GUILFORD PHARMACEUTICALS INC - 10-K Annual Report

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 and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes þ No o

As of June 30, 2002, the aggregate market value of the approximately 28,043,238 shares of common stock of the Registrant issued and outstanding on such date, excluding approximately 1,778,480 shares held by affiliates of the Registrant, was approximately $215,442,893.12. This figure is based on the closing sales price of $7.54 per share of the Registrant’s common stock as reported on The NASDAQ® National Market on June 28, 2002.

As of March 27, 2003, approximately 29,917,608 shares of common stock of the Registrant were issued and outstanding.

List hereunder the following documents incorporated by reference and the Part of the Form 10-K into which the document is incorporated:

Portions of the Registrant’s Notice of Annual Meeting and Proxy Statement to be filed no later than 120 days following December 31, 2002 are incorporated by reference into Part III.

From time to time in this annual report we may make statements that reflect our current expectations regarding our future results of operations, economic performance, and financial condition, as well as other matters that may affect our business. In general, we try to identify these forward-looking statements by using words such as “anticipate,” “believe,” “expect,” “estimate” and similar expressions.

The forward-looking statements contained in this annual report may cover, but are not necessarily limited to, the following topics: (1) efforts to market, sell and distribute GLIADEL® Wafer in the United States and internationally; (2) efforts to expand the labeled uses for GLIADEL® Wafer internationally; (3) the clinical development of GPI 1485, our lead neuroimmunophilin ligand compound; (4) the clinical development of our AQUAVAN™ Injection product candidate; (5) research programs related to our neuroimmunophilin ligand technology and NAALADase inhibition technology; (6) efforts to scale-up product candidates from laboratory bench quantities to commercial quantities; (7) efforts to secure adequate supply of the active pharmaceutical ingredients for clinical development and commercialization; (8) efforts to manufacture drug candidates for clinical development and eventual commercial supply; (9) strategic plans; (10) anticipated expenditures and the potential need for additional funds; and (11) specific guidance we give in the section entitled “Outlook,” regarding our current expectations of our future operating results.

All of these items involve significant risks and uncertainties. These and any of the other statements we make in this annual report that are forward-looking are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. We caution you that our actual results may differ significantly from the results we discuss in the forward-looking statements.

We discuss some factors that could cause or contribute to such differences in the “Risk Factors” section of this annual report. In addition, any forward-looking statements we make in this document speak only as of the date of this document, and we do not intend to update any such forward-looking statements to reflect events or circumstances that occur after that date.

We are a fully integrated pharmaceutical company engaged in the research, development and commercialization of products that target the hospital and neurology markets.

We were incorporated in Delaware in July 1993. Our principal executive offices are located at 6611 Tributary Street, Baltimore, MD 21224. Our telephone number is (410) 631-6300, and our website address is http://www.guilfordpharm.com. We make our electronic filings with the Securities and Exchange Commission (SEC), including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports, available on our website free of charge as soon as practicable after we file or furnish them with the SEC.

Financial information prepared in accordance with accounting principles generally accepted in the United States of America, including information about revenues from customers, measures of profit and loss and total assets, can be found in our consolidated statements included elsewhere in this report.

The following tables summarize the status of GLIADEL® Wafer, our marketed product, and our other research and development programs:


(1)	“Marketed” means that a product is currently being sold. “Clinical Development” means that the product is being used in clinical trials. “Pre-clinical” means testing in vitro and in animal models, pharmacology and toxicology testing, product formulation and process development. “Research” means


	initial research related to specific molecular targets, synthesis of new chemical entities and assay development for the identification of lead compounds.

(2)	In November 2002, we withdrew an application submitted to the European Agency for the Evaluation of Medicinal Products, or the EMEA, to approve GLIADEL® Wafer for ‘first-line’ therapy in Europe. We plan to resubmit this application to the EMEA during the second half of 2003.

(3)	MAP Medical Technologies Oy, or MAP, our corporate partner in Europe for this technology, has informed us that it submitted an application to receive regulatory approval in Finland for DOPASCAN® Injection in April 2002. It expects the Finnish regulatory authorities to respond to this application by April 2003. Daiichi Radioisotope Laboratories, Ltd., or DRL, our corporate partner in Japan for this technology, has informed us that it completed a Phase III clinical trial with the product in July 2002, and expects to file an application for marketing approval in Japan with the Japanese Health Authority in the first half of 2003.

GLIADEL® Wafer is a proprietary biodegradable polymer product that contains BCNU (carmustine), a cancer chemotherapeutic drug. Up to eight wafers are implanted in the cavity created when a neurosurgeon removes a brain tumor. The wafers gradually erode and deliver BCNU directly to the tumor site for an extended period of time. By inserting the wafer directly at the site of the tumor, the rest of the patient’s body is not exposed to the toxic side effects of BCNU.

In 1996, the U.S. Food and Drug Administration (FDA) approved GLIADEL® Wafer for use as an adjunct to surgery to prolong survival in patients with recurrent glioblastoma multiforme, or GBM, for whom surgery is indicated. Also in 1996, we entered into agreements with Aventis (then Rhône-Poulenc Rorer) granting it marketing rights to GLIADEL® Wafer in the U.S. and clinical development and marketing rights in the rest of the world (excluding Scandinavia, where the product is distributed and marketed by Orion Pharma under an agreement with us entered into in 1995, and later, Japan). Under these agreements, Aventis paid us $7.5 million as a one time, non-refundable rights payment, $26.5 million as non-refundable milestone payments, and purchased $7.5 million of our common stock. Aventis also paid us a combined transfer price and royalty of approximately 35% on its purchases of the product from us during the term of the agreements. Between 1996 and October 2000, Aventis obtained regulatory approval for GLIADEL® Wafer for the recurrent indication in over 21 countries, including France, Germany, the United Kingdom, Spain, Canada, South Korea and Israel.

In October 2000, we reacquired Aventis’ marketing rights to GLIADEL® Wafer for 300,000 shares of our common stock then valued at approximately $8 million. Aventis continued to market GLIADEL® Wafer for a transition period ending December 31, 2000, after which, we have been solely responsible for the marketing, sale and distribution of GLIADEL® Wafer except in Scandinavia, where the product continues to be sold by Orion Pharma. Since the reacquisition of Aventis’ rights in GLIADEL® Wafer, we have built a commercial operations function, consisting of approximately 10 internal marketing and sales management, reimbursement and managed care specialists, medical affairs, professional services and customer service personnel, and an approximately 28-person field sales force.

In April 2001, we submitted a supplemental New Drug Application, or sNDA, for GLIADEL® Wafer, seeking to expand the label for the product to include use in initial surgery for malignant glioma. In March 2002, the FDA sent us a not approvable letter indicating concerns regarding the survival benefit associated with GLIADEL® Wafer treatment during initial surgery. In response to the FDA’s letter, we proposed that we obtain an additional one to two years of follow-up data on patients enrolled in the GLIADEL® Wafer Phase III clinical trial on which the sNDA was based, under the assumption that the additional data might address the FDA’s concerns. We agreed with the FDA on the protocol and methods for collecting and analyzing this additional long-term follow up data. On September 19, 2002, we presented the results of this analysis to FDA. After completing an informal review of these data, the FDA advised us that the submission of an amendment to the Company’s sNDA containing the long-term follow up data would receive a formal FDA review and

We pay a royalty to Massachusetts Institute of Technology, or MIT, on sales of GLIADEL® Wafer pursuant to the license agreement under which the Company acquired the underlying technology for the product. During 2002, we recognized approximately $0.6 million in royalty expense to MIT.

We currently manufacture GLIADEL® Wafer using a proprietary process at our 18,000 square foot manufacturing facility in Baltimore, Maryland, which includes areas designated for packaging, quality assurance, laboratory and warehousing. The manufacturing facility has been in operation since April 1995. It was initially inspected by the FDA in October 1995, and was re-inspected by the FDA in February 1999 and in September 2002. Also, in October 1999, we were inspected by the Medicines Control Agency, the United Kingdom’s regulatory authority. The facilities we are currently using for manufacturing enable us to produce up to 8,000 GLIADEL® Wafer treatments (each consisting of eight wafers) annually.

In January 1998, we expanded our manufacturing facilities to allow for the additional synthesis of the polyanhydride co-polymer used in the manufacture of GLIADEL® Wafer. Also in 1998, we completed construction of a second clean room facility, which we expect would allow us to increase our GLIADEL® Wafer manufacturing capacity to 20,000 treatments annually.

We believe that the various materials used in GLIADEL® Wafer are readily available and will continue to be available at reasonable prices. Nevertheless, while we believe that we have an adequate supply of BCNU, the active chemotherapeutic ingredient in GLIADEL® Wafer, to meet current demand, any interruption in the ability of our two current suppliers to deliver this ingredient could prevent us from delivering the product on a timely basis. Failure of any supplier to provide sufficient quantities of raw material for GLIADEL® Wafer in accordance with the FDA’s current Good Manufacturing Practice, or cGMP, regulations could cause delays in our ability to sell the product.

