UNITED STATES
SECURITIES AND EXCHANGE COMMISION

FORM 10-Q

Commission File Number
000-50438

Myogen, Inc.

7575 West 103rd Avenue, Suite 102
Westminster, CO 80021
(303) 410-6666
(Address, including zip code, and telephone number,
including area code, of principal executive offices)

     Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ       No o

     Check whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes þ       No o

     As of May 6, 2005 there were 35,767,808 shares of the Registrant’s Common Stock outstanding, par value $0.001 per share.

This quarterly report on Form 10-Q consists of 42 pages.

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MYOGEN, INC.
FORM 10-Q

INDEX

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MYOGEN, INC.
(A Development Stage Enterprise)

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

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MYOGEN, INC.
(A Development Stage Enterprise)

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

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MYOGEN, INC.
(A Development Stage Enterprise)

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

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MYOGEN, INC.

Note 1: Basis of Presentation

     The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. For further information, refer to the consolidated financial statements and footnotes thereto as of and for the year ended December 31, 2004, included in the Annual Report on Form 10-K of Myogen, Inc. (the “Company” or “Myogen”) filed with the Securities and Exchange Commission on March 15, 2005.

     The Company has generated limited revenue to date and its activities have consisted primarily of developing products, licensing products, raising capital and recruiting personnel. Accordingly, the Company is considered to be in the development stage as of March 31, 2005 as defined in Statement of Financial Accounting Standards (“SFAS”) No. 7, Accounting and Reporting by Development Stage Enterprises.

Note 2: Liquidity

     The Company has incurred significant losses and negative cash flows from operations in every fiscal period since June 10, 1996 (Inception). For the three months ended March 31, 2005, the Company incurred losses from operations of $18,858,575 and negative cash flows from operations of $17,142,215. For the years ended December 31, 2004, 2003 and 2002, the Company incurred losses from operations of $58,483,712, $42,972,596 and $28,815,118, respectively, and negative cash flows from operations of $47,698,031, $31,706,160 and $26,459,454, respectively. As of March 31, 2005, the Company had a deficit accumulated during the development stage of $194,463,234. Management anticipates that operating losses and negative cash flows from operations will continue for at least the next several years.

     To date, the Company has satisfied its cash commitments primarily through public and private placements of equity securities. From Inception through March 31, 2005, the Company has raised $258,028,860 of net cash proceeds from the sale of equity securities.

     Based on current spending projections, management believes that the existing cash, cash equivalents and investments will be sufficient to continue operations through at least the first quarter of 2006. Failure to generate sufficient revenues or raise additional capital could have a material adverse effect on the Company’s ability to achieve its intended business objectives. Management plans to conduct additional financings to meet future working capital and capital expenditure needs. There can be no assurance that such additional financing will be available or, if available, that such financing can be obtained on terms satisfactory to the Company.

Note 3: Stock-Based Compensation

     The Company measures compensation expense to employees using the intrinsic value method as prescribed by Accounting Principles Board Opinion (“APB”) No. 25, Accounting For Stock Issued to Employees (“APB 25”) and provides pro forma disclosures of net loss as if the fair value based method was applied as prescribed by SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”). Accordingly, the Company does not recognize compensation expense for options granted to employees when the exercise price equals or exceeds the fair value of common stock as of the grant date. Stock-based awards to consultants are accounted for under the provisions of SFAS 123 and Emerging Issues Task Force (“EITF”) Issue 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.

     Had employee compensation cost for the Company’s stock-based compensation plan been determined based on the fair value at the grant dates for awards using the Black-Scholes model prescribed by SFAS 123, the Company’s pro forma net loss and pro forma net loss per share would be as follows:

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Note 4: Inventory Components

Note 5: Comprehensive Loss

     A reconciliation of net loss to comprehensive loss is as follows:

Note 6: Revenue Recognition

     Myogen recognizes revenue in accordance with SEC Staff Accounting Bulletin No. 104 Revenue Recognition in Financial Statements (SAB 104). Arrangements with multiple elements are accounted for in accordance with Emerging Issues Task Force Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, or EITF 00-21. The Company considers this methodology to be the most appropriate for its business model and current revenue streams.

  Product Sales

     Product sales are recognized when the following four revenue recognition criteria are met: (i) persuasive evidence of an arrangement exists; (ii) product is shipped from the distributor’s consignment stock to the customer; (iii) the selling price is fixed or determinable; and (iv) collection is reasonably assured. Once the product is shipped to the customer, the Company does not allow product returns.

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  Research and development contracts

     Myogen may enter into collaborative agreements with pharmaceutical companies where the other party receives exclusive marketing and distribution rights for certain products for set time periods and set geographic areas. The rights associated with this research and development are assigned or can be assigned to the collaborator through a license at the collaborator’s option. The terms of the collaborative agreements can include non-refundable funding of research and development efforts, licensing fees, payments based on achievement of certain milestones, and royalties on product sales. Myogen analyzes its multiple element arrangements to determine whether the elements can be separated and accounted for individually as separate units of accounting in accordance with EITF 00-21. The Company recognizes up-front license payments as revenue if the license has stand-alone value, the Company does not have ongoing involvement or obligations, and the fair value of the undelivered items can be determined. If the license is considered to have stand-alone value but the fair value on any of the undelivered items cannot be determined, the license payments are recognized as revenue over the period of performance for such undelivered items or services.

     Non-refundable license fees received are recorded as deferred revenue once received or irrevocably committed and are recognized ratably over the longer of the development period to which they relate or the expected duration of the contractual relationship. Where there are two or more distinct phases embedded in one contract (such as product development and subsequent commercialization or manufacturing), the contracts may be considered multiple element arrangements. When it can be demonstrated that each of these phases is at fair value, they are treated as separate earnings processes with upfront fees being recognized over only the initial product development phase. The relevant time period for the product development phase is based on management estimates and could vary depending upon the outcome of clinical trials and the regulatory approval process. As a result, management frequently reviews the appropriate time period.

     Milestone payments based on designated achievement points that are considered at risk and substantive at the inception of the collaborative contract are recognized when the earnings process is complete and the corresponding payment is reasonably assured. The Company evaluates whether milestone payments are at risk and substantive based on the contingent nature of the milestone, specifically reviewing factors such as the technological and commercial risk that needs to be overcome and the level of investment required. Milestone payments related to arrangements under which the Company has continuing performance obligations are recognized as revenue upon achievement of the milestone only if all of the following conditions are met: the milestone payments are non-refundable; achievement of the milestone was not reasonably assured at the inception of the arrangement; substantive effort is involved in achieving the milestone; and the amount of the milestone payment is reasonable in relation to the effort expended or the risk associated with the achievement of the milestone. If any of these conditions are not met, the milestone payments are deferred and recognized as revenue over the term of the arrangement as the Company completes its performance obligations.

     Revenue from research funding is recognized when the services are performed in order to match revenues to expenses incurred and is typically based on the fully burdened cost of a researcher working on a collaboration. Revenue is recognized ratably over the period as services are performed, with the balance reflected as deferred revenue until earned.

Note 7: Net Loss Per Common Share

     Basic net loss per common share is computed by dividing the net loss attributable to common stockholders for the period by the weighted average number of common shares outstanding during the period and diluted net loss per common share is computed by giving effect to all dilutive potential common stock, including options and warrants.

     Diluted net loss per common share for all periods presented is the same as basic net loss per share because the potential common shares were anti-dilutive. Anti-dilutive common shares not included in the calculation of diluted shares outstanding, using the treasury stock method, is summarized as follows:

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Note 8: Accounts Payable

     Accounts payable are comprised of the following:

Note 9: Commitments and Contingencies

     In the ordinary course of its business, the Company makes certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. These include indemnities of clinical investigators, consultants and contract research organizations involved in the development of the Company’s clinical stage products, indemnities of distributors of its marketed product, indemnities to its lenders and indemnities to directors and officers of the Company to the maximum extent permitted under the laws of the State of Delaware. The duration of these indemnities, commitments and guarantees varies, and, in certain cases, is indefinite. The majority of these indemnities, commitments and guarantees do not provide for any limitation of the maximum potential future payments the Company could be obligated to make. The Company has not recorded any liability for these indemnities, commitments and guarantees in the accompanying consolidated balance sheets. However, the Company accrues for losses for any known contingent liability, including those that may arise from indemnification provisions, when future payment is probable and in accordance with SFAS No. 5, Accounting for Contingencies. No such losses have been recorded to date.

Note 10: Geographic Information

     The Company operates in the United States and in certain countries throughout Europe under one operating segment. All product sales from Inception to March 31, 2005 have occurred in Europe through the Company’s subsidiary.

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Note 11: Recent Accounting Pronouncements

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

     SFAS No. 123(R) and the related interpretations must be adopted no later than January 1, 2006. The Company expects to adopt SFAS No. 123(R) on January 1, 2006.

     SFAS No. 123(R) permits companies to adopt its requirements using one of two methods:

     1. A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123(R) that remain unvested on the effective date.

     2. A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.

     The Company is still assessing the appropriate transition method.

     As permitted by SFAS No. 123, the Company currently accounts for share-based payments to employees using the APB No. 25 intrinsic value method and, therefore, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of SFAS No. 123(R)‘s fair value method will have an impact on the Company’s results of operations, although it will have no impact on the Company’s overall financial position or cash flows. Statement No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While the Company cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), there were no operating cash flows recognized in prior periods for such excess tax deductions for stock option exercises. The Company has not yet determined the method of adoption or the effect of adopting SFAS 123(R), and has not determined whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS No. 123.

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     ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     This information should be read in conjunction with the financial statements and the notes thereto included in Item 1 of Part I of this Quarterly Report and the audited financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 2004 contained in our 2004 Annual Report on Form 10-K.

     This quarterly report on Form 10-Q, including this Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements regarding future events and our future results, such as statements of our plans, objectives, expectations, beliefs, assumptions and intentions. Words such as “expect,” “anticipate,” “target,” “goal,” “project,” “intend,” “plan,” “believe,” “seek,” “estimate,” variations of such words, and similar expressions are intended to identify such forward-looking statements. In addition, any statements which refer to projections of our future financial performance, our anticipated growth and trends in our business and other characterizations of future events or circumstances are forward-looking statements.

     Forward-looking statements in this report include statements relating to:

	•	the development of enoximone, ambrisentan and darusentan, including projected development and clinical trial timelines;
	•	expected trends and projections relating to sales of Perfan® I.V. and our income and expense line items; and
	•	expectations regarding our financial condition and liquidity, including the adequacy of our existing capital resources.

     These forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in “Risk Factors,” other cautionary statements included in this report, in our Form 10-K for the year ended December 31, 2004 and in our other periodic reports on Form 10-Q and Form 8-K. We are providing the information in this quarterly report filed on Form 10-Q as of the date of this report. Except as required by law, we undertake no duty to update any forward-looking statements to reflect the effect on those statements of subsequent events or changes in our expectations or assumptions.

Overview

     We are a biopharmaceutical company focused on the discovery, development and commercialization of small molecule therapeutics for the treatment of cardiovascular disorders. We believe that our advanced understanding of the biology of cardiovascular disease combined with our clinical development expertise in cardiovascular therapeutics provide us with the capability to discover novel therapies, as well as identify, license or acquire products that address serious, debilitating cardiovascular disorders that are not adequately treated with existing therapies.

     We currently market an intravenous (i.v.) formulation of enoximone, Perfan® I.V., in Europe for the treatment of acute decompensated heart failure and we have three product candidates in late-stage clinical development: enoximone capsules for the treatment of patients with advanced chronic heart failure, ambrisentan for the treatment of patients with pulmonary arterial hypertension (PAH) and darusentan for the treatment of patients with resistant systolic hypertension. All three of our product candidates are orally administered small molecules that we believe offer advantages over currently available therapies and have the potential to address unmet needs in their respective markets.

