INDEVUS PHARMACEUTICALS INC - 10-K Annual Report

The aggregate market value of the voting and non-voting common equity (excluding preferred stock convertible into and having voting rights on certain matters equivalent to 622,000 shares of Common Stock) held by non-affiliates of the registrant was approximately $108,000,000, based on the last sales price of the Common Stock as of December 10, 2002. Shares of Common Stock held by each executive officer and director, by each person who beneficially owns 10% or more of the outstanding Common Stock, and individuals or entities related to such persons have been excluded. This determination of affiliate status may not be conclusive for other purposes.

Statements in this Form 10-K that are not statements or descriptions of historical facts are “forward-looking” statements under Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995 and are subject to numerous risks and uncertainties. These and other forward-looking statements made by the Company in reports that we file with the Securities and Exchange Commission, press releases, and public statements of our officers, corporate spokespersons or our representatives are based on a number of assumptions and relate to, without limitation: the Company’s ability to successfully develop, obtain regulatory approval for and commercialize any products, including trospium; its ability to enter into corporate collaborations or to obtain sufficient additional capital to fund operations; and the Redux^TM-related litigation. The words “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate” or other expressions which predict or indicate future events and trends and do not relate to historical matters identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements as they involve risks and uncertainties and such forward-looking statements may turn out to be wrong. Actual results could differ materially from those currently anticipated due to a number of factors, including those set forth under “Risk Factors” and elsewhere in, or incorporated by reference into, this Form 10-K. These factors include, but are not limited to: dependence on the success of trospium; the early stage of products under development; uncertainties relating to clinical trials, regulatory approval and commercialization of the Company’s products; risks associated with contractual arrangements; dependence on third parties for manufacturing and marketing; competition; need for additional funds and corporate partners; history of operating losses and expectation of future losses; product liability; risks related to certain insurance-related litigation; risks relating to the Redux-related litigation; limited patents and proprietary rights; dependence on market exclusivity; valuation of our common stock; and other risks. The forward-looking statements represent the Company’s judgment and expectations as of the date of this Report. The Company assumes no obligation to update any such forward-looking statements. See “Risk Factors.”

Indevus is a biopharmaceutical company engaged in the development and commercialization of a diversified portfolio of product candidates, including multiple compounds in late stage clinical development. The Company is currently developing or has certain rights to five core compounds. The names of these compounds and their intended uses are as follows: trospium for overactive bladder, pagoclone for panic and generalized anxiety disorders (“GAD”), citicoline for ischemic stroke, IP 751 (initially referred to by the Company as CT-3) for pain and inflammatory disorders, and PRO 2000 for the prevention of infection by the human immunodeficiency virus (“HIV”) and other sexually transmitted pathogens.

The Company seeks to acquire, develop and commercialize a portfolio of pharmaceutical products for a range of therapeutic indications. The key elements to Indevus’ business strategy include: 1) identifying products with broad applications and large, unsatisfied markets, 2) acquiring clinical and late pre-clinical stage compounds, including products with clinical data or market experience outside the U.S., 3) defining pathways for these compounds through the clinic and to market, 4) adding value to acquired products through clinical testing and regulatory review activities and competencies, and 5) commercializing products independently or through selective corporate partnerships that will help ensure the timely penetration of target markets. The Company’s strategy encompasses a range of products and therapeutic areas arising from a variety of partners including biopharmaceutical, regional pharmaceutical, and multi-national pharmaceutical firms, as well as academic and government institutions.

The Company’s lead product is trospium, a muscarinic receptor antagonist under development as a treatment for overactive bladder. In September 2002, the Company announced positive results from a 523-patient, Phase III clinical trial demonstrating that patients with overactive bladder treated with trospium had significantly reduced frequencies of micturition (urination) and urinary incontinence episodes compared with patients who received placebo. In addition to meeting these dual primary endpoints, the trial met all of its overactive bladder secondary endpoints, and the drug was well tolerated as evidenced by a favorable safety profile. The Company plans to file a New Drug Application (“NDA”) for trospium with the U.S. Food and Drug Administration (“FDA”) in the second quarter of 2003, contingent upon discussions with the FDA. The Company in-licensed rights to develop and commercialize trospium in the United States from Madaus AG (“Madaus”), a German pharmaceutical company. Trospium is currently marketed in Europe, where it is one of the leading treatments for overactive bladder.

A second product in advanced clinical-stage development is pagoclone, a novel GABA (gamma amino butyric acid) receptor agonist for the treatment of anxiety disorders. In June 2002, Pfizer Inc (“Pfizer”) returned to the Company exclusive, worldwide development and commercialization rights for pagoclone. To date, there have been three positive Phase II clinical trials of pagoclone, two in panic disorder conducted by Indevus and one in GAD conducted by Pfizer. Pfizer’s most recent data in two Phase II GAD trials and one Phase III panic disorder trial did not demonstrate statistically significant efficacy. The Company is pursuing a new worldwide development partnership for the commercialization of pagoclone. The Company believes the data from these six clinical trials suggest the potential of pagoclone as a novel anti-anxiety agent that lacks the sedative effects and withdrawal or rebound-anxiety symptoms seen with other agents.

Citicoline has been under development by the Company as a neuroprotective treatment for ischemic stroke. Based on the data from the Company’s three Phase III trials with citicoline, the Company believes that additional clinical testing is required before an NDA can be submitted. Two meta-analyses of clinical trials presented at the 27^th International Stroke Conference in February 2002 suggest that treatment with citicoline may reduce infarct growth after stroke and reduce rates of death or disability over a long term. As a result of corporate partnering discussions following these findings, Indevus has signed a non-binding memorandum of agreement with a privately held biotechnology company to fund the further development of citicoline. The finalization of this agreement is contingent upon input from the FDA on the design and clinical endpoints of an additional large Phase III trial and the negotiation of a definitive contract.

The Company licensed exclusive, worldwide rights to IP 751, a novel anti-inflammatory and analgesic compound, in June 2002 from Atlantic Technology Ventures, Inc. (“ATV”). IP 751, a new chemical entity, is a non-psychoactive synthetic derivative of tetrahydrocannabinol (THC). The compound appears to inhibit inflammatory cytokines, particularly interleukin 1-beta and TNF-alpha. Results of a Phase II clinical trial conducted in Germany and announced in December 2002 showed that treatment with IP 751 significantly reduced neuropathic pain among 21 patients and was well tolerated, with no evidence of psychoactive properties. An initial Phase I clinical trial designed to assess the safety of IP 751 showed that it was well tolerated, with no clinically significant adverse events and no evidence of psychoactive properties. An Investigational New Drug Application (“IND”) for IP 751 has been filed with the FDA, and the Company is currently determining the optimal clinical and regulatory plan for advancing IP 751 as a therapy for pain and inflammatory disorders.

PRO 2000 is a topical microbicide in development for the prevention of the sexual transmission of HIV and other sexually-transmitted diseases (“STDs”). Government-sponsored Phase I and Phase I/II studies in both healthy and HIV-positive women have shown PRO 2000 to be well-tolerated. In February 2002, PRO 2000 was selected for a broad, five-year testing program of vaginal microbicides by an international collaboration of research groups in the United Kingdom and Africa under a grant from the U.K. Department for International Development (“DFID”). This program will include a multi-national, randomized, double-blind, placebo-controlled Phase III clinical trial. Additional clinical trials with PRO 2000 are planned to begin in 2003. These include a Phase II trial funded by the European Commission to assess its safety in approximately 100 sexually active female volunteers and a National Institute of Health (“NIH”)-sponsored Phase II/III pivotal trial to determine its safety and efficacy in blocking male to female HIV transmission intended to begin in 2003.

Under an agreement with Eli Lilly and Company (“Lilly”), the Company has received royalties on net sales through December 31, 2001 in the U.S. of Sarafem^®, a treatment for premenstrual dysphoric disorder (“PMDD”), a severe form of premenstrual syndrome (“PMS”). In December 2002, the Company entered into a renegotiated licensing agreement with Lilly providing for an initial payment to the Company upon the signing of the agreement and royalty payments from Lilly to the Company based on net sales of Sarafem in the U.S. until the expiration of the Company’s patent related to Sarafem. In addition, the agreement includes other potential milestone payments to the Company from Lilly. Upon the completion of the conditional agreement announced by Galen Holdings PLC (“Galen”) in December 2002, Galen would acquire the U.S. sales and marketing rights to Sarafem from Lilly. If the conditional agreement is consummated between Lilly and Galen, any remaining milestone payments would be accelerated.

On May 30, 2001, the Company entered into the Indemnity and Release Agreement with American Home Products Corporation (subsequently Wyeth, “Wyeth”) related to product liability cases filed against the Company concerning Redux (the “AHP Indemnity and Release Agreement”). Redux (dexfenfluramine hydrochloride capsules) C-IV, a prescription weight loss medication, was launched by Wyeth in June 1996 and withdrawn from the market in September 1997, following which the Company has been named, together with other pharmaceutical companies, as a defendant in approximately 3,200 product liability legal actions involving the use of Redux and other weight loss drugs.

The AHP Indemnity and Release Agreement provides for indemnification and funding by Wyeth as follows: (i) complete indemnification for plaintiffs who had as of May 30, 2001 opted out of Wyeth’s national class action settlement of diet drug claims and claimants alleging primary pulmonary hypertension, (ii) all future legal costs related to the Company’s defense of Redux-related product liability cases, and (iii) additional insurance coverage to supplement the Company’s existing policies. In exchange, the Company agreed to dismiss its suit against Wyeth filed in January 2000, its appeal from the order approving Wyeth’s national class action settlement of diet drug claims, and its cross-claims against Wyeth related to Redux product liability legal actions. The Company believes that the provisions of this agreement, combined with the Company’s existing product liability insurance, are sufficient to address the Company’s potential remaining Redux product liability exposure.

General: Trospium is under development as a drug to treat overactive bladder, defined as urinary frequency and urgency that may be associated with urge incontinence. According to the American Foundation for Urological Disorders, an estimated 17 million Americans suffer from overactive bladder, and approximately 85 percent of these are women. According to the SCRIP Report dated September 2000, only 20 percent of overactive bladder patients are currently treated with pharmacotherapy. Economic costs related to diagnosis and treatment of overactive bladder are estimated to exceed $26 billion, as stated in the Journal of the American Medical Association report on December 16, 1998.

Current treatments for overactive bladder include compounds in the same class as trospium, such as Detrol LA^™ (tolterodine) and Ditropan XL^™ (oxybutynin). In contrast to trospium, these drugs are lipophilic and have been shown to cross the blood-brain barrier. Based on the hydrophilic nature of trospium and pre-clinical and clinical findings to date, the Company believes that trospium does not cross the blood-brain barrier, thereby possibly avoiding central nervous system side effects. In addition, at therapeutic concentrations trospium is not an inhibitor of specific enzymes in the Cytochrome P450 system, a metabolic pathway commonly associated with drug-drug interactions. Furthermore, trospium is excreted largely unchanged in the urine. Finally, clinical data have shown that patients treated with trospium have a relatively low rate of dry mouth, and the degree of dry mouth they do experience is well tolerated.

Development Program: In September 2002, the Company announced that a 523-patient, double-blind, placebo-controlled Phase III clinical trial with trospium met both of its primary endpoints, achieving significantly reduced frequencies of micturition (p£0.01) and urinary incontinence episodes (p£0.01) among patients treated with trospium compared with patients who received placebo. In addition, the trial met all overactive bladder secondary endpoints, including but not limited to, urgency, increased bladder capacity (volume voided) and quality of life. The drug was also well tolerated, as evidenced by a favorable safety profile. The incidence of dry mouth and other adverse events observed in this trial suggests a product profile for trospium that will make it competitive in the marketplace. Over 400 patients from this trial entered an ongoing nine-month open label extension of the study. The Company plans to submit complete, detailed results from this trial to a peer-reviewed journal with the key objective of publication in 2003. Prior to its Phase III trial, the Company successfully completed an electrocardiographic study recommended by the FDA for drugs in the pharmacological class of trospium.

Based on the results of its Phase III trial, Indevus plans to file an NDA for trospium with the FDA that will include the European clinical trial database during the second quarter of 2003, contingent upon discussions with the FDA regarding stability testing and manufacturing issues. The Company is working with Madaus to achieve compliance with U.S. current Good Manufacturing Practices (“cGMP”) standards in anticipation of a future FDA inspection of their German manufacturing plant. Madaus currently manufactures trospium for the European market to current European manufacturing standards. See “Risk Factors—We will depend on the success of trospium” and “—We will rely on third parties to commercialize and manufacture our products.”

The clinical database for trospium trials encompasses over 2,300 patients in 32 clinical trials, of which twelve are double-blind, controlled studies, including nine double-blind, placebo-controlled studies, and three are active-controlled trials. Based upon previous discussions with the FDA, the Company believes that, in combination with existing efficacy and safety data on trospium, its recently concluded, successful Phase III trial is sufficient for submission of the NDA. See “Risk Factors—We will rely on the favorable outcome of clinical trials of our products.”

Licensing and Proprietary Rights: In November 1999, the Company licensed exclusive U.S. rights from Madaus to market trospium (the “Madaus Agreement”). In exchange, the Company agreed to pay Madaus regulatory milestone, royalty and sales milestone payments. Indevus is responsible for all clinical development and regulatory activities and costs related to the compound and for manufacturing and marketing the compound in the U.S. There are no existing U.S. patents covering the use of orally-administered trospium to treat overactive bladder. The Company expects to rely on the provisions of the Drug Price Competition and Patent Term Restoration Act of 1984 (“Waxman-Hatch Act”) to obtain a period of market exclusivity in the U.S., if the FDA approves trospium in the U.S. for the intended indication. The Company intends to seek additional patent protection for trospium through the development of a once-a-day formulation of the drug. The Madaus Agreement includes a license of the know-how relating to the European clinical trials of trospium. See “Agreements,” “Patents and Proprietary Rights,” and “Government Regulation.”

Madaus Development: The current clinical database for trospium includes over 2,300 subjects and patients (over 1,700 treated with active drug). The database comprises two double-blind, placebo-controlled dose-ranging studies, seven double-blind, placebo-controlled studies, one of which included an active-controlled treatment arm, and several comparative trials, one of which was a long-term comparative 52-week study on safety, tolerability, and efficacy. Many of these studies assessed the relative efficacy of trospium on urodynamic measurements such as bladder capacity and compliance, maximum detrusor pressure, and residual urine, in addition to micturition frequency diary data. In addition to this clinical database, over 10,000 patients have been followed in post-marketing trials. To supplement the clinical database, Indevus will also utilize Madaus’ extensive pharmacology, toxicology and pharmacokinetic studies, including acute, sub-acute, chronic, carcinogenicity, genotoxicity, and reproduction studies, as well as numerous pre-clinical and clinical biopharmaceutical studies.