Prior to 2000, our strategy had been to establish collaborations with larger pharmaceutical companies where possible, to develop and promote products that require extensive development, sales and marketing resources. However, in connection with our reacquisition of commercialization rights to GLIADEL® Wafer, during the fourth quarter of 2000 and the first quarter of 2001, we established our commercial operations capabilities in the United States, including marketing, sales management, medical affairs, reimbursement and other relevant functions to support a 28-member field sales force. When we established our sales force, it was initially on a contract basis through Cardinal Health Sales and Marketing Services, a division of Cardinal Health Inc., or Cardinal. During October 2002, we brought our sales force in-house, and now members of our sales force are directly employed by us. In order to assist in the distribution of GLIADEL® Wafer, we engaged Cord Logistics Inc., in November 2000, to handle fulfillment of customer orders.

Also in 2001, we established a Canadian subsidiary that is responsible for all aspects of the sales and marketing of GLIADEL® Wafer in Canada, including receiving pricing and reimbursement approvals from the Canadian National Healthcare System. GLIADEL® Wafer will be supplied to our Canadian customers through a third-party logistical distributor. In Europe, we have an agreement with IDIS Limited, based in the U.K., for the distribution of GLIADEL® Wafer to our network of European distributors and on a named hospital basis in countries where we have not engaged a third-party distributor. To date, we have entered into agreements for the marketing, sale and distribution of GLIADEL® Wafer in Italy, Portugal, Spain, the United Kingdom, Greece, South Africa, Australia, Israel, Hong Kong and the People’s Republic of China, as well as in other international markets.

The establishment of commercial operations provides us with the opportunity and flexibility to market and sell other products we are developing, or products that we may in-license or otherwise acquire.

In 2002, 2001 and 2000, sales of GLIADEL® Wafer generated revenues of $14.5, $20.4 and $1.5, respectively, which represented 99%, 99%, and 8%, of our total revenues, respectively.

Our neuroimmunophilin ligand program, originated from observations first made in the laboratory of Dr. Solomon Snyder, Director of the Department of Neuroscience at Johns Hopkins and one of our directors and founders, that certain proteins that exist within a cell, known as “immunophilins,” are enriched 10-40 fold in certain areas of the central nervous system. The Johns Hopkins scientists went on to discover that commonly used immunosuppressive drugs can promote nerve growth. We have exclusively licensed rights to patent applications relating to this research from Johns Hopkins. Our scientists, together with their academic collaborators, further demonstrated that the pathway leading to nerve regeneration could be separated from the immunosuppressant pathway. As a result of this basic research, Guilford scientists discovered GPI 1485 and many other proprietary small molecules, called neuroimmunophilin ligands, which are neurotrophic, i.e., regenerate nerves, in animal models of various disease states without being immunosuppressive, are orally-bioavailable and are able to cross the blood-brain barrier.

In August 1997, we entered into a collaboration with Amgen Inc. to develop and commercialize a broad class of neuroimmunophilin ligands, referred to as FKBP neuroimmunophilin ligands, as well as any other compounds that may have resulted from the collaboration, for all human therapeutic and diagnostic applications. During 1998, Amgen nominated GPI 1485, which it called “NIL-A,” as the lead compound in the program, initially targeting Parkinson’s disease. During 1999, Amgen filed an Investigational New Drug, or IND, application with the FDA and commenced human trials with NIL-A, focusing on safety, tolerability and pharmacokinetic study in healthy subjects. NIL-A entered Phase II testing in patients with Parkinson’s disease during 2000. In July 2001, we announced results of this six-month Phase II, randomized, double blind, placebo-controlled evaluation of the safety, pharmacokinetics and efficacy of NIL-A in patients with mild to moderate Parkinson’s disease. The results of the evaluation suggest that NIL-A at doses of up to 1,000 mg taken orally four times a day for six months is well tolerated, but does not produce a significant reversal of the motor symptoms of Parkinson’s disease.

In September 2001, Amgen terminated the collaboration and, thereafter, returned all rights to the neuroimmunophilin technology to us, including certain clinical trial supplies for which we paid $0.2 million.

We have since renamed NIL-A as GPI 1485 and in November 2002, initiated a Phase II clinical trial of GPI 1485, for the treatment of Parkinson’s disease. This Phase II trial will provide an assessment of the long-term (two-year) treatment effect of GPI 1485 in patients with mild to moderate Parkinson’s disease. We have designed this trial to follow-up on the initial findings from the Phase II study completed [by Amgen] of NIL-A. In particular, the current Phase II trial will look more thoroughly at the ability of GPI 1485 to reduce the requirement for conventional symptomatic therapy for Parkinson’s disease, as well as further assess the imaging results that indicate GPI 1485 may reduce the rate of progression of this disabling disease. The Phase II clinical trial is a multicenter, randomized, double-blind, placebo-controlled evaluation of the safety, pharmacokinetics and efficacy of GPI 1485 in patients with mild to moderate Parkinson’s disease. A total of 200 patients will be enrolled and randomly assigned to receive either placebo or GPI 1485 orally four times a day. We expect the study to be completed in 2005.

We have more than 60 U.S. patents protecting our Neuroimmunophilin ligand technology.

In the first quarter of 2000, we licensed from ProQuest Pharmaceuticals Inc., or ProQuest, rights relating to a novel prodrug of a widely-used anesthetic, propofol. A prodrug is a compound that is converted in the body into an active drug. The prodrug, which we have named AQUAVAN™ Injection, is water-soluble and converts to propofol upon intravenous administration. In contrast, propofol, which has been approved for use by the FDA, is itself administered in a lipid emulsion, which can cause complications. AQUAVAN™

Since we licensed AQUAVAN™ Injection from ProQuest, we have conducted four Phase I clinical studies in Europe in healthy volunteers and one Phase I clinical study in the United States. In July 2002, we announced the commencement of a Phase II clinical trial of AQUAVAN™ Injection in patients undergoing coronary artery surgery. This study, taking place in Europe, is the first use of AQUAVAN™ Injection in surgical patients. The purpose of the study was to evaluate the safety, tolerability and efficacy of AQUAVAN™ Injection, compared to DIPRIVAN® Injectable Emulsion (i.e., the branded formulation of propofol), for use in pre-operative sedation, anesthesia induction and maintenance, and post-operative ICU sedation in patients undergoing coronary artery bypass surgery.

In February 2003, we announced the commencement of a Phase II clinical trial of AQUAVAN™ Injection in the United States in patients undergoing conscious sedation during elective colonoscopy. The first part of the Phase II trial is a dose ranging pilot study to determine the optimal sedative dose of AQUAVAN™ Injection for use in achieving conscious sedation in patients. Once identified, the second phase of the trial will investigate and compare the effects of AQUAVAN™ Injection to Midazolam HCI in patients undergoing colonoscopy.

We have exclusive rights in the U.S. to a composition of matter patent covering AQUAVAN™ Injection.

DOPASCAN® Injection was invented by scientists at the Research Triangle Institute, or RTI, in Research Triangle Park, North Carolina. In 1994, we obtained exclusive rights to patents covering DOPASCAN® Injection from RTI.

DOPASCAN® Injection is our product candidate for the diagnosis and monitoring of Parkinson’s disease. It is administered intravenously in trace quantities and allows physicians to obtain images and measure the degeneration of dopamine neurons in the brain. Dopamine neurons are highly concentrated in a specialized area of the brain. They degenerate in patients with Parkinson’s disease. Parkinson’s disease affects more than 900,000 patients in the United States.

In its early stages, Parkinson’s disease can be very difficult to distinguish clinically from other diseases with similar symptoms but which do not respond well or at all to specific therapy for Parkinson’s disease. There are no diagnostic tests in the United States currently marketed or commercially available that can reliably detect the degeneration of dopamine neurons, and the typical delay between the onset of symptoms of Parkinson’s disease and clinical diagnosis is more than two years. The primary way to establish the diagnosis at present is through repeated physician visits and the use of therapeutic trials of drugs such as L-Dopa, which carry with them the risk of unnecessary and sometimes severe side effects.

Following intravenous injections with DOPASCAN® Injection, images of a subject’s brain are obtained with a SPECT camera and may identify the loss of dopamine neurons in the brain. To date, over 2,000 patients have been imaged in the United States and Europe using DOPASCAN® Injection. In a multi-center Phase IIb clinical trial conducted by the Parkinson’s Study Group in the United States and completed in 1997, DOPASCAN® Injection accurately differentiated patients clinically diagnosed with a Parkinsonian disorder (i.e., Parkinson’s disease and progressive supranuclear palsy) from subjects without a Parkinsonian disorder (e.g., essential tremor and healthy controls) with a high sensitivity (98%) and specificity (97%). In addition, no serious adverse events were attributed to DOPASCAN® Injection in this study.

