Merck & Co., Inc., Thalomid® (thalidomide) is a trademark of Celgene Corporation and Angiomax® (bivalirudin) is a trademark of The Medicines Company. Other trademarks used in this Quarterly Report on Form 10-Q are the property of their respective owners.

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PART I     FINANCIAL INFORMATION

Item 1.    Condensed Consolidated Financial Statements

Millennium Pharmaceuticals, Inc.
Condensed Consolidated Balance Sheets

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

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Millennium Pharmaceuticals, Inc.
Condensed Consolidated Statements of Operations
(unaudited)

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

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Millennium Pharmaceuticals, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)

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

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Millennium Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements

1.        Basis of Presentation

        The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals and revisions of estimates, considered necessary for a fair presentation of the accompanying condensed consolidated financial statements have been included. Interim results for the three month period ended March 31, 2004 are not necessarily indicative of the results that may be expected for the year ended December 31, 2004. For further information, refer to the financial statements and accompanying footnotes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003, which was filed with the Securities and Exchange Commission (“SEC”) on March 10, 2004.

2.        Summary of Significant Accounting Policies

Reclassifications

        In connection with the launch of VELCADE® (bortezomib) for Injection in May 2003 and the recognition of related costs of sales, the Company reclassified certain INTEGRILIN® (eptifibatide) Injection related manufacturing expenses to cost of sales so that cost of sales now includes manufacturing-related expenses associated with the sales of INTEGRILIN and VELCADE. These reclassified manufacturing-related expenses were previously included in cost of co-promotion revenue. Certain INTEGRILIN related advertising and promotional expenses that were previously included in cost of co-promotion revenue have been reclassified to selling, general and administrative expenses. Prior period amounts have been adjusted to conform to the current year presentation. There was no impact on net loss in any period.

        Advertising and promotional expenses are expensed as incurred. During the three months ended March 31, 2004 and 2003, advertising and promotional expenses were $8.8 million and $6.8 million, respectively.

Cash Equivalents and Marketable Securities

        Cash equivalents consist principally of money market funds and corporate bonds with maturities of three months or less at the date of purchase. Marketable securities consist primarily of investment-grade corporate bonds, asset-backed debt securities and U.S. government agency debt securities.

        Management determines the appropriate classification of marketable securities at the time of purchase and reevaluates such designation at each balance sheet date. Marketable securities at March 31, 2004 and December 31, 2003 are classified as “available-for-sale.” Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported in a separate component of stockholders’ equity. The cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion are included in investment income. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities and other investments are included in investment income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in investment income.

        During the three months ended March 31, 2004 and 2003, the Company recorded realized gains on marketable securities of $0.7 million and $0.04 million, respectively, and realized losses on marketable securities of $0.3 million and $0.06 million, respectively.

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Millennium Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements (continued)

Segment Information

        Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures about Segments of an Enterprise and Related Information” (SFAS No. 131), establishes standards for the way that public business enterprises report information about operating segments in their financial statements. SFAS No. 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers.

        The Company operates in one business segment, which focuses on the development and commercialization of proprietary therapeutic products. All of the Company’s product sales are currently related to sales of VELCADE® (bortezomib) for Injection. All of the Company’s co-promotion revenue is currently related to sales of INTEGRILIN® (eptifibatide) Injection.

        Revenues from Ortho Biotech Products, L.P. (“Ortho Biotech”) accounted for approximately 10% of consolidated revenues for the three months ended March 31, 2004. Revenues from Bayer, AG (“Bayer”) accounted for approximately 1% and 22% of consolidated revenues for the three months ended March 31, 2004 and 2003, respectively. Revenues from Aventis Pharmaceuticals, Inc. (“Aventis”) accounted for approximately 2% and 13% of consolidated revenues for the three months ended March 31, 2004 and 2003, respectively. There were no other significant customers in the three months ended March 31, 2004 and 2003, respectively.

Information Concerning Market and Source of Supply Concentration

        The Company and Schering-Plough Ltd. and Schering Corporation (collectively “SGP”) co-promote INTEGRILIN in the United States and share any profits and losses. INTEGRILIN has received regulatory approval in the European Union and a number of other countries for various indications. The Company has exclusively licensed to SGP rights to market INTEGRILIN outside of the United States, and SGP pays the Company royalties based on these sales of INTEGRILIN. The Company has long-term supply arrangements with two suppliers for the bulk product and with another two suppliers, one of which is SGP, for the filling and final packaging of INTEGRILIN.

Inventory

        Inventories are stated at the lower of cost (first in, first out) or market. Inventories are reviewed periodically for slow-moving or obsolete status based on sales activity, both projected and historical.

        Inventory consists of the following (in thousands):

Goodwill and Intangible Assets

        Intangible assets consist of specifically identified intangible assets. Goodwill is the excess of any purchase price over the estimated fair market value of net tangible assets acquired not allocated to specific intangible assets.

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Millennium Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements (continued)

        Intangible assets consist of the following (in thousands):

        Amortization of intangibles is computed using the straight-line method over the useful lives of the respective assets as follows:

        Amortization expense for the three months ended March 31, 2004 and 2003 was approximately $8.4 million and $9.7 million, respectively. In addition, in connection with its restructuring initiative discussed in Note 3, the Company recognized an impairment charge in the three months ended March 31, 2003 of approximately $11.3 million for technology it no longer intends to pursue.

        As required by SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill and indefinite lived intangible assets are not amortized but are reviewed annually for impairment, or more frequently if impairment indicators arise. Separable intangible assets that are not deemed to have an indefinite life are amortized over their useful lives and reviewed for impairment when events or changes in circumstances suggest that the assets may not be recoverable. The Company tests for goodwill impairment annually, on October 1, and whenever events or changes in circumstances suggest that the carrying amount may not be recoverable.

        On October 1, 2003, the Company performed its annual goodwill impairment test and determined that no impairment existed on that date. The Company continually monitors business and market conditions to assess whether an impairment indicator exists. If the Company were to determine that an impairment indicator exists, it would be required to perform an impairment test which might result in a material impairment charge to the statement of operations.

Revenue Recognition

        The Company recognizes revenue from the sale of its products, co-promotion collaboration and strategic alliances. The Company’s revenue arrangements with multiple elements are divided into separate units of accounting if certain criteria are met, including whether the delivered element has stand-alone value to the customer and whether there is objective and reliable evidence of the fair value of the undelivered items. The consideration received is

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Millennium Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements (continued)

allocated among the separate units based on their respective fair values, and the applicable revenue recognition criteria are applied to each of the separate units. Advance payments received in excess of amounts earned are classified as deferred revenue until earned.

   Net product sales

        The Company records product sales of VELCADE® (bortezomib) for Injection when delivery has occurred and title passes to the customer, collection is reasonably assured and the Company has no further obligations. Allowances are recorded as a reduction to product sales for estimated returns and discounts at the time of sale. Costs incurred by the Company for shipping and handling are recorded in cost of sales.

   Co-promotion revenue

        Co-promotion revenue includes the Company’s share of profits from the sale of INTEGRILIN® (eptifibatide) Injection in co-promotion territories by SGP. Also included in co-promotion revenue are reimbursements from SGP of the Company’s manufacturing-related costs, advertising and promotional expenses associated with the sale of INTEGRILIN within co-promotion territories and royalties from SGP on sales of INTEGRILIN outside of the co-promotion territory. The Company recognizes revenue when SGP ships INTEGRILIN to wholesalers and records it net of allowances, if any. The Company defers certain manufacturing-related expenses until the time SGP ships related product to its customers inside and outside of co-promotion territories. Deferred revenue also includes cash advances from SGP to the Company for the Company’s prepayments to its manufacturers of INTEGRILIN.

   Revenue under strategic alliances

        The Company recognizes revenue from nonrefundable license payments, milestone payments and reimbursement of research and development costs. Nonrefundable upfront fees for which no further performance obligations exist are recognized as revenue on the earlier of when payments are received or collection is assured.

        Nonrefundable upfront licensing fees and certain guaranteed, time-based payments that require continuing involvement in the form of research and development, manufacturing or other commercialization efforts by the Company are recognized as revenue:

        Milestone payments are recognized as revenue when the performance obligations, as defined in the contract, are achieved. Performance obligations typically consist of significant milestones in the development life cycle of the related technology, such as initiation of clinical trials, filing for approval with regulatory agencies and approvals by regulatory agencies.

        Reimbursements of research and development costs are recognized as revenue as the related costs are incurred.

Net Loss Per Common Share

        Basic net loss per common share is computed using the weighted average number of common shares outstanding during the period. Diluted net loss per common share is typically computed using the weighted average number of common and dilutive common equivalent shares from stock options, warrants and convertible debt using the treasury stock method. However, for all periods presented, diluted net loss per share is the same as basic net loss

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Millennium Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements (continued)

per share as the inclusion of weighted average shares of common stock issuable upon the exercise of stock options, warrants and convertible debt would be antidilutive.

