Millennium Pharmaceuticals 10Q 2007 Q1 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 March 31, 2007

OR

o	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		(I.R.S. Employer
of incorporation or organization)		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 o

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 o Non-accelerated filer o

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

Number of shares of the registrant’s Common Stock, $0.001 par value, outstanding on May 4, 2007: 321,119,350

MILLENNIUM PHARMACEUTICALS, INC.

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2007

TABLE OF CONTENTS

PART I	FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements

	Condensed Consolidated Balance Sheets as of March 31, 2007 and December 31, 2006	3

	Condensed Consolidated Statements of Operations for the three months ended March 31, 2007 and 2006	4

	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2007 and 2006	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15

	Risk Factors That May Affect Results	27

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	40

Item 4.	Controls and Procedures	40

PART II	OTHER INFORMATION

Item 6.	Exhibits	41

	Signatures	42

	Exhibit Index	43

The following Millennium trademarks are used in this Quarterly Report on Form 10-Q: Millennium®, the Millennium “M” logo and design (registered), Millennium Pharmaceuticals™, VELCADE® (bortezomib) for Injection, and INTEGRILIN® (eptifibatide) Injection. All are covered by registrations or pending applications for registration in the U.S. Patent and Trademark Office and many other countries. 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.

PART I FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

Millennium Pharmaceuticals, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except per share amounts)	March 31, 2007			December 31, 2006
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	62,602		$	212,273
Marketable securities	756,567			682,076
Accounts receivable, net of allowances of $519 in 2007 and $521 in 2006	70,313			94,516
Inventory	12,090			13,598
Prepaid expenses and other current assets	12,615			13,191
Total current assets	914,187			1,015,654
Property and equipment, net	145,796			153,349
Restricted cash	7,615			7,600
Other assets	31,370			27,900
Goodwill	1,214,711			1,213,910
Developed technology, net	263,511			271,876
Intangible assets, net	61,401			61,523
Total assets	$	2,638,591		$	2,751,812

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	19,253		$	26,301
Accrued expenses	52,670			62,544
Current portion of restructuring	23,394			25,540
Current portion of deferred revenue	6,905			10,378
Current portion of capital lease obligations	1,200			1,185
Current portion of long-term debt	—			99,571
Total current liabilities	103,422			225,519
Other long-term liabilities	791			757
Restructuring, net of current portion	40,472			41,974
Deferred revenue, net of current portion	15,979			13,344
Capital lease obligations, net of current portion	74,735			75,041
Long-term debt	250,000			250,000

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: 320,445 shares at March 31, 2007 and 317,342 shares at December 31, 2006 issued and outstanding	320			317
Additional paid-in capital	4,672,578			4,657,177
Accumulated other comprehensive loss	(1,937		)	(1,326		)
Accumulated deficit	(2,517,769		)	(2,510,991		)
Total stockholders’ equity	2,153,192			2,145,177
Total liabilities and stockholders’ equity	$	2,638,591		$	2,751,812

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

Millennium Pharmaceuticals, Inc.

Condensed Consolidated Statements of Operations

(unaudited)

	Three Months Ended March 31,
(in thousands, except per share amounts)	2007			2006

Revenues:
Net product sales	$	58,640		$	53,373
Revenue under strategic alliances	15,714			38,629
Royalties	36,370			30,473
Total revenues	110,724			122,475

Costs and expenses:
Cost of sales (excludes amortization of acquired intangible assets)	5,358			15,828
Research and development (Note 1)	71,229			82,598
Selling, general and administrative (Note 1)	39,525			35,465
Restructuring	5,611			2,831
Amortization of intangibles	8,487			8,487
Total costs and expenses	130,210			145,209

Loss from operations	(19,486		)	(22,734		)

Other income (expense):
Investment income, net	15,495			4,625
Interest expense	(2,787		)	(2,732		)
Net loss	$	(6,778	)	$	(20,841	)

Amounts per common share:

Net loss per share, basic and diluted	$	(0.02	)	$	(0.07	)

Weighted average shares, basic and diluted	316,072			311,823

Note 1: In accordance with SFAS No. 123 (revised 2004), “Share Based Payment,” (“SFAS No. 123R”), stock-based compensation expense is allocated in the condensed consolidated statements of operations expense lines as follows:

	Three Months Ended March 31,
(in thousands)	2007		2006

Research and development	$	2,055	$	6,334
Selling, general and administrative	3,347		4,166

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

Millennium Pharmaceuticals, Inc

Condensed Consolidated Statements of Cash Flows

(unaudited)

	Three Months Ended March 31,
(in thousands)	2007			2006

Cash Flows from Operating Activities:
Net loss	$	(6,778	)	$	(20,841	)
Adjustments to reconcile net loss to cash provided by (used in) operating activities:
Depreciation and amortization	17,083			16,442
Restructuring charges, net	—			54
Amortization of deferred financing costs	448			111
Realized (gain) loss on securities, net	(5,092		)	2,006
401K stock match	1,650			1,702
Stock-based compensation expense	5,402			10,500
Changes in operating assets and liabilities:
Accounts receivable	24,203			(4,211		)
Inventory	1,508			(586		)
Prepaid expenses and other current assets	576			(467		)
Restricted cash and other assets	(3,509		)	(1,171		)
Accounts payable and accrued expenses	(20,534		)	(24,626		)
Deferred revenue	(838		)	(5,936		)
Other long-term liabilities	34			640
Net cash provided by (used in) operating activities	14,153			(26,383		)

Cash Flows from Investing Activities:
Investments in marketable securities	(190,474		)	(84,728		)
Proceeds from sales and maturities of marketable securities	117,991			118,420
Purchases of property and equipment	(1,100		)	(1,386		)
Other investing activities	1,269			(739		)
Net cash provided by (used in) investing activities	(72,314		)	31,567

Cash Flows from Financing Activities:
Net proceeds from employee stock purchases	8,351			9,198
Repayment of principal of long-term debt obligations	(99,571		)	—
Principal payments on capital leases	(291		)	(1,769		)
Net cash provided by (used in) financing activities	(91,511		)	7,429

Increase (decrease) in cash and cash equivalents	(149,672		)	12,613
Effects of exchange rate changes on cash and cash equivalents	1			—
Cash and cash equivalents, beginning of period	212,273			5,029
Cash and cash equivalents, end of period	$	62,602		$	17,642

Supplemental Cash Flow Information:
Cash paid for interest	$	3,323		$	3,920
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.

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 months ended March 31, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007. 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, 2006, which was filed with the Securities and Exchange Commission (“SEC”) on March 1, 2007.

The information presented in the condensed consolidated financial statements and related footnotes at March 31, 2007, and for the three months ended March 31, 2007 and 2006, is unaudited and the condensed consolidated balance sheet amounts and related footnotes at December 31, 2006, have been derived from audited financial statements.

2. Summary of Significant Accounting Policies

Reclassifications

Certain prior year amounts of the condensed consolidated statements of cash flows have been reclassified to conform to the current year presentation related to equity adjustments from foreign currency translation.

Cash Equivalents, Marketable Securities and Other Investments

Cash equivalents principally consist of money market funds and corporate bonds with maturities of three months or less at the date of purchase. Marketable securities primarily consist 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 the statement of operations, 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 March 31, 2007 and December 31, 2006.

Management determines the appropriate classification of marketable securities at the time of purchase and reevaluates such designation at each balance sheet date. Marketable securities at March 31, 2007 and December 31, 2006 are classified as “available-for-sale.” Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported in a separate component of stockholders’ equity. The cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion are included in investment income. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities and other investments are included in investment income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in investment income.

During the three months ended March 31, 2007, the Company recorded realized gains on marketable securities and other investments of $6.0 million and realized losses on marketable securities of $0.9 million. During the three months ended March 31, 2006, the Company did not record significant realized gains on marketable securities and recorded realized losses on marketable securities of $2.0 million.