Madaus has conducted several trials comparing the safety and efficacy of trospium with its two principal competitors in Europe, tolterodine and oxybutynin. A double-blind, randomized efficacy trial, testing trospium and oxybutynin, was conducted with 358 patients, 268 of whom were treated with trospium (20 mg twice a day) and 90 with oxybutynin (5 mg twice a day) over a 52-week period. Hofner et al. (Neurourol Urodyn 19, 2000, 487-88) reported that there was no significant difference between trospium and oxybutynin in the reduction in micturitions and urge incontinence episodes. Among key safety measures, trospium had a statistically and clinically significantly lower incidence of dry mouth (p<0.01) than oxybutynin.

(2 mg twice a day) and 60 with placebo over a three-week period. Junemann et al. (Neurourol Urodyn 19, 2000, 488-90) reported that trospium-treated patients experienced a statistically significant (p<0.01) reduction in micturitions compared with placebo-treated patients, whereas the reduction in micturitions among tolterodine-treated patients failed to reach statistical significance over placebo patients. There was no statistically significant difference in side effects between trospium patients and tolterodine patients.

General: Pagoclone is a compound under development to treat panic and generalized anxiety disorders. Panic disorder is a severe anxiety condition characterized by panic attacks, acute episodes of anxiety comprised of distressing symptoms, such as breathing difficulty, sweating, heart palpitations, dizziness or fainting, and fear of losing control. Generalized anxiety disorder is characterized by excessive anxiety and worry most days for at least six months about a variety of events or activities, such as work or family. Patients with generalized anxiety disorder experience persistent diffuse anxiety without the specific symptoms that characterize phobic disorders, panic disorders or obsessive-compulsive disorders. There are approximately 20 million people in the U.S. (Drug and Market Development, October 2001) and 60 million worldwide with anxiety disorders (In Vivo, September 2001).

Current pharmacological treatments for panic and anxiety disorders generally include benzodiazepines, serotonin agonists and selective serotonin reuptake inhibitors. Traditional side effects seen with these classes of anti-anxiety drugs include sedation, lack of mental acuity, withdrawal and rebound anxiety related to the benzodiazepine class of drugs, and agitation, insomnia and sexual dysfunction related to serotonin reuptake inhibitors. Pre-clinical and early clinical data suggest that treatment with pagoclone may have advantages over these treatments by limiting these common side effects.

Pfizer Agreement: In December 1999, the Company entered into an agreement with Pfizer, subsequently amended, under which the Company licensed to Pfizer exclusive, worldwide rights to develop and commercialize pagoclone (the “Pfizer Agreement”). Under the Pfizer Agreement, the Company received $16,750,000, including an up-front payment of $13,750,000, and was entitled to receive up to an additional $62,000,000 in payments contingent upon the achievement of clinical and regulatory milestones, as well as royalties on net sales. In addition, under the Pfizer Agreement, Pfizer was responsible for conducting and funding all clinical development, regulatory review, manufacturing and marketing of pagoclone on a worldwide basis. See “Agreements.”

In June 2002, Pfizer informed the Company of the results of its most recent clinical trials with pagoclone in GAD and panic disorder, which did not achieve the level of efficacy established in previous trials. Accordingly, Pfizer elected not to pursue further development of the compound and returned to the Company exclusive, worldwide development and commercialization rights to pagoclone. The Company is therefore seeking a corporate partnership to conduct the further clinical development, regulatory review and commercialization of pagoclone.

Development Program: To date, a total of six clinical trials have been conducted with pagoclone in generalized anxiety disorder and panic disorder, including three positive Phase II clinical trials, two in panic disorder conducted by Indevus and one in generalized anxiety disorder conducted by Pfizer. Pfizer’s most recent data in two Phase II generalized anxiety disorder trials and one Phase III panic disorder trial did not show statistically significant efficacy. As demonstrated in previous clinical trials, pagoclone was well tolerated in these latest trials, with no significant differences from placebo with respect to adverse events, including sedation and

The six-week clinical trial conducted by Pfizer among 200 patients involved a flexible dose regimen ranging from 0.3 milligrams of pagoclone per day to 1.2 milligrams per day. Entry criteria for patients included Hamilton Anxiety Scale (HAM-A) scores of 20 or higher. Pagoclone patients had a mean 2.3 point lower HAM-A score than placebo patients at week three (p=.033), a mean 3.3 point lower score at week four (p=.006) and a mean 3.2 point lower score at week six (p=.012). At week six, the mean reduction in HAM-A score among pagoclone patients was 11.7 versus 8.5 for placebo. With respect to side effects, there were no statistically significant differences between pagoclone-treated and placebo-treated patients in sleepiness, as measured by the Stanford Sleepiness Scale, and in withdrawal symptoms, as measured by the Rickel’s Withdrawal Symptom Checklist. In addition, there were no serious clinical or laboratory adverse events among patients treated with pagoclone.

The double-blind, placebo-controlled, parallel group study involved 277 patients at six clinical sites in the United States. Patients were enrolled in the study following confirmed diagnoses of panic disorder. The number of attacks experienced by each patient during a two-week screening period prior to enrollment represented the baseline for subsequent comparison of panic attack frequency. Following the screening period, patients were randomized to receive one of three doses of pagoclone orally (.15 milligrams/day, .30 milligrams/day or .60 milligrams/day) or placebo for eight weeks. The primary outcome measurement was the change from baseline in the number of panic attacks seen at the eight week time point. This primary analysis, conducted on a Last Observation Carried Forward (LOCF) basis, showed that patients in the .15 milligrams/day group experienced a 43% reduction in the number of panic attacks relative to patients on placebo (p=0.141), that patients in the .30 milligrams/day group experienced a 70% reduction relative to patients on placebo (p=0.021), and that patients in the .60 milligrams/day group experienced a 52% reduction (p=0.098) relative to patients on placebo.

Pagoclone was well tolerated with a low incidence of side effects in all dosage groups and no clinically significant differences from placebo. Sedation, a major side effect of benzodiazepine drugs, was evaluated by use of the Stanford Sleepiness Scale. There were no differences observed between pagoclone and placebo using this scale. In addition, there were no evident withdrawal effects seen at the end of the study as determined by the Rickels Withdrawal Scale. Of note, other common side effects seen with existing classes of anti-anxiety drugs were not significantly different between pagoclone patients and patients receiving placebo in this trial. These traditional side effects include sedation, lack of mental acuity, withdrawal and rebound anxiety related to the benzodiazepine class of drugs, and agitation, insomnia and sexual dysfunction related to selective serotonin reuptake inhibitors.

Pilot Study: In November 1997, the Company announced that data from a pilot study among 16 patients suffering from panic attacks showed that those who were treated with three doses per day, orally, of pagoclone experienced a marked reduction in the number of their panic attacks compared to those who received placebo. This double-blind, placebo controlled crossover study was conducted by a team of researchers in the U.K. Pagoclone produced a significant reduction (40%, p=0.012) in the total number of panic attacks over a two-week treatment period and a reduction (40%, p=0.006) in the average number of panic attacks per day compared to the pre-treatment period. No significant change in the total number of panic attacks was observed during placebo treatment.

Licensing and Proprietary Rights: In February 1994, the Company licensed from Rhône-Poulenc Rorer, S.A., now Aventis, S.A. (“Aventis”) exclusive, worldwide rights to pagoclone, subject to Aventis’ option to obtain a sublicense in France, in exchange for license fees, milestone payments and royalties based on net sales. In August 2002, Aventis declined to exercise a contractual option to continue the development of pagoclone. A composition of matter patent and several process patents for pagoclone have issued in the U.S. and Europe. See “Agreements” and “Patents and Proprietary Rights.”

General: Citicoline has been under development as a treatment for ischemic stroke. An ischemic stroke occurs when brain tissue dies or is severely damaged as the result of interrupted blood flow caused by a clogged artery which deprives an area of the brain of blood and oxygen, commonly known as an infarct. This loss of blood flow and oxygen causes, among other events, a breakdown of brain cell membranes, and places the surrounding tissue, the penumbra, at risk for death, leading to an extension of the size of infarct.

