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UNITED STATES

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

For the fiscal year ended December 31, 2003

Commission File Number: 0-23736

Guilford Pharmaceuticals Inc.

6611 Tributary Street

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

     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, 2003, the aggregate market value of the approximately 28,931,279 shares of common stock of the Registrant issued and outstanding on such date, excluding approximately 2,044,013 shares held by affiliates of the Registrant, was approximately $119,917,206. This figure is based on the closing sales price of $4.46 per share of the Registrant’s common stock as reported on The NASDAQ® National Market on June 30, 2003.

     As of March 11, 2004, approximately 33,930,333 shares of common stock of the Registrant were issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

     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, 2003 are incorporated by reference into Part III.

TABLE OF CONTENTS

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FORWARD LOOKING STATEMENTS

      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.

      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.

PART I

Item 1.     Business.

Overview

      Guilford is a pharmaceutical company engaged in the research, development and commercialization of proprietary pharmaceutical products that target the hospital and neurology markets. We market and sell proprietary pharmaceutical products within our targeted markets, conduct clinical research to expand the labeled indications for our marketed products, and develop new product candidates. We also collaborate with other pharmaceutical companies to support the sales and marketing of our products and the clinical development of our products and product candidates.

      During 2003, as part of our effort to implement our strategy, we were successful in expanding the approved uses of GLIADEL® Wafer to include use at the time of initial surgery for malignant glioma, acquired AGGRASTAT® Injection, a hospital-based, anti-platelet aggregation medication from Merck & Co., Inc., completed Phase II clinical trials for our AQUAVAN® Injection product candidate in conscious sedation and initiated a Phase II clinical trial of GPI 1485, our product candidate for Parkinson’s disease and peripheral nerve injury, for treatment of post-prostatectomy erectile dysfunction. We supported these activities, in part, through a number of capital raising activities, including the completion during the second and third quarters of 2003, of a $69.4 million convertible debt offering, a $42 million revenue interest agreement with Paul Royalty Fund, L.P. and Paul Royalty Fund II, L.P., and a $27.3 million private placement of our common stock to certain institutional investors.

      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.

Marketed Products

      We currently have two marketed products: GLIADEL® Wafer and AGGRASTAT® Injection. GLIADEL® Wafer provides targeted, site specific chemotherapy for the treatment of malignant glioma at the

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      The following table summarizes our marketed products:

(1)	“Marketed” means that a product is being sold and marketed under applicable regulatory approval.
(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 because we were waiting for the FDA to respond to a similar application filed in the United States. In February 2003, the FDA responded favorably to our application and, therefore, we resubmitted this application to the EMEA during September 2003, and we expect to be notified of the EMEA’s decision regarding expanding the label for GLIADEL® Wafer during 2004.

Product Candidates

      Our product pipeline consists of product candidates in various stages of clinical and preclinical development. AQUAVAN® Injection, a prodrug of propofol, is in Phase II clinical trials for procedural sedation during brief diagnostic or therapeutic procedures. GPI 1485, our lead neuroimmunophilin ligand compound, is in Phase II clinical trials for the treatment of Parkinson’s disease and peripheral nerve injury. DOPASCAN® Injection is in Phase III clinical trials as an imaging agent to diagnose and monitor the progression of Parkinson’s disease. Our preclinical research programs include the development of NAALADase inhibitor compounds, through our corporate partner, Pfizer, Inc., for neuropathic pain, and on our own for prostate cancer, drug addiction and traumatic brain and spinal cord injury and the development of PARP inhibitor compounds for cancer chemosensitization and radiosensitization.

      The following table summarizes our clinical development programs for our products and product candidates:

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(1)	“Clinical Development” means that the product is being used in clinical trials.
(2)	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 during 2004. Daiichi Radioisotope Laboratories, Ltd., or DRL, our corporate partner in Japan for this technology, has informed us that it applied for marketing approval in Japan with the Japanese Health Authority in 2003, and it expects this agency to respond to its application during 2004.
(3)	Currently, AGGRASTAT® Injection does not have a label indication for immediate use in a cardiac catheterization laboratory in percutaneous coronary intervention, or PCI, settings. In order to expand AGGRASTAT® Injection’s label to include PCI, we expect to initiate a Phase III clinical trial of AGGRASTAT® Injection in the PCI setting in 2004.