•

Enoximone. We believe that chronic oral administration of low doses of enoximone capsules has the potential to alleviate symptoms and reduce hospitalizations for patients with advanced chronic heart failure, resulting in a decrease in associated health care costs and improvement in patients’ quality of life. We are evaluating enoximone capsules in three Phase III trials (ESSENTIAL I & II and EMPOWER) and we completed the treatment phase of one additional Phase III trial in February 2004 (EMOTE). In November 2004, we announced the completion of the treatment

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		phase of both ESSENTIAL trials. We plan to report preliminary data for the ESSENTIAL trials in July 2005.
	•	Ambrisentan. We believe that ambrisentan may have several clinical benefits over existing PAH therapies, including greater and more durable efficacy, low incidence of liver toxicity, once daily dosing and lower incidence of interactions with other drugs. We completed a Phase II clinical trial of ambrisentan in September 2003 and announced the initiation of the two pivotal Phase III trials, ARIES-1 & -2, in January 2004. We expect to complete enrollment in ARIES-2 by the end of June 2005 and ARIES-1 in the fourth quarter of 2005. We plan to report preliminary results from each of the ARIES trials approximately six months following the completion of enrollment in each trial.
	•	Darusentan. We believe that there is a significant need for a therapeutic agent that, when used in combination with currently available medications, is capable of lowering blood pressure in patients suffering from resistant systolic hypertension (i.e., patients whose blood pressure cannot be adequately controlled with existing medication). We believe that darusentan may be an agent that is capable of improving control of blood pressure in this patient population, leading to the potential for enhanced patient outcomes, such as a reduction in the number of serious cardiac events and the progression of chronic kidney disease. In July 2004, we announced the initiation of a Phase IIb clinical trial to evaluate the safety and efficacy of darusentan in patients with resistant systolic hypertension. In April 2005, we announced the completion of patient enrollment in the Phase IIb clinical trial of darusentan. We expect the treatment phase of this trial will be completed on July 8, 2005 and we intend to report results of the trial one or two months thereafter.

     Through our internal research program and academic collaborations, we are developing an advanced understanding of the biological pathways of heart disease and have discovered several novel molecular targets that we believe play a key role in pathological cardiac hypertrophy and its progression to heart failure. A subset of these targets forms the basis of our drug discovery research program.

     We are in the development stage and since inception have devoted substantially all of our efforts to the discovery, in-licensing and development of drugs to treat cardiovascular disease. We have incurred losses each year since our inception and had an accumulated deficit of $194.5 million as of March 31, 2005. We incurred operating losses of $18.9 million and $16.2 million for the three months ended March 31, 2005 and 2004, respectively, and $58.5 million, $43.0 million, $28.8 million for the years 2004, 2003 and 2002, respectively. Our research and development expenses have historically been much higher than our revenues.

     Our current revenue is derived solely from sales of Perfan® I.V. in Europe and research and development contract revenues from our agreement with Novartis Institutes for BioMedical Research, Inc. (“Novartis”) signed in October 2003. Prior to our licensing the worldwide rights to enoximone in 1998, Perfan® I.V. was marketed in Europe by Aventis. In 1999, we formed our wholly-owned German subsidiary, Myogen GmbH, to manage our sales and marketing activities in Europe. From 2000 through 2002, we entered into agreements with distributors to distribute Perfan® I.V. in Belgium, France, Germany, Ireland, Italy, Luxembourg, the Netherlands and the United Kingdom. We recorded our first sales of Perfan® I.V. in 2000. Even if our sales and marketing efforts lead to increases in Perfan® I.V. sales in future periods, we do not expect that such increases will result in a material reduction in our overall net loss. Our cost of product sold reflects the cost of Perfan® I.V., which we purchase exclusively from a contract manufacturer, and the cost of royalties payable to Aventis.

     Our primary business activities have been focused on the development of enoximone capsules, ambrisentan and darusentan. From inception to March 31, 2005, we have incurred expenses of approximately $87.7 million, $41.1 million and $10.6 million for the development of enoximone capsules, ambrisentan and darusentan, respectively. These expenses represent both clinical development costs and the costs associated with non-clinical support activities such as toxicological testing, manufacturing process development and regulatory consulting services. We also report the costs of product licenses in this category, including our milestone obligations associated with the licensing of enoximone, ambrisentan and darusentan.

     While some of our research and development expenses are the result of the internal costs related directly to our employees, a majority of the expenses are charged to us by external service providers, including clinical research organizations and contract manufacturers. The cost of our clinical trial programs is the most significant portion of our development expenses, with the number of patients enrolled in a trial and

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the attendant level of contract research organization and clinical site activity being the principal cost determinants. We expect that expenses in the research and development category will increase for the foreseeable future as we add personnel and expand our clinical trial activities. The amount of the increase is difficult to predict due to the uncertainty inherent in the timing of clinical trial initiations, the rate of patient enrollment and the detailed design of future trials. In addition, the results from our trials, as well as the results of trials of similar drugs under development by others, will influence the number, size and duration of planned and unplanned trials.

     We have a discovery research effort, which is conducted by our scientists, through collaborative agreements with academic laboratories and in conjunction with Novartis. In October 2003, we entered into a research collaboration with Novartis for the discovery and development of novel drugs for the treatment of cardiovascular disease. In exchange for license payments and a commitment to fund our research, Novartis has the exclusive right to license drug targets and compounds developed through the collaboration. To date, Novartis has not licensed any drug targets or compounds under the terms of the collaboration. If Novartis does execute a license, Novartis will be obligated to fund all further development of the licensed product candidate, make payments to us upon the achievement of certain milestones and pay us royalties for sales of any products that are successfully commercialized. Upon the completion of Phase II clinical trials of any product candidate Novartis has licensed from us, we have the option to enter into a co-promotion and profit sharing agreement with them for that product candidate, subject to our reimbursement of a portion of the development expenses incurred up to that point, our agreement to share the future development and marketing expenses and elimination of the royalty payable to us.

     Our selling, general and administrative expense category consists of our sales, marketing, business development, finance, accounting and general administration costs. These costs are comprised of expenses related directly to our staff, as well as external costs associated with service providers such as consultants, lawyers, accountants and insurers. We anticipate that selling, general and administrative expenses will increase significantly in the foreseeable future based on our expectation that we will expand our efforts to prepare for the potential commercialization of enoximone capsules and ambrisentan.

     Our on-going development programs for enoximone capsules, ambrisentan and darusentan will be lengthy and expensive. Even if these trials show our product candidates to be safe and effective in treating their target conditions, we do not expect to be able to record commercial sales of any of our product candidates for several years. As a result of these development program expenses and the costs of preparing for the possible commercial launch of enoximone and ambrisentan, we expect to incur significant and growing losses for the foreseeable future. Although the size and timing of our future operating losses is subject to significant uncertainty, we expect them to continue to increase over the next several years as we continue to fund our development programs and prepare for potential commercial launch of our product candidates. Our primary source of working capital has been equity financings.

     The pace and outcome of our clinical development programs and the progress of our discovery research program are difficult to predict. If we enter into additional third party collaborations or acquire new product candidates, the timing and amounts of any related licensing payments or expenses are likely to be highly variable. As a result, we anticipate that our quarterly results will fluctuate for the foreseeable future. In view of this variability and of our limited operating history, we believe that period-to-period comparisons of our operating results are not meaningful and you should not rely on them as indicative of our future performance.

Results of Operations for the Three Months Ended March 31, 2005 and 2004

  Revenues

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     Product sales

     Product sales were derived from sales of Perfan® I.V. in Europe. Sales in United States dollars increased due to the increased euro/dollar exchange rate in the first quarter 2005, as compared to the first quarter 2004.

     We expect that Perfan® I.V. unit sales in 2005 will be similar to 2004 sales, and we do not expect sales of this product to become significant compared to our level of expenses.

     Research and development contracts revenue

     Research and development contracts revenues for the three months ended March 31, 2005 were related to the research collaboration with Novartis initiated in October 2003. The research and development contracts revenue for the three months ended March 31, 2005 mainly consisted of license revenue totaling $417,000 and research support funding of $1.25 million. The research and development contracts revenue for the three months ended March 31, 2004 mainly consisted of license revenue totaling $417,000 and research support funding of $923,000. The license revenue is derived from the non-refundable upfront payment made by Novartis in 2003, which is being recognized ratably over three years. The research support funding is related to the fully burdened cost of the researchers working on the further development of specific potential drug targets and is recognized in the period in which the services are performed and expenses are incurred.

  Costs and Expenses

     Cost of Product Sold

     The cost of product sold for Perfan® I.V. increased in the three months ended March 31, 2005 compared to the same period in 2004, primarily due to the increase in product sales in United States dollars. The cost of goods sold, as a percentage of Perfan® I.V. sales, was 34% for the three months ended March 31, 2005 as compared to 32% for the same quarter in 2004.

     Research and Development

     Research and development expenses, excluding stock-based compensation expenses, are summarized as follows:

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     The $2.9 million increase in development costs for enoximone capsules in the three months ended March 31, 2005 as compared to the same period in 2004 was primarily due to the following:

	•	$2.6 million increase in clinical investigator site payments and external contract costs associated with clinical monitoring and program management efforts as a result of higher patient enrollment and ongoing patient progress in the ESSENTIAL trials;
	•	$290,000 increase related to the initiation of several Phase I enoximone studies; and
	•	$240,000 increase in the internal costs associated with the management of the enoximone trials primarily due to an increase in the number of employees.

     These increases were partially offset by a $395,000 decrease related to the conclusion of our EMOTE study in March 2004.

     The $816,000 increase in development costs for ambrisentan in the three months ended March 31, 2005 as compared to the same period in 2004 was primarily related to:

	•	$1.0 million increase in clinical investigator site payments and external contract costs associated with clinical monitoring and program management efforts as a result of higher patient enrollment and ongoing patient progress in the two Phase III ARIES trials and the related extension study;
	•	$235,000 increase in expenses related to consulting and other external costs for ambrisentan; and
	•	$65,000 increase in internal expenses associated with the management of the ambrisentan trials primarily due to an increase in the number of employees.

     These increases were partially offset by a $300,000 decrease related to the conclusion of our Phase II PAH trial and decreased costs related to the extension study and a decrease of $170,000 in expenses related to work on developing the commercial manufacturing process for ambrisentan, which was due to the variability in the timing of this work.

     The development costs for darusentan in the three months ended March 31, 2005 were consistent with the same period in 2004.

     Discovery research expenses increased by about $620,000 in the three months ended March 31, 2005 as compared to the same period in 2004. The increase related to increased staffing levels and to increased lab supply and equipment costs.

     Selling, General and Administrative

     The $1.0 million increase in selling, general and administrative expense for the three months ended March 31, 2005 as compared to the same period in 2004 was due to an increase of $330,000 related to increased staffing and related recruiting costs, $295,000 increase in professional service and related consulting costs, $235,000 related to increased marketing costs and a $140,000 increase related to conferences and travel costs.

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     Stock-Based Compensation

     Stock-based compensation expenses decreased due to the continued vesting of below-market options granted to employees prior to the initial public offering. Since the initial public offering in 2003, the Company has not granted options to employees with exercise prices below the fair market value on the date of grant. The stock-based compensation expense for each period was allocated between selling, general and administrative and research and development as follows:

     Interest Income, Net

     Interest income net of interest expense was $563,000 and $172,000 for the three months ended March 31, 2005 and 2004, respectively. Interest income was $650,000 and $303,000 for the three months ended March 31, 2005 and 2004, respectively. The increase in interest income in 2005 relates to the increased investment balance in 2005 as a result of the funds raised in our September 2004 financing. Interest expense declined to $87,000 from $131,000 for the three months ended March 31, 2005 and 2004, respectively, as a result of the reduced balance remaining on our term loan.