Mechanism of Action: Citicoline is believed to have multiple acute and longer-term mechanisms of action in diminishing the effects of stroke. On an acute basis, citicoline appears to limit infarct size by preventing the accumulation of fatty acids, which would otherwise yield toxic oxidation products, by preventing their release. On a longer-term basis, citicoline is believed to promote the formation of additional membrane elements needed by damaged neurons to restore functional activity by raising blood levels of choline, cytidine and other phospholipid precursors, which are substrates believed to be essential for the formation of the nerve cell membrane. Citicoline is thereby believed to help stabilize the cell membrane and, as a result, decrease edema, or brain swelling, caused when blood flow to brain cells is stopped, and help to re-establish normal neurochemical function in the brain. Citicoline also appears to increase levels of acetylcholine, a neurotransmitter believed to be associated with learning and memory functions.

Regulatory Review: The Company had submitted an NDA for citicoline to the FDA in December 1997. Data in the NDA included the results of two Phase III clinical trials conducted by the Company in the U.S., a Japanese Phase III clinical trial conducted by Takeda Chemical Industries Ltd. (“Takeda”) and supportive clinical and post-marketing data from more than 30 countries where citicoline has already been approved. The NDA was accepted for filing and was assigned priority and fast-track review status. However, based on the results of a subsequent 100-patient Phase III trial which failed to meet its primary endpoint of reducing infarct size among patients taking citicoline versus those taking placebo, the Company withdrew its NDA in April 1998.

Takeda Agreement: In December 1999, the Company entered into an agreement, subsequently amended, with Takeda (the “Takeda Agreement”) under which the Company licensed to Takeda exclusive rights to commercialize citicoline in the U.S. and Canada. Under the Takeda Agreement, the Company received $13,000,000 in licensing and other payments and was entitled to receive up to $60,000,000 in payments contingent upon the achievement of regulatory milestones, as well as royalties on net sales. Following analysis of a Phase III trial completed in early 2000, Takeda notified the Company of its decision not to participate in the further development of citicoline, thereby terminating the Takeda Agreement. The Company reacquired all rights to the compound.

Licensing and Proprietary Rights: In January 1993, the Company licensed from Ferrer Internacional, S.A. (“Ferrer”) exclusive marketing and manufacturing rights based on certain patent rights relating to the use of citicoline, including certain patent and know-how rights in the U.S. and know-how rights in Canada, in exchange for royalties based on sales (the “Ferrer Agreement”). In June 1998, the Ferrer Agreement was amended to extend to January 31, 2002 the date upon which Ferrer may terminate the Ferrer Agreement if FDA approval of citicoline is not obtained. The Ferrer Agreement provides for such date to be extended for up to two years if the Company provides information to Ferrer which tends to establish that the Company has carried out the steps for obtaining such approval and that such approval has not been obtained for reasons beyond the Company’s control. The Company has been providing such information to Ferrer, and the Ferrer Agreement is currently extended to January 31, 2003 and is expected to be extended beyond such date.

General: IP 751, initially referred to by the Company as CT-3, is a non-psychoactive synthetic derivative of tetrahydrocannabinol (THC) in early clinical development to treat pain and inflammatory disorders. An analgesic and anti-inflammatory compound, IP 751 appears to suppress inflammatory cytokines, including TNF-alpha and IL-beta, and the COX-2 enzyme, which are implicated in pain and inflammation. Unlike most available non-steroidal anti-inflammatory agents (NSAIDS), in pre-clinical studies IP 751 does not appear to produce gastrointestinal ulceration. The Company believes IP 751 has a broad potential to treat painful inflammatory conditions such as arthritis, post-operative pain, musculoskeletal injuries, headache and neuropathic pain.

Development Program: In December 2002, the Company announced results of a Phase II clinical trial showing that patients treated with IP 751 experienced a significant reduction in neuropathic pain. Investigators at the Hannover Medical School in Hannover, Germany reported that patients experienced significantly less pain when treated with IP 751 compared with placebo during the two-week, crossover design trial among 21 patients. In addition, the drug was well tolerated, with no evidence of psychoactive properties.

Patients were randomized to two 7-day treatment periods in a crossover design. They received one of two doses of IP 751 (20 milligrams or 40 milligrams) or placebo twice a day during the first week, then were switched to the other regimen during the second week. The degree of pain, as shown by visual analog scores (VAS) decreased significantly during treatment periods (p<0.05). Based on these results, Indevus is currently determining the optimal clinical and regulatory plan for advancing IP 751 as a therapy for pain and inflammatory disorders.

Pre-clinical development of IP 751 has demonstrated that it is active in multiple pre-clinical models of pain and inflammation, including multiple sclerosis and the cutaneous inflammation associated with exposure to the chemical warfare blister agent sulfur mustard. An IND for IP 751 has been filed with the FDA, and an initial Phase I clinical trial designed to assess its safety showed that it was well tolerated, with no clinically significant adverse events and no evidence of psychotropic activity. See “Risk Factors—Our products are early stage and may not be successful or achieve market acceptance.”

Licensing and Proprietary Rights: The Company licensed exclusive, worldwide rights to IP 751 from ATV in June 2002, in exchange for an up-front licensing payment, development milestones and royalty payments (the “ATV Agreement”). The Company is responsible for the clinical development, regulatory activities and commercialization of this compound. The Company holds an exclusive license to all intellectual property relating to IP 751, including patents and patent applications covering the composition of matter, formulations and uses.

General: PRO 2000 is under development as a topical microbicide to prevent the sexual transmission of HIV and certain other disease-causing viruses and bacteria. HIV infection usually leads to AIDS, a life-threatening impairment of the immune system. The World Health Organization estimates that 4.7 million new adult HIV infections were acquired worldwide in 2000, the majority through heterosexual intercourse. Heterosexual contact has also become the most common route of HIV infection in U.S. women. Other STDs such as genital herpes, chlamydia and gonorrhea can lead to serious complications, especially in women, and can increase the risk of HIV infection. Based on estimates by the Kaiser Family Foundation and the World Health Organization, there are 15 million new STD cases each year in the U.S. and more than 340 million worldwide. Topical microbicides represent a new class of protective substances that are designed to be applied vaginally before sexual contact. Topical microbicides have the potential to offer an appealing, female-controlled alternative to condoms, the only products currently known to prevent HIV transmission.

The Company believes that PRO 2000’s use as a topical microbicide is based upon its ability to block infection by HIV and other sexually transmitted disease pathogens by preventing their attachment and entry into cells. Laboratory studies have shown that the drug is active against HIV, herpes simplex virus, chlamydia and the bacteria that cause gonorrhea. Moreover, in government-sponsored tests, vaginally applied PRO 2000 was shown to be efficacious in a mouse model for genital herpes infection and a monkey model for vaginal HIV infection. The product is also highly stable, odorless and virtually colorless. PRO 2000 differs significantly from nonoxynol-9-containing spermicides, which have failed to provide protection against HIV infection in previous human clinical trials.

Development Program: A number of pre-clinical and early clinical studies with PRO 2000 have been completed under the sponsorship of government agencies and research organizations in the U.S. and Europe. Following the completion of these studies, a number of additional clinical trials are ongoing or planned. These include a Phase II clinical trial in Africa funded by the European Commission and scheduled to begin in early 2003. This trial will assess the safety of PRO 2000 in approximately 100 sexually active female volunteers. In addition, an NIH-sponsored Phase II/III pivotal trial to determine the safety and efficacy of PRO 2000 in blocking male to female HIV transmission is planned to begin in 2003 in Africa and India. The study is expected to involve approximately 10,000 HIV-uninfected women at risk for acquiring HIV by virtue of living in countries where the risk of such infection is high. See “Risk Factors—We rely on the favorable outcome of clinical trials of our products.”