There can be no assurance, however, that similar results will be seen in any other clinical trials for DOPASCAN® Injection that may be conducted in the future or that the FDA will approve DOPASCAN® Injection as a safe and effective diagnostic.

We have entered into an agreement with DRL, a leading Japanese radiopharmaceutical company, to develop and commercialize DOPASCAN® Injection in Japan, Korea and Taiwan. DRL has informed us that

In January 2002, we announced that we sublicensed European rights for the development and commercialization of DOPASCAN® Injection to MAP, a division of Schering AG located in Finland. Under the terms of the agreement, MAP and its affiliated companies received exclusive development, marketing, sales and distribution rights to DOPASCAN® Injection for all European Union member states and other select European markets. Under the agreement, MAP will be responsible for seeking regulatory approvals, and for manufacturing, marketing and selling DOPASCAN® Injection in these countries. MAP has informed us that it submitted an application to receive regulatory approval in Finland for DOPASCAN® Injection in April 2002. It expects the Finnish regulatory authorities to respond to this application by April 2003.

In May 2002, we sublicensed DOPASCAN® Injection to Molecular Neuroimaging LLC, or MNI, a privately held company based in New Haven, Connecticut that specializes in the use of brain imaging technologies for, among other purposes, the analysis of clinical trials of pharmaceutical product candidates targeting neurodegenerative diseases. Under the terms of our agreement with MNI, except under limited circumstances, MNI pays us a royalty for each administration of DOPASCAN® Injection. During the term of our agreement, MNI has also agreed to provide us with favorable pricing for its services (including the administration of DOPASCAN® Injection) for any clinical trials for our product candidates. Presently, we have engaged MNI to provide its services for our clinical trial of GPI 1485 for Parkinson’s disease. MNI’s sublicense to DOPASCAN® Injection terminates upon the FDA’s approval of the product candidate for marketing and sale in the United States.

NAALADase, or N-Acetylated-Alpha-Linked-Acid-Dipeptidase, is a membrane-bound enzyme found principally in the central and peripheral nervous system. NAALADase is believed to play a role in modulating the release of glutamate in the nervous system. Glutamate is one of the brain’s most common chemical messengers. Under normal conditions, glutamate is released into a microscopic space — called the synapse — that exists between neurons in the brain. There, it stimulates post-synaptic glutamate receptors, an action that is critical to such functions as learning, memory and motor control. However, during conditions of acute injury or chronic disease, there may be a large increase in glutamate release that incites a cascade of biochemical events, ultimately leading to cell injury and death.

Our NAALADase inhibitor program is aimed at developing a commercial drug to block excessive glutamate release. Our initial target is diabetic neuropathy, a debilitating and progressive disorder involving increased pain sensitivity, tingling, weakness and numbness in a patient’s extremities. It is believed to affect about one million people in the United States, yet there are no approved drugs to treat this disabling condition.

We are additionally evaluating the use of NAALADase inhibitors as potential protective therapies for a range of chronic neurodegenerative disorders. We have created several unique classes of NAALADase inhibitors as a way to diversify our research and maximize potential therapeutic applications in peripheral neuropathy, chronic pain, schizophrenia, Lou Gehrig’s Disease (ALS), epilepsy, head and spinal cord trauma, stroke, Alzheimer’s and Parkinson’s disease.

In several animal models of diabetic neuropathy and neuropathic pain, our NAALADase inhibitors appear to normalize pain sensitivity, increase nerve conduction velocity and prevent nerve degeneration. Initially, we selected GPI 5693 as a lead NAALADase inhibitor compound and commenced Phase I clinical studies with this compound in early 2001 for the treatment of neuropathic pain and the underlying disease process associated with diabetic peripheral neuropathy. This Phase I Study, conducted in Europe, evaluated the safety, tolerability and pharmacokinetics of the compound in healthy subjects and suggested that it may be well tolerated at dose levels up to 750mg per day. During 2001 and 2002, our scientists identified GPI 16072 and other second-generation NAALADase inhibitor compounds, which appear to be up to 100 times more potent than GPI 5693 in pre-clinical studies. The increased potency of GPI 16072 may permit a lower dose of

the compound to provide the same or greater therapeutic effect than higher dosages of less potent compounds, thereby reducing the potential for side effects. We have completed extensive pre-clinical work with GPI 16072 and have determined that it could be advanced into clinical trials with the assistance of a future corporate partner for this program.

We have 35 U.S. patents and corresponding foreign counterparts protecting our NAALADase technology.

Other Neuroimmunophilin ligands and other neurotrophic and cytoprotective small molecules

Our scientists have also developed potent, novel, orally-active small molecule ligands of cyclophilin that may be neuroprotective and neuroregenerative. These compounds have shown neuroprotection and neurite outgrowth in animal models of neurodegeneration. These activities may be mediated by the actions of cyclophilin ligands on maintaining mitochondrial viability and function. Cyclophilin ligands might be useful in the treatment of cerebral ischemia, heart ischemia, Huntington’s Disease, age-related macular degeneration, traumatic brain injury, spinal cord injury and peripheral neuropathy.

On July 30, 2002, we announced a reorganization of our research and development programs, which included a workforce reduction of 58 employees, most of whom worked in the areas of research and development. In connection with this reorganization, we suspended further development of our polyphosphoester biopolymer drug delivery program, or PPE Program, and our PARP inhibitor research program. The PPE Program included our PACLIMER® Microspheres and LIDOCAINE-PE Microspheres (formerly known as LIDOMER Microspheres) development programs. PACLIMER® Microspheres is a product candidate for investigating controlled, site-specific administration and release of paclitaxel (brand name TAXOL®) for ovarian cancer and non-small cell lung cancer. LIDOCAINE-PE Microspheres is a product candidate for controlled, site-specific administration and release of LIDOCAINE, a commonly used analgesic, for post-operative pain. Our PARP inhibitor research program investigated the inhibition of the PARP enzyme for the prevention of cell necrosis in connection with the occurrence of conditions such as stroke and heart attack.

In order to further develop the programs that were affected by this reorganization, we are pursuing corporate partnerships and other similar licensing transactions.

All domestic prescription pharmaceutical manufacturers are subject to extensive regulation by the federal government, principally the FDA and, to a lesser extent, by state and local governments as well as foreign governments if products are marketed abroad. Biologics and controlled drug products, such as vaccines and narcotics, and radiolabeled drugs, are often regulated more stringently than are other drugs. The Federal Food, Drug, and Cosmetic Act and other federal statutes and regulations govern or influence the development, testing, manufacture, labeling, storage, approval, advertising, promotion, sale and distribution of prescription pharmaceutical products. Pharmaceutical manufacturers are also subject to certain inspection, registration, recordkeeping and reporting requirements. Noncompliance with applicable requirements can result in warning letters, fines, recall or seizure of products, total or partial suspension of production and/or distribution, refusal of the government to enter into supply contracts or to approve marketing applications and criminal prosecution.

Upon FDA approval, a drug may only be marketed in the United States for the approved indications in the approved dosage forms and at the approved dosage levels. The FDA also may require post-approval testing and surveillance to monitor a drug in larger and more diverse patient populations. Manufacturers of approved drug products are subject to ongoing compliance with FDA regulations. For example, the FDA mandates that drugs be manufactured in conformity with the FDA’s applicable cGMP regulations. In complying with the cGMP regulations, manufacturers must continue to spend time, money and effort in production, recordkeeping and quality control to ensure that the product meets applicable specifications and other requirements. The FDA periodically inspects drug manufacturing facilities to ensure compliance with its cGMP regulations. Adverse experiences with the commercialized product must be reported to the FDA. The FDA also may require the submission of any lot of the product for inspection and may restrict the release of any lot that does not comply with FDA regulations, or may otherwise order the suspension of manufacture, voluntary recall or seizure. Product approvals may be withdrawn if compliance with regulatory requirements is not maintained or if problems concerning safety or efficacy of the product occur following approval.

The steps required before a drug may be commercially distributed in the United States include: (i) conducting appropriate pre-clinical laboratory and animal tests; (ii) submitting to the FDA an application for an IND, which must become effective before clinical trials may commence; (iii) conducting well-controlled human clinical trials that establish the safety and efficacy of the drug product; (iv) filing with the FDA a New Drug Application (NDA) for non-biological drugs; and (v) obtaining FDA approval of the NDA prior to any commercial sale or shipment of the non-biological drug. NDA’s also must include a description of the manufacturing processes, including quality control procedures and validation requirements.