Realized gains on marketable securities for the three months ended March 31, 2007 included a realized gain of approximately $3.5 million related to the sale of the Company’s investment in SGX Pharmaceuticals, Inc. and a realized gain of approximately $2.3 million related to the Company’s share of proceeds from a class action proceeding against WorldCom, Inc. During 2002, the Company recorded realized losses equal to the carrying value of its investment in WorldCom, Inc., as the decline in value was determined to be other-than-temporary at that time.

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. The remainder of the Company’s total revenue is related to its strategic alliances and royalties.

Revenues from Ortho Biotech Products, L.P. (“OBL”), a member of the Johnson & Johnson Family of Companies, accounted for approximately 15 percent and 21 percent of consolidated revenues for the three months ended March 31, 2007 and 2006, respectively.

Revenues from Schering-Plough Ltd. and Schering Corporation (collectively “SGP”) accounted for approximately 25 percent and 32 percent of consolidated revenues for the three months ended March 31, 2007 and 2006, respectively.

There were no other significant customers under strategic alliances and royalties for the three months ended March 31, 2007 and 2006.

Information Concerning Market and Source of Supply Concentration

INTEGRILIN® (eptifibatide) Injection has received regulatory approvals in the United States, the countries of the European Union and a number of other countries for various indications. The Company and 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, S.A. (“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. As of July 1, 2006, SGP began to purchase the majority of its API directly from the manufacturer. The Company has two manufacturers that currently perform fill/finish services for INTEGRILIN and two packaging suppliers 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.

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.

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. 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.

VELCADE inventories primarily relate to raw materials used in production, work in process and finished goods inventory on hand. INTEGRILIN inventories include raw materials used in production and work in process to supply GSK and limited amounts of work in process to supply SGP.

Inventory consists of the following (in thousands):

	March 31, 2007		December 31, 2006
Raw materials	$	9,128	$	9,736
Work in process	2,260		3,458
Finished goods	702		404
	$	12,090	$	13,598

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):

	March 31, 2007					December 31, 2006
	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
Developed technology	$	435,000	$	(171,489	)	$	435,000	$	(163,124	)
Core technology	$	18,712	$	(18,712	)	$	18,712	$	(18,712	)
Other	17,060		(14,659		)	17,060		(14,537		)
Total amortizable intangible assets, excluding developed technology	35,772		(33,371		)	35,772		(33,249		)
Total indefinite-lived trademark	59,000		—			59,000		—
Total intangible assets, excluding developed technology	$	94,772	$	(33,371	)	$	94,772	$	(33,249	)

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

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

Amortization expense was approximately $8.5 million in each of the three months ended March 31, 2007 and 2006. 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.

Goodwill as of March 31, 2007 consists of the excess purchase price over the estimated fair value of net tangible and intangible assets. The carrying value may be adjusted as a result of the continued settlement of contingent consideration arising from acquisitions. Accordingly, goodwill increased by $0.8 million and $0.7 million for the three months ended March 31, 2007 and 2006, respectively.

Revenue Recognition

The Company recognizes revenue from the sale of its products, 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.

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.

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

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 OBL;

· 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 March 31, 2007 and 2006, advertising and promotional expenses were $6.7 million and $5.2 million, respectively.

Net Loss Per Common Share

Basic net loss per common share is computed using the weighted-average number of common shares outstanding during the period, 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 and unvested restricted

shares that were not included in the calculation of diluted shares because the effect of including the options, warrants and unvested restricted shares would have been anti-dilutive were 3.4 million and 2.2 million at March 31, 2007 and 2006, respectively.

Comprehensive Loss

Comprehensive loss comprises net loss, changes 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 March 31,
	2007			2006
Net loss	$	(6,778	)	$	(20,841	)
Unrealized gain (loss) on marketable securities	(615		)	8,816
Cumulative translation adjustments	4			(5		)
Comprehensive loss	$	(7,389	)	$	(12,030	)

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

	March 31, 2007			December 31, 2006
Unrealized loss on marketable securities	$	(971	)	$	(356	)
Cumulative translation adjustments	(966		)	(970		)
Accumulated other comprehensive loss	$	(1,937	)	$	(1,326	)

Stock-Based Compensation Expense

The Company adopted SFAS No. 123 (revised 2004), “Share Based Payment,” (“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 stock issued under the Company’s employee stock purchase plans. The Company recognized stock-based compensation expense of $5.4 million and $10.5 million during the three months ended March 31, 2007 and 2006, respectively. The reduction in stock-based compensation expense was primarily due to forfeitures in excess of original estimates which resulted from the forfeit of certain cliff-based awards held by employees that were severed in connection with restructuring initiatives, as well as normal attrition.

Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” or SFAS No. 157. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 codifies the definition of fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company does not believe adoption will have a material impact on its results of operations, financial position or cash flows.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” or SFAS No. 159. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently analyzing the effect, if any, SFAS No. 159 will have on its consolidated financial position and results of operations.

3. Restructuring

2006 Resource Alignment

In October 2006, the Company announced a program to further align resources with its current corporate priorities of advancing VELCADE and accelerating the clinical and preclinical pipeline by lowering investment in discovery and

supporting areas. As part of its program, the Company has reduced in-house research and development technologies and headcount in areas where the work can now be outsourced.

The Company recorded restructuring charges of approximately $5.0 million during the three months ended March 31, 2007, under the 2006 restructuring program, primarily for facilities-related costs associated with vacated buildings and employee termination benefits as a result of headcount reductions. “Other” in the table below includes the write-off of deferred rent in accordance with SFAS No. 13, “Accounting for Leases,” upon vacating the facilities.

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

	Balance at									Balance at
	December 31,									March 31,
	2006		Charges		Payments			Other		2007
Termination benefits	$	3,602	$	847	$	(2,749	)	$	—	$	1,700
Facilities	—		4,095		—			93		4,188
Other associated costs	—		31		(15		)	—		16
Total	$	3,602	$	4,973	$	(2,764	)	$	93	$	5,904

2005 Strategic Refinement

In October 2005, the Company announced its 2005 restructuring plan in support of a refined business strategy focused on advancing key growth assets, including VELCADE, advancing the Company’s clinical pipeline and building a leading oncology-focused discovery organization. In connection with the strategic 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.

The Company recorded restructuring charges of approximately $0.2 million during the three months ended March 31, 2007 under the 2005 restructuring plan, primarily related to the net present value adjustment for facilities charged to restructuring in prior years. The Company recorded restructuring charges of approximately $1.9 million during the three months ended March 31, 2006 under the 2005 restructuring plan, primarily related to additional facility related costs associated with vacated buildings and employee termination benefits.

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

	Balance at								Balance at
	December 31,								March 31,
	2006		Charges			Payments			2007
Termination benefits	$	133	$	—		$	(49	)	$	84
Facilities	13,827		214			(1,666		)	12,375
Other associated costs	24		(24		)	—			—
Total	$	13,984	$	190		$	(1,715	)	$	12,459

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 approximately $0.4 million and $0.9 million during the three months ended March 31, 2007 and 2006, respectively, under the Company’s 2003 restructuring plan, primarily related to the net present value adjustment for facilities charged to restructuring in prior years.

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

	Balance at							Balance at
	December 31,							March 31,
	2006		Charges		Payments			2007
Facilities	$	49,928	$	448	$	(4,873	)	$	45,503

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 the restructuring.

In accordance with SFAS No. 146, the Company’s facilities related expenses and liabilities in all 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 all of the Company’s restructuring initiatives at March 31, 2007 is approximately $23.4 million due through March 31, 2008 and $40.5 million thereafter through 2014. The actual amount and timing of the payment of the remaining accrued liability is dependent upon the ultimate terms of any potential subleases or lease restructuring. The Company expects to record total restructuring charges of between $15.0 to $25.0 million in 2007. These charges relate to certain facilities that the Company decided to abandon in November 2006, but will not be vacated until 2007, as well as net present value adjustments on facilities charged to restructuring in prior years. In connection with the decision to abandon the facilities in 2007, the Company revised the useful lives of the leasehold improvements at these facilities in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” During the three months ended March 31, 2007, the Company recorded additional amortization expense of approximately $2.8 million in research and development expense related to its decision.