An international collaboration of research groups in the United Kingdom and Africa was awarded a grant of approximately $22.7 million from the U.K.’s DFID in February 2002 to test the safety and efficacy of vaginal microbicides, including PRO 2000. The Clinical Trials Unit of the Medical Research Council (“MRC”) and Imperial College in London will coordinate the program, which will involve researchers in South Africa, Uganda, Tanzania, Cameroon and Zambia. The DFID grant will support a broad, five-year program that will include a multi-national, randomized, double-blind, placebo-controlled Phase III clinical trial of candidate microbicides.

In October 2000, dosing and follow-up for a Phase I/II clinical trial of PRO 2000 was completed by the NIH at sites in the U.S. and South Africa. This study was designed to assess safety and acceptability in healthy, sexually active women and HIV-infected, sexually abstinent women. The results were presented at the International Congress of Sexually Transmitted Infections in June 2001 (Mayer et al., The Safety and Tolerability of PRO 2000 Gel, a Novel Topical Microbicide, in Sexually Active HIV- and Abstinent HIV+ Women). No serious side effects were reported, and the investigators concluded that PRO 2000 was safe and well tolerated in both groups of women. Previous Phase I studies conducted in Europe with support from the Medical Research Council of the United Kingdom showed a promising safety and acceptability profile for the drug in healthy, sexually abstinent women. Other Phase I studies, to evaluate the safety of male exposure to PRO 2000, showed that it was safe and well tolerated.

Pre-clinical development with PRO 2000 included an NIH-funded study with 28 female macaque monkeys, divided equally into one control group and three treatment groups that received gels with 0.5% PRO 2000, 2% PRO 2000, and 4% PRO 2000 concentrations. All of the control animals were infected within two weeks after receiving the simian human immunodeficiency virus (SHIV), and went on to develop AIDS symptoms. Of the treated animals, none in the 0.5% group, and only one each in the 2% and 4% groups became infected and developed disease. Results of this study were presented in February 2001 at the 8th Conference on Retroviruses and Opportunistic Infections (Lewis et al., Efficacy of PRO 2000 Gel in a Macaque Model for Vaginal HIV Transmission).

Licensing and Proprietary Rights: In June 2000, the Company licensed exclusive, worldwide rights to develop and market PRO 2000 from HeavenlyDoor.com, Inc., formerly Procept, Inc. (“HDCI”), in exchange for an up-front payment, as well as potential future milestone payments and royalties on net sales. The Company is responsible for all remaining development and commercialization activities for PRO 2000. The Company holds an exclusive license to all intellectual property relating to PRO 2000, including four issued U.S. patents: one covering the composition of matter, two covering the use of PRO 2000 to prevent or treat HIV infection, and one covering the use of PRO 2000 to prevent pregnancy. A similar contraception patent has also issued in South Africa. Composition and use claims are under review in several other territories, including Europe, Canada, and Japan. See “Agreements” and “Patents and Proprietary Rights.”

General: Dersalazine is a compound for the treatment of inflammatory bowel disease (“IBD”), which includes ulcerative colitis and Crohn’s disease. IBD results from an abnormal immune system response to stimuli in the digestive tract. Several types of cells, cytokines and other mediators are involved in the inflammatory cascade initiated by the exacerbated immune response. Interfering with or halting multiple stages of the inflammatory cascade may provide an effective therapeutic approach to IBD. Ulcerative colitis is a chronic disease that primarily affects the colon and causes inflammation in the upper layers of the large intestine, while Crohn’s disease usually occurs in the small intestine and causes inflammation deeper within the wall of the intestine. Up to one million people in the U.S. (Journal of the American Medical Association, February 7, 2001) and two million worldwide (Pharmaprojects 2001) suffer from these diseases. Fifty percent of these are affected by ulcerative colitis and 50 percent by Crohn’s disease (MEDACorp Survey, 2001).

The cytokines inhibited by dersalazine include TNF-alpha, IL-1 beta and IL-8, all of which are believed to contribute significantly to the inflammatory cascade leading to IBD. Dersalazine also appears to block the effects of platelet activating factor, a naturally occurring mediator with pro-inflammatory effects implicated in the pathogenesis of IBD. The 5-ASA molecule contained within dersalazine has known anti-inflammatory and antioxidant properties which may also ameliorate the deleterious inflammatory effects ascribed to the overproduction of free radicals.

Licensing and Proprietary Rights: In September 2001, the Company acquired worldwide marketing rights to dersalazine from Uriach in exchange for an up-front licensing payment, development milestones and royalty payments. Indevus is responsible for the clinical development, regulatory activities and commercialization of dersalazine. The patents licensed by the Company from Uriach cover compositions and processes for manufacturing dersalazine and the cytokine inhibiting portion of the molecule following bacterial cleavage. See “Agreements” and “Patents and Proprietary Rights.”

General: The Company’s ability to conduct clinical trials on a timely basis, to obtain regulatory approvals and to commercialize its products will depend in part upon its ability to manufacture its products, either directly or through third parties, at a competitive cost and in accordance with applicable FDA and other regulatory requirements, including cGMP regulations. The Company has no manufacturing facilities and limited marketing capabilities. In general, the Company intends to seek to contract with third parties to manufacture and market products.

To the extent the Company enters into collaborative arrangements with pharmaceutical and other companies for the manufacturing or marketing of products, these collaborators are generally expected to be responsible for funding or reimbursing the Company all or a portion of the development costs, including the costs of clinical testing necessary to obtain regulatory clearances, and for commercial-scale manufacturing and marketing. These collaborators are expected to be granted exclusive or semi-exclusive rights to sell specific products in exchange for license fees, milestone payments, royalties, equity investments or other financial consideration. Accordingly, the Company will be dependent on such third parties for the manufacturing and marketing of products subject to the

collaboration. There can be no assurance the Company will be able to obtain or retain third-party manufacturing and marketing collaborations on acceptable terms, or at all, which may delay or prevent the commercialization of products under development. Such collaborative arrangements could result in lower revenues and profit margins than if the Company marketed a product itself. In the event the Company determines to establish its own manufacturing or marketing capabilities, it would require substantial additional funds. See “Risk Factors—We will rely on third parties to commercialize and manufacture our products,” “—Our failure to acquire and develop additional product candidates will impair our ability to grow,” and “—We need additional funds in the future.”

Trospium: Under the Madaus Agreement, the Company is responsible for all clinical development, regulatory activities and costs related to trospium in the U.S., as well as the commercialization and marketing of trospium in the U.S. either independently or through marketing partners. The Company anticipates that Madaus will manufacture the product for commercial use, provided that it can deliver acceptable product to satisfy the U.S. regulatory and market requirements. The Company believes that Madaus’ manufacturing facility does not currently meet cGMP requirements. Although Madaus is endeavoring to bring its manufacturing facility into compliance with cGMP, failure to do so in a timely manner could cause a material delay in the NDA submission, FDA approval, if any, and commercialization of trospium. While the Company may seek a second manufacturing source for trospium if Madaus is unable to meet all regulatory requirements or to provide the necessary quantities of trospium in a timely manner, this could also cause a material delay in the NDA submission, FDA approval, if any, and commercialization of trospium.

Citicoline: The Company will be dependent upon third party suppliers of citicoline bulk compound, finished product and packaging for manufacturing and would be dependent on third parties for the marketing and distribution of citicoline. Supplies of citicoline finished product used for clinical purposes have been produced on a contract basis by third party manufacturers. The Ferrer Agreement requires the purchase from Ferrer of citicoline bulk compound for commercial purposes. If such conditions permit the purchase of bulk compound from a third party, the Company entered into an agreement with a manufacturer to supply citicoline bulk compound for commercial purposes.

larger research and development staffs and significantly greater experience in conducting clinical trials and other regulatory approval procedures, as well as in manufacturing and marketing pharmaceutical products, than the Company. In the event the Company or its licensees market any products, they will compete with companies with well-established distribution networks and market position. Additional mergers and acquisitions in the pharmaceutical industry may result in even more resources being concentrated in the Company’s competitors.

There can be no assurance that currently marketed products, or products under development or introduced by others, will not adversely affect sales of any products developed by the Company, render the Company’s products or potential products obsolete or uneconomical, or result in treatments or cures superior to any therapy developed by the Company, or that any therapy developed by the Company will be preferred to any existing or newly developed products or technologies. Other companies may succeed in developing and commercializing competing products earlier than the Company or products which are safer and more effective than those under development by the Company. Advances in current treatment methods may also adversely affect the market for such products. The approval and introduction of therapeutic or other products that compete with products being developed by the Company could also adversely affect the Company’s ability to attract and maintain patients in clinical trials for the same indication or otherwise to complete its clinical trials successfully or on a timely basis. Further, certain of Indevus’ agreements eliminate or provide for reduced royalties in the event of generic competition.

Colleges, universities, governmental agencies and other public and private research organizations continue to conduct research and are becoming more active in seeking patent protection and licensing arrangements to collect royalties for use of technology that they have developed, some of which may be directly competitive with that of the Company. In addition, these institutions may compete with the Company in recruiting qualified scientific personnel. The Company expects technological developments in its fields of product development to occur at a rapid rate and expects competition to intensify as advances in these fields are made. See “Risk Factors—Our products may be unable to compete successfully with other products.”

Trospium: Current therapy for overactive bladder includes anticholinergics, such as Detrol and Detrol LA by Pharmacia Corporation and Ditropan XL by Johnson & Johnson, Inc. Watson Pharmaceuticals has re-submitted their NDA for the oxybutynin patch, Oxytrol^® Patch. The Company is aware of other companies evaluating specific antimuscaranics and antispasmodics in pre-clinical and clinical development for overactive bladder, including solifenacin by Yamanouchi Pharma America, for which an NDA is expected to be filed in the first quarter of 2003, and darifenacin by Pfizer, also expected to file in the first half of 2003.

Pagoclone: Current pharmacological treatments for anxiety and panic disorders generally include benzodiazepines, such as Valium and Xanax, serotonin agonists such as BuSpar, and selective serotonin reuptake inhibitors such as Paxil, Zoloft, Prozac, and Effexor. Traditional side effects seen with these classes of anti-anxiety drugs include sedation, lack of mental acuity, withdrawal and rebound anxiety related to the benzodiazepine class of drugs, and agitation, insomnia and sexual dysfunction related to serotonin reuptake inhibitors. The Company is aware of competitors which market certain prescription drugs for indications other than anxiety and which are planning to seek an expansion of labeling to include anxiety as an indication. In addition, the Company is aware that other companies are developing compounds for anxiety that are in pre-clinical or clinical development.

Citicoline: Activase, marketed by Genentech, Inc., is the first and only therapy to be approved for the management of stroke. A genetically engineered version of naturally occurring tissue plasminogen activator (t-PA), Activase is indicated for the treatment of acute ischemic stroke within three hours of symptom onset. Although t-PA improves clinical outcome, intracranial hemorrhage, a serious side effect, occurs in six percent of the t-PA-treated patients. Several other companies have later stage programs in stroke treatment including Ancrod (Arvin, BASF/Abbott/Knoll), Pro-urokinase (PROACT, Abbott), and BAY-x-3702 (Repinotan, Bayer).

However, to date, none of these has shown unequivocal safety and efficacy in pivotal trials. Further, each of these competing compounds under development exhibits a relatively short therapeutic window and potentially dose-limiting toxicity. A number of additional compounds have produced unsatisfactory results in pivotal studies, and have been terminated or are likely to have their development discontinued. Based on existing clinical data on citicoline, the Company believes that citicoline may be an attractive post-stroke therapy, particularly in patients with moderate to severe strokes, due to its potentially broader, 24-hour post-stroke therapeutic window and that it may be used as combination therapy with other compounds in development or on the market.

IP 751: A variety of treatments are currently prescribed for pain and inflammatory disorders, including opioids, NSAIDs (non-steroidal anti-inflammatories) / COX-II inhibitors and combinations of these drugs. The most prevalent types of pain are related to the back, post-operative recovery, osteoarthritis, diabetic neuropathy, rheumatoid arthritis and cancer. NSAIDs, the global leaders in pain treatment, include Celebrex, co-promoted by Pfizer and Pharmacia, Vioxx, marketed by Merck, and Bextra, co-promoted by Pfizer and Pharmacia. The principal marketed opioids include oxycontin and morphine. A key unmet need in the area of pain management is the reduction of side effects experienced with existing treatments, including gastrointestinal bleeding, ulceration, cardiovascular effects, tolerance and physical or psychological dependence. Unlike most available NSAIDS, in pre-clinical studies IP 751 does not appear to produce gastrointestinal ulceration.

PRO 2000: No comparable product to prevent sexually transmitted infections has been approved for use in the U.S., Europe or Japan. Marketed vaginal spermicides containing the detergent nonoxynol-9 have been found to be ineffective at reducing HIV transmission, and may actually increase the risk of infection. Approximately 60 new substances are being evaluated for this indication, but the Company believes only a few have reached the stage of development of PRO 2000. These include BufferGel by Reprotect, LLC, Savvy by Biosyn, Inc., Emmelle by ML Laboratories, PLC, Carraguard by The Population Council, and cellulose sulfate gel by the Contraceptive Research and Development Program.

Dersalazine: Various formulations of 5-ASA, which has long been used to treat IBD, are available as oral preparations, suppositories and enemas. Often used as first-line therapy for IBD, they include Asacol^® (mesalamine) tablets, Dipentum (olsalazine) capsules, Pentasa^® (mesalamine) capsules and Colazal^® (balsalazide) capsules. Corticosteroid therapy, such as prednisone or hydrocortisone, is given when the 5-ASA products cannot control inflammation and usually reserved for short-term use in moderate or severe cases. If the patient does not respond to these treatments, anti-immune therapy is an option. This therapy utilizes drugs that suppress the body’s ability to make antibodies against the disease and includes azathioprine and 6-mercaptopurine. Investigational therapies include metronidazole, other antibiotics and immunosuppressive agents, and monoclonal antibodies. A significant percentage of those with ulcerative colitis and Crohn’s disease will eventually require surgery. New treatment options that induce and maintain remissions, minimize side effects and improve quality of life are needed.

Trospium: In November 1999, the Company entered into the Madaus Agreement under which it licensed from Madaus exclusive U.S. rights to develop and market trospium, an orally-administered prescription drug product currently marketed as a treatment for overactive bladder in Europe. In exchange, the Company has agreed to pay Madaus potential regulatory milestone, royalty and sales milestone payments. Indevus is responsible for all clinical development and regulatory activities and costs related to the compound in the United States. Pursuant to the Madaus Agreement, Madaus is required to manufacture the product, provided certain conditions are met.

Pagoclone: In December 1999, the Company entered into the Pfizer Agreement, under which the Company licensed to Pfizer exclusive, worldwide rights to develop and commercialize pagoclone.Under the Pfizer Agreement the Company received $16,750,000, including an up-front payment of $13,750,000, and was entitled to receive up to an additional $62,000,000 in payments contingent upon the achievement of clinical and regulatory milestones, as well as royalties on net sales. Under the Pfizer Agreement, Pfizer was responsible

for conducting and funding all further clinical development, regulatory review, manufacturing and marketing of pagoclone on a worldwide basis. In June 2002, Pfizer informed the Company of the results of its most recent clinical trials with pagoclone in generalized anxiety disorder and panic disorder, which did not achieve the level of efficacy established in previous trials. Accordingly, Pfizer elected not to pursue further development of the compound and returned to the Company exclusive, worldwide development and commercialization rights to pagoclone. In August 2002, Aventis, licensor of pagoclone to the Company, declined to exercise its contractual option to develop pagoclone. As a result, the Company is seeking a new worldwide development partnership for the commercialization of pagoclone.

In February 1994, the Company licensed from Aventis exclusive, worldwide rights for the manufacture, use and sale of pagoclone under patent rights and know-how related to the drug, except that Indevus granted Aventis an option to sublicense from Indevus, under certain conditions, rights to market pagoclone in France. In exchange, the Company paid Aventis a license fee and agreed to make milestone payments based on clinical and regulatory developments, and to pay royalties based on net sales or, if sublicensed by the Company, the Company would pay to Aventis a portion of receipts from the sublicensee in lieu of milestone and royalty payments. The Company is responsible for all costs of developing, manufacturing, and marketing pagoclone.

Citicoline: In December 1999, the Company entered into the Takeda Agreement under which the Company licensed to Takeda exclusive rights to commercialize citicoline in the U.S. and Canada. Under the Takeda Agreement, the Company received $13,000,000 in licensing and other payments, and was entitled to receive up to $60,000,000 in payments contingent upon the achievement of regulatory milestones in the U.S. and Canada, as well as royalties on net sales. In December 2000, Takeda notified the Company of its decision not to participate in the further development of citicoline, thereby terminating the Takeda Agreement. Therefore, the Company has reacquired all rights to this compound. Indevus has signed a non-binding memorandum of agreement with a privately held biotechnology company to fund further development of citicoline. The finalization of this agreement is contingent upon input from the FDA on the design and clinical endpoints of an additional large Phase III trial and the negotiation of a definitive contract.

In January 1993, the Company entered into the Ferrer Agreement, subsequently amended, granting the Company the exclusive right to make, use and sell any products or processes developed under patent rights relating to certain uses of citicoline in exchange for an up-front license fee and royalties based on sales. The Company’s license includes patent and know-how rights in the U.S. and know-how rights in Canada, and is for a period co-extensive with Ferrer’s license from the Massachusetts Institute of Technology (“MIT”). The Ferrer Agreement provides that Ferrer may terminate the agreement under certain circumstances, including the insolvency or bankruptcy of Indevus, in the event more than 50% of the ownership of Indevus is transferred to a non-affiliated third party or in the event FDA approval of citicoline is not obtained by January 31, 2002. The Ferrer Agreement provides for such date to be extended for up to two years if the Company provides information to Ferrer which tends to establish that the Company has carried out the steps for obtaining such approval and if such approval has not been obtained for reasons beyond the Company’s control. The Company has been providing such information to Ferrer and the Ferrer Agreement is currently extended to January 31, 2003 and is expected to be extended beyond such date. The Ferrer Agreement requires Indevus to use diligent efforts to obtain regulatory approval.

Dersalazine: In September 2001, the Company acquired worldwide rights to dersalazine from Uriach, in exchange for an up-front licensing payment, and potential development milestone and royalty payments. The Company is responsible for the clinical development, regulatory activities and commercialization of dersalazine. Under this agreement, the Company anticipates that Uriach will manufacture dersalazine through the completion of Phase II clinical testing. Uriach retains an option to co-market the product in Spain.

Sarafem: In June 1997, the Company entered into the Lilly Agreement, under which it sublicensed to Lilly exclusive, worldwide rights under an MIT patent that was licensed exclusively by MIT to the Company and which is directed to the use of fluoxetine to treat certain conditions and symptoms associated with PMS (the “Lilly Agreement”). In July 2000, Lilly received approval for fluoxetine to treat PMDD and is marketing the drug under the trade name Sarafem. Lilly’s composition of matter patent on fluoxetine expired in July 2001. The Lilly Agreement provided for milestone payments and royalties based on net sales of fluoxetine attributable to the approved indication in the U.S. up to an annual maximum limit. In December 2002, the Company entered into a renegotiated licensing agreement with Lilly providing for an initial payment to the Company upon the signing of the agreement and royalty payments from Lilly to the Company based on net sales of Sarafem in the U.S. from October 1, 2002 until the expiration of the Company’s patent related to Sarafem. In addition, the agreement includes other potential milestone payments to the Company from Lilly. Upon the completion of the conditional agreement announced by Galen in December 2002, Galen would acquire the U.S. sales and marketing rights to Sarafem from Lilly. If the conditional agreement is consummated between Lilly and Galen, any remaining milestone payments to Indevus from Lilly would be accelerated. MIT is entitled to a portion of all payments, including royalties, made to Indevus by Lilly.

AHP Indemnity and Release Agreement: In May 2001, the Company entered into an agreement with Wyeth pursuant to which Wyeth agreed to indemnify the Company against certain classes of product liability cases filed against the Company related to Redux (dexfenfluramine), a prescription anti-obesity compound withdrawn from the market in September 1997. This indemnification covers existing plaintiffs who have already opted out of Wyeth’s national class action settlement of diet drug claims and claimants alleging primary pulmonary hypertension. In addition, Wyeth has agreed to fund all future legal costs related to the Company’s defense of Redux-related product liability cases. The agreement also provides for Wyeth to fund additional insurance coverage to supplement the Company’s existing product liability insurance. The Company believes this total insurance coverage is sufficient to address its potential remaining Redux product liability exposure. However, there can be no assurance that uninsured or insufficiently insured Redux-related claims or Redux-related claims for which the Company is not otherwise indemnified or covered under the AHP Indemnity and Release Agreement will not have a material adverse effect on the Company’s future business, results of operations or financial condition or that the potential of any such claims would not adversely affect the Company’s ability to obtain sufficient financing to fund operations. Up to the date of the AHP Indemnity and Release Agreement, the Company’s defense costs were paid by, or subject to reimbursement to the Company from, the Company’s product liability insurers. To date, there have been no Redux-related product liability settlements or judgments paid by the Company or its insurers. In exchange for the indemnification, defense costs, and insurance coverage provided to Indevus by Wyeth, the Company agreed to dismiss its suit against Wyeth

Servier Agreements: In February 1990, the Company and Les Laboratoires Servier (“Servier”) entered into agreements, subsequently amended (the “Servier Agreements”), granting the Company an exclusive right to market dexfenfluramine in the U.S. to treat obesity associated with abnormal carbohydrate craving. The Servier Agreements provide for royalties on net sales, with certain required minimum royalties. Servier has the right to terminate the license agreement upon the occurrence of certain events. Indevus agreed to indemnify Servier under certain circumstances and Indevus was required to name Servier as an additional insured on its product liability insurance policies which are subject to ongoing claims by Servier.

Wyeth Agreements: In November 1992, the Company entered into a series of agreements (the “Wyeth Agreements”) which granted American Cyanamid Company the exclusive right to manufacture and market dexfenfluramine in the U.S. for use in treating obesity associated with abnormal carbohydrate craving, with the Company retaining co-promotion rights. In 1994, Wyeth acquired American Cyanamid Company. The Wyeth Agreements are for a term of 15 years commencing on the date dexfenfluramine is first commercially introduced by Wyeth, subject to earlier termination. Wyeth has the right to terminate the Wyeth Agreements upon 12 months notice to the Company.