      The following table summarizes our key research programs:

(1)	“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.

Marketed Products

GLIADEL® Wafer

     General

      GLIADEL® Wafer is a proprietary cancer chemotherapy product approved for the treatment of malignant glioma (brain cancer) at the time of initial surgery, as an adjunct to surgery and radiation, and for the treatment of recurrent glioblastoma multiforme, a rapidly fatal form of malignant brain cancer. It is a biodegradable polymer containing BCNU (carmustine), a cancer chemotherapeutic drug, and is designed to provide targeted, site specific chemotherapy. We estimate that there are 11,000 cases of malignant glioma in the United States each year. After a surgeon resects a brain tumor, up to eight wafers are implanted in the cavity that remains. Once implanted, the wafers gradually dissolve, delivering high concentrations of BCNU directly to the tumor site for an extended period of time. By inserting the wafer directly at the site of the tumor, the physician can minimize exposure to BCNU throughout the body and reduce or alleviate many of the side effects associated with intravenous chemotherapy.

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      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. 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). Between 1996 and October 2000, Aventis obtained regulatory approval for GLIADEL® Wafer for this 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.

      In April 2001, we submitted a supplemental New Drug Application (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 agreed with the FDA on the protocol and methods for collecting and analyzing long-term follow up data for the purpose of reapplying for a first surgery approval. On September 19, 2002, we presented the results of this analysis to the FDA. On February 25, 2003, the FDA approved our amended sNDA.

      We pay a royalty to Massachusetts Institute of Technology (MIT) on sales of GLIADEL® Wafer pursuant to the license agreement under which we acquired the underlying technology for the product. During 2003, we recognized approximately $0.8 million in royalty expense to MIT.

     Manufacturing and Raw Materials

      We currently manufacture GLIADEL® Wafer using a proprietary process at our 18,000 square foot facility in Baltimore, Maryland, which includes areas designated for packaging, quality assurance, laboratory and warehousing. This facility was initially inspected by the FDA in October 1995, and it 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. We have a second clean room facility, which we expect would allow us to increase our GLIADEL® Wafer manufacturing capacity to 20,000 treatments annually. We are currently manufacturing GLIADEL® Wafer at 15% of capacity per year; and therefore, we believe that our capacity to manufacture GLIADEL® Wafer will satisfy patient demand for the product.

      We believe that the various materials used in GLIADEL® Wafer are readily available and will continue to be available at reasonable prices. We have an adequate supply of BCNU, the active chemotherapeutic ingredient in GLIADEL® Wafer, to meet our expected demand for the product. Nevertheless, failure of any supplier to provide sufficient quantities of raw material for GLIADEL® Wafer in accordance with the FDA’s current Good Manufacturing Practice (cGMP) regulations could cause delays in our ability to sell the product.

     AGGRASTAT® Injection

     General

      AGGRASTAT® Injection is a glycoprotein GP IIb/ IIIa receptor antagonist, indicated for the treatment of acute coronary syndrome (ACS) including patients who are to be medically managed and those undergoing percutaneuous transluminal coronary angioplasty (PTCA) or atherectomy. ACS includes unstable angina, which is characterized by chest pain when one is at rest, and non-ST elevation myocardial infarction (NSTEMI). GP IIb/ IIIa receptor antagonists, including AGGRASTAT® Injection, block the ability of

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      AGGRASTAT® Injection was developed by Merck & Co., Inc. (Merck) and was approved by the FDA in May 1998. We acquired the rights to AGGRASTAT® Injection in the United States and its territories from Merck in October 2003, for $84 million plus certain royalty payments to Merck, based on our net sales of the product. We financed $42 million of the purchase price through a revenue interest agreement with Paul Royalty Fund, L.P. and Paul Royalty Fund, II, L.P. (collectively, PRF). Under this agreement, PRF provided us with $42 million and we will provide PRF with a percentage of our revenues of GLIADEL® Wafer, AGGRASTAT® Injection, and in certain circumstances, other products, until 2012. This revenue interest agreement is described in more detail in Item 7 of this annual report entitled, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

     Manufacturing and Raw Materials

      We have entered into an exclusive supply agreement with Merck for the manufacture and supply of the active pharmaceutical ingredient (API) of AGGRASTAT® Injection. AGGRASTAT® Injection finished product is sold in 100 ml and 250 ml pre-mixed bags and 50 ml vials. Merck has agreed to supply us with the finished product of AGGRASTAT® Injection, through its contract manufacturers, Baxter (for bags) until August 2007 and Ben Venue (for vials) and through the end of 2004, or earlier, if we negotiate direct contractual relationships with those manufacturers.

