Millennium Pharmaceuticals (MLNM) 10-Q 2006 Q2 Quarterly report

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 June 30, 2006

OR

|_|  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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  |X| Accelerated filer  |_| Non-accelerated filer  |_|

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 August 2, 2006: 315,324,347

MILLENNIUM PHARMACEUTICALS, INC.

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2006

TABLE OF CONTENTS

		Page
PART I	FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005	3
	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2006 and 2005	4
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2006 and 2005	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	17
	Risk Factors That May Affect Results	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40
Item 4.	Controls and Procedures	41
PART II	OTHER INFORMATION
Item 4.	Submission of Matters to a Vote of Security Holders	42
Item 6.	Exhibits	42
	Signatures	43
	Exhibit Index	44

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. ReoPro® (abciximab) is a trademark of Eli Lilly & Company, Aggrastat® (tirofiban) is a trademark of Merck & Co., Inc., Thalomid® (thalidomide) and Revlimid® (lenalidomide) 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.

2

PART I     FINANCIAL INFORMATION

Item 1.    Condensed Consolidated Financial Statements

Millennium Pharmaceuticals, Inc.
Condensed Consolidated Balance Sheets

	June 30, 2006			December 31, 2005
	(unaudited)
(in thousands, except per share amounts)
Assets
Current assets:
Cash and cash equivalents	$	10,461		$	5,029
Marketable securities		615,542			640,559
Accounts receivable, net of allowances of $521 in 2006 and $2,504 in      2005		69,009			64,338
Inventory		13,623			15,824
Prepaid expenses and other current assets		11,512			15,346
Total current assets		720,147			741,096
Property and equipment, net		167,534			183,059
Restricted cash		7,431			8,486
Other assets		18,138			16,716
Goodwill		1,212,437			1,210,926
Developed technology, net		288,607			305,337
Intangible assets, net		61,768			62,012
Total assets	$	2,476,062		$	2,527,632
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	20,512		$	31,137
Accrued expenses		53,405			60,325
Current portion of restructuring		32,817			35,362
Current portion of deferred revenue		18,654			27,745
Current portion of capital lease obligations		1,446			4,136
Current portion of long-term debt		99,571			5,890
Total current liabilities		226,405			164,595
Other long-term liabilities		716			48
Restructuring, net of current portion		53,189			69,541
Deferred revenue, net of current portion		13,133			15,973
Capital lease obligations, net of current portion		75,641			76,226
Long-term debt		—			99,571
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:      315,215 shares at June 30, 2006 and 311,121 shares at      December 31, 2005 issued and outstanding		315			311
Additional paid-in capital		4,618,765			4,582,204
Deferred compensation		—			(4,219	)
Accumulated other comprehensive loss		(6,556	)		(9,580	)
Accumulated deficit		(2,505,546	)		(2,467,038	)
Total stockholders' equity		2,106,978			2,101,678
Total liabilities and stockholders' equity	$	2,476,062		$	2,527,632

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

3

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
(in thousands, except per share amounts)
Revenues:
Net product sales	$	58,786		$	43,892		$	112,159		$	88,687
Co-promotion revenue		—			47,661			—			90,487
Revenue under strategic alliances		27,165			19,092			65,794			55,182
Royalties		34,172			—			64,645			—
Total revenues		120,123			110,645			242,598			234,356
Costs and expenses:
Cost of sales (excludes amortization of        acquired intangible assets)		14,102			16,680			29,930			31,261
Research and development (Note 1)		79,309			86,939			161,907			173,093
Selling, general and administrative (Note 1)		37,391			52,060			72,856			103,697
Restructuring		1,554			2,999			4,385			4,106
Amortization of intangibles		8,487			8,500			16,974			17,000
Total costs and expenses		140,843			167,178			286,052			329,157
Loss from operations		(20,720	)		(56,533	)		(43,454	)		(94,801	)
Other income (expense):
Investment income, net		5,777			14,737			10,402			19,179
Interest expense		(2,724	)		(2,315	)		(5,456	)		(4,903	)
Net loss	$	(17,667	)	$	(44,111	)	$	(38,508	)	$	(80,525	)
Amounts per common share:
Net loss per share, basic and diluted	$	(0.06	)	$	(0.14	)	$	(0.12	)	$	(0.26	)
Weighted average shares, basic and diluted		313,321			307,570			312,575			307,082

Note 1: Upon adoption of SFAS No. 123 (revised 2004), “Share Based Payments,” (“SFAS No. 123R”) on January 1, 2006, the Company began recording stock-based compensation expense in its condensed consolidated statements of operations. No stock-based compensation expense was recognized under SFAS No. 123R in any prior periods. See Note 6 to the condensed consolidated financial statements for further discussion. Stock-based compensation expense is allocated in the condensed consolidated statements of operations expense lines as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2006		2005		2006		2005
Research and development	$	5,998	$	—	$	12,332	$	—
Selling, general and administrative		5,483		—		9,649		—
Total	$	11,481	$	—	$	21,981	$	—

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

4

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

	Six Months Ended June 30,
	2006			2005
(in thousands)
Cash Flows from Operating Activities:
Net loss	$	(38,508	)	$	(80,525	)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization		33,252			39,883
Non-cash restructuring charges		4,368			—
Amortization and write-off of deferred financing costs		218			226
Realized loss on securities, net		3,078			1,521
Realized gain on sale of investment in TransForm Pharmaceuticals		—			(10,465	)
401K match stock compensation		2,838			3,057
Stock-based compensation expense under SFAS No. 123R		21,981			—
Changes in operating assets and liabilities:
Accounts receivable		(4,671	)		3,025
Inventory		2,201			3,942
Prepaid expenses and other current assets		3,834			(95	)
Restricted cash and other assets		(1,620	)		(3,523	)
Accounts payable and accrued expenses		(36,272	)		(39,168	)
Advance from Schering-Plough		—			(49,250	)
Deferred revenue		(11,931	)		20,769
Other long-term liabilities		668			—
Net cash used in operating activities		(20,564	)		(110,603	)
Cash Flows from Investing Activities:
Investments in marketable securities		(179,640	)		(141,974	)
Proceeds from sales and maturities of marketable securities		206,428			256,537
Proceeds from sale of investment in TransForm Pharmaceuticals		—			10,585
Purchases of property and equipment		(5,552	)		(6,430	)
Other investing activities		(1,379	)		(4,507	)
Net cash provided by investing activities		19,857			114,211
Cash Flows from Financing Activities:
Net proceeds from employee stock purchases		15,966			8,625
Repayment of long-term debt		(5,890	)		—
Principal payments on capital leases		(3,275	)		(6,901	)
Net cash provided by financing activities		6,801			1,724
Increase in cash and cash equivalents		6,094			5,332
Equity adjustment from foreign currency translation		(662	)		140
Cash and cash equivalents, beginning of period		5,029			14,436
Cash and cash equivalents, end of period	$	10,461		$	19,908
Supplemental Cash Flow Information:
Cash paid for interest	$	5,165		$	4,942
Supplemental Disclosure of Noncash Investing Activities:
Receipt of shares of SGX Pharmaceuticals, Inc. common stock in exchange for note receivable	$	6,000		$	—

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

5

Millennium Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements

1.   Basis of Presentation

        The accompanying condensed consolidated financial statements have been prepared in accordance with 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 six months ended June 30, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006. For further information, refer to the consolidated financial statements and accompanying footnotes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005, which was filed with the Securities and Exchange Commission (“SEC”) on March 8, 2006.

        The information presented in the condensed consolidated financial statements and related footnotes at June 30, 2006, and for the three and six months ended June 30, 2006 and 2005, is unaudited and the condensed consolidated balance sheet amounts and related footnotes at December 31, 2005, have been derived from audited financial statements.

2.   Summary of Significant Accounting Policies

Reclassifications

        Certain prior year amounts in operating activities of the condensed consolidated statements of cash flows have been reclassified to conform to the current year presentation. This reclassification has no impact on previously reported net loss or net cash used in operating activities.

        Certain prior year amounts included in accrued expenses of the condensed consolidated balance sheets have been reclassified to accounts payable to conform to the current year presentation. This reclassification has no impact on previously reported net loss or current liabilities.

