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, 2003 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.) 8 Campus Drive, 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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ] As of October 31, 2003, the registrant had 47,343,225 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...... 10 ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................. 32 ITEM 4 - CONTROLS AND PROCEDURES.................................................................... 32 PART II. OTHER INFORMATION............................................................................. 33 ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS.................................................. 33 ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K........................................................... 33 SIGNATURES ............................................................................................ 34 EXHIBIT INDEX ......................................................................................... 35 PART I. FINANCIAL INFORMATION ITEM 1 - UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THE MEDICINES COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, DECEMBER 31, 2003 2002 ------------- ------------- (unaudited) ASSETS Current assets: Cash and cash equivalents $ 27,425,984 $ 36,777,007 Available for sale securities 99,450,778 6,731,728 Accrued interest receivable 873,819 129,414 Accounts receivable, net of allowances of approximately $1.80 million and $0.64 million at September 30, 2003 and December 31, 2002, respectively 18,795,022 15,078,488 Inventories 6,426,329 14,178,660 Prepaid expenses and other current assets 1,122,325 660,720 ------------- ------------- Total current assets 154,094,257 73,556,017 Fixed assets, net 1,432,976 924,497 Other assets 276,814 233,854 ------------- ------------- Total assets $ 155,804,047 $ 74,714,368 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,763,790 $ 8,291,995 Accrued expenses 16,019,848 11,092,134 ------------- ------------- Total current liabilities 18,783,638 19,384,129 Deferred revenue 1,302,083 1,395,833 Commitments and contingencies - - ------------- ------------- Total liabilities 20,085,721 20,779,962 Stockholders' equity: Preferred stock, $1.00 par value per share, 5,000,000 shares authorized; no shares issued and outstanding - - Common stock, $.001 par value per share, 75,000,000 shares authorized at September 30, 2003 and December 31, 2002, respectively; 47,308,498 and 39,894,285 issued and outstanding at September 30, 2003 and December 31, 2002, respectively 47,308 39,894 Additional paid-in capital 453,201,180 354,239,193 Deferred compensation (1,308,317) (3,125,494) Accumulated deficit (316,440,174) (297,274,830) Accumulated other comprehensive income 218,329 55,643 ------------- ------------- Total stockholders' equity 135,718,326 53,934,406 ------------- ------------- Total liabilities and stockholders' equity $ 155,804,047 $ 74,714,368 ============= ============= See accompanying notes to unaudited 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, -------------------------------- ------------------------------- 2003 2002 2003 2002 ---- ---- ---- ---- Net revenue $ 21,248,027 $ 9,133,199 $ 56,702,827 $ 24,004,230 Operating expenses: Cost of revenue 6,602,543 2,227,178 19,835,063 4,959,808 Research and development 9,382,934 9,866,139 24,835,640 28,567,263 Selling, general and administrative 11,834,740 8,467,569 32,190,894 27,199,457 ------------ ------------ ------------ ------------ Total operating expenses 27,820,217 20,560,886 76,861,597 60,726,528 ------------ ------------ ------------ ------------ Loss from operations (6,572,190) (11,427,687) (20,158,770) (36,722,298) Other income (expense): Interest income 409,962 215,927 993,426 760,996 Interest expense - - - (32,847) ------------ ------------ ------------ ------------ Net loss $ (6,162,228) $(11,211,761) $(19,165,344) $(35,994,149) ============ ============ ============ ============ Basic and diluted net loss per common share $ (0.13) $ (0.29) $ (0.43) $ (0.99) ============ ============ ============ ============ Shares used in computing net loss per common share: Basic and diluted 47,129,695 39,161,664 45,035,965 36,409,258 ============ ============ ============ ============ See accompanying notes to unaudited condensed consolidated financial statements. Page 2 THE MEDICINES COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- 2003 2002 ------------- ------------- Cash flows from operating activities: Net loss $ (19,165,344) $ (35,994,149) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 439,099 409,748 Amortization of premiums on available for sale securities 510,718 - Non-cash stock compensation 2,594,972 2,434,243 Loss on disposals of fixed assets 107,572 - Changes in operating assets and liabilities: Accrued interest receivable (744,405) (127,595) Accounts receivable (3,716,535) (1,911,423) Inventory 7,752,331 (1,017,707) Prepaid expenses and other current assets (461,146) (532,210) Other assets (42,960) (38,567) Accounts payable (5,529,166) (6,985,831) Accrued expenses 4,907,193 6,580,263 Deferred revenue (93,750) 1,427,083 ------------- ------------- Net cash used in operating activities (13,441,421) (35,756,145) Cash flows from investing activities: Purchases of available for sale securities (113,667,999) (6,749,399) Maturities and sales of available for sale securities 20,654,989 - Purchase of fixed assets (1,050,985) (54,026) ------------- ------------- Net cash used in investing activities (94,063,995) (6,803,425) Cash flows from financing activities: Proceeds from short-term borrowings - 10,000,000 Repayments of revolving line of credit borrowings - (10,000,000) Proceeds from issuances of common stock, net 98,191,611 33,525,590 Repurchases of common stock - (542) ------------- ------------- Net cash provided by financing activities 98,191,611 33,525,048 Effect of exchange rate changes on cash (37,218) 5,986 ------------- ------------- Increase in cash and cash equivalents (9,351,023) (9,028,536) Cash and cash equivalents at beginning of period 36,777,007 53,884,376 ------------- ------------- Cash and cash equivalents at end of period $ 27,425,984 $ 44,855,839 ============= ============= See accompanying notes to unaudited condensed consolidated financial statements. Page 3 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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. In December 2000 the U.S. Food and Drug Administration approved Angiomax(R) (bivalirudin), the Company's first product, for use as an anticoagulant in combination with aspirin in patients with unstable angina undergoing coronary angioplasty. The Company commenced sales of Angiomax in the United States in the first quarter of 2001. In 2003, the Company acquired the rights to Clevelox(R) (clevidipine), a phase 2 product being studied for blood pressure control during surgical procedures. 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-month and nine-month periods ended September 30, 2003 are not necessarily indicative of the results that may be expected for the entire fiscal year ending December 31, 2003. 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, 2002 filed with the Securities and Exchange Commission. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassification Certain reclassifications have been made to the prior year's information to conform to the 2003 presentation. Page 4 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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, 2003 consisted of investments of $26.3 million in money market funds and $1.1 million of corporate bonds with original maturities of less than three months. Cash equivalents at December 31, 2002 consisted 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. The cost of debt securities in this category is adjusted for amortization of premium and accretion of discount to maturity. At September 30, 2003, the Company held available for sale securities with fair value totaling $99.5 million. These available for sale securities included various certificates of deposit, corporate debt securities and United States government agency notes, $58.1 million of which had original maturities of more than one year but less than two years and $41.4 million of which had original maturities of more than three months and less than one year. At December 31, 2002, the Company held available for sale securities with fair value totaling $6.7 million, all with original maturities greater than three months and less than one year. These available for sale securities included various certificates of deposit, corporate