Commercial Operations

      Our commercial operations are comprised of 63 full time sales and marketing specialists, encompassing medical affairs, sales operations, sales training and marketing personnel. This function includes a 49 member United States field sales force, 3 marketing specialists, 5 medical affairs specialists, and 6 people dedicated to additional sales and marketing related functions. They are responsible for the direct sales and marketing of GLIADEL® Wafer and AGGRASTAT® Injection throughout the United States and the sales and marketing of GLIADEL® Wafer outside the United States, through a network of specialty pharmaceutical distributors. We established our commercial operations capabilities in connection with our reacquisition of commercial rights to GLIADEL® Wafer, during the fourth quarter of 2000 and the first quarter of 2001. In order to assist in the distribution of GLIADEL® Wafer in the United States, we engaged Cord Logistics Inc., in November 2000, to handle fulfillment of customer orders.

      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.

      Through our acquisition of AGGRASTAT® Injection, we have leveraged our commercial operations capabilities across two marketed products. We also expect our experience in commercial operations to benefit us when product candidates in our pipeline, such as AQUAVAN® Injection, are able to be marketed following FDA approval.

      In 2003, 2002 and 2001, sales of GLIADEL® Wafer generated revenues of $19.2 million, $14.5 million, and $20.4 million, respectively, which represented 70%, 99%, and 99% of our total revenues, respectively. Approximately 69% of our sales of GLIADEL® Wafer in 2002 and approximately 76% in 2003 were made to Specialty Pharmaceuticals Distribution (SPD), a division of Cardinal Health, Inc. (formerly known as National Specialty Services, Inc.) under a distribution agreement with SPD. Because we acquired AGGRASTAT® Injection in October 2003, we only generated revenues from this product for November and December 2003. For those two months, AGGRASTAT® Injection generated revenues of $2.5 million, representing 9% of our total revenues for 2003.

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Clinical Development Programs

     AQUAVAN® Injection

      AQUAVAN® Injection is a novel sedative/hypnotic. We are currently studying AQUAVAN® Injection for procedural sedation during brief diagnostic and therapeutic medical procedures. Procedural sedation is “mild to moderate” sedation in which patients are lethargic, but responsive to stimulation and are able to maintain their own airways. Procedural sedation is generally used in non-invasive procedures lasting under two hours, for example, various endoscopy procedures, cardiac procedures, biopsies, insertions or removals of lines, tubes or catheters and other minor surgical procedures.

      Our clinical trials with AQUAVAN® Injection have studied its use in connection with elective colonoscopy. In November 2003, we announced that we had completed a preliminary analysis from a Phase II, open label, multi-center adaptive dose ranging study of AQUAVAN® Injection, used in combination with fentanyl citrate, to provide mild sedation in healthy patients aged 18-60 undergoing elective colonoscopy. The analysis we submitted to the FDA suggests that AQUAVAN® Injection provides rapid onset and rapid recovery from sedation/anesthesia in a convenient dosing regimen and without serious adverse effects. We also conducted a confirmatory Phase II study of AQUAVAN® Injection to evaluate the fixed dose identified in our dose ranging study. Pending agreement with the FDA, we expect to begin a Phase III clinical trial program studying AQUAVAN® Injection for procedural sedation during 2004, in as many as four separate indications.

      We licensed the rights to AQUAVAN® Injection from ProQuest Pharmaceuticals Inc. (ProQuest) during the first quarter of 2000. AQUAVAN® Injection is a prodrug of a widely-used anesthetic, propofol. A prodrug is a compound that is converted in the body into an active drug. AQUAVAN® Injection, is water-soluble and converts to propofol in the body upon intravenous administration. As a result of the body’s conversion of AQUAVAN® Injection into propofol, low, therapeutically effective levels of propofol are released while avoiding the high levels of propofol seen after injection with the FDA approved propofol lipid emulsion. In addition, the administration of propofol lipid emulsion can cause other complications.

      Since we licensed AQUAVAN® Injection from ProQuest, we have also conducted four Phase I clinical studies in Europe in healthy volunteers, one Phase I clinical study in the United States and a Phase II clinical trial of AQUAVAN® Injection in patients undergoing coronary artery surgery. This second Phase II study, took place in Europe and was 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. We announced the results of this clinical trial in November 2003. These results suggest that AQUAVAN® Injection could be used to provide total intravenous anesthesia for complex medical and surgical procedures in high risk patients. There were no drug-related serious adverse events in either the AQUAVAN® Injection or DIPRIVAN® Injectable Emulsion treatment groups.

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

     GPI 1485/ Neuroimmunophilin Ligand Program

      GPI 1485 is our investigational new drug that belongs to a class of small molecule compounds called neuroimmunophilin ligands. It is orally administered and, in preclinical experiments, has been shown to repair and regenerate damaged nerves without affecting normal healthy nerves. GPI 1485 and other neuroimmunophilin ligands may have application in the treatment of a broad range of diseases and conditions, including Parkinson’s disease, spinal cord injury, brain trauma, and peripheral nerve injuries. We are currently studying GPI 1485 for use in connection with the treatment of Parkinson’s disease and post-prostatectomy erectile dysfunction, a condition caused by peripheral nerve injury at the time of surgery.

      Parkinson’s disease is a chronic, progressive degenerative disorder that affects over one million people in the United States. While the exact cause of the disease is not known, physicians have observed that patients with the disease experience a progressive deterioration of dopamine nerve cells located in a specific region of the brain. The loss of these nerve cells is believed to contribute to the symptoms of Parkinson’s disease, which

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      In November 2003, we announced that we had initiated a Phase II clinical trial with GPI 1485 for the treatment of post-prostatectomy erectile dysfunction (PPED). In PPED, sexual dysfunction occurs as a result of compression or stretch injury to nerve fibers that surround the prostate and which are responsible for trapping blood flow to sustain a penile erection. Unfortunately, a high proportion of men undergoing radical prostate surgery may experience side effects from their surgery including urinary incontinence and sexual dysfunction, which is frequently unresponsive to currently available drug therapies, including VIAGRA®. GPI 1485 represents a novel approach to the treatment of PPED by potentially promoting the protection and regeneration of peripheral nerves that may sustain injury during radical prostate surgery.

     History of Neuroimmunophilin Ligand Program

      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 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. After we regained the rights to this technology, we continued to analyze the results of Amgen’s Phase II trial and determined that the trial suggested that oral administration of GPI 1485 may retard the loss of dopamine transporters.

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

     DOPASCAN® Injection

      DOPASCAN® Injection is our product candidate for the diagnosis and monitoring of Parkinson’s disease to which we obtained exclusive patent rights from the Research Triangle Institute (RTI) in Research Triangle Park, North Carolina, where it was invented. DOPASCAN® Injection is administered intravenously in trace quantities and allows physicians to obtain images and measure the density of dopamine neurons in the brain. Dopamine neurons are highly concentrated in a specialized area of the brain. These neurons degenerate significantly in patients with Parkinson’s disease. Parkinson’s disease affects more than one million patients in the United States.

      We have entered into an agreement with Daiichi Radioisotope Laboratories, Ltd., or DRL, a leading Japanese radiopharmaceutical company, to develop and commercialize DOPASCAN® Injection in Japan, Korea and Taiwan. DRL has informed us that it completed a Phase III clinical trial with the product in July 2002, filed an application for regulatory approval in June 2003, with the Japanese Health Authority, and expects to be informed about the status of that application during 2004. In January 2002, we sublicensed European rights for the development and commercialization of DOPASCAN® Injection to MAP, a division of Schering AG located in Finland. 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 during 2004.

      In May 2002, we sublicensed DOPASCAN® Injection for research purposes 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. 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.

      We currently do not have a clinical development program for DOPASCAN® Injection in the United States; and therefore, do not expect to be applying to the FDA to market and sell DOPASCAN® Injection.

     AGGRASTAT® Injection

      In October 2003, we acquired rights to AGGRASTAT® Injection in the U.S. and its territories from Merck. Between 1999 and 2001 Merck conducted a Phase III clinical trial in order to obtain a label for immediate percutaneous coronary intervention in a cardiac catheterization laboratory, or PCI. In that trial, called TARGET, Merck attempted to show AGGRASTAT® Injection was not inferior to ReoPro (abciximab), the drug believed to be most effective in the PCI setting, but failed to do so. Based on several other trials that have been conducted since TARGET, it is now believed that the dose of AGGRASTAT® Injection used in TARGET was not sufficient. Based on these data, we plan to conduct a clinical study with AGGRASTAT® Injection using an appropriately higher dose, for the purpose of expanding the label to include use in the PCI setting. We expect to begin this trial by the third quarter of 2004.

Pre-Clinical and Research Programs

     NAALADase Inhibitor Compounds

      NAALADase, or N-Acetylated-Alpha-Linked-Acid-Dipeptidase, is a membrane-bound enzyme found 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

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      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 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 these second-generation compounds may permit a lower dose of these compounds to provide the same or greater therapeutic effect than higher dosages of less potent compounds, thereby reducing the potential for side effects.

      In May 2003, we entered into an agreement granting Pfizer the exclusive right to develop NAALADase inhibitors worldwide, for which Pfizer paid us $5 million upon the execution of the agreement, and was to pay us $10 million on or before March 31, 2004. If Pfizer does not pay the additional $10 million by that date, we may elect to have all rights to the NAALADase inhibitor technology revert to us. Under the terms of the agreement, Pfizer is to conduct and pay for all costs associated with research, development, manufacturing and commercialization of any products that may emerge from the agreement. As part of the agreement, we would be eligible to receive royalties on future product sales and milestone payments related to the successful development and commercialization of a NAALADase inhibitor. The schedule of milestone payments under the agreement outlines a total of $42 million to be paid for each compound developed through commercialization, as well as one additional set of milestone payments totaling $20 million for an additional indication for the same compound, if Pfizer continues the development and commercialization of any compounds under the agreement. We are currently discussing with Pfizer the status of the collaboration, including whether they will make the $10 million payment under our agreement, or whether there are other mutually agreeable terms and conditions under which we would agree to continue the collaboration.

      Under the terms of the agreement, we retained the right to continue the development of NAALADase inhibitors for prostate cancer, head and spinal cord injury and drug addiction. We are currently pursuing the development of GPI 5693 for prostate cancer and drug addiction.

      We have 38 U.S. patents and corresponding foreign counterparts protecting our NAALADase technology.

     PARP Inhibitor Compounds

      Poly(ADP-ribose) polymerase, or PARP, is an abundant nuclear enzyme found in most eukaryotic tissues. Upon activation by DNA damage, PARP synthesizes poly(ADP-ribose) from nicotinamide adenine dinucleotide (NAD). As a component of the DNA base excision repair system, PARP plays a major role in facilitating DNA repair and maintaining genomic integrity. In cancer treatment, high PARP activity is believed to enable tumor cells to counteract the chemotherapy and radiation therapy by repairing DNA damage. In animal testing, PARP inhibition enhances the activity of radiotherapy, as well as a wide spectrum of chemotherapeutic agents. In ischemia, over-activation of PARP mediates necrosis by depleting NAD and ATP. In animal testing, PARP inhibition provides neuroprotection in stroke and myocardial ischemia models.

      Our scientists have synthesized several families of potent orally bioavailable small molecule PARP inhibitors that are efficacious in rodent models of cancer and ischemia. Our lead compound, GPI 15427, is highly brain penetrable and has shown robust chemo- and radio-sensitization in several brain cancer and ischemia models. We are currently conducting preclinical toxicology and pharmacokinetic characterization of GPI 15427 for clinical development.