With respect to a drug product with an active ingredient not previously approved by the FDA, the manufacturer must usually submit a full NDA, including complete reports of pre-clinical, clinical and laboratory studies, to prove that the product is safe and effective. A full NDA may also need to be submitted for a drug product with a previously approved active ingredient if studies are required to demonstrate safety and efficacy, such as when the drug will be used to treat an indication for which the drug was not previously approved, or where the dose or method of drug delivery is changed. In addition, the manufacturer of an approved drug may be required to submit for the FDA’s review and approval a supplemental NDA, including reports of appropriate clinical testing, prior to marketing the drug with additional indications or making other significant changes to the product or its manufacture. A manufacturer intending to conduct clinical trials ordinarily will be required first to submit an IND to the FDA containing information relating to previously conducted pre-clinical studies.

Pre-clinical testing includes formulation development, laboratory evaluation of product chemistry and animal studies to assess the potential safety and efficacy of the product formulation. Pre-clinical tests to support an FDA application must be conducted in accordance with the FDA regulations concerning Good Laboratory Practices (GLPs). The results of the pre-clinical tests are submitted to the FDA as part of the IND and are reviewed by the FDA prior to authorizing the sponsor to conduct clinical trials in human subjects. Unless the FDA issues a clinical hold on an IND, the IND becomes effective 30 days following its receipt by the FDA. There is no certainty that submission of an IND will result in the commencement of clinical trials or that the commencement of one phase of a clinical trial will result in commencement of other phases or that the performance of any clinical trials will result in FDA approval.

Clinical trials for new drugs typically are conducted in three phases, are subject to detailed protocols and must be conducted in accordance with the FDA’s regulations concerning good clinical practices (GCPs). Clinical trials involve the administration of the investigational drug product to human subjects. Each protocol indicating how the clinical trial will be conducted in the United States must be submitted for review to the FDA as part of the IND. The FDA’s review of a study protocol does not necessarily mean that, if the study is successful, it will constitute proof of efficacy or safety. Further, each clinical study must be conducted under the auspices of an independent institutional review board (IRB) established pursuant to FDA regulations. The IRB considers, among other factors, ethical concerns and informed consent requirements. The FDA or the IRB may require changes in a protocol both prior to and after the commencement of a trial. There is no

assurance that the IRB or the FDA will permit a study to go forward or, once started, to be completed. Clinical trials may be placed on hold at any time for a variety of reasons, particularly if safety concerns arise, or regulatory requirements are not met.

The three phases of clinical trials are generally conducted sequentially, but they may overlap. In Phase I, the initial introduction of the drug into humans, the drug is tested for safety, side effects, dosage tolerance, metabolism and clinical pharmacology. Phase II involves controlled tests in a larger but still limited patient population to determine the efficacy of the drug for specific indications, to determine optimal dosage and to identify possible side effects and safety risks. Phase II testing for an indication typically takes at least from one and one-half to two and one-half years to complete. If preliminary evidence suggesting effectiveness has been obtained during Phase II evaluations, expanded Phase III trials are undertaken to gather additional information about effectiveness and safety that is needed to evaluate the overall benefit-risk relationship of the drug and to provide an adequate basis for physician labeling. Phase III studies for a specific indication generally take from two and one-half to five years to complete. There can be no assurance that Phase I, Phase II or Phase III testing will be completed successfully within any specified time period, if at all, with respect to any of our product candidates.

Reports of results of the pre-clinical studies and clinical trials for non-biological drugs are submitted to the FDA in the form of an NDA for approval of marketing and commercial shipment. The NDA typically includes information pertaining to the preparation of drug substances, analytical methods, drug product formulation, and details on the manufacture of finished product as well as proposed product packaging and labeling. Submission of an NDA does not assure FDA approval for marketing. Approval of a non-biological drug is dependent on a variety of factors, particularly on evidence consisting of adequate and well-controlled investigations. FDA will often use advisory committees to help decide whether a new product or new uses should be approved. Committee recommendations are purely advisory, and the FDA does not have to follow them, but frequently does.

User fee legislation now requires the submission in federal fiscal year 2003 of $313,320, to cover the costs of FDA review of a full NDA. Annual fees are also required for certain approved prescription drugs and for their manufacturers. The current user fee legislation expires at the end of September 2007. The failure to reauthorize PDUFA could have a serious impact on the review times and approval rates for all drugs, including Guilford’s candidate drugs.

The median FDA approval time is currently about 15 months for new drugs subject to user fee legislation, although clinical development, reviews, or approvals of treatments for cancer and other serious or life-threatening diseases may be accelerated, expedited or fast-tracked. In addition, approval times can vary widely among the various reviewing branches of the FDA. The approval process may take substantially longer if, among other things, the FDA has questions or concerns about the safety and/or efficacy of a product. In general, the FDA requires at least two properly conducted, adequate and well-controlled clinical studies demonstrating safety and efficacy with sufficient levels of statistical assurance. In certain limited cases the FDA may consider one clinical study sufficient. The FDA also may request long-term toxicity studies or other studies relating to product safety or efficacy. For example, the FDA may require additional clinical tests following NDA approval to confirm product safety and efficacy (Phase IV clinical tests) or require other conditions for approval. Notwithstanding the submission of such data, the FDA ultimately may decide that the application does not satisfy its regulatory criteria for approval.

Confirmatory studies similar to Phase III clinical studies may be conducted after, rather than before, FDA approval under certain circumstances. The FDA may determine under its expedited, accelerated, or fast-track provisions that previous limited studies establish an adequate basis for drug product approval, provided that the sponsor agrees to conduct additional studies after approval to verify safety and effectiveness. Treatment of patients not in clinical trials with an experimental drug may also be allowed under a Treatment IND before general marketing begins. Charging for an investigational drug also may be allowed under a Treatment IND to recover certain costs of development if various requirements are met. These cost-recovery, Treatment IND, and expedited, accelerated or fast-track approval provisions are limited, for example, to drug products (i) intended to treat AIDS or other serious severely debilitating or life-threatening diseases,

especially and that provide meaningful therapeutic benefit to patients over existing treatments, (ii) that are for diseases for which no satisfactory alternative therapy exists, or (iii) that address an unmet medical need. No assurances exist that our product candidates will qualify for cost-recovery, expedited, accelerated, or fast-track approvals or for treatment use under the FDA’s regulations or the current statutory provisions.

The full NDA process for newly marketed non-biological drugs, such as those being developed by us, including neuroimmunophilin ligand products and inhibitors of NAALADase, can take a number of years and involves the expenditure of substantial resources. There can be no assurance that any approval will be granted on a timely basis, or at all, or that we will have sufficient resources to carry such potential products through the regulatory approval process.

The Drug Price Competition and Patent Term Restoration Act of 1984 (“DPC-PTR Act”) established abbreviated procedures for obtaining FDA approval for many non-biological drugs which are off-patent and whose marketing exclusivity has expired. Applicability of the DPC-PTR Act means that a full NDA is not required for approval of a competitive product. Abbreviated requirements are applicable to drugs which are, for example, either bioequivalent to brand-name drugs, or otherwise similar to brand-name drugs, such that all the safety and efficacy studies previously done on the innovator product need not be repeated for approval. Changes in approved drug products, such as in the delivery system, dosage form, or strength, can be the subject of abbreviated application requirements. There can be no assurance that abbreviated applications will be available or suitable for our non-biological drug products.

A five-year period of market exclusivity is provided for newly marketed active ingredients of drug products not previously approved and a three-year period of market exclusivity is provided for certain changes in approved drug products for which reports of new clinical investigations are essential for approval (other than bioequivalence studies). A period of three years is available for changes in approved products, such as in delivery systems of previously approved products. These periods of marketing exclusivity mean that products that are the subject of abbreviated applications, which generally rely to some degree on approvals or on some data submitted by previous applicants for comparable innovator drug products, cannot be marketed during the period of exclusivity. The market exclusivity provisions of the DPC-PTR Act bar only the marketing of competitive products that are the subject of abbreviated applications, not products that are the subject of full NDAs. The DPC-PTR Act also may provide a maximum time of five years to be restored to the life of any one patent for the period it takes to obtain FDA approval of a drug product, including biological drugs. No assurances exist that the exclusivity or patent restoration benefits of the DPC-PTR Act will apply to any of our product candidates.

Products marketed outside the United States, which are manufactured in the United States are subject to certain FDA export regulations, as well as regulation by the country in which the products are to be sold. U.S. law can prohibit the export of unapproved drugs to certain countries abroad. We also would be subject to foreign regulatory requirements governing clinical trials and pharmaceutical sales, if products are marketed abroad. Whether or not FDA approval has been obtained, approval of a product by the comparable regulatory authorities of foreign countries must usually be obtained prior to the commencement of marketing of the product in those countries. The approval process varies from country to country and the time required may be longer or shorter than that required for FDA approval.

