UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

(Mark One)

|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2005

|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission file number 0-28494

MILLENNIUM PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

Delaware		04-3177038
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

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

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

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

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

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

Number of shares of the registrant's Common Stock, $0.001 par value, outstanding on November 4, 2005: 310,451,529

MILLENNIUM PHARMACEUTICALS, INC.

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2005

TABLE OF CONTENTS

		Page
PART I	FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements

	Condensed Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004	3

	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2005 and 2004	4

	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and 2004	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	16

	Risk Factors That May Affect Results	28

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39

Item 4.	Controls and Procedures	40

PART II	OTHER INFORMATION

Item 6.	Exhibits	41

	Signatures	42

	Exhibit Index	43

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

PART I FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

Millennium Pharmaceuticals, Inc.
Condensed Consolidated Balance Sheets

	September 30, 2005			December 31, 2004
	(unaudited)
(in thousands, except per share amounts)
Assets
Current assets:
Cash and cash equivalents	$	60,412		$	14,436
Marketable securities		594,742			685,971
Accounts receivable, net of allowances		78,372			87,874
Inventory		16,936			97,274
Prepaid expenses and other current assets		17,496			16,057

Total current assets		767,958			901,612
Property and equipment, net		194,447			220,115
Restricted cash		9,641			10,316
Other assets		14,395			15,325
Goodwill		1,210,218			1,208,328
Developed technology, net		313,702			338,798
Intangible assets, net		62,134			62,537

Total assets	$	2,572,495		$	2,757,031


Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	15,275		$	36,470
Accrued expenses		68,077			89,125
Advance from Schering-Plough		—			49,250
Current portion of restructuring		32,674			34,242
Current portion of deferred revenue		35,571			21,294
Current portion of capital lease obligations		5,460			10,480
Current portion of long term debt		5,890			—

Total current liabilities		162,947			240,861
Other long term liabilities		15			5,778
Restructuring, net of current portion		74,673			39,794
Deferred revenue, net of current portion		21,909			11,691
Capital lease obligations, net of current portion		76,521			80,452
Long term debt, net of current portion		99,571			105,461

Commitments and contingencies

Stockholders' equity:
Preferred Stock, $0.001 par value; 5,000 shares authorized, none issued		—			—
Common Stock, $0.001 par value; 500,000 shares authorized: 310,051 shares at September 30, 2005 and 306,399 shares at December 31, 2004 issued and outstanding		310			306
Additional paid-in capital		4,573,862			4,547,430
Deferred compensation		(4,518	)		—
Accumulated other comprehensive loss		(9,676	)		(5,953	)
Accumulated deficit		(2,423,119	)		(2,268,789	)

Total stockholders' equity		2,136,859			2,272,994

Total liabilities and stockholders' equity	$	2,572,495		$	2,757,031

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

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
(in thousands, except per share amounts)

Revenues:
Net product sales	$	50,942		$	37,668		$	139,629		$	102,288
Co-promotion revenue		33,037			62,557			123,524			159,034
Revenue under strategic alliances		105,186			9,749			160,368			86,537
Royalties		12,514			—			12,514			—

Total revenues		201,679			109,974			436,035			347,859

Costs and expenses:
Cost of sales (excludes amortization of acquired intangible assets)		89,020			18,630			120,281			52,462
Research and development		80,632			98,961			253,725			299,621
Selling, general and administrative		40,623			45,903			144,320			137,500
Restructuring		58,791			(414	)		62,897			36,370
Amortization of intangibles		8,500			8,378			25,500			25,134

Total costs and expenses		277,566			171,458			606,723			551,087

Loss from operations		(75,887	)		(61,484	)		(170,688	)		(203,228	)

Other income (expense):
Investment income, net		4,902			1,115			24,081			13,650
Interest expense		(2,820	)		(2,725	)		(7,723	)		(8,012	)
Gain on sale of equity interest in joint venture		—			—			—			40,000

Net loss	$	(73,805	)	$	(63,094	)	$	(154,330	)	$	(157,590	)

Amounts per common share:
Net loss, basic and diluted	$	(0.24	)	$	(0.21	)	$	(0.50	)	$	(0.52	)

Weighted average shares, basic and diluted		308,848			305,202			307,675			304,445

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

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

	Nine Months Ended September 30,
	2005			2004
(in thousands)

Cash Flows from Operating Activities:
Net loss	$	(154,330	)	$	(157,590	)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization		58,456			69,981
Restructuring charges (reversals), net		1,255			(255	)
Amortization of deferred financing cost		340			364
Realized loss on marketable securities, net		2,249			3,751
Realized gain on sale of investment in TransForm Pharmaceuticals		(10,465	)		—
Stock compensation expense		4,224			4,946
Changes in operating assets and liabilities:
Accounts receivable		9,502			(37,239	)
Inventory		80,338			9,623
Prepaid expenses and other current assets		561			5,286
Restricted cash and other assets		(5,611	)		877
Accounts payable and accrued expenses		(6,931	)		(4,279	)
Advance from Schering-Plough		(49,250	)		—
Deferred revenue		24,494			(22,402	)

Net cash used in operating activities		(45,168	)		(126,937	)


Cash Flows from Investing Activities:
Investments in marketable securities		(261,710	)		(345,580	)
Proceeds from sales and maturities of marketable securities		347,611			442,241
Proceeds from sale of investment in TransForm Pharmaceuticals		10,585			—
Purchases of property and equipment		(8,561	)		(34,519	)
Other investing activities		(5,282	)		3,979

Net cash provided by investing activities		82,643			66,121


Cash Flows from Financing Activities:
Net proceeds from employee stock purchases		17,043			22,050
Principal payments on capital leases		(8,951	)		(11,389	)

Net cash provided by financing activities		8,092			10,661

Increase (decrease) in cash and cash equivalents		45,567			(50,155	)
Equity adjustment from foreign currency translation		409			(227	)
Cash and cash equivalents, beginning of period		14,436			55,847

Cash and cash equivalents, end of period	$	60,412		$	5,465


Supplemental Cash Flow Information:
Cash paid for interest	$	8,916		$	8,858

Supplemental Disclosure of Noncash Investing and Financing Activities:
Issuance of restricted stock	$	4,784		$	—

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

Millennium Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements

1. Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals and revisions of estimates, considered necessary for a fair presentation of the accompanying condensed consolidated financial statements have been included. Interim results for the three and nine months ended September 30, 2005 are not necessarily indicative of the results that may be expected for the year ended December 31, 2005. For further information, refer to the financial statements and accompanying footnotes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004, which was filed with the Securities and Exchange Commission (“SEC”) on March 8, 2005.

The information presented in the condensed consolidated financial statements and related footnotes at September 30, 2005, and for the three and nine months ended September 30, 2005 and 2004, is unaudited and the condensed consolidated balance sheet amounts and related footnotes at December 31, 2004, have been derived from audited financial statements.

2. Summary of Significant Accounting Policies

Cash Equivalents, Marketable Securities and Other Investments

Cash equivalents consist principally of money market funds and corporate bonds with maturities of three months or less at the date of purchase. Marketable securities consist primarily of investment-grade corporate bonds, asset-backed debt securities and U.S. government agency debt securities. Other investments represent ownership in private companies in which the Company holds less than a 20 percent ownership position and does not otherwise exercise significant influence. The Company carries such investments at cost unless significant influence can be exercised over the investee, in which case such securities are recorded using the equity method. These investments are included in other long term assets at September 30, 2005 and December 31, 2004.

Management determines the appropriate classification of marketable securities at the time of purchase and reevaluates such designation at each balance sheet date. Marketable securities at September 30, 2005 and December 31, 2004 are classified as “available-for-sale.” Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported in a separate component of accumulated other comprehensive loss in stockholders’ equity. The cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion are included in investment income. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities and other investments are included in investment income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in investment income.

During the three months ended September 30, 2005, the Company did not record any realized gains on marketable securities and recorded realized losses on marketable securities and other investments of $0.9 million. During the three months ended September 30, 2004, the Company recorded realized gains on marketable securities and other investments of $0.5 million and realized losses on marketable securities and other investments of $5.1 million.

During the nine months ended September 30, 2005 and 2004, the Company recorded realized gains on marketable securities of $0.1 million and $1.8 million, respectively, and realized losses on marketable securities and other investments of $2.4 million and $5.6 million, respectively.

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

During the nine months ended September 30, 2005, the Company recorded a realized gain of approximately $10.5 million from the sale of its cost method investment in TransForm Pharmaceuticals, Inc. (“TransForm”). The Company expects to record an additional realized gain of up to approximately $2.8 million in the second half of 2006 upon the final settlement and receipt of the escrowed portion of the sale proceeds. TransForm, a company specializing in the discovery of formulations and novel crystalline forms of drug molecules, was acquired by Johnson & Johnson in a cash-for-stock transaction that closed in April 2005.

Segment Information

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

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

Revenues from Ortho Biotech Products, L.P. (“Ortho Biotech”), a member of the Johnson & Johnson family of companies, accounted for approximately five percent and six percent of total revenues for the three months ended September 30, 2005 and 2004, respectively, and 11 percent and 21 percent of total revenues for the nine months ended September 30, 2005 and 2004, respectively.

Revenues from Schering-Plough Ltd. and Schering Corporation (collectively “SGP”), excluding co-promotion revenue, accounted for approximately 46 percent and 21 percent of total revenues for the three and nine months ended September 30, 2005, respectively.

There were no other significant customers under strategic alliances and royalties in the three and nine months ended September 30, 2005 and 2004, respectively.

Information Concerning Market and Source of Supply Concentration

INTEGRILIN has received regulatory approvals in the United States, the countries of the European Union and a number of other countries for various indications. The Company and SGP co-promoted INTEGRILIN in the United States and shared any profits and losses through August 31, 2005. In September 2005, SGP acquired the exclusive development and commercialization rights to INTEGRILIN in the United States. The Company will continue to manage the supply chain for INTEGRILIN at the expense of SGP for products sold in the SGP territories. In the European Union, GlaxoSmithKline plc (“GSK”) exclusively markets INTEGRILIN.

The Company relies on third-party contract manufacturers for the clinical and commercial production of INTEGRILIN. The Company has two manufacturers that provide eptifibatide, the active pharmaceutical ingredient necessary to make INTEGRILIN for both clinical trials and commercial supply. Solvay, Societe Anonyme (“Solvay”), one of the current manufacturers, owns the process technology used by it and the other manufacturer for the production of the active pharmaceutical ingredient. The Company is seeking approval of its own alternative process technology for the production of eptifibatide for approval in the United States, Europe and other countries, as required. The Company entered into an agreement with Solvay in January 2003 for an initial term of four years and one-year renewal periods thereafter. The Company has one manufacturer that currently performs fill/finish services for INTEGRILIN. The Company is qualifying a second fill/finish supplier and has identified an alternative packaging supplier to serve as future sources of supply for the United States. The FDA or other regulatory agencies must approve the processes or the facilities that may be used for the manufacture of our marketed products. Some materials in process at these alternative suppliers are included in inventory.