debt securities and United States government agency notes. Revenue Recognition The Company sells its products primarily to wholesalers and distributors who, in turn sell to hospitals. Revenue from product sales is not recognized until there is persuasive evidence of an arrangement, delivery has occurred, the price is fixed and determinable, and collectibility is reasonably assured. Also, because the Company's products are sold with limited rights of return, revenue is not recognized until 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 sale of the product and the amount of returns can be reasonably estimated. The Company records allowances for product returns, rebates and discounts at the time of sale, and reports revenue net of such allowances. The Company must make significant judgments and estimates in determining the allowances. For instance: Page 5 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - The Company's wholesaler customers have the right to return any unopened product during the 18 month period beginning six months prior to the labeled expiration date and ending 12 months after the labeled expiration date. As a result, in calculating the allowance for product returns, the Company must estimate the likelihood that product sold to wholesalers might remain in their inventory to within six months of expiration and determine if it will be returned. The Company bases its estimates on information from wholesalers, historic patterns of returns, industry data and on the expiration dates of product currently being shipped. - Certain hospitals purchasing the Company's products from wholesalers have the right to receive a discounted price and a volume-based rebate if they have a direct contract with the Company or participate in a group purchasing organization that has a contract with the Company. As a result, the Company must estimate the likelihood that product sold to wholesalers might be ultimately sold to a participating hospital. The Company bases its estimates on information from wholesalers and hospitals, industry data, historic patterns of discounts and customer rebate thresholds. If actual results differ from the Company's estimates, the Company will be required to make adjustments to these allowances in the future. Revenue from collaborative agreements may include non-refundable fees or milestone payments. These payments are recorded as deferred revenue until 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, which could result in a change in the deferral period. Inventories Inventory is recorded upon the transfer of title from the Company's vendors. Inventory is stated at the lower of cost or market value. Angiomax bulk drug product is classified as raw materials and its costs are determined using a weighted average of production run manufacturing costs. Work-in-progress costs of filling, finishing and packaging are recorded against specific product batches, or lots. Prior to FDA approval of Angiomax and of its original manufacturing process in December 2000, the Company expensed all of these costs as research and development. The Company records as inventory any Angiomax bulk drug product manufactured according to its original manufacturing process to which the Company took title after FDA approval. Together with its contract-manufacturing partner, UCB Bioproducts S.A., the Company has developed a second-generation chemical synthesis process, the Chemilog process, for the manufacture of Angiomax bulk drug substance. On May 23, 2003 the Company received FDA approval of this process. Accordingly, all Angiomax bulk drug product manufactured using the Chemilog process to which title had transferred to the Company prior to May 23, 2003 has been expensed as research and development, and all bulk drug product manufactured after FDA approval has been and will be recorded as inventory. Page 6 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The Company reviews inventory for slow-moving or obsolete amounts based on expected revenues. If actual revenues are less than expected, allowances for excess amounts may be required in the future. SEPTEMBER 30, DECEMBER, 31 INVENTORIES 2003 2002 - ----------- ------------ ------------ Raw materials....................................... $ 5,099,342 $ 4,126,870 Work-in-progress.................................... 380,452 8,370,949 Finished Goods...................................... 946,535 1,680,841 ------------ ------------ TOTAL........................................... $ 6,426,329 $ 14,178,660 ============ ============ Research and Development Expenditures for research and development costs are expensed as incurred. Stock-Based Compensation Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation" encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" requires the disclosure of the impacts of SFAS No. 123 in quarterly reports. The Company has elected to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition and share-based compensation costs provisions of SFAS No. 123 and SFAS No. 148 to stock-based employee compensation: THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, --------------------------------- ------------------------------- 2003 2002 2003 2002 ---- ---- ---- ---- Net loss - As reported $ (6,162,228) $(11,211,761) $(19,165,344) $(35,994,149) Add: Total stock-based employee compensation expense included in net income as reported 557,025 633,808 1,673,056 2,434,243 Less: Total stock-based compensation expense determined under fair value based method for all stock option awards and discounts under the 2000 Employee Stock Purchase Plan (2,708,941) (2,217,143) (7,670,869) (4,965,905) ------------ ------------ ------------ ------------ Net loss - Proforma $ (8,314,144) $(12,795,096) $(25,163,157) $(38,525,811) ============ ============ ============ ============ Net loss per share - As reported $ (0.13) $ (0.29) $ (0.43) $ (0.99) ============ ============ ============ ============ Net loss per share - Proforma $ (0.18) $ (0.33) $ (0.56) $ (1.06) ============ ============ ============ ============ Page 7 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- ------------------------------- 2003 2002 2003 2002 ---- ---- ---- ---- Expected dividend yield 0% 0% 0% 0% Expected stock price volatility 87% 90% 88% 90% Risk-free interest rate 2% 3% 2% 3% Expected option term 2.90 2.79 2.83 2.79 3. NET LOSS PER SHARE The following table sets forth the computation of basic and diluted net loss per share for the three-month and nine-month periods ended September 30, 2003 and 2002. THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, -------------------------------- ------------------------------- 2003 2002 2003 2002 ---- ---- ---- ---- BASIC AND DILUTED Net loss $ (6,162,228) $(11,211,761) $(19,165,344) $(35,994,149) Weighted average common shares outstanding 47,132,607 39,172,483 45,041,522 36,423,982 Less: unvested restricted common shares outstanding (2,911) (10,819) (5,557) (14,724) ------------ ------------ ------------ ------------ Weighted average common shares used to compute net loss per share $ 47,129,695 $ 39,161,664 $ 45,035,965 $ 36,409,258 ============ ============ ============ ============ Basic and diluted net loss per share $ (0.13) $ (0.29) $ (0.43) $ (0.99) ============ ============ ============ ============ Options to purchase 4,760,084 and 4,427,298 shares of common stock outstanding as of September 30, 2003 and 2002, 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 795,432 and 2,873,688 shares of common stock as of September 30, 2003 and 2002, respectively, were also excluded from the computation of diluted net loss per share as their effect would have been antidilutive. During the period from January 1, 2000 to September 30, 2000, the Company issued options to purchase 2,273,624 shares 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 price of the Company's common stock in connection with the Company's initial public offering. The total deferred stock compensation associated with these options is approximately $17.3 million. The Company Page 8 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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, 2003, cancellation of options that had not been exercised resulted in a reduction in the total deferred stock compensation of approximately $0.1 million. Included in the results of operations is deferred stock compensation expense associated with these options of $0.6 million and $1.7 million for the three and nine months ended September 30, 2003, respectively, and $0.6 million and $2.4 million for the three and nine months ended September 30, 2002, respectively. We expect to record amortization expense for the remaining deferred stock compensation associated with these options as follows: approximately $0.5 million for the remainder of 2003, and approximately $0.8 million in 2004, assuming the continued vesting of the associated options. In May 2003, the Company granted options to a non-employee consultant to purchase 50,000 shares at an exercise price based on the fair market value of the Company's common stock on the date of the consulting agreement in April 2003. In September 2003, the Company amended the terms of fully-vested options to purchase 10,000 shares of common stock that were granted to a non-employee consultant in May 2001. In each case, these options were valued utilizing the Black-Scholes option-pricing model. Included in selling, general and administrative expenses in the results of operations for the three and nine months ended September 30, 2003 were $0.3 million and $0.9 million, respectively, of non-cash stock compensation expense associated with these options. The options granted in May 2003 will be revalued and expensed over the remainder of their vesting term. 4. SALES OF COMMON STOCK On March 19, 2003, the Company sold through a public offering 5.6 million shares of its common stock at a price of $17.50 per share. The Company is using and expects to continue to use the $91.5 million net proceeds from the sale of common stock to fund further clinical development and commercialization of Angiomax, to fund research and development of Clevelox(R) (clevidipine) and for working capital and other general corporate purposes. In addition, employees of the Company purchased stock pursuant to option exercises and our employee stock purchase plan for aggregate net proceeds to the Company of approximately $3.5 million and $6.7 million, respectively, for the three and nine months ended September 30, 2003. 5. COMPREHENSIVE LOSS Comprehensive losses are primarily comprised of net losses, unrealized gains and losses on available for sales securities and currency translation adjustments. Comprehensive losses for the three and nine months ended September 30, 2003 were $6.1 million and $19.0 million, respectively. Comprehensive losses for the three and nine months ended September 30, 2002 were $11.2 million and $36.0 million, respectively. Page 9 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and accompanying notes in this quarterly report. In addition to the historical information, the discussion in this quarterly report contains certain forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated by the forward-looking statements due to factors including, but not limited to, those set forth under "Factors That May Affect Future Results" below. OVERVIEW We are a specialty pharmaceutical company with growing revenue from sales of our first product, Angiomax, a direct thrombin inhibitor used as an anticoagulant in patients undergoing coronary angioplasty. The U.S. Food and Drug Administration, or FDA, approved Angiomax in December 2000 for use as an anticoagulant in combination with aspirin in patients with unstable angina undergoing coronary angioplasty, and we began selling the product in the United States in January 2001. Our revenues to date have been generated almost entirely from sales of Angiomax in the United States. Since our inception we have generated significant losses. We expect to continue to spend significant amounts on the development of our products and on the sales and marketing of Angiomax in the balance of 2003 and thereafter. We also plan to continue to invest in clinical studies to expand the use of Angiomax and to develop Clevelox(R) (clevidipine), an intravenous compound for the short-term control of high blood pressure in patients undergoing cardiac surgery. Additionally, we plan to continue to evaluate possible acquisitions of development-stage or approved products that would fit within our growth strategy. Accordingly, we will need to generate greater revenues to achieve and then maintain profitability. Angiomax in Angioplasty We believe that continued increased use of Angiomax by existing hospital customers, as well as penetration to new hospitals, will be critical elements of our ability to increase revenues. In November 2002, we announced the primary 30-day results of our REPLACE-2 clinical trial, which was designed to evaluate Angiomax as the foundation anticoagulant for coronary angioplasty within the context of modern therapeutic products and technologies, including coronary stents. Since that time additional hospitals have granted Angiomax formulary approval, hospital demand for the product has increased and sales of Angiomax have increased significantly. In September 2003, we announced the six-month follow-up results for REPLACE-2. These results confirm that patients undergoing a course of treatment using Angiomax in elective or urgent coronary angioplasty had lower death rates at six months, and equivalent rates with respect to myocardial infarction and urgent revascularization, compared to patients receiving the current standard of low dose weight-adjusted heparin plus a glycoprotein IIb/IIIa inhibitor. Patients undergoing an Angiomax regimen also had less bleeding, cost less to treat and had a Page 10 shorter duration of treatment. Earlier results raised the question of possible increased mortality rates due to a slight increase in rates of a less serious form of a heart attack, known as periprocedural non-Q-wave MI, in Angiomax patients at 30 days; however, the six-month results actually demonstrated numerically lower death rates in the Angiomax patients. We expect that investigators will present the one-year mortality data at the upcoming American Heart Association Scientific Sessions in November 2003. In July 2003, we submitted a supplemental New Drug Application to the FDA requesting an amended label for Angiomax in order to include data from the REPLACE-1 and REPLACE-2 trials in coronary angioplasty as well as the ATBAT trial in patients with heparin-induced thrombocytopenia undergoing coronary angioplasty. We believe the ATBAT data filing fulfills our FDA-required Phase 4 trial obligation. In August 2003 we submitted a Market Authorisation Application to the European Agency for the Evaluation of Medicinal Products, or EMEA, for the use of Angiomax in patients undergoing percutaneous coronary interventions. The filing in Europe is centralized for the 18 countries covered by the EMEA. Angiomax Manufacturing In May 2003, we received approval for the Chemilog process, the second-generation manufacturing process for the Angiomax bulk drug substance. The new process involves enhancements to early manufacturing steps to improve the efficiency of synthesizing bivalirudin, the active ingredient of Angiomax. We expect the Chemilog process to improve the economies of manufacturing Angiomax bulk drug substance and to enable us to scale up our manufacturing efficiently so that we can continue to meet customer demand for Angiomax. Clevelox(R) (clevidipine) In March 2003, we acquired from AstraZeneca A.B. exclusive worldwide (excluding Japan) license rights to Clevelox pursuant to study and exclusive option agreement with AstraZeneca that we entered into in March 2002. Prior to March 2002, AstraZeneca conducted Phase 2 clinical trials of Clevelox demonstrating that Clevelox acts to reduce blood pressure rapidly after intravenous infusion. We have completed a protocol for, and plan to commence in 2003, a Phase 3 program in patients undergoing cardiac surgery to investigate the potential of Clevelox to simplify and improve the treatment of these patients. Expenditures 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 acquisitions, clinical trials, and activities relating to regulatory filings and manufacturing development efforts. We outsource many of the activities associated with our clinical trials and manufacturing development to independent organizations to maximize efficiency and minimize our internal overhead. We expense our research and development costs as they are incurred. Selling, general and administrative expenses consist primarily of salaries Page 11 and related expenses, general corporate activities and costs associated with promotion and marketing activities. Financing In March 2003, we received $91.5 million in net proceeds from a public offering of 5.6 million shares of our common stock at a price of $17.50 per share. We are using and expect to continue to use the proceeds from the offering to fund further clinical development and commercialization of Angiomax, to fund research and development of Clevelox and for working capital and other general corporate purposes. APPLICATION OF CRITICAL ACCOUNTING POLICIES 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 our reported assets and liabilities, revenues and expenses, and other financial information. Actual results may differ significantly from these estimates under different assumptions and conditions. In addition, our reported financial condition and results of operations could vary due to a change in the application of a particular accounting standard. We regard an accounting estimate underlying our financial statements as a "critical accounting estimate" if the accounting estimate requires us to make assumptions about matters that are highly uncertain at the time of estimation and if different estimates that reasonably could have been used in the current period, or changes in the estimate that are reasonably likely to occur from period to period, would have had a material effect on the presentation of financial condition, changes in financial condition, or results of operations. Our significant accounting policies are more fully described in the Notes to Unaudited Consolidated Financial Statements section of this quarterly report on Form 10-Q and in Note 2 of the Notes to Consolidated Financial Statements in our annual report on Form 10-K for the year ended December 31, 2002. 