In addition to the requirements for product approval, before a pharmaceutical product may be marketed and sold in certain foreign countries the proposed pricing for the product must be approved as well. Products may be subject to price controls and/or limits on reimbursement. The requirements governing product pricing and reimbursement vary widely from country to country and can be implemented disparately at the national level. The European Union generally provides options for its fifteen Member States to restrict the range of medicinal products for which their national health insurance systems provide reimbursement. Member States in the European Union can opt to have a “positive” or a “negative” list. A positive list is a listing of all

medicinal products covered under the national health insurance system, whereas a negative list designates which medicinal products are excluded from coverage. In the European Union, the United Kingdom and Spain use a negative list approach, while France uses a positive list approach. In Canada, each province decides on reimbursement measures.

The European Union also generally provides options for its Member States to control the prices of medicinal products for human use. A Member State may approve a specific price for the medicinal product or it may instead adopt a system of direct or indirect controls on the profitability of the company placing the medicinal product on the market. For example, the regulation of prices of pharmaceuticals in the United Kingdom (U.K.) is generally designed to provide controls on the overall profits that pharmaceutical companies may derive from their sales to the U.K. National Health Service. The U.K. system is generally based on profitability targets or limits for individual companies which are normally assessed as a return on capital employed by the company in servicing the National Health Service market, comparing capital employed and profits.

In comparison, Italy generally establishes prices for pharmaceuticals based on a price monitoring system. The reference price is the European average price calculated on the basis of the prices in four reference markets: France, Spain, Germany and the U.K. Italy typically establishes the price of medicines belonging to the same therapeutic class on the lowest price for a medicine belonging to that category (i.e., same active principle, same pharmaceutical form, same route of administration). Spain generally establishes the selling price for new pharmaceuticals based on the prime cost, plus a profit margin within a range established each year by the Spanish Commission for Economic Affairs. Promotional and advertising costs are limited.

In Canada, prices for most new drugs are generally limited such that the cost of therapy for the new drug is in the range of the cost of therapy for existing drugs used to treat the same disease in Canada. Prices of breakthrough drugs and those which bring a substantial improvement are generally limited to the median of the prices charged for those drugs in other industrialized countries, such as France, Germany, Italy, Sweden, Switzerland, the U.K. and the United States.

There can be no assurance that any country which has price controls or reimbursement limitations for pharmaceuticals will allow favorable reimbursement and pricing arrangements for GLIADEL® Wafer, or if approved, our product candidates.

We are also governed by other federal, state and local laws. These laws include, but are not limited to, those regulating working conditions enforced by the Occupational Safety and Health Administration and regulating environmental hazards under such statutes as the Toxic Substances Control Act, the Resource Conservation and Recovery Act and other environmental laws enforced by the United States Environmental Protection Agency (“USEPA”). The Drug Enforcement Agency (DEA) regulates controlled substances, such as narcotics. A precursor compound to DOPASCAN® Injection is a tropane-derivative similar to cocaine and thus is subject to DEA regulations. Establishments handling controlled substances must, for example, be registered and inspected by the DEA, and may be subject to export, import, security and production quota requirements. Radiolabeled products, including drugs, are also subject to regulation by the Department of Transportation and to state and federal licensing requirements. Various states often have comparable health and environmental laws, such as those governing the use and disposal of controlled and radiolabeled products.

As of December 31, 2002, we owned or had licensed rights to more than 130 U.S. patents and more than 100 foreign patents. In addition, we owned or had licensed more than 750 pending applications worldwide. We also own registered trademarks to DOPASCAN®, PACLIMER®, and GLIADEL® and have an allowed trademark application to AQUAVAN™ in the United States.

The value of our intellectual property rights is subject to various uncertainties and contingencies. The scope of intellectual property protection afforded to pharmaceutical and biotechnological inventions is uncertain, and our product candidates are subject to this uncertainty. We cannot be certain that any of our patent applications will be granted, that additional products or processes we develop will be patentable, or that

Further, other companies have been issued patents and have filed patent applications relating to our key technologies. While we do not believe that we are infringing any valid patents of which we are aware, we cannot be certain that our products or product candidates will not infringe or be dominated by patents that have issued or may issue to third parties.

We control the disclosure and use of our proprietary information through confidentiality agreements with employees, consultants and other third parties. However, our confidentiality agreements may not be honored, disclosure of our proprietary information may occur, and disputes may arise concerning the ownership of intellectual property or the applicability of confidentiality obligations.

We support and collaborate in research conducted by other companies, universities and governmental research organizations. We may not be able to acquire exclusive rights to the intellectual property derived from such collaborations and disputes may arise as to rights in derivative or related research programs that we conduct. To the extent that consultants or other research collaborators use third parties’ intellectual property in their work with us, disputes may also arise as to the rights to resulting intellectual property. In addition, in the event we breach any of our collaborative research contracts, such a breach may cause us to lose certain licensed intellectual property rights.

If we are required to defend against charges of infringement of intellectual property rights of third parties or assert our own intellectual property rights against third parties, we may incur substantial costs and could be enjoined from commercializing certain products. We may also be required to pay monetary damages. To avoid or settle litigation, we may seek licenses from third parties or attempt to redesign our products or processes to avoid infringement. However, we may not be successful in obtaining licenses or successfully redesigning our products or processes.

We could also be required to participate in U.S. interference proceedings or international patent oppositions. In fact, in order to protect our intellectual property position with respect to our neuroimmunophilin ligands, we filed a European opposition in 1998 to revoke another company’s European patent. In 2000, we won this opposition, and the subject patent was revoked. However, the patentee has appealed the initial determination, and the patent could be reinstated. If the patent is reinstated, litigation could ultimately result.

In March 1994, we entered into an agreement (the “GLIADEL® Wafer Agreement”) with Scios Inc. pursuant to which we licensed from Scios exclusive worldwide rights to numerous U.S. patents and patent applications and corresponding international patents and patent applications for polyanhydride biodegradable polymer technology for use in the field of tumors of the central nervous system and cerebral edema. GLIADEL® Wafer is covered under this license by two U.S. patents and certain related international patents and patent applications. The patent rights in the U.S. will expire in 2006. In April 1994, Scios assigned all of its rights and obligations under the GLIADEL® Wafer Agreement to MIT.

Under the GLIADEL® Wafer Agreement, we are obligated to pay a royalty on all net sales of products incorporating the technology covered by the Agreement, as well as a percentage of all royalties received by us from sublicensees and certain advance and minimum annual royalty payments. We have exclusive worldwide rights to the technology for brain cancer therapeutics, subject to certain conditions, including a requirement to perform appropriate preclinical tests and file an IND with the FDA within 24 months of the identification of a drug-polymer product having greater efficacy than GLIADEL® Wafer. In addition, we are obligated to meet certain development milestones. Although we believe that we can comply with such obligations, our failure to perform these obligations could result in losing our rights to new polymer-based products.

In June 1996, we entered into a license agreement with MIT and Johns Hopkins regarding a patent application covering biodegradable polymers for use in connection with the controlled local delivery of certain chemotherapeutic agents (including paclitaxel (TAXOL®) and camptothecin). Under this agreement, we are

obligated to make certain annual and milestone payments to MIT and to pay royalties based on any sales of products incorporating the technology licensed to us. Furthermore, under the terms of the agreement, we have committed to spend minimum amounts to develop the technology and to meet certain development milestones, including filing a New Drug Application for this technology by June 25, 2006. Our failure to perform these obligations could result in losing our rights to such technology. In addition, the underlying patents are subject to march-in rights of the U.S. government.

In July 1996, we entered into a license agreement with Johns Hopkins that currently covers several U.S. patents respecting certain PPEs developed at Johns Hopkins and patent applications for additional PPEs. This agreement, among other things, requires us to pay certain processing, maintenance and/or up-front fees, milestone payments and royalties, a portion of proceeds from sublicenses, and fees and costs related to patent prosecution and maintenance and to spend minimum yearly amounts for, and meet deadlines regarding development of this technology, including filing a New Drug Application for this technology by July 18, 2006. If we fail to meet these requirements, the agreement could be terminated. In the event of termination of these licenses, we would lose our rights to the use of the licensed technology. In addition, the underlying patents are subject to march-in rights of the U.S. government.

We have entered into exclusive license agreements with Johns Hopkins, to patents covering the neurotrophic use of neuroimmunophilin ligands. We have also entered into exclusive license agreements with Johns Hopkins regarding the rights to the inhibition of PARP and other technologies for neuroprotective uses. These agreements require us to pay, among other things, certain processing, maintenance, and/or up-front fees, milestone payments and royalties, a portion of proceeds from sublicenses, and fees and costs related to patent prosecution and maintenance and to spend minimum amounts for, and meet deadlines regarding, development of the technologies. In the event of termination of these licenses, we would lose our rights to use the licensed technology.