Comprehensive Loss

        Comprehensive loss was $36.7 million and $134.3 million for the three months ended March 31, 2004 and 2003, respectively. Comprehensive loss is composed of net loss, unrealized gains and losses on marketable securities and cumulative foreign currency translation adjustments. Accumulated other comprehensive income as of March 31, 2004 and December 31, 2003 included $9.1 million and $4.9 million, respectively of unrealized gains on marketable securities and $(0.3) million and $(0.03) million, respectively, of cumulative foreign currency translation adjustments.

Stock-Based Compensation

        The Company follows the intrinsic value method under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations, in accounting for its stock-based compensation plans, rather than the alternative fair value accounting method provided for under SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”). Under APB 25, when the exercise price of options granted equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. In accordance with Emerging Issues Task Force (“EITF”) 96-18, the Company records compensation expense equal to the fair value of options granted to non-employees over the vesting period, which is generally the period of service.

        The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation (in thousands, except per share amounts):

        The weighted-average per share fair value of options granted during the three months ended March 31, 2004 and 2003 was $12.10 and $4.90, respectively.

        The fair value of stock options and common shares issued pursuant to the stock option and stock purchase plans at the date of grant were estimated using the Black-Scholes model with the following weighted-average assumptions:

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Millennium Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements (continued)

        The Company has never declared cash dividends on any of its capital stock and does not expect to do so in the foreseeable future.

Accounting Pronouncements

        In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51” (“FIN 46”) and in December 2003 issued a revised FIN 46 (“FIN 46R”) which addressed the period of adoption of FIN 46 for entities created before January 31, 2003. FIN 46 provides a new consolidation model which determines control and consolidation based on potential variability in gains and losses. The provisions of FIN 46 are effective for enterprises with variable interests in variable interest entities created after January 31, 2003. For its interests in variable interest entities created before February 1, 2003, the Company adopted FIN 46 in the first quarter of fiscal 2004 and the adoption did not have a material impact on the Company’s consolidated financial position or results of operations.

3.        Restructuring

        In December 2002 and June 2003, the Company took steps to realign the Company’s resources to become a commercially-focused biopharmaceutical company. The Company discontinued certain discovery research efforts, reduced overall headcount, primarily in its discovery group and consolidated its research and development facilities. As of December 1, 2002, the Company adopted SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities (“SFAS No. 146”). SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at its fair value in the period in which the liability is incurred, except for one-time termination benefits that meet certain requirements. These actions resulted in the recognition of restructuring charges in the fourth quarter of 2002 and the year ended 2003. During 2004, the Company will continue to recognize additional restructuring charges primarily related to lease obligations and termination benefits as part of its overall restructuring plan.

        These costs are included in restructuring charges in the statements of operations and current and long term restructuring liabilities on the balance sheet at March 31, 2004. The following table displays the restructuring activity and liability balances (in thousands):

        The projected payments of the remaining balances of the restructuring charges at March 31, 2004 are approximately $33.4 million due through March 31, 2005 and $43.1 million thereafter through 2022.

        Costs of termination benefits relate to severance packages, out-placement services and career counseling for employees affected by the restructuring. Charges related to facilities include estimated remaining rental obligations, net of estimated sublease income, for facilities that the Company no longer occupies. Included in other facilities charges is the write-off of deferred rent recorded in accordance with SFAS No. 13, “Accounting for Leases.” The Company’s decisions to vacate certain facilities and abandon the related leasehold improvements as well as terminate certain research programs were deemed to be impairment indicators under SFAS No. 144, “Accounting for the Impairment or

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Millennium Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements (continued)

Disposal of Long-Lived Assets.” As a result of performing the impairment evaluations, asset impairment charges were recorded to adjust the carrying value of the related long-lived assets to their net realizable values. The fair values of the assets were estimated based upon anticipated future cash flows, discounted at a rate commensurate with the risk involved.

4.        Revenue and Strategic Alliances

        The Company has entered into research, development, technology transfer and commercialization arrangements with major pharmaceutical and biotechnology companies relating to a broad range of therapeutic products. These alliances provide us with the opportunity to receive various combinations of equity investments, license fees and research funding, and may provide certain additional payments contingent upon our achievement of research and regulatory milestones and royalties and/or share profits if our collaborations are successful in developing and commercializing products.

        Under these agreements, the Company’s partners may make up-front payments, additional payments upon the achievement of specific research and product development milestones, ongoing research funding and/or pay royalties to or in some cases share profits with the Company based upon any product sales resulting from the collaboration. In certain alliances, collaborators may make equity investments in the Company’s common stock.

   Product Alliances

        Through its merger with LeukoSite, Inc. (“LeukoSite”) in 1999, the Company became a party to a joint venture agreement with ILEX Products, Inc. (“ILEX”) to form Millennium & ILEX Partners, L.P. (“M&I”) for the purpose of developing and commercializing the CAMPATH® (alemtuzumab) humanized monoclonal antibody for use in the treatment of chronic lymphocytic leukemia. The Company accounted for its investment in the joint venture under the equity method of accounting. On December 31, 2001, ILEX Oncology acquired the Company’s equity interest in M&I which owns the CAMPATH product in exchange for $20.0 million plus additional consideration contingent upon future sales of CAMPATH. The Company earned $40.0 million of such consideration in each of 2004, 2003 and 2002. In addition, the Company could be entitled to additional payments from ILEX Oncology if future U.S. sales of CAMPATH meet pre-defined thresholds.

5        Convertible Debt

        The Company had the following convertible notes outstanding at March 31, 2004:

        Under the terms of these notes, the Company is required to make semi-annual interest payments on the outstanding principal balance of the 5.0% notes on March 1 and September 1 of each year, of the 4.5% notes on June 15 and December 15 of each year and of the 5.5% notes on January 15 and July 15 of each year. All required interest payments to date have been made.

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Millennium Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements (continued)

6.        Subsequent Event

        In April 2004, the European Commission granted Marketing Authorization for VELCADE® (bortezomib) for Injection for the treatment of patients with multiple myeloma who have received at least two prior therapies and have demonstrated disease progression on their last therapy. Under this Authorization, a single license was granted to Millennium for marketing VELCADE in the 15 member states of the European Union, plus Norway and Iceland. On May 1, 2004, VELCADE was also approved for marketing when the ten accession member countries officially joined the European Union.

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Item 2.        Management's Discussion and Analysis of Financial Condition and Results of Operations

        Our management’s discussion and analysis of our financial condition and results of our operations include the identification of certain trends and other statements that may predict or anticipate future business or financial results that are subject to important factors that could cause our actual results to differ materially from those indicated. See “Risk Factors That May Affect Results.”

Overview

        We have set aggressive goals for 2004 and during the first quarter we have made significant progress towards achieving these goals. We experienced a 13% increase in revenue this quarter compared to the first quarter of 2003 driven by sales of VELCADE, which reached $100.0 million in cumulative sales in April 2004, making VELCADE one of the strongest cancer product launches in history. Net loss has decreased from $137.9 million for the three months ended March 31, 2003 to $40.6 million for the same period in 2004. Our financial position remains strong, with $838.8 million in cash, cash equivalents and marketable securities.

        In December 2002 and June 2003, we took steps to realign our resources to become a commercially-focused biopharmaceutical company. We discontinued certain discovery research efforts, reduced overall headcount, primarily in our discovery group, streamlined our discovery and development projects and consolidated our research and development facilities. As a result of this restructuring and other cost containment efforts, our total costs and expenses have decreased 19% from the first quarter of 2003 to the first quarter of 2004.

        In addition to our two marketed products, VELCADE and INTEGRILIN® (eptifibatide) Injection, we have ten drug candidates in clinical development. Our strategy is to develop multiple products in our disease areas of focus, cancer, cardiovascular disease and inflammatory disease, through clinical trials and regulatory approvals and to be involved in the marketing and sale of many of these products. We plan to advance the clinical development of these drug candidates based on our assessment of their market potential, the results of clinical trials and our available resources. We plan to develop and commercialize many of our products on our own in the United States, but will seek development and commercial collaborators outside of the United States when we believe that this will maximize product value.

Our Products

VELCADE® (bortezomib) for Injection

        VELCADE, the first of a new class of medicines called proteasome inhibitors, is the first treatment in more than a decade to be approved in the United States for patients with multiple myeloma. We received accelerated approval from the FDA on May 13, 2003 to market VELCADE for the treatment of multiple myeloma patients who have received at least two prior therapies and have demonstrated disease progression on their most recent therapy.

        In April 2004, the European Commission granted Marketing Authorization for VELCADE for the treatment of patients with multiple myeloma who have received at least two prior therapies and have demonstrated disease progression on their last therapy. Under this Authorization, a single license was granted to Millennium for marketing VELCADE in the 15 member states of the European Union, plus Norway and Iceland. On May 1, 2004, VELCADE was also approved for marketing when the ten accession member countries officially joined the European Union.