The Company continues to evaluate its strategic alternatives, including facility consolidation, and as a result, significant additional restructuring charges could occur in future periods.

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

VELCADE

In January 2007, the Company and Ortho Biotech Inc. (“OBI”) began jointly promoting VELCADE to U.S.-based physicians who treat multiple myeloma patients. The Company pays a proportion of the VELCADE-related costs for the OBI sales force, and OBI is entitled to receive a commission should sales associated with the increased promotional effort exceed pre-specified targets. Both parties are able to terminate the agreement under certain circumstances and subject to fees. The Company continues to be responsible for manufacturing and distribution of VELCADE in the U.S. The current agreement between the Company and OBL for the promotion of VELCADE outside the U.S. remains unchanged.

5. Convertible Debt

The Company had the following convertible notes outstanding at March 31, 2007 and December 31, 2006:

	March 31, 2007		December 31, 2006
2.25% convertible senior notes due November 15, 2011	$	250,000	$	250,000
5.5% convertible subordinated notes due January 15, 2007	—		83,325
5.0% convertible subordinated notes due March 1, 2007	—		16,246
Total	$	250,000	$	349,571

The $250.0 million of principal of 2.25% convertible senior notes due November 15, 2011 are convertible into the Company’s common stock at a price equal to $15.47 per share (the “2.25% notes”). Under the terms of the 2.25% notes, the Company is required to make semi-annual interest payments on the outstanding principal balance on May 15 and November 15 of each year.

The 2.25% notes are convertible into the Company’s common stock based upon a conversion rate of 64.6465 shares of common stock per $1,000 principal amount of the 2.25% notes, which is equal to an initial conversion price of approximately $15.47 per share of stock, subject to adjustment. The 2.25% notes are convertible only in the following circumstances: (1) if the closing price of the common stock exceeds 120% of the conversion price within a specified period, (2) if specified distributions to holders of the common stock are made or specified corporate transactions occur, (3) if the average trading price per $1,000 principal amount is less than 98% of the average conversion of the notes within a specified period (the “parity trigger”) or (4) during the last three months prior to the maturity date of the notes, unless previously repurchased by the Company under certain circumstances. In lieu of delivery of shares of the Company’s common stock, the Company may elect to deliver cash or a combination of cash and shares of the Company’s common stock in satisfaction of its obligation upon conversion. The 2.25% notes are subordinated in right of payment to future senior indebtedness of the Company.

The parity trigger represents an embedded derivative that requires bifurcation and separate accounting under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” As of March 31, 2007 and December 31, 2006, the Company estimated that the value of the parity trigger was not material to its consolidated results of operations and its financial position.

In accordance with the payment terms, the Company repaid the entire $83.3 million principal balance on its 5.5% convertible subordinated notes due on January 15, 2007 that were convertible at a price equal to $42.07 per share and the entire $16.2 million principal balance on its 5.0% convertible subordinated notes due on March 1, 2007 that were convertible at a price equal to $34.21 per share.

6. Stock 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 stock issued under the Company’s employee stock purchase plans.

In March 2007, the Company implemented performance based vesting for a portion of executive officer restricted stock awards. A significant portion of the annual equity awards to all executive officers will vest only upon achievement of predefined performance objectives. These performance based awards vest over a four year period so long as the predefined annual “target” or “overachievement” performance objectives are met or exceeded. No shares will vest in the years where “target” or “overachievement” performance objectives are not achieved and such shares will be forfeited. Performance based awards are recorded as compensation cost, based on the market value on the date the “target” or “overachievement “ performance objectives are known and probable, 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 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 March 31,				Three Months Ended March 31,
	2007		2006		2007		2006
Expected life	4.4		3.7		0.5		0.5
Risk-free interest	4.73	%	4.72	%	4.82	%	3.63	%
Volatility	40	%	45	%	40	%	60	%

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

The following table presents the combined option activity of the Company’s stock plans for the three months ended March 31, 2007:

					Weighted-
					Average
	Shares of		Weighted-		Remaining
	Common Stock		Average		Contractual	Aggregate
	Attributable to		Exercise Price		Term	Intrinsic Value
	Options		of Options		(in years)	(in thousands)
Outstanding at January 1, 2007	27,004,963		$	16.19
Granted	733,866		10.87
Exercised	(1,032,354	)	8.08
Forfeited or expired	(1,840,031	)	20.97
Outstanding at March 31, 2007	24,866,444		$	16.02	5.47	$	30,342
Vested or expected to vest at March 31, 2007	23,984,185		$	16.21	5.35	$	29,493
Exercisable at March 31, 2007	20,168,757		$	17.13	4.77	$	26,295

As of March 31, 2007, the total remaining unrecognized compensation cost related to nonvested stock option awards amounted to approximately $12.7 million, including estimated forfeitures, which will be recognized over the weighed-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 March 31, 2007, and changes during the three months then ended, is presented below:

	Shares		Weighted-Average Grant Date Fair Value
Nonvested at January 1, 2007	1,659,100		$	10.31
Granted	2,090,446		10.84
Vested	(406,184	)	10.45
Forfeited	(151,855	)	10.37
Nonvested at March 31, 2007	3,191,507		$	10.64

As of March 31, 2007 the total remaining unrecognized compensation cost related to nonvested restricted stock awards amounted to approximately $21.6 million, including estimated forfeitures, which will be recognized over the weighted-average remaining requisite service period of approximately one and one half years.

7. Income Taxes

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’s adoption did not have a material impact on its results of operations, financial position or cash flows as it has not recorded any liabilities relating to uncertain tax positions.

The Company files income tax returns in the United States federal jurisdiction and various state, local, and foreign jurisdictions. The Company is no longer subject to any tax assessment from an income tax examination in major taxing jurisdictions for years before 2003, except to the extent that in the future it utilizes net operating losses or tax credit carryforwards that originated before 2003. The Company currently is not under examination by the Internal Revenue Service or other jurisdictions for any tax years.

The Company recognizes both accrued interest and penalties related to unrecognized tax benefits in income tax expense. The Company has not recognized any interest and penalties since inception.

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 an innovation-driven biopharmaceutical company focused on discovering, developing and commercializing medicines to change the lives of patients with cancer and inflammatory diseases. We currently commercialize VELCADE, the U.S. market leader for the treatment of patients with multiple myeloma who have received at least one prior therapy. In addition, VELCADE is the first and only FDA approved therapeutic for the treatment of patients who have received at least one prior therapy for mantle cell lymphoma, or MCL. We have a development pipeline of clinical and preclinical product candidates in our therapeutic focus areas of cancer and inflammatory diseases, and we have an oncology-focused drug discovery organization. Strategic business relationships are a key component of our business.

In January 2007, Ortho Biotech Inc., or OBI, and we began to jointly promote VELCADE to U.S.-based physicians who treat multiple myeloma patients. We believe this collaboration, with the well-established OBI oncology sales force, will help us to realize the full potential of VELCADE in the U.S. market.

Our business strategy is to build a portfolio of new medicines based on our understanding of genomics and 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 expect to seek development and commercial collaborators on favorable terms or when we otherwise believe that doing so would be advantageous to us.

In April 2007, we announced the advancement of a new small molecule, MLN4924, a novel inhibitor of Nedd 8 Activating Enzyme (NAE), from discovery to the development pipeline. NAE is an unprecedented target in the protein homeostasis pathway that acts upstream of the proteasome, the target of VELCADE. NAE regulates a subset of proteins that controls the regulation and survival of cancer cells. MLN4924 is the seventh molecule to advance from our discovery organization to the development pipeline in the past three years.