Liquidity and Capital Resources

     Our cash, cash equivalents and investments amounted to $101.6 million and $119.6 million at March 31, 2005 and December 31, 2004, respectively. From our inception on June 10, 1996 to March 31, 2005, we funded our operations primarily with $258.0 million (net of issuance costs) from private equity financings and our public offerings, $5.3 million from term loans, $11.7 million from sales of Perfan® I.V., $10.5 million related to our research and development contract with Novartis and $3.8 million from net interest income earned on cash equivalents and investments.

     Our cash outflows in the next 12 months are expected to consist primarily of external expenses related to our research and development programs, sales and marketing expenses and payroll costs. Our cash outflows beyond one year are also expected to consist primarily of external expenses related to our research and development programs, sales and marketing expenses and payroll costs. We believe that our cash, cash equivalents and investment balances will allow us to fund our future working capital and capital expenditures through at least the end of the first quarter of 2006 and potentially longer if the results of our ESSENTIAL trials and/or Phase IIb trial of darusentan do not support further development. Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. Although we expect that our existing resources could be adequate to support our operations for a longer period of time under certain scenarios, there can be no assurance that this can, in fact, be accomplished.

     We intend to pursue potential additional collaborations and financing transactions to meet our future working capital and capital expenditure needs. There can be no assurance that such additional financing will be available or, if available, that such financing can be obtained on terms satisfactory to us. If we are unable to raise additional capital when required or on acceptable terms, we may have to significantly delay, scale back or discontinue one or more of our clinical trials, those aspects of our drug discovery program not funded by Novartis or other aspects of our operations.

     Our cash, cash equivalents and investments are held in a variety of interest-bearing instruments, consisting of United States government and agency securities, high-grade United States corporate bonds, municipal bonds, mortgage-backed securities, commercial paper and money market accounts. Our Board of Directors has approved our written investment policy, which limits our investment instruments to those mentioned above. We review compliance with this policy on a monthly basis.

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     At March 31, 2005, we had approximately $2.7 million in net fixed assets. We expect to purchase additional equipment and to invest in leasehold improvements in 2005, and we expect our spending on fixed assets to grow in future years.

     Operating activities resulted in net cash outflows of $17.1 million and $15.7 million for the three months ended March 31, 2005 and 2004, respectively. The cumulative net cash outflow from operating activities from our inception to March 31, 2005 was $153.1 million. The use of cash in all periods was primarily a result of our losses from operations.

     Investing activities resulted in net cash inflows of $1.3 million and net cash outflows of $10.4 million for the three months ended March 31, 2005 and 2004, respectively. The net cash inflow for the three months ended March 31, 2005 resulted from $0.4 million in capital asset expenditures and $12.7 million in purchases of investments offset by $14.5 million in proceeds related to the maturity of investments. The net cash outflow for the three months ended March 31, 2004 resulted from $0.3 million in capital asset expenditures and $37.7 million in purchases of investments offset by $27.6 million in proceeds from the sale of short-term investments. Cumulative investing activities from inception to March 31, 2005 resulted in net cash outflows of $51.5 million, with $4.6 million in net capital asset expenditures offset by $332,000 in proceeds from the sale of property and equipment and $447.6 million in purchases of investments offset by $400.2 million in proceeds from the maturity of investments.

     Financing activities resulted in net cash outflows of $0.4 million and $0.4 million for the three months ended March 31, 2005 and 2004, respectively. Financing activities for the three months ended March 31, 2005 and 2004 consisted primarily of payments of $472,000 and $428,000 on our term loan, respectively. Cumulative financing activities from our inception to March 31, 2005 resulted in net cash inflows of $259.6 million, primarily related to the issuance of our Series A, C and D preferred stock, the sale of shares of our common stock in our initial public offering and our September 2004 financing and borrowings under our term loans.

     Total operating lease expense for the three months ended March 31, 2005 and 2004 was approximately $125,000 and $100,000, respectively. We have future payment commitments for operating leases of approximately $1.3 million, principally for our office and laboratory space as of March 31, 2005. In addition, many of our contracts with clinical research organizations, contract manufacturers, academic research agreements and others contain termination provisions that would require us to make final payments if we were to terminate prematurely. The size of these payments depends upon the timing and circumstances of the termination, and therefore the extent of the future commitments cannot be meaningfully quantified.

Critical Accounting Policies

     Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

     We believe the following policies to be the most critical to an understanding of our financial condition and results of operations because they require us to make estimates, assumptions and informed management judgments about matters that are inherently uncertain:

	•	revenue recognition;
	•	accounting for research and development expenses;
	•	estimating the value of our equity instruments for use in deferred stock-based compensation calculations; and
	•	accounting for income taxes.

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  Revenue Recognition

     We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 104 “Revenue Recognition in Financial Statements” (SAB 104). Arrangements with multiple elements are accounted for in accordance with Emerging Issues Task Force Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, or EITF 00-21. We consider this methodology to be the most appropriate for our business model and current revenue streams.

     Product Sales. Product sales are recognized when the following four revenue recognition criteria are met: (i) persuasive evidence of an arrangement exists; (ii) product is shipped from the distributor’s consignment stock to the customer; (iii) the selling price is fixed or determinable; and (iv) collection is reasonably assured. Once the product is shipped to the customer, we do not allow product returns.

     Research and development contracts. We may enter into collaborative agreements with pharmaceutical companies where the other party generally receives exclusive marketing and distribution rights for certain products for set time periods and set geographic areas. The rights associated with this research and development are assigned or can be assigned to the collaborator or through a license at the collaborator’s option. The terms of the collaborative agreements can include non-refundable licensing fees, funding of research and development efforts, payments based on achievement of certain milestones, and royalties on product sales. We analyze our multiple element arrangements to determine whether the elements can be separated and accounted for individually as separate units of accounting in accordance with EITF 00-21. We recognize up-front license payments as revenue if the license has stand-alone value, we do not have ongoing involvement or obligations, and the fair value of the undelivered items can be determined. If the license is considered to have stand-alone value but the fair value on any of the undelivered items cannot be determined, the license payments are recognized as revenue over the period of performance for such undelivered items or services.

     Non-refundable license fees received are recorded as deferred revenue once received or irrevocably committed, and are recognized ratably over the longer of the development period to which they relate or the expected duration of the contractual relationship. Where there are two or more distinct phases embedded into one contract (such as product development and subsequent commercialization or manufacturing), the contracts may be considered multiple element arrangements. When it can be demonstrated that each of these phases is at fair value, they are treated as separate earnings processes with upfront fees being recognized over only the initial product development phase. The relevant time period for the product development phase is based on management estimates and could vary depending upon the outcome of clinical trials and the regulatory approval process. As a result, management frequently reviews the appropriate time period.

     Milestone payments, based on designated achievement points that are considered at risk and substantive at the inception of the collaborative contract, are recognized as earned when the earnings process is complete and the corresponding payment is reasonably assured. We evaluate whether milestone payments are at risk and substantive based on the contingent nature of the milestone, specifically reviewing factors such as the technological and commercial risk that needs to be overcome and the level of investment required. Milestone payments related to arrangements under which we have continuing performance obligations are recognized as revenue upon achievement of the milestone only if all of the following conditions are met: the milestone payments are non-refundable; achievement of the milestone was not reasonably assured at the inception of the arrangement; substantive effort is involved in achieving the milestone; and the amount of the milestone payment is reasonable in relation to the effort expended or the risk associated with the achievement of the milestone. If any of these conditions are not met, the milestone payments are deferred and recognized as revenue over the term of the arrangement as we complete our performance obligations.

     Revenue from research funding is recognized when the services are performed and is typically based on the fully burdened cost of a researcher working on a collaboration. Revenue is recognized ratably over the period as services are performed, with the balance reflected as deferred revenue until earned.

  Accounting for research and development expenses

     Our research and development expense category is primarily composed of costs associated with product development for enoximone capsules, ambrisentan and darusentan. These expenses represent both clinical

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development costs and the costs associated with non-clinical support activities such as toxicological testing, manufacturing process development and regulatory consulting services. Clinical development costs represent internal costs for personnel, external costs incurred at clinical sites and contractual payments to third party clinical research organizations to perform certain activities in support of our clinical trials. We also report the costs of product licenses in this category, including our ongoing milestone obligations associated with the licensing of ambrisentan and darusentan. Our product candidates do not currently have regulatory approval; accordingly, we expense the license and milestone fees when we incur the liability. We have a discovery research effort, which is conducted in part on our premises by our scientists and in part through collaborative agreements.

  Valuation of equity instruments

     We record compensation expense related to options issued to consultants and options issued to, or common stock sold to, employees at less than the fair value. As a result, we have recorded deferred stock-based compensation expense that represents, in the case of employees, the difference between the option exercise price and the fair value of our common stock. In the case of consultants, deferred stock-based compensation represents the fair value of the options granted, computed using the Black-Scholes option-pricing model. These expenses are based on the fair value of the options and common stock. Because prior to our initial public offering, there was no public market for our common stock, we have estimated the fair value of these equity instruments using various valuation methods. Subsequent to our initial public offering on October 30, 2003, we estimate the fair value of these equity instruments using the value for our common stock that the public market establishes. Deferred stock-based compensation for employees is recognized over the remaining vesting period of the related option. Deferred stock-based compensation related to consultants is recognized over the vesting period of the related option and the amount recognized is subject to change based on changes in the fair value of our common stock. We recognize stock-based compensation using an accelerated method as described in Financial Accounting Standards Board Interpretation No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans, an Interpretation of APB Opinions No. 15 and 25 (FIN 28).

  Accounting for income taxes

     We must make significant management judgments when determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. At December 31, 2004, we recorded a full valuation allowance of $63.5 million against our net deferred tax asset balance, due to uncertainties related to the ultimate recovery of our deferred tax assets as a result of our history of operating losses. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our deferred tax assets will be recoverable. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to change the valuation allowance, which could materially impact our financial position and results of operations.

Recent Accounting Pronouncements

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

     SFAS No. 123(R) and the related interpretations must be adopted no later than January 1, 2006. We expect to adopt SFAS No. 123(R) effective as of January 1, 2006.

     SFAS No. 123(R) permits companies to adopt its requirements using one of two methods:

     1. A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123(R) that remain unvested on the effective date.

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     2. A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.

     We are still assessing the appropriate transition method.

     As permitted by SFAS No. 123, we currently account for share-based payments to employees using the APB No. 25 intrinsic value method and, as such, generally recognize no compensation cost for employee stock options. Accordingly, the adoption of SFAS No. 123(R)‘s fair value method will have an impact on our results of operations, although it will have no impact on our overall financial position or cash flows. Statement No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While we cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), there were no operating cash flows recognized in prior periods for such excess tax deductions for stock option exercises. We have not yet determined the method of adoption or the effect of adopting SFAS 123(R) and have not determined whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS No. 123.

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RISK FACTORS

     Our business faces significant risks. These risks include those described below and may include additional risks of which we are not currently aware or which we currently do not believe are material. If any of the events or circumstances described in the following risks actually occurs, our business, financial condition or results of operations could be materially adversely affected and such events or circumstances could cause our actual results to differ materially from the results contemplated by the forward-looking statements contained in this report. These risks should be read in conjunction with the other information set forth in this report as well as in our annual report on Form 10-K for the year ended December 31, 2004 and in our other periodic reports on Form 10-Q and Form 8-K.

Risks Related to Our Business

We are at an early stage of development as a company and we do not have, and may never have, any products that generate significant revenues.

     We are at an early stage of development as a biopharmaceutical company, and we do not have any commercial products that generate significant revenues. Our existing product candidates will require extensive clinical evaluation, regulatory review and marketing efforts and substantial investment before they could provide us with any revenues. Our efforts may not lead to commercially successful drugs, for a number of reasons, including:

	•	our product candidates may not prove to be safe and effective in clinical trials;
	•	we may not be able to obtain regulatory approvals for our product candidates or approvals may be narrower than we seek;
	•	we may not have adequate financial or other resources to complete the development and commercialization of our product candidates; or
	•	any products that are approved may not be accepted in the marketplace.

     Other than sales of Perfan® I.V. in Europe, which are only minor, we do not expect to be able to market any of our product candidates for a number of years. If we are unable to develop, receive approval for, or successfully commercialize any of our product candidates, we will be unable to generate significant revenues. If our development programs are delayed, we may have to raise additional capital or reduce or cease our operations.

We have a history of operating losses and we may never become profitable.

     We have experienced significant operating losses since our inception in 1996. At March 31, 2005, we had an accumulated deficit of $194.5 million. For the year ended December 31, 2004 we had an operating loss of $58.5 million and for the years ended December 31, 2003 and 2002, we had operating losses of $43.0 million and $28.8 million, respectively. Revenues from the commercial sales of our only approved product, Perfan® I.V., were $3.3 million and $2.8 million for the years ended December 31, 2004 and 2003, respectively, and we will not achieve profitability from the sales of this product alone. We also do not expect that research and development revenue, which was $6.6 million and $1.0 million in 2004 and 2003, respectively, will become sufficient for us to achieve profitability. We have funded our operations principally from the sale of our equity securities. We expect to continue to incur substantial additional operating losses for the next several years as we pursue our clinical trials, research and development efforts and commercialization of our product candidates. To become profitable, we, either alone or with our collaborators, must successfully develop, manufacture and market our product candidates, or continue to identify, develop, acquire, manufacture and market other new product candidates. We may never have any significant revenues or become profitable.

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If we fail to obtain additional financing, we may be unable to complete the development and commercialization of our product candidates or continue our research and development programs.

     Our operations have consumed substantial amounts of cash since inception. To date, our sources of cash have been primarily limited to the sale of our equity securities. We expect to continue to spend substantial amounts on research and development, including amounts spent on conducting clinical trials for our product candidates, manufacturing clinical supplies, preparing for potential commercial launch of our product candidates and expanding our discovery research programs. In the first quarter of 2005, our operations consumed approximately $5.7 million of cash per month, compared to $5.2 million of cash per month in 2004. This rate of cash consumption would have increased by an average of $0.5 million per month had research and development funding not been received. We expect that our monthly cash used by operations will continue to increase for the next several years. Based on current spending projections, we believe that our current cash, cash equivalents and investments are sufficient to fund operations through at least the end of the first quarter of 2006. We will be required to raise additional capital to complete the development and commercialization of our current product candidates. If we are unable to raise additional capital when required or on acceptable terms, we may have to significantly delay, scale back or discontinue one or more of our drug development or discovery research programs. We also may be required to:

	•	seek collaborators for our product candidates at an earlier stage than otherwise would be desirable and on terms that are less favorable than might otherwise be available; and
	•	relinquish, license or otherwise dispose of rights to technologies, product candidates or products that we would otherwise seek to develop or commercialize ourselves on terms that are less favorable than might otherwise be available.

We may experience delays in our clinical trials that could adversely affect our financial position and our commercial prospects.

     We do not know when our current clinical trials will be completed, if at all. We also cannot accurately predict when other planned clinical trials will begin or be completed. Many factors affect patient enrollment, including the size of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, competing clinical trials and new drugs approved for the conditions we are investigating. Other companies are conducting clinical trials and have announced plans for future trials that are seeking or likely to seek patients with the same diseases as those we are studying. Competition for patients in some cardiovascular disease trials is particularly intense because of the limited number of leading specialist physicians and the geographic concentration of major clinical centers.

     A number of factors may prevent us from completing our projected goals for enrollment or decrease the pace of enrollment in our Phase III ARIES trials of ambrisentan in PAH. These factors include the inclusion of placebo control groups; competing trials being conducted by Encysive Pharmaceuticals Inc. of sitaxsentan in substantially similar PAH patient populations; the Phase IV trial of bosentan in PAH patients with Class II symptoms being conducted by Actelion Ltd; the continued market adoption of bosentan; the continued or increased off-label prescription of sildenafil in patients with PAH based on the results of a Phase III trial conducted by Pfizer and reported at the annual conference of the American College of Chest Physicians in October 2004; pivotal clinical trials proposed to be conducted by ICOS Corporation and Eli Lilly of oral tadalafil in PAH; and FDA approval of sildenafil or sitaxsentan for PAH. We have committed substantial resources to the ARIES trials in an attempt to increase the likelihood of completing enrollment in an acceptable time frame. These efforts may not be successful in maintaining our projected current enrollment rates.

     As a result of the numerous factors which can affect the pace of progress of clinical trials, our trials may take longer to enroll patients than we anticipate, if they can be completed at all. Delays in patient enrollment in the trials may increase our costs and slow our product development and approval process. Our product development costs will also increase if we need to perform more or larger clinical trials than planned. If other companies’ product candidates show favorable results, we may conduct additional clinical trials. Any delays in completing our clinical trials will delay our ability to generate revenue from product sales, and we may have insufficient capital resources to support our operations. Even if we do have sufficient capital resources, our ability to become profitable will be delayed.

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     In addition, we may experience delays in closing out our clinical trials and analyzing clinical trial data after the patient treatment phase of a trial has been completed. This is of particular concern with large, international trials such as ESSENTIAL I & II and ARIES-1 & -2.

Adverse events in our clinical trials may force us to stop development of our product candidates or prevent regulatory approval of our product candidates.

     Our product candidates may produce serious adverse events. These adverse events could interrupt, delay or halt clinical trials of our product candidates and could result in the Food and Drug Administration, or FDA, or other regulatory authorities denying approval of our product candidates for any or all targeted conditions. An independent data safety monitoring board, the FDA, other regulatory authorities or we may suspend or terminate clinical trials at any time. We cannot assure you that any of our product candidates will be safe for human use.

Our applications for regulatory approval could be delayed or denied due to problems with studies conducted before we in-licensed the product candidates.

     We are developing product candidates, including enoximone capsules, ambrisentan and darusentan, that we have in-licensed from other pharmaceutical companies. Many of the pre-clinical studies and some of the clinical studies on these product candidates were conducted by other companies before we in-licensed the product candidates. In some cases, the studies were conducted when regulatory requirements were different from today. We would incur unanticipated costs and experience delays if we were required to repeat some or all of those studies. Even if the previous studies are acceptable to regulatory authorities, we may have to spend additional time analyzing and presenting the results of the studies. Problems with the previous studies could cause our regulatory applications to be delayed or rejected.

If our product candidates do not meet safety or efficacy endpoints in clinical evaluations, they will not receive regulatory approval and we will be unable to market them.

     Other than Perfan® I.V., which is approved for use in several European countries, our current product candidates, enoximone capsules, ambrisentan and darusentan, are in clinical development and have not received regulatory approval from the FDA or any foreign regulatory authority.

     The regulatory approval process typically is extremely expensive, takes many years and the timing of any approval cannot be accurately predicted. If we fail to obtain regulatory approval for our current or future product candidates, we will be unable to market and sell such products and therefore may never be profitable.

     As part of the regulatory approval process, we must conduct pre-clinical studies and clinical trials for each product candidate to demonstrate safety and efficacy. The number of pre-clinical studies and clinical trials that will be required varies depending on the product candidate, the condition being evaluated, the trial results and regulations applicable to any particular product candidate.

     The results of pre-clinical studies and initial clinical trials of our product candidates do not necessarily predict the results of later-stage clinical trials. Preliminary results may not be confirmed upon full analysis of the detailed results of a trial. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy despite having progressed through initial clinical trials. We cannot assure you that the data collected from the pre-clinical studies and clinical trials of our product candidates will be sufficient to support FDA or other regulatory approval. In addition, the continuation of a particular study after review by an independent data safety monitoring board does not necessarily indicate that our product candidate will achieve the clinical endpoint or prove to be safe.

     The FDA and other regulatory agencies can delay, limit or deny approval for many reasons, including:

	•	a product candidate may not be safe or effective;
	•	the manufacturing processes or facilities we have selected may not meet the applicable requirements; and
	•	changes in their approval policies or adoption of new regulations may require additional work.

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     Any delay in, or failure to receive or maintain, approval for any of our products could prevent us from ever generating meaningful revenues or achieving profitability.

Even if our products meet safety and efficacy endpoints in clinical trials, regulatory authorities may not approve them, or we may face post-approval problems that require withdrawal of our products from the market.

     Our product candidates may not be approved even if they achieve their endpoints in clinical trials. Regulatory agencies, including the FDA, or their advisors may disagree with our interpretations of data from pre-clinical studies and clinical trials. Regulatory agencies also may approve a product candidate for fewer conditions than requested or may grant approval subject to the performance of post-marketing studies for a product candidate. In addition, regulatory agencies may not approve the labeling claims that are necessary or desirable for the successful commercialization of our product candidates.

     Even if we receive regulatory approvals, our product candidates may later exhibit adverse effects that limit or prevent their widespread use or that force us to withdraw those product candidates from the market. In addition, a marketed product continues to be subject to strict regulation after approval and may be required to undergo post-approval studies. Any unforeseen problems with an approved product or any violation of regulations could result in restrictions on the product, including its withdrawal from the market. Any delay in, or failure to receive or maintain regulatory approval for, any of our products could prevent us from ever generating meaningful revenues or achieving profitability.

     Ambrisentan and darusentan belong to a class of drugs called endothelin receptor antagonists, which may cause liver, testicular and fetal abnormalities. Bosentan, a product of Actelion, Inc., also belongs to this class of drugs, and the FDA, as a condition of the approval of bosentan, required that Actelion distribute bosentan via a closed distribution system. This distribution system seeks to manage the post-marketing risk of an approved medication through: (i) limited access through a number of specialty distributor pharmacies; (ii) registration of all practitioners prescribing the medication; (iii) registration of all patients receiving the medication; (iv) written certification by the practitioner that the medication is being prescribed for a medically appropriate use; (v) review of safety warnings with the patient by the practitioner; (vi) an ongoing comprehensive program to monitor, collect, track, and report adverse event and other safety related information from patients receiving the medication; and (vii) distribution of a medication guide to patients that addresses concerns about liver toxicity and pregnancy and the actions patients should take to avoid these adverse events. Since ambrisentan and darusentan belong to the same class of drugs as bosentan, the FDA may require that ambrisentan and darusentan be distributed through a closed distribution system that would increase distribution costs and may make patient access and reimbursement more difficult.

There can be no assurance that enoximone capsules do not increase mortality.

     Clinical trials with type-III phosphodiesterase, or PDE-III, inhibitors, including enoximone capsules, have shown that at certain doses these compounds can increase the risk of mortality in specific patient populations. In studies of enoximone capsules administered at doses of 100 to 300 milligrams three times a day, some patients experienced abnormal rhythms in the beating of the heart. In one Phase II placebo-controlled trial involving 151 patients administered placebo capsules or enoximone capsules three times a day, there was a statistically significant increase in the mortality rate in the group of patients receiving 100 milligram enoximone capsules three times a day compared to the group of patients receiving placebo capsules: 36% of the patients treated with 100 milligrams enoximone capsules three times a day died during the evaluation period versus 23% of the patients treated with placebo. We are testing enoximone capsules administered at doses of 25 and 50 milligrams three times a day. The preliminary results of the EMOTE trial announced in March 2004 demonstrated a six-month mortality rate of 38% for the group of patients receiving enoximone and 31% for the group of patients receiving placebo. Although the difference in the mortality rates between these two groups did not achieve statistical significance, we cannot assure you that increased mortality will not occur at these lower doses in our larger pivotal clinical trials or in commercial usage after approval. If we are unable to clearly demonstrate that mortality is not increased by enoximone capsules at these lower doses, we are not likely to receive regulatory approval to market enoximone capsules.

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Abnormal elevations of liver function test results have been reported as complications in trials of endothelin receptor antagonists.

     Abnormal elevations of liver function test (LFT) results, which are indicative of potential liver toxicity, have been reported as complications in trials of endothelin receptor antagonists. If the results of any of our clinical trials, including the trials relating to ambrisentan and darusentan, indicate higher than expected levels of abnormal LFTs, we may not receive regulatory approval to market the product candidate and our product, if approved for marketing, may not be able to compete with other products.

Endothelin receptor antagonists, including ambrisentan and darusentan, have demonstrated toxicity in animals.

     Prior to regulatory approval for a product candidate, we are required to conduct studies of our product candidates on animals to determine if they have the potential to have toxic effects. The toxicology tests for ambrisentan and darusentan indicated that they both cause birth defects in rabbits and rats. Other toxicology tests indicated that ambrisentan and darusentan caused damage to the testes causing infertility in rats and that ambrisentan had the potential to cause damage to the testes in dogs. We assume that similar toxicities could occur in humans. As a result, we will only seek approval for, and the FDA will only consider approving ambrisentan and darusentan for, the treatment of severe diseases such as PAH or resistant systolic hypertension. Neither ambrisentan nor darusentan should be taken by women who are pregnant, or are capable of getting pregnant and not practicing adequate forms of birth control; however, there can be no assurance that ambrisentan or darusentan will not be taken by such women. Additionally, there can be no assurance that a patient will not exceed the recommended dose of our products and suffer adverse consequences.

Market acceptance of our product candidates is uncertain.

     We cannot assure you that physicians will prescribe or patients will use enoximone capsules, ambrisentan or darusentan, if they are approved. Physicians will prescribe our products only if they determine, based on experience, clinical data, side effect profiles and other factors, that they are preferable to other products then in use or beneficial in combination with other products. Recommendations and endorsements by influential physicians will be essential for market acceptance of our products and we may not be able to obtain these recommendations and endorsements. Because of prior reports of increased mortality caused by high dose enoximone capsules in earlier clinical trials, physicians may be unwilling to use enoximone capsules in treating their patients. Physicians may not be willing to use ambrisentan and darusentan because of demonstrated adverse side effects such as damage to testes in some animal species. Additionally, market acceptance of endothelin receptor antagonists will be limited because they are known to cause birth defects in animals and are believed to do the same in humans.

     Enoximone capsules for the treatment of advanced chronic heart failure, ambrisentan for the treatment of PAH and darusentan for the treatment of resistant systolic hypertension address highly competitive markets and the availability of other drugs and devices for the same conditions may slow or reduce market acceptance of our products. Drugs such as beta blockers, angiotensin converting enzyme inhibitors and diuretics have been on the market for many years, and physicians have experience with prescribing these products for the treatment of chronic heart failure and hypertension. In addition, an angiotensin receptor blocker was recently approved for the treatment of heart failure. Bosentan, a non-selective endothelin receptor antagonist, is a drug that has been approved for PAH, the same condition we intend for ambrisentan, and has been available since December 2001. Adoption of ambrisentan may be slow if physicians continue to prescribe bosentan. In addition, sitaxsentan, an ETA selective endothelin receptor antagonist like ambrisentan, may be an alternative treatment for PAH based on the preliminary results of recent pivotal Phase III clinical trials. Sitaxsentan is at a more advanced stage of development than ambrisentan and is likely to be on the market before ambrisentan if it is approved. If sitaxsentan is approved and achieves market acceptance prior to ambrisentan, the adoption of ambrisentan may be slowed or reduced. Pfizer Inc. completed clinical trials for sildenafil for the treatment of PAH, reported results of the trial at the annual conference of the American College of Chest Physicians in October 2004 and filed an NDA for expansion of its label. The results of the recent sildenafil and sitaxsentan studies and FDA approval of the drugs in 2005 and/or 2006 may slow market adoption of ambrisentan if it is approved.

     Many other factors influence the adoption of new pharmaceuticals, including marketing and distribution restrictions, adverse publicity, product pricing and reimbursement by third-party payors. Even if our product candidates achieve market acceptance, the market may not be large enough and/or prevailing market pricing may not be high enough to result in significant revenues. The failure of our product candidates to achieve market acceptance would prevent us from ever generating meaningful product revenues.

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If we become subject to product liability claims, the damages may exceed our insurance.

     It is impossible to predict from the results of animal studies the potential adverse effects that a product candidate may have in humans. We face the risk that the use of our product candidates in human clinical trials will result in adverse effects. If we complete clinical testing for our product candidates and receive regulatory approval to market our products, we will mark our products with warnings that identify the known potential adverse effects and the patients who should not receive our product. We cannot assure that physicians and patients will comply with these warnings. In addition, unexpected adverse effects may occur even with use of our products that have received approval for commercial sale.

     In pre-clinical testing, ambrisentan and darusentan caused birth defects in animals. Based on these results and similar results with other endothelin receptor antagonists, we have concluded that ambrisentan and darusentan could cause birth defects in humans. Neither ambrisentan nor darusentan should be taken by women who are pregnant, or are capable of getting pregnant and not practicing adequate forms of birth control; however, there can be no assurance that ambrisentan or darusentan will not be taken by such women. Additionally, there can be no assurance that a patient will not exceed the recommended dose of our products and suffer adverse consequences. If a child is born with a birth defect or a patient suffers harm from exceeding the approved dose on our products, we may be subject to product liability claims that exceed any insurance coverage that may be in effect at the time.

     Regardless of their merit or eventual outcome, liability claims may result in:

	•	decreased demand for our products and product candidates;
	•	injury to our reputation;
	•	withdrawal of clinical trial participants;
	•	costs of related litigation;
	•	substantial monetary awards to patients and others;
	•	loss of revenues; and
	•	the inability to commercialize our products and product candidates.

     We have obtained liability insurance of $10 million for Perfan® I.V. and our product candidates in clinical trials. We cannot predict all of the possible harms or side effects that may result and, therefore, the amount of insurance coverage we currently hold, or that we or our collaborators may obtain, may not be adequate to protect us from any liabilities. In addition, if any of our product candidates are approved for marketing, we may seek additional insurance coverage. We may be unable to obtain additional coverage or afford such coverage. We may not have sufficient resources to pay for any liabilities resulting from a claim beyond the limit of our insurance coverage. If we cannot protect against potential liability claims, we or our collaborators may find it difficult or impossible to commercialize our products. We may not be able to renew or increase our insurance on reasonable terms, if at all.

If we are unable to develop adequate sales, marketing or distribution capabilities or enter into agreements with third parties to perform some of these functions, we will not be able to commercialize our products effectively.

     We have limited experience in sales, marketing and distribution. To directly market and distribute any products, we must build a sales and marketing organization with appropriate technical expertise and distribution capabilities. We may attempt to build such a sales and marketing organization on our own or with the assistance of a contract sales organization. For some market opportunities, we may need to enter into co-promotion or other licensing arrangements with larger pharmaceutical or biotechnology firms in order to increase the commercial success of our products. We may not be able to establish sales, marketing and distribution capabilities of our own or enter into such arrangements with third parties in a timely manner or on acceptable terms. To the extent that we enter into co-promotion or other licensing arrangements, our product revenues are likely to be lower than if we directly marketed and sold our products, and some or all of the revenues we receive will depend upon the efforts of third parties, and these

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efforts may not be successful. Additionally, building marketing and distribution capabilities may be more expensive than we anticipate, requiring us to divert capital from other intended purposes or preventing us from building our marketing and distribution capabilities to the desired levels.

Since we will rely on third-party manufacturers, we may be unable to control the availability or cost of producing our products.

     There can be no assurance that our products, if approved, can be manufactured in sufficient commercial quantities, in compliance with regulatory requirements and at an acceptable cost. Although there are several potential manufacturers capable of manufacturing our products, we intend to select and rely initially on one third-party to manufacture each of our approved products. Establishing a replacement source for any of our products could require at least 12 months and significant additional expense. We will need to expand relationships with manufacturers we have used in the past or establish new relationships with different third-party manufacturers for our products. We may not be able to contract for manufacturing capabilities on acceptable terms, if at all. Furthermore, third-party manufacturers may encounter manufacturing or quality control problems or may be unable to obtain or maintain the necessary governmental licenses and approvals to manufacture our products. Any such failure could delay or prevent us from receiving regulatory approvals and marketing our products. Our dependence on third parties may reduce our profit margins and delay or limit our ability to develop and commercialize our products on a timely and competitive basis.

Our third-party manufacturers and their manufacturing facilities and processes are subject to regulatory approval, which may delay or disrupt our development and commercialization efforts.

     Third-party manufacturers of our products or product candidates must ensure that all of the processes, methods and equipment are compliant with the current Good Manufacturing Practices, or cGMP, and conduct extensive audits of vendors, contract laboratories and suppliers. The cGMP requirements govern quality control of the manufacturing process and documentation policies and procedures. Compliance by third-party manufacturers with cGMP requires record keeping and quality control to assure that the product meets applicable specifications and other requirements. Manufacturing facilities are subject to inspection by regulatory agencies at any time. If an inspection by regulatory authorities indicates that there are deficiencies, third-party manufacturers could be required to take remedial actions, stop production or close the facility, which would disrupt the manufacturing processes and limit the supplies of our products or product candidates. If they fail to comply with these requirements, we also may be required to curtail the clinical trials of our product candidates, and may not be permitted to sell our products or may be limited in the jurisdictions in which we are permitted to sell them.

Due to our reliance on contract research organizations and other third parties to conduct clinical trials, we are unable to directly control the timing, conduct and expense of our clinical trials.

     We rely primarily on third parties to conduct our clinical trials, including the ESSENTIAL and ARIES trials, as well as the clinical trials for darusentan. In addition, in certain countries outside of the United States, we rely on third parties to interact on our behalf with applicable regulatory authorities. As a result, we have had and will continue to have less control over the conduct of the clinical trials, the timing and completion of the trials, the required reporting of adverse events and the management of data developed through the trial than would be the case if we were relying entirely upon our own staff. Communicating with outside parties can also be challenging, potentially leading to mistakes as well as difficulties in coordinating activities. Outside parties may have staffing difficulties, may undergo changes in priorities or may become financially distressed, adversely affecting their willingness or ability to conduct our trials. We may experience unexpected cost increases that are beyond our control. Errors or omissions by third party providers may also create errors in publicly reported results, forcing us to revise our previous disclosures or having other adverse affects on our business or stock price. Problems with the timeliness or quality of the work of a contract research organization may lead us to seek to terminate the relationship and use an alternative service provider. However, making this change may be costly and may delay our trials, and contractual restrictions may make such a change difficult or impossible. Additionally, it may be impossible to find a replacement organization that can conduct our trials in an acceptable manner and at an acceptable cost.

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If we do not find development and commercialization collaborators for our product candidates, we may have to reduce or delay our rate of product development and commercialization and increase our expenditures.

     Our existing collaborations have been with academic scientists and institutions for basic scientific research and in 2003 we entered into a research collaboration with Novartis relating to targets and compounds identified in our discovery research program. To date, we have not entered into any collaboration agreements for the development or commercialization of our existing product candidates. We plan to enter into relationships with selected pharmaceutical or biotechnology companies to help develop and commercialize our product candidates. We may not be able to negotiate collaborations with these other companies for the development or commercialization of our product candidates on acceptable terms. If we are not able to establish such collaborative arrangements, we may have to reduce or delay further development of some of our programs, increase our planned expenditures and undertake development and commercialization activities at our own expense.

     Any development or commercialization collaborations we have entered into or may enter into with pharmaceutical or biotechnology companies, including our research collaboration agreement with Novartis, are or will be subject to a number of risks, including:

	•	collaborators may not pursue further development and commercialization of compounds resulting from collaborations or may elect not to renew research and development programs;
	•	collaborators may delay clinical trials, underfund a clinical trial program, stop a clinical trial or abandon a product candidate, repeat or conduct new clinical trials or require the development of a new formulation of a product candidate for clinical testing;
	•	a collaborator with marketing and distribution rights to one or more of our products may not commit enough resources to the marketing and distribution of our products, limiting our potential revenues from the commercialization of these products; and
	•	disputes may arise delaying or terminating the research, development or commercialization of our product candidates, or resulting in significant legal proceedings.

Even if we receive regulatory approval for our product candidates, we will be subject to ongoing regulatory obligations and review.

     Following any regulatory approval of our product candidates, we will be subject to continuing regulatory obligations such as safety reporting requirements and additional post-marketing obligations, including regulatory oversight of the promotion and marketing of our products. In addition, we and our third-party manufacturers will be required to adhere to regulations setting forth cGMP. These regulations cover all aspects of the manufacturing, storage, testing, quality control and record keeping relating to our product candidates. Furthermore, we or our third-party manufacturers must pass a pre-approval inspection of manufacturing facilities by the FDA and foreign authorities before obtaining marketing approval and will be subject to periodic inspection by these regulatory authorities. Such inspections may reveal compliance issues that could prevent or delay marketing approval, or require the expenditure of financial or other resources to address. If we fail to comply with applicable regulatory requirements, we may be subject to fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution.

Our success depends on retention of our President and Chief Executive Officer and other key personnel.

     We are highly dependent on our President, Chief Executive Officer and Chairman, J. William Freytag, Ph.D., and other members of our management team. We are named as the beneficiary on a term life insurance policy covering Dr. Freytag in the amount of $2.0 million. We also depend on academic collaborators for each of our research and development programs. The loss of any of our key employees or academic collaborators could delay our discovery research program and the development and commercialization of our product candidates or result in termination of them in their entirety. Dr. Freytag, as well as others on our executive management team, has a severance agreement with us, but the agreement provides for “at-will” employment with no specified term. Our future success also will depend in large part

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on our continued ability to attract and retain other highly qualified scientific, technical and management personnel, as well as personnel with expertise in clinical testing, governmental regulation and commercialization. We face competition for personnel from other companies, universities, public and private research institutions, government entities and other organizations. If we are unsuccessful in our recruitment and retention efforts, our business will be harmed.

     We also rely on consultants, collaborators and advisors to assist us in formulating and conducting our research. All of our consultants, collaborators and advisors are employed by other employers or are self-employed and may have commitments to or consulting contracts with other entities that may limit their ability to contribute to our company.

If our discovery research program is not successful, we may be unable to develop additional product candidates.

     We have devoted and expect to continue to devote significant resources to our discovery research program. For the years ended December 31, 2004, 2003 and 2002, we spent $5.2 million, $3.3 million and $3.5 million, respectively, on our discovery research program. We are obligated under sponsored research agreements to make annual payments of $250,000 to the University of Texas Southwestern Medical Center. However, this program may not succeed in identifying additional therapeutic targets, product candidates or products. If we do not develop new products, and if our existing product candidates do not receive regulatory approval or achieve commercial success, we would have no other way to achieve any meaningful revenue. Moreover, if we do not develop new products, our revenues from any of our product candidates that are approved will eventually decline as they face competition when any applicable patents, or periods of market exclusivity expire. The collaboration agreement we entered into with Novartis in October 2003 provides Novartis with an exclusive option to our discoveries, with limited exceptions, for a three year period ending October 2006. Novartis may choose to terminate or not renew the agreement with us, possibly delaying our development programs and increasing our operating loss.

Our operations may be impaired unless we can successfully manage our growth.

     We expect to continue to expand our research and development, product development, sales and marketing and administrative operations. Our number of employees and operational spending have increased significantly each year since inception. This expansion has placed, and is expected to continue to place, a significant strain on our management, operational and financial resources. To manage further growth, we will be required to improve existing, and implement additional, operational and financial systems, procedures and controls and hire, train and manage additional employees. We cannot assure that (i) our current and planned personnel, systems, procedures and controls will be adequate to support our anticipated growth, (ii) management will be able to hire, train, retain, motivate and manage required personnel or (iii) management will be able to successfully identify, manage and exploit existing and potential market opportunities. Our failure to manage growth effectively could limit our ability to achieve our research and development and commercialization goals.

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If we engage in any acquisition, we will incur a variety of costs, and we may never realize the anticipated benefits of the acquisition.

     Since our inception, we have acquired three product candidates through in-licensing. One of our strategies for business expansion is the acquisition of additional products and product candidates. We may attempt to acquire these product candidates, or other potentially beneficial technologies, through in-licensing or the acquisition of businesses, services or products that we believe are a strategic fit with our business. Although we currently have no commitments or agreements with respect to any acquisitions, if we undertake an acquisition, the process of integrating the acquired business, technology, service or product may result in unforeseen operating difficulties and expenditures and may divert significant management attention from our ongoing business operations. Moreover, we may fail to realize the anticipated benefits of any acquisition for a variety of reasons, such as an acquired product candidate proving to not be safe or effective in later clinical trials. We may fund any future acquisition by issuing equity or debt securities, which could dilute the ownership percentages of our existing stockholders. Acquisition efforts can consume significant management attention and require substantial expenditures, which could detract from our other programs. In addition, we may devote resources to potential acquisitions that are never completed.

Our attempts to increase future sales of Perfan® I.V. may be unsuccessful.

     Our current product sales revenue is derived solely from European sales of Perfan® I.V. and we recorded $3.3 million in sales of this product in 2004. The revenue we receive on sales of Perfan® I.V. currently exceeds our costs associated with having it manufactured and sold. The sales of Perfan® I.V. fund our European sales efforts and help offset some of the costs we incur to develop our product candidates. We believe that our sales and marketing efforts in Europe will, at most, lead to only modest increases in Perfan® I.V. sales. Our sales may decline over time due to the lack of patent protection for Perfan® I.V. and competition from other drugs sold for the same condition as Perfan® I.V., some of which sell for significantly lower prices. If we do not maintain or increase our sales of Perfan® I.V. in Europe, our operating losses will increase. We could also be forced to discontinue our European sales program, depriving us of potential commercialization and sales experience and contacts which may be important for the successful commercial launch of any of our product candidates that receive regulatory approval.

Our corporate compliance program cannot guarantee that we are in compliance with all potentially applicable regulations.

     The development, manufacturing, pricing, sales, and reimbursement of our products, together with our general operations, are subject to extensive regulation by federal, state and other authorities within the United States and numerous entities outside of the United States. We are a relatively small company with approximately 100 employees, approximately 40% of whom have joined us in the last 12 months. We also have significantly fewer employees than many other companies that have the same or fewer product candidates in late stage clinical development and we rely heavily on third parties to conduct many important functions.

     As a publicly traded company we are subject to significant regulations, including the Sarbanes-Oxley Act of 2002, some of which have either only recently been adopted or are currently proposals subject to change. While we have developed and instituted a corporate compliance program based on what we believe are the current best practices and continue to update the program in response to newly implemented or changing regulatory requirements, we cannot assure that we are or will be in compliance with all potentially applicable regulations. For example, in connection with our assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004, and the corresponding audit of that assessment by our independent registered public accounting firm, we identified significant deficiencies in our internal controls over financial reporting, none of which was determined to be a “material weakness” as defined by the Public Company Accounting Oversight Board. However, we cannot assure you that we will not find significant deficiencies or material weaknesses in the future. We also cannot assure that we could correct any such weakness to allow our management to assess whether our internal control over financial reporting are effective in time to enable our independent registered public accounting firm to attest that such assessment will have been fairly stated in any report to be filed with the Securities and Exchange Commission, or SEC, or attest that we have maintained effective internal control over financial reporting. If we fail to comply with the Sarbanes-Oxley Act or any other regulations we could be subject to a range of consequences, including restrictions on our ability to sell equity or otherwise raise capital funds, suspension

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or termination of clinical trials, the failure to approve a product candidate, restrictions on our products or manufacturing processes, withdrawal of products from the market, significant fines, or other sanctions or litigation.

     Pharmaceutical and biotechnology companies have faced lawsuits and investigations pertaining to violations of health care “fraud and abuse” laws, such as the federal false claims act, the federal anti-kickback statute, and other state and federal laws and regulations. While we have developed and implemented a corporate compliance program based upon what we believe are current best practices, we cannot guarantee that this program will protect us from future lawsuits or investigations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant fines or other sanctions.

Our operations involve hazardous materials, and compliance with environmental laws and regulations is expensive.

     Our research and development activities involve the controlled use of hazardous materials, including chemicals that cause cancer, volatile solvents, radioactive materials including tritium and phosphorus-32 and biological materials including human tissue samples that have the potential to transmit diseases. Our operations also produce hazardous waste. We are subject to a variety of federal, state and local regulations relating to the use, handling and disposal of these materials. We generally contract with third parties for the disposal of such substances and store certain low level radioactive waste at our facility until the materials are no longer considered radioactive. While we believe that we comply with current regulatory requirements, we cannot eliminate the risk of accidental contamination or injury from these materials. We may be required to incur substantial costs to comply with current or future environmental and safety regulations. If an accident or contamination occurred, we would likely incur significant costs associated with civil penalties or criminal fines and in complying with environmental laws and regulations. Although we currently carry a $2.0 million pollution and remediation insurance policy, we cannot assure that this would be sufficient to cover our potential liability if we experienced a loss or that such insurance will continue to be available to us in the future.

Changes in the economic, political, legal and business environments in foreign countries in which we do business could limit or disrupt our current and future international sales and operations.

     We sell Perfan® I.V. in Europe and also expect to commercialize other products outside the United States and, as a result, our international sales and operations could be limited or disrupted by any of the following:

	•	economic problems that disrupt foreign healthcare payment systems;
	•	the imposition of governmental controls and changes in regulatory requirements;
	•	less favorable intellectual property or other applicable laws;
	•	the inability to obtain any necessary foreign regulatory approvals of products in a timely manner;
	•	import and export license requirements;
	•	economic weakness, including inflation, or political instability in particular foreign economies and markets;
	•	business interruptions resulting from geo-political actions, including war and terrorism;
	•	compliance with tax, employment, immigration and labor laws;
	•	unexpected changes in tariffs, trade barriers and regulatory requirements;
	•	difficulties in staffing and managing international operations; and

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•

slower payment terms.

Currency fluctuations may negatively affect our financial condition.

     We sell Perfan® I.V. in Europe and incur significant expenses, including for clinical trials, outside the United States. As a result, our business is affected by fluctuations in exchange rates between the United States dollar and foreign currencies. Our reporting currency is the United States dollar and, therefore, financial positions are translated into United States dollars at the applicable foreign exchange rates. Because our foreign currency revenues are significantly smaller than our foreign currency expenses, exchange rate fluctuations may adversely affect our results of operations, financial position and cash flows.

Risks Related to Our Industry

Our competitors may develop and market drugs that are less expensive, more effective or safer than our product candidates.

     The pharmaceutical market is highly competitive. Many pharmaceutical and biotechnology companies have developed or are developing products that will compete with products we are developing. Several significant competitors are working on, or already have approval for, drugs for the same indications as enoximone capsules, ambrisentan and darusentan. It is possible that our competitors will develop and market products that are less expensive, more effective or safer than our future products or that will render our products obsolete. Some of these products are in late-stage clinical trials. It is also possible that our competitors will commercialize competing products before any of our product candidates are approved and marketed.

     Actelion, Ltd. received FDA approval in December 2001 for bosentan, a non-selective endothelin receptor antagonist for the treatment of PAH. United Therapeutics Corp. received FDA approval in May 2002 for treprostinil for the treatment of PAH. GlaxoSmithKline plc markets epoprostenol for PAH. Encysive Pharmaceuticals, Inc. is developing sitaxsentan, an ETA selective endothelin receptor antagonist which has demonstrated efficacy in a Phase III study and may be approved for PAH earlier than ambrisentan. Pfizer, Inc. has evaluated the use of sildenafil for the treatment of PAH, and reported results of a 278-patient Phase III trial at the annual meeting of the American College of Chest Physicians in October 2004. The results of this study suggest that sildenafil could become a major competitor to ambrisentan. Pfizer filed an NDA with the FDA in December 2004 to expand the labeling for sildenafil to include Class II and Class III PAH. ICOS Corporation and Eli Lilly plan to conduct a pivotal clinical trial to evaluate oral tadalafil in PAH. A number of other companies, including Abbott Laboratories and Speedel, have ETA selective endothelin receptor antagonists in late-stage clinical development and could compete with ambrisentan and darusentan. In addition, a number of companies, including Actelion, Roche, Novartis AG and Speedel, are developing renin inhibitors for the treatment of hypertension.

     We expect that competition from pharmaceutical and biotechnology companies, universities and public and private research institutions will increase. Many of these competitors have substantially greater financial, technical, research and other resources than we do. We may not have the financial resources, technical and research expertise or marketing, distribution or support capabilities to compete successfully.

The status of reimbursement from third-party payors for newly approved health care drugs is uncertain and failure to obtain adequate reimbursement could limit our ability to generate revenue.

     Our ability to commercialize pharmaceutical products may depend, in part, on the extent to which reimbursement for the products will be available from:

	•	government and health administration authorities;
	•	private health insurers;
	•	managed care programs; and
	•	other third-party payors.

     Significant uncertainty exists as to the reimbursement status of newly approved health care products. Third-party payors, including Medicare, are challenging the prices charged for medical products and

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services. Government and other third-party payors increasingly are attempting to contain health care costs by limiting both coverage and the level of reimbursement for new drugs and by refusing, in some cases, to provide coverage for uses of approved products for disease conditions for which the FDA has not granted labeling approval. Third-party insurance coverage may not be available to patients for our products. If government and other third-party payors do not provide adequate coverage and reimbursement levels for our products, their market acceptance may be reduced.

Health care reform measures could adversely affect our business.

     The business and financial condition of pharmaceutical and biotechnology companies are affected by the efforts of governmental and third-party payors to contain or reduce the costs of health care. In the United States and in foreign jurisdictions there have been, and we expect that there will continue to be, a number of legislative and regulatory proposals aimed at changing the health care system. For example, in some countries other than the United States, pricing of prescription drugs is subject to government control, and we expect proposals to implement similar controls in the United States to continue. Another example of proposed reform that could affect our business is the discussion of drug reimportation into the United States. In 2000, Congress directed the FDA to adopt regulations allowing the reimportation of approved drugs originally manufactured in the United States back into the United States from other countries where the drugs were sold at a lower price. Although the Secretary of Health and Human Services has refused to implement this directive, in July 2003 the House of Representatives passed a similar bill that does not require the Secretary of Health and Human Services to act. The reimportation bills have not yet resulted in any new laws or regulations; however, these and other initiatives remain subject to active debate both on the federal and state levels and could decrease the price we or any potential collaborators receive for our products, adversely affecting our profitability.

     We are unable to predict what additional legislation or regulation, if any, relating to the health care industry or third-party coverage and reimbursement may be enacted in the future or what effect such legislation or regulation would have on our business. Outside the United States certain countries set prices in connection with the regulatory process. We cannot be sure that such prices will be acceptable to us or our collaborative partners. The pendency or approval of such proposals or reforms could result in a decrease in our stock price or limit our ability to raise capital or to obtain strategic partnerships or licenses.

     The FDA has designated ambrisentan an orphan drug under the Orphan Drug Act. In addition, the Commission of the European Communities, with a favorable opinion of the Committee for Orphan Medicinal Products of the European Medicines Agency (EMEA), has granted orphan drug designation to ambrisentan. The U.S. and European orphan drug designations provide incentives to manufacturers to develop and market drugs for rare diseases, generally by entitling the first developer that receives marketing approval for an orphan drug to a exclusive marketing period (typically seven years in the United States and up to ten years in Europe) for that product. Orphan drug designation does not increase the likelihood of eventual regulatory approval for a product candidate, including ambrisentan, and orphan drug designation may be withdrawn by the FDA and the EMEA in certain circumstances. In recent years, Congress and the EMEA have considered legislation to change the orphan drug regulations to shorten the period of automatic market exclusivity and to grant marketing rights to simultaneous developers of a drug. If the U.S. or European orphan drug regulations are amended in this manner, any approved drugs for which we have been granted exclusive marketing rights will face increased competition, which may decrease the amount of revenue we may receive from these products.

Changes in or interpretations of accounting rules and regulations, including recently enacted changes relating to the expensing of stock options, could result in unfavorable accounting charges or require us to change our compensation policies.

     Accounting methods and policies for business and market practices of biopharmaceutical companies are subject to further review, interpretation and guidance from relevant accounting authorities, including the SEC. The Financial Accounting Standards Board, or FASB, issued SFAS No. 123 (Revised 2004, “FAS 123(R)”) and its related implementation guidance in December 2004. FAS 123(R) focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions and will require us to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). The cost will be recognized over the period during which an employee is required to provide service in exchange for the award. We are required to implement FAS 123(R) as of the beginning of the first annual reporting period that begins after June 15, 2005 and we intend to adopt the standard effective as of January 1, 2006.

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     We currently are not required to record stock-based compensation charges if the employee’s stock option exercise price equals or exceeds the fair value of our common stock at the date of grant. As a result of our implementation of FAS 123(R), our future operating expenses will increase. We rely heavily on stock options to compensate existing employees and attract new employees. We may choose to reduce our reliance on stock options as a compensation tool as a result of the impact of FAS 123(R). If we reduce our use of stock options, it may be more difficult for us to attract, motivate and retain qualified employees. If we do not reduce our reliance on stock options, our reported losses will increase.

     Although we believe that our accounting practices are consistent with current accounting pronouncements, changes to or interpretations of accounting methods or policies in the future may require us to reclassify, restate or otherwise change or revise our financial statements.

Risks Related to Our Intellectual Property

Since we may not obtain additional patent protection for enoximone capsules, we expect to rely solely on the Hatch-Waxman Act and similar foreign statutes to obtain market exclusivity.

     The primary composition of matter patents covering enoximone have expired. We therefore have no immediate and direct means to prevent third parties from making, selling, using or importing enoximone in the United States, Europe, Japan or elsewhere. Instead, we expect to rely upon the United States Drug Price Competition and Patent Term Restoration Act of 1984, commonly known as the Hatch-Waxman Act, and applicable foreign legislation, to achieve market exclusivity for enoximone capsules. For new drug applications, or NDAs, for new chemical entities not previously approved, the Hatch-Waxman Act provides for marketing exclusivity to the first applicant to gain approval for a particular drug by prohibiting acceptance or approval of an abbreviated new drug application, or ANDA, from a generic competitor for up to five years after approval of the original NDA. This exclusivity only applies to submissions of an ANDA and would not prevent a third party from conducting pivotal clinical trials and thereafter filing a complete regulatory submission for enoximone. Our competitors will be free during any period of statutory exclusivity to develop the data necessary either to file an ANDA at the end of the exclusivity period or to conduct studies in support of a complete NDA filing during the period of market exclusivity. European and Japanese law may also provide us with marketing exclusivity following market approval. Although statutory market exclusivity in Europe, the United States and Japan may apply even when the composition of matter patent has already expired, it is possible that enoximone will not qualify for such exclusivity, or alternatively, the terms of the Hatch-Waxman Act, or similar foreign statutes, could be amended to our disadvantage. If we do not qualify for marketing exclusivity for enoximone capsules, the competition we face would increase, reducing our potential revenues.

We may not be able to extend market exclusivity for enoximone capsules by developing an extended release formulation.

     Our current strategy includes attempting to obtain an additional period of market exclusivity for enoximone capsules by developing an extended release formulation before the marketing exclusivity period for enoximone capsules ends. We have not yet identified a specific extended release formulation. If we pursue this development strategy, we expect to file for and obtain patents covering the specific formulation developed, as well as its use for the treatment of various diseases. If we successfully develop an extended release formulation of enoximone capsules and successfully conduct clinical trials to demonstrate its safety and efficacy, a separate three years of marketing exclusivity could be obtained. This would not, however, prevent a competitor from filing an ANDA for the immediate release formulation after expiration of the five-year exclusivity period. There can be no assurance that such an extended release formulation will be successfully developed in a timely manner, that adequate patent protection can be obtained or that any such formulation would provide a commercial advantage. In addition, many third parties have patents covering many of the technologies and manufacturing processes needed to develop and make extended release formulations. There can be no assurance that we can obtain rights to such patents on attractive financial terms, if at all.

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We rely on compounds and technology licensed from third parties and termination of any of those licenses would result in the loss of significant rights.

     We have exclusive, worldwide licenses to enoximone for the treatment of cardiovascular disease, ambrisentan for all conditions, and darusentan for all conditions other than cancer. We also have the worldwide exclusive rights to certain patents and patent applications licensed from the University of Colorado and the University of Texas Southwestern Medical Center and rights to license future technology and patent applications arising out of research sponsored at those institutions related to heart failure. Key financial and other terms for future technology would still need to be negotiated with the research institutions, and it may not be possible to obtain any such license on terms that are satisfactory to us.

     Our licenses generally may be terminated by the licensor if we fail to perform our obligations under the license, including obligations to develop and commercialize the compounds and technologies under license. The license agreements also generally require us to meet specified milestones or show commercially reasonable diligence in the development and commercialization of the compounds or technology under the license. If our agreements are terminated, we would lose the rights to the product candidates, reducing our potential revenues.

If we are unable to protect our proprietary technology, we may not be able to compete effectively.

     Our success depends in part on our ability to obtain and enforce patent protection for our products, both in the United States and other countries, to prevent our competitors from developing, manufacturing and marketing products based on our technology. The scope and extent of patent protection for our product candidates is uncertain and frequently involves complex legal and factual questions. We cannot predict the breadth of claims that will be allowed and issued in patents related to biotechnology or pharmaceutical applications. Once such patents have issued, we cannot predict how the claims will be construed or enforced or whether applicable statutes, regulations or case law will change in any material respect. In addition, statutory differences between countries may limit the protection we can obtain on some of our inventions outside of the United States. For example, methods of treating humans are not patentable in many countries outside of the United States.

     Furthermore, the patents that we have licensed with respect to enoximone, ambrisentan and darusentan are owned by third parties. These third parties, with our advice and input, are responsible for and control the prosecution and enforcement of these patents. A failure by these third parties to adequately prosecute and enforce these patents could result in a decline in the value of the patents and have a material adverse effect on our business. Since we collaborate with third parties on some of our technology, there is also the risk that disputes may arise as to the rights to technology or drugs developed in collaboration with other parties.

     The coverage claimed in a patent application can be significantly narrowed before a patent is issued, both in the United States and other countries. We do not know whether any of our pending or future patent applications will result in the issuance of patents. To the extent patents have been issued or will be issued, we do not know whether these patents will be subject to further proceedings that may limit their scope, provide significant proprietary protection or competitive advantage, or cause them to be circumvented or invalidated. Furthermore, patents already issued to us, or patents that may issue on our pending applications, may become subject to dispute, including interference, reissue or reexamination proceedings in the United States, or opposition proceedings in foreign countries. Any of these proceedings could result in the limitation or loss of rights. Additionally, changes in applicable patent law, including case law, could impact the interpretation, scope or enforceability of our patents and limit our ability to exclude competitors from entering our markets and utilizing our technology.

     We also rely on trade secrets and proprietary know-how to develop and maintain our competitive position. While we believe that we have protected our trade secrets, some of our current or former employees, consultants, scientific advisors or collaborators may unintentionally or willfully disclose our confidential information to competitors or use our proprietary technology for their own benefit. If our collaborative partners, employees or consultants develop inventions or processes independently that may be applicable to our products under development, disputes may arise about ownership of proprietary rights to those inventions and/or processes. Such inventions and/or processes will not necessarily become our property, but may remain the property of those persons or their employers. Protracted and costly litigation could be necessary to enforce and determine the scope of our proprietary rights. Furthermore, enforcing a

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claim alleging the infringement of our trade secrets would be expensive and difficult to prove, making the outcome uncertain. Our competitors may also independently develop equivalent knowledge, methods and know-how or gain access to our proprietary information through some other means.

We may be accused of infringing on the proprietary rights of third parties, which could impair our ability to successfully commercialize our product candidates.

     Our success depends in part on operating without infringing the proprietary rights of third parties. It is possible that we may infringe on intellectual property rights of others without being aware of the infringement. If a patent holder believes that one of our product candidates infringes on its patent, it may sue us even if we have received patent protection for our technology. If another party claims we are infringing its technology, we could face a number of issues, including the following:

	•	defending a lawsuit, which is very expensive and time consuming;
	•	defending against an interference proceeding in the United States Patent and Trademark Office, which also can be very expensive and time consuming;
	•	an adverse decision in a lawsuit or in an interference proceeding resulting in the loss of some or all of our rights to our intellectual property;
	•	paying a large sum for damages if we are found to be infringing;
	•	being prohibited from making, using, selling or offering for sale our product candidates or our products, if any, until we obtain a license from the patent holder. Such a license may not be granted to us on satisfactory terms, if at all, and even if we are granted a license, we may have to pay substantial royalties or grant cross-licenses to our patents; and
	•	redesigning the manufacturing methods or the use claims of our product candidates so that they do not infringe on the other party’s patent in the event that we are unable to obtain a license, which, even if possible, could require substantial additional capital, could necessitate additional regulatory approval, and could delay commercialization.

Risks Related to Our Stock

The market price of our common stock has been and may continue to be highly volatile.

     We cannot assure you that an active trading market for our common stock will exist at any time. Holders of our common stock may not be able to sell shares quickly or at the market price if trading in our common stock is not active. The trading price of our common stock has been and is likely to be highly volatile and could be subject to wide fluctuations in price in response to various factors, many of which are beyond our control, including:

	•	actual or anticipated results of our clinical trials;
	•	actual or anticipated regulatory approvals of our products or of competing products;
	•	changes in laws or regulations applicable to our products;
	•	changes in the expected or actual timing of our development programs;
	•	actual or anticipated variations in quarterly operating results;
	•	announcements of technological innovations by us, our collaborators or our competitors;
	•	new products or services introduced or announced by us or our competitors;
	•	changes in financial estimates or recommendations by securities analysts;

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	•	conditions or trends in the biotechnology and pharmaceutical industries;
	•	changes in the market valuations of similar companies;
	•	announcements by us of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
	•	additions or departures of key personnel;
	•	disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies;
	•	the loss of a collaborator, including Novartis;
	•	developments concerning our collaborations;
	•	trading volume of our common stock; and
	•	sales of our common stock by us or our stockholders.

     In addition, the stock market in general, the Nasdaq National Market and the market for technology companies in particular have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Further, there has been particular volatility in the market prices of securities of biotechnology and life sciences companies. These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market, securities class-action litigation has often been instituted against companies. Such litigation, if instituted against us, could result in substantial costs and diversion of management’s attention and resources.

Our principal stockholders and management own a significant percentage of our stock and will be able to exercise significant influence.

     Our executive officers, directors and principal stockholders, together with their affiliates, currently own approximately 52% of our voting stock, including shares subject to their outstanding options and warrants, and we expect that this group will continue to hold a significant percentage of our outstanding voting stock. Accordingly, these stockholders will likely be able to have a significant impact on the composition of our board of directors and continue to have significant influence over our operations. This concentration of ownership could have the effect of delaying or preventing a change in our control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which in turn could limit the market value of our common stock.

Issuance of shares in connection with financing transactions or under stock plans and outstanding warrants will dilute current stockholders.

     Pursuant to our 2003 Equity Incentive Plan, our management is authorized to grant stock options to our employees, directors and consultants, and our employees are eligible to participate in our 2003 Employee Stock Purchase Plan. As of March 31, 2005, options to purchase a total of 3,841,044 shares were outstanding under the Plan (most of which have exercise prices below our current market price) and options to purchase 1,408,170 shares remained available for grant under the plan. The reserve under our 2003 Equity Incentive Plan will automatically increase each January 1 by the lesser of five percent of the number of total outstanding shares of our common stock on such date or 2,500,000 shares, subject to the ability of our board of directors to prevent or reduce such increase. Additionally, we have 250,000 shares of our common stock reserved for issuance under our 2003 Employee Stock Purchase Plan, approximately 20,000 of which were issued as of March 31, 2005. The reserve under our 2003 Employee Stock Purchase Plan will automatically increase each January 1 by the lesser of 1.25% of the number of total outstanding shares of our common stock on such date or 500,000 shares, subject to the ability of our board of directors to prevent or reduce such increase. In addition, we also have warrants outstanding to purchase 1,878,351 shares of our common stock, all of which have exercise prices below our current market price. Our stockholders will incur dilution upon exercise of any outstanding stock options or warrants. In addition, if

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we raise additional funds by issuing additional common stock, or securities convertible into or exchangeable or exercisable for common stock, further dilution to our existing stockholders will result, and new investors could have rights superior to existing stockholders.

Some provisions of our charter documents and Delaware law may have anti-takeover effects that could discourage, delay or prevent a change of control or management, even if such changes would be beneficial to our stockholders.

     Provisions in our certificate of incorporation and bylaws, as well as provisions of Delaware law, could make it more difficult for a third party to acquire us, even if doing so would benefit our stockholders. Since management is appointed by the board of directors, any inability to effect a change in the board may result in the entrenchment of management. These provisions include:

	•	authorizing the issuance of “blank check” preferred stock;
	•	limiting the removal of directors by the stockholders to removal for cause;
	•	prohibiting stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders;
	•	eliminating the ability of stockholders to call a special meeting of stockholders; and
	•	establishing advance notice requirements for nominations for election to the Board of Directors or for proposing matters that can be acted upon at stockholder meetings.

     In addition, we are subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with an interested stockholder for a period of three years following the date on which the stockholder became an interested stockholder. This provision could have the effect of delaying or preventing a change of control, whether or not it is desired by or beneficial to our stockholders.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We do not use derivative financial instruments in our investment portfolio and have no foreign exchange contracts. Our financial instruments consist of cash, cash equivalents, short-term investments, trade accounts receivable, accounts payable and long-term obligations. We consider investments that, when purchased, have a remaining maturity of 90 days or less to be cash equivalents.

     We invest in marketable securities in accordance with our investment policy. The primary objectives of our investment policy are to preserve principal, maintain proper liquidity to meet operating needs and maximize yields. Our investment policy specifies credit quality standards for our investments and limits the amount of credit exposure to any single issue, issuer or type of investment. The maximum allowable duration of a single issue is 18 months and the average duration of the issues in the portfolio is less than nine months.

     As of March 31, 2005, we had an investment portfolio of investments in a variety of interest-bearing instruments, consisting of United States government and agency securities, high-grade United States corporate bonds, municipal bonds, mortgage-backed securities and money market accounts of $46.6 million excluding those classified as cash and cash equivalents. Our investments consist primarily of bank notes, various government obligations and asset-backed securities. These securities are classified as available-for-sale and are recorded on the balance sheet at fair market value with unrealized gains or losses reported as accumulated other comprehensive income, a separate component of stockholders’ equity. Unrealized losses are charged against income when a decline in fair market value is determined to be other than temporary. The specific identification method is used to determine the cost of securities sold.

     Investments in fixed-rate interest-earning instruments carry varying degrees of interest rate risk. The fair market value of our fixed-rate securities may be adversely impacted due to a rise in interest rates. In general, securities with longer maturities are subject to greater interest-rate risk than those with shorter maturities. Due in part to this factor, our investment income may fall short of expectations or we may suffer losses in principal if securities are sold that have declined in market value due to changes in interest rates.

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Due to the short duration of our investment portfolio, we believe an immediate 10% change in interest rates would not be material to our financial condition or results of operations.

     The euro is the functional currency for Myogen GmbH. We translate asset and liability accounts to the United States dollar based on the exchange rate as of the balance sheet date, while the income statement and cash flow statement amounts are translated to the United States dollar at the average exchange rate for the period. Exchange gains and losses resulting from such translation are included as a separate component of stockholders’ equity/(deficit). Transaction gains and losses are recognized in income during the period in which they occur and are included in selling, general and administrative expenses. In addition, we conduct clinical trials in many countries, exposing us to cost increases if the United States dollar declines in value compared to other currencies.

ITEM 4. CONTROLS AND PROCEDURES

     We carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (“Exchange Act”), as of the end of the period covered by this report. Based on that evaluation, the CEO and CFO have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and can therefore only provide reasonable, not absolute, assurance that the design will succeed in achieving its stated goals.

     In addition, we reviewed our internal controls, and there have been no changes in our internal controls over financial reporting during the quarter ended March 31, 2005 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     None

ITEM 2. UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS

     On November 4, 2003, we closed the sale of 5,000,000 shares of our common stock in our initial public offering (the “Offering”), and on November 7, 2003, we closed the sale of an additional 750,000 shares of our common stock pursuant to the exercise by the underwriters of an over-allotment option. The Registration Statement on Form S-1 (Reg. No. 333-108301) (the “Registration Statement”) we filed to register our common stock in the Offering was declared effective by the Securities and Exchange Commission on October 29, 2003. The Offering commenced as of October 29, 2003 and did not terminate before any securities were sold. The offering was completed and all shares were sold at an initial price per share of $14.00. The aggregate purchase price of the Offering amount registered was $80,500,000.

     The managing underwriters for the initial public offering were Credit Suisse First Boston LLC, J.P. Morgan Securities Inc., CIBC World Markets Corp. and Lazard Freres & Co. LLC. We incurred expenses in connection with the Offering of $7.2 million, which consisted of direct payments of: (i) $1.4 million in legal, accounting and printing fees; (ii) $5.6 million in underwriters’ discounts, fees and commissions; and (iii) $0.2 million in miscellaneous expenses.

     After deducting expenses of the offering, we received net offering proceeds of approximately $73.3 million. As of March 31, 2005, we held approximately $44.5 million of the proceeds from the Offering, all of which are invested in short-term financial instruments. We intend to use these remaining proceeds for research and development, general corporate purposes and working capital. We regularly assess the specific uses and allocations for these funds.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

     None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     None

ITEM 5. OTHER INFORMATION

     None

ITEM 6. EXHIBITS

	31.1	Certification of principal executive officer required by Rule 13a-14(a).
	31.2	Certification of principal financial officer required by Rule 13a-14(a).
	32.1	Section 1350 Certification.

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SIGNATURES

     Pursuant to the requirements of the Exchange Act, 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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