Our Ortho Biotech Collaboration

        On June 30, 2003, we entered into an agreement with Ortho Biotech Products, L.P., or Ortho Biotech, a wholly owned subsidiary of Johnson & Johnson, to collaborate on the commercialization and continued clinical development of VELCADE. Under the terms of the agreement, we retain all commercialization rights to and profits from VELCADE in the United States. Ortho Biotech and its affiliate, Janssen-Cilag, have agreed to commercialize VELCADE outside of the United States. We are entitled to distribution fees from Ortho Biotech and its

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affiliates on sales of VELCADE® (bortezomib) for Injection outside of the United States. We also retain an option to co-promote VELCADE with Ortho Biotech at a future date in certain European countries.

        Under this agreement, we are engaged with Ortho Biotech in an extensive global program for further clinical development of VELCADE with the purpose of maximizing the clinical and commercial potential of VELCADE. This program is investigating the potential of VELCADE to treat multiple forms of solid and hematological tumors, including continued clinical development of VELCADE for multiple myeloma. Ortho Biotech is responsible for 40% of the joint development costs through 2005 and for 45% of those costs after 2005. In addition, we may receive payments from Ortho Biotech for achieving clinical development milestones, regulatory milestones outside of the United States or agreed-upon sales levels of VELCADE.

INTEGRILIN® (eptifibatide) Injection

        In collaboration with Schering-Plough Corporation and Schering-Plough Ltd., together referred to as SGP, INTEGRILIN is marketed in the United States, in all 15 member states of the European Union and in other countries, including Argentina, Australia, Brazil, Canada, India, Japan, Mexico, Singapore, South Africa, Switzerland and Thailand.

Critical Accounting Policies and Significant Judgments and Estimates

        Our management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, inventory, intangible assets and goodwill. We base our estimates on historical experience and on various other factors that are believed to be appropriate under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

        While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements included in our Form 10-K filed with the SEC on March 10, 2004, we believe the following accounting policies are most critical to aid in fully understanding and evaluating our reported financial results.

Revenue

        We recognize revenue from the sale of our products, co-promotion collaboration and strategic alliances. Our revenue arrangements with multiple elements are divided into separate units of accounting if certain criteria are met, including whether the delivered element has stand-alone value to the customer and whether there is objective and reliable evidence of the fair value of the undelivered items. The consideration we receive is allocated among the separate units based on their respective fair values, and the applicable revenue recognition criteria are applied to each of the separate units. Advance payments received in excess of amounts earned are classified as deferred revenue until earned.

        We recognize revenue from the sales of VELCADE in the U.S. when delivery has occurred and title has transferred to the wholesalers. Allowances are recorded as a reduction to product sales for product returns and discounts at the time of sale. The allowances are based primarily on historical trends in the pharmaceutical industry for similar products and discounts included in our agreements with wholesalers. As we continue to develop company specific experience, our estimates are continually reviewed. If actual future results vary, we may need to adjust our estimates, which could have an impact on the timing and amount of revenue to be recognized.

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        We recognize co-promotion revenue when SGP ships INTEGRILIN® (eptifibatide) Injection to wholesalers. Co-promotion revenue includes our share of the profits from the sales of INTEGRILIN, reimbursements of our manufacturing-related costs, advertising and promotional expenses and royalties from SGP on sales of INTEGRILIN outside of the co-promotion territory. We communicate with SGP to calculate our share of the profits from the sales of INTEGRILIN on a monthly basis. The calculation includes estimates of the amount of advertising and promotional expenses and other costs incurred on a monthly basis. We also communicate with SGP to estimate royalties earned on sales outside of the co-promotion territory. Adjustments to our estimates are based upon actual information that we receive subsequent to our reporting deadlines. Our estimates are adjusted on a monthly basis and historically have not been significant due to periodic communication with our collaborator. Significant adjustments in future reporting periods could impact the timing and the amount of revenue to be recognized.

        Nonrefundable upfront licensing fees and certain guaranteed, time-based payments that require continuing involvement in the form of research and development, manufacturing or other commercialization efforts by us are recognized as strategic alliance revenue:

        Milestone payments are recognized as strategic alliance revenue when the performance obligations, as defined in the contract, are achieved. Performance obligations typically consist of significant milestones in the development life cycle of the related technology, such as initiation of clinical trials, filing for approval with regulatory agencies and approvals by regulatory agencies.

        Reimbursements of research and development costs are recognized as strategic alliance revenue as the related costs are incurred.

        When the period of deferral cannot be specifically identified from the contract, management estimates the period based upon other critical factors contained within the contract. We continually review these estimates which could result in a change in the deferral period and might impact the timing and the amount of revenue recognized.

Inventory

        Inventory consists of currently marketed products and from time to time product candidates awaiting regulatory approval which were capitalized based upon management’s judgment of probable near term commercialization. Inventory primarily represents raw materials used in production, work in process and finished goods inventory on hand, valued at cost. Inventories are reviewed periodically for slow-moving or obsolete status based on sales activity, both projected and historical. Our current sales projections provide for full utilization of the inventory balance. If product sales levels differ from projections or a launch of a new product is delayed, inventory may not be fully utilized and could be subject to impairment, at which point we would record a reserve to adjust inventory to its net realizable value.

        At March 31, 2004 and December 31, 2003, inventory does not include any amounts for products that have not yet been approved for sale.

Intangible Assets

        We have acquired significant intangible assets that we value and record. Those assets which do not yet have regulatory approval and for which there are no alternative uses are expensed as acquired in-process research and development, and those that are specifically identified and have alternative future uses are capitalized. We use a

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discounted cash flow model to value intangible assets acquired. The discounted cash flow model requires assumptions about the timing and amount of future cash inflows and outflows, risk, the cost of capital, and terminal values. Each of these factors can significantly affect the value of the intangible asset. We engage independent valuation experts who review our critical assumptions for significant acquisitions of intangibles. We review intangible assets for impairment on a periodic basis using an undiscounted net cash flows approach. If the undiscounted cash flows of an intangible asset are less than the carrying value of an intangible asset, the intangible asset is written down to the discounted cash flow value. Where cash flows cannot be identified for an individual asset, the review is applied at the lowest group level for which cash flows are identifiable.

Goodwill

        On October 1, 2003, we performed our annual goodwill impairment test and determined that no impairment existed on that date. However, since the date of acquisition of COR Therapeutics, Inc., or COR, which generated a significant amount of goodwill, we have experienced a significant decline in market capitalization due to a decline in stock price. We continually monitor business and market conditions to assess whether an impairment indicator exists. If we were to determine that an impairment indicator exists, we would be required to perform an impairment test which could result in a material impairment charge to our statement of operations.

Accounting Pronouncements

        In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51” (“FIN 46”) and in December 2003 issued a revised FIN 46 (“FIN 46R”) which addressed the period of adoption of FIN 46 for entities created before January 31, 2003. FIN 46 provides a new consolidation model which determines control and consolidation based on potential variability in gains and losses. The provisions of FIN 46 are effective for enterprises with variable interests in variable interest entities created after January 31, 2003. We adopted the provisions of FIN 46 in the first quarter of fiscal 2004 and the adoption did not have a material impact on our financial position or results of operations for our interests in variable interest entities created before February 1, 2003.

Reclassifications

        In connection with the launch of VELCADE® (bortezomib) for Injection in May 2003 and the recognition of the related costs of sales, we reclassified certain INTEGRILIN® (eptifibatide) Injection related manufacturing expenses to cost of sales so that cost of sales now includes manufacturing-related expenses associated with the sales of INTEGRILIN and VELCADE. These reclassified manufacturing-related expenses were previously included in cost of co-promotion revenue. Certain INTEGRILIN related advertising and promotional expenses that were previously included in cost of co-promotion revenue have been reclassified to selling, general and administrative expenses.

        Prior period amounts have been adjusted to conform to the current year presentation. There was no impact on net loss in any period.

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Results of Operations

Net Loss and Loss Per Share

        For the three months ended March 31, 2004, (the “2004 Quarterly Period”), we reported a net loss of $40.6 million, or $0.13 per basic and diluted share, compared to a net loss of $137.9 million, or $0.47 per basic and diluted share for the three months ended March 31, 2003 (the “2003 Quarterly Period”). The decrease in net loss was primarily due to the $40.0 million of additional consideration earned upon the achievement of predetermined sales targets of CAMPATH® (alemtuzumab) humanized monoclonal antibody, decreased operating expenses as a result of our restructuring initiative, lower restructuring expenses and increased revenues.

Revenues

        Revenues increased 13% to $92.6 million in the 2004 Quarterly Period from $81.7 million in the 2003 Quarterly Period. We received FDA approval to market VELCADE® (bortezomib) for Injection and began shipping to wholesalers in May 2003. Net product sales of VELCADE were $29.6 million in the 2004 Quarterly Period, reflecting distribution of product into the supply channel and moderate growth from the fourth quarter of 2003. Future product sales are subject to risk and uncertainties, including physician adoption rates and future trial results. Product sales from VELCADE represent approximately 32% of our total revenue in the 2004 Quarterly Period.