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., or OBL, elsewhere for the treatment of multiple myeloma in newly diagnosed, or front-line patients, and for the treatment of additional cancer types. We believe, if approved, these additional uses of VELCADE would lead to a 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 the long term, we expect to bring new products to market on a regular basis from our pipeline of discovery and development-stage programs. We also expect to continue to evaluate opportunities to in-license and acquire molecules from other companies in order to supplement our pipeline. If we are successful, we will 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 based on phase II data from the FDA on May 13, 2003 to market VELCADE for the treatment of multiple myeloma patients who have received at least two prior therapies and have demonstrated disease progression on their most recent therapy, commonly referred to as third-line and beyond.

In December 2006, the FDA granted full approval of VELCADE for the treatment of patients with MCL who have received at least one prior therapy, commonly referred to as relapsed, or second-line MCL. This approval followed the FDA’s decision in November 2004 to grant VELCADE fast track designation for MCL due to the high unmet medical need of MCL patients and the strength of clinical trial data for VELCADE in the treatment of MCL. In April 2006, we initiated a phase III trial of VELCADE in combination with rituximab in the relapsed follicular and marginal zone non-Hodgkin’s lymphoma setting.

In March 2005, we received full 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 or relapsed multiple myeloma. This regulatory decision increased the approved market potential of

the drug and also marked the completion of the confirmatory studies required by the FDA after it granted accelerated approval in May 2003. VELCADE is the only single-agent therapy that has both demonstrated longer survival in patients with multiple myeloma and the extension of patient survival on its FDA approved labeling.

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, the European Commission granted us a single license 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. Regulatory authorities in a number of other countries, including countries within Latin America and South-East Asia and Japan have also approved VELCADE. The product is now approved in more than 80 countries. Under our agreement with OBL, we have transferred the licenses to affiliates of OBL. OBL’s affiliates now market VELCADE in these countries.

In April 2005, OBL 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. In October 2006, OBL received approval for marketing VELCADE in Japan for relapsed or refractory multiple myeloma in patients who have received at least one prior therapy.

Our Alliances

Ortho Biotech Collaborations

In January 2007, OBI and we began to jointly promote VELCADE to U.S.-based physicians who treat multiple myeloma patients. We pay the cost of a portion of the OBI sales effort dedicated to VELCADE and a commission if sales associated with the increased effort exceed specified targets. Both parties are able to terminate the agreement under certain circumstances and subject to termination fees. We continue to be responsible for manufacturing and distribution of VELCADE in the U.S. Our current agreement with OBL, a member of the Johnson Family Of Companies and an affiliate of OBI, for the promotion of VELCADE outside the U.S. remains unchanged.

In June 2003, we entered into an agreement with OBL to collaborate on the commercialization of VELCADE and with Johnson & Johnson Pharmaceutical Research & Development, L.L.C., or JJPRD, for the continued clinical development of VELCADE. OBL and its affiliate, Janssen-Cilag, are commercializing VELCADE outside of the United States, and Janssen Pharmaceutical K.K. is responsible for Japan. We receive distribution fees included in royalties from OBL and its affiliates from sales of VELCADE outside of the United States. We manage the supply chain for VELCADE at the expense of OBL for products sold in the OBL territories. We retain an option to co-promote VELCADE with OBL 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 and non-Hodgkin’s lymphoma, or NHL. JJPRD is responsible for 45% of the joint development costs. We are eligible to receive payments from JJPRD or OBL for achieving clinical development milestones, regulatory milestones outside of the United States or agreed-upon sales levels of VELCADE.

INTEGRILIN® (eptifibatide) Injection

Schering-Plough Ltd. and Schering Corporation, together referred to as 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 collaboration agreement with SGP, we generally shared any profits or losses from INTEGRILIN sales in the United States included in co-promotion revenue with SGP and we granted SGP an exclusive license to market INTEGRILIN outside the United States and the European Union in exchange for royalty obligations.

On September 1, 2005, SGP obtained the exclusive U.S. development and commercialization rights for INTEGRILIN products from us and paid us a nonrefundable upfront payment of approximately $35.5 million. In addition, we are entitled to 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. Minimum royalty payments for 2007 are set at approximately $85.4 million. There are no guaranteed minimum royalty payments beyond 2007. We also receive royalties on net product sales by SGP outside of the United States. SGP’s obligation to pay us royalties in other countries expires on a country by country basis upon the later of fifteen years from the first commercial use of an INTEGRILIN product in such country and the expiration of the last to expire patent covering such INTEGRILIN product. We are continuing to manage the supply chain for INTEGRILIN at the expense of SGP for products sold in the SGP territories including the U.S. We receive payments as a result of managing the supply chain and record those payments as strategic alliance revenue.

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. We manage the supply chain for INTEGRILIN at the expense of GSK for products sold in the GSK territories. We receive payments as a result of managing the supply chain and record those payments as strategic alliance revenue.

sanofi-aventis Inflammatory Disease Collaboration

In June 2000, we entered into a broad agreement in the field of inflammatory disease with Aventis, now sanofi-aventis, which includes joint discovery, development and commercialization of small molecule drugs for the treatment of specified inflammatory diseases. This agreement covers a substantial portion of our development program in the inflammatory disease area and provides us with potential access to sanofi-aventis’ large promotional infrastructure in connection with the commercialization of jointly developed products. The discovery phase of this collaboration has concluded. However, we and sanofi-aventis are continuing a limited research program covering two advanced preclinical candidates discovered through the collaboration. The development and commercialization programs continue under the agreement.

As provided in the original agreement, in North America, we have agreed to share the responsibility for and cost of developing, manufacturing and marketing products arising from the alliance. Outside of North America, sanofi-aventis is responsible for and will bear the cost of developing, manufacturing and marketing products arising from the alliance. sanofi-aventis is required to pay us a royalty on product sales outside of North America. Under this agreement, sanofi-aventis acquired 4.5 million shares of our common stock over a two-year period through 2001 for $250.0 million.

To date, we and sanofi-aventis have identified a significant number of novel drug targets and associated molecules relevant in inflammatory diseases. During the remaining portion of the development phase of the alliance, we and sanofi-aventis have agreed to focus our joint resources on preclinical and clinical development of candidates identified in the collaboration. The alliance has identified several development candidates, one of which, MLN3897, is now being tested in a phase II clinical trial and two of which, MLN3701 and MLN0415, are now being tested by us in phase I clinical trials. A fourth candidate, MLN6095, is now in preclinical testing.

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 1, 2007, 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 strategic alliances and royalties and distribution fees based on net sales of licensed products. We divide our revenue arrangements with multiple elements into separate units of accounting if specified criteria are met, including whether the delivered element has stand-alone value to the customer and whether there is objective and reliable evidence of the fair value of the undelivered items. We allocate the consideration we receive among the separate units based on their respective fair values, and 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.

We record allowances as a reduction to product sales for product returns, chargebacks and discounts at the time of sale. We estimate VELCADE product returns based on historical return patterns. We expect VELCADE returns to be, and returns have been, generally low because the shelf life for the product is 18 months in the United States, and we expect, and have experienced, that wholesalers will not stock significant inventory due to the relatively high cost of the product. 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 results 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 March 31, 2007.

We recognize nonrefundable upfront licensing fees and guaranteed, time-based payments that, in either case, 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 substantive performance obligations, as defined in the contract, are achieved. Performance obligations typically consist of significant milestones in the development life cycle of the related 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 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. 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. These adjustments have not been, and we do not expect them 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. VELCADE inventories primarily represent raw materials used in production, work in process and finished goods inventory on hand, valued at cost. INTEGRILIN inventories include raw

materials used in production and work in process, valued at cost, to supply GSK and limited amounts of work in process, valued at cost, to supply SGP. We review inventories 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, we would write down the intangible asset to the discounted cash flow value. Where we cannot identify cash flows for an individual asset, our review is applied at the lowest group level for which cash flows are identifiable.

Goodwill

On October 1, 2006, 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.

Restructuring

In accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” our facilities related expenses and liabilities under all of our 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.