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. As a matter of policy, the Company monitors these investments in private companies on a quarterly basis and determines whether any impairment in their value would require a charge to current earnings, based on the implied value from any recent rounds of financing completed by the investee, market prices of comparable public companies and general market conditions. These other investments are included in other long term assets at June 30, 2006 and December 31, 2005.

        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 June 30, 2006 and December 31, 2005 are classified as “available-for-sale.” Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported in a separate component of stockholders’ equity. The cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion are included in investment income. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities and other investments are included in investment income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in investment income.

        During the three and six months ended June 30, 2006, the Company did not record significant realized gains on marketable securities. During the three and six months ended June 30, 2006, the Company recorded realized losses on marketable securities of $1.1 million and $3.1 million, respectively. During the three months ended June 30, 2005, the Company did not record realized gains on marketable securities and recorded realized losses on marketable securities of $0.8 million. During the six months ended June 30, 2005, the Company recorded realized gains on marketable securities of $0.1 million and realized losses on marketable securities of $1.6 million.

6

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

        During the three months ended June 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 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 reported in prior periods was related to sales and development of INTEGRILIN® (eptifibatide) Injection through August 31, 2005. 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, including license fees, milestones, distribution fees on sales outside of the United States and expense reimbursement accounted for approximately 14 percent and eight percent of total revenues for the three months ended June 30, 2006 and 2005, respectively, and 17 percent and 15 percent of total revenues for the six months ended June 30, 2006 and 2005, respectively.

        Revenues from Schering-Plough Ltd. and Schering Corporation (collectively “SGP”), including license fees, royalties on sales of INTEGRILIN in the United States and other territories and manufacturing-related reimbursement accounted for approximately 30 percent and 31 percent of total revenues for the three and six months ended June 30, 2006, respectively. There was no revenue other than co-promotion revenue recorded from SGP during the three and six months ended June 30, 2005, respectively.

        There were no other significant customers under strategic alliances and royalties in the three and six months ended June 30, 2006 and 2005.

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 from the Company. The Company continues 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 three approved manufacturers that provide eptifibatide, the active pharmaceutical ingredient (“API”) 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 one other manufacturer for the production of the API. The Company entered into an agreement with Solvay in January 2003 for an initial term of four years and one-year renewal periods thereafter. In June 2006, the Company received FDA approval of its own alternative process technology utilized by the third manufacturer for the production of eptifibatide for approval in the United States and is currently seeking approval in Europe and other countries, as required. Beginning July 1, 2006, SGP will purchase the majority of its API directly from the manufacturer. The Company has two manufacturers that currently perform fill/finish services for INTEGRILIN and a new packaging supplier 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 the Company’s marketed products. Materials in process at these alternative suppliers are included in inventory.

7

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 works with one manufacturer under a long-term supply agreement to complete fill/finish for VELCADE. The Company is currently qualifying a second fill/finish supplier in order to mitigate its risk of VELCADE supply interruption. Materials in process at these alternative suppliers are included in inventory.

        During 2004, the Company began distributing VELCADE in the United States through a sole-source open access distribution model where the Company sells directly to an independent third party who in turn distributes to the wholesaler base. In April 2006, the Company’s distributor added a second distribution site to its network in order to improve access to the product for physicians in the western United States.

Inventory

        Inventory consists of currently marketed products, including VELCADE and INTEGRILIN, and from time to time, product candidates awaiting regulatory approval, which are 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 June 30, 2006 and December 31, 2005, 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):

	June 30, 2006		December 31, 2005
Raw materials	$	6,798	$	7,632
Work in process		6,125		7,370
Finished goods		700		822
	$	13,623	$	15,824

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):

	June 30, 2006					December 31, 2005
	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
Developed technology	$	435,000	$	(146,393	)	$	435,000	$	(129,663	)
Core technology	$	18,712	$	(18,712	)	$	18,712	$	(18,712	)
Other		17,060		(14,292	)		17,060		(14,048	)
Total amortizable intangible assets, excluding      developed technology		35,772		(33,004	)		35,772		(32,760	)
Total indefinite-lived trademark		59,000		—			59,000		—
Total intangible assets, excluding developed technology	$	94,772	$	(33,004	)	$	94,772	$	(32,760	)

        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

8

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

        Amortization expense was approximately $8.5 million in each of the three months ended June 30, 2006 and 2005. Amortization expense was approximately $17.0 million in each of the six months ended June 30, 2006 and 2005. The Company expects to incur amortization expense of approximately $34.0 million for each of the next five years.

        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, including the restructured relationship with SGP, 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.

        Goodwill as of June 30, 2006 and December 31, 2005 consists of the excess purchase price over the estimated fair value of net tangible and intangible assets primarily related to the Company’s acquisitions of COR Therapeutics, Inc., LeukoSite, Inc. (“LeukoSite”) and Cambridge Discovery Chemistry, LTD. The carrying value may be adjusted as a result of the continued settlement of contingent consideration arising from the LeukoSite acquisition.

Revenue Recognition

        The Company recognizes revenue from the sale of its products, its co-promotion collaboration through August 31, 2005, 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.

Net product sales

        The Company records product sales of VELCADE when delivery has occurred, title has transferred, 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 under strategic alliances from nonrefundable license payments, milestone payments, 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.

9

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

        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 connection with the closing of the Company’s amended collaboration agreement with SGP, as discussed in Note 4, 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, or distribution fees, 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.

Advertising and Promotional Expenses

        Advertising and promotional expenses are expensed as incurred. During the three months ended June 30, 2006 and 2005, advertising and promotional expenses were $5.3 million and $10.5 million, respectively. During the six months ended June 30, 2006 and 2005, advertising and promotional expenses were $10.6 million and $22.1 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, excluding restricted stock that has been issued but is not yet vested. 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 and warrants (the proceeds of which are then assumed to have been used to repurchase outstanding stock using the treasury stock method), the assumed conversion of convertible notes and the vesting of unvested restricted shares of common stock. Options and warrants to purchase shares of common stock that were not included in the calculation of diluted shares because the effect of including the options and warrants would have been anti-dilutive were 1.0 million and 1.3 million for the three and six months ended June 30, 2006, respectively, and 1.6 million and 1.7 million for the three and six months ended June 30, 2005, respectively.

10

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

Comprehensive Loss

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
Net loss	$	(17,667	)	$	(44,111	)	$	(38,508	)	$	(80,525	)
Unrealized gain (loss) on marketable securities		(5,130	)		3,307			3,686			(1,351	)
Cumulative translation adjustments		(657	)		61			(662	)		140
Comprehensive loss	$	(23,454	)	$	(40,743	)	$	(35,484	)	$	(81,736	)

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

	June 30, 2006			December 31, 2005
Unrealized loss on marketable securities	$	(6,055	)	$	(9,741	)
Cumulative translation adjustments		(501	)		161
Accumulated other comprehensive loss	$	(6,556	)	$	(9,580	)

Stock-Based Compensation Expense

        As discussed more fully in Note 6, the Company adopted SFAS No. 123 (revised 2004), “Share Based Payment,” (“SFAS No. 123R”), effective January 1, 2006. SFAS 123R requires the recognition of the fair value of stock-based compensation in its statements of operations. Stock-based compensation expense primarily relates to stock options, restricted stock and stock issued under the Company’s employee stock purchase plans.

        Prior to January 1, 2006, the Company followed 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. Under APB 25, when the exercise price of the employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense was recognized. The Company elected the modified prospective transition method for adopting SFAS 123R. Under this method, the provisions of SFAS 123R apply to all awards granted or modified after the date of adoption. In addition, the unrecognized expense of awards not yet vested at the date of adoption, determined under the original provisions of SFAS 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), is being recognized in the Company’s statements of operations in the periods after the date of adoption. For stock options granted prior to January 1, 2006, the Company calculated stock-based compensation expense on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in substance, multiple awards. For restricted stock granted prior to January 1, 2006, the Company calculated stock-based compensation expense on a straight-line basis over the requisite service period of the entire award.

        As a result of the adoption of SFAS 123R, the Company’s net loss for the three and six months ended June 30, 2006 is $11.5 million, or $0.04 per share, and $22.0 million, or $0.07 per share, respectively, greater than if it had continued to account for shared-based compensation under APB 25.