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        Co-promotion revenue, based on worldwide sales of INTEGRILIN® (eptifibatide) Injection, was $47.8 million for the 2004 Quarterly Period compared to $50.9 million for the 2003 Quarterly Period. Worldwide sales of INTEGRILIN in the 2004 Quarterly Period, as provided to us by SGP, were $73.0 million, an 18% percent decrease over sales for the 2003 Quarterly Period. The 6% decrease in co-promotion revenue is primarily attributable to the decrease in product sales in the United States, offset in part by higher net reimbursement from SGP to us under our collaboration agreement.

        Revenue under strategic alliances decreased 51% to $15.1 million in the 2004 Quarterly Period from $30.8 million in the 2003 Quarterly Period. The decrease is primarily attributable to the October 2003 conclusion of the research phase of the Bayer agreement and the April 2003 termination of the Aventis Pharmaceuticals, Inc. technology transfer agreement. This decrease is partially offset by increased development reimbursement revenue and clinical development milestone revenue under our alliance with Ortho Biotech. We expect that our revenue mix will continue to shift to product-based revenue as we develop our product pipeline, commercialize additional products subject to obtaining required regulatory approvals and enter into new commercial alliances and our discovery-focused alliances conclude.

Cost of Sales

        Cost of sales remained relatively unchanged from the 2003 Quarterly Period and includes manufacturing-related expenses associated with the sale of VELCADE® (bortezomib) for Injection and INTEGRILIN.

Research and development

        Research and development expenses decreased 24% to $96.3 million in the 2004 Quarterly Period from $126.8 million in the 2003 Quarterly Period. This decrease reflects the financial benefits of our 2003 restructuring efforts, including reductions in discovery personnel and personnel-related costs.

        In addition to our ongoing clinical trials of INTEGRILIN and VELCADE, we have ten drug candidates in clinical development with five identified as high priorities. The following chart summarizes the clinical trials of these ten drug candidates, the applicable disease indication and the current trial status of the program. High priority candidates are denoted with an asterisk.

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        Completion of clinical trials may take several years or more and the length of time can vary substantially according to the type, complexity, novelty and intended use of a product candidate. The types of costs incurred during a clinical trial vary depending upon the type of product candidate and the nature of the study.

        CMR International, an independent pharmaceutical data collection agency, estimates that clinical trials in our areas of focus are typically completed over the following timelines:

        Upon successful completion of phase III clinical trials of a product candidate, we intend to submit the results to the FDA to support regulatory approval. However, we cannot be certain that any of our product candidates will prove to be safe or effective, will receive regulatory approvals, or will be successfully commercialized. Our clinical trials might prove that our product candidates may not be effective in treating the disease or may prove to have undesirable or unintended side effects, toxicities or other characteristics that require us to cease further development of the product candidate. The cost to take a product candidate through clinical trials is dependent upon, among other things, the disease indications, the timing, the size and dosing schedule of each clinical trial, the number of patients enrolled in each trial and the speed at which patients are enrolled and treated. We could incur increased product development costs if we experience delays in clinical trial enrollment, delays in the evaluation of clinical trial results or delays in regulatory approvals.

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        Products that are likely to result from our research and development projects are based on new technologies and new therapeutic approaches that have not been extensively tested in humans. The regulatory requirements governing these types of products may be more rigorous than for conventional products. As a result, it is difficult to estimate the nature and length of the efforts to complete such products as we may experience a longer regulatory process in connection with any products that we develop based upon these new technologies or therapeutic approaches. In addition, ultimate approval for commercial manufacturing and marketing of our products is dependent on the FDA or applicable approval body in the country for which approval is being sought, adding further uncertainty to estimated costs and completion dates. Significant delays could allow our competitors to bring products to market before we do and impair our ability to commercialize our product candidates.

        Due to the variability in the length of time necessary to develop a product, the uncertainties related to the estimated cost of the projects and ultimate ability to obtain governmental approval for commercialization, accurate and meaningful estimates of the ultimate cost to bring our product candidates to market are not available.

        We budget and monitor our research and development costs by type or category, rather than by project on a comprehensive or fully allocated basis. Significant categories of costs include personnel, clinical, third party research and development services and laboratory supplies. In addition, a significant portion of our research and development expenses is not tracked by project as it benefits multiple projects or our technology platform. Consequently, fully loaded research and development cost summaries by project are not available.

        Given the uncertainties related to development, we are currently unable to reliably estimate when, if ever, our product candidates will generate revenue and cash flows. We do not expect to receive net cash inflows from any of our major research and development projects until a product candidate becomes a profitable commercial product.

Selling, General and Administrative

        Selling, general and administrative expenses increased 17% to $44.8 million in the 2004 Quarterly Period from $38.4 million in the 2003 Quarterly Period. The increase reflects the net impact of increased selling and marketing expenses related to the launch of VELCADE® (bortezomib) for Injection and the expansion of the Millennium-SGP sales force for INTEGRILIN® (eptifibatide) Injection partially offset by decreased expenses in corporate general and administrative functions.

Restructuring

        In December 2002 and June 2003, we took steps to focus our resources on development and commercialization. Our restructuring plan includes consolidation of research and development facilities, overall headcount reduction and streamlining of discovery and development projects. As a result, we have recorded restructuring charges of $11.6 million in the 2004 Quarterly Period and $28.2 million in the 2003 Quarterly Period related to remaining rental obligations on facilities that we have vacated, asset impairments, personnel costs and contract termination. Charges related to facilities include the estimated remaining rental obligation, net of estimated sublease income, for facilities that we no longer occupy. Our decisions to vacate certain facilities and abandon the related leasehold improvements as well as terminate certain research programs were deemed to be impairment indicators under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” or SFAS No. 144. As a result of performing the impairment evaluations, we recorded asset impairment charges to adjust the carrying value of the related long lived assets to fair value. Fair value of the assets was estimated based upon anticipated future cash flows, discounted at a rate commensurate with the risk involved. We anticipate additional restructuring charges in future periods as we continue to execute our restructuring plan. These charges will primarily include additional facilities and personnel costs relating to one-time termination benefits that meet certain requirements.

Amortization of Intangibles

        Amortization of intangible assets decreased 13% to $8.4 million in the 2004 Quarterly Period from $9.7 million in the 2003 Quarterly Period as the specifically identified intangible assets from our LeukoSite, Inc., or

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LeukoSite, acquisition were fully amortized as of December 2003. We will continue to amortize the specifically identified intangible assets from our COR acquisition through 2015.

Investment Income

        Investment income decreased 34% to $6.4 million in the 2004 Quarterly Period from $9.6 million in the 2003 Quarterly Period. The decrease is primarily attributable to a lower average balance of invested funds in the 2004 Quarterly Period, offset by more favorable market conditions resulting in higher yields.

Interest Expense

        Interest expense decreased 74% to $2.7 million in the 2004 Quarterly Period from $10.4 million in the 2003 Quarterly Period, reflecting the April 2003 repurchase of $577.8 million aggregate principal amount of our 5.0% convertible subordinated notes due March 1, 2007, that are convertible into our common stock at any time prior to maturity at a price equal to $34.21 per share and our 4.5% convertible senior notes due June 15, 2006, that are convertible into our common stock at any time prior to maturity at a price equal to $40.61 per share.

Gain on Sale of Equity Interest in Joint Venture

        Through our acquisition of LeukoSite, we became a party to a joint venture partnership, Millennium & ILEX Partners, L.P., or M&I, for development of CAMPATH® (alemtuzumab) humanized monoclonal antibody. We sold our equity interest in M&I and in consideration for the sale, we received an initial payment of $20.0 million in December 2001. During each of the second quarters of 2003 and 2002, we recorded additional gains of $40.0 million on our sale of this equity interest based upon the achievement of predetermined sales targets of CAMPATH. During the 2004 Quarterly Period, we recorded our final $40.0 million gain on our sale of this equity interest based upon the achievement of predetermined sales targets of CAMPATH for 2004 that entitled us to this additional consideration under the terms of our agreement with ILEX. In addition, we could be entitled to additional payments from ILEX if future sales of CAMPATH in the United States meet pre-defined sales thresholds.

Liquidity and Capital Resources

        We require cash to fund our operating expenses, to make capital expenditures, acquisitions and investments and to pay debt service, including principal and interest and capital lease payments. We have also made strategic commitments to purchase debt and equity securities from some of our alliance collaborators in accordance with our Board of Directors’ approved policies and our business needs. These investment commitments are generally in smaller companies. We may lose money in these investments and our ability to liquidate these investments is in some cases very limited. We may also owe our partners milestone payments and royalties. We have committed to fund development costs incurred by some of our partners.

        We have funded our cash requirements primarily through the following:

        In the future, we expect to continue to fund our cash requirements from some of these external sources as well as from sales of VELCADE® (bortezomib) for Injection, INTEGRILIN and other products, subject to regulatory

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approval. We are entitled to additional committed research and development funding under certain of our strategic alliances. We believe the key factors that could affect our internal and external sources of cash are:

        As of March 31, 2004 we had $838.8 million in cash, cash equivalents and marketable securities. This excludes $14.9 million of interest-bearing marketable securities classified as restricted cash on our balance sheet as of March 31, 2004 which serve as collateral for letters of credit securing leased facilities.

