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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 November 4, 2004: 305,960,455

MILLENNIUM PHARMACEUTICALS, INC.

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 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.

4

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

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

5

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 and nine months ended September 30, 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

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 September 30, 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 September 30, 2004 and 2003, the Company recorded realized gains on marketable securities of $0.5 million and $3.0 million, respectively, and realized losses on marketable securities and other investments of $5.1 million and $0.9 million, respectively. During the nine months ended September 30, 2004 and 2003, the Company recorded realized gains on marketable securities of $1.8 million and $6.1 million, respectively, and realized losses on marketable securities and other investments of $5.6 million and $3.1 million, respectively.

     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 research, 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. The remainder of the Company’s total revenues is currently related to its strategic alliances.

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

        Revenues from Ortho Biotech Products, L.P. (“Ortho Biotech”) accounted for approximately 6% and 27% of total revenues for the three months ended September 30, 2004 and 2003, respectively, and 21% and 11% of total revenues for the nine months ended September 30, 2004 and 2003, respectively.

        Revenues from Bayer, AG (“Bayer”) accounted for approximately 2% and 12% of total revenues for the three months ended September 30, 2004 and 2003, respectively, and 1% and 15% of total revenues for the nine months ended September 30, 2004 and 2003, respectively.

        Revenues from Aventis Pharmaceuticals, Inc. (“Aventis”) accounted for approximately 1% and 9% of total revenues for the three months ended September 30, 2004 and 2003, respectively, and 2% and 18% of total revenues for the nine months ended September 30, 2004 and 2003, respectively.

        There were no other significant customers under strategic alliances in the three and nine months ended September 30, 2004 and 2003, respectively.

Information Concerning Market and Source of Supply Concentration

        INTEGRILIN® (eptifibatide) Injection has received regulatory approvals in the United States, the countries of the European Union and a number of other countries for various indications. The Company and Schering-Plough Ltd. and Schering Corporation (collectively “SGP”) co-promote INTEGRILIN in the United States and share any profits and losses. The Company 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. In June 2004, the Company acquired from SGP the rights to market the product in Europe and entered into a new agreement with GlaxoSmithKline plc (“GSK”). SGP continues to co-promote the product in the United States with the Company as well as exclusively market the product in areas outside of the United States and Europe. Under the agreement with GSK, GSK will exclusively market INTEGRILIN in Europe upon the approved transfer of marketing authorizations, which is anticipated to be complete by December 2004. SGP will continue to promote and sell INTEGRILIN in Europe until the transfer is complete.

        The Company has two manufacturers for the supply of eptifibatide, the raw material necessary to make INTEGRILIN. The Company has one manufacturer that currently performs fill/finish services for INTEGRILIN. The Company is qualifying an alternative fill/finish supplier and has identified an alternative packaging supplier to serve as future sources of supply for the United States and international markets.

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. The Company assesses the probability of commercialization based upon several factors including estimated launch date, time to manufacturer and shelf life. At September 30, 2004 or December 31, 2003, inventory does not include amounts for products that have not been approved for sale.

        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):

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

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.

        Intangible assets consist of the following (in thousands):

        On February 12, 2002, the Company acquired COR Therapeutics, Inc. (“COR”) for an aggregate purchase price of $1.8 billion. The transaction was recorded as a purchase for accounting purposes and the Company’s consolidated financial statements include COR’s operating results from the date of the acquisition. The purchase price was allocated, based upon an independent valuation, to the assets purchased and liabilities assumed based upon their respective fair values, with the excess of the purchase price over the estimated fair market value of net tangible assets acquired allocated to in-process research and development, developed technology, trademark and goodwill.

        During the year ended December 31, 2002, the Company recorded a one-time charge of $242.0 million for acquired in-process research and development representing the estimated fair value related to five incomplete projects that, at the time of the COR acquisition, had no alternative future use and for which technological feasibility had not been established. The most significant purchased research and development project that was in-process at the date of the acquisition consisted of inhibitors of certain growth factor receptors in the tyrosine kinase family. These inhibitors have the potential to reduce the narrowing of blood vessels. Cancers such as certain leukemias appear to harbor activated forms of some of these receptors. This project represented 62% of the total in-process value and was in pre-clinical testing at the time of the acquisition. The Company has advanced this project into Phase I clinical testing. The Company discontinued the remaining four of the five projects acquired as part of its restructuring efforts.

        COR’s developed technology consisted of an existing product, INTEGRILIN® (eptifibatide) Injection and related patents. This developed technology was determined to be separable from goodwill and was valued at approximately $435.0 million. Because the INTEGRILIN name was well recognized in the marketplace and was considered to contribute to the product revenue, the trademark was determined to be separable from goodwill. The INTEGRILIN trademark was valued at approximately $59.0 million and is considered to have an infinite life.

        The excess of the purchase price over the fair value of the net tangible and identifiable intangible assets was recorded as goodwill. Intangible assets that were not specifically identifiable, had indeterminate lives or were inherent in the continuing business and related to the Company as a whole were classified as goodwill. The significant factors contributing to the existence of goodwill related to company management, a specialized cardiovascular sales force, market position and operating experience.

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

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

        Amortization expense for the three months ended September 30, 2004 and 2003 was approximately $8.4 million and $9.7 million, respectively. Amortization expense for the nine months ended September 30, 2004 and 2003 was approximately $25.1 million and $29.0 million, respectively. In addition, in connection with its restructuring initiative discussed in Note 3, the Company recognized an impairment charge in the nine months ended September 30, 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, 2004, 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 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, 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, development 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.

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

Revenue under strategic alliances

        The Company recognizes revenue from nonrefundable license payments, milestone payments, royalties 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.

        Royalties are recognized as revenue when earned.

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

Advertising and Promotional Expenses

        Advertising and promotional expenses are expensed as incurred. During the three months ended September 30, 2004 and 2003, advertising and promotional expenses were $8.9 million and $5.5 million, respectively. During the nine months ended September 30, 2004 and 2003, advertising and promotional expenses were $28.6 million and $20.2 million, respectively.

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 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 is composed of net loss, unrealized gains and losses on marketable securities and cumulative foreign currency translation adjustments. The following table displays comprehensive loss (in thousands):

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

The components of accumulated other comprehensive income (loss) were as follows (in thousands):

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 September 30, 2004 and 2003 was $6.87 and $9.64, respectively, and during the nine months ended September 30, 2004 and 2003 was $9.02 and $7.23, 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)

        Through the end of the second quarter of 2004, the fair value of stock options granted was determined utilizing a historical volatility rate. In the third quarter of 2004, the Company changed the volatility assumption. The Company now uses the most recent three-year time period for purposes of calculating the expected volatility. Additionally, the Company considered implied volatilities of currently traded options to provide an estimate based upon current trading activity. After considering other such factors as its stage of development, the length of time the Company’s stock has been publicly traded and the impact of having two marketed products, the Company believes this volatility rate better reflects the expected volatility of its stock going forward.

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

        On March 31, 2004, the FASB issued an Exposure Draft, “Share-Based Payment — An Amendment of FASB Statements No. 123 and 95” (“proposed FAS 123R”), which currently is expected to be effective for public companies in periods beginning after June 15, 2005. The Company would be required to implement the proposed standard no later than the quarter that begins July 1, 2005. The cumulative effect of adoption, if any, applied on a modified prospective basis, would be measured and recognized on July 1, 2005. The proposed FAS 123R addresses the accounting for transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. The proposed FAS 123R would eliminate the ability to account for share-based compensation transactions using APB 25, and generally would require instead that such transactions be accounted for using a fair-value based method. As proposed, companies would be required to recognize an expense for compensation cost related to share-based payment arrangements including stock options and employee stock purchase plans. The FASB expects to issue a final standard by December 31, 2004. The Company is currently evaluating option valuation methodologies and assumptions in light of the proposed FAS 123R related to employee stock options. Current estimates of option values using the Black-Scholes method (as shown above) may not be indicative of results from valuation methodologies ultimately adopted in the final rules.

Accounting Pronouncements

        In January 2003, the Financial Accounting Standards Board (“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 its 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

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

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, the year ended 2003 and the first nine months of 2004. During the remainder of 2004 and 2005, the Company will continue to recognize additional restructuring charges primarily related to lease obligations as part of its overall restructuring plan.

        These costs are included in restructuring charges in the statements of operations and other current and other long term liabilities on the balance sheet at September 30, 2004. The following table displays the restructuring activity and liability balances (in thousands):

        The projected timing of payment of the remaining restructuring liabilities at September 30, 2004 are approximately $28.6 million due through September 30, 2005 and $51.1 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 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 the Company with the opportunity to receive various combinations of license fees, research funding, co-promotion revenue, distribution fees and may provide certain additional payments contingent upon the achievement of research and regulatory milestones and royalties and/or profit shares if the Company’s collaborations are successful in developing and commercializing products.

Product Alliances

        During September 2004, the Company initiated the process, contemplated by the original agreement with SGP, to transition U.S. distribution responsibilities for INTEGRILIN® (eptifibatide) Injection from SGP to the Company. The Company expects this transition to take place during the last quarter of 2005, at the earliest.

        In June 2004, the Company executed an agreement with GSK under which GSK will exclusively market INTEGRILIN in Europe. The commercialization alliance is designed to provide significant sales and marketing

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

support to capitalize on market opportunities for INTEGRILIN® (eptifibatide) Injection in Europe. Under the terms of the agreement, the Company is entitled to license fees and royalties from GSK on INTEGRILIN sales in Europe upon the achievement of certain objectives.

        GSK will actively commercialize INTEGRILIN in Europe upon the approved transfer of marketing authorizations, which is anticipated to be complete by December 2004. The execution of this agreement between the Company and GSK for INTEGRILIN follows the Company’s acquisition of the rights to market the product in Europe from its partner SGP. SGP will continue to promote and sell INTEGRILIN in Europe until the transfer is complete.

        SGP continues to co-promote INTEGRILIN with the Company in the United States and sell the product in all other territories outside Europe, and continues to pay the Company royalties on INTEGRILIN sales outside of the United States and Europe.

5.     Convertible Debt

        The Company had the following convertible notes outstanding at September 30, 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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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 we have made significant progress towards achieving these goals. Our net loss decreased from $337.3 million for the nine months ended September 30, 2003 to $157.6 million for the same period in 2004, driven by decreased restructuring charges, decreased research and development expenses and increased product-related revenues, offset by decreased strategic alliance revenue. Our financial position remains strong with $761.6 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, excluding restructuring charges, have decreased approximately 11% for the nine months ended September 30, 2004 from the same period last year.

        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, including cancer, cardiovascular and inflammation, 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 in the ten accession member countries when those countries officially joined the European Union. VELCADE has also been approved in Argentina, Israel, South Korea and Turkey.

        In September 2004, we submitted a supplemental New Drug Application (sNDA) to the FDA for VELCADE for the treatment of patients with multiple myeloma who have received at least one prior therapy. Also in September 2004, the European Medicines Evaluation Agency, or EMEA, accepted for review a filing by Ortho Biotech Products, L.P., a wholly owned subsidiary of Johnson & Johnson, or Ortho Biotech, for the same indication in Europe.

        In November 2004, we announced that the FDA had granted VELCADE fast track designation for relapsed and refractory mantle cell lymphoma, an aggressive form of non-Hodgkin’s lymphoma. This designation allows for the FDA to accept on a rolling basis portions of a marketing application for review prior to the submission of a final document.

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Ortho Biotech Collaboration

        In June 2003, we entered into an agreement with Ortho Biotech to collaborate on the commercialization and continued clinical development of VELCADE® (bortezomib) for Injection. 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 receive distribution fees from Ortho Biotech and its affiliates on sales of VELCADE 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 currently marketed in the United States, in all member states of the European Union and in other countries, including Argentina, Australia, Brazil, Canada, India, Japan, Mexico, Singapore, South Africa, Switzerland and Thailand.

        During September 2004, we initiated the process, contemplated by our original agreement with SGP, to transition U.S. distribution responsibilities for INTEGRILIN from SGP to us. We expect this transition to take place during the last quarter of 2005, at the earliest.

        In June 2004, we acquired the rights to market INTEGRILIN in Europe from SGP and entered into an agreement with GlaxoSmithKline plc, or GSK, in which GSK will exclusively market INTEGRILIN in Europe. This commercialization alliance with GSK is designed to provide significant sales and marketing support to capitalize on market opportunities for INTEGRILIN in Europe. Under the terms of the agreement, we are entitled to license fees and royalties from GSK on INTEGRILIN sales in Europe upon the achievement of certain objectives.

        GSK will actively commercialize INTEGRILIN in Europe upon the approved transfer of marketing authorizations, which is anticipated to be complete by December 2004. SGP will continue to promote and sell INTEGRILIN in Europe until the transfer is complete.

        SGP continues to co-promote INTEGRILIN with us in the United States and sell the product in all other territories outside Europe, and continues to pay us royalties on INTEGRILIN sales outside of the United States and Europe.

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.

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        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, our 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® (bortezomib) for Injection in the United States 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. As VELCADE is a fairly new product, we estimate product returns based on an on-going analysis of industry trends for similar products and historical return patterns as they become available. VELCADE returns are expected to be generally low because the shelf life for the product is 18 months in the United States and we expect wholesalers not to stock much inventory due to the expensive nature of the product. Additionally, we consider several factors in our estimation process including our internal sales forecasts, inventory levels as provided by certain wholesalers and third-party market research data. As we continually monitor actual product returns and inventory levels in the domestic distribution channel, if circumstances change or conditions become more competitive in the market for therapeutic products that address multiple myeloma, we may take actions to increase our product return estimates. This would result in an incremental reduction of future product sales at the time the return estimate is changed. Since product launch, we have made no material revisions to our estimate of product returns or other dilution reserves. Accruals for rebates, chargebacks, and other discounts are immaterial as a result of the recent introduction of VELCADE and the current lack of competitive product available.

        We recognize co-promotion revenue based on SGP’s reported shipments of 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, development 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 SGP. 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:

        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.

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        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.

        Royalties are recognized as revenue when earned.

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

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.

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 discounted cash flow model to value intangible assets. 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, 2004, 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 Financial Accounting Standards Board, or FASB, issued Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51", or FIN 46, and in December 2003 issued a revised FIN 46, or 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.

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Results of Operations
(dollars in thousands, except per share amounts)

Net Loss and Loss Per Share

        Net loss and loss per share for the three months ended September 30, 2004 (the “2004 Three Month Period”) and the nine months ended September 30, 2004 (the “2004 Nine Month Period”) decreased from the comparable periods in 2003 primarily due to lower restructuring charges, decreased research and development expenses as a result of our restructuring initiative and increased product-related revenues in all periods, offset by decreased strategic alliance revenue due to the timing of certain milestones and the conclusion of certain research and technology alliances in the three months ended September 30, 2003 (the “2003 Three Month Period”).

Revenues

        Total revenues decreased 24% in the 2004 Three Month Period with no change in the 2004 Nine Month Period from the comparable periods in 2003.

        In May 2003 we received FDA approval to market VELCADE® (bortezomib) for Injection and began shipping to wholesalers. Net product sales of VELCADE were $37.7 million in the 2004 Three Month Period and $102.3 million in the 2004 Nine Month Period, reflecting increased patient penetration and use of the product in both the three and nine month periods. Reserves for product returns, chargebacks and discounts represent approximately 5.5% to 6.5% of gross product sales for all periods presented. Product sales from VELCADE represent approximately 34% of our total revenues in the 2004 Three Month Period and 29% of total revenue in the 2004 Nine Month Period.

        Co-promotion revenue, based on worldwide sales of INTEGRILIN® (eptifibatide) Injection, increased 31% in the 2004 Three Month Period and 5% in the 2004 Nine Month Period from the comparable periods in 2003. The increases in co-promotion revenue are primarily attributable to the increase in product sales in the United States and higher net reimbursement from SGP to us under our collaboration agreement. Worldwide sales of INTEGRILIN in the 2004 Three Month Period, as provided to us by SGP, were $93.8 million, an 18% increase over sales for the 2003 Three Month Period, and $244.7 million for the 2004 Nine Month Period, a 6% decrease from sales for the 2003 Nine Month Period. Co-promotion revenue represents approximately 57% of our total revenues in the 2004 Three Month Period and 46% of total revenue in the 2004 Nine Month Period.

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        Revenue under strategic alliances decreased 87% in the 2004 Three Month Period from the comparable period in 2003. This decrease is primarily due to a $30.0 million milestone earned in 2003 under our Ortho Biotech alliance, decreases in revenue recognized under the research phase of the Bayer AG, or Bayer, agreement and the April 2003 termination of the Aventis Pharmaceuticals, Inc., or Aventis, technology transfer agreement.

        Revenue under strategic alliances decreased 48% in the 2004 Nine Month Period from the comparable period in 2003. This decrease is primarily attributable to a decrease in revenue recognized under the research phase of the Bayer agreement and the technology transfer agreement with Aventis, partially offset by increased revenue under our Ortho Biotech alliance from milestone payments received from Ortho Biotech relating to VELCADE® (bortezomib) for Injection approval in the European Union and the achievement of agreed-upon sales levels of VELCADE.

        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, enter into new commercial alliances and conclude our discovery-focused alliances.

Cost of Sales

        Cost of sales increased 5% in the 2004 Three Month Period and 7% in the 2004 Nine Month Period from the comparable periods in 2003. Cost of sales includes manufacturing-related expenses associated with the sale of VELCADE and INTEGRILIN® (eptifibatide) Injection. The increases were primarily driven by increased sales of VELCADE.

Research and development

        Research and development expenses decreased 17% in the 2004 Three Month Period and 21% in the 2004 Nine Month Period from the comparable periods in 2003. The decreases reflect the financial benefits of our restructuring efforts, including reductions in discovery personnel and personnel-related costs. We expect that our mix between research and development expense will continue to shift as we increase our investment in later-stage development programs.

        In addition to our ongoing clinical trials of INTEGRILIN and VELCADE, we have ten drug candidates in clinical development with five currently identified as high priorities. As we continually prioritize our portfolio, we allocate resources across our drug candidate programs accordingly, which may mean a shift in 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

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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.

        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 the 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 7% in the 2004 Three Month Period and 12% in the 2004 Nine Month Period from the comparable periods in 2003. The increases are primarily due to increased selling and marketing expenses related to VELCADE® (bortezomib) for Injection and INTEGRILIN® (eptifibatide) Injection in both the 2004 Three and Nine Month Periods and the expansion of the Millennium-SGP sales force for INTEGRILIN, including increases in salaries and benefits, partially offset by decreased expenses in corporate general and administrative functions attributable to our restructuring efforts in the 2004 Nine Month Period.

Restructuring

        In December 2002 and June 2003, we took steps to focus our resources on drug development and commercialization. Our restructuring plan includes consolidation of research and development facilities, overall headcount reduction and streamlining of discovery and development projects. During the 2004 Three Month Period we recognized a credit of $0.4 million from the final settlement of certain termination benefits and adjustments to our estimated sublease income. We recorded $36.4 million of charges related to the recognition of the estimated remaining rental obligations, net of estimated sublease income, for facilities that we vacated during the 2004 Nine Month Period.

        We recorded restructuring charges of $52.7 million in the 2003 Three Month Period and $146.2 million in the nine months ended September 30, 2003 (the “2003 Nine Month Period”). These charges are related to facilities, asset impairment and personnel costs. 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

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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 the estimated remaining rental obligations, net of estimated sublease income, for facilities that we vacated and any adjustments to those estimates.

Amortization of Intangibles

        Amortization of intangible assets decreased 13% in both the 2004 Three Month Period and the 2004 Nine Month Period from the comparable periods in 2003. Amortization expense decreased as the specifically identified intangible assets from our LeukoSite, Inc., or 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 87% in the 2004 Three Month Period and 49% in the 2004 Nine Month Period from the comparable periods in 2003. The decrease in the 2004 Three Month Period is primarily related to increased realized losses on securities, decreased realized gains, as well as decreased interest income as a result of lower average balance of invested funds. The decrease in the 2004 Nine Month Period is primarily related to decreased realized gains, increased realized losses and a lower average balance of invested funds.

Interest Expense

        Interest expense increased 2% in the 2004 Three Month Period and decreased 56% in the 2004 Nine Month Period from the comparable periods in 2003. The decrease in the 2004 Nine Month Period is attributable to 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 (the “5.0% notes”) 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 (the “4.5% notes”).

Gain on Sale of Equity Interest in Joint Venture

        Through our acquisition of LeukoSite, we became a party to a joint venture partnership, Millennium and ILEX Partners, L.P., or M&I, for the 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 Nine Month Period, we recorded the final $40.0 million gain related to our sale of this equity interest based upon the achievement of predetermined 2004 sales targets of Campath. In addition, we will be entitled to additional payments from ILEX if sales of Campath in the United States after 2004 exceed specified annual

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thresholds. If these thresholds are not achieved, we will not receive any future additional payments related to Campath.

Debt Financing Charge

        During the 2003 Nine Month Period, we recorded a non-cash charge of $10.5 million which represents the write-off of approximately $12.4 million of unamortized original debt issuance costs associated with the 5.0% notes and 4.5% notes assumed in the COR acquisition, offset by $1.9 million relating to the expired premium put on the untendered notes on April 29, 2003.

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 investments in debt and equity securities of some of our alliance collaborators in accordance with our Board of Directors’ approved policies and our business needs. These investments are generally in smaller companies. We have lost and may in the future lose money in these types of 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 collaborators.

        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, INTEGRILIN and other products, subject to regulatory 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 September 30, 2004 we had $761.6 million in cash, cash equivalents and marketable securities. This excludes $16.1 million of interest-bearing marketable securities classified as restricted cash on our balance sheet as of September 30, 2004 which primarily serve as collateral for letters of credit securing leased facilities.

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