11

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

        SFAS 123R requires the presentation of pro forma information for periods prior to adoption as if the Company had accounted for all stock-based employee compensation expense under the fair value method of that statement. For purposes of this pro forma disclosure, the estimated fair value of the stock options at the date of the grant is amortized to expense on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in substance, multiple awards. The Company accounted for forfeitures as they occurred. The following table illustrates the effect on net loss and loss per share for the three and six months ended June 30, 2005, as if the Company had applied the fair value recognition provisions of SFAS 123R to stock-based employee compensation expense (in thousands, except per share amounts):

	Three Months Ended June 30, 2005			Six Months Ended June 30, 2005
Net loss	$	(44,111	)	$	(80,525	)
Add: Stock-based employee compensation expense as reported in the      Statement of Operations		—			—
Deduct: Total stock-based employee compensation expense determined      under fair value based method for all awards		(17,601	)		(34,010	)
Pro forma net loss	$	(61,712	)	$	(114,535	)
Amounts per common share:
Basic and diluted - as reported	$	(0.14	)	$	(0.26	)
Basic and diluted - pro forma	$	(0.20	)	$	(0.37	)

Accounting Pronouncements

        In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS No. 154”), which replaces Accounting Principles Board Opinions No. 20, “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements — an Amendment of APB Opinion No. 28.”  SFAS No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application, or the earliest practicable dates, as the required method for reporting a change in accounting principle and restatement with respect to the reporting of a correction of an error. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Although the Company will continue to evaluate the application of SFAS No. 154, the Company does not currently believe that adoption will have a material impact on results of operations, financial position or cash flows.

        In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109” (the “Interpretation”). The Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. The Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Interpretation is effective for fiscal years beginning after December 15, 2006. The Company has not completed its evaluation of the Interpretation, but does not currently believe that adoption will have a material impact on its results of operations, financial position or cash flows.

3.   Restructuring

2005 Strategy 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, the Company’s development pipeline of novel oncology and inflammation molecules and the Company’s oncology-focused discovery organization. In connection with the strategy refinement, the Company substantially reduced its effort in inflammation discovery and reduced overall headcount, including eliminating INTEGRILIN sales and marketing positions, positions in inflammation discovery and various other business support groups.

12

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

        The Company recorded net restructuring credits of $1.6 million during the three months ended June 30, 2006 and net restructuring charges of $0.3 million during the six months ended June 30, 2006 under the 2005 restructuring plan. The restructuring charges primarily related to additional facility related costs associated with vacated buildings and employee termination benefits as a result of the headcount reductions within inflammation discovery and business support groups. Offsetting these charges was a net credit of approximately $7.8 million resulting from the earlier than anticipated sublease of one of the vacated buildings at a higher rate per square foot than the Company had originally estimated.

        These costs are included in restructuring in the statements of operations and in current and long-term liabilities on the balance sheet at June 30, 2006. The following table displays the restructuring activity and liability balances (in thousands):

	Balance at December 31, 2005		Charges			Payments			Asset Impairment			Balance at June 30, 2006
Termination benefits	$	4,367	$	1,006		$	(3,858	)	$	—		$	1,515
Facilities		24,812		(5,172	)		(3,408	)		—			16,232
Asset impairment		—		4,368			—			(4,368	)		—
Contract termination		37		37			(74	)		—			—
Other associated costs		16		46			(38	)		—			24
Total	$	29,232	$	285		$	(7,378	)	$	(4,368	)	$	17,771

        The Company continues to evaluate its strategic alternatives under the refined strategy, including facility consolidation, and as a result, significant material restructuring charges could result.

2003 Restructuring Plan

        In December 2002 and June 2003, the Company realigned 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. The Company recorded restructuring charges of $3.2 million and $4.1 million during the three and six months ended June 30, 2006, respectively, under the 2003 restructuring plan. The restructuring charges primarily related to adjustments to the Company’s original estimates of the remaining rental obligations for a vacated facility based upon the Company’s inability to secure subtenants in the time and manner included in its earlier estimates.

        The following table displays the restructuring activity and liability balances (in thousands):

	Balance at December 31, 2005		Charges		Payments			Balance at June 30, 2006
Facilities	$	75,671	$	4,093	$	(11,529	)	$	68,235
Other associated costs		—		6		(6	)		—
Total	$	75,671	$	4,099	$	(11,535	)	$	68,235

        The Company accounts for its restructuring charges in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS No. 146”). SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at its fair value in the period in which the liability is incurred, except for one-time termination benefits that meet specified requirements. Costs of termination benefits relate to severance packages, out-placement services and career counseling for employees affected by 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 in the real estate market. The Company reviews its estimates and assumptions on a regular basis, until the outcome is finalized, and makes whatever modifications are 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 June 30, 2006 is approximately $32.8 million due through June 30, 2007 and $53.2 million due thereafter through 2022. The actual amount and timing of the payment of the remaining accrued liability is primarily dependent upon the ultimate terms of any potential subleases or lease restructuring related to facilities.

13

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

        On September 1, 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 INTEGRILIN supply chain. In addition, SGP is obligated to pay the Company 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. There are no guaranteed minimum royalty payments beyond 2007.

        Upon closing, SGP assumed development obligations relating to INTEGRILIN. The Company continues 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.

        In January 2005, the Company repaid SGP approximately $49.3 million for advances SGP had made for inventory purchases in prior years.

        During the six months ended June 30, 2006 and 2005, the Company recognized $15.0 million and $20.0 million, respectively, of milestone payments under its alliance with Ortho Biotech relating to VELCADE and the achievement of agreed-upon sales levels of VELCADE.

5. Convertible Debt

        The Company had the following convertible notes outstanding at June 30, 2006, for a total of $99.6 million, all of which is included in current liabilities:

• $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 and of the 5.5% notes on January 15 and July 15 of each year. All required interest payments to date have been made.

        In accordance with the payment terms, the Company paid off the $5.9 million principal balance on its 4.5% convertible senior notes during the three months ended June 30, 2006.

14

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

6. Stock Option Plans

        As discussed in Note 2, the Company adopted SFAS 123R effective January 1, 2006. SFAS 123R requires the recognition of the fair value of stock-based compensation in its statements of operations. Stock-based compensation expense primarily relates to stock options, restricted stock and the stock issued under the Company’s employee stock purchase plans. Stock options are granted to employees at exercise prices equal to the fair market value of the Company’s stock at the dates of grant. Generally, options have a contractual term of ten years and vest monthly over a four-year period from grant date, although certain options have been, and may in the future, be granted with shorter vesting periods. Options granted to consultants and other nonemployees generally vest over the period of service to the Company. Awards of restricted stock are granted to officers and certain employees and generally fully vest four years from the grant date, although certain awards have been, and may in the future, be granted with shorter vesting periods. The Company recognizes stock-based compensation expense equal to the fair value of stock options on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in substance, multiple awards. Restricted stock awards are recorded as compensation cost, based on the market value on the date of the grant, on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in substance, multiple awards.  The Company provides newly issued shares to satisfy stock option exercises, the issuance of restricted stock and stock issued under the Company's employee stock purchase plans.

        As a result of the adoption of SFAS 123R, the Company’s net loss for the three and six months ended June 30, 2006 is $11.5 million, or $0.04 per share, and $22.0 million, or $0.07 per share, greater than if it had continued to account for share-based compensation under APB 25.

        In connection with the adoption of SFAS 123R, the Company reassessed the valuation methodology for stock options and the related input assumptions. The assessment of the valuation methodology resulted in the continued use of the Black-Scholes model. In the fourth quarter of 2005, the Company considered implied volatilities of currently traded options to provide an estimate of volatility based upon current trading activity. After considering other factors such as its stage of development, the length of time the Company has been public and the impact of having a marketed product, the Company concluded that a blended volatility rate based upon the most recent three-year and four-year periods of historical performance as well as the implied volatilities of currently traded options better reflects the expected volatility of its stock going forward. The Company uses historical data to estimate option exercise and employee termination behavior, adjusted for known trends, to arrive at the estimated expected life of an option. Upon adoption of SFAS 123R, the Company validated its estimates and assumptions with an independent third party having the relevant expertise in valuation methodologies. The Company updated these assumptions during the second quarter to reflect recent historical data. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The following table summarizes the weighted-average assumptions the Company used in its fair value calculations at the date of grant:

	Stock Options				Stock Purchase Plan
	Three Months Ended June 30,		Six Months Ended June 30,		Three Months Ended June 30,		Six Months Ended June 30,
	2006	2005	2006	2005	2006	2005	2006	2005
Expected life (years)	3.5	5.4	3.7	5.3	0.5	0.5	0.5	0.5
Risk-free interest rate	4.98%	3.73%	4.77%	4.09%	5.06%	3.65%	4.35%	3.46%
Volatility	45%	60%	45%	60%	45%	60%	52%	60%

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

        SFAS 123R requires the application of an estimated forfeiture rate to current period expense to recognize compensation expense only for those awards expected to vest. The Company estimates forfeitures based upon historical data, adjusted for known trends, and will adjust its estimate of forfeitures if actual forfeitures differ, or are expected to differ from such estimates. Subsequent changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of stock-based compensation expense in future periods.

        In December 2002, the Company’s Board of Directors reduced the number of shares authorized for issuance under some of the Company’s older plans and acquired plans so that the Company cannot issue new options under those plans. Additionally, at that time, the Board of Directors amended some of the Company’s option plans to provide for full vesting of options issued under the plans to optionholders who terminate their employment for good reason or are terminated without cause within the period one month before and one year after a change of control.

15

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

        The 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. The number of stock option shares authorized is equal to 5% of the number of shares outstanding on April 12, 2000 plus an annual increase to be made on January 1, 2001, 2002, and 2003 equal to 5% of the number of shares outstanding or a lesser amount determined by the Board of Directors. At June 30, 2006, a total of 40,187,071 shares of common stock have been reserved for the exercise of options outstanding and are available for future grant under the 2000 Plan.

        The following table presents the combined option activity of the Company’s stock plans for the six months ended June 30, 2006:

	Shares of Common Stock Attributable to Options			Weighted-Average Exercise Price of Options		Weighted-Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)
Outstanding at January 1, 2006		34,949,289		$	16.56
Granted		3,294,786			10.18
Exercised		(2,141,372	)		6.46
Forfeited or expired		(4,581,622	)		21.13
Outstanding at June 30, 2006		31,521,081		$	15.92		6.97	$	23,234
Vested or expected to vest at June 30,2006		30,355,938		$	16.12		0.33	$	22,627
Exercisable at June 30, 2006		19,908,892		$	19.11		5.95	$	14,457

        The weighted-average grant-date fair value of options granted during the three months ended June 30, 2006 and 2005 was $3.41 and $4.89, respectively, and during the six months ended June 30, 2006 and 2005 was $3.92 and $4.73, respectively. The intrinsic value of options exercised during the three months ended June 30, 2006 and 2005 amounted to approximately $2.1 million and $0.9 million, respectively, and during the six months ended June 30, 2006 and 2005 amounted to approximately $7.5 million and $1.8 million, respectively. As of June 30, 2006, the total remaining unrecognized compensation cost related to nonvested stock option awards amounted to approximately $29.3 million, including estimated forfeitures, which will be recognized over the weighted-average remaining requisite service period of approximately one and one half years.

        A summary of the status of nonvested shares of restricted stock as of June 30, 2006, and changes during the six months then ended, is presented below:

	Shares			Weighted-Average Grant Date Fair Value
Nonvested at January 1, 2006		480,000		$	9.97
Granted		1,387,560			10.44
Vested		—			—
Forfeited		(94,495	)		10.50
Nonvested at June 30, 2006		1,773,065		$	10.31

        As of June 30, 2006, the total remaining unrecognized compensation cost related to nonvested restricted stock awards amounted to approximately $11.8 million, including estimated forfeitures, which will be recognized over the weighted-average remaining requisite service period of approximately two years. No shares of restricted stock vested during the three and six months ended June 30, 2006 and 2005, respectively.

16

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 innovative products in disease areas with unmet medical needs. We currently market VELCADE, the market leader in the multiple myeloma relapsed setting. We have a development pipeline of clinical and preclinical product candidates in our therapeutic focus areas of cancer and inflammation, and we have an oncology-focused discovery organization. Strategic business relationships are a key component of our business.

        On October 26, 2005, we announced a refined business strategy to focus on advancing key growth assets, including VELCADE, our clinical and preclinical pipeline in oncology and inflammation molecules and our oncology-focused discovery organization. As part of our refined strategy, we have taken steps to reduce total annual research and development and selling, general and administrative expenses in 2006. These steps build on our restructured relationship with Schering-Plough Corporation and Schering-Plough Ltd., together referred to as SGP. We reduced the size of our company from approximately 1,500 employees at the end of 2004 to approximately 1,100 employees at 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. We have recorded approximately $42.8 million of restructuring charges from September 2005 through June 2006 in connection with our refined strategy. We continue to evaluate our strategic alternatives under our refined strategy, including facility consolidation, and as a result, additional restructuring charges could result.

        On September 1, 2005, SGP obtained the exclusive U.S. development and commercialization rights for INTEGRILIN from us and paid us a nonrefundable upfront payment of approximately $35.5 million. We 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. Beyond 2007, we will receive royalties based on a predetermined royalty rate; however, there are no guaranteed minimum royalty payments beyond 2007. In addition, we continue to manage the supply of product for INTEGRILIN at the expense of SGP for products sold in the SGP territories. The payments received as a result of managing the supply chain are recorded as strategic alliance revenue.

        We expect our new relationship with SGP to be at least financially equivalent to the former co-promotion arrangement, taking into account the expected future revenues and anticipated costs savings. Strategically, our goal in restructuring the relationship was to increase the near term certainty of revenues from INTEGRILIN through the guaranteed minimum royalties for 2006 and 2007, while eliminating the need to further invest our resources into INTEGRILIN sales and marketing and development activities. In addition, the restructured relationship allows us to focus on our key growth assets, including VELCADE, the pipeline and our oncology-focused discovery organization.

        Our overall business strategy is to build a portfolio of innovative, new medicines based on our understanding of particular molecular pathways that affect the establishment and progression of specific diseases. These molecular pathways include the related effects of proteins on cellular performance, reproduction and death. We plan to develop and commercialize many of our products on our own, but will seek development and commercial collaborators on favorable terms or when we believe that doing so would be advantageous to us. For example, we generally intend to enter into sales and marketing alliances with major pharmaceutical companies for products in disease areas that require large sales forces or for markets outside of the United States.

        In the near term, we expect to focus our commercial activities in cancer where we plan to build on our commercial and regulatory experience with VELCADE. We also are working to obtain approval to market VELCADE in the United States and, through Ortho Biotech Products, L.P., a member of the Johnson Family Of Companies, or Ortho Biotech, elsewhere for initial treatment of multiple myeloma and for the treatment of additional cancer types. We believe that these additional uses of VELCADE would lead to significant expansion of our cancer business. In inflammatory disease, we are advancing novel product candidates in clinical development as potential treatments for serious and widely prevalent conditions.

        In July 2006, we brought forward from discovery to development MLN6095, a small molecule inhibitor of a target that plays a role in inflammatory disease. This is the fifth Millennium discovered molecule to progress to the development pipeline in the past two-and-a-half years.

17

        In the long term, we expect to bring new products to market on a regular basis from our pipeline of discovery and development-stage programs and continue to evaluate opportunities to supplement our pipeline through in-licensing and acquisitions. If we are successful, we would use the revenues from this expanding portfolio of marketed products to broaden the scope of our operations.

VELCADE® (bortezomib) for Injection

        VELCADE, the first of a new class of medicines called proteasome inhibitors, was 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. This approval was subject to the completion of and submission of data from the phase III APEX clinical trial.

        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 therapy. This regulatory decision also marked the completion of the confirmatory trial commitment that was necessary for transition from accelerated approval to full approval.

        In April 2004, the European Commission granted Marketing Authorization for VELCADE in Europe 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. 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 countries within Latin America and South-East Asia, bringing the total number of approved countries to more than 75.

        In April 2005, our collaborator, 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, due to the high unmet medical need of these patients and based on the strength of data for VELCADE in its clinical trials. 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. In June 2006, based on final data from a Phase II trial, we filed a sNDA for VELCADE in the treatment of relapsed or refractory mantle cell lymphoma. The FDA is expected to give us their deadline to review date, or PDUFA date, in early August.

        In April 2006, we initiated a phase III trial of VELCADE in combination with rituximab in the relapsed follicular non-Hodgkin's lymphoma setting.

Our Alliances

Ortho Biotech Collaboration

        In June 2003, we entered into an agreement with Ortho Biotech to collaborate on the commercialization of and through the agreement with Johnson & Johnson Pharmaceutical Research & Development, L.L.C., or JJPRD, continue 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 retain an option to co-promote VELCADE with Ortho Biotech at a future date in specified European countries.

        We are engaged with JJPRD 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. JJPRD was responsible for 40% of the joint development costs through 2005 and is responsible 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 milestones based upon agreed-upon sales levels of VELCADE.

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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 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 shared promotional efforts in the United States equally with SGP, except for costs associated with marketing programs specific to us.

        After September 1, 2005, under our amended collaboration agreement with SGP, we began receiving royalties on sales of INTEGRILIN in the United States. SGP continues to pay us royalties on sales of INTEGRILIN in specified territories outside of the European Union and reimburses us for manufacturing-related costs.

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. Under the terms of the agreement, we have received license fees and are entitled to future 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 condensed 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, goodwill and stock-based compensation expense. We base our estimates on historical experience and on various other factors that we believe are 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, 2006, 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 through August 31, 2005, 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

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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 we apply the applicable revenue recognition criteria 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 sale of VELCADE in the United States when delivery has occurred and title has transferred. During the fourth quarter of 2004, we began distributing VELCADE through a sole-source open access distribution model in which we sell directly to an independent third party who in turn distributes to the wholesaler base. In April 2006, our sole-source distributor added a second distribution site to its network in order to improve access to the product for physicians in the western United States. Under our agreement with our sole-source distributor, inventory levels are contractually limited to no more than three weeks. VELCADE product inventory levels held by the sole-source distributor and wholesalers may fluctuate from time to time within our desired range of one to two weeks of inventory in the distribution channel. During the second quarter of 2006, inventory levels rose by less than a week to the higher end of our one to two week desired range.

        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 stock significant inventory due to the expense 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. As we continually monitor actual product returns and inventory levels in the domestic distribution channel, we have reduced and may, from time to time in the future, 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. Our accruals for rebates, chargebacks, and other discounts were immaterial at June 30, 2006.

        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 and 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 the adjustments were not significant due to frequent 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 and we record royalty revenues based on estimates of sales from interim data provided by licensees. Beginning September 1, 2005, upon closing the amended collaboration agreement with SGP, we

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began recording royalty revenues as a separate line item in our statement of operations. For all of our royalty arrangements, we 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 are 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 record royalties on a cash basis.

Inventory

        Inventory consists of currently marketed products and from time to time product candidates awaiting regulatory approval, which are 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 June 30, 2006 and December 31, 2005, inventory does not include amounts for products that had 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, valued at cost, for INTEGRILIN to supply GSK and limited amounts of work in process, valued at cost, 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 adjust inventory to its net realizable value.

Intangible Assets

        We have acquired significant intangible assets that we value and record. Those assets that 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, including the restructured relationship with SGP, 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.

Stock-Based Compensation Expense

        We adopted Statement of Financial Accounting Standards, or SFAS No. 123 (revised 2004), “Share Based Payment,” or SFAS No. 123R, effective January 1, 2006. SFAS 123R requires the recognition of the fair value of stock-based compensation expense in our operations, and accordingly the adoption of SFAS No. 123R fair value method will have a significant impact on our results of operations, although it will have no impact on our overall financial position. Option valuation models require the input of highly subjective assumptions, including stock price volatility and expected term of an option. In the fourth quarter of 2005, we considered implied volatilities of currently traded options to provide an estimate of volatility based upon current trading activity. After considering other such factors as our stage of development, the length of time we have been public and the impact of having a marketed product, we believe a blended volatility rate based upon the most recent three-year and four-year periods of historical performance, as well as the implied volatilities of currently traded options better reflects the expected volatility of our stock going forward. Changes in market price directly affect volatility and could cause future stock-based compensation expense to vary significantly in future reporting periods.

        We use historical data to estimate option exercise and employee termination behavior, adjusted for known trends, to arrive at the estimated expected life of an option. Upon adoption of SFAS 123R, we validated our estimates and assumptions

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with an independent third party having the relevant expertise in valuation methodologies. We updated these assumptions during the second quarter of 2006 to reflect recent historical data. Additionally, we are required to estimate forfeiture rates to estimate the number of shares that will vest in a period to which the fair value is applied. We will continually monitor employee exercise behavior and may further adjust the estimated term and forfeiture rates in future periods. Increasing the estimated life would result in an increase in the fair value to be recognized over the requisite service period, generally the vesting period. Estimated forfeitures will be adjusted to actual forfeitures upon the vest date of the cancelled options as a cumulative catch up adjustment on a quarterly basis. Doing so could cause future expenses to vary at each reporting period.

        We estimate stock-based compensation expense to be in the range of $40.0 million to $50.0 million in 2006, dependent upon market price, assumptions used in estimating the fair value as discussed above and the levels of share-based payments granted in 2006. In March 2006, we revised our annual merit compensation program to include both stock options and restricted stock to certain employees. For the three and six months ended June 30, 2006, we recognized total stock-based compensation expense under SFAS 123R of $11.5 million and $22.0 million, respectively. As of June 30, 2006, the total remaining unrecognized compensation cost related to nonvested stock option awards and nonvested restricted stock awards amounted to approximately $29.3 million and $11.8 million, including estimated forfeitures, respectively, which will be amortized over the weighted-average remaining requisite service periods of approximately one and one half years and two years, respectively.

Accounting Pronouncements

        In May 2005, the Financial Accounting Standards Board issued SFAS No. 154, “Accounting Changes and Error Corrections,” or SFAS No. 154 which replaces Accounting Principles Board Opinions No. 20, “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements — an Amendment of APB Opinion No. 28.”  SFAS No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application, or the earliest practicable dates, as the required method for reporting a change in accounting principle and restatement with respect to the reporting of a correction of an error. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Although we continue to evaluate the application of SFAS No. 154, we do not currently believe that adoption will have a material impact on our results of operations, financial position or cash flows.

        In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109”, or the “Interpretation”. The Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. The Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Interpretation is effective for fiscal years beginning after December 15, 2006. Although we have not completed our evaluation of the Interpretation, we do not currently believe that adoption will have a material impact on our results of operations, financial position or cash flows.

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Results of Operations

	Three Months Ended June 30,						Increase/ (Decrease) Percentage change			Six Months Ended June 30,						Increase/ (Decrease) Percentage change
	2006			2005			2006/2005			2006			2005			2006/2005
(in thousands, except per share amounts)
Revenues:
Net product sales	$	58,786		$	43,892			34	%	$	112,159		$	88,687			26	%
Co-promotion revenue		—			47,661			(100	)		—			90,487			(100	)
Revenue under strategic alliances		27,165			19,092			42			65,794			55,182			19
Royalties		34,172			—			—			64,645			—			—
Total revenues		120,123			110,645			9			242,598			234,356			4
Costs and expenses:
Cost of sales (excludes amortization of        acquired intangible assets)		14,102			16,680			(15	)		29,930			31,261			(4	)
Research and development (Note 1)		79,309			86,939			(9	)		161,907			173,093			(6	)
Selling, general and administrative       (Note 1)		37,391			52,060			(28	)		72,856			103,697			(30	)
Restructuring		1,554			2,999			(48	)		4,385			4,106			7
Amortization of intangibles		8,487			8,500			—			16,974			17,000			—
Total costs and expenses		140,843			167,178			(16	)		286,052			329,157			(13	)
Loss from operations		(20,720	)		(56,533	)		(63	)		(43,454	)		(94,801	)		(54	)
Other income (expense):
Investment income, net		5,777			14,737			(61	)		10,402			19,179			(46	)
Interest expense		(2,724	)		(2,315	)		18			(5,456	)		(4,903	)		11
Net loss	$	(17,667	)	$	(44,111	)		(60	)%	$	(38,508	)	$	(80,525	)		(52	)%
Amounts per common share:
Net loss per share, basic and diluted	$	(0.06	)	$	(0.14	)				$	(0.12	)	$	(0.26	)
Weighted average shares, basic and diluted		313,321			307,570						312,575			307,082

Note 1: Upon adoption of SFAS No. 123R on January 1, 2006, the Company began recording stock-based compensation expense in its consolidated statements of operations. No stock-based compensation expense was recognized under SFAS No. 123R in any prior periods. See Note 6 of our condensed consolidated financial statements for further discussion. Stock-based compensation expense is allocated in the condensed consolidated statements of operations expense lines as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2006		2005		2006		2005
(in thousands)
Research and development	$	5,998	$	—	$	12,332	$	—
Selling, general and administrative		5,483		—		9,649		—
Total	$	11,481	$	—	$	21,981	$	—

Revenues

        Total revenues increased 9% to $120.1 million during the three months ended June 30, 2006, or the 2006 Three Month Period, and 4% to $242.6 million during the six months ended June 30, 2006, or the 2006 Six Month Period, from the comparable periods in 2005. The increase primarily related to higher net product sales of VELCADE offset by lower revenue from our collaborators, including total lower revenue from SGP as a result of the restructured relationship and lower license fee revenue recognized from GSK partially offset by increased royalty revenue recognized from Ortho Biotech on sales of

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VELCADE outside of the United States. Revenue from our collaborators includes revenue under strategic alliance, royalties, and in 2005, co-promotion revenue.