Cash Flows

        We used $84.8 million of cash in operating activities in the 2004 Quarterly Period and $105.6 million in the 2003 Quarterly Period. The principal use of cash in operating activities in both 2004 and 2003 was to fund our net loss. Cash flows from operations can vary significantly due to various factors including changes in accounts receivable, as well as changes in accounts payable and accrued expenses. The average collection period of our accounts receivable can vary and is dependent on various factors, including the type of revenue and the payment terms related to those revenues.

        Investing activities provided $21.0 million in the 2004 Quarterly Period. The principal source of funds during the 2004 Quarterly Period was from the sale of marketable securities. We used $767.5 million of cash in investing activities in the 2003 Quarterly Period as we reinvested our cash into our securities portfolio. The decrease from the 2003 Quarterly Period of approximately $9.2 million in purchases of property and equipment is a result of the consolidation of our research and development activities as part of our restructuring initiative and timing of our expenditures.

        Financing activities provided $9.7 million in the 2004 Quarterly Period and $30.1 million in the 2003 Quarterly Period. The principal sources were from the sales of common stock to our employees in both the 2004 and 2003 Periods, as well as the sales of common stock to Abbott Laboratories, Inc. in the 2003 Quarterly Period.

        We believe that our existing cash and cash equivalents, internally generated funds and the anticipated cash payments from our product sales, co-promotion revenue and current strategic alliances will be sufficient to support our

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expected operations, fund our debt service and capital lease obligations and fund our capital commitments for at least the next several years.

Contractual Obligations

        Our major outstanding contractual obligations relate to our facilities leases, convertible notes, capital leases from equipment financings and commitments to purchase debt and equity securities from certain collaborators.

        There have been no significant changes to our contractual obligations and commercial commitments included in our Form 10-K as of December 31, 2003.

        As of March 31, 2004, we did not have any financing arrangements that were not reflected in our balance sheet.

RISK FACTORS THAT MAY AFFECT RESULTS

        This Quarterly Report on Form 10-Q and certain other communications made by us contain forward-looking statements, including statements about our growth and future operating results, discovery and development of products, potential acquisitions, strategic alliances and intellectual property. For this purpose, any statement that is not a statement of historical fact should be considered a forward-looking statement. We often use the words “believe,” “anticipate,” “plan,” “expect,” “intend,” “will” and similar expressions to help identify forward-looking statements.

        We cannot assure investors that our assumptions and expectations will prove to have been correct. Important factors could cause our actual results to differ materially from those indicated or implied by forward-looking statements. Such factors that could cause or contribute to such differences include those factors discussed below. We undertake no intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Regulatory Risks

Our business may be harmed if we do not fulfill certain post-approval requirements of the FDA relating to VELCADE® (bortezomib) for Injection or obtain approval to market VELCADE for additional therapeutic uses.

        The FDA granted accelerated approval for VELCADE for specific therapeutic uses that requires the fulfillment of specific post-approval requirements. Our business would be seriously harmed if we do not fulfill these requirements and the FDA revokes its marketing approval for VELCADE. In addition, an important part of our strategy to grow our business is to market VELCADE for additional indications. To do so, we will need to successfully conduct clinical trials and then apply for and obtain the appropriate regulatory approvals. If we are unsuccessful in our clinical trials, or we experience a delay in obtaining or are unable to obtain authorizations for expanded uses of VELCADE, our revenues may not grow as expected and our business and operating results will be harmed.

We may not be able to obtain approval in additional countries to market VELCADE.

        VELCADE is currently approved for marketing in the United States and the countries of the European Union. If we are not able to obtain approval to market VELCADE in additional countries, we will lose the opportunity to sell in those countries and will not be able to earn potential milestone payments under our agreement with Ortho Biotech or collect potential distribution fees on sales of VELCADE by Ortho Biotech in those countries.

We may not be able to obtain marketing approval for products or services resulting from our development efforts.

        The products that we are developing require research and development, extensive preclinical studies and clinical trials and regulatory approval prior to any commercial sales. This process is expensive and lengthy, and can

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often take a number of years. In some cases, the length of time that it takes for us to achieve various regulatory approval milestones affects the payments that we are eligible to receive under our strategic alliance agreements.

        We may need to address successfully a number of technological challenges in order to complete development of our products. Moreover, these products may not be effective in treating any disease or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may preclude our obtaining regulatory approval or prevent or limit commercial use.

        In some cases, we may experience challenges to the extension of exclusivity of our marketing approval in certain jurisdictions. With respect to INTEGRILIN, regulatory authorities in Luxembourg instituted a claim to reduce the effective term of supplemental protection certificates for INTEGRILIN in the European Community from 2014 to 2012. That claim was denied by the court of first instance in Europe. That denial has been appealed to the European Court of Justice, which we expect will hold a hearing on the appeal in 2004. If that court decides against us, the term of the supplemental protection certificates covering INTEGRILIN could be shortened in any particular European Community Member State in which a subsequent action requesting enforcement of the appellate decision was filed and decided against us. Shortening of such term could allow earlier generic competition in any such Member State.

If we fail to comply with regulatory requirements, or if we experience unanticipated problems with our approved products, our products could be subject to restrictions or withdrawal from the market.

        Any product for which we obtain marketing approval, along with the manufacturing processes, post-approval clinical data and promotional activities for such product, is subject to continual review and periodic inspections by the FDA, and other regulatory bodies. In particular, the marketing approval that we received from the FDA for VELCADE requires that we satisfactorily complete specified post-approval clinical trials of this product. Later discovery of previously unknown problems or safety issues with our products or manufacturing processes, or failure to comply with regulatory requirements, may result in restrictions on such products or manufacturing processes, withdrawal of the products from the market or the imposition of civil or criminal penalties. As with any newly approved therapeutic product, we expect that our knowledge of the safety profile for VELCADE will expand after wider usage and the possibility exists of patients receiving VELCADE treatment experiencing unexpected serious adverse events which could have a material adverse effect on our business.

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

        We have only limited experience in filing and prosecuting the applications necessary to gain regulatory approvals. Moreover, certain of the products that are likely to result from our research and development programs may be based on new technologies and new therapeutic approaches that have not been extensively tested in humans. The regulatory requirements governing these types of products may be more rigorous than for conventional products. As a result, we may experience a longer regulatory process in connection with any products that we develop based on these new technologies or new therapeutic approaches.

Risks Relating to Our Business, Strategy and Industry

Our revenues over the next several years will be materially dependent on the commercial success of INTEGRILIN® (eptifibatide) Injection and VELCADE® (bortezomib) for Injection.

        Our revenues over the next several years will be materially dependent on the commercial success of INTEGRILIN, which has been on the market in the United States since June 1998, and VELCADE, which was approved by the FDA in May 2003 and commercially launched in the United States shortly after that date. Marketing of INTEGRILIN outside the United States commenced in mid-1999. Demand for GP IIb-IIIa inhibitors, such as INTEGRILIN, has been flattening since the beginning of 2003, although we have seen an increase in demand for INTEGRILIN since the third quarter of 2003. Because of the recent introduction of VELCADE, we have very limited

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experience as to the sales levels of this product. Our business plan contemplates obtaining marketing authorization to sell VELCADE® (bortezomib) for Injection outside the United States and the European Union for the treatment of patients with multiple myeloma, and both in the United States and abroad for other indications. We will be adversely affected if VELCADE does not receive such approvals.

We will not achieve our business plan, and we may be forced to scale back our operations and research and development programs, if:

We face substantial competition, and others may discover, develop or commercialize products and services before or more successfully than we do.

        The fields of biotechnology and pharmaceuticals are highly competitive. Many of our competitors are substantially larger than we are, and these competitors have substantially greater capital resources, research and development staffs and facilities than we have. Furthermore, many of our competitors are more experienced than we are in drug research, discovery, development and commercialization, obtaining regulatory approvals and product manufacturing and marketing. As a result, our competitors may discover, develop and commercialize pharmaceutical products or services before we do. In addition, our competitors may discover, develop and commercialize products or services that make the products or services that we or our collaborators have developed or are seeking to develop and commercialize non-competitive or obsolete.

        Due to the incidence and severity of cardiovascular diseases, the market for therapeutic products that address these diseases is large, and we expect the already intense competition in this field to increase. Our most significant competitors are major pharmaceutical companies and biotechnology companies. The two products that compete directly with INTEGRILIN in the GP IIb-IIIa inhibitor market segment are ReoPro® (abciximab), which is produced by Johnson & Johnson and sold by Johnson & Johnson and Eli Lilly and Company, and Aggrastat® (tirofiban HCl), which is produced and sold by Merck & Co., Inc. outside of the United States and by Guilford Pharmaceuticals, Inc. in the United States.

        Other competitive factors that could negatively affect INTEGRILIN include:

        With respect to VELCADE, we face competition from Celgene Corporation’s Thalomid® (thalidomide) and its derivatives, a treatment for complications associated with leprosy which is increasingly used for multiple myeloma based on data published in peer-reviewed publications. Celgene Corporation recently filed an sNDA for thalidomide for the treatment of multiple myeloma that was accepted by the FDA for review. We also face competition for VELCADE from traditional chemotherapy treatments, and there are other potentially competitive therapies for VELCADE that are in late-stage clinical development for the treatment of multiple myeloma. In addition, multiple myeloma therapies in development may reduce the number of patients available for VELCADE treatment through enrollment of these patients in clinical trials of these potentially competing products.

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Sales of INTEGRILIN® (eptifibatide) Injection and possibly VELCADE® (bortezomib) for Injection in particular reporting periods may be affected by fluctuations in allowances and buying patterns.

        A significant portion of INTEGRILIN domestic pharmaceutical sales is made by SGP to major drug wholesalers. These sales are affected by fluctuations in the buying patterns of these wholesalers and the corresponding changes in inventory levels maintained by them. These changes may not reflect underlying prescriber demand. Additionally, we and our commercial partners make provisions at the time of sale of both VELCADE and INTEGRILIN for all discounts, rebates and estimated sales allowances based on historical experience updated for changes in facts and circumstances, as appropriate. To the extent these allowances are incorrect, we may need to adjust our estimates which could have a material impact on the timing and amount of revenue we are able to recognize from these sales.

        We expect that sales from INTEGRILIN will generally be lower in the summer months because fewer medical procedures are typically performed during these months. These fluctuations in sales of INTEGRILIN may have a material adverse effect on our results of operations for particular reporting periods. It is possible that sales of VELCADE will be similarly affected by fluctuations in buying patterns.

Because our research and development projects are based on new technologies and new therapeutic approaches that have not been extensively tested in humans, it is possible that our discovery process will not result in commercial products or services.

        The process of discovering drugs based upon genomics and other new technologies is new and evolving rapidly. We focus a portion of our research on diseases that may be linked to several or many genes working in combination or to unprecedented targets. Both we and the general scientific and medical communities have only a limited understanding of the role that genes play in these diseases. To date, we have not commercialized any products discovered through our genomics research, and we may not be successful in doing so in the future. In addition, relatively few products based on gene discoveries have been developed and commercialized by others. Rapid technological development by us or others may result in compounds, products or processes becoming obsolete before we recover our development expenses.

We may not be able to obtain biological material, including human and animal DNA and RNA samples, required for our genetic studies, which could delay or impede our drug discovery efforts.

        Our drug discovery strategy uses genetic studies of families and populations prone to particular diseases. These studies require the collection of large numbers of DNA and RNA samples from affected individuals, their families and other suitable populations as well as animal models. The availability of DNA and RNA samples and other biological material is important to our ability to discover the genes responsible for human diseases through human genetic approaches and other studies. Competition for these resources is intense. Access to suitable populations, materials and samples could be limited by forces beyond our control, including governmental actions. Some of our competitors may have obtained access to significantly more family and population resources and biological materials than we have obtained. As a result, we may not be able to obtain access to DNA and RNA samples necessary to support our human discovery programs.

If our clinical trials are unsuccessful, or if they experience significant delays, our ability to commercialize products will be impaired.

        We must provide the FDA and foreign regulatory authorities with preclinical and clinical data demonstrating that our products are safe and effective before they can be approved for commercial sale. Clinical development, including preclinical testing, is a long, expensive and uncertain process. It may take us several years to complete our testing, and failure can occur at any stage of testing. Interim results of preclinical or clinical studies do not necessarily predict their final results, and acceptable results in early studies might not be seen in later studies. Any preclinical or clinical test may fail to produce results satisfactory to the FDA. Preclinical and clinical data can be interpreted in different ways, which could delay, limit or prevent regulatory approval. Negative or inconclusive results from a

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preclinical study or clinical trial, adverse medical events during a clinical trial or safety issues resulting from products of the same class of drug could cause a preclinical study or clinical trial to be repeated or a program to be terminated, even if other studies or trials relating to the program are successful. For example, in December 2003, we decided to stop further accrual to a phase II trial examining VELCADE® (bortezomib) for Injection in colorectal cancer because interim findings produced results that did not meet the pre-specified efficacy criteria for continuation of study accrual.

        We may not complete our planned preclinical or clinical trials on schedule or at all. We may not be able to confirm the safety and efficacy of our potential drugs in long-term clinical trials, which may result in a delay or failure to commercialize our products. In addition, due to the substantial demand for clinical trial sites in the cardiovascular area, we may have difficulty obtaining a sufficient number of appropriate patients or clinician support to conduct our clinical trials as planned. As a result, we may have to expend substantial additional funds to obtain access to resources or delay or modify our plans significantly. Our product development costs will increase if we experience delays in testing or approvals. Significant clinical trial delays could allow our competitors to bring products to market before we do and impair our ability to commercialize our products or potential products.

Because many of the products and services that we develop will be based on new technologies and therapeutic approaches, the market may not be receptive to these products and services upon their introduction.

        The commercial success of any of our products and services for which we may obtain marketing approval from the FDA or other regulatory authorities will depend upon their acceptance by the medical community and third party payors as clinically useful, cost-effective and safe. Many of the products and services that we are developing are based upon new technologies or therapeutic approaches. As a result, it may be more difficult for us to achieve market acceptance of our products and services, particularly the first products and services that we introduce to the market based on new technologies and therapeutic approaches. Our efforts to educate the medical community on these potentially unique approaches may require greater resources than would be typically required for products and services based on conventional technologies or therapeutic approaches. The safety, efficacy, convenience and cost-effectiveness of our products as compared to competitive products will also affect market acceptance.

Risks Relating to Our Financial Results and Need for Financing

We have incurred substantial losses and expect to continue to incur losses. We will not be successful unless we reverse this trend.

        We have incurred losses of $40.6 million for the three months ended March 31, 2004 and losses of $137.9 million for the three months ended March 31, 2003 and losses of $483.7 million for the year ended December 31, 2003 and $590.2 million for the year ended December 31, 2002 and $192.0 million for the year ended December 31, 2001. We expect to continue to incur substantial operating losses in future periods. Prior to our acquisition of COR, substantially all of our revenues resulted from payments from collaborators, and not from the sale of products.

        We expect to continue to incur significant expenses in connection with our research and development programs and commercialization activities. As a result, we will need to generate significant revenues to pay these costs and achieve profitability. We cannot be certain whether or when we will become profitable because of the significant uncertainties with respect to our ability to generate revenues from the sale of products and services and from existing and potential future strategic alliances.

We may need additional financing, which may be difficult to obtain. Our failure to obtain necessary financing or doing so on unattractive terms could adversely affect our business and operations.

        We will require substantial funds to conduct research and development, including preclinical testing and clinical trials of our potential products. We will also require substantial funds to meet our obligations to our collaborators and maximize the prospective benefits to us from our alliances, manufacture and market products and services that are approved for commercial sale, including INTEGRILIN® (eptifibatide) Injection and VELCADE, and meet our debt service obligations. Additional financing may not be available when we need it or may not be available on favorable terms.

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        If we are unable to obtain adequate funding on a timely basis, we may have to delay or curtail our research and development programs or our product commercialization activities. We could be required to seek funds through arrangements with collaborators or others that may require us to relinquish rights to certain of our technologies, product candidates or products which we would otherwise pursue on our own.

Our indebtedness and debt service obligations may adversely affect our cash flow and otherwise negatively affect our operations.

        At March 31, 2004, we had approximately $105.5 million of outstanding convertible debt and $98.2 million of capital lease obligations. During each of the last five years, our earnings were insufficient to cover our fixed charges. We will be required to make interest payments on our outstanding convertible notes totaling approximately $16.9 million over the next three years, assuming our convertible debt remains outstanding until maturity.

        We may in the future incur additional indebtedness, including long-term debt, credit lines and property and equipment financings to finance capital expenditures. We intend to satisfy our current and future debt service obligations from cash generated by our operations, our existing cash and investments and, in the case of principal payments at maturity, funds from external sources. We may not have sufficient funds and we may be unable to arrange for additional financing to satisfy our principal or interest payment obligations when those obligations become due. Funds from external sources may not be available on acceptable terms, or at all.

        Our indebtedness could have significant additional negative consequences, including:

If we do not achieve the anticipated benefits of our restructuring, or if the costs of this restructuring exceed anticipated levels, our business could be harmed.

        In June, 2003, we announced a restructuring designed to focus our resources on development and commercialization of product opportunities and achieving our goal of becoming profitable in the future. We may not achieve the cost savings anticipated from the restructuring because such savings are difficult to predict and speculative in nature. In 2003, we recorded approximately $191.0 million related to this restructuring and expect to record additional restructuring charges during 2004 and 2005 in the aggregate of approximately $60.0 million. While we believe this estimate to be reasonable, it is possible that the actual charges will exceed this range. For example, we may not be able to lease facilities that we plan to close in connection with the restructuring as quickly or on as favorable terms as we anticipate.

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Risks Relating to Collaborators

We depend significantly on our collaborators to work with us to develop and commercialize products and services.

