SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarterly Period Ended September 30, 2002 Commission File Number 000-31191 The Medicines Company ------------------------------------------------------ (Exact Name of Registrant as Specified in Its Charter) Delaware 04-3324394 ------------------------------- ------------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 5 Sylvan Way, Parsippany, NJ 07054 - ---------------------------------------- ---------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (973) 656-1616 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date: As of October 23, 2002, there were 39,299,967 shares of Common Stock, $0.001 par value per share, outstanding. THE MEDICINES COMPANY TABLE OF CONTENTS Part I. Financial Information.................................................1 Item 1 - Unaudited Condensed Consolidated Financial Statements..............1 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations..........................................8 Item 3 - Quantitative and Qualitative Disclosures About Market Risk........26 Item 4 - Controls and Procedures...........................................27 Part II. Other Information....................................................28 Item 6 - Exhibits and Reports on Form 8-K..................................28 SIGNATURES....................................................................29 CERTIFICATIONS................................................................30 PART I. FINANCIAL INFORMATION ITEM 1 - UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THE MEDICINES COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) SEPTEMBER 30, DECEMBER 31, 2002 2001 ------------- ------------- ASSETS Current assets: Cash and cash equivalents $ 44,855,840 $ 53,884,376 Available for sale securities 6,883,486 125,000 Accrued interest receivable 134,352 6,757 ------------- ------------- 51,873,678 54,016,133 ------------- ------------- Accounts receivable, net of allowances of approximately $2.2 million at September 30, 2002 and $823,000 at December 31, 2001 7,258,107 5,346,684 Inventories 17,602,036 16,610,928 Prepaid expenses and other current assets 1,084,402 550,564 ------------- ------------- Total current assets 77,818,223 76,524,309 Fixed assets, net 873,903 1,223,528 Other assets 191,643 153,076 ------------- ------------- Total assets $ 78,883,769 $ 77,900,913 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,820,837 $ 8,805,476 Accrued expenses 14,555,856 7,974,473 ------------- ------------- Total current liabilities 16,376,693 16,779,949 Deferred revenue 1,427,083 -- Commitments and contingencies -- -- ------------- ------------- Total liabilities 17,803,776 16,779,949 Stockholders' equity: Common stock, $.001 par value, 75,000,000 shares authorized at September 30, 2002 2002 and December 31, 2001, respectively; 39,279,839 and 34,606,582 shares issued and outstanding at September 30, 2002 and December 31, 2001, respectively 39,280 34,607 Additional paid-in capital 352,785,612 321,041,704 Deferred compensation (4,383,063) (8,593,773) Accumulated deficit (287,437,831) (251,443,682) Accumulated other comprehensive income 75,995 82,108 ------------- ------------- Total stockholders' equity 61,079,993 61,120,964 ------------- ------------- Total liabilities and stockholders' equity $ 78,883,769 $ 77,900,913 ============= ============= See accompanying notes to condensed consolidated financial statements. Page 1 THE MEDICINES COMPANY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, -------------------------------- ------------------------------- 2002 2001 2002 2001 ------------ ------------ ------------ ------------ Net revenue $ 9,133,199 $ 3,526,234 $ 24,004,230 $ 7,435,063 Operating expenses: Cost of revenue 2,227,178 564,835 4,959,808 1,216,278 Research and development 9,866,139 6,325,575 28,567,263 27,229,728 Selling, general and administrative 8,467,569 8,732,412 27,199,457 27,359,289 ------------ ------------ ------------ ------------ Total operating expenses 20,560,886 15,622,822 60,726,528 55,805,295 Loss from operations (11,427,687) (12,096,588) (36,722,298) (48,370,232) Other income (expense): Interest income 215,927 787,659 760,996 2,852,188 Interest expense -- -- (32,847) -- Loss on sale of investments -- -- -- (850,000) ------------ ------------ ------------ ------------ Net loss (11,211,760) (11,308,929) (35,994,149) (46,368,044) ============ ============ ============ ============ Basic and diluted net loss attributable to common stockholders per common share $ (0.29) $ (0.33) $ (0.99) $ (1.43) ============ ============ ============ ============ Shares used in computing net loss attributable to common stockholders per common share: Basic and diluted 39,161,664 34,502,886 36,409,258 32,382,878 ============ ============ ============ ============ See accompanying notes to condensed consolidated financial statements. Page 2 THE MEDICINES COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- 2002 2001 ------------ ------------ Cash flows from operating activities: Net loss $(35,994,149) $(46,368,044) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 409,748 355,324 Amortization of deferred stock compensation 2,434,243 3,195,698 Loss on sales of fixed assets -- 520 Changes in operating assets and liabilities: Accrued interest receivable (127,595) 1,132,242 Accounts receivable (1,911,423) (3,011,355) Inventory (1,017,707) (4,868,735) Prepaid expenses and other current assets (532,210) (241,064) Other assets (38,567) 96,926 Accounts payable (6,985,831) (1,068,655) Accrued expenses 6,580,263 (1,191,672) Deferred revenue 1,427,083 -- ------------ ------------ Net cash used in operating activities (35,756,145) (51,968,815) Cash flows from investing activities: Purchases of available for sale securities (6,749,399) (7,430,886) Maturities and sales of available for sale securities -- 44,025,759 Purchase of fixed assets (54,026) (614,020) ------------ ------------ Net cash (used in) provided by investing activities (6,803,425) 35,980,853 Cash flows from financing activities: Proceeds from issuances of common stock, net 33,525,590 42,386,974 Repurchases of common stock (542) (11) ------------ ------------ Net cash provided by financing activities 33,525,048 42,386,963 Effect of exchange rate changes on cash 5,986 26,139 ------------ ------------ (Decrease)/increase in cash and cash equivalents (9,028,536) 26,425,140 Cash and cash equivalents at beginning of period 53,884,376 36,802,356 ------------ ------------ Cash and cash equivalents at end of period $ 44,855,840 $ 63,227,496 ============ ============ See accompanying notes to condensed consolidated financial statements. Page 3 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. NATURE OF BUSINESS The Medicines Company (the Company) was incorporated in Delaware on July 31, 1996. The Company is a specialty pharmaceutical company engaged in the acquisition, development and commercialization of late-stage development drugs or drugs approved for marketing. The U.S. Food and Drug Administration approved Angiomax(R) (bivalirudin) for use as an anticoagulant in patients with unstable angina undergoing percutaneous transluminal coronary angioplasty in December 2000 and the Company commenced sales of Angiomax in the United States in the first quarter of 2001. The Company was considered to be a development-stage enterprise, as defined in Statement of Financial Accounting Standards No. 7, "Accounting and Reporting by Development Stage Enterprises" through December 31, 2000. With the commencement of sales in 2001, the Company is no longer considered to be a development-stage enterprise. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, the accompanying financial statements include all adjustments, consisting only of normal recurring accruals, considered necessary for a fair presentation of the Company's financial position, results of operations, and cash flows for the periods presented. The results of operations for the three- and nine-month periods ended September 30, 2002 are not necessarily indicative of the results that may be expected for the entire fiscal year ending December 31, 2002. These condensed consolidated financial statements should be read in conjunction with the audited financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001, filed with the Securities and Exchange Commission. Cash, Cash Equivalents and Available for Sale Securities The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents at September 30, 2002 and December 31, 2001 consist of investments in money market funds. These investments are carried at cost, which approximates fair value. The Company considers securities with original maturities of greater than three months to be available for sale securities. Securities under this classification are recorded at fair market value and unrealized gains and losses are recorded as a separate component of stockholders' equity. The estimated fair value of the available for sale securities is determined based on quoted market prices or rates for similar instruments. Page 4 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (unaudited) At September 30, 2002, the Company held various certificates of deposit, corporate bonds and United States government agency notes with fair value totaling $6.9 million, all with less than one-year terms. At December 31, 2001, the Company held a certificate of deposit for $125,000 that was pledged as a security deposit on its facility lease in Parsippany, New Jersey. Revenue Recognition The Company recognizes revenue from product sales in accordance with generally accepted accounting principles in the United States, including the guidance in Staff Accounting Bulletin 101. Revenue from product sales is recognized when there is persuasive evidence of an arrangement, delivery has occurred, the price is fixed and determinable, and collectibility is