Effective June 1996, the Company entered into a three-year copromotion agreement with Wyeth-Ayerst Laboratories (“Wyeth-Ayerst”), a Wyeth company (the “Copromotion Agreement”). The Copromotion Agreement provided for Indevus to promote Redux to certain diabetologists, endocrinologists, bariatricians and weight management specialists, subject to certain restrictions, and receive payments from Wyeth for a portion of the Company’s actual costs. Indevus was also entitled to varying percentages of profit derived from sales generated by its sales force, after deducting certain costs.

Under the Wyeth Agreements, under certain circumstances, the Company was required to indemnify Wyeth, and the Company was entitled to indemnification by Wyeth against certain claims, damages or liabilities incurred in connection with Redux. The cross indemnification between the Company and Wyeth generally related to the activities and responsibilities of each company. The Company and Wyeth mutually released each other from any rights to indemnification pursuant to the Wyeth Agreements as part of the AHP Indemnity and Release Agreement described above.

Boehringer: In November 1995, the Company entered into a manufacturing agreement with Boehringer Ingelheim Pharmaceuticals, Inc. (“Boehringer”) under which Boehringer agreed to supply, and the Company agreed to purchase, all of the Company’s requirements for Redux capsules. The contract contained certain minimum purchase, insurance and indemnification commitments by the Company and required conformance by Boehringer to the FDA’s cGMP regulations. Boehringer has made certain claims on the Company related to the Company’s cancellation of the manufacturing agreement with Boehringer. (See Note M of Notes to Consolidated Financial Statements.)

Trospium: The compound trospium is not covered by a composition of matter patent. Along with know-how, the Company licensed from Madaus two U.S. patents, one of which relates to a process for manufacturing trospium and the other relates to the use of trospium to treat certain asthmatic conditions. These patents were issued in August 1989 and October 1988, respectively. The commercialization of trospium by the Company will not utilize these patents, and the Company intends to rely on the provisions of the Waxman-Hatch Act to obtain a period of market exclusivity in the U.S. if the FDA approves trospium in the U.S. for the intended indication, although there is no assurance that market exclusivity will be granted. The Waxman-Hatch Act establishes a period of time from the date of FDA approval of certain new drug applications during which the Company would have market exclusivity. The applicable period is five years in the case of drugs containing an active ingredient

not previously approved. The Company intends to seek more extensive market exclusivity protection for trospium through the development of a once-a-day formulation of the drug. If successful in achieving the intended performance specifications for the once-a-day formulation, the Company will seek patent protection with respect to such formulation, which if granted, is likely to include a term of up to twenty years, although the Company cannot provide any assurance that any patent on such a once-a-day formulation, if granted, can or will preclude eventual market erosion from new technologies or competing products.

Citicoline: The compound citicoline is not covered by a composition of matter patent. Pursuant to the Ferrer Agreement, the Company licensed from Ferrer a U.S. patent covering the administration of citicoline to treat patients afflicted with conditions associated with the inadequate release of brain acetylcholine, which expires in 2003. As described in the licensed patent, the inadequate release of acetylcholine may be associated with several disorders, including the behavioral and neurological syndromes seen after brain traumas and peripheral neuromuscular disorders and post-stroke rehabilitation. Although the claim of the licensed patent is broadly directed to the treatment of inadequate release of brain acetylcholine, there can be no assurance this patent will afford protection against competitors of citicoline to treat ischemic stroke.

U.S. patents were issued to the Company in September and October 1998 and in February 1999 relating to use of citicoline in the protection of brain tissue from cerebral infarction following ischemic stroke. The Company licensed worldwide rights to these patents to Ferrer, except in the U.S. and Canada, in exchange for which the Company will be entitled to royalties from Ferrer on certain exports and sales of the solid oral form of citicoline in certain countries upon its approval in each country. Foreign counterpart patent applications were filed and are being pursued by the Company.

In May 2000, the Company was awarded a U.S. patent, including claims directed to a composition of matter, for a “hyperhydrated” form of citicoline. It is believed that solid forms of citicoline, including tablets, have greater stability when this hyperhydrated form of citicoline is present. The normal term of this patent does not expire until 2018. The Company is also pursuing foreign counterparts of this patent in Canada, China, all European countries subscribing to the European Patent Convention, Hungary, Japan, Mexico and Norway.

IP 751: The Company holds an exclusive, worldwide license from ATV to all intellectual property ATV owns or controls relating to IP 751, including patents and patent applications covering the composition of matter, formulations and uses of IP 751. Method claims include methods for the treatment of pain and inflammation, and the treatment of cancer. The ATV patent portfolio also includes patent coverage for certain cannabinoid analogs and their uses. Foreign counterpart patent applications to cannabinoid drugs and their analogs were filed recently on behalf of ATV.

PRO 2000: The Company holds an exclusive license to intellectual property relating to PRO 2000, including four issued U.S. patents: one covering the composition of matter issued in June 2000, two covering the use of PRO 2000 to prevent or treat HIV infection, which issued in March and October 1997, respectively, and one covering the use of PRO 2000 to prevent pregnancy issued in September 1999. A similar contraception patent has also issued in South Africa. Composition and use claims are under review in several other territories, including Europe, Canada and Japan.

General: There can be no assurance that patent applications filed by the Company or others, in which the Company has an interest as assignee, licensee or prospective licensee, will result in patents being granted or that, if granted, any of such patents will afford protection against competitors with similar technology or products, or could not be circumvented or challenged. In addition, certain products the Company is developing are not covered by any patents and, accordingly, the Company will be dependent on obtaining market exclusively under the Waxman-Hatch Act for such products. If the Company is unable to obtain strong proprietary rights protection of its products after obtaining regulatory clearance, competitors may be able to market competing generic products by obtaining regulatory clearance, by demonstrating equivalency to the Company’s product, without being required to conduct the lengthy clinical tests required of the Company. Certain of the Company’s agreements provide for reduced royalties, or forgo royalties altogether, in the event of generic competition. See “Risk Factors—We may depend on market exclusivity for trospium and other products.”

The products being developed by the Company may conflict with patents which have been or may be granted to competitors, universities or others. Third parties could bring legal actions against the Company or its sublicensees claiming patent infringement and seeking damages or to enjoin manufacturing and marketing of the affected product or the use of a process for the manufacture of such products. If any such actions are successful, in addition to any potential liability for indemnification, damages and attorneys’ fees in certain cases, the Company could be required to obtain a license, which may not be available, in order to continue to manufacture or market the affected product or use the affected process. The Company also relies upon unpatented proprietary technology and may determine in some cases that its interest would be better served by reliance on trade secrets or confidentiality agreements rather than patents. No assurance can be made that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to such proprietary technology or disclose such technology or that the Company can meaningfully protect its rights in such unpatented proprietary technology. The Company may also conduct research on other pharmaceutical compounds or technologies, the rights to which may be held by, or be subject to, patent rights of third parties. Accordingly, if products

Delaware (State or other jurisdiction of incorporation or organization)		04-3047911 (I.R.S. Employer Identification Number)
One Ledgemont Center 99 Hayden Avenue Lexington, MA (Address of principal executive offices)		02421-7966 (Zip Code)

Product Name	Indication/Use	Regulatory Status*	Commercial Rights
Trospium	Overactive bladder	Phase III completed	U.S.

Pagoclone	Panic and Generalized Anxiety Disorders	Phase III in panic disorder; Phase II in generalized anxiety disorder	Worldwide

Citicoline	Ischemic stroke	Phase III	U.S. and Canada

IP 751	Pain/inflammation	Phase I/II	Worldwide

PRO 2000	Prevention of HIV and sexually transmitted diseases	Phase II	Worldwide