We obtained exclusive worldwide rights to DOPASCAN® Injection pursuant to a March 1994 license agreement (the RTI Agreement) with Research Triangle Institute (RTI), which grants us rights to various U.S. and international patents and patent applications relating to binding ligands for certain receptors in the brain which are or may be useful as dopamine neuron imaging agents. DOPASCAN® Injection and certain related precursors and analogues are covered by U.S. patents, which expire in 2009, as well as certain related international patents and patent applications.

Under the RTI Agreement, we reimbursed RTI for certain past patent-related expenses and agreed to make annual payments to RTI to support mutually agreed-upon research that was conducted at RTI through March 1999. In addition, we are obligated to pay RTI a royalty on gross revenues we receive from products derived from the licensed technology and from sublicensee proceeds and to make certain minimum royalty payments following the first commercial sale of such products. We must use commercially reasonable efforts to develop products related to the licensed technology and to meet certain performance milestones. Our failure to perform our obligations under the RTI Agreement in the future could result in termination of the license, and loss of our right to use this technology.

In March 2000, we entered into a license agreement with ProQuest Pharmaceuticals Inc., or ProQuest, which granted us exclusive worldwide development and commercialization rights to a prodrug of propofol, which we later named AQUAVAN™ Injection. Under the terms of the license agreement, we made an upfront payment to ProQuest in exchange for an equity position in the company and we are required to make additional payments to ProQuest based on the achievement of certain development milestones. We are also required to pay ProQuest royalties on AQUAVAN™ Injection sales.

Aspects of the technology licensed by us under agreements with third party licensors may be subject to certain government rights. Government rights in inventions conceived or reduced to practice under a government-funded program (“subject inventions”) may include a non-exclusive, royalty-free worldwide license to practice or have practiced such inventions for any governmental purpose. In addition, the U.S. government has the right to require us to grant licenses which shall be exclusive under any of such inventions

to a third party if they determine that: (i) adequate steps have not been taken to commercialize such inventions; (ii) such action is necessary to meet public health or safety needs; or (iii) such action is necessary to meet requirements for public use under federal regulations. The U.S. government also has the right to take title to a subject invention if there is a failure to disclose the invention and elect title within specified time limits. In addition, the U.S. government may acquire title in any country in which a patent application is not filed within specified time limits. Federal law requires any licensor of an invention that was partially funded by the federal government to obtain a covenant from any exclusive licensee to manufacture products using the invention substantially in the United States. Further, the government rights include the right to use and disclose, without limitation, technical data relating to licensed technology that was developed in whole or in part at government expense. Some of our principal technology license agreements contain provisions recognizing these government rights.

We are involved in technological fields in which developments are expected to continue at a rapid pace. Our success depends upon our ability to compete effectively in the research, development and commercialization of products and technologies in our areas of focus. Competition from pharmaceutical, chemical and biotechnology companies, universities and research institutes is intense and expected to increase. Many of these competitors have substantially greater research and development capabilities and experience and greater manufacturing, marketing, financial and managerial resources than we do and represent significant competition for us. Acquisitions of competing companies by large pharmaceutical or other companies could enhance the financial, marketing and other resources available to these competitors. These competitors may develop products which are superior to those that we have under development.

We are aware of several competing approaches for the treatment of malignant glioma, including using radioactive seeds for interstitial radiotherapy, increasing the permeability of the blood-brain barrier to chemotherapeutic agents, sensitizing cancer cells to chemotherapeutic agents using gene therapy and developing chemotherapeutics directed to specific receptors in brain tumors. Furthermore, our patent protection for GLIADEL® Wafer ends in 2006. At that time, others may try to copy the wafer and enter the market as a generic drug through applicable FDA procedures.

A number of companies have shown interest in trying to develop neurotrophic agents to promote nerve growth and repair in neurodegenerative disorders and traumatic central nervous system injuries. Most of these activities have focused on naturally occurring growth factors. These factors contain large molecules that generally cannot cross the blood-brain barrier and thus present problems in administration and delivery. We are aware of several companies that are investigating small molecule neurotrophic compounds for peripheral neuropathy in the clinic.

There is intense competition to develop an effective and safe neuroprotective drug or biological agent. Calcium channel antagonists, calpain inhibitors, adenosine receptor antagonists, free radical scavengers, superoxide dismutase inducers, proteoloytic enzyme inhibitors, phospholipase inhibitors and a variety of other agents are under active development by others. Glutamate or NMDA receptor antagonists are under development by several other companies.

The anesthesia/sedation field is concentrated in the United States mainly among four major companies, with several other companies doing research in the field. There are numerous products currently on the market that are accepted as relatively safe and effective anesthetic agents and sedation agents. In addition, we are aware of several companies that are seeking to develop water soluble formulations of propofol. We cannot be sure that we can successfully develop AQUAVAN™ Injection into a safe and effective drug or that it will be cleared for marketing. Even if we are able to market AQUAVAN™ Injection, the commercial prospects for it will depend heavily on its safety and efficacy profile relative to alternatives then available in the market.

Although our PACLIMER® Microspheres and Lidocaine-PE Microspheres are based on a proprietary polymer system, this technology could compete with other developing and existing drug delivery technologies. We are aware of several other companies that are seeking to develop sustained release injectable products for

We believe that at least two other companies are clinically evaluating imaging agents for dopamine neurons. In addition, a variety of radiolabeled compounds for use with Positron Emission Tomography (PET) scanners have been used to image dopamine neurons successfully in patients with Parkinson’s disease. PET scanning is currently only available in a limited number of hospitals in the United States and Europe.

Any product candidate that we develop and for which we gain regulatory approval, including GLIADEL® Wafer, must then compete for market acceptance and market share. For certain of our product candidates, an important factor will be the timing of market introduction of competitive products. Accordingly, the relative speed with which we and competing companies can develop products, complete the clinical testing and approval processes, and supply commercial quantities of the products to the market is expected to be an important determinant of market success. Other competitive factors include the capabilities of our collaborators, product efficacy and safety, timing and scope of regulatory approval, product availability, marketing and sales capabilities, reimbursement coverage, the amount of clinical benefit of our product candidates relative to their cost, method of administration, price and patent protection. Our competitors may develop more effective or more affordable products or achieve earlier product development completion, patent protection, regulatory approval or product commercialization than us. The achievement of any of these goals by our competitors could have a material adverse effect on our business, financial condition and results of operations.

Our research and development expenses were $46.1 million, $54.3 million and $46.9 million for the years ended December 31, 2002, 2001 and 2000, respectively. These expenses were divided between our research and development platforms in the following manner:

Our pharmaceutical technology research and development expenses decreased in 2002, compared to 2001, primarily due to a decrease in expenses in our NAALADase inhibitor program resulting from the completion of our Phase I clinical trials of GPI 5693 (a lead NAALADase inhibitor compound). The decrease in spending on our NAALADase inhibitors was partially offset by an increase in spending on our neuroimmunophilin ligand technology and our AQUAVAN™ Injection program. For 2003, we expect research and development expenses for our pharmaceutical technologies to be incurred primarily in connection with further clinical development of AQUAVAN™ Injection, the preparation for, and initiation of, one or more Phase II clinical trials of GPI 1485, our lead neuroimmunophilin ligand compound and additional NAALADase inhibitor program research.

Research and development expenses related to our pharmaceutical and related technologies increased in 2001 compared to 2000. This increase is the result of advancing AQUAVAN™ Injection and GPI 5693 into clinical trials and was offset by a reduction in expenses associated with our neuroimmunophilin program, as Amgen Inc., our former corporate partner, completed its research funding to us.

Our biopolymer technology research and development expenses decreased in 2002, compared to 2001, due to a decrease in expenses incurred in connection with the clinical development of both PACLIMER®

Microspheres and Lidocaine-PE (formerly LIDOMER^TM Microspheres). The decrease in clinical development expenses resulted from the completion of our clinical trials for PACLIMER® Microspheres (ovarian cancer) and Lidocaine-PE (post-operative pain) during the first quarter of 2002. In connection with our corporate restructuring in the third quarter of 2002, we terminated the clinical trial for PACLIMER® Microspheres (lung cancer). We, therefore, expect research and development expenses related to our biopolymer technology to further decrease during the remainder of 2003, compared to 2002. Currently, we do not plan to conduct additional research or clinical testing of our biopolymer technologies. Instead, we plan to pursue a corporate partnership, divestiture or similar strategic transaction to further develop these technologies.

With respect to our biopolymer technologies, the modest decrease in 2001 compared to 2000 reflects less development expenses incurred related to PACLIMER® Microspheres offset by an increase in expenses related to Lidocaine-PE as it advanced into the clinical trial.

Our indirect research and development expenses decreased for the year ended 2002 compared to 2001, in part due to decreased overhead and a reduction in force in the second half of 2002. The increase from the year ended 2000 to 2001 was caused by increased costs to operate our facilities as well as increased general research and development management activity. These expenses include the costs of operating and maintaining our facilities, property and equipment, to the extent used in connection with the research and development of our technologies, as well as the costs of our general management of research and development projects.

Product liability risk is inherent in the testing, manufacture, marketing and sale of GLIADEL® Wafer and our product candidates, and there can be no assurance that we will be able to avoid significant product liability exposure. While we currently maintain product liability insurance covering clinical trials and product sales, there can be no assurance that this or any future insurance coverage obtained by us will be adequate or that claims will be covered by our insurance. Our insurance policies provide coverage on a claims-made basis and are subject to annual renewal. Product liability insurance varies in cost, can be difficult to obtain and may not be available to us in the future on acceptable terms, or at all.

At December 31, 2002, we employed 235 individuals. Of these 235 employees, 134 were employed in the areas of research and product development and in the manufacturing and quality control of GLIADEL® Wafer. The remaining 101 employees performed selling, general and administrative functions, including sales and marketing, executive, finance and administration, legal and business development. None of our employees are currently represented by a labor union. To date, we have not experienced work stoppages related to labor issues and we believe our relations with our employees are good.

Hiring and retaining qualified personnel are important factors for our future success. There can be no assurance that we will be able to continue to hire qualified personnel and, if hired, that we will be able to retain these individuals.

Craig R. Smith, M.D., Chairman of the Board of Directors, President and Chief Executive Officer, age 57, joined the Company as a Director when the Company was founded in July 1993. Dr. Smith was elected President and Chief Executive Officer in August 1993 and Chairman of the Board in January 1994. Prior to joining the Company, Dr. Smith was Senior Vice President for Business and Market Development at Centocor, Inc., a biotechnology company. Before joining Centocor, Dr. Smith served on the Faculty of the Department of Medicine at Johns Hopkins Medical School. Dr. Smith received his M.D. from the State University of New York at Buffalo in 1972 and received training in Internal Medicine at Johns Hopkins Hospital from 1972 to 1975.

Andrew R. Jordan, Executive Vice President, Finance and Administration, Chief Financial Officer and Treasurer, age 55, joined the Company as Vice President, Secretary, Treasurer and Chief Financial Officer in September 1993. In January 1997, he became Senior Vice President, Finance and Administration, Chief Financial Officer and Treasurer and in February 2003, he was promoted to Executive Vice President. Prior to joining the Company, Mr. Jordan held various positions with KPMG LLP, a public accounting firm, including partner since 1983. Mr. Jordan’s experience at KPMG LLP included advising early-stage and emerging technology companies and initial and secondary public equity and debt offerings. He received his B.A. from Rutgers College in 1969 and his MBA from Rutgers Graduate School of Business in 1973 and is a Certified Public Accountant.

John P. Brennan, Senior Vice President, Technical Operations, age 60, joined the Company as Vice President, Operations in January 1994 and became Senior Vice President, Technical Operations in January 1997. From 1980 to 1993, he was Vice President, Technical Operations and Manufacturing for G.D. Searle and Co., where he was responsible for the operation of manufacturing plants in North America, Latin America and Europe and the worldwide pharmaceutical and process technology. Mr. Brennan received his B.S. in Chemistry from the Philadelphia College of Pharmacy and Science in 1968 and attended the Wharton Graduate Management Program in 1976.

Thomas C. Seoh, Senior Vice President, Corporate and Commercial Development and Strategic Planning, age 45, joined the Company in April 1995, as Vice President, General Counsel and Secretary. In August 1999, he was promoted to Senior Vice President. In February 2001, he became Senior Vice President, Corporate Development, General Counsel and Secretary and in February 2002 he became Senior Vice President, Corporate and Commercial Development and Strategic Planning. Mr. Seoh previously held legal management positions with ICN Pharmaceuticals, Inc., including Vice President and Associate General Counsel, and with Consolidated Press U.S., Inc., and was associated with the New York and London offices of Lord Day & Lord, Barrett Smith. Mr. Seoh received his J.D. and A.B. from Harvard University.

Nancy J. Linck, Ph.D., J.D., Senior Vice President and General Counsel, age 61, joined the Company as Vice President, Intellectual Property in November 1998. In February 2001, Dr. Linck was promoted to Senior Vice President, Intellectual Property and Deputy General Counsel. Dr. Linck became Senior Vice President, General Counsel and Secretary in February 2002. From 1994 to 1998, Dr. Linck was Solicitor for the U.S. Patent and Trademark Office, where she acted as general counsel for the Commissioner of Patents and Trademarks. From 1987 to 1994, Dr. Linck worked as a patent and trademark litigator at the intellectual property law firm of Cushman, Darby & Cushman, first as an associate from 1987 to 1990, and later as a partner from 1991 to 1994. Since 1995, Dr. Linck has served as an Adjunct Professor of Law, first at George Washington University School of Law and presently at Georgetown University Law Center. Dr. Linck received her B.S. in Chemistry from the University of California, Berkeley, her M.S. and Ph.D. in Inorganic Chemistry from the University of California, San Diego, and her J.D. from Western New England College School of Law.

William C. Vincek, Ph.D., Senior Vice President, Pharmaceutical and Chemical Development, age 55, joined the Company as Vice President, Corporate Quality in August 1997. In August 1999, he became Vice President, Pharmaceutical & Chemical Development. In February 2002, Dr. Vincek was promoted to Senior Vice President, Pharmaceutical and Chemical Development. From November 1993 until Dr. Vincek joined the Company, he was Group Director, CMC & Pre-clinical Regulatory Affairs and Global Research and Development GMP Quality Assurance at Glaxo Wellcome, Inc. Prior to that time, Dr. Vincek held various positions at SmithKline Beecham Pharmaceuticals and related entities. Dr. Vincek received his Ph.D. and M.S. in Medicinal Chemistry from the University of Kansas. Dr. Vincek received a B.S. in Chemistry from Colorado State University.

Margaret M. Contessa, Senior Vice President, Human Resources, age 54, joined Guilford as Vice President, Human Resources in November 2000. In February 2002, Ms. Contessa was promoted to Senior Vice President, Human Resources. Prior to joining Guilford, from March 1998 to January 1999, Ms. Contessa was Vice President, Human Resources of Witco Corporation, a manufacturer of specialty chemicals located in Greenwich, Connecticut. From 1986 through 1998, she was employed by Engelhard Corporation as Director,

Human Resources, and prior to that held various human resources positions with Schering Plough and BASF. Ms. Contessa received her B.S. in Management Science at Fairleigh Dickinson University in 1977 and received training at Harvard and Columbia University.

Barbara S. Slusher, Ph.D., Senior Vice President, Research, Animals, & Toxicology, age 38, joined Guilford in January 1995 as Principal Scientist and Group Leader in Research and Development. Dr. Slusher was promoted to Senior Vice President, Research, Animals & Toxicology in August 2002 after being named Vice President, Biology in February 2000. From April 1992 until Dr. Slusher joined Guilford, she was Senior Research Pharmacologist for Zeneca Pharmaceuticals Inc. Dr. Slusher received her Ph.D. in Pharmacology and Molecular Sciences from the Johns Hopkins School of Medicine in 1991 and her Master’s degree in Management from the Johns Hopkins School of Continuing Studies in 1991. Dr. Slusher received her B.S. degree in Chemistry from Dickinson College in 1986.

Denise D. Battles, Vice President, Corporate Quality, age 47, joined Guilford in August 1994 as Director of Quality Assurance and became Senior Director of Product Compliance in August 1997. Ms. Battles was promoted to Vice President of Corporate Quality in August 1999. Prior to joining the Company, Ms. Battles was employed by Pharmaceutical Systems, Incorporated as the Director of Quality Assurance and held various positions with Quality Control and Quality Assurance at Baxter Healthcare Corporation. Ms. Battles received her B.S. in Biology from Fisk University in 1977 and received training at the Lake Forest Graduate School of Management.

Valerie D. Riddle, M.D., Vice President, Clinical Affairs, age 42, joined Guilford in January 2001, as Vice President, Medical Affairs. In August 2002, she was promoted to Vice President, Clinical Affairs. Prior to joining Guilford, Dr. Riddle was Senior Director, Medical Sciences at MedImmune, Inc. since 1998. From 1990 to 1998, Dr. Riddle held various positions with the Washington Hospital Center, most recently as Director, HIV/ AIDS Service, Section of Infectious Diseases. Dr. Riddle received her M.D. and B.A. in Chemistry from the University of South Florida in 1989 and 1984, respectively.

Francesca M. Cook, Vice President, Policy and Reimbursement Services, age 38, joined Guilford in March 2001. Prior to joining the Company, Ms. Cook held various positions since 1996 with Covance Health Economics and Outcomes Services, most recently as Vice President. Before joining Covance Health Economics and Outcomes Services, Ms. Cook was a Legislative Assistant for the Office of Senator Carol Moseley-Braun, United States Senate in Washington, D.C. Ms. Cook received her Master of Public Health degree in 1988 from Yale University School of Medicine, Department of Epidemiology and Public Health. She received her Bachelor of Arts degree in Biology in 1986 from Mount Holyoke College.

Jean-Marie Vallet, Vice President, Business Development, age 47, joined Guilford in May 2002. From 2000 to 2001, Dr. Vallet was Corporate Vice President and President Human Healthcare for Valigen, a functional genomics company. From 1996 to 2000, he held several positions with Bristol-Myers Squibb, including, Vice President, Business Development for the European region. Dr. Vallet holds a Master’s Degree in Biochemistry and Genetics from the University of Paris XI. He received his Ph.D. in Molecular Biology from the University of Geneva and an MBA from IMD in Lausanne, Switzerland.

Michael Kelly, Vice President, Sales and Marketing, age 38, joined the Company in December 2002. Prior to joining the Company he held various positions with Viropharma Incorporated, most recently as Vice President of Sales from January 2001 through December 2002, and before that as Vice President of Marketing from January 2000 through December 2000. In 1997, Mr. Kelly joined Viropharma as Executive Director of Marketing. From 1991 until 1997, Mr. Kelly held various positions at TAP Pharmaceuticals, a pharmaceutical company, the latest being Manager of Hospital Account Executives within the Mid-Atlantic Region. Mr. Kelly received his B.S. in Marketing from the Trenton State College and his M.B.A. from Rider College.

Asher M. Rubin, Vice President, Deputy General Counsel and Secretary, age 32, joined the Company in October 2000, as Senior Corporate Counsel and Assistant Secretary. He was promoted to Associate General Counsel and Assistant Secretary in August 2001, to Deputy General Counsel and Assistant Secretary in February 2002, and to Vice President, Deputy General Counsel and Secretary in February 2003. Prior to joining the Company, Mr. Rubin was an associate with the law firm of Miles & Stockbridge P.C., in

In August 1994, we entered into a lease for an approximately 83,000 square foot building in Baltimore, Maryland that currently serves as our headquarters, which we expanded in 1998 to approximately 90,000 square feet. We currently occupy 23,000 square feet for office space, 18,000 square feet for manufacturing space for GLIADEL® Wafer, and 49,000 square feet of research and development laboratories. The initial term of the lease expires in June 2005. Thereafter, we may exercise two five-year renewal options, or we may exercise a purchase option any time after the ninth year of the lease for the then-current fair market value.

In February 1998, we entered into an operating lease with a trust affiliated with First Union National Bank for the construction and occupancy of a new laboratory and office facility, consisting of approximately 77,000 square feet. We took possession of this facility in June 1999. The lease expires in February 2005, at which time we have an option (i) to purchase the property or (ii) to sell the property on behalf of the trust (subject to certain limitations and related obligations). In addition, we may, with the consent of First Union, enter into a new lease arrangement for the facility.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” for a more complete description of the Company’s arrangements with First Union. In addition, see Leases footnote 11 in the Notes to the Consolidated Financial Statements.

No matters were submitted to a vote of the Company’s security holders during the last quarter of its fiscal year ended December 31, 2002.

An investment in our stock is very speculative and involves a high degree of risk. You should carefully consider the following important factors, as well as the other information in this report and our other SEC filings, before purchasing our stock.

We may not be able to achieve or sustain significant revenues or earn a profit in the future. Since we were founded in July 1993, with the sole exception of 1996, we have not earned a profit in any year. Our losses result mainly from the significant amount of money that we have spent on research, development and clinical trial activities. As of December 31, 2002, we had an accumulated deficit of approximately $249.6 million. We expect to have significant additional losses over the next several years due to expenses associated with our product candidates related to research, development and clinical trial activities, applying for and obtaining meaningful patent protection and establishing freedom to commercialize and applying for and receiving regulatory approval for our drug product candidates.

Our product candidates are in research or various stages of pre-clinical and clinical development. Except for GLIADEL® Wafer, none of our products or product candidates may be sold to the public. Nearly all of our past revenues have come from:


	•	payments from Aventis and Amgen under now terminated agreements with each of them, supporting the research, development and commercialization of our product candidates;

	•	royalty payments from Aventis’ sale and distribution of GLIADEL® Wafer; and

Presently, we receive significant revenue only from the sale of GLIADEL® Wafer and we do not expect that revenue to be sufficient to support all our anticipated future activities. We do not expect to generate revenue from the sale of our product candidates for the next several years, if ever, because of the significant risks associated with pharmaceutical product development.

Many factors will dictate our ability to achieve sustained profitability in the future, including:


	•	the successful development of and our ability to successfully market, sell and distribute our products, including GLIADEL® Wafer;

	•	the successful development of our product candidates either on our own, or together with future corporate partners with whom we enter into collaborative or license agreements; and

	•	the ability to in-license or acquire additional products in our targeted markets.

Our short-term prospects depend heavily on sales of GLIADEL® Wafer, our only commercial product. We commercially launched GLIADEL® Wafer in the United States in February 1997. We do not know whether the product will ever gain broad market acceptance. If GLIADEL® Wafer fails to gain broad market acceptance, the revenues we receive from sales of GLIADEL® Wafer would be unlikely to increase.

Until February 25, 2003, we only had approval from the FDA to market GLIADEL® Wafer in the United States for only a limited subset of patients who suffer from brain cancer. Our approval is for those patients who have a brain tumor surgically removed and have “recurrent” forms of a type of brain cancer called glioblastoma multiforme, or GBM. A “recurrent” GBM is one in which the cancer has returned after initial surgery to remove a brain tumor. The number of patients undergoing recurrent surgery for GBM is very limited, and we believe the total number of patients on an annual basis who have GBM in the United States is approximately 3,000 to 4,000.

On February 25, 2003, we received FDA approval to market GLIADEL® Wafer for patients undergoing initial surgery for malignant glioma in conjunction with surgery and radiation. The number of patients undergoing initial surgery is estimated to be 8,000 per year.

In addition, in January 2002 we submitted applications for approval to market GLIADEL® Wafer in Europe for patients undergoing initial surgery for malignant glioma. In November 2002, we withdrew those applications and plan to resubmit them now that the FDA has approved our amended sNDA. Presently, GLIADEL® Wafer is approved for recurrent GBM market in only 21 countries, including France, Spain, Germany and the U.K. GLIADEL® Wafer is currently approved for first-line therapy only in the United States and Canada. If we are not able to obtain additional approvals, the market for GLIADEL® Wafer would remain limited, which reduces the likelihood of increasing the revenues that we receive from sales of GLIADEL® Wafer. Regardless of the number of foreign regulatory approvals that we have received, international sales to date comprise a


Delaware		52-1841960
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)


Marketed Product(1)	Indication/Condition	Status

GLIADEL® Wafer	Recurrent glioblastoma multiforme	Currently approved for sale in the United States and in 25 other countries throughout the world.
	Newly diagnosed malignant glioma	Currently approved for sale in the United States and Canada.(2)


Clinical Development
Programs(1)	Indication/Condition	Status

GPI 1485 (our lead neuroimmunophilin ligand)	Parkinson’s disease	Phase II
AQUAVAN^TMInjection	Conscious sedation	Phase II
	Sedation, anesthesia induction and maintenance for patients undergoing coronary artery bypass graft surgery.	Phase II
DOPASCAN® Injection	Imaging agent to diagnose and monitor Parkinson’s disease	Phase III(3)


Pre-clinical and Research
Programs(1)	Indications	Status

GPI 16072 (NAALADase inhibitor compound)	Neuropathic pain and disease modification for diabetic neuropathy and other neuroprotective indications (such as ALS, glaucoma and stroke)	Pre-clinical
Other NAALADase inhibitor compounds	Neuropathic pain and disease modification for diabetic neuropathy and other neuroprotective indications (such as ALS, glaucoma and stroke)	Research
Other, neuroimmunophilin ligands, including Cyclophilin ligands	Cerebral ischemia, heart ischemia, Alzheimer’s disease, traumatic spinal cord injury, multiple sclerosis,vascular degeneration and Huntingdon’s diseases	Research
Other neurotrophic and cytoprotective small molecules	Alzheimer’s disease, traumatic spinal cord injury, multiple sclerosis, neuropathy, stroke and other ischemic damage	Research



	Years ended December 31

	2002		2001		2000

Pharmaceutical technologies	$	20,815	$	24,512	$	21,087
Biopolymer technologies		4,990		8,563		8,648
Indirect expenses		20,298		21,197		17,165

	$	46,103	$	54,272	$	46,900