VELCADE has received approvals in the United States, the countries of the European Union and a number of other countries for the treatment of certain multiple myeloma patients. The Company sells VELCADE in the United States through its oncology-specific sales force and Ortho Biotech and its affiliates sell VELCADE outside the United States in countries where approvals have been received.

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

The Company also relies on third-party contract manufacturers for the manufacturing, fill/finish and packaging of VELCADE for both commercial purposes and for ongoing clinical trials. The Company has established long-term supply relationships for the production of commercial supplies of VELCADE. The Company currently works with one manufacturer to complete fill/finish for VELCADE and the Company is qualifying a second fill/finish supplier.

During 2004, the Company began distributing VELCADE in the United States through a sole-source distribution model where the Company sells directly to a third party, which in turn distributes to the wholesaler base.

Inventory

Inventory consists of currently marketed products and from time to time, product candidates awaiting regulatory approval which were capitalized based upon management’s judgment of probable near term commercialization. The Company assesses the probability of commercialization based upon several factors including estimated launch date, time to manufacture and shelf life. At September 30, 2005 and December 31, 2004, inventory does not include amounts for products that have not been approved for sale.

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

Inventory consists of the following (in thousands):

	September 30, 2005		December 31, 2004
Raw materials	$	7,975	$	73,214
Work in process		8,518		8,507
Finished goods		443		15,553

	$	16,936	$	97,274

On September 1, 2005, upon the transfer of the commercialization rights for INTEGRILIN to SGP, the Company sold all existing raw material and finished goods INTEGRILIN inventories to SGP. This one-time sale of approximately $71.4 million was included in revenue under strategic alliances for the three and nine months ended September 30, 2005.

Goodwill and Intangible Assets

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

Intangible assets consist of the following (in thousands):

	September 30, 2005					December 31, 2004
	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
Developed technology	$	435,000	$	(121,298	)	$	435,000	$	(96,202	)

Core technology	$	18,712	$	(18,712	)	$	18,712	$	(18,712	)
Other		17,060		(13,926	)		20,060		(16,523	)

Total amortizable intangible assets		35,772		(32,638	)		38,772		(35,235	)
Total indefinite-lived trademark		59,000		—			59,000		—

Total intangible assets	$	94,772	$	(32,638	)	$	97,772	$	(35,235	)

On February 12, 2002, the Company acquired COR Therapeutics, Inc. (“COR”) for an aggregate purchase price of $1.8 billion, primarily consisting of 55.1 million shares of Millennium common stock. The transaction was recorded as a purchase for accounting purposes. The purchase price was allocated to the assets purchased and liabilities assumed based upon their respective fair values, with the excess of the purchase price over the estimated fair market value of net tangible assets acquired allocated to in-process research and development, developed technology, trademark and goodwill.

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

During the year ended December 31, 2002, the Company recorded a one-time charge of $242.0 million for acquired in-process research and development representing the estimated fair value related to five incomplete projects that, at the time of the COR acquisition, had no alternative future use and for which technological feasibility had not been established. The most significant purchased research and development project that was in-process at the date of the acquisition consisted of inhibitors of specified growth factor receptors in the tyrosine kinase family. These inhibitors have the potential to reduce the narrowing of blood vessels. Cancers such as specified leukemias appear to harbor activated forms of some of these receptors. This project represented 62 percent of the total in-process value and was in pre-clinical testing at the time of the acquisition. The Company has advanced this project into phase I clinical testing. The Company discontinued the remaining four of the five in-process projects as part of its 2003 restructuring efforts.

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

Intangible assets that were not specifically identifiable, had indeterminate lives or were inherent in the continuing business and related to the Company as a whole were classified as goodwill. The significant factors contributing to the existence of goodwill related to company management, a specialized cardiovascular sales force, market position and operating experience.

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

Developed technology	13 years
Core technology	4 years
Other	2 to 12 years

Amortization expense for the three months ended September 30, 2005 and 2004 was approximately $8.5 million and $8.4 million, respectively. Amortization expense for the nine months ended September 30, 2005 and 2004 was approximately $25.5 million and $25.1 million, respectively. During the nine months ended September 30, 2005, the Company retired intangible assets of approximately $3.0 million that had been fully amortized.

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

On October 1, 2005, the Company performed its annual goodwill impairment test and determined that no impairment existed on that date. The Company continually monitors business and market conditions to assess whether an impairment indicator exists. If the Company were to determine that an impairment indicator exists, it would be required to perform an impairment test, which might result in a material impairment charge to the statement of operations.

Revenue Recognition

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

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

Net product sales

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

Co-promotion revenue

Through August 31, 2005, co-promotion revenue included the Company’s share of profits from the sale of INTEGRILIN in co-promotion territories by SGP. Also included in co-promotion revenue were reimbursements from SGP of the Company’s manufacturing-related costs, development costs, advertising and promotional expenses associated with the sale of INTEGRILIN within co-promotion territories and royalties from SGP on sales of INTEGRILIN outside of the co-promotion territory other than Europe. The Company recognized revenue when SGP shipped INTEGRILIN to wholesalers and recorded it net of allowances, if any. The Company deferred specified manufacturing-related expenses until the time SGP shipped related product to its customers inside and outside of co-promotion territories and outside of Europe.

Beginning September 1, 2005 as a result of the Company’s transition from a co-promotion to a royalty arrangement for INTEGRILIN in the United States, the Company no longer reports co-promotion revenue.

Revenue under strategic alliances

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

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

	•		ratably over the development period if development risk is significant;

	•		ratably over the manufacturing period or estimated product useful life if development risk has been substantially eliminated; or

	•		based upon the level of research services performed during the period of the research contract.

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

Royalties

Beginning on September 1, 2005, in conjunction with the closing of the Company’s restructured relationship with SGP, the Company began to record royalty income. Royalties are recognized as revenue when earned. Royalties may include:

	•		royalties earned on sales of INTEGRILIN in the United States and other territories around the world, as provided by SGP;

	•		royalties earned on international sales of VELCADE, as provided by Ortho Biotech;

	•		royalties earned on sales of INTEGRILIN in Europe, as provided by GSK; and

	•		other royalties.

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

Advertising and Promotional Expenses

Advertising and promotional expenses are expensed as incurred. During the three months ended September 30, 2005 and 2004, advertising and promotional expenses were $6.7 million and $7.7 million, respectively. During the nine months ended September 30, 2005 and 2004, advertising and promotional expenses were $28.8 million and $26.4 million, respectively.

Net Loss Per Common Share

Basic net loss per common share is computed using the weighted-average number of common shares outstanding during the period. Diluted net loss per share is based upon the weighted average number of common shares outstanding during the period, plus additional weighted average common equivalent shares outstanding during the period when the effect is not anti-dilutive. Common equivalent shares result from the assumed exercise of outstanding stock options, warrants and unvested restricted shares of common stock (the proceeds of which are then assumed to have been used to repurchase outstanding stock using the treasury stock method), and the assumed conversion of convertible notes. However, for all periods presented, diluted net loss per share is the same as basic net loss per share as the inclusion of common equivalent shares would be anti-dilutive.

Comprehensive Loss

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
Net loss	$	(73,805	)	$	(63,094	)	$	(154,330	)	$	(157,590	)
Unrealized gain (loss) on marketable securities		(2,781	)		2,478			(4,132	)		(8,069	)
Cumulative translation adjustments		269			99			409			(228	)

Comprehensive loss	$	(76,317	)	$	(60,517	)	$	(158,053	)	$	(165,887	)

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

	September 30, 2005			December 31, 2004
Unrealized loss on marketable securities	$	(9,505	)	$	(5,373	)
Cumulative translation adjustments		(171	)		(580	)

Accumulated other comprehensive loss	$	(9,676	)	$	(5,953	)

Stock-Based Compensation

The Company follows the intrinsic value method under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations, in accounting for its stock-based compensation plans, rather than the alternative fair value accounting method provided for under SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), as amended by SFAS No. 148, “Accounting for Stock-based Compensation—Transition and Disclosure,” (“SFAS No. 148”). Under APB 25, when the exercise price of options granted equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Restricted stock awards are recorded as compensation cost over the requisite vesting periods based on the market value on the date of grant. In accordance with Emerging Issues Task Force (“EITF”) 96-18, the Company records compensation expense equal to the fair value of options granted to non-employees over the vesting period, which is generally the period of service.

The following information regarding net loss and net loss per share has been determined as if the Company had accounted for its employee stock options and employee stock plan under the fair value method prescribed by SFAS No. 123, as amended by SFAS No. 148. The resulting effect on net loss and net loss per share pursuant to SFAS No. 123 is not likely to be representative of the effects in future periods, due to subsequent additional option grants and periods of vesting.

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

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
Net loss	$	(73,805	)	$	(63,094	)	$	(154,330	)	$	(157,590	)
Add: Stock-based compensation as reported in the Statement of Operations		550			—			550			271
Deduct: Total stock-based compensation expense determined under fair value based method for all awards		(12,653	)		(14,276	)		(46,664	)		(48,398	)

Pro forma net loss	$	(85,908	)	$	(77,370	)	$	(200,444	)	$	(205,717	)

Amounts per common share:
Basic and diluted - as reported	$	(0.24	)	$	(0.21	)	$	(0.50	)	$	(0.52	)
Basic and diluted - pro forma	$	(0.28	)	$	(0.25	)	$	(0.65	)	$	(0.68	)

The weighted-average per share fair value of options granted during the three months ended September 30, 2005 and 2004 was $5.61 and $6.87, respectively, and during the nine months ended September 30, 2005 and 2004 was $5.01 and $9.02, respectively.

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

	Stock Options				Stock Purchase Plan
	Three Months Ended September 30,		Nine Months Ended September 30,		Three Months Ended September 30,		Nine Months Ended September 30,
	2005	2004	2005	2004	2005	2004	2005	2004
Expected life (years)	5.5	5.5	5.32	5.35	0.5	0.5	0.5	0.5
Interest rate	4.06%	2.89%	4.09%	2.79%	3.65%	2.88%	3.46%	1.98%
Volatility	.60	.60	.60	.70	.60	.60	.60	.70

The Black-Scholes model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. Option valuation models require the input of highly subjective assumptions including the expected stock price volatility. The Company’s employee stock options have characteristics significantly different from those of traded options and changes in the subjective inputs assumptions can materially affect the fair value estimate.

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

The Company's 2000 Incentive Stock Plan (the “2000 Plan”) allows for the granting of incentive and nonstatutory stock options, restricted stock awards and other stock-based awards, including the grant of shares based upon specified conditions, the grant of securities convertible into common stock and the grant of stock appreciation rights.