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 revenue recognition and inventory, as described under the caption "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Application of Critical Accounting Policies" in our annual report on Form 10-K for the year ended December 31, 2002, fit the definition of "critical accounting estimates and judgments." RESULTS OF OPERATIONS Three Months Ended September 30, 2003 and 2002 Net Revenue. Net revenue increased 133% to $21.2 million for the three months ended September 30, 2003 as compared to $9.1 million for the three months ended September 30, 2002. Page 12 Virtually all of our revenue in each period was from U.S. sales of Angiomax. We believe that growth in 2003, including the third quarter, has been due primarily to increased use of Angiomax by existing hospital customers and adoption of Angiomax by new hospital customers. Since we announced the results of the REPLACE-2 clinical trial in November 2002, additional hospitals have granted Angiomax formulary approval and hospital demand for the product has increased. Cost of Revenue. Cost of revenue for the three months ended September 30, 2003 was $6.6 million, or 31% of net revenue, compared to $2.2 million, or 24% of net revenue, for the three months ended September 30, 2002. Cost of revenue for the three months ended September 30, 2003 consisted of expenses in connection with the manufacture of Angiomax that was sold during the period, which represented 64% of the 2003 cost of revenue, royalty expenses under our agreement with Biogen, Inc. for the license of bivalirudin, which we have developed as Angiomax, which represented 23% of the 2003 cost of revenue, and the logistics costs of selling Angiomax, such as distribution, storage, and handling, which represented 13% of the 2003 cost of revenue. Cost of revenue for the three months ended September 30, 2002 consisted of expenses in connection with the manufacture of the Angiomax sold, which represented 57% of the 2002 cost of revenue, royalty expenses under our agreement with Biogen, which represented 29% of the 2002 cost of revenue, and the logistics costs of selling Angiomax, which represented 14% of the 2002 cost of revenue. Prior to obtaining FDA approval for Angiomax and its original manufacturing process, all costs of manufacturing Angiomax were expensed as research and development costs and therefore not reflected in cost of revenue. In late 2000, after obtaining FDA approval for Angiomax and its original manufacturing process, we began recording the costs of manufacturing Angiomax as inventory, which is reflected in cost of revenue, rather than as research and development expense. During 2002 and in early 2003, we took delivery of drug material manufactured using the Chemilog process, which was approved by the FDA on May 23, 2003. Because this material was manufactured prior to FDA approval of the Chemilog process, we expensed all costs of manufacturing as research and development. We are recording all costs of manufacturing Angiomax after May 23, 2003 as inventory. Although we sold some Angiomax in the third quarter of 2003 that had been manufactured using the Chemilog process and whose cost of manufacturing had previously been expensed, most of the Angiomax that we sold in the third quarter of 2003 was manufactured using the original manufacturing process following the date of FDA approval of Angiomax. As a result, we recorded the cost of manufacturing such material as cost of revenue during the third quarter of 2003. In the three months ended September 30, 2002, we sold Angiomax that had been manufactured using the original manufacturing process both before and after FDA approval of Angiomax. However, we sold a greater portion of Angiomax whose costs had been previously expensed than Angiomax for which the cost of manufacturing needed to be recorded in the three months ended September 30, 2002. As a result, our cost of manufacturing as a percentage of net revenue was substantially higher in the 2003 period compared to the 2002 period. We expect our cost of manufacturing as a percentage of net revenue to decrease over the next six months as we expect to sell only previously expensed Angiomax, produced by the Chemilog Page 13 process prior to FDA approval. We expect that we will begin selling Angiomax produced using the Chemilog process after FDA approval as soon as the second quarter of 2004. At such time, we will experience an increase in our cost of manufacturing as a percentage of net revenue. Research and Development Expenses. Research and development expenses for the three months ended September 30, 2003 decreased 5% to $9.4 million, from $9.9 million for the three months ended September 30, 2002. The decrease in research and development expenses was primarily due to lower costs relating to clinical trials. We incurred $7.0 million less in the 2003 period than in the 2002 period for our REPLACE-2 trial, for which we completed patient enrollment in third quarter of 2002. These lower expenses were partly offset by $5.1 million of additional Angiomax clinical development program costs, mostly relating to our ACUITY and Phase 4 drug-eluting stents programs described below, and $1.2 million additional expenses in connection with the development related start-up costs of our planned Phase 3 trial program of Clevelox. We have a number of clinical trial programs currently underway, or about to commence, for expanding the applications of Angiomax for use as an intravenous anticoagulant in the treatment of arterial thrombosis. As of the date of this quarterly report, we are conducting: - - a Phase 2/3 trial program studying the use of Angiomax as an anticoagulant in patients undergoing coronary artery bypass graft surgery, or CABG, with and without the use of a bypass pump, and in treatment of patients with an clinical condition known as heparin-induced thrombocytopenia and thrombosis syndrome, or HIT/HITTS, who were undergoing CABG, with and without the use of a bypass pump; - - a randomized Phase 3 trial program to study called ACUITY to study the use of Angiomax in patients presenting to the emergency department with coronary syndromes who may be medically managed or ultimately treated in the catheterization laboratory or operating room; - - a Phase 2 trial program to study the use of Angiomax in neonates and infants up to six months old with active thrombosis; and - - two Phase 4 programs investigating the use of Angiomax with drug-eluting stents. In addition, we are supporting a number of investigations, including clinical studies, of Angiomax in patients undergoing percutaneous peripheral angioplasties. The funding for Angiomax has represented and will continue to represent a significant portion of research and development spending. For the three months ended September 30, 2003 and 2002, research and development expenses related to Angiomax included the costs of clinical trials and the cost associated with preparation of U.S. and worldwide marketing applications. Page 14 For the three months ended September 30, 2003, research and development expenses relating to Clevelox consisted of manufacturing development and other start-up costs relating to the Phase 3 clinical trial we plan to commence in the fourth quarter of 2003 in patients undergoing cardiac surgery. The amount of future research and development expenses associated with Angiomax and Clevelox is not reasonably certain as these costs are dependent upon the clinical trial process, the regulatory process and, in the case of Angiomax, the timing for obtaining marketing approval for other applications of the product in the United States and other countries. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 40% to $11.8 million for the three months ended September 30, 2003, from $8.5 million for the three months ended September 30, 2002. The increase in selling, general and administrative expenses of $3.4 million was primarily due to additional sales force and related recruiting expenses and Angiomax promotion expenses. Non-cash Stock Compensation. In connection with our initial public offering, during the year ended December 31, 2000, we recorded deferred stock compensation on the grant of stock options of approximately $17.3 million, representing the difference between the exercise price of such options and the fair market value of our common stock at the date of grant of such options. The exercise prices of these options were below the estimated fair market value of our common stock as of the date of grant based on the estimated price of our common stock in our initial public offering. We amortize the deferred stock compensation that was recorded in 2000 over the respective vesting periods of the individual stock options. We recorded amortization expense for such deferred compensation of approximately $0.6 million and $0.6 million for the three-month periods ended September 30, 2003, and September 30, 2002, respectively. We expect to record additional amortization expense for the deferred compensation associated with these options of approximately $0.5 million during the remainder of 2003 and approximately $0.8 million in 2004. The amortization expense is included in our operating expenses in the consolidated statements of operations. In September 2003, we amended the terms of fully-vested options to purchase 10,000 shares of common stock that were granted to a non-employee consultant in May 2001. We also granted in May 2003 options to a non-employee consultant to purchase 50,000 shares at an exercise price based on the fair market value of our common stock on the date of the consulting agreement in April 2003. In each case, these options were valued utilizing the Black-Scholes option-pricing model. We recorded $0.3 million in related non-cash stock compensation expense in selling, general and administrative expenses for the three months ended September 30, 2003. The options granted in May 2003 will be revalued and expensed over the remainder of their vesting term. Other Income and Expense. Interest income increased 90% to $0.4 million for the three months ended September 30, 2003, from $0.2 million for the three months ended September 30, 2002. The increase in interest income of $0.2 million was primarily due to higher average cash, cash equivalents, and available for sale securities balances. For the three months ended Page 15 September 30, 2003, interest income was attributable to the investment of the remaining proceeds of our sales of shares of common stock in public offerings in 2002 and 2003. In the three months ended September 30, 2002, interest income was primarily attributable to the investment of the remaining proceeds of our sales of shares of common stock in a private placement in May 2001. We had no interest expense during the three months ended September 30, 2003 or 2002. Nine months Ended September 30, 2003 and 2002 Net Revenue. Net revenue increased 136% to $56.7 million for the nine months ended September 30, 2003 as compared to $24.0 million for the nine months ended September 30, 2002. Virtually all the revenue in both periods was from U.S. sales of Angiomax. We believe that growth in 2003 has been due primarily to increased use of Angiomax by existing hospital customers and adoption of Angiomax by new hospital customers and increased prices. Since we announced the results of the REPLACE-2 clinical trial in November 2002, additional hospitals have granted Angiomax formulary approval and hospital demand for the product has increased. Cost of Revenue. Cost of revenue for the nine months ended September 30, 2003 was $19.8 million, or 35% of net revenue, compared to $5.0 million, or 21% of net revenue, for the nine months ended September 30, 2002. Cost of revenue for the nine months ended September 30, 2003 consisted of expenses in connection with the manufacture of the Angiomax sold, which represented 69% of the 2003 cost of revenue, royalty expenses under our agreement with Biogen which represented 21% of the 2003 cost of revenue and the logistics costs of selling Angiomax, such as distribution, storage, and handling, which represented 10% of the 2003 cost of revenue. Cost of revenue for the nine months ended September 30, 2002 consisted of expenses in connection with the manufacture of the Angiomax sold, which represented 46% of the 2002 cost of revenue, royalty expenses under our agreement with Biogen, which represented 36% of the 2002 cost of revenue, and the logistics costs of selling Angiomax, such as distribution, storage, and handling, which represented 18% of the 2002 cost of revenue. Our cost of manufacturing as a percentage of net revenue increased substantially in 2003 because almost all Angiomax sold in the nine months ended September 30, 2003 was product manufactured after the date of FDA approval of Angiomax. Research and Development Expenses. Research and development expenses for the nine months ended September 30, 2003 decreased 13% to $24.8 million, from $28.6 million for the nine months ended September 30, 2002. The decrease in research and development expenses was primarily due to lower development costs relating to clinical trials and manufacturing processes. We incurred $15.4 million less in the 2003 period than in the 2002 period for our REPLACE-2 trial, for which we completed patient enrollment in the third quarter of 2002, and we incurred $0.8 million less in the 2003 period than in the 2002 period for manufacturing development of Angiomax using the Chemilog process. These lower costs were partly offset by $6.9 million of new Angiomax clinical development programs, mostly related to ACUITY, a $1.0 million license fee to AstraZeneca in connection with the licensing of rights to Clevelox, expenses associated with pre-existing contracts for manufacturing Clevelox and related start-up costs of our planned Phase 3 trial program of Clevelox. We do not expect to incur further development expenses relating to the Chemilog process in future periods, as costs relating to Page 16 Angiomax bulk drug product manufactured using the Chemilog process are now recorded as inventory. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 18% to $32.2 million for the nine months ended September 30, 2003, from $27.2 million for the nine months ended September 30, 2002. The increase in selling, general and administrative expenses of $5.0 million was primarily due to increased sales force, promotional spending and additional administrative and recruiting expenses. Non-cash Stock Compensation. No additional deferred compensation was recorded during the nine months ended September 30, 2003 or during the full year 2002 because all of the exercise prices of all grants of stock options during these periods were at the fair market value of our common stock on the date of grant. We amortize the deferred stock compensation that was recorded in 2000 over the respective vesting periods of the individual stock options. We recorded amortization expense for deferred compensation of approximately and $1.7 million and $2.4 million for the nine months ended September 30, 2003 and September 30, 2002, respectively. In September 2003, we amended the terms of fully-vested options to purchase 10,000 shares of common stock that were granted to a non-employee consultant in May 2001. In addition, in May 2003, we granted options to a non-employee consultant to purchase 50,000 shares at an exercise price based on the fair market value of the Company's common stock on the date of the consulting agreement in April 2003. In each case, these options were valued utilizing the Black-Scholes option-pricing model. We recorded $0.9 million of expense in selling, general and administrative expenses in the nine months ended September 30, 2003. The options granted in May 2003 will be revalued and expensed over the remainder of their vesting term. Other Income and Expense. Interest income increased 31% to $1.0 million for the nine months ended September 30, 2003, from $0.7 million for the nine months ended September 30, 2002. The increase in interest income of $0.2 million was primarily due to higher average cash and available for sale securities balances offset in part by lower available interest rates on securities. For the nine months ended September 30, 2003, interest income was attributable to the investment of the remaining proceeds of our sales of shares of common stock in a private placement in May 2001 and in public offerings in 2002 and 2003. In the nine months ended September 30, 2002, interest income was primarily attributable to the investment of the remaining proceeds of our initial public offering in August and September 2000 and our private placement in May 2001. We had no interest expense during the nine months ended September 30, 2003 as compared to interest expense of $33,000 during the nine months ended September 30, 2002 that was 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 2002. Page 17 LIQUIDITY AND CAPITAL RESOURCES Sources of Liquidity. 