        We market and sell INTEGRILIN® (eptifibatide) Injection through an alliance with SGP and will develop and commercialize VELCADE® (bortezomib) for Injection outside of the United States through an alliance with Ortho Biotech Products, L.P., a wholly owned subsidiary of Johnson & Johnson. We conduct substantial discovery and development activities through strategic alliances, including with Ortho Biotech for the ongoing development of VELCADE, and with SGP for the ongoing development of INTEGRILIN. We expect to enter into additional alliances in the future, especially in connection with product commercialization. The success of our alliances depends heavily on the efforts and activities of our collaborators.

        Each of our collaborators has significant discretion in determining the efforts and resources that it will apply to the alliance. Our existing and any future alliances may not be scientifically or commercially successful.

        The risks that we face in connection with these existing and any future alliances include the following:

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

        An important element of our business strategy is entering into strategic alliances for the development and commercialization of products and services when we believe that doing so will maximize product value. In some instances, if we are unsuccessful in reaching an agreement with a suitable collaborator, we may fail to meet certain of our business objectives for the applicable product or program. We face significant competition in seeking appropriate collaborators. Moreover, these alliance arrangements are complex to negotiate and time-consuming to document. We may not be successful in our efforts to establish additional strategic alliances or other alternative arrangements. The terms of any additional strategic alliances or other arrangements that we establish may not be favorable to us. Moreover, such strategic alliances or other arrangements may not be successful.

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Risks Relating to Intellectual Property

If we are unable to obtain patent protection for our discoveries, the value of our technology and products will be adversely affected. If we infringe patent or other intellectual property rights of third parties, we may not be able to develop and commercialize our products and services or the cost of doing so may increase.

        Our patent positions, and those of other pharmaceutical and biotechnology companies, are generally uncertain and involve complex legal, scientific and factual questions.

        Our ability to develop and commercialize products and services depends in significant part on our ability to:

There is significant uncertainty about the validity and permissible scope of patents in our industry, which may make it difficult for us to obtain patent protection for our discoveries.

        The validity and permissible scope of patent claims in the pharmaceutical and biotechnology fields, including the genomics field, involve important unresolved legal principles and are the subject of public policy debate in the United States and abroad. For example, there is significant uncertainty both in the United States and abroad regarding the patentability of gene sequences in the absence of functional data and the scope of patent protection available for full-length genes and partial gene sequences. Moreover, some groups have made particular gene sequences available in publicly accessible databases. These and other disclosures may adversely affect our ability to obtain patent protection for gene sequences claimed by us in patent applications that we file subsequent to such disclosures. There is also some uncertainty as to whether human clinical data will be required for issuance of patents for human therapeutics. If such data are required, our ability to obtain patent protection could be delayed or otherwise adversely affected.

Third parties may own or control patents or patent applications and require us to seek licenses, which could increase our development and commercialization costs, or prevent us from developing or marketing our products or services.

        We may not have rights under some patents or patent applications related to some of our existing and proposed products, processes or services. Third parties may own or control these patents and patent applications in the United States and abroad. Therefore, in some cases, such as those described below, in order to develop, manufacture, sell or import some of our existing and proposed products, processes or services, we or our collaborators may choose to seek, or be required to seek, licenses under third-party patents issued in the United States and abroad, or those that might issue from United States and foreign patent applications. In such event, we would be required to pay license fees or royalties or both to the licensor. If licenses are not available to us on acceptable terms, we or our collaborators may not be able to develop, manufacture, sell or import these products, processes or services.

        Our MLN02 product candidate is a humanized monoclonal antibody. We are aware of third-party patents and patent applications that relate to humanized or modified antibodies, products useful for making humanized or modified antibodies and processes for making and using humanized or modified antibodies. We are also aware of third-party patents and patent applications relating to manufacturing processes for humanized or modified antibodies, products thereof and materials useful in such processes. With respect to MLN2704 and MLN1202, also humanized monoclonal

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antibodies, we are also aware of third-party patent applications relating to anti-PSMA antibodies, in the case of MLN2704, and anti-CCR-2 antibodies, in the case of MLN1202.

        With respect to VELCADE® (bortezomib) for Injection and other proteasome inhibitors in the treatment of myocardial infarctions, we are aware of the existence of a potentially interfering patent application filed by a third party. In addition, on June 26, 2002, Ariad Pharmaceuticals, Inc. sent to us and approximately 50 other parties a letter offering a sublicense for the use of United States Patent No. 6,410,516, which is exclusively licensed to Ariad. If this patent is valid and Ariad successfully sues us for infringement, we would require a license from Ariad in order to manufacture and market VELCADE.

We may become involved in expensive patent litigation or other proceedings, which could result in our incurring substantial costs and expenses or substantial liability for damages or require us to stop our development and commercialization efforts.

        There has been substantial litigation and other proceedings regarding the patent and other intellectual property rights in the pharmaceutical and biotechnology industries. We may become a party to patent litigation or other proceedings regarding intellectual property rights. For example, we believe that we hold patent applications that cover genes that are also claimed in patent applications filed by others. Interference proceedings before the United States Patent and Trademark Office may be necessary to establish which party was the first to invent these genes.

        The cost to us of any patent litigation or other proceeding, even if resolved in our favor, could be substantial. Some of our competitors may be able to sustain the cost of such litigation or proceedings more effectively than we can because of their substantially greater financial resources. If a patent litigation or other proceeding is resolved against us, we or our collaborators may be enjoined from developing, manufacturing, selling or importing our products, processes or services without a license from the other party and we may be held liable for significant damages. We may not be able to obtain any required license on commercially acceptable terms or at all.

        Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace. Patent litigation and other proceedings may also absorb significant management time.

Risks Relating to Product Manufacturing, Marketing and Sales

Because we have limited sales, marketing and distribution experience and capabilities, we are dependent on third parties to successfully perform these functions on our behalf, or we may be required to incur significant costs and devote significant efforts to augment our existing capabilities.

        We have limited sales, marketing and distribution experience and capabilities.

        We are marketing and selling VELCADE in the United States solely through our recently hired cancer-specific sales force and without a collaborator. Our success in selling VELCADE will depend heavily on the performance of this sales force. In the European Union and subject to approval in other areas outside the United States, Ortho Biotech or its affiliates will market VELCADE in those areas and as a result our ability to earn revenue related to VELCADE outside of the United States will depend heavily on Ortho Biotech.

        We have a specialty cardiovascular sales force that markets INTEGRILIN® (eptifibatide) Injection with SGP in the United States. SGP also markets INTEGRILIN outside of the United States. Our success in receiving co-promotion revenue from sales of INTEGRILIN will depend heavily on the marketing efforts of these sales forces.

        Depending on the nature of the products and services for which we obtain marketing approval, we may need to rely significantly on sales, marketing and distribution arrangements with our collaborators and other third parties. For example, some types of pharmaceutical products require a large sales force and extensive marketing capabilities for effective commercialization. If in the future we elect to perform sales, marketing and distribution functions for these

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types of products ourselves, we would face a number of additional risks, including the need to recruit a large number of additional experienced marketing and sales personnel.

Because we have very limited manufacturing capabilities, we will continue to be dependent on third-party manufacturers to manufacture products for us, or we will be required to incur significant costs and devote significant efforts to establish our own manufacturing facilities and capabilities.

        We have limited manufacturing experience and no commercial-scale manufacturing capabilities. In order to continue to develop products and services, apply for regulatory approvals and commercialize products and services, we will need to develop, contract for or otherwise arrange for the necessary manufacturing capabilities.

        We currently rely upon third parties to produce material for preclinical testing purposes and expect to continue to do so in the future. We also expect to rely upon other third parties, including our collaborators, to produce materials required for clinical trials and for the commercial production of certain of our products.

        There are a limited number of manufacturers that operate under the FDA’s good manufacturing practices regulations capable of manufacturing our products. As a result, we have experienced some difficulty finding manufacturers for our products with adequate capacity for our anticipated future needs. If we are unable to arrange for third-party manufacturing of our products, or to do so on commercially reasonable terms, we may not be able to complete development of our products or market them.

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

        We may in the future elect to manufacture certain of our products in our own manufacturing facilities. We would need to invest substantial additional funds and recruit qualified personnel in order to build or lease and operate any manufacturing facilities.

Our manufacturing experience with VELCADE® (bortezomib) for Injection is very limited we are dependent on third parties to produce product sufficient to meet market demand.

        We currently rely on third-party contract manufacturers to complete the manufacturing, fill/finish and packaging of VELCADE for both commercial purposes and for ongoing clinical trials. We are currently seeking to establish long-term supply relationships for the production of commercial supplies of VELCADE. We work with one manufacturer to complete fill/finish for VELCADE. If our current third party manufacturer performing fill/finish for VELCADE is unable or unwilling to continue performing these services for us and we are unable to find a replacement manufacturer, we could run out of VELCADE for commercial sale and our business could be substantially harmed.

        In the European Union, an affiliate of Ortho Biotech will perform packaging for European sales of VELCADE and as a result we will be substantially dependent on Ortho Biotech’s ability to manufacture for these areas.

We face particular challenges in connection with the manufacture of INTEGRILIN® (eptifibatide) Injection; if we do not meet these challenges, our revenues and income will be adversely affected.

        We have no manufacturing facilities for INTEGRILIN and, accordingly, rely on third-party contract manufacturers for the clinical and commercial production of INTEGRILIN. We have two manufacturers that provide us with eptifibatide, the raw material necessary to make INTEGRILIN. In January 2003, we entered into a new supply agreement with Solvay, one of those manufacturers. Solvay owns the process technology used by it and the other manufacturer for the production of bulk product. As a result, until we develop alternative process technologies, we will continue to rely on these manufacturers.

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        We have one manufacturer that currently performs fill/finish services for INTEGRILIN® (eptifibatide) Injection. We have identified alternative fill/finish and packaging suppliers to serve as future sources of supply for the United States and international markets. Although we believe that the fill/finish and packaging performed by our primary manufacturer is sufficient to meet our supply requirements for INTEGRILIN for the foreseeable future, the inability of this manufacturer to continue its fill/finish services or our inability to secure alternative manufacturers could adversely affect the supply of INTEGRILIN and, thereby, harm our results of operations.

        We expect to improve or modify our existing process technologies and manufacturing capabilities for INTEGRILIN. We cannot quantify the time or expense that may ultimately be required to improve or modify our existing process technologies, but it is possible that such time or expense could be substantial. Moreover, we may not be able to implement any of these improvements or modifications successfully.

        Our manufacturing plans and commercialization strategy for INTEGRILIN include the addition of extra capacity for the manufacture of INTEGRILIN as described above. We are currently engaged in finalizing multiple third-party manufacturing arrangements on commercially reasonable terms. We may not be able to do so, and, even if such arrangements are established, if demand for INTEGRILIN does not meet our forecasts, the manufacturing cost could become more expensive on a per unit basis. If we are unable to obtain contract manufacturing on commercially acceptable terms, we may not be able to produce INTEGRILIN in sufficient quantities to meet future market demand.

        We frequently carry significant amounts of INTEGRILIN in inventory. If for some reason we were unable to sell INTEGRILIN, our inventory could expire and we would be required to write-off the value of the expired inventory.

If we fail to obtain an adequate level of reimbursement for our products or services by third-party payors, there may be no commercially viable markets for our products or services.

        The availability and levels of reimbursement by governmental and other third-party payors affect the market for any pharmaceutical product or health care service. These third-party payors continually attempt to contain or reduce the costs of health care by challenging the prices charged for medical products and services. In certain foreign countries, particularly the countries of the European Union, the pricing of prescription pharmaceuticals is subject to governmental control. We may not be able to sell our products and services profitably if reimbursement is unavailable or limited in scope or amount.

        In particular, third-party payors could lower the amount that they will reimburse hospitals or doctors to treat the conditions for which the FDA has approved INTEGRILIN or VELCADE® (bortezomib) for Injection. If they do, pricing levels or sales volumes of INTEGRILIN or VELCADE may decrease. In addition, if we fail to comply with the rules applicable to the Medicaid and Medicare programs, we could be subject to the imposition of civil or criminal penalties or exclusion from these programs.

        In foreign markets, a number of different governmental and private entities determine the level at which hospitals will be reimbursed for administering INTEGRILIN and VELCADE to insured patients. If these levels are set, or reset, too low, it may not be possible to sell INTEGRILIN or VELCADE at a profit in these markets.

        In both the United States and certain foreign jurisdictions, there have been a number of legislative and regulatory proposals to change the health care system. For example, the passage of the Medicare Prescription Drug and Modernization Act of 2003 imposes new requirements for the distribution and pricing of prescription drugs which may affect the marketing of our products. Further proposals are likely. The potential for adoption of these proposals affects or will affect our ability to raise capital, obtain additional collaborators and market our products.

        In addition, we believe that the increasing emphasis on managed care in the United States has and will continue to put pressure on the price and usage of our present and future products, which may adversely affect product sales. Further, when a new therapeutic product is approved, the availability of governmental or private reimbursement for that product is uncertain, as is the amount for which that product will be reimbursed. We cannot predict the availability or amount of reimbursement for our product candidates, and current reimbursement policies for INTEGRILIN or VELCADE could change at any time.

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

        Our business exposes us to the risk of product liability claims that is inherent in the manufacturing, testing and marketing of human therapeutic products. In particular, INTEGRILIN® (eptifibatide) Injection and VELCADE® (bortezomib) for Injection are administered to patients with serious diseases who have a high incidence of mortality. Although we have product liability insurance that we believe is appropriate, this insurance is subject to deductibles, co-insurance requirements and coverage limitations and the market for such insurance is becoming more restrictive. We may not be able to obtain or maintain adequate protection against potential liabilities. If we are unable to obtain insurance at acceptable cost or otherwise protect against potential product liability claims, we will be exposed to significant liabilities, which may materially and adversely affect our business and financial position. These liabilities could prevent or interfere with our product commercialization efforts.

Guidelines and recommendations can affect the use of our products.

        Government agencies promulgate regulations and guidelines directly applicable to us and to our products. In addition, professional societies, practice management groups, private health and science foundations and organizations involved in various diseases from time to time may also publish guidelines or recommendations to the health care and patient communities. Recommendations of government agencies or these other groups or organizations may relate to such matters as usage, dosage, route of administration and use of concomitant therapies. Recommendations or guidelines suggesting the reduced use of our products or the use of competitive or alternative products that are followed by patients and health care providers could result in decreased use of our products.

Risks Relating to an Investment in Our Common Stock

The trading price of our securities could be subject to significant fluctuations.

        The trading price of our common stock has been volatile, and may be volatile in the future. During 2003, our common stock traded as high as $19.05 per share and as low as $6.24 per share. Factors such as announcements of our or our competitors’ operating results, changes in our prospects and market conditions for biotechnology stocks in general could have a significant impact on the future trading prices of our common stock.

        In particular, the trading price of the common stock of many biotechnology companies, including ours, has experienced extreme price and volume fluctuations, which have at times been unrelated to the operating performance of such companies whose stocks were affected. Some of the factors that may cause volatility in the price of our securities include:

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        The price of our securities may also be affected by the estimates and projections of the investment community, general economic and market conditions, and the cost of operations in our product markets. While we cannot predict the individual effect that these factors may have on the price of our securities, these factors, either individually or in the aggregate, could result in significant variations in price during any given period of time. There can be no assurance that these factors will not have an adverse effect on the trading price of our common stock.

We have anti-takeover defenses that could delay or prevent an acquisition and could adversely affect the price of our common stock.

        Provisions of our certificate of incorporation and bylaws and of Delaware law could have the effect of delaying, deferring or preventing an acquisition of our company. For example, we have divided our board of directors into three classes that serve staggered three-year terms, we may issue shares of our authorized “blank check” preferred stock and our stockholders are limited in their ability to call special stockholder meetings. In addition, we have issued preferred stock purchase rights that would adversely affect the economic and voting interests of a person or group that seeks to acquire us or a 15% or more interest in our common stock without negotiations with our board of directors.

Item 3.        Quantitative and Qualitative Disclosures About Market Risk

        We manage our fixed income investment portfolio in accordance with our Policy for Securities Investments, or Investment Policy, that has been approved by our Board of Directors. The primary objectives of our Investment Policy are to preserve principal, maintain a high degree of liquidity to meet operating needs, and obtain competitive returns subject to prevailing market conditions. Investments are made primarily in high-grade corporate bonds with effective maturities of three years or less, asset-backed debt securities and U.S. government agency debt securities. These investments are subject to risk of default, changes in credit rating and changes in market value. These investments are also subject to interest rate risk and will decrease in value if market interest rates increase. A hypothetical 100 basis point increase in interest rates would result in an approximate $14.2 million decrease in the fair value of our investments as of March 31, 2004. However, due to the conservative nature of our investments and relatively short effective maturities of debt instruments, interest rate risk is mitigated. Our Investment Policy specifies credit quality standards for our investments and limits the amount of exposure from any single issue, issuer or type of investment. We do not own derivative financial instruments in our investment portfolio.

        As of March 31, 2004, the fair value of our 4.5% notes, 5.0% notes and 5.5% notes approximates their carrying value. The interest rates on our convertible notes and capital lease obligations are fixed and therefore not subject to interest rate risk.

        We have no derivative instruments outstanding as of March 31, 2004.

        As of March 31, 2004 we did not have any financing arrangements that were not reflected in our balance sheet.

Item 4.        Controls and Procedures

        Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2004. In designing and evaluating our disclosure controls and procedures, 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 chief executive officer and chief financial officer concluded that as of March 31, 2004, our disclosure controls and procedures were (1) designed to ensure that material information relating to us is made known to our chief executive officer and chief financial officer by others, particularly during the period in which this report was prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

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

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PART II    OTHER INFORMATION

Item 6.    Exhibits and Reports on Form 8-K

         The following Current Reports on Form 8-K were filed or furnished by us during the three months ended March 31, 2004.

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SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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EXHIBIT INDEX

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