        Net product sales of VELCADE increased 34% to $58.8 million in the 2006 Three Month Period and 26% to $112.2 million in the 2006 Six Month Period from the comparable periods in 2005. The increase in net product sales was attributable to higher unit volume coupled with price increases in both periods. Volume increase is attributable to growth in product demand as a result of increased penetration in the second line treatment setting of multiple myeloma patients, an increase in the number of cycles used on average for responding patients, and fluctuations in inventory levels within our desired range of one to two weeks in the domestic distribution channel. Reserves for product returns, chargebacks and discounts represented approximately 5% to 6% of gross product sales for all periods presented. Product sales from VELCADE represented approximately 49% and 40% of our total revenues in the 2006 Three Month Period and the three months ended June 30, 2005, or the 2005 Three Month Period, respectively, and 46% and 38% of our total revenues in the 2006 Six Month Period and the six months ended June 30, 2005, or the 2005 Six Month Period, respectively.

        As of September 1, 2005, we no longer report co-promotion revenue due to our restructured relationship with SGP. Co-promotion revenue represented approximately 43% of our total revenues in the 2005 Three Month Period and 39% of our total revenues in the 2005 Six Month Period.

        Revenue under strategic alliances increased 42% to $27.2 million in the 2006 Three Month Period and 19% to $65.8 million in the 2006 Six Month Period from the comparable periods in 2005. The increase in both the 2006 Three and Six Month Periods was primarily due to the restructured SGP relationship, which generates revenue from the management of the INTEGRILIN supply chain on behalf of SGP in the form of license fees and reimbursement of manufacturing-related expenses. Beginning July 1, 2006, SGP will purchase the majority of the active pharmaceutical ingredient necessary to manufacture INTEGRILIN. We expect reimbursement of manufacturing-related expenses to decrease in future periods as a result of this change. Additionally, we expect cost of sales to decrease by a corresponding amount with no net impact on our statements of operations.

        We expect revenue under strategic alliances to fluctuate in future periods 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.

        As mentioned above, we began recording royalty revenue starting September 1, 2005. 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. We recorded $34.2 million and $64.6 million of royalty revenue during the 2006 Three and Six Month Periods, respectively, which primarily included royalties from SGP and Ortho Biotech.

Cost of Sales

        Cost of sales decreased 15% to $14.1 million in the 2006 Three Month Period and 4% to $29.9 million in the 2006 Six Month Period from the comparable periods in 2005. Cost of sales includes manufacturing-related expenses associated with the sales of VELCADE as well as costs associated with managing the INTEGRILIN supply chain on behalf of SGP. The decrease was primarily a result of timing differences due to the manner in which we now recognize cost of sales at the time of shipment to SGP under our restructured relationship. Through August 31, 2005 under our co-promotion arrangement with SGP, we deferred certain manufacturing-related expenses until the time SGP shipped INTEGRILIN to its customers inside and outside of the co-promotion territories. This decrease was partially offset by increased cost of sales associated with higher VELCADE sales.

Research and Development

        Research and development expenses decreased 9% to $79.3 million in the 2006 Three Month Period and 6% to $161.9 million in the 2006 Six Month Period from the comparable periods in 2005. The decrease in both periods was primarily a result of cost reductions associated with our 2005 strategy refinement and restructuring efforts combined with decreased spending in our discovery organization partially offset by the addition of stock-based compensation expense of approximately $6.0 million and $12.3 million in the 2006 Three and Six Month Periods, respectively, related to the adoption of SFAS 123R on January 1, 2006.

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        In addition to our ongoing clinical trials of VELCADE, we have a number of drug candidates in clinical and late preclinical development. In January 2006, as part of our portfolio review process, based on the evaluation of clinical data in the context of additional opportunities in the pipeline, we decided to discontinue development of MLN2704 in its current form as well as MLN1202 in rheumatoid arthritis. The following chart summarizes the applicable disease indication and the clinical or preclinical trial status of our drug candidates.

Product Description	Disease Indication	Current Trial Status
Cancer
MLN518 is a small molecule inhibitor of the Receptor Tyrosine Kinase, or RTK, including FLT-3, PDGF-R and c-KIT	Acute myeloid leukemia Glioma(1) Renal(1) Prostate(1)	phase I/phase II phase I planned for 2006 phase I planned for 2006 phase I planned for 2006
MLN8054 is a small molecule inhibitor of AuroraA kinases	Advanced malignancies	phase I
Inflammatory Diseases
MLN0002 is a humanized monoclonal antibody directed against the alpha4beta7 receptor	Crohn's disease Ulcerative colitis	preclinical with prior phase II data preclinical with prior phase II data
MLN1202 is a humanized monoclonal antibody directed against CCR2	Multiple sclerosis Atherosclerosis Scleroderma	phase IIa phase II phase IIa planned for 2007
MLN3897 is a small molecule CCR1 inhibitor	Chronic inflammatory diseases such as rheumatoid arthritis	phase I with phase IIa planned for 2006
MLN3701 is a small molecule CCR1 inhibitor, backup to MLN3897	Chronic inflammatory diseases such as rheumatoid arthritis	phase I
MLN0415 is a small molecule inhibitor of IKKbeta	Chronic inflammatory diseases such as rheumatoid arthritis	phase I planned for 2006
MLN6095 is a small molecule anti-inflammatory inhibitor	Inflammatory diseases	preclinical

__________________
    ⁽¹⁾        Trials planned to be conducted through Cancer Therapy Evaluation Program, a division of the National Cancer Institute.

        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	2-4 years

        Upon successful completion of phase III clinical trials, and in some cases phase II, 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.

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        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 projects as we may experience a longer regulatory process in connection with any products that we develop based upon these new technologies or therapeutic approaches. In addition, ultimate approval for commercial manufacturing and marketing of our products is dependent on the FDA or applicable approval body in the country for which approval is being sought, adding further uncertainty to estimated costs and completion dates. Significant delays could allow our competitors to bring products to market before we do and impair our ability to commercialize our product candidates.

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

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

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

Selling, General and Administrative

        Selling, general and administrative expenses decreased 28% to $37.4 million in the 2006 Three Month Period and 30% to $72.9 million in the 2006 Six Month Period from the comparable periods in 2005. The decrease in both periods was primarily the result of reduced sales and marketing expenses associated with the transfer of the U.S. commercialization rights to INTEGRILIN to SGP as of September 1, 2005 combined with cost reductions associated with our 2005 strategy refinement and restructuring efforts partially offset by the addition of stock-based compensation expense of approximately $5.5 million and $9.6 million in the Three and Six Month Periods, respectively, related to the adoption of SFAS 123R on January 1, 2006.

Restructuring

        During the fourth quarter of 2005, we announced our 2005 strategy refinement focused on advancing key growth assets, including VELCADE, our clinical and preclinical pipeline in oncology and inflammation molecules and our oncology-focused discovery organization. As part of our refined strategy, we have taken a series of steps, building on our restructured relationship with SGP, which together have reduced research and development and selling, general and administrative expenses in 2006. We expect these cost reductions to continue throughout the remainder of 2006. We reduced the size of our company from approximately 1,500 employees at the end of 2004 to approximately 1,100 at 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 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.

        In accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” our facilities related expenses and liabilities under both the 2003 and 2005 restructuring plans included estimates of the remaining rental obligations, net of estimated sublease income, for facilities we no longer occupy. We validated our estimates and assumptions with independent third parties having relevant expertise in the real estate market. 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 2006 Three and Six Month Periods, we recorded a total of $1.6 million and $4.4 million, respectively, in restructuring charges under the 2005 strategy refinement and our 2003 restructuring plan. We recorded net restructuring credits of $1.6 million during the 2006 Three Month Period and net restructuring charges of $0.3 million during the 2006 Six

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Month Period under the 2005 restructuring plan. The restructuring charges primarily related to additional facility related costs associated with vacated buildings and employee termination benefits as a result of the headcount reductions within inflammation discovery and business support groups. Offsetting these charges was a credit resulting from the earlier than anticipated sublease of one of the vacated buildings at a higher rate per square foot than was originally estimated. We recorded restructuring charges of $3.2 million and $4.1 million during the 2006 Three and Six Month Periods, respectively, under the 2003 restructuring plan. The restructuring charges primarily related to adjustments to our original estimates of the remaining rental obligations for a certain vacated facility based upon our inability to secure subtenants in the time and manner included in our earlier estimates.

Amortization of Intangibles

        Amortization of intangible assets of $8.5 million in the 2006 Three Month Period and $17.0 million in the 2006 Six Month Period was relatively unchanged from the comparable periods in 2005. Amortization in 2006 and 2005 primarily related 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 $34.0 million for each of the next five years.

Investment Income

        Investment income decreased 61% to $5.8 million in the 2006 Three Month Period and 46% to $10.4 million in the 2006 Six Month Period from the comparable periods in 2005. The decrease in both periods was primarily attributable to the realized gain of approximately $10.5 million recognized upon the sale of our cost method investment in TransForm Pharmaceuticals, Inc. in April 2005, partially offset by more favorable market conditions resulting in higher yields.

Interest Expense

        Interest expense increased 18% to $2.7 million in the 2006 Three Month Period and 11% to $5.5 million in the 2006 Six Month Period from the comparable periods in 2005. The increase was primarily attributable to increased capital lease buyouts resulting in higher related interest expense.

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 of some of our alliance collaborators in accordance with our Board of Directors’ approved policies and our business needs. These investments were 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 through August 31, 2005;

• product sales of VELCADE;

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

• royalty payments related to the sales of our products; and

• equity and debt financings in the public markets.

        In the future, we expect to continue to fund our cash requirements from some or all 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;

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• 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 June 30, 2006 we had $626.0 million in cash, cash equivalents and marketable securities. This excludes $7.4 million of interest-bearing marketable securities classified as restricted cash on our balance sheet as of June 30, 2006, which primarily serve as collateral for letters of credit securing leased facilities. As of June 30, 2006 we had $99.6 million of outstanding convertible debt, all of which is included in current liabilities.

        Our significant capital resources are as follows:

	June 30, 2006		December 31, 2005
(in thousands)
Cash, cash equivalents and marketable securities	$	626,003	$	645,588
Working capital		493,742		576,501
Long-term debt, net of current portion		—		99,571

	Six Months Ended June 30,
	2006			2005
Cash provided by (used in):
Operating activities	$	(20,564	)	$	(110,603	)
Investing activities		19,857			114,211
Financing activities		6,801			1,724
Capital expenditures (included in investing activities above)		(5,552	)		(6,430	)

Cash Flows

        The principal use of cash in operating activities in both 2006 and 2005 was to fund our net loss. 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 $19.9 million in the 2006 Six Month Period and $114.2 million in the comparable period in 2005. The principal source of funds in both 2006 and 2005 was the proceeds from sales and maturities of marketable securities. In April 2005, we recorded proceeds of approximately $10.6 million upon the sale of our cost method investment in TransForm.

        Financing activities provided cash of $6.8 million in the 2006 Six Month Period and $1.7 million in the comparable period in 2005. The principal source of funds was from the purchases of common stock by our employees. We used $5.9 million in 2006 to pay off our 4.5% convertible senior notes in accordance with the payment terms. We also used $3.3 million and $6.9 million in 2006 and 2005, respectively, to make principal payments on our capital leases.

        We believe that our existing cash and cash equivalents and the anticipated cash receipts from our product sales, 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

        As noted above and in accordance with the payment terms, we paid off the $5.9 million principal balance on our 4.5% convertible senior notes during the 2006 Three Month Period.

        There have been no additional significant changes to our contractual obligations and commercial commitments included in our Form 10-K as of December 31, 2005.

        As of June 30, 2006, we did not have any financing arrangements that were not reflected in our balance sheet.

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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 and more than 75 other countries including the countries of the European Union. If we are not able to obtain approval to market VELCADE in additional countries, we will lose the opportunity to sell in those countries and will not be able to earn potential milestone payments under our agreement with Ortho Biotech or collect potential distribution fees on sales of VELCADE by Ortho Biotech in those countries.

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

        The products that we are developing require research and development, extensive preclinical studies and clinical trials and regulatory approval prior to any commercial sales. This process is expensive and lengthy, and can 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. For example, in January 2006, as part of our portfolio review process, based on the evaluation of clinical data in the context of additional opportunities in the pipeline, we decided to discontinue development at this time of MLN2704 in its current form as well as MLN1202 in rheumatoid arthritis.

        Failure to gain approval for the products we are developing could have an adverse material impact on our business.

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 or more frequently than expected serious adverse events, which could have a material adverse effect on our business.

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        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, such as proteasome inhibition, 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.

        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.

        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 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’s Thalomid and Revlimid. In May 2006, the FDA approved the use of Thalomid for the treatment of newly diagnosed multiple myeloma. We also face competition for VELCADE from Celgene’s Revlimid which was approved by the FDA in December 2005 for the treatment of a subset of patients with transfusion-dependent anemia and in June 2006 for relapsed or refractory multiple myeloma. We also face competition for VELCADE from traditional chemotherapy treatments, and there are other potentially competitive therapies for VELCADE, including other proteasome inhibitors, that are in late-stage clinical development for the treatment of multiple myeloma. In addition, multiple myeloma therapies in development may reduce the number of patients available for VELCADE treatment through enrollment of these patients in clinical trials of these potentially competing products.

        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. The most significant competitors for SGP and GSK in marketing INTEGRILIN 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.

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        Other competitive factors that could negatively affect INTEGRILIN include:

• expanded use of heparin replacement therapies, such as Angiomax® (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

• SGP’s 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 INTEGRILIN 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, SGP may not realize sales goals for the product and could reduce the royalty revenue we recognize and thus 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 make provisions at the time of sale of VELCADE for discounts, rebates, product returns and other 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 amount of revenue we are able to recognize from these sales.

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 a number of genes working in combination or to novel 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

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repeated or a program to be terminated, even if other studies or trials relating to the program are successful. For example, in December 2003 we decided to stop further accrual to a phase II trial examining VELCADE in colorectal cancer because interim findings produced results that did not meet the pre-specified efficacy criteria for continuation of study accrual.

        We may not complete our planned preclinical or clinical trials on schedule or at all. We may not be able to confirm the safety and efficacy of our potential drugs in long-term clinical trials, which may result in a delay or failure to commercialize our products. We may have difficulty obtaining a sufficient number of appropriate patients or clinical support to conduct our clinical trials as planned. 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 difficulties in recruiting 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 expeditiously 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 $17.7 million for the three months ended June 30, 2006 and $44.1 million for the three months ended June 30, 2005. We have incurred net losses of $38.5 million for the six months ended June 30, 2006 and $80.5 million for the six months ended June 30, 2005, net losses of $198.2 million for the year ended December 31, 2005, $252.3 million for the year ended December 31, 2004 and $483.7 million for the year ended December 31, 2003. 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.

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        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 positive net income. Our ability to achieve positive net income 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 successfully develop products and generate revenues from the sale of approved 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. We may also require additional financing to execute on product in-licensing or acquisition opportunities. 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, our product commercialization activities or our in-licensing or acquisition 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 June 30, 2006, we had approximately $99.6 million of outstanding convertible debt which matures in 2007 and $77.1 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 $5.4 million over the next year.

        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.

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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.