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 and revenues from sales of Angiomax. In March 2002, we entered into a collaboration agreement 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. Under 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 2003, we filed registration statements on Forms S-3 with the Securities and Exchange Commission registering 5.6 million shares of our common stock, including 697,280 shares that the underwriters had the option to purchase to cover over-allotments. We sold all 5.6 million shares of the common stock on March 19, 2003 at a price to the public of $17.50 per share. Net proceeds from the sale totaled $91.5 million. Cash Flows. As of September 30, 2003, we had $27.4 million in cash and cash equivalents, as compared to $36.8 million as of December 31, 2002. The major uses of cash during the nine months ended September 30, 2003 included net cash used in operating activities of $13.4 million and net cash used in investing activities of $94.1 million, which was offset by $98.2 million received from financing activities. We used net cash of $13.4 million in operating activities during the nine months ended September 30, 2003. This use of cash consisted primarily of funding a net loss of $19.2 million and increases in accounts receivable of $3.7 million and accrued interest receivable of $0.7 million and decreases in accounts payable of $5.5 million, partly offset by a decrease in inventory of $7.8 million and increases in accrued expenses of $4.9 million, non-cash stock compensation of $2.6 million, and depreciation of $0.5 million. The decrease in accounts payable can be largely attributed to the $4.2 million payment in 2003 for Chemilog product purchased in December 2002. The increase in accounts receivable can largely be attributed to the higher sales volume and the timing of sales in 2003, offset in part by a $1.4 million increase in the allowances for customer chargeback and other discounts related to higher sales volume and the price increase that we initiated in June 2003. The decrease in inventory can be largely attributed to growth in product sales and the expensing of Chemilog inventory prior to FDA approval. During the nine months ended September 30, 2003, we used $94.1 million in cash in net investing activities, which consisted principally of the purchase and reinvestment of available for sale securities. Cash provided by financing activities of $98.2 million during the nine months ended September 30, 2003 consisted primarily of the proceeds of the public offering of 5.6 million shares of our common stock in March 2003 that resulted in net proceeds of $91.5 million. In Page 18 addition, employees purchased stock pursuant to option exercises and our employee stock purchase plan for aggregate net proceeds to us of approximately $6.7 million. Funding Requirements. We expect to devote substantial resources to our research and development efforts 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 related to our additional clinical trials with respect to Angiomax and Clevelox; - 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 operating plan as of the date of this quarterly report, which includes 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 the foreseeable future. We expect, however, to periodically assess our financing alternatives and access the capital markets opportunistically. 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. Any 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. Page 19 CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS Our long-term contractual commitments include operating leases for our facilities in Parsippany, New Jersey and Waltham, Massachusetts, which expire in January 2013 and August 2008, respectively. Future annual minimum payments under these operating leases are: MINIMUM OPERATING LEASE OBLIGATIONS YEAR(S) AMOUNT - ---------------------------------------------------------------------------- ------------- 2003........................................................................ $ 204,000 2004........................................................................ 772,000 2005........................................................................ 725,000 2006........................................................................ 728,000 2007........................................................................ 744,000 Later years................................................................. 3,350,000 ------------- Total operating lease obligations.................................. $ 6,523,000 ============= In addition to amounts accrued or payable as of September 30, 2003, we have commitments to make payments to UCB Bioproducts of a total of $14.6 million through June 2004 for Angiomax bulk drug substance to be produced using the Chemilog process and $1.2 million in related filling, finishing and packaging commitments through April 2004. We also have $0.5 million in contractual commitments related to research and development activities. Page 20 FORWARD-LOOKING STATEMENTS This quarterly report on Form 10-Q includes forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. For this purpose, any statements contained herein regarding our strategy, future operations, financial position, future revenues, projected costs, 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 plans, intentions or expectations disclosed in our forward-looking statements. There are a number of important factors that could cause actual results or events to differ materially from those disclosed in the forward-looking statements we make. These important factors include our "critical accounting estimates" and the risk factors set forth below under the caption "Factors That May Affect Future Results." 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 date of this quarterly report. FACTORS THAT MAY AFFECT FUTURE RESULTS RISKS RELATED TO OUR BUSINESS WE HAVE A HISTORY OF NET LOSSES, AND WE EXPECT TO CONTINUE TO INCUR ADDITIONAL NET LOSSES AND MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY We have incurred net losses since our inception, including net losses of approximately $19.2 million for the nine months ended September 30, 2003. At September 30, 2003, we had an accumulated deficit of approximately $316.4 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. We will need to generate significantly greater revenues to achieve and then maintain profitability. However, we remain unsure as to 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 Angiomax is our only commercial product and, we expect, will account for almost all of our revenues for the foreseeable future. The commercial success of Angiomax will depend upon its acceptance by regulators, physicians, patients and other key decision-makers as a safe, therapeutic and cost-effective alternative to heparin and other products used in current practice, or currently being developed. If Angiomax is not commercially successful, we will have to find additional sources of funding or curtail or cease operations. Page 21 NEAR-TERM GROWTH IN OUR SALES OF ANGIOMAX IS HIGHLY DEPENDENT ON PHYSICIAN ACCEPTANCE OF THE REPLACE-2 TRIAL In the fall of 2002, we completed a 6,002 patient post-marketing Phase 3b/4 clinical trial of Angiomax in coronary angioplasty called REPLACE-2. In November 2002, the principal investigators of the clinical trial announced that, based on 30-day patient follow-up results, Angiomax met all of the primary and secondary objectives of the trial. In March 2003, we released the results of the detailed cost analysis study to examine per-patient total hospital resource consumption at U.S. clinical trial sites. In September 2003, the principal investigators of the clinical trial further announced that, based on six-month patient follow-up results, Angiomax again met all of the primary and secondary objectives of the trial. We believe that the near-term commercial success of Angiomax will depend upon the extent to which physicians, patients and other key decision-makers accept the results of the REPLACE-2 trial. Since the original results were announced, additional hospitals have granted Angiomax formulary approval and hospital demand for the product has increased. We cannot be certain, however, that these trends will continue. Some commentators have challenged various aspects of the trial design of REPLACE-2, the conduct of the study and the analysis and interpretation of the results from the study, including how we define bleeding and the clinical relevance of types of ischemic events. If physicians, patients and other key decision-makers do not accept the trial results, adoption of Angiomax may suffer, and our business will be materially adversely affected. We continued to follow the patients involved in the REPLACE-2 trial for the one-year follow-up period. If the extended follow-up data released by investigators in November 2003 are less favorable than the 30-day and six-month patient follow-up data announced to date, physician adoption of Angiomax may be adversely affected. WE CANNOT EXPAND THE INDICATIONS FOR WHICH WE ARE MARKETING 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 angioplasty. One of our key objectives is to expand the indications for which Angiomax is approved for marketing by the FDA. In order to market Angiomax for these expanded indications, we will need to complete our clinical trials that are currently underway, conduct additional clinical trials, obtain positive results from those trials and obtain FDA approval for such proposed indications. 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 Angiomax through distribution partners in international markets, including Europe. In order to market Angiomax in the European Union and many other foreign jurisdictions, we or our distribution partners must obtain separate regulatory approvals. Obtaining foreign approvals may require additional trials and expense. In February 1998, we submitted a Marketing Authorization Application, or MAA, to the European Agency for Evaluation of Medicinal Products, or the EMEA, for use of Angiomax in unstable angina patients undergoing coronary angioplasty. Following extended interaction with European Page 22 regulatory authorities, the Committee of Proprietary Medicinal Products of the EMEA voted in October 1999 not to recommend Angiomax for approval in coronary angioplasty, and we withdrew our application to the EMEA. In August 2003, we resubmitted an MAA with the results of the REPLACE-2 trial. We may not be able to obtain approval or may be delayed in obtaining approval from any or all of the jurisdictions in which we seek approval to market Angiomax. 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 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. 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 Clevelox or any additional product candidates or products we may acquire on terms that are acceptable to us. Any current or future arrangements for development and commercialization may not be successful. If we are not able to establish or maintain agreements relating to Angiomax, Clevelox or any additional products we may acquire on terms that we deem favorable, our results of operations 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 are not 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, Clevelox, 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. Page 23 FAILURE TO ACHIEVE OUR REVENUE TARGETS OR RAISE ADDITIONAL FUNDS IN THE FUTURE MAY AFFECT THE DEVELOPMENT, MANUFACTURE AND SALE OF OUR PRODUCTS We will need to generate significantly greater revenues to achieve and then maintain profitability. The clinical development and regulatory approval of Angiomax for additional indications, the clinical development and regulatory approval of Clevelox and the acquisition and development of additional product candidates by us will require a commitment of substantial funds. Our future funding requirements depend upon many factors, including our ability to achieve our revenue targets, and may be significantly greater than we expect. As of the date of this quarterly report, we believe, based on our current operating plan, which includes 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 the foreseeable future. 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. Any 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 DEPEND 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 do not manufacture any of our products and do not plan to develop any capacity to manufacture them. As of the date of this quarterly report, we obtain all of our Angiomax bulk drug substance from one manufacturer, UCB Bioproducts, and rely on another manufacturer, Ben Venue Laboratories, to carry out all fill-finish activities for Angiomax, which includes final formulation and transfer of the drug into vials where it is then freeze-dried and sealed. The terms of our agreement with UCB Bioproducts require us to purchase a substantial portion of our Angiomax bulk drug product from UCB Bioproducts, which could hinder our ability to obtain an additional supplier for Angiomax. 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 practices, or cGMP, regulations and guidelines. There are a limited number of manufacturers that operate 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 UCB Bioproducts or Ben Venue is unable to carry out its respective manufacturing obligations, 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 Page 24 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. WE DO NOT OWN THE TECHNOLOGY UNDERLYING THE CHEMILOG PROCESS AND MAY BE UNABLE TO UTILIZE THE CHEMILOG PROCESS IF UCB BIOPRODUCTS BREACHES OUR AGREEMENT Our agreement with UCB Bioproducts for the supply of Angiomax bulk drug substance provides that UCB Bioproducts owns all of the proprietary technology that was used to develop and that is employed in the Chemilog process. Although the agreement requires that UCB Bioproducts transfer this technology to a secondary supplier of Angiomax bulk drug substance or to us or an alternate supplier at the expiration of the agreement, if UCB Bioproducts fails or is unable to transfer successfully this technology, we would be unable to employ the Chemilog process to manufacture our Angiomax bulk drug substance, which could cause us to experience delays in the manufacturing process and increase our manufacturing costs in the future. 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 to market any product for a particular indication, we will be required to complete pre-clinical studies and extensive clinical trials in humans to demonstrate the safety and efficacy of such product for such indication. We are evaluating Angiomax in clinical trials for additional uses in open vascular surgery such as CABG, in medical conditions that require urgent treatment such as unstable angina, in patients with heparin allergy, in children and in peripheral angioplasty. 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 a product candidate to be safe or effective for the intended use. 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. OUR FAILURE TO ACQUIRE AND DEVELOP ADDITIONAL PRODUCT CANDIDATES OR APPROVED PRODUCTS WILL IMPAIR OUR ABILITY TO GROW Page 25 As part of our growth strategy, we intend to acquire and develop additional product candidates or approved products. The success of this strategy depends upon our ability to identify, select and acquire pharmaceutical products 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 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 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. A BREACH OF ANY OF THE AGREEMENTS UNDER WHICH WE LICENSE COMMERCIALIZATION RIGHTS TO PRODUCTS OR TECHNOLOGY FROM OTHERS COULD CAUSE US TO LOSE LICENSE RIGHTS THAT ARE IMPORTANT TO OUR BUSINESS OR SUBJECT US TO CLAIMS BY OUR LICENSORS We license 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 have exclusively licensed patents and patent applications relating to Angiomax from Biogen and relating to Clevelox from AstraZeneca. Under these agreements, we are subject to commercialization and development, sublicensing, royalty, patent prosecution and maintenance, insurance and other obligations. Any failure by us to comply with any of these obligations or any other breach by us of these license agreements could give the licensor the right to terminate the license in whole, terminate the exclusive nature of the license or bring a claim against us for damages. Any such termination or claim, particularly relating to our agreement with Biogen, could have a material adverse effect on our business. Even if we contest any such termination or claim and are ultimately successful, our stock price could suffer. In addition, upon any termination of a license agreement, we may be required to license to the licensor any related intellectual property that we developed. WE MAY NOT BE ABLE TO MANAGE OUR BUSINESS EFFECTIVELY IF WE ARE UNABLE TO ATTRACT AND RETAIN KEY PERSONNEL AND CONSULTANTS Page 26 Our 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 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 our industry with the breadth of skills and experience required to acquire, 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. 