Stock-Based Compensation Expense

We adopted Statement of Financial Accounting Standards, or SFAS, No. 123 (revised 2004), “Share Based Payment,” or SFAS 123R, effective January 1, 2006 under the modified prospective method. SFAS 123R requires the recognition of the fair value of stock-based compensation expense in our operations, and accordingly the adoption of SFAS 123R fair value method has had and will continue to 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 determining our volatility, we have considered implied volatilities of currently traded options to provide an estimate of volatility based upon current trading activity in addition to our historical volatility. 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 historical performance, as well as the implied volatilities of currently traded options, best reflects the expected volatility of our stock going forward. Changes in market price directly affect volatility and could cause 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. We update these assumptions on a quarterly basis to reflect recent historical data. Additionally, we are required to estimate forfeiture rates to approximate 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 adjustment on a quarterly basis. Doing so could cause future expenses to vary at each reporting period.

In March 2006, we revised our annual merit compensation program to include the availability of both stock options and restricted stock to certain employees. In March 2007, we extended the choice of stock options or restricted stock to all employees through the annual merit compensation program. Additionally, in March 2007, we implemented performance based vesting for a portion of executive officer restricted stock awards. A significant portion of the annual equity awards to all executive officers will vest only upon achievement of predefined performance objectives. For the three months ended March 31, 2007, we recognized total stock-based compensation expense under SFAS 123R of $5.4 million. As of March 31, 2007, the total remaining unrecognized compensation cost related to nonvested stock option awards amounted to approximately $12.7 million, including estimated forfeitures, which will be amortized over the weighted-average remaining requisite service periods of approximately one and one half years. As of March 31, 2007, the total remaining unrecognized compensation cost related to nonvested restricted stock awards amounted to approximately $21.6 million, including estimated forfeitures, which will be amortized over the weighted-average remaining requisite service periods of approximately one and one half years.

During the second quarter of 2006, we received a telephone inquiry from the Securities ad Exchange Commission, or SEC, regarding whether stock options we awarded with a stated grant date of September 26, 2001 were, in fact, granted on that date. We were one of more than 30 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 option grants dated September 26, 2001. During the second quarter of 2006, we initiated a review of our September 26, 2001 grants, as well as other historical grants. We completed this review during the third quarter of 2006 and met with the SEC to discuss our findings. We reported to the SEC that our review did not uncover any evidence of fraud with respect to the September 26, 2001 options grants or the other historical option grants that we reviewed. Additionally, we reported to the SEC our conclusion that any additional compensation expense resulting from the grants we reviewed was immaterial. The SEC staff advised us at our meeting that they would communicate with us after they had evaluated the results of our review and the documentation we provided.

Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” or SFAS No. 157. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 codifies the definition of fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. We do not currently believe that adoption will have a material impact on our results of operations, financial position or cash flows.

In February 2007, the FASB released SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” or SFAS No. 159. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We are currently analyzing the effect, if any, SFAS No. 159 will have on our consolidated financial position and results of operations.

Results of Operations

							Increase/
							(Decrease)
	Three Months Ended						Percentage
	March 31,						Change
(in thousands, except per share amounts)	2007			2006			2007/2006

Revenues:
Net product sales	$	58,640		$	53,373		10	%
Revenue under strategic alliances	15,714			38,629			(59	)
Royalties	36,370			30,473			19
Total revenues	110,724			122,475			(10	)

Costs and expenses:
Cost of sales (excludes amortization of acquired intangible assets)	5,358			15,828			(66	)
Research and development (Note 1)	71,229			82,598			(14	)
Selling, general and administrative (Note 1)	39,525			35,465			11
Restructuring	5,611			2,831			98
Amortization of intangibles	8,487			8,487			—
Total costs and expenses	130,210			145,209			(10	)

Loss from operations	(19,486		)	(22,734		)	(14	)

Other income (expense):
Investment income, net	15,495			4,625			235
Interest expense	(2,787		)	(2,732		)	2
Net loss	$	(6,778	)	$	(20,841	)	(67	)%

Amounts per common share:
Net loss per share, basic and diluted	$	(0.02	)	$	(0.07	)

Weighted average shares, basic and diluted	316,072			311,823

Note 1: In accordance with SFAS 123R, stock-based compensation expense is allocated in the condensed consolidated statements of operations expense lines as follows:

	Three Months Ended March 31,
(in thousands)	2007		2006

Research and development	$	2,055	$	6,334
Selling, general and administrative	3,347		4,166

Revenues

Total revenues decreased 10% to $110.7 million during the three months ended March 31, 2007, or the 2007 Three Month Period, compared to the three months ended March 31, 2006, or the 2006 Three Month Period. The decrease was primarily related to lower strategic alliance revenue as a result of a decrease in milestone revenue during 2007 and lower revenue under the SGP relationship. Partially offsetting these decreases were increased product sales of VELCADE within the United States and increased distribution fees recognized from OBL on sales of VELCADE outside of the United States.

Net product sales of VELCADE increased 10% to $58.6 million in the 2007 Three Month Period compared to the 2006 Three Month Period. The increase was primarily attributable to growth in product demand as well as price increases during the period. The growth in product demand was primarily a result of an increase in the number of cycles used in patients and greater use in patients with relapsed mantle cell lymphoma, for which the product received FDA approval in December 2006. Reserves for product returns, chargebacks and discounts were within the range of 5% and 10%

of gross product sales in each of the 2007 and 2006 Three Month Periods. Net product sales from VELCADE represented approximately 53% and 44% of our total revenues in the 2007 and 2006 Three Month Periods, respectively.

Revenue under strategic alliances decreased 59% to $15.7 million in the 2007 Three Month Period compared to the 2006 Three Month Period. The decrease was primarily related to a decrease in milestone revenue earned in the 2007 Three Month Period as well as lower revenue under the SGP relationship. Revenue under the SGP relationship was generated from the management of the INTEGRILIN supply chain on behalf of SGP in the form of license fees and reimbursement of manufacturing-related expenses. On July 1, 2006, SGP began purchasing the majority of the active pharmaceutical ingredient necessary to manufacture INTEGRILIN resulting in lower reimbursement of manufacturing-related expenses during the 2007 Three Month Period.

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 other biopharmaceutical companies.

Royalty revenue increased 19% to $36.4 million in the 2007 Three Month Period compared to the 2006 Three Month Period. The increase was primarily a result of increased distribution fees recognized from OBL on sales of VELCADE outside of the United States.

Cost of Sales

Cost of sales decreased 66% to $5.4 million in the 2007 Three Month Period compared to the 2006 Three Month Period. Cost of sales included 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 in the 2007 Three Month Period was primarily due to the decrease in INTEGRILIN manufacturing-related expenses as a result of SGP purchasing the majority of the active pharmaceutical ingredient directly as of July 1, 2006.

Research and Development

Research and development expenses decreased 14% to $71.2 million in the 2007 Three Month Period compared to the 2006 Three Month Period. The decrease was primarily a result of cost reductions associated with our 2006 resource alignment and restructuring efforts combined with reduced stock-based compensation expense. The reduction in stock-based compensation expense was primarily due to forfeitures in excess of original estimates which resulted from the forfeit of certain cliff-based awards held by employees that were severed in connection with restructuring initiatives, as well as normal attrition.

In addition to our ongoing clinical trials of VELCADE, we have a number of drug candidates in clinical and late preclinical development. The following chart summarizes the applicable disease indication and the clinical or preclinical trial status of our drug candidates as of April 2007.

Product Description	Disease Indication	Current Trial Status
*Cancer*

MLN518 is a small molecule inhibitor of the class III receptor tyrosine kinase (RTKs), FLT-3, c-KIT, and PDGF-R	Acute myeloid leukemia Glioma(1) Renal cell carcinoma(1) Prostate cancer (1)	phase I/phase II phase I/phase II phase II phase II

MLN8054 is a small molecule inhibitor of Aurora A Kinase	Advanced malignancies	phase I

MLN8237 is a small molecule inhibitor of Aurora A Kinase	Advanced malignancies	preclinical / phase I planned for May 2007

MLN4924 is a small molecule inhibitor of Nedd8 – activating enzyme (NAE)	Advanced malignancies	preclinical

*Inflammatory Diseases*

MLN0002 is a humanized monoclonal antibody directed against the alpha4beta7 integrin	Crohn’s disease Ulcerative colitis	phase II (2)

MLN1202 is a humanized monoclonal antibody directed against CCR2	Multiple sclerosis Atherosclerosis	phase IIa phase IIa-completed

MLN3897 is a small molecule CCR1 inhibitor(3)	Chronic inflammatory diseases such as rheumatoid arthritis	phase II

MLN3701 is a small molecule CCR1 inhibitor, backup to MLN3897(3)	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

MLN6095 is a small molecule CrTh2 receptor antagonist(3)	Asthma	preclinical

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

(2) Clinical trials in ulcerative colitis patients resumed, May 2007 with a new commercially scalable cell line; prior phase II data establishes proof-of-concept for this mechanism.

(3) In development through our sanofi-aventis inflammatory disease collaboration.

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

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

Clinical Phase	Objective	Estimated Completion Period
phase I	Establish safety in humans, study how the drug works, metabolizes and interacts with other drugs	1-2 years
phase II	Evaluate efficacy, optimal dosages and expanded evidence of safety	2-3 years
phase III	Confirm efficacy and safety of the product	2-3 years

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

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

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

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

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

Selling, General and Administrative

Selling, general and administrative expenses increased 11% to $39.5 million in the 2007 Three Month Period compared to the 2006 Three Month Period. The increase is primarily attributable to higher commission expense associated with the increased product sales as well as increased costs representing our portion of funding the OBI sales effort dedicated to VELCADE under the new OBI collaboration arrangement.

Restructuring

During the 2007 Three Month Period, we recorded a total of $5.6 million of restructuring charges under all of our restructuring initiatives. We recorded restructuring charges of approximately $5.0 million under the 2006 restructuring program primarily for facilities-related costs associated with vacated buildings and employee termination benefits as a result of headcount reductions. We also recorded restructuring charges in the 2007 Three Month Period of approximately $0.2 million and $0.4 million under the 2005 and 2003 restructuring plans, respectively, primarily related to the net present value adjustment for facilities charged to restructuring in prior years.

We estimate that of the remaining restructuring liabilities under all restructuring initiatives at March 31, 2007, we will pay approximately $23.4 million through March 31, 2008 and $40.5 million thereafter through 2014.

We expect to record total restructuring charges in 2007, under all restructuring initiatives, of between $15.0 million and $25.0 million. These charges relate primarily to certain facilities that we decided to abandon in November 2006, but will not be vacated until 2007, as well as net present value adjustments on facilities charged to restructuring in prior years. In connection with the decision to abandon the facilities in 2007, we revised the useful lives of the leasehold improvements at these facilities in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” During the 2007 Three Month Period, we recorded additional amortization expense of approximately $2.8 million in research and development expense related to our decision.

We are still evaluating the need or opportunity for further facilities consolidation associated with the 2006 restructuring initiative and the total future restructuring charges for facility consolidation are dependent upon the nature and timing of the final decisions we make. As we continue to evaluate strategic alternatives, including potential facilities consolidation in connection with our programs, significant restructuring charges could occur in future periods.

Amortization of Intangibles

Amortization of intangible assets of $8.5 million in the 2007 Three Month Period was unchanged from the 2006 Three Month Period. Amortization in 2007 and 2006 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 increased 235% to $15.5 million in the 2007 Three Month Period compared to the 2006 Three Month Period. The increase was primarily attributable to a $3.5 million gain on sale of our investment in SGX Pharmaceuticals, Inc. common stock, a $2.3 million gain recognized in January 2007 upon the settlement of the class action lawsuit of WorldCom, Inc., and higher average balance of invested funds during the quarter.

Interest Expense

Interest expense increased 2% to $2.8 million in the 2007 Three Month Period compared to the 2006 Three Month Period. The increase was primarily related to an increase in accrued interest on our convertible notes as a result of higher average balances of indebtedness during the period offset by decreased capital lease buyouts resulting in lower 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 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:

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

· the success of our clinical and preclinical development programs;

· our ability to enter into additional strategic collaborations and to maintain existing 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 us specifically.

As of March 31, 2007, we had $819.2 million in cash, cash equivalents and marketable securities. This excludes $7.6 million of interest-bearing marketable securities classified as restricted cash on our balance sheet as of March 31, 2007, which primarily serve as collateral for letters of credit securing leased facilities.

Our significant capital resources and sources and uses of cash are as follows:

(in thousands)	March 31, 2007		December 31, 2006
Cash, cash equivalents and marketable securities	$	819,169	$	894,349
Working capital	810,765		790,135

	Three Months Ended March 31,
	2007			2006
Cash provided by (used in):
Operating activities	$	14,153		$	(26,383	)
Investing activities	(72,314		)	31,567
Financing activities	(91,511		)	7,429
Capital expenditures (included in investing activities above)	(1,100		)	(1,386		)

Cash Flows

Operating activities provided cash of $14.2 million in the 2007 Three Month Period. The principal source of funds was the collection of accounts receivable offset by the payment of expenses in order to fund our net loss. Cash flows from operations can vary significantly due to various factors including changes in accounts receivable, as well as changes in accounts payable and accrued expenses. The average collection period of our accounts receivable can vary and is dependent on various factors, including the type of revenue and the payment terms related to those revenues.

Investing activities used cash of $72.3 million in the 2007 Three Month Period. The principal use of funds was the purchases of marketable securities. In February 2007, we received proceeds of approximately $3.5 million related to the sale of our investment in SGX Pharmaceuticals, Inc. In January 2007, we received proceeds of approximately $2.3 million related to our share of proceeds from a class action proceeding against WorldCom, Inc.

Financing activities used cash of $91.5 million in the 2007 Three Month Period. The principal use of funds was the repayment of our 5.5% and 5.0% convertible subordinated notes in accordance with the payment terms offset by payments received from the purchase of common stock by our employees. We also used $0.3 million in financing activities 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 $83.3 million and $16.3 million principal balances on our 5.5% and 5.0% convertible subordinated notes, respectively, during the 2007 Three Month Period.

The parity trigger associated with our 2.25% convertible senior notes represents an embedded derivative that requires bifurcation and separate accounting under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” At March 31, 2007 and December 31, 2006, we estimated that the value of the parity trigger was not material to our consolidated results of operations and financial position.

There have been no additional significant changes to our contractual obligations and commercial commitments included in our Form 10-K as of December 31, 2006.

As of March 31, 2007, we did not have any financing arrangements that were not reflected in our balance sheet.

RISK FACTORS THAT MAY AFFECT RESULTS

This Quarterly Report on Form 10-Q contains forward-looking statements that are based on current expectations, estimates, forecasts and projections about us, our future performance, our business, our beliefs and our management’s assumptions. In addition, we, or others on our behalf, may make forward-looking statements in press releases or written statements, or in our communications and discussions with investors and analysts in the normal course of business through meetings, webcasts, phone calls and conference calls. Words such as “expect,” “anticipate,” “outlook,” “could,” “target,” “project,” “intend,” “plan,” “believe,” “seek,” “estimate,” “should,” “may,” “will,” “assume” or “continue,” and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve important risks, uncertainties and assumptions that are difficult to predict. We describe some of the risks, uncertainties and assumptions that could affect our business, including our financial condition and results of operations, in this “Risk Factors” section. We have based our forward-looking statements on our management’s beliefs and assumptions based on information available to our management at the time the statements are made.

We caution you that actual outcomes and results may differ materially from what is expressed, implied or forecast by our forward-looking statements. Reference is made in particular to forward-looking statements about our growth and future financial and operating results, discovery and development of products, strategic alliances, regulatory approvals, competitive strengths, intellectual property, litigation, mergers and acquisitions, market acceptance or continued acceptance of our products, accounting estimates, financing activities, ongoing contractual obligations and sales efforts. We do not intend to update or revise any forward-looking statements, whether as a result of new information, future events, changes in assumptions 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 in accordance with GCP 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 a total of more than 80 countries including the countries of the European Union. If we or OBL are not able to obtain approval to market VELCADE in additional countries, OBL will lose the opportunity to sell in those countries and we may not be able to earn potential milestone and royalty payments under our agreement with OBL or collect potential distribution fees on sales of VELCADE by OBL 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, including the submission of user fees, 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 of MLN2704 as well as MLN1202 in rheumatoid arthritis.

Failure to gain approval for the products we are developing could have a material adverse 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, adverse event reporting and promotional activities for such product, is subject to continual review and periodic inspections by the FDA and other regulatory authorities. 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 authorities 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.

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. Additionally, the FDA requires that we, along with our collaborators and third party manufacturers, may not employ, in any capacity, persons who have been debarred under the FDA’s Application Integrity Policy. Employment of such a debarred person (even if inadvertently) may result in delays in the FDA’s review or approval of our products, or the rejection of data developed with the involvement of such person(s).

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 development or 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, or if such approvals are subject to limitations on the indicated uses for which we may market the product.

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 Corporation’s Thalomid and Revlimid. In May 2006, the FDA approved the use of Thalomid for the treatment of newly diagnosed multiple myeloma. Revlimid was approved by the FDA in December 2005 for the treatment of patients with myelodysplastic syndromes and in June 2006 for multiple myeloma patients who have received at least one prior therapy. While Revlimid has limited the growth potential of VELCADE in some indications, as Revlimid only was approved recently, it is difficult for us to determine the sustained level of competition that it may pose for VELCADE. We also face competition for VELCADE from traditional chemotherapy treatments, and there are other potentially competitive therapies for VELCADE, including other proteasome inhibitors, some of which 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 GlaxoSmithKline plc, or 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 Medicure Inc. in the United States.

Sales of INTEGRILIN could also be negatively impacted in the future by other competitive factors, including:

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

· changing treatment practices for percutaneous coronary intervention and acute coronary syndrome 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.

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.

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 factors 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.

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 or other regulatory authorities. Preclinical and clinical data can be interpreted in different ways, which could delay, limit or prevent regulatory approval. Negative or inconclusive results from a preclinical study or clinical trial, adverse medical events during a clinical trial or safety issues resulting from products of the same class of drug could cause a preclinical study or clinical trial to be repeated or prolonged or a program to be terminated, even if other studies or trials relating to the program are successful.

We may not complete our planned preclinical or clinical trials on schedule or at all. We may not be able to confirm the safety and efficacy of our potential drugs in long-term clinical trials, which may result in a delay or failure to commercialize our products. 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, or at all. In addition, institutional review boards or regulators, including the FDA, or our collaborators may hold, suspend or terminate our clinical trials for various reasons, including noncompliance with regulatory requirements or if, in their opinion, the participating subjects are being exposed to unacceptable health risks. 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 trial 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 and consumers 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.

Our strategy of generating growth through license arrangements and acquisitions may not be successful.

An important element of our business strategy is to acquire additional therapeutic agents through license arrangements or acquisitions of other companies. Although we regularly review and engage in discussions with third parties with respect to such transactions, we may be unable to license or acquire other suitable products or product candidates from third parties for a number of reasons. In particular, the licensing and acquisition of pharmaceutical and biological products, including through the acquisition of other companies, is a competitive area. A number of other companies are also pursuing strategies to license or acquire products within our therapeutic focus areas of cancer and inflammation. These other companies may have a

competitive advantage over us due to their size, cash resources and greater drug research, discovery and development and commercialization capabilities.

Other factors that may prevent us from licensing or otherwise acquiring suitable products and product candidates include the following:

· we may be unable to license or acquire the relevant technology on terms that would allow us to make an appropriate return on the product;

· companies that perceive us to be their competitor may be unwilling to assign or license their product rights to us; or

· we may be unable to identify suitable products or product candidates within our areas of focus.

In addition, we expect competition for licensing and acquisition candidates in the biotechnology and pharmaceutical fields to increase, which may mean fewer suitable opportunities for us as well as higher prices. If we are unable to successfully obtain rights to suitable products and product candidates, our business, financial condition and prospects for growth could suffer.

If we fail to successfully manage any acquisitions, our ability to develop our product candidates and expand our product candidate pipeline may be harmed.

Following any future acquisitions, our failure to adequately address the financial, operational or legal risks of these transactions could harm our business. Financial aspects of these transactions that could alter our financial position, reported operating results or stock price include:

· use of cash resources;

· higher than anticipated acquisition costs and expenses;

· potentially dilutive issuances of equity securities;

· the incurrence of debt and contingent liabilities, impairment losses or restructuring charges;

· large write-offs and difficulties in assessing the relative percentages of in-process research and development expense that can be immediately written off as compared to the amount that must be amortized over the appropriate life of the asset; and

· amortization expenses related to other intangible assets.

Operational risks that could harm our existing operations or prevent realization of anticipated benefits from these transactions include:

· challenges associated with managing an increasingly diversified business;

· disruption of our ongoing business;

· difficulty and expense in assimilating the operations, products, technology, information systems or personnel of the acquired company;

· diversion of management’s time and attention from other business concerns;

· inability to maintain uniform standards, controls, procedures and policies;

· the assumption of known and unknown liabilities of the acquired company, including intellectual property claims; and

· subsequent loss of key personnel.

If we are unable to successfully manage our acquisitions, our ability to develop new products and continue to expand our product pipeline may be limited.

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 $6.8 million for three months ended March 31, 2007, $20.8 million for the three months ended March 31, 2006, $44.0 million for the year ended December 31, 2006, $198.2 million for the year ended December 31, 2005 and $252.3 million for the year ended December 31, 2004. We expect to continue to incur operating losses in future periods. Prior to our acquisition of COR Therapeutics, Inc., or COR, in February 2002, substantially all of our revenues resulted from payments from collaborators, and not from the sale of products. As of March 31, 2007, we had an accumulated deficit of $2.5 billion.

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, primarily resulting from our acquisition of COR and goodwill 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 March 31, 2007, we had approximately $250.0 million of outstanding convertible debt and $75.9 million of capital lease obligations. We will be required to make interest payments on our outstanding convertible notes of approximately $6.0 million for each of the next four and a half years. Additionally, we will be required to make interest payments on our capital lease obligations of approximately $2.4 million for each of the next three years.

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

Our indebtedness could have significant additional negative consequences, including:

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

· limiting our ability to obtain additional financing;

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

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

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

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

We recorded restructuring charges of $5.6 million for the three months ended March 31, 2007, $2.8 million for the three months ended March 31, 2006, $20.4 million for the year ended December 31, 2006, $77.1 million for the year ended December 31, 2005 and $38.0 million for the year ended December 31, 2004. Costs associated with our restructuring efforts include reducing personnel and infrastructure resulting from the restructured relationship with SGP for INTEGRILIN and reducing our in-house research and development technologies and headcount in areas in which we believe the work can now be outsourced cost effectively. As a result of these efforts, we expect to reduce total research and development and selling, general and administration expenses as compared to prior years. We may not achieve our estimated expense reductions anticipated

from restructurings because such savings are difficult to predict and speculative in nature. We continue to evaluate strategic alternatives, including facility consolidation, and as a result, significant additional restructuring charges could occur in future periods.

We received an informal inquiry from the Securities and Exchange Commission regarding stock options that we granted in September 2001. If the Securities and Exchange Commission, or SEC, does not agree with our conclusion regarding the accounting for such options and determines that we have incorrectly accounted for historical stock option grants, and if the associated expense not previously recorded is material, we likely would be required to restate certain historical financial statements and could 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, 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 option grants we made in September 2001. In September 2006, we met with the SEC to discuss the findings of our review of the September 2001 option grants and other of our historical option grants. We reported to the SEC that our review did not uncover any evidence of fraud with respect to the September 2001 option grants or the other historical option grants that we reviewed. Additionally, we reported to the SEC our conclusion that any additional compensation expense resulting from our review of the September 2001 option grants and other historical option grants was immaterial. We cannot express any view as to how the SEC may assess the information we provided. If it is determined that any of our option grants were incorrectly granted or accounted for, we may be required to record compensation expense relating to those grants, and, if the expense is material, we likely would be required to restate certain of our historical financial statements. Additionally, we could become subject to an enforcement proceeding or other litigation. The 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 OBL. We began jointly promoting VELCADE in the United States in the first quarter of 2007 under a two-year agreement with OBI. 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 OBL 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 and our joint promotion agreement with OBL and OBI, 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.

· 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 began paying us royalties based on net product sales of INTEGRILIN. In 2007, the minimum royalty payment is set at $85.4 million, with some conditions that could reduce this minimum. There are no minimum guaranteed royalty payments beyond 2007. 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 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. In addition, from time to time, we receive unsolicited letters purporting to advise us of the alleged relevance of third party patents.

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

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

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

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

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

We are a party to various license agreements. In particular, we license rights to patents for the formulation of VELCADE 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 2017 and the issued foreign patents expire in 2015 with extensions issued or pending in a number of countries. However, we may not be granted any such potential or pending extension. The issued United States patents that cover INTEGRILIN expire in 2014 and 2015 and the issued foreign patents expire between 2010 and 2012. Our patent-protected products also can face competition in the form of generic versions of branded products of competitors that lose their market exclusivity.

In addition, third parties could produce counterfeit products labeled as VELCADE, INTEGRILIN or other of our products in the future. Counterfeit products could reduce sales or compromise goodwill associated with our product brands.

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 currently are marketing and selling VELCADE in the United States solely through our cancer-specific sales force and without a collaborator. In the first quarter of 2007, we began jointly promoting VELCADE in the United States with OBI. Our success in selling VELCADE will depend heavily on the performance of these sales forces. In areas outside the United States where VELCADE has received approval, OBL 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 OBL.

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 2007, our success in receiving royalties and milestone payments from sales of INTEGRILIN depends entirely on the marketing efforts of these third parties.

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

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

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

We currently rely 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 current GMP regulations capable of manufacturing our products. In addition, the FDA will inspect our contract manufacturers prior to granting approval of a new drug application, and will conduct periodic, unannounced inspections to ensure strict ongoing compliance with current GMPs and other applicable regulations. 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. Any failure by

our third party manufacturers to comply with applicable regulations, including current GMP regulations, could result in sanctions being imposed on the manufacturers or us, including fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing approval of our product candidates, delays, suspension or withdrawal of approvals, seizures or recalls of products, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect our business.

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 OBL 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, and have contracted with a second manufacturer who will provide fill/finish services for VELCADE in the future. 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, two of which 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 for the production of bulk product. Lonza is the other current manufacturer of eptifibatide, and we own the process technology utilized by it. We have two approved manufacturers that currently perform fill/finish services for INTEGRILIN and two packaging suppliers for the United States. If our current manufacturers are unable to continue or decide to discontinue their manufacturing, fill/finish or packaging services and we are unable to secure alternative manufacturers, the supply of INTEGRILIN could be adversely affected which could substantially harm our business.

In order to mitigate the risk of INTEGRILIN supply interruption, we are exploring several options for the long-term supply of eptifibatide. Also, Solvay, the owner of the process technology used by it and by one of our former suppliers of eptifibatide, has raised concerns that the new Millennium process may have been developed using information asserted to be confidential and proprietary to Solvay. If Solvay succeeds in a claim relating to these concerns, our ability to practice our new process could be negatively impacted, which could adversely affect our ability to obtain INTEGRILIN from suppliers using the new process or the cost of manufacturing eptifibatide and negatively impact our business. We are in discussions with Solvay regarding its concern.

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.

We face a risk of government enforcement actions in connection with marketing activities.

Because we are a company operating in a highly regulated industry, for many reasons, regulatory authorities could take enforcement action against us including seizure of allegedly misbranded product, cessation of promotional activities, injunction or criminal prosecution against us and our officers or employees.

For example, we face the potential of FDA enforcement action for allegations of off-label promotion of VELCADE. Some physicians prescribe VELCADE for uses not approved by the FDA or comparable regulatory agencies outside the United States. For example, VELCADE is not approved for front-line treatment of multiple myeloma. However, we are aware that the oncology physician community is using VELCADE for this purpose. Although physicians may lawfully prescribe VELCADE for off-label uses, any promotion by us of off-label uses would be unlawful. Although we have policies and procedures in place designed to help assure ongoing compliance with regulatory requirements regarding off-label promotion, regulatory authorities could take enforcement action against us if they believe we are promoting, or have promoted, VELCADE for off-label use.

Additionally, the Department of Justice can bring civil or criminal actions against companies that promote drugs for unapproved uses, based on the False Claims Act and other federal laws governing reimbursement for such products under the Medicare, Medicaid and other federally supported healthcare programs. Monetary penalties in such cases have often been in excess of $100 million. Civil penalties can include costly mandatory compliance programs and exclusion from federal healthcare programs.

Guidelines and recommendations can affect the use of our products.

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

Risks Relating to Holding Our Common Stock

The trading price of our common stock 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 three months ended March 31, 2007, our common stock traded as high as $11.53 per share and as low as $10.24 per share. During 2006, our common stock traded as high as $12.08 per share and as low as $7.83 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 common stock may also be affected by the estimates and projections of the investment community and our ability to meet or exceed the financial projections we provide to the public. The price may also be affected by general economic and market conditions, and the cost of operations in our product markets. While we cannot predict the individual effect that these factors may have on the price of our securities, these factors, either individually or in the aggregate, could result in significant variations in price during any given period of time. We can not assure you that these factors will not have an adverse effect on the trading price of our common stock.

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

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We manage our fixed income investment portfolio in accordance with our Policy for Securities Investments, or Investment Policy, that has been approved by our Board of Directors. The primary objectives of our Investment Policy are to preserve principal, maintain a high degree of liquidity to meet operating needs, and obtain competitive returns subject to prevailing market conditions. Investments are made primarily in investment-grade corporate bonds with effective maturities of three years or less, asset-backed debt securities and U.S. government agency debt securities. These investments are subject to risk of default, changes in credit rating and changes in market value. These investments are also subject to interest rate risk and will decrease in value if market interest rates increase. A hypothetical 100 basis point increase in interest rates would result in an approximate $12.9 million decrease in the fair value of our investments as of March 31, 2007. However, due to the conservative nature of our investments and relatively short effective maturities of debt instruments, interest rate risk is mitigated. Our Investment Policy specifies credit quality standards for our investments and limits the amount of exposure from any single issue, issuer or type of investment. We do not own derivative financial instruments in our investment portfolio as of March 31, 2007.

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 March 31, 2007, the fair value of our 2.25% 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.

As of March 31, 2007 we did not have any financing arrangements that were not reflected in our balance sheet.

Item 4. Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2007. In designing and evaluating our disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and our management necessarily applied its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our chief executive officer and chief financial officer concluded that as of March 31, 2007, 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 March 31, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHER INFORMATION

Item 6. Exhibits

(a) Exhibits

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

SIGNATURES

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

	MILLENNIUM PHARMACEUTICALS, INC.
	(Registrant)


Dated: May 9, 2007	/s/ MARSHA H. FANUCCI
	Marsha H. Fanucci
	Senior Vice President and Chief Financial Officer
	(principal financial and chief accounting officer)

Exhibit Index

Exhibit No.		Description
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

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. freshman Avg

Millennium Pharmaceuticals (MLNM) 10-Q2007 Q1 Quarterly report

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