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

During the three months ended September 30, 2005, the Company issued 480,000 shares of restricted stock to certain key executives. Restricted stock awards generally vest over four years from the grant date. The Company recorded $4.8 million of deferred compensation in connection with the issuance of restricted stock and recognized approximately $0.3 million of compensation expense during the three months ended September 30, 2005 related to these awards.

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

Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123R (revised 2004), “Share-Based Payment—An Amendment of FASB Statements No. 123 and 95” (“SFAS No. 123R”). SFAS No. 123R requires companies to calculate and record in the income statement the cost of equity instruments, such as stock options or restricted stock, awarded to employees for services received. The cost of the equity instrument is to be measured based on the fair value of the instruments on the date they are granted and is required to be recognized over the period during which the employees are required to provide services in exchange for the equity instruments. SFAS No. 123R is effective at the beginning of the first fiscal year beginning after June 15, 2005, or January 1, 2006.

SFAS No. 123R provides two alternatives for adoption:

	•		a “modified prospective” method in which compensation cost is recognized for all awards granted subsequent to the effective date of the statement as well as for the unvested portion of awards outstanding as of the effective date; and

	•		a “modified retrospective” method which follows the approach in the “modified prospective” method, but also permits entities to restate prior periods to record compensation cost calculated under SFAS No. 123 for pro forma disclosure.

The Company plans to adopt SFAS No. 123R using the modified prospective method. As permitted by SFAS No. 123, the Company currently accounts for share-based payments to employees using APB 25 intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of SFAS No. 123R’s fair value method will have a significant impact on the Company’s result of operations, although it will have no impact on its overall financial position. The Company cannot accurately estimate at this time the impact of adopting SFAS No. 123R as it will depend on market price, assumptions used and levels of share-based payments granted in future periods. However, had the Company adopted SFAS No. 123R in a prior period, the impact would approximate the impact of SFAS No. 123 as described in the disclosure of pro forma net loss and loss per share in Note 2 above.

3. Restructuring

2005 Strategic Refinement

In October 2005, the Company announced its 2005 restructuring plan in support of a refined strategy focused on advancing key growth assets, including VELCADE, advancing the Company’s clinical pipeline of eight novel oncology and inflammation molecules and building a leading oncology-focused discovery organization. The Company is substantially reducing its effort in inflammation discovery and is reducing overall headcount, including eliminating INTEGRILIN sales and marketing positions, positions in inflammation discovery and various other business support groups. As a result of the headcount reductions, the Company is also further consolidating its Cambridge, MA facilities.

The Company recorded restructuring charges of $28.2 million in September 2005 primarily related to the remaining rental obligation, net of estimated sublease income, for a facility the Company vacated in September 2005 and termination benefits for approximately 180 employees.

The Company expects to record additional restructuring charges for termination benefits for employees notified in October 2005 and additional remaining rental obligations due to facilities that will be vacated through 2006, as well as the write-down of leasehold improvements at such facilities. The total charges are expected to be between $75.0 million and $85.0 million and will be recorded in 2005 and 2006, including the $28.2 million recorded in the three months ended September 30, 2005.

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

The activity related to restructuring expense for the nine month period ended September 30, 2005 is as follows (in thousands):

	Balance at December 31, 2004		Charges		Payments			Asset Impairment			Stock Compensation			Other			Balance at September 30, 2005
Termination benefits	$	—	$	3,058	$	(573	)	$	—		$	(284	)	$	(68	)	$	2,133
Facilities		—		23,554		(753	)		—			—			(233	)		22,568
Asset impairment		—		971		—			(971	)		—			—			—
Contract termination		—		621		—			—			—			(621	)		—

Total	$	—	$	28,204	$	(1,326	)	$	(971	)	$	(284	)	$	(922	)	$	24,701

2003 Restructuring Plan

In December 2002 and June 2003, the Company took steps as part of its 2003 restructuring plan to realign its resources to become a commercially-focused biopharmaceutical company. The Company discontinued specified discovery research efforts, reduced overall headcount, primarily in its discovery group and consolidated its research and development facilities. Based upon a review of real estate market conditions, the Company recorded an additional $30.6 million of restructuring expense reflecting changes in the Company’s estimates of the length of time it would take to sublease certain properties vacated under the 2003 restructuring plan.

The activity related to restructuring expense for the nine month period ended September 30, 2005 is as follows (in thousands):

	Balance at December 31, 2004		Charges			Payments			Other			Balance at September 30, 2005
Termination benefits	$	728	$	—		$	(484	)	$	(244	)	$	—
Facilities		67,956		34,882			(20,192	)		—			82,646
Contract termination		5,352		(189	)		(5,163	)		—			—


Total	$	74,036	$	34,693		$	(25,839	)	$	(244	)	$	82,646

The Company adopted SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS No. 146”) in December 2002. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at its fair value in the period in which the liability is incurred, except for one-time termination benefits that meet specified requirements. Costs of termination benefits relate to severance packages, out-placement services and career counseling for employees affected by the restructuring.

In accordance with SFAS No. 146, the Company’s facilities related expenses and liabilities in both the 2005 and 2003 restructuring plans include estimates of the remaining rental obligations, net of estimated sublease income, for facilities the Company no longer occupies. The Company validates its estimates and assumptions with independent third parties having relevant expertise. The Company reviews its estimates and assumptions on a regular basis, until the outcome is finalized, and makes whatever modifications management believes necessary, based on the Company’s best judgment, to reflect any changed circumstances.

The projected timing of payments of the remaining restructuring liabilities under both the 2005 and the 2003 restructuring plans at September 30, 2005 is approximately $32.7 million due through September 30, 2006 and $74.7 million thereafter through 2022. The actual amount and timing of the payment of the remaining accrued liability is dependent upon the ultimate terms of any potential subleases or lease restructuring.

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

4. Revenue and Strategic Alliances

The Company has entered into research, development, technology transfer and commercialization arrangements with major pharmaceutical and biotechnology companies relating to a broad range of therapeutic products. These alliances provide the Company with the opportunity to receive various combinations of license fees, research funding, co-promotion revenue, distribution fees and may provide additional payments contingent upon its achievement of research and regulatory milestones and royalties and/or profit shares if the Company’s collaborations are successful in developing and commercializing products.

Product Alliances

�� During the three months ended September 30, 2005, the Company transferred to SGP the exclusive development and commercialization rights to INTEGRILIN in the United States. In exchange for these rights, SGP paid the Company approximately $35.5 million in a nonrefundable upfront payment that the Company is recognizing as revenue ratably over the Company’s period of involvement in managing the supply chain. In addition, SGP will pay the Company significant royalties on product sales of INTEGRILIN over the lifetime of the product, with the potential of receiving royalties beyond the 2014 patent expiration date.

As of September 1, 2005, the Company no longer records co-promotion revenue. The Company now records royalties on sales of INTEGRILIN in the United States and other territories, as earned on a quarterly basis over the life of the INTEGRILIN product. In each of 2006 and 2007, minimum royalties are set at approximately $85.4 million.

Upon closing, the Company recognized strategic alliance revenue of approximately $71.4 million relating to the Company’s sale to SGP of the existing raw materials and finished goods INTEGRILIN inventory. SGP will assume development obligations relating to the product. The Company will continue to manage the supply chain for INTEGRILIN at the expense of SGP for products sold in the United States and other areas outside of the European Union.

During the nine months ended September 30, 2005, the Company recognized $20.0 million of milestone payments under its alliance with Ortho Biotech relating to VELCADE and the achievement of agreed-upon sales levels of VELCADE.

In January 2005, the transition of the INTEGRILIN marketing authorization for the European Union from SGP to GSK was completed and GSK began selling INTEGRILIN in the countries of the European Union. During the three and nine months ended September 30, 2005, the Company recognized approximately $6.9 million and $14.8 million, respectively, of strategic alliance revenue related to the payment of approximately $22.9 million from GSK.

5. Convertible Debt

The Company had the following convertible notes outstanding at September 30, 2005, for a total of $105.5 million, of which $5.9 million is included in current liabilities:

	•		$5.9 million of principal of 4.5% convertible senior notes due June 15, 2006, that are convertible into the Company’s common stock at any time prior to maturity at a price equal to $40.61 per share (the “4.5% notes”), included in current portion of long term debt at June 30, 2005;

	•		$83.3 million of principal of 5.5% convertible subordinated notes due January 15, 2007, that are convertible into the Company’s common stock at any time prior to maturity at a price equal to $42.07 per share (the “5.5% notes”); and

	•		$16.3 million of principal of 5.0% convertible subordinated notes due March 1, 2007, that are convertible into the Company’s common stock at any time prior to maturity at a price equal to $34.21 per share (the “5.0% notes”).

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

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

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

Overview

We are a leading biopharmaceutical company focused on discovering, developing and commercializing breakthrough products in the areas of cancer and inflammatory disease. We currently market VELCADE, the market leader in the multiple myeloma relapsed setting, and we have eight other potential therapeutic products in various stages of clinical and preclinical development in our therapeutic areas of disease focus.

On October 26, 2005, we announced a refinement in our strategy to focus on growing VELCADE in its existing indication and in new uses, accelerating the development of our oncology and inflammation molecules, and strengthening our oncology discovery organization. As part of our refined strategy, we have taken and will continue to take a series of steps to reduce operating expenses in 2006. These steps build on our restructured relationship with Schering Corporation and Schering-Plough Ltd., together referred to as SGP. We plan to reduce the size of our company from 1,500 employees at the end of 2004 to approximately 1,100 employees by the end of 2005, by managing attrition, eliminating INTEGRILIN sales and marketing positions, and reducing the number of positions in inflammation discovery and in business support groups. In addition, we are further consolidating our Cambridge-based facilities.

We expect the restructuring charge resulting from this refined strategy to be between approximately $75.0 million and $85.0 million, consisting primarily of facilities costs and employee termination benefits. Approximately one fourth of this charge is a non-cash asset impairment charge, primarily related to the write-down of leasehold improvements. The majority of this charge will be recorded in 2005 and 2006, including the $28.2 million recognized in the third quarter 2005.

On September 1, 2005, SGP obtained the exclusive U.S. development and commercialization rights for INTEGRILIN products from us and paid us a nonrefundable upfront payment of approximately $35.5 million. We will also receive royalties on net product sales of INTEGRILIN in the United States from SGP for so long as SGP is engaged in the commercialization and sale of an INTEGRILIN product in the United States, with the potential of receiving royalties beyond the 2014 patent expiration date. In 2006 and 2007, minimum royalty payments for each year are set at approximately $85.4 million.

In addition, at closing, we recognized strategic alliance revenue of approximately $71.4 million in connection with the sale to SGP of our existing INTEGRILIN raw materials and finished goods inventory and SGP assumed development responsibilities relating to the product. We will continue to manage the supply chain for INTEGRILIN at the expense of SGP for products sold in the SGP territories.

We expect the new relationship to be at least financially equivalent to the former profit share, including the expected revenues and costs savings, while allowing us to participate in the potential upside of the INTEGRILIN product. Strategically, we hope to increase the near term certainty of revenues from INTEGRILIN with the guaranteed minimum royalties, while eliminating the need to further invest our resources into INTEGRILIN sales and marketing and development activities. We expect these changes will enable us to streamline and focus our resources on VELCADE and our pipeline, which are both critical to our continued success.

In addition to our marketed product, VELCADE, we have a number of drug candidates in development. Our business strategy is to develop and commercialize important new medicines through clinical trials and regulatory approvals and to play a significant role in the marketing and sale of many of these products. We plan to develop and commercialize many of our products on our own, but will also seek development and commercial collaborators on favorable terms or when we otherwise believe that doing so would be advantageous to us.

Our Products

VELCADE® (bortezomib) for Injection

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

In March 2005, we received approval from the FDA of our supplemental New Drug Application, or sNDA, for VELCADE for the treatment of patients with multiple myeloma who have received at least one prior therapy, commonly referred to as second line, based on our completed phase III APEX clinical trial. This regulatory decision marks the full approval of the drug and increases the approved market potential of the drug.

The European Commission granted Marketing Authorization for VELCADE for the treatment of multiple myeloma patients who have received at least two prior therapies and have demonstrated disease progression on their most recent therapy in Europe in April 2004. Under this Authorization, a single license was granted to Millennium for marketing VELCADE in the 15 member states of the European Union, plus Norway and Iceland. VELCADE was also approved for marketing in the ten accession member countries when those countries officially joined the European Union on May 1, 2004. VELCADE has also been approved in a number of other countries, including Canada, Switzerland, Argentina, Israel, Bulgaria, Slovenia, South Korea and Mexico, bringing the total number of approved countries to more than 60.

In April 2005, our collaborator, Ortho Biotech Products, L.P., a member of the Johnson & Johnson family of companies, or Ortho Biotech, received approval from the European Commission for VELCADE as a monotherapy for multiple myeloma patients who have received at least one prior therapy and who have already undergone or are unsuitable for bone marrow transplantation.

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

Ortho Biotech Collaboration

In June 2003, we entered into an agreement with Ortho Biotech to collaborate on the commercialization and continued clinical development of VELCADE. Under the terms of the agreement, we retain all commercialization rights to VELCADE in the United States. Ortho Biotech and its affiliate, Janssen-Cilag, have agreed to commercialize VELCADE outside of the United States and Janssen Pharmaceutical K.K. is responsible for Japan. We receive distribution fees from Ortho Biotech and its affiliates from sales of VELCADE outside of the United States. We also retain an option to co-promote VELCADE with Ortho Biotech at a future date in specified European countries.

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

INTEGRILIN® (eptifibatide) Injection

Through August 31, 2005, we co-promoted INTEGRILIN in the United States in collaboration with SGP, and shared profits and losses. As of September 1, 2005, SGP markets INTEGRILIN in the United States and specified other areas outside of the European Union. GlaxoSmithKline plc, or GSK, markets INTEGRILIN in the European Union under a license from us.

SGP Collaboration

In April 1995, COR Therapeutics, Inc., or COR, entered into a collaboration agreement with SGP to jointly develop and commercialize INTEGRILIN on a worldwide basis. We acquired COR in February 2002.

Under our amended collaboration agreement with SGP, we will receive royalties on sales of INTEGRILIN in the United States and other specified territories outside of the European Union. Additionally, SGP will reimburse us for manufacturing-related costs for INTEGRILIN.

Under our original agreement with SGP, we generally shared any profits or losses from sales in the United States with SGP based on the amount of promotional efforts that each party contributed. Since the United States launch of INTEGRILIN in June 1998, we agreed to share promotional efforts in the United States equally with SGP, except for costs associated with marketing programs specific to us.

GSK License Agreement

In June 2004, we reacquired the rights to market INTEGRILIN in Europe from SGP and concurrently entered into a license agreement granting GSK exclusive marketing rights to INTEGRILIN in Europe. In January 2005, the transition of the INTEGRILIN marketing authorizations for the European Union from SGP to GSK was completed, and GSK began selling INTEGRILIN in the countries of the European Union. GSK also markets INTEGRILIN in other European countries where it has received approval of the transfer from SGP to GSK of the relevant marketing authorizations. Our commercialization alliance with GSK is designed to provide significant sales and marketing support from GSK to address market opportunities for INTEGRILIN in Europe. Under the terms of the agreement, we are entitled to license fees and royalties from GSK on INTEGRILIN sales in Europe subject to the achievement of specified objectives.

Under the license agreement with GSK, decisions regarding the ongoing marketing of INTEGRILIN are generally subject to the oversight of a joint steering committee with equal membership from GSK and us. However, GSK has significant final decision-making authority with respect to European marketing issues. Our agreement with GSK continues until the later of December 31, 2014, or as long as GSK continues to commercialize INTEGRILIN in any European country.

Critical Accounting Policies and Significant Judgments and Estimates

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

While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements included in our Form 10-K, filed with the SEC on March 8, 2005, we believe the following accounting policies are most critical to aid in fully understanding and evaluating our reported financial results.

Revenue

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

We recognize revenue from the sales of VELCADE in the United States when delivery has occurred and title has transferred to the wholesalers. We record allowances as a reduction to product sales for product returns, chargebacks and discounts at the time of sale. As VELCADE is a fairly new product, we estimate product returns based on historical return patterns as they become available. VELCADE returns are expected to be generally low because the shelf life for the product is 18 months in the United States and we expect wholesalers not to significantly stock inventory due to the expensive nature of the product. Additionally, we consider several factors in our estimation process including our internal sales forecasts, inventory levels as provided by wholesalers and third-party market research data. During the fourth quarter of 2004, we began distributing VELCADE through a sole-source distribution model. As we continually monitor actual product returns and inventory levels in the domestic distribution channel, we have and may, from time to time, reduce our product returns estimate. Doing so would result in increased product sales at the time the return estimate is changed. If circumstances change or conditions become more competitive in the market for therapeutic products that address multiple myeloma, we may take actions to increase our product return estimates. Doing so would result in an incremental reduction of product sales at the time the return estimate is changed. Accruals for rebates, chargebacks, and other discounts are immaterial.

Through August 31, 2005, we recognized co-promotion revenue based on SGP’s reported shipments of INTEGRILIN to wholesalers. Co-promotion revenue included our share of the profits from the sales of INTEGRILIN, reimbursements of our manufacturing-related costs, development costs and advertising and promotional expenses. We communicated with SGP to calculate our share of the profits from the sales of INTEGRILIN on a monthly basis. The calculation included estimates of the amount of advertising and promotional expenses and other costs incurred on a monthly basis. Adjustments to our estimates were based upon actual information that we received subsequent to our reporting deadlines. Our estimates were adjusted on a monthly basis and historically have not been significant due to periodic communication with SGP.

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

	•		ratably over the development period if development risk is significant;

	•		ratably over the manufacturing period or estimated product useful life if development risk has been substantially eliminated; or

	•		based upon the level of research services performed during the period of the research contract.

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

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

We are entitled to receive royalty payments under license agreements with a number of third parties that sell products based on technology we have developed or to which we have rights. These license agreements provide for the payment of royalties to us based on sales of the licensed product. Beginning September 1, 2005, upon closing the amended collaboration agreement with SGP, we record royalty revenues based on estimates of sales from interim data provided by licensees. Revenue is recorded in the period in which it is earned. Going forward, we will perform an analysis of historical royalties we have been paid, adjusted for any changes in facts and circumstances, as appropriate. Differences between actual royalty revenues and estimated royalty revenues will be adjusted for in the period which they become known, typically the following quarter. We do not expect these adjustments to be significant. To the extent we do not have sufficient ability to accurately estimate royalty revenue, we will record royalties on a cash basis.

Inventory

Inventory consists of currently marketed products and from time to time product candidates awaiting regulatory approval which were capitalized based upon management’s judgment of probable near-term commercialization. We assess the probability of commercialization based upon several factors including estimated launch date, time to manufacture and shelf life. At September 30, 2005 and December 31, 2004, inventory does not include amounts for products that have not been approved for sale. Inventories primarily represent raw materials used in production, work in process and finished goods inventory on hand, valued at cost for VELCADE, raw material used in production and work in process for INTEGRILIN to supply GSK and limited amounts of work in process for INTEGRILIN to supply SGP. Inventories are reviewed periodically for slow-moving or obsolete status based on sales activity, both projected and historical. Our current sales projections provide for full utilization of the inventory balance. If product sales levels differ from projections or a launch of a new product is delayed, inventory may not be fully utilized and could be subject to impairment, at which point we would record a reserve to adjust inventory to its net realizable value.

Intangible Assets

We have acquired significant intangible assets that we value and record. Those assets which do not yet have regulatory approval and for which there are no alternative uses are expensed as acquired in-process research and development, and those that are specifically identified and have alternative future uses are capitalized. We use a discounted cash flow model to value intangible assets at acquisition. The discounted cash flow model requires assumptions about the timing and amount of future cash inflows and outflows, risk, the cost of capital, and terminal values. Each of these factors can significantly affect the value of the intangible asset. We engage independent valuation experts who review our critical assumptions for significant acquisitions of intangibles. We review intangible assets for impairment on a periodic basis using an undiscounted net cash flows approach when impairment indicators arise. If the undiscounted cash flows of an intangible asset are less than the carrying value of an intangible asset, the intangible asset is written down to the discounted cash flow value. Where cash flows cannot be identified for an individual asset, the review is applied at the lowest group level for which cash flows are identifiable.

Goodwill

On October 1, 2005, we performed our annual goodwill impairment test and determined that no impairment existed on that date. However, since the date of acquisition of COR, which generated a significant amount of goodwill, we have experienced a significant decline in market capitalization due to a decline in stock price. We continually monitor business and market conditions to assess whether an impairment indicator exists. If we were to determine that an impairment indicator exists, we would be required to perform an impairment test which could result in a material impairment charge to our statement of operations.

Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123R (revised 2004), “Share-Based Payment—An Amendment of FASB Statements No. 123 and 95,” or SFAS No. 123R. SFAS No. 123R requires companies to calculate and record in the income statement the cost of equity instruments, such as stock options or restricted stock, awarded to employees for services received. The cost of the equity instrument is to be measured based on the fair value of the instruments on the date they are granted and is required to be recognized over the period during which the employees are required to provide services in exchange for the equity instruments. SFAS No. 123R is effective at the beginning of the first fiscal year beginning after June 15, 2005, or January 1, 2006.

SFAS No. 123R provides two alternatives for adoption:

	•		a “modified prospective” method in which compensation cost is recognized for all awards granted subsequent to the effective date of the statement as well as for the unvested portion of awards outstanding as of the effective date; and

	•		a “modified retrospective” method which follows the approach in the “modified prospective” method, but also permits entities to restate prior periods to record compensation cost calculated under SFAS No. 123 for pro forma disclosure.

We plan to adopt SFAS No. 123R using the modified prospective method. As permitted by SFAS No. 123, we currently account for share-based payments to employees using APB 25 intrinsic value method and, as such, generally recognize no compensation cost for employee stock options. Accordingly, the adoption of SFAS No. 123R’s fair value method will have a significant impact on our result of operations, although it will have no impact on our overall financial position. We cannot

accurately estimate at this time the impact of adopting SFAS No. 123R as it will depend on our market price, our assumptions used and levels of share-based payments granted in future periods. However, had we adopted SFAS No. 123R in a prior period, the impact would approximate the impact of SFAS No. 123 as described in the disclosure of pro forma net loss and loss per share in Note 2 to our condensed consolidated financial statements.

Results of Operations

(dollars in thousands, except per share amounts)

Net Loss and Loss per Share

	Three Months Ended September 30,							Nine Months Ended September 30,
	2005			2004			% Change	2005			2004			% Change

Net loss	$	(73,805	)	$	(63,094	)	17%	$	(154,330	)	$	(157,590	)	(2)%

Amounts per common share:
Net loss per share, basic and diluted	$	(0.24	)	$	(0.21	)	14%	$	(0.50)		$	(0.52	)	(4)%

Net loss and loss per share for the three months ended September 30, 2005, or the 2005 Three Month Period, increased from the comparable period in 2004 primarily due to larger restructuring charges, partially offset by increased product-related revenue and decreased research and development expenses. Net loss and loss per share for the nine months ended September 30, 2005, or the 2005 Nine Month Period, decreased slightly from the comparable period in 2004 primarily due to decreased research and development expense and higher product-related revenue, partially offset by the 2004 gain on sale of equity investment in a joint venture and increased restructuring charges.

Revenues

	Three Months Ended September 30,					Nine Months Ended September 30,
	2005		2004		% Change	2005		2004		% Change

Revenues:
Net product sales	$	50,942	$	37,668	35%	$	139,629	$	102,288	37%
Co-promotion revenue		33,037		62,557	(47)		123,524		159,034	(22)
Revenue under strategic alliances		105,186		9,749	979		160,368		86,537	85
Royalties		12,514		—	—		12,514		—	—

Total revenues	$	201,679	$	109,974	83%	$	436,035	$	347,859	25%

Total revenues increased 83% to $201.7 million during the 2005 Three Month Period and 25% to $436.0 million during the 2005 Nine Month Period, from the comparable periods in 2004. The increases are primarily due to one-time payments from certain of our collaborators, including the one-time sale of existing INTEGRILIN inventory to SGP and increased net product sales of VELCADE.

Net product sales of VELCADE increased 35% to $50.9 million in the 2005 Three Month Period and 37% in the 2005 Nine Month Period from the comparable periods in 2004. Reserves for product returns, chargebacks and discounts represent approximately 5.0% to 6.0% of gross product sales for all periods presented. Product sales from VELCADE represent approximately 25% of our total revenues in the 2005 Three Month Period and 32% of total revenue in the 2005 Nine Month Period.

Co-promotion revenue, based on sales of INTEGRILIN, decreased 47% in the 2005 Three Month Period and 22% in the 2005 Nine Month Period from the comparable periods in 2004. Co-promotion revenue includes only two months of activity in the 2005 Three Month Period and eight months of activity for the 2005 Nine Month Period. As of September 1, 2005, we are no longer reporting co-promotion revenue due to our restructured relationship with SGP.

Revenue under strategic alliances increased to $105.2 million during the 2005 Three Month Period and to $160.4 million during the 2005 Nine Month Period from the comparable periods in 2004 primarily due to the one-time sale of existing INTEGRILIN inventory to SGP of approximately $71.4 million and several other milestones and reimbursements under certain of our strategic alliances.

We expect revenue under strategic alliances to fluctuate depending on the level of revenues earned for ongoing development efforts, the level of milestones achieved and the number of alliances we may enter into in the future with major pharmaceutical companies.

Beginning, September 1, 2005, in connection with the closing of our transaction with SGP, we now record royalty revenue. Royalty revenue may include royalties earned upon sales of INTEGRILIN in the United States and other territories around the world as provided by SGP, royalties earned upon sales of INTEGRILIN in Europe as provided by GSK, distribution fees earned upon sales outside of the United States of VELCADE as provided by Ortho Biotech and any royalties earned under certain of our early discovery alliances. During the 2005 Three Month Period, we recorded $12.5 million of royalty revenue which primarily included royalties from SGP and Ortho Biotech.

Costs and Expenses

	Three Months Ended September 30,						Nine Months Ended September 30,
	2005		2004			% Change	2005		2004		% Change

Costs and expenses:
Cost of sales	$	89,020	$	18,630		378%	$	120,281	$	52,462	129%
Research and development		80,632		98,961		(19)		253,725		299,621	(15)
Selling, general and administrative		40,623		45,903		(12)		144,320		137,500	5
Restructuring		58,791		(414	)	14,301		62,897		36,370	73
Amortization of intangibles		8,500		8,378		1		25,500		25,134	1

Total costs and expenses	$	277,566	$	171,458		62%	$	606,723	$	551,087	10%

Cost of Sales

Cost of sales increased in each of the 2005 Three and Nine Month Periods from the comparable periods in 2004. Cost of sales includes manufacturing-related expenses associated with the sales of VELCADE and INTEGRILIN. The increase in both periods is primarily attributable to the one-time sale of existing INTEGRILIN inventory to SGP on September 1, 2005.

Research and Development

Research and development expenses decreased 19% in the 2005 Three Month Period and 15% in the 2005 Nine Month Period from the comparable periods in 2004. The decreases in both periods primarily reflect the decreased spending in our discovery organization, a decrease in development spending for INTEGRILIN and VELCADE, as well as our continued focus on resource management and allocation. In 2004, we were preparing for the sNDA filing for VELCADE in the multiple myeloma second-line treatment setting, which resulted in higher research and development spending. We expect research and development expenses to decrease in 2006 due to our 2005 strategy refinement.

In addition to our ongoing clinical trials of VELCADE, we have a number of drug candidates in late preclinical and clinical development. In August 2005, as part of our annual portfolio review, based on a variety of considerations to determine appropriate compound and resource prioritization, we decided to discontinue our phase I clinical trial of MLN2222. The following chart summarizes the applicable disease indication and the clinical or preclinical trial status of these drug candidates.

Product Description	Disease Indication	Current Trial Status

*Cancer*
MLN2704 is a targeting monoclonal antibody vehicle conjugated to toxin DM1	Prostate cancer	phase I/phase II

MLN518 is a small molecule inhibitor of the Receptor Tyrosine Kinases, or RTK, including FLT-3, PDGF-R and c-KIT	Acute myeloid leukemia	phase I/phase II

MLN8054 is a small molecule inhibitor of the Aurora kinase	Advanced malignancies	phase I

*Inflammatory Diseases*
MLN1202 is a humanized monoclonal antibody directed against CCR2	Rheumatoid arthritis Multiple sclerosis Secondary atherosclerosis Scleroderma	phase IIa phase IIa phase IIa phase IIa planned

MLN3897 is a small molecule CCRI inhibitor	Chronic inflammatory diseases such as rheumatoid arthritis	phase I with phase IIa planned

MLN02 is a humanized monoclonal antibody directed against the alpha4ß7 receptor	Crohn's disease Ulcerative colitis	preclinical with prior phase II data preclinical with prior phase II data

Product Description	Disease Indication	Current Trial Status

MLN3701 is a small molecule CCR1 inhibitor, backup to MLN3897	Chronic inflammatory diseases such as rheumatoid arthritis	preclinical with phase I planned

MLN0415 is a small molecule inhibitor of IKKB	Inflammatory diseases	preclinical

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

We estimate that clinical trials in our areas of focus are typically completed over the following timelines:

Clinical Phase	Objective	Estimated Completion Period

Phase I	Establish safety in humans, study how the drug works, metabolizes and interacts with other drugs	1-2 years

Phase II	Evaluate efficacy, optimal dosages and expanded evidence of safety	2-3 years

Phase III	Confirm efficacy and safety of the product	2-3 years

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

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

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

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

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

Selling, General and Administrative

Selling, general and administrative expenses decreased 12% in the 2005 Three Month Period from the comparable period in 2004. The decrease is primarily the result of reduced sales and marketing expenses associated with the transfer of the U.S.

commercialization rights to INTEGRILIN to SGP. Selling, general and administrative expenses increased 5% in the 2005 Nine Month Period from the comparable period in 2004. This increase is primarily the result of our investment to improve our commercial productivity and growth prospects, including increased sales and marketing spending associated with the launch of VELCADE in its new indication, partially offset by the decreased sales and marketing expenses subsequent to September 1, 2005 described above.

Restructuring

On October 26, 2005, we announced our 2005 strategy refinement focused on growing VELCADE in its existing indication and in new uses, accelerating the development of our oncology and inflammation molecules, and strengthening our oncology discovery organization. As part of our refined strategy, we have taken and will continue to take a series of steps, building on our restructured relationship with SGP, which together are expected to reduce operating expenses in 2006. We plan to reduce the size of our company from 1,500 employees at the end of 2004 to approximately 1,100 employees by the end of 2005, by managing attrition, eliminating INTEGRILIN sales and marketing positions, and reducing the number of positions in inflammation discovery and in business support groups. In addition, we are further consolidating our Cambridge-based facilities.

In December 2002 and June 2003, we took steps as part of our 2003 restructuring plan to focus our resources on drug development and commercialization. Our restructuring plan included consolidation of research and development facilities, overall headcount reduction and streamlining of discovery and development projects.

We adopted SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS No. 146”) in December 2002. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at its fair value in the period in which the liability is incurred, except for one-time termination benefits that meet specified requirements. Costs of termination benefits relate to severance packages, out-placement services and career counseling for employees affected by the restructuring.

In accordance with SFAS No. 146, our facilities related expenses and liabilities under both the 2005 and 2003 restructuring plans include estimates of the remaining rental obligations, net of estimated sublease income, for facilities we no longer occupy. We validate our estimates and assumptions with independent third parties having relevant expertise. We review our estimates and assumptions on a regular basis, until the outcome is finalized, and make whatever modifications we believe necessary, based on our best judgment, to reflect any changed circumstances. It is possible that such estimates could change in the future resulting in additional adjustments, and the effect of any such adjustments could be material.

During the 2005 Three Month Period, we recorded a total of $58.8 million of restructuring charges under the 2005 strategy refinement and our 2003 restructuring plan. We recorded restructuring charges of approximately $28.2 million under the 2005 restructuring plan primarily related to the remaining rental obligation, net of sublease income, of a facility we vacated during September 2005 and employee termination benefits for approximately 180 employees affected by the transfer of the U.S. commercialization rights to SGP. Based upon our continuing review of current real estate market conditions, we recorded an additional $30.6 million primarily reflecting changes in our estimate of the length of time it would take to sublease certain properties vacated under the 2003 restructuring plan.

Under the 2005 restructuring plan, we expect to record additional restructuring charges for termination benefits for employees notified in October 2005 and remaining rental obligations due to facilities that will be vacated through 2006, as well as the write-down of leasehold improvements at such facilities. We expect total restructuring charges under the 2005 restructuring plan to be between approximately $75.0 million and $85.0 million, including the $28.2 million recorded in the 2005 Three Month Period.

Amortization of Intangibles

Amortization of intangible assets was $8.5 million in the 2005 Three Month Period and $25.5 million in the 2005 Nine Month Period, relatively unchanged from the comparable periods in 2004. Amortization in 2005 and 2004 primarily relates to specifically identified intangible assets from the COR acquisition. We will continue to amortize the specifically identified intangible assets from our COR acquisition through 2015. We expect to incur amortization expense of approximately $35.0 million for each of the next five years.

Other income (expense)

	Three Months Ended September 30,							Nine Months Ended September 30,
	2005			2004			% Change	2005			2004			% Change

Other income (expense):
Investment income, net	$	4,902		$	1,115		340%	$	24,081		$	13,650		76%
Interest expense		(2,820	)		(2,725	)	3		(7,723	)		(8,012	)	(4)
Gain on sale of equity interest in joint venture		—			—		—		—			40,000		(100)

Total other income (expense)	$	2,082		$	(1,610	)	229%	$	16,358		$	45,638		(64)%

Investment Income

Investment income increased 340% in the 2005 Three Month Period and 76% in the 2005 Nine Month Period from the comparable periods in 2004. The increase in the 2005 Three Month Period is primarily attributable to higher realized losses in the 2004 Three Month Period. The increase in the 2005 Nine Month Period is primarily attributable to the realized gain of approximately $10.5 million recognized upon the sale of our cost method investment in TransForm Pharmaceuticals, Inc., or TransForm. We expect to record an additional realized gain of up to approximately $2.8 million in the second half of 2006 upon the final settlement and receipt of the escrowed portion of the sale proceeds.

Interest Expense

Interest expense increased 3% in the 2005 Three Month Period and decreased 4% in the 2005 Nine Month Period.

Gain on Sale of Equity Interest in Joint Venture

Through our acquisition of LeukoSite, we became a party to a joint venture partnership, Millennium and ILEX Partners, L.P., or M&I, for development of Campath® (alemtuzumab) humanized monoclonal antibody. We sold our equity interest in M&I and in consideration for the sale, we received an initial payment of $20.0 million in December 2001. During each of the second quarters of 2003 and 2002, we recorded additional gains of $40.0 million on our sale of this equity interest based upon the achievement of predetermined sales targets of Campath. During the first quarter of 2004, we recorded the final $40.0 million gain related to our sale of this equity interest based upon the achievement of predetermined 2004 sales targets of Campath. We will be entitled to additional payments from ILEX’s successor, Genzyme Corporation, if sales of Campath in the United States after 2004 exceed specified annual thresholds. However, we currently do not expect that these thresholds will be achieved and therefore, we are unlikely to receive future additional payments related to Campath.

Liquidity and Capital Resources

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

We have funded our cash requirements primarily through the following:

	•		our co-promotion relationship with SGP for the sale of INTEGRILIN;

	•		product sales of VELCADE;

	•		payments from our strategic collaborators, including equity investments, license fees, milestone payments and research funding; and

	•		equity and debt financings in the public markets.

In the future, we expect to continue to fund our cash requirements from some of these sources as well as from sales of other products, subject to receiving regulatory approval. We are entitled to additional committed research and development funding under some of our strategic alliances. We believe the key factors that could affect our internal and external sources of cash are:

	•		revenues and margins from sales of VELCADE, INTEGRILIN and other products and services for which we may obtain marketing approval in the future or which are sold by companies that may owe us royalty, milestone, distribution or other payments on account of such products;

	•		the success of our clinical and preclinical development programs;

	•		our ability to enter into additional strategic collaborations and to maintain existing and new collaborations as well as the success of such collaborations; and

	•		the receptivity of the capital markets to financings by biopharmaceutical companies generally and to financings by our company specifically.

As of September 30, 2005 we had $655.2 million in cash, cash equivalents and marketable securities. This excludes $9.6 million of interest-bearing marketable securities classified as restricted cash on our balance sheet as of September 30, 2005, which primarily serve as collateral for letters of credit securing leased facilities.

	September 30, 2005		December 31, 2004
(in thousands)
Cash, cash equivalents and marketable securities	$	655,154	$	700,407
Working capital		605,011		660,751

	Nine Months Ended September 30,
	2005			2004
Cash provided by (used in):
Operating activities	$	(45,168	)	$	(126,937	)
Investing activities		82,643			66,121
Financing activities		8,092			10,661
Capital expenditures (included in investing activities above)		(8,561	)		(34,519	)

Cash Flows

The principal use of cash in operating activities in both 2005 and 2004 was to fund our net loss. In September 2005, we received approximately $85.5 million from SGP, consisting of the upfront license fee associated with the U.S. commercialization rights for INTEGRILIN, as well as payment for the one-time sale of existing INTEGRILIN raw materials inventory. In January 2005, we paid SGP approximately $49.3 million for advances SGP had made to COR for inventory purchases in prior years. Cash flows from operations can vary significantly due to various factors including changes in accounts receivable, as well as changes in accounts payable and accrued expenses. The average collection period of our accounts receivable can vary and is dependent on various factors, including the type of revenue and the payment terms related to those revenues.

Investing activities provided cash of $82.6 million in the 2005 Nine Month Period and $66.1 million in the comparable period in 2004. The principal source of funds during both the 2005 Nine Month Period and in the comparable period in 2004 was from the proceeds from sales and maturities of marketable securities. In April 2005, we recorded a realized gain of approximately $10.5 million upon the sale of our cost method investment in TransForm. We expect to record an additional realized gain of up to approximately $2.8 million in the second half of 2006 upon the final settlement and receipt of the escrowed portion of the sale proceeds. The decrease in capital expenditures from the 2004 Nine Month Period is a result of less leasehold improvements in 2005.

Financing activities provided cash of $8.1 million in the 2005 Nine Month Period and $10.7 million in the comparable period in 2004. The principal source was from the sales of common stock to our employees. We used cash in financing activities to make principal payments on our capital leases.

We believe that our existing cash and cash equivalents and the anticipated cash payments from our product sales, co-promotion revenue, current strategic alliances and royalties will be sufficient to support our expected operations, fund our debt service and capital lease obligations and fund our capital commitments for at least the next several years.

Contractual Obligations

There have been no significant changes, other than in January 2005, we paid SGP approximately $49.3 million for advances SGP had made to COR for inventory purchases in prior years, to our contractual obligations and commercial commitments included in our Form 10-K as of December 31, 2004.

As of September 30, 2005, we did not have any financing arrangements that were not reflected in our balance sheet.

RISK FACTORS THAT MAY AFFECT RESULTS

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

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

Regulatory Risks

Our business may be harmed if we do not obtain approval to market VELCADE for additional therapeutic uses.

An important part of our strategy to grow our business is to market VELCADE for additional indications. To do so, we will need to successfully conduct clinical trials and then apply for and obtain the appropriate regulatory approvals. If we are unsuccessful in our clinical trials, or we experience a delay in obtaining or are unable to obtain authorizations for expanded uses of VELCADE, our revenues may not grow as expected and our business and operating results will be harmed.

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

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

We may not be able to obtain marketing approval for products resulting from our development efforts and we may face challenges to the exclusivity of our marketing approvals.

The products that we are developing require research and development, extensive preclinical studies and clinical trials and regulatory approval prior to any commercial sales. This process is expensive and lengthy, and can often take a number of years. In some cases, the length of time that it takes for us to achieve various regulatory approval milestones affects the payments that we are eligible to receive under our strategic alliance agreements.

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

In some cases, we may experience challenges to the extension of exclusivity of our marketing approval. For example, with respect to INTEGRILIN, regulatory authorities in Luxembourg instituted a claim to reduce the effective term of supplemental protection certificates for INTEGRILIN in the European Community from 2014 to 2012. That claim was denied

by the court of first instance in Europe. That denial was appealed to the European Court of Justice. In April 2005 the European Court of Justice decided against us and the term of the supplemental protection certificates covering INTEGRILIN can now be shortened to 2012 in any particular European Community Member State in which a subsequent action requesting enforcement of the appellate decision was filed and decided against us. Shortening of such term could allow earlier generic competition in any such Member State.

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

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

We are a party to collaborations that transfer responsibility for specified regulatory requirements, such as filing and maintenance of marketing authorizations and safety reporting to our collaborators. If our collaborators do not fulfill these regulatory obligations, products, including VELCADE or INTEGRILIN, could be withdrawn from the market, which would have a material adverse effect on our business.

Some of our products may be based on new technologies which may affect our ability or the time we require to obtain necessary regulatory approvals.

Products that result from our research and development programs may be based on new technologies and new therapeutic approaches that have not been extensively tested in humans. The regulatory requirements governing these types of products may be more rigorous than for conventional products. As a result, we may experience a longer regulatory process in connection with any products that we develop based on these new technologies or new therapeutic approaches.

Risks Relating to Our Business, Strategy and Industry

Our revenues over the next several years will be materially dependent on the commercial success of VELCADE and INTEGRILIN.

Our revenues over the next several years will be materially dependent on the commercial success of our two currently marketed products: VELCADE and INTEGRILIN. VELCADE was approved by the FDA in May 2003 and commercially launched in the United States shortly after that date. Marketing of VELCADE outside the United States commenced in April 2004. INTEGRILIN has been on the market in the United States since June 1998. Marketing of INTEGRILIN outside the United States commenced in mid-1999.

Because of the recent introduction of VELCADE, we have limited experience as to the sales levels of this product. Our business plan contemplates obtaining marketing authorization to sell VELCADE in many countries for the treatment of all patients with multiple myeloma and both in the United States and abroad for other indications. We will be adversely affected if VELCADE does not receive such approvals.

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

	•		we do not obtain regulatory approval to sell VELCADE in additional countries or for additional therapeutic uses;

	•		physicians reduce prescribing INTEGRILIN for its current indications or fail to use INTEGRILIN earlier in treatment and in the PCI setting; or

	•		the sales of VELCADE or INTEGRILIN do not meet our expectations.

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

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

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

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

Other competitive factors that could negatively affect INTEGRILIN include:

	•		expanded use of heparin replacement therapies, such as Angiomax(R)(bivalirudin), which is produced and sold by The Medicines Company;

	•		changing treatment practices for PCI and ACS based on new technologies, including the use of drug-coated stents;

	•		increased use of another class of anti-platelet drugs known as ADP inhibitors in patients whose symptoms make them potential candidates for treatment with INTEGRILIN; and

	•		inability to complete clinical trials and develop data to promote increased use of INTEGRILIN in its current indications as well as in new indications.

Sales of INTEGRILIN and possibly VELCADE in particular reporting periods may be affected by fluctuations in inventory, allowances and buying patterns.

A significant portion of INTEGRILIN domestic pharmaceutical sales is made by SGP to major drug wholesalers. These sales are affected by fluctuations in the buying patterns of these wholesalers and the corresponding changes in inventory levels maintained by them. Inventory levels held by these wholesalers may fluctuate significantly from quarter to quarter. If these wholesalers build inventory levels excessively in any quarter, sales to the wholesalers in future quarters may unexpectedly decrease notwithstanding steady prescriber demand. Because SGP commercializes the product and manages product distribution, we have limited insight into or control over forces affecting changes in distributor inventory levels. If SGP does not appropriately manage this distribution, we and SGP may not realize sales goals for the product and increased returns could reduce the revenue we recognize and adversely affect our business.

We distribute VELCADE in the U.S. through a sole-source distribution model, where we sell directly to a third party who in turn distributes to the wholesaler base. Our VELCADE product inventory levels may fluctuate from time to time depending on the consistency of the distribution logistics of this arrangement and the buying patterns of these wholesalers.

Additionally, we and our commercial collaborators make provisions at the time of sale of both VELCADE and INTEGRILIN for all discounts, rebates and estimated sales allowances based on historical experience updated for changes in facts and circumstances, as appropriate. To the extent these allowances are incorrect, we may need to adjust our estimates, which could have a material impact on the timing and actual revenue we are able to recognize from these sales.

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

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

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

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

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

We may not complete our planned preclinical or clinical trials on schedule or at all. We may not be able to confirm the safety and efficacy of our potential drugs in long-term clinical trials, which may result in a delay or failure to commercialize our products. A number of additional events could delay the completion of our clinical trials, including conditions imposed on us by the FDA or foreign regulatory authorities regarding the scope or design of our clinical trials, lower than anticipated retention rates for patients in our clinical trials, insufficient supply or deficient quality of our product candidates or other materials necessary to conduct our clinical trials or the failure of our third-party contractors to comply with regulatory requirements or otherwise meet their contractual obligations to us in a timely manner. As a result, we may have to expend substantial additional funds to obtain access to resources or delay or modify our plans significantly. Our product development costs will increase if we experience delays in testing or approvals. Significant clinical trial delays could allow our competitors to bring products to market before we do and impair our ability to commercialize our products or potential products.

If third parties on which we rely for clinical trials do not perform as contractually required or as we expect, we may not be able to obtain regulatory approval for or commercialize our product candidates.

We depend on independent clinical investigators and, in some cases, contract research organizations and other third-party service providers to conduct the clinical trials of our product candidates and expect to continue to do so. We rely heavily on these parties for successful execution of our clinical trials, but we do not control many aspects of their activities. Nonetheless, we are responsible for confirming that each of our clinical trials is conducted in accordance with the general investigational plan and protocol. Our reliance on these third parties that we do not control does not relieve us of our responsibility to comply with the regulations and standards of the FDA relating to good clinical practices. Third parties may not complete activities on schedule or may not conduct our clinical trials in accordance with regulatory requirements or the applicable trials plans and protocols. The failure of these third parties to carry out their obligations could delay or prevent the development, approval and commercialization of our product candidates or result in enforcement action against us.

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

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

Because of the high demand for talented personnel within our industry, we could experience delays and/or incur substantial costs to recruit employees necessary for our success and growth.

Because competition for talented employees within our industry is fierce, we may not be successful in hiring, retaining or promptly replacing key management, sales, marketing and technical personnel. Any failure to expediently fill our needs for key personnel could have a material adverse effect on our business.

Risks Relating to Our Financial Results and Need for Financing

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

We have incurred net losses of $73.8 million and $63.1 million for the three months ended September 30, 2005 and 2004, respectively, net losses of $154.3 million and $157.6 million for the nine months ended September 30, 2005 and 2004, respectively, net losses of $252.3 million for the year ended December 31, 2004, net losses of $483.7 million for the year ended December 31, 2003 and net losses of $590.2 million for the year ended December 31, 2002. We expect to continue to incur substantial operating losses in future periods. Prior to our acquisition of COR, substantially all of our revenues resulted from payments from collaborators, and not from the sale of products.

We expect to continue to incur significant expenses in connection with our research and development programs and commercialization activities. As a result, we will need to generate significant revenues to help fund these costs and achieve profitability. Our ability to achieve profitability would be adversely impacted if our acquired intangible assets and goodwill, primarily resulting from our acquisition of COR, became impaired as a result of reduced market capitalization or product failures or withdrawals. We cannot be certain whether or when we will become profitable because of the significant uncertainties with respect to our ability to generate revenues from the sale of products and from existing and potential future strategic alliances.

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

We will require substantial funds to conduct research and development, including preclinical testing and clinical trials of our potential products. We will also require substantial funds to meet our obligations to our collaborators, manufacture and market products that are approved for commercial sale, including VELCADE, and meet our debt service obligations. Additional financing may not be available when we need it or may not be available on favorable terms.

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

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

At September 30, 2005, we had approximately $105.5 million of outstanding convertible debt and $82.0 million of capital lease obligations. During each of the last five years, our earnings were insufficient to cover our fixed charges. We will be required to make interest payments on our outstanding convertible notes totaling approximately $8.4 million over the next two years.

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

Our indebtedness could have significant additional negative consequences, including:

	•		increasing our vulnerability to general adverse economic and industry conditions;

	•		limiting our ability to obtain additional financing;

	•		requiring the dedication of a substantial portion of our cash flow from operations to service our indebtedness, thereby reducing the amount of our expected cash flow available for other purposes, including capital expenditures and research and development;

	•		limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; and

	•		placing us at a possible competitive disadvantage to less leveraged competitors and competitors that have better access to capital resources.

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

In December 2002 and June 2003, we announced a restructuring designed to focus our resources on development and commercialization of product opportunities and achieving our goal of becoming profitable in the future. We may not achieve the cost savings anticipated from the restructuring because such savings are difficult to predict and speculative in nature. In 2003, we recorded approximately $191.0 million related to this restructuring and in 2004, we recorded approximately $38.0 million related to this restructuring.

On September 1, 2005, we transferred exclusive U.S. commercialization and development rights of INTEGRILIN to SGP and on October 26, 2005, we announced additional efforts to refine our strategy including a substantial reduction of our inflammation discovery programs. As a result of these 2005 efforts, we expect to reduce total research and development and sales, general and administration expenses by approximately 30 percent in 2006 from 2004, including headcount reductions from approximately 1,500 at the end of 2004 to approximately 1,100 by year end 2005. We expect to incur total restructuring charges of between $75.0 million to $85.0 million related to these 2005 efforts, consisting primarily of facilities costs and employee termination benefits. The majority of these charges will be spread over 2005 and 2006. We recorded $28.2 million of restructuring charges for these 2005 efforts in the third quarter of 2005. We may not achieve our estimated expense reductions because such savings are difficult to predict and speculative in nature.

While we believe our restructuring estimates to be reasonable, it is possible that the actual charges will exceed the ranges discussed above. For example, we may not be able to lease facilities that we have closed or plan to close in connection with the restructuring as quickly or on as favorable terms as we anticipated.

Risks Relating to Collaborators

We depend significantly on our collaborators to work with us to commercialize and develop products including VELCADE and INTEGRILIN.

Outside of the United States, we commercialize VELCADE through an alliance with Ortho Biotech. On September 1, 2005, we transferred exclusive U.S. commercialization and development rights of INTEGRILIN to SGP and SGP is solely responsible for the commercialization and development of INTEGRILIN outside of Europe. GSK is responsible for marketing and selling INTEGRILIN in Europe. We conduct substantial discovery and development activities through strategic alliances, including with Ortho Biotech for the ongoing development of VELCADE. We expect to enter into additional alliances in the future, especially in connection with product commercialization. The success of our alliances depends heavily on the efforts and activities of our collaborators.

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

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

	•		All of our strategic alliance agreements are for fixed terms and are subject to termination under various circumstances, including, in many cases, such as in our collaboration with Ortho Biotech, without cause.

	•		Our collaborators may change the focus of their development and commercialization efforts. Pharmaceutical and biotechnology companies historically have re-evaluated their development and commercialization priorities following mergers and consolidations, which have been common in recent years in these industries. The ability of some of our products to reach their potential could be limited if our collaborators decrease or fail to increase marketing or spending efforts related to such products.

	•		We expect to rely on our collaborators to manufacture many products covered by our alliances.

	•		In our strategic alliance agreements, we generally agree not to conduct specified types of research and development in the field that is the subject of the alliance. These agreements may have the effect of limiting the areas of research and development that we may pursue, either alone or in collaboration with third parties.

	•		Our collaborators may develop and commercialize, either alone or with others, products that are similar to or competitive with the products that are the subject of the alliance with us.

	•		Our collaborators may not properly maintain or defend our intellectual property rights or may use our proprietary information in such a way as to expose us to potential litigation.

We are substantially dependent on SGP for future revenues related to INTEGRILIN.

Under the terms of our revised agreement with SGP effective as of September 1, 2005, SGP will pay us royalties over the U.S. lifespan of INTEGRILIN based on product sales. In 2006 and 2007, minimum royalty payments for each year are set at $85.4 million, with some conditions that could reduce these minimums. If SGP’s INTEGRILIN sales after 2007 are less than expected, we will receive less royalty revenue than we expect which would have a material adverse effect on our ability to fund other parts of our business.

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

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

Risks Relating to Intellectual Property

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

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

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

	•		obtain patents;

	•		obtain licenses to the proprietary rights of others on commercially reasonable terms;

	•		operate without infringing upon the proprietary rights of others;

	•		prevent others from infringing on our proprietary rights; and

	•		protect trade secrets.

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

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

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

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

Our MLN02 and MLN1202 product candidates are humanized monoclonal antibodies. Our product candidate MLN2704 also includes a recombinant antibody. We are aware of third-party patents and patent applications that relate to humanized or modified antibodies, products useful for making humanized or modified antibodies and processes for making and using recombinant antibodies. With respect to MLN2704, we are also aware of third-party patent applications relating to anti-PSMA antibodies.

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

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

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

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

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

Our patent protection for any compounds that we seek to develop may be limited to a particular method of use or indication such that, if a third party were to obtain approval of the compound for use in another indication, we could be subject to competition arising from off-label use.