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 a widely used, inexpensive, generic drug used in patients with arterial thrombosis. Because heparin is inexpensive and has been widely used for many years, physicians and medical decision-makers may be hesitant to adopt Angiomax. 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 direct and indirect thrombin inhibitors currently on the market, awaiting regulatory approval and in development, including orally administered agents. The thrombin inhibitors on the market include products for use in the treatment of patients with a clinical condition known as HIT/HITTS, patients with unstable angina and patients with deep vein thrombosis. ANGIOMAX MAY COMPETE WITH ALL GROUPS OF ANTICOAGULANT DRUGS, INCLUDING PLATELET INHIBITORS AND FIBRINOLYTIC DRUGS, WHICH MAY LIMIT THE USE OF ANGIOMAX In general, anticoagulant drugs may be classified into four groups: drugs that directly target and inhibit thrombin, drugs that 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 platelet inhibitors or fibrinolytic drugs. Although platelet inhibitors and fibrinolytic drugs may be complementary to Angiomax, we recognize that Angiomax may compete with these and other anticoagulant drugs to the extent Angiomax and any of these anticoagulant drugs are approved for the same indication. In addition, platelet inhibitors and fibrinolytic drugs may compete with Angiomax for the use of hospital financial resources. For example, 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, hospitals may be forced to use either Angiomax or platelet inhibitors or fibrinolytic drugs but not necessarily several of the drugs together. WE FACE SUBSTANTIAL COMPETITION, WHICH MAY RESULT IN OTHERS DISCOVERING, DEVELOPING OR COMMERCIALIZING COMPETING PRODUCTS BEFORE OR MORE SUCCESSFULLY THAN WE DO Page 27 Our 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 markets for our products. Potential competitors in the United States and other countries include major pharmaceutical and chemical companies, specialized pharmaceutical companies and 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. 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 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 us or our competitors, the availability and timing of third-party reimbursement and the timing of regulatory approvals. 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 business 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 or products, 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 quarter ended September 30, 2003, revenues from the sale of Angiomax to three 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 fails to pay us on a timely basis or at all, our financial position and results of operations could be materially adversely affected. Page 28 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 for use as an anticoagulant in patients undergoing coronary angioplasty, and which has been approved for sale in five other countries for indications similar to those approved by the FDA, 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. In addition to initial regulatory approval, our product and product candidates are subject to extensive and rigorous ongoing domestic and foreign government regulation of, among other things, the research, development, testing, manufacture, labeling, promotion, advertising, distribution and marketing of our products and product candidates. 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 companies like us are generally uncertain and involve complex legal, scientific and factual issues. Our success depends significantly on our ability to: - obtain and maintain U.S. and foreign patents; - protect trade secrets; - operate without infringing the proprietary rights of others; and Page 29 - 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 and Clevelox. As of the date of this quarterly report, we exclusively license six issued U.S. patents relating to Angiomax and three issued U. S. patents relating to Clevelox. 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 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 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 Page 30 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 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 drug treatments by government authorities, private health insurers and other organizations will have an effect on our ability to successfully commercialize, and attract collaborative partners to invest in the development of, 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 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 31 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. To mitigate market risk, as well as credit and default risk, we place our investments in high-quality financial instruments, primarily money market funds, certificates of deposit, corporate debt and U.S. government agency securities with maturities or auction dates of less than two years, which we believe are subject to limited credit risk. However, these instruments are subject to interest rate risk and will decrease in value if interest rates increase. We currently do not hedge interest rate exposure. At September 30, 2003, we held $126.9 million in cash, cash equivalents and available for sale securities, of which 54% were due within one year. 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. If the applicable exchange rate undergoes a change of 10.0%, we do not believe that it would have a material impact on our results of operations or cash flows. ITEM 4 - CONTROLS AND PROCEDURES Our management, with the participation of our chief executive officers and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2003. Based on this evaluation, our chief executive officers and chief financial officer concluded that, as of September 30, 2003, our disclosure controls and procedures were (1) designed to ensure that material information relating to us, including our consolidated subsidiaries, is made known to our chief executive officers and chief financial officer by others within those entities, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended September 30, 2003 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Page 32 PART II. OTHER INFORMATION ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS During the three months ended September 30, 2003, we issued 5,007 shares of our common stock upon the cashless exercise of outstanding warrants. The purchase price of $5.92 per share was paid in the form of cancellation of a portion of the warrants, in accordance with the cashless exercise provision included in the warrants; accordingly, we received no proceeds from the issuance of the shares. The shares were issued to an "accredited investor" without registration under the Securities Act of 1933, as amended, or the securities laws of certain states, in reliance on the exemptions provided by Section 3(a)(9) of the Securities Act and in reliance on similar exemptions under applicable state laws. 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 22, 2003, we furnished a current report on Form 8-K with the SEC in connection with our announcement of financial results for the quarter ended June 30, 2003. Page 33 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: November 6, 2003 By: /s/ Steven H. Koehler ------------------------------- Steven H. Koehler Chief Financial Officer Page 34 EXHIBIT INDEX Exhibit Number Description 31.1 Executive Chairman - Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Chief Executive Officer - Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.3 Chief Financial Officer - Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Executive Chairman - Certification pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Chief Executive Officer - Certification pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.3 Chief Financial Officer - Certification pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Page 35