reasonably assured. However, because the Company's products are sold with limited rights of return, the Company's recognition of revenue from product sales is also subject to Statement of Financial Accounting Standards No. 48 (SFAS 48) "Revenue Recognition When Right of Return Exists." Under SFAS 48, revenue is recognized when the price to the buyer is fixed, the buyer is obligated to pay the Company and the obligation to pay is not contingent on resale of the product, the buyer has economic substance apart from the Company, the Company has no obligation to bring about the sale of the product and the amount of returns can be reasonably estimated. The Company reserves for estimated returns at the time of sale and revenues are reported net of such amounts. The Company does not offer price protection to its customers. The Company sells its products primarily to wholesalers and distributors who, in turn, sell to hospitals. Hospitals that have signed contracts with the Company or that participate in group purchasing organizations that have signed contracts with the Company receive rebates based on their volume of purchases. The Company provides for such estimated rebates at the time of sale and revenues are reported net of such amounts. Revenue from collaborative agreements may include non-refundable fees or milestone payments. These payments are recorded as deferred revenue when contractual performance obligations have been satisfied, and they are recognized ratably over the term of these agreements. When the period of deferral cannot be specifically identified from the contract, the Company must estimate the period based upon other critical factors contained within the contract. The Company reviews these estimates, at least annually, possibly resulting in a change in the deferral period. 3. NET LOSS PER SHARE The following table sets forth the computation of basic and diluted net loss per share for the three and nine months ended September 30, 2002 and 2001. Page 5 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (unaudited) THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, -------------------------------- ------------------------------- 2002 2001 2002 2001 ------------ ------------ ------------ ------------ BASIC AND DILUTED Net loss $(11,211,760) $(11,308,929) $(35,994,149) $(46,368,044) Weighted average common shares outstanding 39,172,483 34,542,242 36,423,982 32,449,717 Less: unvested restricted common shares outstanding (10,819) (39,356) (14,724) (66,839) ------------ ------------ ------------ ------------ Weighted average common shares used to compute net loss per share 39,161,664 34,502,886 36,409,258 32,382,878 ============ ============ ============ ============ Basic and diluted net loss per share $ (0.29) $ (0.33) $ (0.99) $ (1.43) ============ ============ ============ ============ Options to purchase 4,427,298 and 4,161,465 shares of common stock outstanding as of September 30, 2002 and 2001, respectively, have not been included in the computation of diluted net loss per share, as their effect would have been antidilutive. Outstanding warrants to purchase 2,873,688 and 3,156,073 shares of common stock as of September 30, 2002 and 2001, respectively, were also excluded from the computation of diluted net loss per share, as their effect would have been antidilutive. During the period January 1, 2000 to September 30, 2000, the Company issued options to purchase a total of 2,273,624 shares of common stock at exercise prices below the estimated fair value of the Company's common stock as of the date of grant of such options based on the estimated price of the Company's common stock in the Company's initial public offering. The total deferred stock compensation associated with these options is approximately $17.3 million. No additional deferred stock compensation was recorded during the nine months ended September 30, 2002 or during the full year 2001 because all grants of stock options during these periods were issued at the fair market value on the date of grant. The Company amortizes deferred stock compensation over the respective vesting periods of the individual stock options. Total deferred compensation is reduced when the associated options are cancelled prior to exercise. During the nine months ended September 30, 2002, cancellation of options that had not been exercised resulted in a reduction in the total deferred stock compensation of approximately $1.8 million. Included in the results of operations is compensation expense of approximately $634,000 and $2.4 million for the three and nine months ended September 30, 2002, respectively, and approximately $977,000 and $3.2 million for the three and nine months ended September 30, 2001, respectively, associated with such options. We expect to record amortization expense for the remaining deferred stock compensation as follows: approximately $693,000 for the remainder of 2002, approximately $2.7 million in 2003 and approximately $943,000 in 2004, assuming the continued vesting of the associated options. Page 6 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (unaudited) 4. COMPREHENSIVE LOSS Comprehensive losses are primarily comprised of net losses, unrealized losses on available for sales securities and currency translation adjustments. Comprehensive losses for the three and nine months ended September 30, 2002 were $11.2 million and $36.0 million, respectively, and for the three and nine months ended September 30, 2001 were $11.4 million and $46.3 million, respectively. 5. SALE OF COMMON STOCK On June 25, 2002, the Company sold through a public offering 4.0 million shares of its common stock at a price of $8.20 per share. The Company is using and expects to continue to use the $30.9 million net proceeds from the sale of common stock to fund working capital and other general corporate purposes, including additional clinical trials of Angiomax and clevidipine and other product development activities, further commercialization activities of Angiomax, and for the acquisition of additional product candidates and approved products. 6. LOAN AND SECURITY AGREEMENT WITH COMERICA BANK On March 26, 2002, the Company signed a loan and security agreement with Comerica Bank-California providing for borrowings of up to $10.0 million. On August 12, 2002, the Company terminated this loan and security agreement. 7. SALES, MARKETING AND DISTRIBUTION AGREEMENT WITH NYCOMED DANMARK A/S On March 25, 2002, the Company entered into a collaboration with Nycomed Danmark A/S, a European pharmaceutical company, under which Nycomed will serve as the exclusive distributor of Angiomax in 35 countries, including 12 countries in the European Union. Nycomed paid an initial fee of $1.5 million and agreed to pay up to $2.5 million in milestone payments upon receipt of regulatory approvals in Europe. In addition, Nycomed purchased 79,428 shares of the Company's common stock for a total purchase price of approximately $1.0 million, which represented the fair market value of the shares at the time of purchase. The Company and Nycomed will work together to obtain regulatory approvals in the countries covered by the agreement and share costs of clinical trials used to extend indications in Europe beyond coronary angioplasty. Page 7 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Our management's discussion and analysis of financial condition and results of operations contains forward-looking statements and is subject to important factors that could cause our future results to differ materially from those indicated. See "Factors that May Affect Future Results" beginning on page 16. GENERAL We operate as a pharmaceutical company selling and developing products for the treatment of hospital patients. We acquire, develop and commercialize pharmaceutical products that are in late stages of development or have been approved for marketing. In December 2000, we received marketing approval from the U.S. Food and Drug Administration for Angiomax(R), our lead product, for use as an anticoagulant in combination with aspirin in patients with unstable angina undergoing coronary balloon angioplasty. Coronary balloon angioplasty is a procedure used to restore normal blood flow in an obstructed artery in the heart. We began selling Angiomax in U.S. hospitals in January 2001 as an anticoagulant replacement for heparin in these procedures. In March 2002, we entered into a study and exclusive option agreement with AstraZeneca AB relating to the licensing, development and commercialization of clevidipine, an intravenous, short-acting calcium channel blocker, for which Phase 3 clinical trials are planned. Prior to our signing this agreement, AstraZeneca conducted Phase I and Phase 2 clinical trials of clevidipine. These clinical trials demonstrated that clevidipine acts to reduce blood pressure almost immediately after intravenous infusion. We have initiated a clinical trial to compare clevidipine to nitroglycerin for blood pressure control in patients undergoing coronary artery bypass graft surgery. If this clinical trial achieves satisfactory results, we will then enter into a license agreement with AstraZeneca for clevidipine. In the first quarter of 2002, we also entered into an agreement with Nycomed Danmark A/S under which Nycomed will serve as the exclusive distributor of Angiomax in 35 countries, including 12 countries in the European Union. We have not received marketing approval for Angiomax in any of these countries. In addition, in March 2002, we received an approvable letter from the U.S. Food and Drug Administration for a second-generation process for the manufacture of Angiomax bulk drug material, known as the Chemilog process. On October 9, 2002, we received a Notice of Compliance from the Therapeutic Products Directorate of Canada, enabling us to market Angiomax in Canada. Since our inception, we have incurred significant