Although we generally seek the broadest patent protection available for our proprietary compounds, we may not be able to obtain patent protection for the actual composition of any particular compound and may be limited to protecting a new method of use for the compound or otherwise restricted in our ability to prevent others from exploiting the compound. If we are unable to obtain patent protection for the actual composition of any compound that we seek to develop and commercialize and must rely on method of use patent coverage, we would likely be unable to prevent others from manufacturing or marketing that compound for any use that is not protected by our patent rights. If a third party were to receive marketing approval for the compound for another use, physicians could nevertheless prescribe it for indications that are not described in the product’s labeling or approved by the FDA or other regulatory authorities. Even if we have patent protection of the prescribed indication, as a practical matter, we would have little recourse as a result of this off-label use. In that event, our revenues from the commercialization of the compound would likely be adversely affected.

If we fail to comply with our obligations in our intellectual property licenses with third parties, we could lose license rights that are important to our business.

We are a party to various license agreements. In particular, we license rights to patents for the formulation of VELCADE, issued U.S. patents covering MLN2704 and issued patents relating to MLN518 and MLN1202. We may enter into additional licenses in the future. Our existing licenses impose, and we expect future licenses will impose, various diligence, milestone payment, royalty, insurance and other obligations on us. If we fail to comply with these obligations, the licensor may have the right to terminate the license, in which event we might not be able to market any product that is covered by the licensed patents.

Risks Relating to Product Manufacturing, Marketing and Sales

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

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

SGP exclusively markets INTEGRILIN in areas outside of Europe including the United States and GSK exclusively markets INTEGRILIN in Europe. As a result, except for our minimum royalty payments from SGP in 2006 and 2007, our success in receiving royalties and milestone payments from sales of INTEGRILIN depends entirely on the marketing efforts of these third parties.

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

Because we have no commercial manufacturing capabilities, we will continue to be dependent on third-party manufacturers to manufacture products for us, or we will be required to incur significant costs and devote significant efforts to establish our own manufacturing facilities and capabilities.

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

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

There are a limited number of contract manufacturers that operate under the FDA’s good manufacturing practices regulations capable of manufacturing our products. If we are unable to arrange for third-party manufacturing of our products, or to do so on commercially reasonable terms, we may not be able to complete development of our products or commercialize them.

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

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

Because we have no commercial manufacturing capability for VELCADE, we are dependent on third parties to produce product sufficient to meet market demand.

We rely on third-party contract manufacturers to manufacture, fill/finish and package VELCADE for both commercial purposes and for all clinical trials. We have established long-term supply relationships for the production of commercial supplies of VELCADE. We work with one manufacturer, with whom we have a long-term supply agreement, to complete fill/finish for VELCADE. If any of our current third party manufacturers performing production and fill/finish for VELCADE are unable or unwilling to continue performing these services for us and we are unable to find a replacement manufacturer or in the future we are otherwise unable to contract with manufacturers to produce commercial supplies of VELCADE in a cost-effective manner, we could run out of VELCADE for commercial sale and clinical trials and our business could be substantially harmed.

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

We are responsible for managing all clinical and commercial production of INTEGRILIN including INTEGRILIN that SGP and GSK sell or use in clinical trials.

We have no manufacturing facilities for INTEGRILIN and, accordingly, rely on third-party contract manufacturers for the clinical and commercial production of INTEGRILIN. We have two manufacturers that currently provide us with eptifibatide, the active ingredient necessary to make INTEGRILIN. Solvay, one of the current manufacturers, owns the process technology used by it and the other manufacturer for the production of bulk product. As a result, until we have an approved alternative process technology, we will be reliant on these manufacturers. We have one manufacturer that currently performs fill/finish services for INTEGRILIN. We are qualifying a second fill/finish supplier and we have identified an alternative packaging supplier to serve as future sources of supply for the United States. The inability of our current manufacturer to continue its fill/finish services or our inability to secure alternative manufacturers could adversely affect the supply of INTEGRILIN and, thereby, harm our business.

We are seeking approval of an alternate process technology and we are engaged in efforts to enhance the availability of manufacturing capabilities for INTEGRILIN. We cannot quantify the time or expense that may ultimately be required to obtain approval for an alternate process technology, but it is possible that such time or expense could be substantial. Moreover, we may not be able to implement any new process technology successfully.

In order to mitigate the risk of supply interruption, our manufacturing plans and commercialization strategy for INTEGRILIN include the addition of extra capacity for the manufacture of INTEGRILIN as described above. We are currently engaged in finalizing third-party manufacturing arrangements on commercially reasonable terms. We may not be able to do so, and, even if such arrangements are established, if demand for INTEGRILIN does not meet our forecasts, the manufacturing cost could become more expensive on a per unit basis.

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

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

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

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

In both the United States and other foreign jurisdictions, there have been a number of legislative and regulatory proposals to change the health care system. For example, the Medicare Prescription Drug and Modernization Act of 2003 and its implementing regulations impose new requirements for the distribution and pricing of prescription drugs which may affect the marketing of our products. These new requirements have created uncertainty among oncologists and could impact sales levels of VELCADE as oncologists adapt to the new reimbursement model. Further proposals are also likely. The current uncertainty and the potential for adoption of additional proposals could affect the timing of product revenue, our ability to raise capital, obtain additional collaborators and market our products.

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

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

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

Guidelines and recommendations can affect the use of our products.

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

Risks Relating to an Investment in Our Common Stock

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

The trading price of our common stock has been quite volatile, and may be volatile in the future. During 2005, our common stock has traded as high as $13.52 per share and as low as $7.63 per share. Factors such as announcements of our or

our competitors’ operating results, data from our competitors’ clinical trial results, changes in our prospects, market conditions for biopharmaceutical stocks in general and analyst recommendations could have a significant impact on the future trading prices of our common stock.

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

	•		product revenues and the rate of revenue growth;

	•		introduction or success of competitive products;

	•		clinical trial results and regulatory developments;

	•		quarterly variations in financial results and guidance to the investment community with respect to future financial results;

	•		business and product market cycles;

	•		fluctuations in customer requirements;

	•		availability and utilization of manufacturing capacity;

	•		timing of new product introductions; and

	•		our ability to develop and implement new technologies.

The price of our securities may also be affected by the estimates and projections of the investment community and our ability to meet or exceed the financial projections we provide to the public. The price may also be affected by general economic and market conditions, and the cost of operations in our product markets. While we cannot predict the individual effect that these factors may have on the price of our securities, these factors, either individually or in the aggregate, could result in significant variations in price during any given period of time. We can not assure you that these factors will not have an adverse effect on the trading price of our common stock.

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

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We manage our fixed income investment portfolio in accordance with our Policy for Securities Investments, or Investment Policy, that has been approved by our Board of Directors. The primary objectives of our Investment Policy are to preserve principal, maintain a high degree of liquidity to meet operating needs, and obtain competitive returns subject to prevailing market conditions. Investments are made primarily in investment-grade corporate bonds with effective maturities of three years or less, asset-backed debt securities and U.S. government agency debt securities. These investments are subject to risk of default, changes in credit rating and changes in market value. These investments are also subject to interest rate risk and will decrease in value if market interest rates increase. A hypothetical 100 basis point increase in interest rates would result in an approximate $10.2 million decrease in the fair value of our investments as of September 30, 2005. However, due to the conservative nature of our investments and relatively short effective maturities of debt instruments, interest rate risk is mitigated. Our Investment Policy specifies credit quality standards for our investments and limits the amount of exposure from any single issue, issuer or type of investment. We do not own derivative financial instruments in our investment portfolio.

As of September 30, 2005, the fair value of our 4.5% notes, 5.0% notes and 5.5% notes approximates their carrying value. The interest rates on our convertible notes and capital lease obligations are fixed and therefore not subject to interest rate risk.

We have no derivative instruments outstanding as of September 30, 2005.

As of September 30, 2005 we did not have any financing arrangements that were not reflected in our balance sheet.

Item 4. Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2005. In designing and evaluating our disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and our management necessarily applied its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our chief executive officer and chief financial officer concluded that as of September 30, 2005, our disclosure controls and procedures were (1) designed to ensure that material information relating to us is made known to our chief executive officer and chief financial officer by others, particularly during the period in which this report was prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended September 30, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHER INFORMATION

Item 6. Exhibits

(a)	Exhibits

	The exhibits listed in the Exhibit Index are included in this report.

SIGNATURES

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

	MILLENNIUM PHARMACEUTICALS, INC. (Registrant)
Dated: November 8, 2005	By	/s/ MARSHA H. FANUCCI

		Marsha H. Fanucci
		Senior Vice President and Chief Financial Officer
		(principal financial and chief accounting officer)

EXHIBIT INDEX

Exhibit No.		��	Description	��

	10.1†		Amended and Restated Integrilin Agreement dated July 22, 2005 among the Company, Schering Corporation and Schering-Plough, Ltd.

	10.2†		Side Agreement dated October 13, 2005 among the Company, Schering Corporation and Schering-Plough Ltd.

	10.3†		Supply Agreement dated September 1, 2005 by and between the Company and Schering Corporation

	10.4		1996 Employee Stock Purchase Plan, as amended

	10.5		2003 Employee Stock Purchase Plan for Non-U.S. Subsidiaries and Affiliated Entities, as amended

	10.6		Agreement for Consulting Services dated August 1, 2005 between the Company and Mark J. Levin

	31.1		Certification of principal executive officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended

	31.2		Certification of principal financial officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended

	32.1		Statement Pursuant to 18 U.S.C. §1350

	32.2		Statement Pursuant to 18 U.S.C. §1350

† Confidential treatment requested as to certain portions, which portions have been separately filed with the Securities and Exchange Commission.

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Millennium Pharmaceuticals (MLNM) 10-Q2005 Q3 Quarterly report

Content analysis

Millennium Pharmaceuticals, Inc.Notes to Condensed Consolidated Financial Statements

2. Summary of Significant Accounting Policies

Cash Equivalents, Marketable Securities and Other Investments

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

Segment Information

Information Concerning Market and Source of Supply Concentration

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

Inventory

Goodwill and Intangible Assets

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

Revenue Recognition

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

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

Advertising and Promotional Expenses

Net Loss Per Common Share

Comprehensive Loss

Stock-Based Compensation

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

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

Accounting Pronouncements

3. Restructuring

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

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

4. Revenue and Strategic Alliances

5. Convertible Debt

Overview

Our Products

Critical Accounting Policies and Significant Judgments and Estimates

Accounting Pronouncements

Results of Operations

Liquidity and Capital Resources

RISK FACTORS THAT MAY AFFECT RESULTS

Regulatory Risks

Risks Relating to Our Business, Strategy and Industry

Our revenues over the next several years will be materially dependent on the commercial success of VELCADE and INTEGRILIN.

Risks Relating to Our Financial Results and Need for Financing

Risks Relating to Collaborators

Risks Relating to Intellectual Property

Risks Relating to Product Manufacturing, Marketing and Sales

Guidelines and recommendations can affect the use of our products.

Risks Relating to an Investment in Our Common Stock

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Item 4. Controls and Procedures

Millennium Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements

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

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

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