        We recorded restructuring charges of $1.6 million for the three months ended June 30, 2006 and $3.0 million for the three months ended June 30, 2005. We recorded restructuring charges of $4.4 million for the six months ended June 30, 2006 and $4.1 million for the six months ended June 30, 2005, restructuring charges of $77.1 million for the year ended December 31, 2005, $38.0 million for the year ended December 31, 2004 and $191.0 million for the year ended December 31, 2003. In December 2002 and June 2003, we took steps as part of our 2003 restructuring plan to focus our resources on development and commercialization of product opportunities and achieving our goal of becoming profitable in the future. 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 efforts, we expect to reduce total research and development and selling, general and administration expenses. We may not achieve our estimated expense reductions anticipated from the restructurings because such savings are difficult to predict and speculative in nature.

If we or the SEC determine that we have improperly accounted for historical stock option grants, and if the associated expense not previously recorded is material, we could be required to restate certain historical financial statements and become subject to litigation.

        During the second quarter of 2006, we received a telephone inquiry from the SEC regarding whether stock options we awarded with a stated grant date of September 26, 2001 were, in fact, properly granted on that date. We were one of over 30 public companies discussed in a May 2006 third party report concerning the timing of stock option grants from 1997 through 2002. With respect to us, the report referenced one option grant we made in September 2001. As both our review and the SEC’s inquiry are on-going, we or the SEC may identify additional issues relating to other stock option grants. If it is determined that any of our option grants were improperly granted or accounted for, we may be required to record new compensation expense relating to those grants, and if the expense is material we may be required to restate certain of our historical financial statements. Additionally, we could become subject to an enforcement proceeding or other litigation. The adverse effects of such a restatement or litigation could be material.

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, including VELCADE and INTEGRILIN, 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.

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• 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 based on net product sales of INTEGRILIN. 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 and maintain 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

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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 MLN0002 and MLN1202 product candidates are humanized monoclonal antibodies. 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 VELCADE, 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. On May 4, 2006, a federal court jury gave a verdict in favor of Ariad in its patent-infringement lawsuit against Eli Lilly relating to United States Patent No. 6,410,516. We expect that Eli Lilly will challenge this verdict and the validity of the patent with the federal district judge and the U.S. Court of Appeals. In addition, we are also aware that Amgen Inc. has filed a declaratory relief action seeking an invalidity ruling with respect to this patent. However, Ariad’s initial success in its claim against Eli Lilly may increase the possibility that Ariad could sue additional parties, including us, and allege infringement of the patent.

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

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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 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.

Competition from generic pharmaceutical manufacturers could negatively impact our products sales.

        Competition from manufacturers of generic drugs is a major challenge for us in the U.S. and is growing internationally. Upon the expiration or loss of patent protection for one of our products, or upon the “at-risk” launch (despite pending patent infringement litigation against the generic product) by a generic manufacturer of a generic version of one of our products, we could lose the major portion of sales of that product in a very short period, which could adversely affect our business.

        Generic competitors operate without our large research and development expenses and our costs of conveying medical information about our products to the medical community. In addition, the FDA approval process exempts generics from costly and time-consuming clinical trials to demonstrate their safety and efficacy, allowing generic manufacturers to rely on the safety and efficacy data of the innovator product. Generic products, however, need only demonstrate a level of availability in the bloodstream equivalent to that of the innovator product. This means that generic competitors can market a competing version of our product after the expiration or loss of our patent and charge much less. The issued U.S. patents related to VELCADE expire in 2014 with the potential for extension and the issued foreign patents expire in 2015 with extensions issued or pending in a number of countries. The issued United States patents that cover INTEGRILIN expire in 2014 and 2015 and the issued foreign patents expire between 2010 and 2012. In addition, our patent-protected products can face competition in the form of generic versions of branded products of competitors that lose their market exclusivity.

Risks Relating to Product Manufacturing, Marketing and Sales

Because we have limited sales, marketing and distribution experience and capabilities, in some instances 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.

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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 substantially 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, or we may experience delays in doing so.

        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 and INTEGRILIN, we are dependent on third parties to produce product sufficient to meet market demand.

        We are responsible for managing the supply of material for all clinical and commercial production of VELCADE, including VELCADE that Ortho Biotech sells or uses in clinical trials, and INTEGRILIN, including INTEGRILIN that SGP and GSK sell or use in clinical trials.

        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 have no manufacturing facilities for INTEGRILIN and, accordingly, rely on third party contract manufacturers for the clinical and commercial production of INTEGRILIN. We have three approved 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 one other manufacturer for the production of bulk product. We own the technology utilized by the third supplier. We have two manufacturers that currently perform fill/finish services for INTEGRILIN and a new packaging supplier for the United States. If our current manufacturers are unable to continue or decide to discontinue their fill/finish services and we are unable to secure alternative manufacturers, the supply of INTEGRILIN could be adversely affected which could harm our business.

        In order to mitigate the risk of INTEGRILIN supply interruption, we have entered into a new third party fill/finish arrangement on commercially reasonable terms and we are in the process of establishing a second bulk product manufacturing site that will manufacture eptifibatide using the Millennium owned process technology. Because these are new manufacturing arrangements, these manufacturers may encounter difficulties that could adversely affect the supply of INTEGRILIN and, thereby, harm our business. For example, the owner of the process technology used by two of our manufacturers has raised concerns that the new Millennium process may have been developed using information asserted to be confidential to that owner. If that owner succeeds in a claim relating to these concerns, our ability to practice the new process could be negatively impacted which could affect the cost of manufacturing eptifibatide and negatively impact our business.

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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, on federal and state levels, and 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.

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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 the six months ended June 30, 2006, our common stock traded as high as $11.46 per share and as low as $7.83 per share. During 2005, our common stock traded as high as $12.34 per share and as low as $7.63 per share. Factors such as announcements of our or our competitors’ operating results, data from our or our competitors’ clinical trial results, changes in our prospects, market conditions for biopharmaceutical stocks in general and analyst recommendations or commentary concerning our or our competitors’ products or business 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

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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 June 30, 2006. 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.

        We receive distribution fees from Ortho Biotech based on worldwide product sales of VELCADE outside of the U.S. As a result, our financial position, results of operations and cash flows can be affected by fluctuations in foreign currency exchange rates, primarily EURO. Movement in foreign currency exchange rates could cause royalty revenue to vary significantly in future reporting periods.

        As of June 30, 2006, the fair value of our 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 June 30, 2006.

        As of June 30, 2006 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 June 30, 2006. 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 June 30, 2006, 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 June 30, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II    OTHER INFORMATION

Item 4.    Submission of Matters to a Vote of Security Holders

        At our Annual Meeting of Stockholders held on May 4, 2006, our stockholders voted on three matters, as follows:

1. The stockholders elected Deborah Dunsire, Robert F. Friel and Norman C. Selby to serve as Class I directors for a term of three years by the following votes:

	Number of Shares
Name	For	Withheld
Deborah Dunsire	266,389,439	4,892,113
Robert F. Friel	267,046,864	4,234,688
Norman C. Selby	264,190,142	7,091,410

The other directors whose terms of office as a director continue after the meeting are as follows: A. Grant Heidrich, III, Charles J. Homcy, Raju S. Kucherlapati, Eric S. Lander, Mark J. Levin, Kenneth E. Weg and Anthony H. Wild.

2. The stockholders approved an amendment to our 1996 Employee Stock Purchase Plan that reserves an additional 2,000,000 shares of our common stock for issuance under the plan to employees by the following votes:

For:	196,810,004
Against:	10,595,129
Abstain:	336,895
Broker Non-Votes:	63,539,524

3. The stockholders ratified the appointment of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2006 by the following votes:

For:	269,686,049
Against:	1,355,779
Abstain:	239,724

Item 6.    Exhibits

(a)	Exhibits
	The exhibits listed in the Exhibit Index are included in this report.

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SIGNATURES

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

	MILLENNIUM PHARMACEUTICALS, INC. (Registrant)
Dated: August 4, 2006	By	/s/  MARSHA H. FANUCCI
		Marsha H. Fanucci
		Senior Vice President and Chief Financial Officer
		(principal financial and chief accounting officer)

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EXHIBIT INDEX

Exhibit No.		Description
	10.1	Letter Agreement dated May 25, 2006 between the Company and Anna Protopapas
	10.2	1996 Employee Stock Purchase Plan, as amended
	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

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