losses, including a net loss of $11.2 million and $36.0 million for the three and nine months ended September 30, 2002, respectively. Most of our expenditures to date have been for research and development activities and selling, general and administrative expenses. Research and development expenses represent costs incurred for product acquisition, clinical trials, and activities relating to regulatory filings and manufacturing development efforts. We generally outsource our clinical trials and manufacturing development activities to independent organizations to maximize efficiency and minimize our internal Page 8 overhead. Selling, general and administrative expenses consist primarily of salaries and related expenses, general corporate activities and costs associated with product sales and marketing activities. We expect to continue to incur operating losses for the foreseeable future as a result of research and development activities attributable to new and existing products and costs associated with the sale and marketing of our products. To achieve and maintain profitability we will need to generate significantly greater revenues than we have to date. We have not generated taxable income to date. At December 31, 2001, net operating losses available to offset future taxable income for federal income tax purposes were approximately $174.3 million. If not utilized, federal net operating loss carryforwards will expire at various dates beginning in 2011 and ending in 2021. We have not recognized the potential tax benefit of our net operating losses in our statements of operations. The future utilization of our net operating loss carryforwards may be limited pursuant to regulations promulgated under the Internal Revenue Code of 1986, as amended. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported assets and liabilities, revenues and expenses, and other financial information. Actual results may differ significantly from these estimates under different assumptions and conditions. The SEC has indicated that critical accounting estimates and judgments are those which are both important to the portrayal of the company's financial condition and results and require management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our significant accounting policies are more fully described in Note 2 in the Notes To Condensed Consolidated Financial Statements section of this Quarterly Report on Form 10-Q and in Note 2 of the Company's Annual Report on Form 10-K for the year ended December 31, 2001. Not all of these significant accounting policies, however, require management to make difficult, complex or subjective judgments or estimates. We believe that our accounting policies relating to inventory, as described under the caption "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies" in our Form 10-K as of December 31, 2001, fit the definition of "critical accounting estimates and judgments." In addition, we believe our accounting policies relating to revenue recognition, as described below, fit the definition. Revenue Recognition We recognize revenue from product sales in accordance with generally accepted accounting principles in the United States, including the guidance in Staff Accounting Bulletin 101. Revenue from product sales is recognized when there is persuasive evidence of an arrangement, Page 9 delivery has occurred, the price is fixed and determinable, and collectibility is reasonably assured. However, because our products are sold with limited rights of return, our recognition of revenue from product sales is also subject to Statement of Financial Accounting Standards No. 48 (SFAS 48) "Revenue Recognition When Right of Return Exists." Under SFAS 48, revenue is recognized when the price to the buyer is fixed, the buyer is obligated to pay us and the obligation to pay is not contingent on resale of the product, the buyer has economic substance apart from the us, we have no obligation to bring about the sale of the product and the amount of returns can be reasonably estimated. We do not offer price protection to our customers. We sell our products primarily to wholesalers and distributors, who, in turn, sell to hospitals. Hospitals that have signed contracts with us or that participate in group purchasing organizations that have signed contracts with us receive rebates based on their volume of purchases. We record allowances for product returns, rebates and discounts, and report revenue net of such allowances. We must make significant judgments and estimates in preparing the allowances, that could require adjustments in the future. For instance, our customers have the right to return any unopened product with less than six months to the labeled expiration date. Therefore, we must estimate the likelihood that product sold to wholesalers might remain in their inventory to within six months of expiration, and at what points within that six-month period the wholesaler might decide to return the product, if at all. We base our estimates on information from customers, historic patterns of returns and on the expiration dates of product currently being shipped. We do not recognize revenue unless collectibility is reasonably assured. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate and result in an impairment of their ability to make payments, additional allowances may be required. Revenue from collaborative agreements with partners may include non-refundable fees or milestone payments. These payments are recorded as deferred revenue when contractual performance obligations have been satisfied, and they are recognized ratably over the term of these agreements. When the period of deferral cannot be specifically identified from the contract, management must estimate the period based upon other critical factors contained within the contract. We review these estimates, at least annually, which could result in a change in the deferral period. For example, we received $1.5 million from Nycomed as a non-refundable distributor fee. This payment has been recorded as deferred revenue and is being recognized ratably over the term of that agreement, which we estimate to be twelve years. RESULTS OF OPERATIONS Three Months Ended September 30, 2002 and 2001 Net Revenue. Net revenue increased 159% to $9.1 million for the three months ended September 30, 2002 from $3.5 million for the three months ended September 30, 2001. Virtually all the revenue for the three-month periods ended September 30, 2002 and 2001 came from U.S. sales Page 10 of Angiomax, which we commercially launched during the first quarter of 2001. The increase in 2002 was due primarily to increased use of Angiomax at an increasing number of hospitals. Cost of Revenue. Cost of revenue for the three months ended September 30, 2002 was $2.2 million, or 24% of net revenue, compared to $564,000, or 16% of net revenue, for the three months ended September 30, 2001. Cost of revenue consists of expenses in connection with the manufacture of the Angiomax sold, the logistics costs of selling Angiomax and royalty expenses. Our cost of manufacturing as a percentage of net revenue increased substantially in the three months ended September 30, 2002 compared to the three months ended September 30, 2001. The cost of manufacturing as a percentage of net revenue was approximately 10% for the three months ended September 30, 2002 and approximately 2% for the three months ended September 30, 2001. Prior to the second quarter of 2002, we sold only Angiomax product manufactured before the date of FDA approval of Angiomax in December 2000. The costs associated with the manufacture of Angiomax prior to the date of FDA approval of Angiomax were expensed as research and development in the accounting periods prior to December 2000 and were not included in our cost of manufacturing for the three months ended September 30, 2001. In the three months ended September 30, 2002, we sold Angiomax product that was manufactured both before and after the date of FDA approval of Angiomax, resulting in higher costs of manufacturing. In the fourth quarter of 2002, we expect to sell a greater percentage of Angiomax manufactured after the date of FDA approval, and as a result, we expect the cost of manufacturing as a percentage of net revenue to continue to increase. Research and Development Expenses. Research and development expenses increased 56% to $9.9 million for the three months ended September 30, 2002, from $6.3 million for the three months ended September 30, 2001. The increase in research and development expenses of $3.6 million was primarily due to higher clinical development costs mostly related to our REPLACE-2 trial. We have a number of clinical trial programs currently underway, or about to commence, for expanding the applications of Angiomax in the treatment of ischemic heart disease and for use as a procedural anticoagulant. The funding for Angiomax, our main product, has represented and will continue to represent a significant portion of research and development spending. For the three-month periods ended September 30, 2002 and 2001, research and development expenses related to Angiomax included the costs of clinical trials, development manufacturing costs for the bulk drug product and the cost associated with preparation of U.S. and worldwide marketing applications. Our current primary clinical trial of Angiomax, REPLACE-2, completed enrollment and thirty-day follow-up during the third quarter of 2002. As a result, we expect that costs incurred with respect to REPLACE-2 will decrease significantly in the fourth quarter of 2002. We are currently working on a second generation manufacturing process for Angiomax bulk drug substance, called Chemilog, for which we have received an approvable letter from the FDA, and will continue to incur research and development expenses until we receive FDA approval of this process. In the fourth quarter of 2002, we anticipate receipt of Angiomax bulk material from our supplier, UCB Bioproducts, produced using the Chemilog process. The approximate $4 million manufacturing cost of this material will be charged to development expense if FDA approval of this process has not been received. The amount of future research and development expenses associated with Angiomax is not reasonably certain as these costs are dependent upon the regulatory process and the timing for obtaining marketing approval for other Page 11 applications of the product in the United States and other countries. However, we expect them to be substantial. Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased 3% to $8.5 million for the three months ended September 30, 2002, from $8.7 million for the three months ended September 30, 2001. The decrease in selling, general and administrative expenses of $265,000 was primarily due to lower marketing promotion expenses relating to the sale and marketing of Angiomax. Other Income and Expense. Interest income decreased 73% to $216,000 for the three months ended September 30, 2002, from $788,000 for the three months ended September 30, 2001. The decrease in interest income of $572,000 was primarily due to lower cash and available for sale securities balances as a result of spending for operating expenses and working capital requirements and lower available interest rates on securities. Interest income for the three months ended September 30, 2002 and September 30, 2001 was primarily attributable to the investment of the remaining proceeds from our sale of 4.0 million shares of our common stock in a private placement in May 2001. A portion of our interest income for the three months ended September 30, 2002 was attributable to the investment of the proceeds from our sale of 4.0 million shares of our common stock in a public offering in June 2002. We had no interest expense for either the three months ended September 30, 2002 or the three months ended September 30, 2001. Nine Months Ended September 30, 2002 and 2001 Net Revenue. Net revenue increased 223% to $24.0 million for the nine months ended September 30, 2002, from $7.4 million for the nine months ended September 30, 2001. Virtually all the revenue for the nine-month periods ended September 30, 2002 and 2001 came from U.S. sales of Angiomax, which we commercially launched during the first quarter of 2001. The increase in 2002 was due primarily to increased use of Angiomax in an increasing number of hospitals. Cost of Revenue. Cost of revenue for the nine months ended September 30, 2002 was $5.0 million, or 21% of net revenue, compared to $1.2 million, or 16% of net revenue, for the nine months ended September 30, 2001. Our cost of manufacturing as a percentage of net revenue increased substantially in the nine months ended September 30, 2002 compared to the nine months ended September 30, 2001. The cost of manufacturing as a percentage of net revenue was approximately 9% for the nine months ended September 30, 2002 and approximately 2% for the nine months ended September 30, 2001. In the nine months ended September 30,2002, we began selling Angiomax product manufactured both before and after the date of FDA approval of Angiomax in December 2000. The costs associated with the manufacture of Angiomax prior to the date of FDA approval of Angiomax were expensed as research and development in the accounting periods prior to December 2000. Research and Development Expenses. Research and development expenses increased 5% to $28.6 million for the nine months ended September 30, 2002, from $27.2 million for the nine months ended September 30, 2001. The increase in research and development expenses of $1.3 Page 12 million was primarily due to higher clinical development costs relating to our REPLACE-2 trial and $2.5 million of manufacturing development cost incurred in connection with our receipt of the final Chemilog validation batch in the nine months ended September 30, 2002, partly offset by lower clinical development costs relating to the HERO-2 trial program, our Phase 3 trial in acute myocardial infarction that was completed in 2001. Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased 1% to $27.2 million for the nine months ended September 30, 2002, from $27.4 million for the nine months ended September 30, 2001. The decrease in selling, general and administrative expenses of $160,000 was primarily due to lower marketing and selling expenses and corporate infrastructure costs relating to the sales and marketing of Angiomax. Other Income and Expense. Interest income decreased 73% to $761,000 for the nine months ended September 30, 2002, from $2.9 million for the nine months ended September 30, 2001. The decrease in interest income of $2.1 million was primarily due to lower cash and available for sale securities balances attributable to operating expenses and working capital requirements and lower available interest rates on securities. For the nine months ended September 30, 2002, interest income was primarily attributable to the investment of the proceeds of our sale of shares of common stock in a private placement in May 2001. For the nine months ended September 30, 2001, interest income was primarily attributable to the investment of the remaining proceeds of our initial public offering in August and September 2000. We had interest expense of $33,000 during the nine months ended September 30, 2002 associated with the draw down of our revolving line of credit at the end of March 2002. We terminated the revolving line of credit in August. We had no interest expense for the nine months ended September 30, 2001. In the nine months ended September 30, 2001, we liquidated our $3.0 million principal investment in Southern California Edison 5 7/8 % bonds, which were originally due on January 15, 2001, recognizing a loss of $850,000 on the sale. LIQUIDITY AND CAPITAL RESOURCES Since our inception, we have financed our operations through the sale of common and preferred stock, sales of convertible promissory notes and warrants, interest income, draw downs from a revolving line of credit and revenues from sales of Angiomax. In August and September 2000, we received $101.4 million in net proceeds from the sale of common stock in our initial public offering. We received an additional $41.8 million in net proceeds in May 2001 from the sale of 4.0 million shares of our common stock in a private placement, and we received an additional $30.9 million in net proceeds in June 2002 from the sale of 4.0 million shares of our common stock in a public offering. Prior to the initial public offering, we had received net proceeds of $79.4 million from the private placement of equity securities, primarily redeemable convertible preferred stock, and $19.4 million from the issuance of convertible notes and warrants. In March 2002, we entered into a collaboration agreement with Nycomed Danmark A/S. Under Page 13 the agreement, Nycomed paid us an initial non-refundable fee of $1.5 million and agreed to pay up to $2.5 million in additional milestones based on regulatory approvals in Europe. In addition, Nycomed purchased 79,428 shares of our common stock for a total purchase price of approximately $1.0 million. In March 2002, we entered into a loan and security agreement with Comerica Bank-California. Under the agreement, we were able to borrow up to $10.0 million. In August 2002, we terminated this loan and security agreement. On April 23, 2002, we filed a registration statement on Form S-3 with the Securities and Exchange Commission registering 4.0 million shares of our common stock. The registration statement was declared effective by the SEC on May 1, 2002, and the Company sold all 4.0 million shares of the common stock on June 25, 2002 at a price to the public of $8.20 per share. Net proceeds from the sale totaled $30.9 million. As of September 30, 2002, we had $51.9 million in cash, cash equivalents, available for sale securities and accrued interest receivable, as compared to $54.0 million as of December 31, 2001. The decrease in cash, cash equivalents, available for sale securities and accrued interest receivable of $2.3 million was primarily attributable to spending for operating expenses and working capital requirements during the nine-month period ended September 30, 2002. This decrease was partially offset by the proceeds from our public offering in June 2002, the $2.5 million received from Nycomed Danmark A/S, consisting of a non-refundable upfront license fee of $1.5 million and $1.0 million in proceeds from the sale of shares of our common stock to Nycomed, and from collections on sales of Angiomax. We used net cash of $35.8 million in operating activities during the nine months ended September 30, 2002. This consisted of a net loss of $36.0 million, combined with increases in accounts receivable of $1.9 million and inventory of $1.0 million and a decrease in accounts payable of $7.0 million, offset by increases in accrued expenses of $6.6 million and deferred revenue of $1.4 million associated with the Nycomed agreement and from non-cash amortization of deferred stock compensation of $2.4 million and depreciation of $410,000. The increase in inventory of $1.0 million was primarily attributable to the scheduled receipt of bulk Angiomax from our supplier, UCB Bioproducts, during the nine months ended September 30, 2002. The decrease in accounts payable primarily was related to payments for bulk product from UCB along with several large REPLACE-2 related payments. The increase in accrued expenses was largely the result of higher clinical development costs associated with the REPLACE-2 trial. We expect to receive additional Angiomax bulk material in December 2002. During the nine months ended September 30, 2002, we used approximately $6.8 million of cash in net investing activities, which consisted principally of the purchase of available for sale securities. During the nine months ended September 30, 2002, we received $33.5 million from financing activities, which consisted of $30.9 million in proceeds from the sale of 4.0 million shares of our common stock in a public offering in June, $1.0 million in proceeds from the sale of shares of our common stock to Nycomed, and $1.6 million in proceeds from employees purchasing stock under our stock plans. We expect to continue to devote substantial resources to our research and development efforts Page 14 and to our sales, marketing and manufacturing programs associated with the commercialization of our products. Our funding requirements will depend on numerous factors including: - whether Angiomax is commercially successful; - the progress, level and timing of our research and development activities; - the cost and outcomes of regulatory reviews; - the continuation or termination of third party manufacturing or sales and marketing arrangements; - the cost and effectiveness of our sales and marketing programs; - the status of competitive products; - our ability to defend and enforce our intellectual property rights; and - the establishment of additional strategic or licensing arrangements with other companies or acquisitions. We believe, based on our current operating plan, plus anticipated revenues from Angiomax and interest income, that our current cash, cash equivalents and available for sale securities will be sufficient to fund our operations for at least 18 months. If our existing resources are insufficient to satisfy our liquidity requirements due to slower than anticipated revenues from Angiomax or otherwise, or if we acquire additional product candidates, we may need to sell additional equity or debt securities or seek additional financing through other arrangements. The sale of additional equity or debt securities may result in additional dilution to our stockholders, and we cannot be certain that additional public or private financing will be available in amounts or on terms acceptable to us, if at all. If we are unable to obtain this additional financing, we may be required to delay, reduce the scope of, or eliminate one or more of our planned research, development and commercialization activities, which could harm our financial condition and operating results. In addition, in order to obtain additional financing, we may be required to relinquish rights to products, product candidates or technologies that we would not otherwise relinquish. CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS Our contractual obligations and commercial commitments include: - operating leases for our facilities in Cambridge, Massachusetts and Parsippany, New Jersey, which expire in August 2003 and December 2012, respectively. Future annual minimum payments under these operating leases are $185,000 for the remainder of 2002, and $712,000 - 2003; $503,000 - 2004; $492,000 - 2005; $495,000 - 2006; $503,000 - 2007; and a total of $2.6 million for the years 2008 through 2012. - a purchase order that was placed in March 2002 to UCB Bioproducts for the purchase of approximately $5.3 million of Angiomax bulk drug product. We expect to take delivery under this purchase order in December of 2002 and in the first quarter of 2003. Page 15 FACTORS THAT MAY AFFECT FUTURE RESULTS This Quarterly Report includes forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. For this purpose, any statements contained herein regarding our strategy, future operations, financial position, future revenues, projected costs, clinical trials, prospects, plans and objectives of management, other than statements of historical facts, are forward-looking statements. The words "anticipates," "believes," "estimates," "expects," "intends," "may," "plans," "projects," "will," "would" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We cannot guarantee that we actually will achieve the results, plans, intentions or expectations disclosed in our forward-looking statements. There are a number of important factors that may cause actual results or events to differ materially from those disclosed in the forward-looking statements we make. These important factors include the risk factors set forth below. Although we may elect to update forward-looking statements in the future, we specifically disclaim any obligation to do so, even if our estimates change, and readers should not rely on those forward-looking statements as representing our views as of any date subsequent to the filing date of this Quarterly Report. RISKS RELATED TO OUR BUSINESS WE HAVE A HISTORY OF NET LOSSES, AND WE EXPECT TO CONTINUE TO INCUR NET LOSSES AND MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY We have incurred net losses since our inception, including net losses of approximately $11.2 million and $36.0 million for the three and nine months ended September 30, 2002, respectively. As of September 30, 2002, we had an accumulated deficit of approximately $287.4 million. We expect to make substantial expenditures to further develop and commercialize our products, including costs and expenses associated with clinical trials, regulatory approval and commercialization of products. As a result, we are unsure when we will become profitable, if at all, and if we do become profitable, we may not remain profitable for any substantial period of time. If we fail to achieve profitability within the time frame expected by investors or securities analysts, the market price of our common stock may decline. OUR BUSINESS IS VERY DEPENDENT ON THE COMMERCIAL SUCCESS OF ANGIOMAX Other than Angiomax, our products are in clinical phases of development and, even if approved by the FDA, are a number of years away from entering the market. As a result, Angiomax will account for almost all of our revenues for the foreseeable future. The commercial success of Angiomax will depend upon its acceptance by physicians, patients and other key decision-makers as a safe, therapeutic and cost-effective alternative to heparin and other products used in current practice. If Angiomax is not commercially successful, we will have to find additional sources of revenues or curtail or cease operations. FAILURE TO RAISE ADDITIONAL FUNDS IN THE FUTURE MAY AFFECT THE DEVELOPMENT, MANUFACTURE AND SALE OF OUR PRODUCTS Our operations to date have generated substantial and increasing needs for cash. Our negative cash flow from operations is expected to continue into the foreseeable future. The clinical development and regulatory approval of Angiomax for additional indications, the development and regulatory approval of our other product candidates and the acquisition and development of Page 16 additional product candidates by us will require a commitment of substantial funds. Our future capital requirements are dependent upon many factors and may be significantly greater than we expect. As of the date of this Quarterly Report, we believe, based on our current operating plan, plus anticipated sales of Angiomax and interest income, that our current cash, cash equivalents and available for sale securities will be sufficient to fund our operations for at least 18 months. If our existing resources are insufficient to satisfy our liquidity requirements due to slower than anticipated sales of Angiomax or otherwise, or if we acquire additional product candidates, we may need to sell additional equity or debt securities or seek additional financing through other arrangements. The sale of additional equity or debt securities may result in additional dilution to our stockholders, and we cannot be certain that additional public or private financing will be available in amounts or on terms acceptable to us, if at all. If we are unable to obtain this additional financing, we may be required to delay, reduce the scope of, or eliminate one or more of our planned research, development and commercialization activities, which could harm our financial condition and operating results. In addition, in order to obtain additional financing, we may be required to relinquish rights to products, product candidates or technologies that we would not otherwise relinquish. WE CANNOT EXPAND THE INDICATIONS FOR ANGIOMAX UNLESS WE RECEIVE FDA APPROVAL FOR EACH ADDITIONAL INDICATION. FAILURE TO EXPAND THESE INDICATIONS WILL LIMIT THE SIZE OF THE COMMERCIAL MARKET FOR ANGIOMAX In December 2000, we received approval from the FDA for the use of Angiomax as an anticoagulant in combination with aspirin in patients with unstable angina undergoing coronary balloon angioplasty. One of our key objectives is to expand the indications for which the FDA will approve Angiomax. In order to do this, we will need to conduct additional clinical trials and obtain FDA approval for each proposed indication. If we are unsuccessful in expanding the approved indications for the use of Angiomax, the size of the commercial market for Angiomax will be limited. FAILURE TO OBTAIN REGULATORY APPROVAL IN FOREIGN JURISDICTIONS WILL PREVENT US FROM MARKETING ANGIOMAX ABROAD We intend to market our products in international markets, including Europe. In order to market our products in the European Union and many other foreign jurisdictions, we or our distribution agents must obtain separate regulatory approvals. In February 1998, we submitted a Marketing Authorization Application ("MAA") to the European Agency for the Evaluation of Medicinal Products, or the EMEA, for use of Angiomax in unstable angina patients undergoing angioplasty. Following extended interaction with European regulatory authorities, the Committee of Proprietary Medicinal Products of the EMEA voted in October 1999 not to recommend Angiomax for approval in angioplasty. The United Kingdom and Ireland dissented from this decision. We have withdrawn our application to the EMEA and, as of the date of this Quarterly Report, plan to resubmit an MAA with the results of the REPLACE-2 trial, if positive. We may not be able to obtain approval from any or all of the jurisdictions in which we seek approval to market Angiomax. Obtaining foreign approvals may require additional trials and additional expense. THE DEVELOPMENT AND COMMERCIALIZATION OF OUR PRODUCTS MAY BE TERMINATED OR DELAYED, AND THE COSTS OF DEVELOPMENT AND COMMERCIALIZATION MAY INCREASE, IF THIRD PARTIES WHO WE RELY ON TO MANUFACTURE AND SUPPORT THE DEVELOPMENT AND COMMERCIALIZATION OF OUR PRODUCTS DO NOT FULFILL THEIR OBLIGATIONS Page 17 Our development and commercialization strategy entails entering into arrangements with corporate and academic collaborators, contract research organizations, distributors, third-party manufacturers, licensors, licensees and others to conduct development work, manage our clinical trials, manufacture our products and market and sell our products outside of the United States. Although we manage these services, we do not have the expertise or the resources to conduct such activities on our own and, as a result, are particularly dependent on third parties in most areas. We may not be able to maintain our existing arrangements with respect to the commercialization of Angiomax or establish and maintain arrangements to develop and commercialize clevidipine or any additional product candidates or products on terms that are acceptable to us. Any current or future arrangements for the development and commercialization of our products may not be successful. If we are not able to establish or maintain agreements relating to Angiomax, clevidipine or any additional products on terms which we deem favorable, our financial condition would be materially adversely affected. Third parties may not perform their obligations as expected. The amount and timing of resources that third parties devote to developing, manufacturing and commercializing our products may not be within our control. Furthermore, our interests may differ from those of third parties that manufacture or commercialize our products. Disagreements that may arise with these third parties could delay or lead to the termination of the development or commercialization of our product candidates, or result in litigation or arbitration, which would be time consuming and expensive. If any third party that manufactures or supports the development or commercialization of our products breaches or terminates its agreement with us, or fails to conduct its activities in a timely manner, such breach, termination or failure could: - delay or otherwise adversely impact the development or commercialization of Angiomax, clevidipine, our other product candidates or any additional product candidates that we may acquire or develop; - require us to undertake unforeseen additional responsibilities or devote unforeseen additional resources to the development or commercialization of our products; or - result in the termination of the development or commercialization of our products. WE ARE DEPENDENT ON A SINGLE SUPPLIER FOR THE PRODUCTION OF ANGIOMAX BULK DRUG SUBSTANCE AND A DIFFERENT SINGLE SUPPLIER TO CARRY OUT ALL FILL-FINISH ACTIVITIES FOR ANGIOMAX We have no experience in manufacturing, and we lack the facilities and personnel to manufacture products in accordance with FDA regulations. As of the date of this Quarterly Report, we obtain all of our Angiomax bulk drug substance from one manufacturer, UCB Bioproducts S.A., and rely on another manufacturer, Ben Venue Laboratories, Inc., to carry out all fill-finish activities for Angiomax, which include final formulation and transfer of the drug into vials where it is then freeze-dried and sealed. The FDA requires that all manufacturers of pharmaceuticals for sale in or from the United States achieve and maintain compliance with the FDA's current Good Manufacturing Practice, or cGMP, regulations and guidelines. There are a limited number of manufacturers that operate Page 18 under cGMP regulations capable of manufacturing Angiomax. As of the date of this Quarterly Report, we do not have alternative sources for production of Angiomax bulk drug substance or to carry out fill-finish activities. In the event that either of our current manufacturers is unable to carry out its respective manufacturing obligations to our satisfaction, we may be unable to obtain alternative manufacturing, or obtain such manufacturing on commercially reasonable terms or on a timely basis. If we were required to transfer manufacturing processes to other third party manufacturers, we would be required to satisfy various regulatory requirements, which could cause us to experience significant delays in receiving an adequate supply of Angiomax. Any delays in the manufacturing process may adversely impact our ability to meet commercial demands for Angiomax on a timely basis and supply product for clinical trials of Angiomax. IF WE DO NOT SUCCEED IN DEVELOPING A SECOND-GENERATION PROCESS FOR THE PRODUCTION OF BULK ANGIOMAX DRUG SUBSTANCE, OUR GROSS MARGINS MAY BE BELOW INDUSTRY AVERAGES As of the date of this Quarterly Report, we are developing with UCB Bioproducts a second-generation process for the production of bulk Angiomax drug substance, which is referred to as the Chemilog process. This process, for which we have received an approvable letter from the FDA, involves changes to the early manufacturing steps of our current process and, we expect, will improve our gross margins on the future sales of Angiomax. If regulatory approval of the process is not obtained or is delayed, then our ability to improve our gross margins on future sales of Angiomax may be limited. CLINICAL TRIALS OF OUR PRODUCT CANDIDATES ARE EXPENSIVE AND TIME-CONSUMING, AND THE RESULTS OF THESE TRIALS ARE UNCERTAIN Before we can obtain regulatory approvals for the commercial sale of any product that we wish to develop, we will be required to complete pre-clinical studies and extensive clinical trials in humans to demonstrate the safety and efficacy of such product. As of the date of this Quarterly Report, we are conducting clinical trials of Angiomax for use in the treatment of ischemic heart disease and for additional potential hospital applications as a procedural anticoagulant. There are numerous factors that could delay our clinical trials or prevent us from completing our trials successfully. We, or the FDA, may suspend a clinical trial at any time on various grounds, including a finding that patients are being exposed to unacceptable health risks. The rate of completion of clinical trials depends in part upon the rate of enrollment of patients. Patient enrollment is a function of many factors, including the size of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, the existence of competing clinical trials and the availability of alternative or new treatments. In particular, the patient population targeted by some of our clinical trials may be small. Delays in future planned patient enrollment may result in increased costs and program delays. In addition, clinical trials, if completed, may not show any potential product to be safe or effective. Results obtained in pre-clinical studies or early clinical trials are not always indicative of results that will be obtained in later clinical trials. Moreover, data obtained from pre-clinical studies and clinical trials may be subject to varying interpretations. As a result, the FDA or other applicable regulatory authorities may not approve a product in a timely fashion, or at all. Even if regulatory approval to market a product is granted, the regulatory approval may impose limitations on the indicated use for which the product may be marketed. Page 19 OUR FAILURE TO ACQUIRE AND DEVELOP ADDITIONAL PRODUCT CANDIDATES OR APPROVED PRODUCTS WILL IMPAIR OUR ABILITY TO GROW As part of our growth strategy, we intend to acquire and develop additional pharmaceutical product candidates or approved products. The success of this strategy depends upon our ability to identify, select and acquire pharmaceutical products in late-stage development or that have been approved and that meet the criteria we have established. Because we neither have, nor intend to establish, internal scientific research capabilities, we are dependent upon pharmaceutical and biotechnology companies and other researchers to sell or license product candidates to us. Any product candidate we acquire will require additional research and development efforts prior to commercial sale, including extensive pre-clinical and/or clinical testing and approval by the FDA and corresponding foreign regulatory authorities. All of our product candidates are prone to the risks of failure inherent in pharmaceutical product development, including the possibility that the product candidate will not be safe, non-toxic and effective or approved by regulatory authorities. In addition, we cannot assure you that any approved products that we develop or acquire will be: - manufactured or produced economically; - successfully commercialized; or - widely accepted in the marketplace. In addition, proposing, negotiating and implementing an economically viable product acquisition is a lengthy and complex process. Other companies, including those with substantially greater financial, marketing and sales resources, may compete with us for the acquisition of product candidates and approved products. We may not be able to acquire the rights to additional product candidates and approved products on terms that we find acceptable, or at all. IF WE BREACH ANY OF THE AGREEMENTS UNDER WHICH WE LICENSE COMMERCIALIZATION RIGHTS TO PRODUCTS OR TECHNOLOGY FROM OTHERS, WE COULD LOSE LICENSE RIGHTS THAT ARE IMPORTANT TO OUR BUSINESS We license commercialization rights to products and technology that are important to our business, and we expect to enter into additional licenses in the future. For instance, we acquired our first three products through exclusive licensing arrangements, and we expect to enter into an exclusive license for clevidipine, provided we achieve a successful outcome from our pilot study of the product. Under these licenses we are, or will be, subject to commercialization and development, sublicensing, royalty, insurance and other obligations. If we fail to comply with any of these requirements, or otherwise breach these license agreements, the licensor may have the right to terminate the license in whole or to terminate the exclusive nature of the license. In addition, upon the termination of the license we may be required to license to the licensor the intellectual property that we developed. OUR ABILITY TO MANAGE OUR BUSINESS EFFECTIVELY COULD BE HAMPERED IF WE ARE UNABLE TO ATTRACT AND RETAIN KEY PERSONNEL AND CONSULTANTS The specialty pharmaceutical industry has experienced a high rate of turnover of management personnel in recent years. We are highly dependent on our ability to attract and retain qualified personnel for the acquisition, development and commercialization activities we conduct or sponsor. If we lose one or more of the members of our senior management, including our Page 20 executive chairman, Dr. Clive A. Meanwell, or our chief executive officer, David M. Stack, or other key employees or consultants, our ability to implement successfully our business strategy could be seriously harmed. Our ability to replace these key employees may be difficult and may take an extended period of time because of the limited number of individuals in the biotechnology industry with the breadth of skills and experience required to develop and commercialize products successfully. Competition to hire from this limited pool is intense, and we may be unable to hire, train, retain or motivate such additional personnel. WE FACE SUBSTANTIAL COMPETITION, WHICH MAY RESULT IN OTHERS DISCOVERING, DEVELOPING OR COMMERCIALIZING COMPETING PRODUCTS BEFORE OR MORE SUCCESSFULLY THAN WE DO The specialty pharmaceutical industry is highly competitive. Our success will depend on our ability to acquire and develop products and apply technology, and our ability to establish and maintain a market for our products. Potential competitors in the United States and other countries include major pharmaceutical and chemical companies, specialized biotechnology firms, universities and other research institutions. Many of our competitors have substantially greater research and development capabilities and experience, and greater manufacturing, marketing and financial resources, than we do. Accordingly, our competitors may develop or license products or other novel technologies that are more effective, safer or less costly than existing products or technologies or products or technologies that are being developed by us or may obtain FDA approval for products more rapidly than we are able. Technological development by others may render our products or product candidates noncompetitive. We may not be successful in establishing or maintaining technological competitiveness. BECAUSE THE MARKET FOR THROMBIN INHIBITORS IS COMPETITIVE, OUR PRODUCT MAY NOT OBTAIN WIDESPREAD USE We have positioned Angiomax as a replacement for heparin, which is widely used and inexpensive, for use in patients with ischemic heart disease. Because heparin is inexpensive and has been widely used for many years, medical decision-makers may be hesitant to adopt our alternative treatment. In addition, due to the high incidence and severity of cardiovascular diseases, competition in the market for thrombin inhibitors is intense and growing. There are a number of thrombin inhibitors currently on the market, awaiting regulatory approval and in development, including orally administered agents. THE LIMITED RESOURCES OF THIRD-PARTY PAYERS MAY LIMIT THE USE OF OUR PRODUCTS In general, anticoagulant drugs may be classified in three groups: drugs that directly or indirectly target and inhibit thrombin, drugs that target and inhibit platelets and drugs that break down fibrin. Because each group of anticoagulants acts on different components of the clotting process, we believe that there will be continued clinical work to determine the best combination of drugs for clinical use. We expect Angiomax to be used with aspirin alone or in conjunction with other therapies. Although we are not positioning Angiomax as a direct competitor to platelet inhibitors or fibrinolytic drugs, platelet inhibitors and fibrinolytic drugs may compete with Angiomax for the use of hospital financial resources. Many U.S. hospitals receive a fixed reimbursement amount per procedure for the angioplasties and other treatment therapies they perform. Because this amount is not based on the actual expenses the hospital incurs, U.S. hospitals may have to choose among Angiomax, platelet inhibitors and fibrinolytic drugs. FLUCTUATIONS IN OUR OPERATING RESULTS COULD AFFECT THE PRICE OF OUR COMMON STOCK Our operating results may vary from period to period based on the amount and timing of sales of Page 21 Angiomax, the availability and timely delivery of a sufficient supply of Angiomax, the timing and expenses of clinical trials, announcements regarding clinical trial results and product introductions by our competitors, the availability and timing of third-party reimbursement and the timing of approval for our product candidates. If our operating results do not match the expectations of securities analysts and investors as a result of these and other factors, the trading price of our common stock will likely decrease. WE MAY UNDERTAKE STRATEGIC ACQUISITIONS IN THE FUTURE AND ANY DIFFICULTIES FROM INTEGRATING SUCH ACQUISITIONS COULD DAMAGE OUR ABILITY TO ATTAIN OR MAINTAIN PROFITABILITY We may acquire additional businesses and products that complement or augment our existing business. Integrating any newly acquired businesses or product could be expensive and time-consuming. We may not be able to integrate any acquired business or product successfully or operate any acquired business profitably. Moreover, we may need to raise additional funds through public or private debt or equity financing to acquire any businesses, which may result in dilution for stockholders and the incurrence of indebtedness. OUR REVENUES ARE SUBSTANTIALLY DEPENDENT ON A LIMITED NUMBER OF WHOLESALERS TO WHICH WE SELL ANGIOMAX, AND SUCH REVENUES MAY FLUCTUATE FROM QUARTER TO QUARTER BASED ON THE BUYING PATTERNS OF THESE WHOLESALERS We sell Angiomax primarily to a limited number of national medical and pharmaceutical distributors and wholesalers with distribution centers located throughout the United States. During the three and nine months ended September 30, 2002, revenues from the sale of Angiomax to four wholesalers totaled approximately 96% of our net revenues. Our reliance on this small number of wholesalers could cause our revenues to fluctuate from quarter to quarter based on the buying patterns of these wholesalers. In addition, if any of these wholesalers fail to pay us on a timely basis or at all, our financial position and results of operations could be materially adversely affected. RISKS RELATED TO OUR INDUSTRY IF WE DO NOT OBTAIN FDA APPROVALS FOR OUR PRODUCTS OR COMPLY WITH GOVERNMENT REGULATIONS, WE MAY NOT BE ABLE TO MARKET OUR PRODUCTS AND MAY BE SUBJECT TO STRINGENT PENALTIES Except for Angiomax, which has been approved for sale in the United States, Canada, Israel and New Zealand, we do not have a product approved for sale in the United States or any foreign market. We must obtain approval from the FDA in order to sell our product candidates in the United States and from foreign regulatory authorities in order to sell our product candidates in other countries. We must successfully complete our clinical trials and demonstrate manufacturing capability before we can file with the FDA for approval to sell our products. The FDA could require us to repeat clinical trials as part of the regulatory review process. Delays in obtaining or failure to obtain regulatory approvals may: - delay or prevent the successful commercialization of any of our product candidates; - diminish our competitive advantage; and - defer or decrease our receipt of revenues or royalties. The regulatory review and approval process is lengthy, expensive and uncertain. Extensive pre-clinical data, clinical data and supporting information must be submitted to the FDA for each additional indication to obtain such approvals, and we cannot be certain when we will receive these regulatory approvals, if ever. Page 22 In addition to initial regulatory approval, our products and product candidates will be subject to extensive and rigorous ongoing domestic and foreign government regulation. Any approvals, once obtained, may be withdrawn if compliance with regulatory requirements is not maintained or safety problems are identified. Failure to comply with these requirements may also subject us to stringent penalties. WE MAY NOT BE ABLE TO OBTAIN OR MAINTAIN PATENT PROTECTION FOR OUR PRODUCTS, AND WE MAY INFRINGE THE PATENT RIGHTS OF OTHERS The patent positions of pharmaceutical and biotechnology companies like us are generally uncertain and involve complex legal, scientific and factual issues. Our success depends significantly on our ability to: - obtain U.S. and foreign patents; - protect trade secrets; - operate without infringing the proprietary rights of others; and - prevent others from infringing our proprietary rights. We may not have any patents issued from any patent applications that we own or license. If patents are granted, the claims allowed may not be sufficiently broad to protect our technology. In addition, issued patents that we own or license may be challenged, invalidated or circumvented. Our patents also may not afford us protection against competitors with similar technology. Because patent applications in the United States and many foreign jurisdictions are typically not published until eighteen months after filing and because publications of discoveries in the scientific literature often lag behind actual discoveries, we cannot be certain that others have not filed or maintained patent applications for technology used by us or covered by our pending patent applications without our being aware of these applications. We exclusively license U.S. patents and patent applications and corresponding foreign patents and patent applications relating to Angiomax, IS-159 and CTV-05. In all, as of the date of this Quarterly Report, we exclusively license ten issued U.S. patents. The principal U.S. patent that covers Angiomax expires in 2010. The U.S. Patent and Trademark Office has rejected our application for an extension of the term of the patent beyond 2010 because the application was not filed on time. We filed the application in connection with FDA approval of Angiomax. We are exploring an alternative to extend the term of the patent, but we can provide no assurance that we will be successful. We have not yet filed any independent patent applications. We may not hold proprietary rights to some patents related to our product candidates. In some cases, others may own or control these patents. As a result, we may be required to obtain licenses under third-party patents to market some of our product candidates. If licenses are not available to us on acceptable terms, we will not be able to market these products. We may become a party to patent litigation or other proceedings regarding intellectual property rights. The cost to us of any patent litigation or other proceeding, even if resolved in our favor, could be substantial. If any patent litigation or other intellectual property proceeding in which we are involved is resolved unfavorably to us, we may be enjoined from manufacturing or selling Page 23 our products 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. IF WE ARE NOT ABLE TO KEEP OUR TRADE SECRETS CONFIDENTIAL, OUR TECHNOLOGY AND INFORMATION MAY BE USED BY OTHERS TO COMPETE AGAINST US We rely significantly upon unpatented proprietary technology, information, processes and know-how. We seek to protect this information by confidentiality agreements with our employees, consultants and other third-party contractors, as well as through other security measures. We may not have adequate remedies for any breach by a party to these confidentiality agreements. In addition, our competitors may learn or independently develop our trade secrets. WE COULD BE EXPOSED TO SIGNIFICANT LIABILITY CLAIMS IF WE ARE UNABLE TO OBTAIN INSURANCE AT ACCEPTABLE COSTS AND ADEQUATE LEVELS OR OTHERWISE PROTECT OURSELVES AGAINST POTENTIAL PRODUCT LIABILITY CLAIMS Our business exposes us to potential product liability risks, which are inherent in the testing, manufacturing, marketing and sale of human healthcare products. Product liability claims might be made by patients in clinical trials, consumers, health care providers or pharmaceutical companies or others that sell our products. These claims may be made even with respect to those products that are manufactured in licensed and regulated facilities or otherwise possess regulatory approval for commercial sale. These claims could expose us to significant liabilities that could prevent or interfere with the development or commercialization of our products. Product liability claims could require us to spend significant time and money in litigation or pay significant damages. As of the date of this Quarterly Report, we are covered, with respect to our commercial sales in the United States and New Zealand and our clinical trials, by primary product liability insurance in the amount of $20.0 million per occurrence and $20.0 million annually in the aggregate on a claims-made basis. This coverage may not be adequate to cover any product liability claims. As we commercialize our products, we may wish to increase our product liability insurance. Product liability coverage is expensive. In the future, we may not be able to maintain or obtain such product liability insurance on reasonable terms, at a reasonable cost or in sufficient amounts to protect us against losses due to product liability claims. OUR ABILITY TO GENERATE FUTURE REVENUE FROM PRODUCTS WILL DEPEND ON REIMBURSEMENT AND DRUG PRICING Acceptable levels of reimbursement of the cost of developing and manufacturing drugs and treatments related to those drugs by government authorities, private health insurers and other organizations will have an effect on the successful commercialization of, and attracting collaborative partners to invest in the development of, our product candidates. We cannot be sure that reimbursement in the United States or elsewhere will be available for any products we may develop or, if already available, will not be decreased in the future. If reimbursement is not available or is available only to limited levels, we may not be able to commercialize our products, and may not be able to obtain a satisfactory financial return on our products. Third-party payers increasingly are challenging prices charged for medical products and services. Also, the trend toward managed health care in the United States and the changes in health insurance programs, as well as legislative proposals to reform health care or reduce government Page 24 insurance programs, may result in lower prices for pharmaceutical products, including any products that may be offered by us. Cost-cutting measures that health care providers are instituting, and the effect of any health care reform, could materially adversely affect our ability to sell any products that are successfully developed by us and approved by regulators. Moreover, we are unable to predict what additional legislation or regulation, if any, relating to the health care industry or third-party coverage and reimbursement may be enacted in the future or what effect such legislation or regulation would have on our business. Page 25 ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our exposure to market risk is confined to our cash, cash equivalents and available for sale securities. We place our investments in high-quality financial instruments, primarily money market funds, United States government agency notes, and corporate debt securities with maturities or auction dates of less than one year, which we believe are subject to limited credit risk. We currently do not hedge interest rate exposure. At September 30, 2002, we held $51.7 million in cash, cash equivalents, and available for sale securities, all due within one year, which had an average interest rate of approximately 2.0%. We do not believe that a 10% increase or decrease in interest rates in effect at September 30, 2002 would have a material impact on our results of operations or cash flows. Most of our transactions are conducted in U.S. dollars. We do have certain development and commercialization agreements with vendors located outside the United States. Transactions under certain of these agreements are conducted in U.S. dollars, subject to adjustment based on significant fluctuations in currency exchange rates. Transactions under certain other of these agreements are conducted in the local foreign currency. We do not believe that a 10% increase or decrease in foreign currency exchange rates would have a material impact on our results of operations or cash flows. Page 26 ITEM 4 - CONTROLS AND PROCEDURES 1. Evaluation of disclosure controls and procedures. Based on their evaluation of the Company's disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) as of a date within 90 days of the filing date of this Quarterly Report on Form 10-Q, the Company's principal executive officers and principal financial officer have concluded that the Company's disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and are operating in an effective manner. 2. Changes in internal controls. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their most recent evaluation. Page 27 PART II - OTHER INFORMATION ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits See the Exhibit Index on the page immediately preceding the exhibits for a list of exhibits filed as part of this Quarterly Report, which Exhibit Index is incorporated herein by this reference. b) Reports on Form 8-K On July 25, 2002, the Company filed with the SEC a Current Report on Form 8-K dated July 23, 2002 in connection with its announcement of financial results for the quarter and six-month period ended June 30, 2002. Page 28 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. THE MEDICINES COMPANY Date: October 31, 2002 By: /s/ Steven H. Koehler ----------------------------- Steven H. Koehler Chief Financial Officer Page 29 CERTIFICATIONS I, Clive A. Meanwell, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Medicines Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Clive A. Meanwell -------------------------------- Dated: October 31, 2002 Clive A. Meanwell Executive Chairman Page 30 I, David M. Stack, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Medicines Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ David M. Stack ------------------------------------ Dated: October 31, 2002 David M. Stack President and Chief Executive Officer Page 31 I, Steven H. Koehler, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Medicines Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Steven H. Koehler ------------------------------------ Dated: October 31, 2002 Steven H. Koehler Chief Financial Officer Page 32 EXHIBIT INDEX Exhibit Number Description - ------- ----------- 99.1 Executive Chairman - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 Chief Executive Officer - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.3 Chief Financial Officer - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Page 33