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     Neuroimmunophilin ligands and other neurotrophic and cytoprotective small molecules

      In September 2003, the NIH awarded a $5.5 million four-year program project grant to the Johns Hopkins University and us to study the effects of GPI 1485 in HIV neuropathy and dementia. These studies include cell culture neurotoxicity assays, animal experiments, and culminate in a human clinical study, which we expect will begin in 2005. Additional GPI 1485 preclinical studies including protection from sensorineural hearing loss, stimulation of hair growth, and neuroprotective and neuroregenerative mechanistic studies are ongoing.

      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 and heart ischemia, age-related macular degeneration, HIV and multiple sclerosis.

     Exploratory Research

      We have several promising early stage programs in the neuroprotection and cancer therapeutic areas. Our scientists are pursuing two strategies for inhibition of neuronal death in neurodegenerative diseases. One strategy targets enzymes, such as serine racemase, involved in regulating the activity of the neurotransmitter glutamic acid. Glutamate is a major neurotransmitter in the nervous system, but is neurotoxic in excessive amounts, and elevated levels of glutamate have been implicated in a variety of nervous system disease states. In a second approach, our scientists are developing compounds that inhibit cell death caused by signals from the mitochondria in cells. Mitochondria are the “batteries” that produce energy in the form of ATP in cells, and are important mediators of neuronal death in neurodegenerative diseases. Our scientists have discovered novel series of potent compounds that inhibit mitochondrial death signaling, and are pursuing the development of drug-like small molecules based on these discoveries. In the cancer area, we have discovered novel compounds that modulate the activity of the protein p53, a major protector of cells against cancer. By increasing p53 activity, these compounds inhibit cancer cell growth in a variety of cancer cell lines. Our scientists are also engaged in structure-based drug design targeting a class of proteins called molecular chaperones whose activity is increased in cancer cells.

Reorganization

      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. 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.

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

Government Regulation and Product Testing

      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,

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      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.

     Full Clinical Testing Requirements

      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

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      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 median FDA approval time for an NDA is currently about 15 months for new drugs, 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.

      The full NDA process for newly marketed non-biological drugs, such as GPI 1485, NAALADase Inhibitors and AQUAVAN® Injection 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.

     Other Regulation

      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.

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      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.

      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.

Intellectual Property Rights

      As of December 31, 2003, we owned or had licensed rights to more than 160 U.S. patents and more than 150 foreign patents. In addition, we owned or had licensed more than 600 pending applications worldwide. We also own registered trademarks to AGGRASTAT®, AQUAVAN®, DOPASCAN®, GLIADEL® and PACLIMER®. The following charts identify the number of patents and patent applications that protect or relate to our marketed products, product candidates and key research programs, and whether those patents or patent applications are issued (or filed) in the United States or internationally.

                    United States Patent Portfolio

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                    International Patent Portfolio

      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 any of our patents will provide us with any competitive advantages. In addition, any existing or future patents or intellectual property owned by us may be challenged, invalidated or circumvented by others.

      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.

     Technology Licensing Agreements

      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

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      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 described below.

      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

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      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 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.

     United States Government Rights

      Aspects of the technology licensed by us under agreements with third party licensors may be subject to certain government rights (sometimes referred to as “march-in 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.

Competition

      We compete with other pharmaceutical companies to provide pharmaceutical products to the hospital and neurology markets. 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.

      There are two other GP IIb/IIIa inhibitors that compete with AGGRASTAT® Injection: INTEGRELIN® Injection; and ReoPro®. ReoPro®, which is marketed by Eli Lilly, was the first to come to market and is used predominantly at the time of percuteaneous coronary intervention (PCI). Currently, ReoPro has about a 30% dollar share of the IIb/IIIa market. INTEGRELIN® Injection, which is marketed through a co-promotion between Millennium and Schering, has a broader indication than ReoPro® allowing the product to

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      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.

      The anesthesia/ sedation field is concentrated in the United States mainly among four major companies (Baxter International Inc., Abbott Laboratories, AstraZeneca PLC, and Jones Pharma Inc.), 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 pain, including post-surgical pain. Additionally, other companies are engaged in the development of improved formulations of paclitaxel.

      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.

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Research and Development Expenses

      Our research and development expenses were $33.6 million, $46.1 million, and $54.3 million for the years ended December 31, 2003, 2002 and 2001, respectively. These expenses were divided between our research and development platforms in the following manner: