PRAECIS PHARMACEUTICALS INC - 10-K Annual Report

PRAECIS PHARMACEUTICALS INCORPORATED
(Exact name of registrant as specified in its charter)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) 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. ý

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

The aggregate market value of voting and non-voting stock held by non-affiliates of the registrant, based upon the last sale price of the common stock, par value $.01 per share, reported on The Nasdaq National Market on June 30, 2004, was $189,077,428.

The number of shares of common stock, par value $.01 per share, outstanding as of February 28, 2005 was 52,423,101.

Specified portions of the definitive Proxy Statement with respect to the registrant's 2005 Annual Meeting of Stockholders to be filed by the registrant with the Securities and Exchange Commission are incorporated by reference into Part III of this Annual Report on Form 10-K.

The Company's prospects are subject to certain uncertainties and risks. This Annual Report on Form 10-K also contains certain forward-looking statements within the meaning of the federal securities laws. The Company's future results may differ materially from its current results and actual results could differ materially from those projected in the forward-looking statements as a result of certain risk factors. READERS SHOULD PAY PARTICULAR ATTENTION TO THE CONSIDERATIONS DESCRIBED IN THE SECTION OF THIS REPORT ENTITLED "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS—RISK FACTORS THAT MAY AFFECT FUTURE RESULTS." Readers should also carefully review the risk factors described in the other documents the Company files from time to time with the Securities and Exchange Commission.

		Page
Part I
Item 1.	Business	1
Item 2.	Properties	17
Item 3.	Legal Proceedings	18
Item 4.	Submission of Matters to a Vote of Security Holders	18
Part II
Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	19
Item 6.	Selected Financial Data	20
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	21
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	48
Item 8.	Financial Statements and Supplementary Data	49
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	49
Item 9A.	Controls and Procedures	49
Item 9B.	Other Information	51
Part III
Item 10.	Directors and Executive Officers of the Registrant	52
Item 11.	Executive Compensation	52
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	52
Item 13.	Certain Relationships and Related Transactions	52
Item 14.	Principal Accountant Fees and Services	52
Part IV
Item 15.	Exhibits, Financial Statement Schedules	53
	Signatures	57
	Index to Financial Statements	F-1

We are a biopharmaceutical company focused on the discovery, development and commercialization of innovative therapies that either address unmet medical needs or offer improvements over existing therapies. In early 2004, we launched in the United States our first product, Plenaxis® (abarelix for injectable suspension) for the palliative treatment of men with advanced symptomatic prostate cancer for whom other hormonal therapies are not appropriate, who have refused surgical castration and who are experiencing one or more of a specific set of symptoms. We are promoting Plenaxis in the United States through our own marketing and sales team. We have submitted a marketing authorization application for Plenaxis in Germany. This application is pending with the German regulatory authorities, and there may be regulatory action on the application in the second quarter of 2005 that will enable us and our partner, Schering AG, to determine whether, and for what patient population, Plenaxis will be approved and made commercially available in Germany. Assuming favorable action by the German regulatory authorities, we plan to seek, in collaboration with Schering AG, additional European Union member state approvals through the Mutual Recognition Procedure. Our research and development pipeline includes clinical programs in Alzheimer's disease, non-Hodgkin's lymphoma and androgen-independent prostate cancer, as well as early stage discovery projects. During 2004, we made significant progress on the development of our Direct Select technology platform. Direct Select offers significant enhancements over our proprietary drug discovery technology called Ligand Evolution to Active Pharmaceuticals, or LEAP. Direct Select should allow us to generate vast pharmaceutical libraries and more rapidly and directly identify lead compounds with high affinity and specificity, and will serve as the foundation for future drug development projects.

We were incorporated in Delaware in July 1993 under the name Pharmaceutical Peptides, Inc. In June 1997, we changed our name to PRAECIS PHARMACEUTICALS INCORPORATED. Our corporate headquarters and research facility is located in Waltham, Massachusetts. We conduct our business in one business segment. For the years ended December 31, 2002 and 2004, substantially all of our revenue was generated in the United States. We did not have any revenue for the year ended December 31, 2003. Long-lived assets consist primarily of property and equipment and are located solely in the United States for all periods presented.

Plenaxis® and PRAECIS® are registered trademarks of our company. Apan™, LEAP™, Direct Select™, Rel-Ease™ and the PLUS™ Program are trademarks or trade names of our Company. This Annual Report on Form 10-K also contains trademarks, trade names and service marks of other companies, including but not limited to Casodex®, Eligard®, Lupron Depot®, Viadur® and Zoladex®, all of which are the property of their respective owners.

Our business objective is to discover, in a rapid and efficient manner using our Direct Select and other proprietary technologies, develop and commercialize drugs that either address unmet medical needs or offer improvements over existing therapies. We are currently promoting in the United States our first approved product, Plenaxis. In addition, we have two other compounds in clinical testing, as well as various research and technology programs. Key elements of our strategy to achieve our business objective are:

We have outlined below the status of our commercial, research and development programs, along with the clinical indications they address, where applicable:

Successful research and development in the biotechnology industry is highly uncertain, and very few research and development programs yield a commercial product. Product candidates that appear promising in the early phases of research and development may fail to reach the clinic for a number of reasons. We evaluate on a regular basis the progress of our research and development programs to determine if our resources and personnel are allocated appropriately and our programs are progressing on a reasonable timeline and demonstrating favorable results. During 2004, we decided to reallocate resources and personnel from our programs relating to the androgen receptor antagonist and certain antiviral therapies to other research and development programs. In addition, as previously reported, we determined not to pursue further development of our endometriosis diagnostic test. As a result of our decision regarding the endometriosis diagnostic, we also determined not to continue to allocate resources or personnel to the further development of our Biomarker discovery platform.

We have spent substantial funds over the past three years to develop Plenaxis and our other drug candidates and expect to continue to do so in the future. We spent approximately $56.4 million in 2002, $41.8 million in 2003 and $31.5 million in 2004 on research and development activities.

In November 2003, we received FDA approval to market our first product, Plenaxis (abarelix for injectable suspension) in the United States. Plenaxis is the first gonadotropin releasing hormone (GnRH) antagonist approved for use in prostate cancer patients as a depot formulation. Plenaxis is indicated for the palliative treatment of men with advanced symptomatic prostate cancer, in whom LHRH agonist therapy is not appropriate and who refuse surgical castration, and have one or more of the following: (1) risk of neurological compromise due to metastases, (2) ureteral or bladder outlet obstruction due to local encroachment or metastatic disease, or (3) severe bone pain from skeletal metastases persisting on narcotic analgesia. Plenaxis is not indicated for use in women or children. For safety reasons, Plenaxis is approved with marketing restrictions under 21 CFR 314, Subpart H, and is available only to physicians who enroll in the PLUS (Plenaxis User Safety) Program. Full prescribing information for Plenaxis is available at www.plenaxis.com.

In January 2004, we began shipping Plenaxis to our authorized distributors. We are promoting Plenaxis to physicians, primarily urologists and, to a lesser extent, oncologists, through our own dedicated marketing and sales team. Substantially all of our revenues during 2004 were derived from sales of Plenaxis. Since the initial launch of Plenaxis, we have faced many challenges that have had an adverse impact on the uptake of the product in the market. These challenges have included the need to establish more effective messaging to educate physicians about the product's indication and to differentiate the appropriate patient population, overcome physician uncertainty and concerns over reimbursement, reposition our marketing campaign, strengthen and focus our sales force, and hire representatives for open territories. Sales of Plenaxis during 2004 were significantly lower than expected. We continue to believe that Plenaxis is an important therapy for patients in the indicated population who have limited treatment options available. However, we cannot assure investors that we will be able to successfully commercialize Plenaxis in the United States.

Background. Prostate cancer is one of the most commonly diagnosed cancers in men. The American Cancer Society estimates that approximately 232,000 new diagnoses of, and 30,000 deaths from, prostate cancer will occur in the United States in 2005. At the time of approval, the FDA estimated that approximately 5-10% of men with prostate cancer would be candidates for Plenaxis.

Most prostate cancer cells require hormones, specifically testosterone and its derivatives, for growth. These hormones stimulate the growth of the cancerous cells. Available treatments for prostate cancer patients include hormonal therapies, radiation therapy and surgery. The primary goal of hormonal therapy is to reduce testosterone to low, or castrate, levels, leading to inhibition of prostate cancer cell growth.

Currently available hormonal therapies, known as LHRH agonists, act by overstimulating the GnRH receptor. This overstimulation causes the GnRH receptor to become non-responsive after approximately three weeks. However, this overstimulation first leads to increased production of two hormones, luteinizing hormone, or LH, and follicle stimulating hormone, or FSH. The increased level of LH causes an initial surge of testosterone from the testes. The temporary surge in hormone levels may result in an exacerbation of symptoms, or clinical flare, in some patients. In an attempt to mitigate the flare, physicians may prescribe additional drugs known as anti-androgens. This additional therapy may be only partially effective in reducing some of the undesirable effects of the flare. Only after several weeks following administration of these hormonal therapies does the GnRH receptor become non-responsive and the desired reduction of hormone levels occur. In contrast, Plenaxis has a blocking, or antagonist, effect on the GnRH receptor. Clinical studies have demonstrated that Plenaxis directly reduces levels of testosterone with no initial surge.

For some advanced symptomatic prostate cancer patients, whose disease has progressed, the use of LHRH agonists may not be appropriate because the initial testosterone surge may lead to an exacerbation of symptoms, which could include urinary blockage, worsening pain, kidney failure, paralysis and nerve damage due to spinal cord compression, or, in rare instances, death. LHRH agonists, such as Lupron Depot, marketed by TAP Pharmaceutical Products Inc., and Zoladex, marketed by AstraZeneca Pharmaceuticals L.P., have precautionary labeling about the hormone-induced flare and resulting worsening of clinical symptoms in some patients. For these patients, removal of the testes, known as surgical castration or orchiectomy, may be the only treatment option available to rapidly reduce testosterone levels and avoid the testosterone surge, and this option is not always an acceptable one for the patient. Plenaxis offers the first non-surgical alternative approved for these patients.

Plenaxis User Safety Program. As an element of the FDA's approval of Plenaxis, we are marketing Plenaxis under a comprehensive risk management program developed with the FDA to ensure that patients and physicians are fully informed about the risks and benefits of Plenaxis before using it. The PLUS Program includes, among other elements: product labeling regarding the risk of immediate-onset systemic allergic reactions and the decreased effectiveness of Plenaxis in suppressing serum testosterone to castrate levels with continued dosing in some patients; agreements for physicians and hospital

pharmacists which must be signed in order to purchase the drug; a patient information form which patients sign, indicating that they are informed about the risks and benefits of the drug; an expanded adverse events reporting program that includes immediate-onset systemic allergic reactions; several post-approval, or phase 4, studies; and measures to actively monitor and evaluate the program.

Medicare Coverage. Due to the average patient age at the time of diagnosis and treatment, a substantial majority of Plenaxis patients are likely to be Medicare beneficiaries. In December 2004, we announced that the Centers for Medicare and Medicaid Services, or CMS, had issued a draft decision memorandum in support of a National Coverage Determination, or NCD, for Plenaxis. NCDs are issued by the Secretary of Health and Human Services for a particular item or service if the Secretary determines that Medicare coverage for the item or service should be defined on a nationwide basis. CMS has proposed Medicare coverage for Plenaxis under the following conditions: the product must be administered to a patient meeting all of the criteria of the labeled indication; and the prescribing physician must be enrolled in the PLUS Program. When used in accordance with the product's labeling, there would be no limitation on coverage regardless of the duration of Plenaxis therapy. Without this comprehensive NCD, Plenaxis could receive inconsistent coverage among the Medicare carriers and intermediaries who may fail to distinguish the drug from LHRH agonists. We expect that the draft decision memorandum will become effective by the end of March 2005, although CMS may modify it based on comments it received during the open comment period.

Federal legislation, enacted in December 2003, has altered the way in which physician-administered drugs covered by Medicare are reimbursed, generally leading to lower reimbursement levels. Medicare reimbursement for Plenaxis, as well as for other hormonal therapies for prostate cancer, was reduced by the cuts implemented January 1, 2005 (which entailed a new reimbursement methodology based on a product's "average sales price" or "ASP" rather than the "average wholesale price" methodology previously utilized). Effective January 1, 2005, Plenaxis will be reimbursed at 106% of its ASP. In December 2004, CMS published the ASP for Plenaxis to be in effect for the first quarter of 2005. This ASP will remain in effect for one quarter and will be updated quarterly thereafter. Because physicians will receive a lower rate of reimbursement for Plenaxis, it is possible that some physicians may alter practice patterns and/or refer Medicare patients to hospital outpatient settings rather than continue to treat patients in-office and it is unclear at this time how such a shift in the marketplace dynamic might affect sales of Plenaxis.

European Regulatory Status. In June 2003, we initiated the regulatory submission process in the European Union seeking approval to market Plenaxis for the hormonal management of prostate cancer where androgen suppression is appropriate. We submitted a marketing authorization application, or MAA, in Germany comprised of comprehensive safety and efficacy data utilized to obtain approval in the United States. This application is pending with the German regulatory authorities, and there may be regulatory action on the application in the second quarter of 2005 that will enable us and our partner, Schering AG, to determine whether, and for what patient population, Plenaxis will be approved and made commercially available in Germany. Assuming favorable action by the German regulatory authorities, we plan to seek, in collaboration with Schering AG, additional European Union member state approvals through the Mutual Recognition Procedure. However, we cannot assure investors whether or when such regulatory action on our MAA will occur, or that any such action will enable or result in the successful commercialization of Plenaxis in Germany or in any other country in the European Union.

During 2004, we entered into a license, supply and distribution agreement with Schering AG, under which we granted exclusive rights to Schering AG to commercialize Plenaxis in the field of prostate cancer in Europe, Russia, the Middle East, South Africa, Australia and New Zealand. This agreement is described more fully below under the heading "License Agreements—Schering AG."

Other Territories. We also are continuing to evaluate potential licensing opportunities for the development and commercialization of Plenaxis in Japan and other ex-U.S. territories not covered by the Schering AG agreement. We expect to actively pursue such opportunities following approval in Germany. It is likely that the Japanese regulatory authorities will require clinical trials to be conducted in Japanese men prior to a filing for marketing approval in Japan. Other foreign regulatory authorities may also require additional clinical studies. We cannot assure investors that we will be successful in obtaining regulatory approval in any region outside of the United States for the commercialization of Plenaxis for the treatment of any portion of the prostate cancer patient population or for any other indication, or that we will be able to enter into additional collaboration agreements on favorable terms, or at all.

In addition to our clinical studies in hormonally responsive advanced prostate cancer, a small, investigator-sponsored clinical study was previously conducted in which the effects of using Plenaxis to treat androgen-independent prostate cancer were evaluated. In this disease, the prostate cancer cells no longer need testosterone to grow and, as a consequence, testosterone-lowering therapies are ineffective. The focus of this study was on the suppression of FSH by Plenaxis and the results of the study were encouraging. Accordingly, we initiated our own phase 1 study in May 2004 to evaluate the use of Plenaxis in approximately 22 subjects with androgen-independent prostate cancer who have progressed following treatment with an LHRH agonist.

We have also conducted clinical studies of Plenaxis for the treatment of endometriosis. We began this clinical program in 1998 and in March 2002 we completed a phase 2 study. Based upon the results of this study, during 2002 and 2003 we conducted an additional pharmacokinetic study to attempt to determine the appropriate dose and dosing schedule. We do not currently have any additional endometriosis studies planned and do not expect to conduct further studies without a corporate partner. Any additional clinical trials of Plenaxis for the treatment of endometriosis would also require concurrence by the FDA.

Plenaxis, in addition to its approved indication, may have potential use in treating other diseases or conditions that respond to the reduction of either testosterone, estrogen, LH or FSH. We intend to evaluate and support, when appropriate, small, investigator-sponsored studies in indications where there are unmet medical needs, and where we believe that the potential benefits of treatment with Plenaxis will outweigh the potential risks. Examples of these diseases or conditions may include other types of prostate cancer, gynecological cancers, benign prostatic hypertrophy, gonadal protection during high dose chemotherapy and immune-deficiency disorders. If these small studies yield encouraging results, we intend to work with the FDA to reach agreement on a clinical research program to obtain approval for the use of Plenaxis in these expanded indications in the future.

We are developing Apan for the treatment of Alzheimer's disease. Alzheimer's disease affects an estimated 4.5 million people in the United States, and is expected to become increasingly prevalent as the population ages, according to the Alzheimer's Association. Current therapies provide temporary relief for the symptoms of Alzheimer's disease in some patients, but do not affect the progression of the disease itself.

A hallmark of Alzheimer's disease is the accumulation of plaque-like deposits in brain tissue. A major component of this plaque is a small peptide called beta-amyloid. A large body of clinical, biochemical and genetic evidence suggests that the aggregation of beta-amyloid peptide may be the

underlying cause of Alzheimer's disease. This body of evidence has led to the theory that when single beta-amyloid molecules aggregate they become toxic to nerve cells, and that this toxicity leads to the development and progression of Alzheimer's disease. Alzheimer's disease, with the associated accumulation of beta-amyloid in the brain, may also involve a defect in the ability to clear excess beta-amyloid from the brain to the cerebrospinal fluid, or CSF. Both humans and transgenic mice with Alzheimer's disease-like plaques show increased levels of beta-amyloid in the brain and decreased levels in the CSF as the disease progresses.

Apan inhibits the aggregation of beta-amyloid in several preclinical models. Results of other preclinical studies suggest that Apan may reach the brain in quantities sufficient to block the aggregation of beta-amyloid molecules and, consequently, alter the course of the disease.

In March 2003, we completed a phase 1a dose escalation study of Apan in healthy volunteers. In this study, we evaluated the safety and pharmacokinetics of the compound and identified a maximum tolerated dose, or MTD, in healthy volunteers. Apan was detectable in the CSF after single dose administration to healthy volunteers.

We are currently enrolling Alzheimer's patients in a phase 1/2a, multiple dose study of Apan, which is designed to provide additional safety data and will include certain cognitive analyses and brain-imaging techniques which may provide surrogate indications of therapeutic response. An ongoing phase 1b study, which is designed to determine the MTD of Apan in Alzheimer's patients, continues to take longer than originally anticipated due to the enrollment of cohorts at dose levels that are beyond the predicted MTD, which was based upon the phase 1a study, as well as slower than expected patient accrual.

In light of the significant anticipated development costs estimated for phase 2 and phase 3 studies, we will seek to partner the Apan clinical program with respect to further development activities beyond the current studies.

PPI-2458 is a novel, proprietary molecule that acts by irreversibly inhibiting the enzyme methionine aminopeptidase type 2, or MetAP-2. PPI-2458 is based on the fumagillin class of compounds. This class of compounds has been shown to prevent both the formation of new blood vessels (known as anti-angiogenesis) and abnormal cell growth, which contribute to the growth of aberrant tissues in diseases such as cancer and rheumatoid arthritis. The dose limiting toxicity associated with other fumagillin derivatives that have entered clinical trials has largely prevented their further development. In preclinical studies to date, PPI-2458 continues to demonstrate the potent activity of this class of compounds while displaying an improved toxicity profile.

In preclinical studies conducted separately by us and the National Cancer Institute, or NCI, using both in vitro and animal models, PPI-2458 demonstrated significant anti-tumor activity against certain types of cancer cell lines. We have developed a proprietary pharmacodynamic assay to assess the level of inhibition achieved by PPI-2458 of its target enzyme, MetAP-2. This assay is being utilized in our phase 1 program described below. Data from preclinical studies in the B16F10 xenograft mouse model, which is a commonly used cell line in cancer studies, showed that PPI-2458 significantly inhibited tumor growth and that the degree of growth inhibition was correlated to the level of MetAP-2 inhibition achieved by PPI-2458. The NCI has also presented its data on the anti-angiogenic activity of PPI-2458 and its in vivo efficacy in a variety of xenograft animal models of human cancer, which indicate that the activity of PPI-2458 compares favorably to that of another compound of this class known as TNP-470, which was in development at TAP Pharmaceutical Products Inc.

In December 2003, we initiated an open-label phase 1 dose escalation study of PPI-2458 in non-Hodgkin's lymphoma patients. Initial results collected from the first two patients enrolled in this study demonstrated that orally dosed PPI-2458 achieves inhibition of MetAP-2 peripheral blood cells in humans. In March 2004, the FDA placed this trial on clinical hold until questions relating to a

neuropathological finding observed in a three-month animal toxicology study were satisfactorily resolved. The results of this animal study were not available at the time that the clinical trial was initiated. In June 2004, we received clearance from the FDA, following its review of additional non-clinical data and our revised clinical plan, to resume clinical trials. In late 2004, we opened a new phase 1 clinical trial of PPI-2458 in non-Hodgkin's lymphoma patients and expect patient enrollment to begin during the first half of 2005. This trial is designed to assess the safety and tolerability of PPI-2458 as well as to identify an optimal pharmacological dose. We will utilize our proprietary assay to measure the inhibition of MetAP-2 achieved by PPI-2458. We are additionally evaluating the feasibility of expanding our clinical program to include patients with solid tumors.

In December 2003, we entered into a collaboration with the NCI's Division of Cancer Treatment and Diagnosis for the expansion of clinical development of PPI-2458 for the treatment of various forms of cancer. Under the collaboration agreement, we intend to work with the NCI to optimize the clinical development path for PPI-2458.

We also intend to continue to evaluate potential trials for PPI-2458 in autoimmune diseases, including rheumatoid arthritis. A hallmark of rheumatoid arthritis is the progressive destruction of articular joints and joint surfaces, characterized by the rapid, uncontrolled growth of the cells that line the joints, called synoviocytes. The synoviocytes, in turn, secrete a variety of chemicals that contribute to inflammation, tissue degradation and harmful new blood vessel formation. Data from preclinical studies published during 2004 demonstrate that PPI-2458 inhibits the growth of both human fibroblast-like synoviocytes derived from rheumatoid arthritis patients and human endothelial cells. Both cell types are thought to be important in the progression of joint destruction in rheumatoid arthritis patients. In addition, growth inhibition of these PPI-2458-sensitive cell types in rheumatoid arthritis has been shown in preclinical studies to be linked to MetAP-2 enzyme inhibition in a dose-dependent fashion. In a rodent model of rheumatoid arthritis, PPI-2458 also significantly lessened joint swelling at well-tolerated doses when administered therapeutically after the onset of chronic disease. We believe the mechanism of action of PPI-2458, its improved toxicity profile and the marked attenuation of chronic disease in the rodent arthritis model in vivo, may position this compound as a potential treatment for rheumatoid arthritis and other inflammatory and autoimmune disorders.

In light of the anticipated development costs associated with the PPI-2458 clinical program, we anticipate seeking a partner for this program as clinical development advances.

Our proprietary method for discovering drugs combines the power and diversity of biological selection to identify compounds with potentially favorable drug-like properties with an ability to enhance and optimize these compounds using medicinal chemistry. We call this process Ligand Evolution to Active Pharmaceuticals, or LEAP. We have several granted foreign patents, as well as pending patent applications in the United States and abroad, that cover the essential steps of the LEAP process.

As part of the ongoing evolution and enhancement of this discovery process, during 2004, we focused our research efforts on developing a novel technology platform which we call Direct Select. We have made significant progress on the development of Direct Select, including solving many of the technical challenges associated with creating and screening ultra-large advanced combinatorial chemistry libraries. We believe that Direct Select technology, through the creation of these vast libraries of drug-like molecules, will allow us to more rapidly and directly identify lead compounds with a higher affinity and specificity than has routinely been possible using traditional drug discovery methods or our existing LEAP technology. The enhanced capabilities of these libraries lie in their sheer size, up to 10,000 times the size of compound libraries typically used in the pharmaceutical industry. In pilot trials using Direct Select technology, 250 thousand member libraries were routinely prepared in less than two weeks. These libraries were characterized extensively by mass spectrometry and validated by the selection of novel compounds to defined targets. Our scientists next scaled the process to create multiple libraries

consisting of greater than 100 million molecules containing highly diverse structures. These larger Direct Select libraries are now being applied to the discovery of new orally available compounds directed at selected human disease targets. Construction of a much larger library incorporating additional diversity, scaffolds and drug-like properties is underway with expected completion in early 2005. We continue to develop new chemistries and chemical scaffolds to incorporate into libraries and anticipate producing numerous ultra-large libraries using our automated platform during 2005. We have filed United States and foreign patent applications covering the essential steps of the Direct Select process.

We intend to seek partnering opportunities with respect to our Direct Select discovery platform during 2005, and may also use this technology in identifying new compounds for internal development.

We developed Rel-Ease, our proprietary sustained release drug delivery technology, to allow for the delivery of drugs in a long-acting depot formulation. For example, using Rel-Ease technology, we are able to formulate Plenaxis in such a way that a physician needs to administer it to prostate cancer patients only once every four weeks (following the first month, in which a dose is given on day 15). Besides the obvious benefit of reducing the frequency of dosing for injectable drugs, less frequent injections of a drug in a sustained release formulation may also be more advantageous and desirable than oral administration, leading to improved patient compliance, added convenience and/or simplified reimbursement.

Rel-Ease, unlike many other sustained release injectable formulations, allows for high drug loads with minimal initial "burst" and uses aqueous processes which are compatible with biomolecules. Moreover, Rel-Ease uses readily available pharmaceutical grade raw materials, has a robust manufacturing process that readily scales to commercial quantities and has demonstrated its approvability with the FDA's approval of Plenaxis in November 2003. We have formulated a variety of molecules with Rel-Ease technology, including Plenaxis, other peptides and low molecular weight pharmaceuticals, and believe that Rel-Ease may be useful for formulating drugs in clinical development, as well as creating improved formulations and sustained release formulations of approved drugs. We hold patents that cover the general application of this technology for a broad range of peptide-based drugs.

In April 2004, we entered into a license, supply and distribution agreement with Schering AG under which we granted exclusive rights to Schering AG to commercialize Plenaxis in the field of prostate cancer in Europe, Russia, the Middle East, South Africa, Australia and New Zealand. The Schering AG agreement provides for a combination of upfront, regulatory approval and performance-based milestone payments, as well as a share of revenue through transfer price payments for drug product which will be supplied by us. The transfer price will vary based upon net sales of Plenaxis, as well as pricing and reimbursement levels, in the licensed territory. The milestone payments may total over time approximately $90.0 million, depending on Euro/U.S. Dollar conversion rates and the attainment of specified annual sales levels which the majority of the milestone payments are conditioned upon. The overall financial terms of the Schering AG agreement are intended, depending upon performance levels, to approximate an equal sharing of the net present value of Plenaxis for the prostate cancer indication in the licensed territory.

We received a $2.0 million signing payment from Schering AG during the second quarter of 2004, which we are recognizing into revenues over the remaining patent life of Plenaxis in Europe of approximately twelve years. We recognized approximately $0.1 million in revenues under the Schering AG agreement during 2004.

In October 1996, we entered into a license agreement with Indiana University Foundation. The license agreement was amended in June 1998, and Indiana University Foundation assigned it to Indiana University's Advanced Research and Technology Institute, Inc. Under the agreement, we have an exclusive worldwide license under patent applications, future patents and technology of Indiana University Foundation relating to GnRH antagonist compounds, including abarelix, which is the active ingredient of Plenaxis, and methods of use for abarelix. We have agreed to make performance-based payments of up to an additional $1.5 million, and to pay royalties on our net sales of products covered by the license, including Plenaxis. Through December 31, 2004, we had paid non-refundable fees, performance-based payments and royalties of approximately $3.1 million under this agreement. These amounts were recorded as expenses during the periods amounts were paid. The license agreement remains in effect until the last licensed patent expires, currently 2015. Expiration of the license will not preclude us from continuing to develop and market the licensed products and use the licensed technology, provided we obtain the consent of Advanced Research and Technology Institute to extend the license term past the expiration date. Advanced Research and Technology Institute may not unreasonably withhold its consent to our request for such an extension. We can terminate the agreement at any time upon 90 days notice. Advanced Research and Technology Institute may terminate upon 90 days notice if we materially breach the agreement or fail to make required payments.

We have established an internal infrastructure to support the marketing and sale of Plenaxis in the United States, including marketing and sales support professionals based at our headquarters in Waltham, Massachusetts. We have also established a nationwide network of 40 sales territories, supported by five regional managers. Our sales force promotes Plenaxis to physicians, primarily urologists and, to a lesser extent, oncologists, who are involved in the treatment of patients with advanced symptomatic prostate cancer, and educates physicians and hospital pharmacists about the PLUS Program and the risks and benefits of Plenaxis. In addition to marketing and sales personnel, we have hired a staff of medical science liaisons to engage in scientific exchange, help respond to medical and scientific questions from physicians and facilitate the participation of clinical sites in our phase 4 studies. To date, we have experienced significant turnover in both our sales management and field sales personnel. We believe that this turnover has had, and that the field sales personnel turnover will continue to have, an adverse impact on our ability to market and sell Plenaxis.

In the event that our MAA for Plenaxis is approved in Germany and other countries in the European Union, Plenaxis will be exclusively marketed and sold in those countries by Schering AG pursuant to the license, supply and distribution agreement described above.

We sell Plenaxis directly to a limited number of authorized specialty pharmaceutical distributors and pharmacies who, in turn, sell the product to physicians and hospital pharmacists enrolled in the PLUS Program. There are a relatively small number of specialty distributors and pharmacies that provide such services. From time to time, our distributors may increase or decrease the level of Plenaxis held in inventory which could adversely affect our operating results. For the year-ended December 31, 2004, sales to Oncology Therapeutics Network Joint Venture, L.P., McKesson Specialty Distribution Services, Priority Healthcare Corporation, ASD Specialty Healthcare, Inc. and Cardinal Health 108, Inc. represented approximately 39%, 18%, 16%, 16% and 10%, respectively, of our aggregate net product sales.

These specialty distributors and pharmacies must also distribute Plenaxis only to physicians and hospital pharmacists enrolled in the PLUS Program. There can be no assurance that these specialty

distributors and pharmacies will adequately provide their services to either the end users or to us or that we could find additional outlets to distribute Plenaxis.

Authorized distributors may return Plenaxis in its original container three months prior to, and six months after, the product expiration date, or if the product is damaged when received, the wrong quantity is shipped, or in connection with a product recall. Product shipped during 2004 had an initial approved shelf-life of 24 months with expiration dates of February 2005 and June 2006. At the end of 2004, the FDA approved an extension of the shelf life to 36 months which will be applied to all future commercial lots.

We currently provide substantially all of our distributors with payment terms of up to 120 days on purchases of Plenaxis. Through December 31, 2004, payments have generally been made in a timely manner.

We generally manufacture in-house the drug supply required to support our early preclinical studies. External contractors provide all of our later-stage preclinical, clinical and commercial supplies. We have long-term contracts for each stage of the commercial manufacturing process for Plenaxis.

We have a development and supply agreement with UCB S.A. under which UCB supplies us with commercial volumes of the active pharmaceutical ingredient, or API, for Plenaxis. The UCB agreement was assigned to us by Amgen Inc. effective as of December 17, 2001. In August 2004, we amended our agreement with UCB. Under the amendment, we have committed to purchase a specified quantity of API for delivery in 2005 (at a lower price than would otherwise be applicable under the agreement), for an aggregate purchase price of $3.9 million, $1.6 million of which was included in current liabilities as of December 31, 2004, with the remainder due upon the later of the delivery of the API and December 31, 2005. This API will be produced using quantities of materials in UCB's inventory purchased by UCB pursuant to forecasts submitted to UCB prior to 2001 under the terms of the UCB agreement.

In addition, we have committed to purchase the remaining materials referenced above for an aggregate purchase price of approximately $3.4 million. We are required to purchase a specified quantity of such materials each year beginning in 2006 and ending in 2009. UCB has granted us the option, in lieu of purchasing the remaining materials, to purchase each year, at the same reduced price as noted above, specified quantities of API produced using such materials. The option can be exercised in whole or in part. Materials purchased in one year can be utilized at a later date for the manufacture of API, and we will be credited the cost of such previously purchased materials. We made payments under the UCB Agreement of approximately $1.1 million during 2004.

We also have a supply agreement with Cambrex Charles City, Inc., formerly Salsbury Chemicals, Inc. Under this supply agreement, Cambrex has agreed to manufacture for us the commercial depot formulations of Plenaxis. We retain all rights in manufacturing technology developed in connection with this agreement. During 2004, we amended our supply agreement with Cambrex. Under the amendment, the term of the original agreement has been extended for an additional five years (through July 2010), with an option for us to further extend the term for up to an additional five years, subject to an agreed upon increase in price and in the minimum annual purchase commitment. As part of the amendment, we agreed to a minimum annual purchase commitment of $900,000 per year through 2010. We made payments under the Cambrex agreement of approximately $1.1 million during 2004.

In addition, we have a commercial supply agreement with Baxter Pharmaceutical Solutions LLC to supply Plenaxis in finished vials. Our minimum annual purchase commitment for 2005 and annually for the remainder of the term (through June 2007) is $650,000. We made payments under the Baxter agreement of approximately $1.0 million during 2004.

In order to meet potential increases in demand in connection with the commercialization of Plenaxis, or in the event of a disruption in supply resulting from a force majeure event, we continue to evaluate, as part of our strategic planning process, the possibility of a second source for certain stages of Plenaxis production. However, the number of qualified alternative suppliers is limited, and we cannot assure investors that we will be able to locate alternative suppliers or negotiate second supply agreements on reasonable terms. Furthermore, the process of engineering a new supplier's facility for the production of Plenaxis and obtaining the necessary FDA or foreign regulatory approval of the facility would require substantial lead-time and could be extremely costly. We cannot assure investors that we will not lose one or more of our suppliers, or that in such event we would be readily able to continue the commercialization and sale of Plenaxis or the further development of Plenaxis without substantial and costly delays.

Proprietary protection for our products, technology and processes is essential to our business. We seek proprietary protection predominantly in the form of patents on our products and the processes we use to discover them. With respect to a particular product, we generally seek patent protection on the compound itself, its commercial formulation, its range of applications and its production. Where possible, we also seek patent coverage that could prevent the marketing of, or restrict the commercial threat of, competitive products.

We currently hold 26 United States patents and exclusive licenses to three United States patents. These patents have expiration dates from 2015 through 2020. We also hold or have exclusive licenses to 100 granted foreign patents. In addition, we have filed or hold exclusive licenses to 34 United States utility and provisional patent applications, as well as 122 related foreign patent applications, including both Patent Cooperation Treaty filings and national filings.

In particular, we have or hold exclusive licenses to United States patents that cover both the active ingredient of Plenaxis, known as abarelix, as well as methods of use for abarelix for treating a variety of conditions, including prostate cancer, and the sustained release formulation enabling its once-per-month administration. These patents expire in 2015 and 2016. We also have patents covering the use of abarelix and certain specific uses of any other GnRH antagonist in various therapeutic settings, including in combination with surgery or radiation therapy. In addition, we have issued United States patents and pending United States patent applications covering Apan and PPI-2458, as well as various pending United States and foreign patent applications directed to the Direct Select technology platform. We intend to file additional United States and foreign patent applications, where appropriate, relating to new product discoveries, technologies or improvements.

We also rely on trade secrets, know-how and continuing technological advances to protect various aspects of our core technology. We require our employees, consultants and scientific collaborators to execute confidentiality and invention assignment agreements with us to maintain the confidentiality, and our ownership, of our trade secrets and proprietary information. These agreements generally provide that the employee, consultant or scientific collaborator will not disclose our confidential information to third parties, compete with us or solicit our employees during the course of their employment, consultancy or collaboration with us. These agreements also provide that inventions conceived by the employee, consultant or scientific collaborator in the course of working for us will be our exclusive property. Additionally, our employees agree, for one year following termination of their employment with us, not to solicit our other employees.

A biopharmaceutical company such as ours faces intense competition. Many companies, both public and private, including large pharmaceutical companies, chemical companies and biotechnology companies, develop products or technologies competitive with our products or technologies. Many of these companies have greater financial resources and more experience than we do in discovering and developing drugs, obtaining regulatory approvals, manufacturing and marketing. In addition, academic, government and industry-based research is intense, resulting in considerable competition in obtaining qualified research personnel, submitting patent filings for protection of intellectual property rights and establishing strategic corporate alliances.

Our product, Plenaxis, as well as each of our potential products in research or development, face or will face competition from other products. In addition, there are several companies with technology platforms that will compete with Direct Select. More specifically, Plenaxis, although approved in the United States only for the palliative treatment of men with advanced symptomatic prostate cancer for whom other hormonal therapies are not appropriate, who have refused surgical castration and who are experiencing one or more of a specific set of symptoms, will still compete to some extent with established or newly introduced products, including Lupron Depot, Zoladex, Casodex and other pharmaceuticals used by physicians for the treatment of hormonally responsive advanced prostate cancer in the United States and Europe. Many established products are available in long-acting formulations, including six and twelve-month implants, and one newly introduced treatment for prostate cancer is available as a nasal spray.

We are also aware of several other GnRH antagonists in phase 2 clinical trials for the treatment of prostate cancer, at least one of which may have a more favorable safety profile than Plenaxis. Several other companies are also conducting clinical trials of orally-active, small molecule GnRH antagonist compounds. In addition, Plenaxis and each of our product candidates will face increasing competition from generic formulations of existing drugs whose active components are no longer covered by patents. Specifically, we are aware of various formulations of leuprorelin, the active ingredient of Lupron Depot, including Viadur, marketed by Bayer Corporation as a 12-month hormone therapy implant, and Eligard, marketed by Atrix Laboratories, Inc. in one-, three-, four- and six-month depot formulations for the treatment of advanced prostate cancer.

We believe that the principal competitive factors affecting the market for Plenaxis are the safety and efficacy profile, physician and patient acceptance of the product, product features, including the dosing schedule, and pricing and reimbursement factors. We believe that Plenaxis should be adopted by practitioners and patients as an acceptable and competitive therapy for the subset of advanced symptomatic prostate cancer patients for which Plenaxis is indicated, although no assurance can be given in this regard.

The manufacture and marketing of pharmaceutical products and our ongoing research and development activities in the United States require the approval of numerous governmental authorities, including the FDA. We also must obtain similar approvals from comparable agencies in most foreign countries. The FDA has established mandatory procedures and safety standards which apply to preclinical testing and clinical trials, as well as to the manufacture, storage, distribution, marketing, sales, import and export of pharmaceutical products. State, local and other authorities also regulate pharmaceutical manufacturing and distribution facilities, among other things.

The pharmaceutical research, development and approval process in the United States is typically intensive, uncertain, lengthy and rigorous and can take many years, depending on the product under consideration. As an initial step in the FDA regulatory approval process, an applicant typically conducts preclinical studies in animals to assess a drug's pharmacological profile and to identify potential safety issues. An applicant must conduct specified preclinical laboratory and animal studies in compliance with the FDA's good laboratory practice regulations. Failure to follow these requirements can invalidate the

data, among other things. An applicant must submit the results of these studies to the FDA as part of an investigational new drug application, or IND, before initiating testing in humans. Proposed clinical testing can only begin if the FDA raises no objections to the IND. We can give no assurance that any submission of an IND to the FDA relating to our product candidates will result in the commencement of a clinical trial. The FDA may prevent studies from moving forward by imposing a clinical hold, and may suspend or terminate studies once initiated.

Clinical testing must meet requirements for institutional review board, or IRB, oversight and study subject informed consent, as well as FDA prior review, oversight and good clinical practice requirements. Independent IRBs are responsible for overseeing studies at particular sites and protecting human research study subjects. An IRB may prevent a study from beginning or suspend or terminate a study once initiated. Typically, clinical testing involves a three-phase process. Phase 1 clinical trials generally involve a small number of subjects and are designed to provide information about both product safety and the expected dose of the drug. Phase 2 clinical trials generally provide additional information on dosing and safety in a limited patient population. Generally, phase 2 trials may also provide preliminary evidence of product efficacy. Phase 3 clinical trials are large-scale, well-controlled studies. The goal of phase 3 clinical trials generally is to provide statistically valid proof of efficacy, as well as safety, in the target patient population to support marketing authorization. In order to seek approval to commence commercial sales, the company performing the preclinical testing and clinical trials of a pharmaceutical product then submits the results to the FDA in the form of a new drug application, or NDA, along with proposed labeling for the product and information about the manufacturing processes and facilities that will be used to ensure product quality. Each NDA submission requires a substantial user fee payment for which the FDA has committed generally to review and make a decision concerning approval within 10 months, and of a new "priority" drug within 6 months. However final FDA action on the NDA can take substantially longer and also may involve review and recommendations by an independent FDA advisory committee. Preparing NDA applications involves considerable data collection, verification, analysis and expense. In responding to an NDA, the FDA may conduct a pre-approval inspection of the relevant manufacturing facility or facilities to assess conformance to the current good manufacturing practice requirements and may also inspect sites of clinical investigators involved in the clinical development program to ensure their conformance to good clinical practices.

The FDA must grant approval of our products, which includes a review of the manufacturing processes and facilities used to produce these products, before we can market these products in the United States. The process of obtaining approvals from the FDA can be costly, time consuming and subject to unanticipated delays. The FDA may not approve an NDA, or may require revisions to the product labeling, require that additional studies be conducted prior to or as a condition of approval, or impose other limitations or conditions on product distribution, including, for example, adoption of a special risk management plan. If the FDA grants approval of a drug product, the approval will be limited to specific indications. Approval may also be withdrawn if new issues arise concerning a drug's safety or effectiveness.

The FDA has considerable discretion in determining whether to grant marketing approval for a drug, and may delay or deny approval even in circumstances where the applicant's clinical trials have proceeded in compliance with FDA procedures and regulations and have met the established end-points of the trials. Challenges to FDA determinations are generally time-consuming and costly, and rarely if ever succeed. In November 2003, we received FDA approval to market Plenaxis for the palliative treatment of men with advanced symptomatic prostate cancer for whom other hormonal therapies are not appropriate, who have refused surgical castration and who are experiencing one or more of a specific set of symptoms. We can give no assurance that we will obtain marketing approval for any of our other product candidates.

Now that we have received marketing approval for Plenaxis, we must comply with FDA requirements for manufacturing, labeling, advertising, record keeping and reporting of adverse experiences and other information. In addition, we must seek FDA approval for any significant changes

to the product, the manufacturing of the product, or the labeling. Drug advertising and promotion are subject to federal and state regulations. In the United States, the FDA regulates all company and product promotion, including direct-to-consumer advertising. The manufacture of a product after approval is also subject to comprehensive and continuing regulation. These regulations require the manufacture of products in specific approved facilities and in accordance with current good manufacturing practices, and the listing of products and registration of manufacturing establishments with the FDA. These regulations also impose certain organizational, procedural and documentation requirements with respect to manufacturing and quality assurance activities. All manufacturing facilities are subject to comprehensive, periodic inspections by the FDA.

In addition, Plenaxis has been approved under regulations concerning drugs with certain safety profiles, under which the FDA has established special restrictions to ensure safe use. Under these regulations, Plenaxis was approved with a comprehensive risk management program. This program includes educational outreach to patients and physicians regarding the risks and benefits of Plenaxis, restricted distribution of the product only to physicians enrolled in a prescribing registry, an expanded adverse events reporting program and auditing requirements to evaluate the effectiveness of the program. We are also required to conduct several phase 4 studies to evaluate the risk management program and the appropriate use of the drug in the indicated population. These regulations also give the FDA authority to pre-approve all promotional materials and permit an expedited market withdrawal procedure if issues arise regarding the safe use of Plenaxis.

Our manufacturing, sales, promotion, and other activities following product approval are subject to regulation by numerous regulatory authorities in addition to the FDA, including potentially the Federal Trade Commission, the Department of Justice and individual U.S. Attorney offices within the Department of Justice, CMS, other divisions of the Department of Health and Human Services, and state and local governments. Any distribution of pharmaceutical samples to physicians must comply with applicable rules, including the Prescription Drug Marketing Act. Our sales, marketing and scientific/educational programs must comply with the anti-kickback provisions of the Social Security Act, the False Claims Act, and similar state laws. Our pricing and rebate programs must comply with pricing and reimbursement rules, including the Medicaid rebate requirements of the Omnibus Budget Reconciliation Act of 1990 and the Veteran's Health Care Act. If products are made available to authorized users of the Federal Supply Schedule of the General Services Administration, additional laws and requirements apply. All of our activities are potentially subject to federal and state consumer protection and unfair competition laws.

Depending on the circumstances, failure to meet these applicable legal and regulatory requirements can result in criminal prosecution, fines or other penalties, injunctions, recall or seizure of products, total or partial suspension of production, denial or withdrawal of pre-marketing product approvals, private "qui tam" actions brought by individual whistleblowers in the name of the government, or refusal to allow us to enter into supply contracts, including government contracts. In addition, even if we comply with FDA and other requirements, new information regarding the safety or effectiveness of a product could lead FDA to modify or withdraw a product approval.

We also are subject to various laws and regulations relating to safe working conditions, laboratory and manufacturing practices, the experimental use of animals and the use and disposal of hazardous or potentially hazardous substances, including chemicals, micro-organisms and various radioactive compounds used in connection with our research and development activities. Although we believe that our safety procedures for handling and disposing of these materials comply with the standards prescribed by state and federal regulations, we cannot assure you that accidental contamination or injury from these materials will not occur. Compliance with laws and regulations relating to the protection of the environment has not had a material effect on our capital expenditures or our competitive position. However, we cannot accurately predict the extent of government regulation, and the cost and effect thereof on our competitive position, which might result from any legislative or administrative action.

Additionally, we will likely need to obtain approval of a product from comparable regulatory authorities in foreign countries prior to the commencement of marketing of the product in those countries. The approval procedure varies among countries, may involve additional testing and the time required may differ from that required for FDA approval. Under the current regulatory system in the European Union, marketing authorization applications may be submitted pursuant to a centralized, a decentralized or a national level process. The centralized procedure is mandatory for the approval of biotechnology products and high technology products and available at the applicant's option for other products. The centralized procedure provides for the grant of a single marketing authorization that is valid in all European Union member states. The decentralized procedure is available for all medicinal products that are not subject to the centralized procedure. The decentralized procedure provides for mutual recognition of national approval decisions, changes existing procedures for national approvals and establishes procedures for coordinated European Union actions on products, suspensions and withdrawals. Under this procedure, the holder of a national marketing authorization for which mutual recognition is sought may submit an application to one or more European Union member states, certify that the dossier is identical to that on which the first approval was based or explain any differences and certify that identical dossiers are being submitted to all member states for which recognition is sought. Within 90 days of receiving the application and assessment report, each European Union member state must decide whether to recognize approval. The procedure encourages member states to work with applicants and other regulatory authorities to resolve disputes concerning mutual recognition. Lack of objection of a given country within 90 days automatically results in approval of the European Union country. Following receipt of marketing authorization in a member state, we would then be required to engage in pricing discussions and negotiations with a separate prescription pricing authority in that country.

We are seeking European regulatory approval for the use of Plenaxis for hormonally responsive prostate cancer under the decentralized procedure and filed our first MAA in Germany in June 2003. That review is currently pending. We are relying primarily on third party contractors to assist us with our European regulatory filings for Plenaxis, as well as assistance from our corporate collaborator, Schering AG. However, although we have sought qualified experience and assistance in dealing with the foreign regulatory processes and interacting with foreign regulatory authorities, we cannot assure investors that we will be successful in filing for and obtaining the necessary governmental approvals for Plenaxis or any of our other product candidates in Europe or any other foreign country.

In many of the markets where we operate or intend to operate, the prices of pharmaceutical products are subject to direct price controls (by law) and to drug reimbursement programs with varying price control mechanisms.

In the United States, debate over the reform of the health care system has resulted in an increased focus on pricing. Although there are currently no direct government price controls over private sector purchases in the United States, federal legislation requires pharmaceutical manufacturers to pay prescribed rebates on certain drugs to enable them to be eligible for reimbursement under certain public health care programs. Various states have adopted mechanisms under Medicaid and otherwise that seek to control drug prices, including by disfavoring certain higher priced drugs and by seeking supplemental rebates from manufacturers. In the absence of new government regulation, managed care has become a potent force in the marketplace that increases downward pressure on the prices of pharmaceutical products. Federal legislation, enacted in December 2003, has altered the way in which physician-administered drugs covered by Medicare are reimbursed, generally leading to lower reimbursement levels. Due to the average patient age at the time of diagnosis and treatment, a substantial majority of Plenaxis patients are likely to be Medicare beneficiaries. Medicare reimbursement for Plenaxis, as well as for other hormonal therapies for prostate cancer, was reduced as a consequence of the new federal legislation as of January 1, 2005 (which entailed a new reimbursement methodology based on a product's "average sales price" or "ASP" rather than the

"average wholesale price" methodology previously utilized). Effective January 1, 2005, Plenaxis will be reimbursed at 106% of its ASP. Because physicians will receive a lower rate of reimbursement for Plenaxis, it is possible that some physicians may alter practice patterns and/or refer Medicare patients to hospital outpatient settings rather than continue to treat patients in-office and it is unclear at this time how such a shift in the marketplace dynamic might affect sales of Plenaxis.

This new legislation has also added an outpatient prescription drug benefit to Medicare, effective January 2006. In the interim, Congress has established a discount drug card program for Medicare beneficiaries. Both benefits will be provided primarily through private entities, which will attempt to negotiate price concessions from pharmaceutical manufacturers. While these negotiations may increase pricing pressures, it is also possible that the new Medicare prescription drug benefit may increase the volume of pharmaceutical drug purchases, offsetting, at least in part, potential price discounts. The new law specifically prohibits the United States government from interfering in price negotiations between manufacturers and Medicare drug plan sponsors, but CMS has indicated that it will review the discounts obtained by drug plan sponsors, and will influence pricing in other ways such as through the establishment of formulary design parameters. In addition, some members of Congress are still pursuing legislation that would permit the United States government to use its enormous purchasing power to demand discounts from pharmaceutical companies thereby creating de facto price controls on prescription drugs.

This focus on pricing has led to other adverse government action, and may lead to other action in the future. For example, in December 2003 federal legislation was enacted to change United States import laws and expand the ability to import lower priced versions of our and competing products from Canada, where there are government price controls. These changes to the import laws will not take effect unless and until the Secretary of Health and Human Services certifies that the changes will lead to substantial savings for consumers and will not create a public health safety issue. The prior Secretary of Health and Human Services determined that there was not a basis to make such a certification. However, it is possible that the current Secretary or a subsequent Secretary could make the certification in the future. In addition, legislative proposals have been made to implement the changes to the import laws without any certification, and to broaden permissible imports in other ways. Even if the changes to the import laws do not take effect, and other changes are not enacted, imports from Canada and elsewhere may increase due to market and political forces, and the limited enforcement resources of the FDA, the Customs Service, and other government agencies. For example, numerous states and localities have initiated or proposed programs to facilitate Canadian and other imports, notwithstanding questions raised by FDA about the legality of such actions. We expect that pressures on pricing and operating results will continue.

In the European Union, governments influence the price of pharmaceutical products through their pricing and reimbursement rules and control of national health care systems that fund a large part of the cost of such products to consumers. The approach taken varies from member state to member state. Some jurisdictions operate positive and/or negative list systems under which products may only be marketed once a reimbursement price has been agreed. Other member states allow companies to fix their own prices for medicines, but monitor and control company profits. The downward pressure on health care costs in general, particularly prescription drugs, has become intense. As a result, increasingly high barriers are being erected to the entry of new products, as exemplified by the National Institute for Clinical Excellence in the United Kingdom which evaluates the data supporting new medicines and provides reimbursement recommendations to the government. In addition, in some countries cross-border imports from low-priced markets (parallel imports) exert a commercial pressure on pricing within a country.

In Japan, the National Health Ministry biannually reviews the pharmaceutical prices of individual products. In the past, these reviews have resulted in price reductions.

We maintain product liability insurance for the manufacture and commercial sale of Plenaxis, as well as for clinical trials, in the amount of $20.0 million per occurrence and $20.0 million in the aggregate. Although we maintain product liability insurance, we cannot be sure that this coverage is adequate or that it will continue to be available to us on acceptable terms. Insurance coverage is becoming increasingly expensive, and we may be unable to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability. We may incur significant liability and our business would be harmed if product liability lawsuits are initiated against us and are successful. Furthermore, product liability claims, regardless of their merits or outcome, could be costly and divert management's attention from other business concerns, or adversely affect our reputation and the demand for Plenaxis.

As of February 28, 2005, we had 172 full-time employees, all of whom were located in the United States. We also utilize consultants and independent contractors on a regular basis to assist in the development and potential commercialization of our products. None of our employees are party to a collective bargaining agreement and we have never experienced a work stoppage. We consider our employee relations to be good. We believe that our future success is dependent in part on our ability to attract and retain skilled scientific, sales and marketing, and other professional and senior management personnel. Competition in our industry is intense and we cannot assure you that we will be able to attract, integrate and retain these personnel.

We maintain a website with the address www.praecis.com. We are not including the information contained on our website as a part of, or incorporating it by reference into, this Annual Report on Form 10-K. We make available free of charge through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the Securities and Exchange Commission.

Our corporate headquarters and principal research facility is located in Waltham, Massachusetts, where we own, through our wholly owned real estate subsidiary, land and a building of approximately 175,000 square feet. We have entered into a 15-year lease for this facility with our subsidiary. We currently occupy approximately 100,000 square feet of this facility and would sublease a portion of the remaining space for up to the next three to five years upon acceptable financial terms. However, given the current market conditions for commercial real estate in the Boston area, it is unlikely that we will sublease our excess space on financially acceptable terms in the foreseeable future. In connection with the acquisition of our corporate headquarters and principal research facility, our subsidiary granted a security interest in the facility, together with all fixtures, equipment, improvements and related items, as more fully discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources" appearing elsewhere in this report.

We believe that our facility will be adequate for our operations under our current long-term operating plan and that we would be able to obtain additional space as needed on commercially reasonable terms.

In December 2004 and January 2005, the Company, Chairman and (now former) Chief Executive Officer Malcolm Gefter, President and (now former) Chief Operating Officer Kevin F. McLaughlin, Chief Financial Officer and Treasurer Edward C. English, and former President and Chief Operating Officer William K. Heiden, were named as defendants in three purported class action securities lawsuits filed in the United States District Court for the District of Massachusetts. Those purported class actions are captioned Katz v. Praecis Pharmaceuticals Inc., Malcolm Gefter, Kevin McLaughlin, Edward English and William K. Heiden, Civil Action No. 04-12581-GAO (filed December 9, 2004), Schwartz v. Praecis Pharmaceuticals Inc., Malcolm Gefter, Kevin McLaughlin, Edward English and William K. Heiden, Civil Action No. 04-12704-REK (filed December 27, 2004) and Bassin v. Praecis Pharmaceuticals Inc., Malcolm L. Gefter, Ph.D., Kevin F. McLaughlin, Edward C. English and William K. Heiden, Civil Action No. 05-10134-GAO (filed January 21, 2005). The complaints generally allege securities fraud during the period from November 25, 2003 through December 6, 2004. Each of the complaints purports to assert claims under Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and alleges that the Company and the individually named defendants made materially false and misleading public statements concerning the Company's business and financial results, particularly relating to statements regarding the commercialization of Plenaxis.

On February 7, 2005, a motion was filed to consolidate the Katz, Schwartz and Bassin actions and to appoint lead plaintiffs and lead counsel. On February 18, 2005, the Company and the individual defendants filed a brief response to that motion, reserving their rights to challenge the adequacy and typicality, among other things, of the proposed lead plaintiffs in connection with class certification proceedings, if any. The Court has not yet entered any Orders regarding the consolidation of the pending cases or the appointment of lead plaintiffs and approval of such plaintiffs' selection of lead counsel. At this time, plaintiffs have not specified the amount of damages they are seeking in the actions.

Management believes that the allegations against the Company are without merit, and the Company intends to vigorously defend against the plaintiffs' claims. As this litigation is in an initial stage, management is unable to predict its outcome or its ultimate effect, if any, on the Company's financial condition. However, we expect that the costs and expenses related to this litigation may be significant. Our current director and officer liability insurance policies (which, subject to the terms and conditions thereof, also provide "entity coverage" for the Company for this litigation) provide that the Company is responsible for the first $2.5 million of such costs and expenses. Also, a judgment in or settlement of these actions could exceed our insurance coverage. If we are not successful in defending these actions, our business and financial condition could be adversely affected. In addition, whether or not we are successful, the defense of these actions may divert the attention of our management and other resources that would otherwise be engaged in running our business.

No matters were submitted to a vote of security holders of the Company during the last quarter of the fiscal year ended December 31, 2004.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Our common stock is traded on The Nasdaq National Market under the symbol "PRCS." The following table shows the range of high and low per share sale prices of our common stock as reported on The Nasdaq National Market for the periods indicated.

		Common Stock Price
		High		Low
Year Ended December 31, 2004:
	First Quarter	$	7.58	$	5.12
	Second Quarter		6.56		3.36
	Third Quarter		3.99		1.96
	Fourth Quarter		2.46		1.60
Year Ended December 31, 2003:
	First Quarter	$	4.49	$	2.90
	Second Quarter		5.80		3.83
	Third Quarter		7.25		4.51
	Fourth Quarter		7.98		6.25

As of February 28, 2005, there were approximately 132 holders of record of our common stock registered with our transfer agent, American Stock Transfer & Trust Company. Because many of these shares are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by the record holders.

We have never declared or paid any cash dividends on our capital stock, and we do not currently intend to pay any cash dividends on our common stock in the foreseeable future. We expect to retain future earnings, if any, to fund the development and growth of our business. Therefore, you should not expect to receive any funds in respect of shares of our common stock without selling your shares.

The information under the heading "Equity Compensation Plan Information" in the Company's definitive Proxy Statement to be delivered to stockholders in connection with the Annual Meeting of Stockholders expected to be held on May 12, 2005 is incorporated into Item 12 of this report by reference.

You should read the following selected financial data in conjunction with our consolidated financial statements and the related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this report. We have derived our statement of operations data for each of the three years in the period ended December 31, 2004, and our balance sheet data at December 31, 2003 and 2004, from our audited consolidated financial statements, which we include elsewhere in this report. We have derived the statement of operations data for the years ended December 31, 2000 and 2001 and the balance sheet data at December 31, 2000, 2001 and 2002 from our audited consolidated financial statements, which we do not include in this report.

Delaware	04-3200305
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
830 Winter Street Waltham, Massachusetts	02451-1420
(Address of principal executive offices)	(Zip code)

		Program Status
						Regulatory
Program		Preclinical/ Validation	Phase 1	Phase 2	Phase 3	Regulatory
Program		Preclinical/ Validation	Phase 1	Phase 2	Phase 3	Filing	Approval
Plenaxis (United States)
	Advanced Symptomatic Prostate Cancer
	Androgen Independent Prostate Cancer
Plenaxis (European Union)
	Prostate Cancer
Apan
	Alzheimer's Disease
PPI-2458
	Non-Hodgkin's Lymphoma
	Cancer/Rheumatoid Arthritis
Direct Select Technology Platform

	Year Ended December 31,
	2000	2001	2002	2003	2004
	(in thousands, except per share data)
Statement of Operations Data: