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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended September 30, 2003

or

for the transition period from              to             

Commission File No. 0-18728

Indevus Pharmaceuticals, Inc.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (781) 861-8444

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value per share

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

Indicate by check mark 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.    ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act) YES  x    NO  ¨

The aggregate market value of the voting and non-voting common equity (excluding preferred stock convertible into and having voting rights on certain matters equivalent to 622,000 shares of Common Stock) held by non-affiliates of the registrant was approximately $278,000,000, based on the last sales price of the Common Stock as of December 19, 2003. Shares of Common Stock held by each executive officer and director and each person who beneficially owns 10% or more of the outstanding Common Stock. This determination of affiliate status may not be conclusive for other purposes.

As of December 19, 2003, 47,260,661 shares of Common Stock, $.001 par value per share, of the registrant were issued and outstanding.

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DOCUMENTS INCORPORATED BY REFERENCE

See Part III hereof with respect to incorporation by reference from the registrant’s definitive proxy statement for the fiscal year ended September 30, 2003 to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934 and the Exhibit Index beginning on page number 45 hereto.

PART I

Note Regarding Forward Looking Statements

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

Unless the context indicates otherwise, “Indevus”, the “Company”, “we”, “our” and “us” refer to Indevus Pharmaceuticals, Inc., and “Common Stock” refers to the common stock, $.001 par value per share, of Indevus.

ITEM 1. Business

(a) General Description of Business

Indevus is a biopharmaceutical company engaged in the development and commercialization of a diversified portfolio of pharmaceutical product candidates, including multiple compounds in late-stage clinical development. We currently have six compounds in development: trospium for overactive bladder, pagoclone for panic and generalized anxiety disorders, citicoline for ischemic stroke, IP 751 for pain and inflammatory disorders, PRO 2000 for the prevention of infection by HIV and other sexually-transmitted pathogens, and aminocandin for treatment of systemic fungal infections.

We seek to acquire, develop and commercialize a portfolio of pharmaceutical products for a range of therapeutic indications. The key elements of our business strategy include: (1) identifying product candidates with broad applications and large, unsatisfied markets, (2) acquiring clinical and late pre-clinical stage compounds, including products with clinical data or market experience outside the United States, (3) defining

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strategies to take these compounds through clinical testing and to market, (4) adding value to acquired products through clinical testing and regulatory review activities, and (5) commercializing products in collaboration or combination with corporate partners in order to help ensure the timely penetration of target markets. Our strategy encompasses a range of products and therapeutic areas arising from our relationships with a diverse range of partners including biopharmaceutical, regional pharmaceutical, and multi-national pharmaceutical firms, as well as academic and government institutions. Our rights with respect to our current product candidates have been licensed from third parties.

Our lead product candidate is trospium chloride (“trospium”), a muscarinic receptor antagonist in development as a treatment for overactive bladder. On April 28, 2003, we submitted our New Drug Application (“NDA”) for trospium for filing with the U.S. Food and Drug Administration (“FDA”). The NDA for trospium includes data from 34 clinical studies involving over 2,800 subjects and patients, including 12 double-blind, placebo-controlled or active-controlled studies, 14 clinical pharmacology and pharmacokinetic studies and 8 uncontrolled studies. Results from previous clinical trials and our 523-patient Phase III trial demonstrated that treatment with trospium significantly reduced the frequency of both urination and incontinence episodes in patients with overactive bladder. In addition to the twice-a-day formulation of trospium which is the subject of the filed NDA, we have entered into an agreement with Shire Laboratories, Inc. (“Shire”) to develop extended release, once-a-day formulations. We are currently evaluating commercial opportunities for trospium, including co-promotion and licensing arrangements, strategic combinations, and other partnering opportunities. It is estimated that more than 17 million Americans suffer from overactive bladder in the United States. According to a recent SCRIP Report, only 20 percent of overactive bladder patients are currently treated with pharmacotherapy. In 2002, the market for drugs to treat overactive bladder was approximately $1 billion in the United States. We have exclusive rights to develop and market trospium in the United States. Trospium is currently marketed in Europe, where it is one of the leading treatments for overactive bladder.

Pagoclone is a GABA (gamma amino butyric acid) receptor agonist for the treatment of anxiety disorders. Pagoclone is in Phase III clinical stage development for panic disorder and Phase II for generalized anxiety disorder (“GAD”). To date, there have been three Phase II clinical trials of pagoclone that demonstrated statistically significant efficacy, two in panic disorder and one in GAD, as well as three other clinical trials that did not demonstrate statistically significant efficacy. Results from these clinical trials suggest the potential of pagoclone as a novel anti-anxiety agent that is free from the sedative effects and withdrawal or rebound-anxiety symptoms seen with other anti-anxiety agents. We are pursuing new development and commercialization partnerships for pagoclone, and we are planning to initiate an additional clinical trial with pagoclone in 2004. We have exclusive, worldwide rights to develop and market pagoclone.

Citicoline is cytidine-5 diphosphate choline, a precursor for the biosynthesis of phosphatidylcholine, a major building block of nerve cell membranes, and has been under development as a neuroprotective treatment for ischemic stroke. We have completed three Phase III clinical trials and one Phase II/III clinical trial with citicoline in North America. We believe that these studies may indicate the effectiveness of citicoline in reducing the disability associated with ischemic stroke utilizing various outcome measures. However, only one of these trials has successfully met its primary outcome objective. Two meta-analyses of clinical trials presented at the 27th International Stroke Conference in February 2002 and a recently published analysis of pooled data from various controlled trials suggest that treatment with citicoline may reduce infarct growth after stroke and reduce rates of death or disability over the long term. We believe that additional clinical testing of citicoline is required before an NDA can be submitted. We have defined the design and clinical endpoints of our next stroke trial based on discussions with the FDA, and we continue to have discussions with the FDA regarding the number of additional trials that may be necessary to complete the development of citicoline sufficient for filing an NDA. We are seeking a development partnership for the commercialization of citicoline. We have exclusive rights to develop and market citicoline in the United States and Canada.

IP 751 is a non-psychoactive synthetic derivative of tetrahydrocannabinol (THC). Pre-clinical studies have shown that this novel anti-inflammatory and analgesic compound inhibits inflammatory cytokines, particularly interleukin 1-beta and TNF-alpha. In addition, results of a Phase II clinical trial conducted in Germany and published in the Journal of the Medical Association in September 2003 showed that treatment with IP 751

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significantly reduced neuropathic pain among 21 patients and was well-tolerated, without causing psychoactive adverse events. An initial Phase I clinical trial designed to assess the safety of IP 751 showed that it was well-tolerated, with no clinically significant adverse events and no evidence of psychoactive properties. An Investigational New Drug Application (“IND”) for IP 751 has been filed with the FDA. Additional Phase I and Phase II clinical trials are currently being planned for IP 751. We have exclusive, worldwide rights to develop and market IP 751.

PRO 2000 is a topical microbicide in development for the prevention of the sexual transmission of HIV and other sexually-transmitted diseases (“STDs”). Government-sponsored Phase I and Phase I/II clinical trials in both healthy and HIV-positive women have shown PRO 2000 to be well-tolerated. In February 2002, PRO 2000 was selected for a broad, five-year testing program of vaginal microbicides by an international collaboration of research groups in the United Kingdom and Africa under a grant from the United Kingdom Department for International Development (“DFID”). A Phase II clinical trial in Africa, funded by the European Commission, is currently underway to assess the safety of PRO 2000. It is expected that in 2004 a National Institutes of Health (“NIH”)-sponsored Phase II clinical trial will begin and may extend to a Phase III clinical trial to determine its safety and efficacy in preventing male and female HIV transmission. We have exclusive, worldwide rights to develop and market PRO 2000.

Aminocandin is an echinocandin, a new class of anti-fungal compounds in development for the treatment of a broad spectrum of systemic, invasive fungal infections. Aminocandin has shown in vitro and in vivo activity against a number of candida and aspergillus fungal species. We expect aminocandin will be ready for Phase I clinical testing in early 2004 as an intravenous agent. We believe that aminocandin also has potential to be delivered orally, unlike the currently approved drugs or those under development in its class that can be delivered only intravenously. We plan to pursue technological solutions related to an oral formulation in parallel with an intravenous clinical program. We have exclusive, worldwide rights to develop and market aminocandin.

In addition to our product candidates in development, we are receiving royalties under a patent we licensed to Eli Lilly & Company (“Lilly”) based on net sales of Sarafem in the United States. Sarafem is prescribed to treat certain conditions and symptoms associated with pre-menstrual syndrome.

Indevus Pharmaceuticals, Inc. is a Delaware corporation. Our principal office is at One Ledgemont Center, 99 Hayden Avenue, Lexington, Massachusetts 02421-7966 and our main telephone number is (781) 861-8444. Reports, proxy statements and other information concerning us may be accessed and reviewed through our website: http:/www.indevus.com.

(b) Financial Information about Industry Segments

We operate in only one business segment.

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(c) Narrative Description of Business

PRODUCTS

The following table summarizes, in order of current development stage, our product candidates.

Trospium

General. Trospium chloride is our lead product candidate and is under development as a drug to treat overactive bladder, defined as urinary frequency and urgency that may be coupled with urge incontinence. According to the American Foundation for Urological Disorders, an estimated 17 million Americans suffer from overactive bladder, and approximately 85 percent of these sufferers are women. According to a recent SCRIP Report, only 20 percent of overactive bladder patients are currently treated with pharmacotherapy. In 2002, the market for drugs to treat overactive bladder was approximately $1 billion in the United States. Trospium is currently marketed in most European countries where it is one of the leading treatments for overactive bladder.

Trospium belongs to the anticholinergic class of compounds and binds specifically to the muscarinic receptors. These compounds relax smooth muscles, such as the detrusor muscle in the bladder, thus decreasing bladder contractions. Overactive or unstable detrusor muscle function is believed to be one of the principal causes of overactive bladder symptoms.

Current treatments in the United States for overactive bladder include compounds in the same class as trospium, such as Detrol^™ and Detrol^®LA (tolterodine), Ditropan^® and Ditropan XL^® (oxybutynin) and Oxytrol^® (oxybutynin transdermal formulation). In contrast to trospium, these drugs have been shown to cross into the central nervous system. Based on pre-clinical findings to date, we believe that trospium does not enter into the central nervous system due to its distinct chemical structure, and as a result it may avoid central nervous system side effects. In addition, at therapeutic concentrations trospium is not an inhibitor of, or metabolized by, specific enzymes in the Cytochrome P450 system, a metabolic pathway commonly associated with drug-drug interactions. Since many of the patients who suffer from overactive bladder are also taking other medications, the potential lack of drug-drug interaction would be a significant distinguishing factor for this compound. Furthermore, trospium is not highly metabolized and is excreted largely unchanged in the urine.

Development Program. On April 28, 2003, we submitted an NDA for trospium with the FDA and on June 27, 2003 our NDA was accepted for filing by the FDA. In European and United States clinical trials, trospium has been shown to reduce symptoms associated with overactive bladder. The clinical database for trospium trials

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currently encompasses over 2,800 patients in 34 clinical trials, of which twelve are double-blind, controlled studies, including nine double-blind, placebo-controlled studies, and three are active-controlled trials. Many of these studies assessed the relative efficacy of trospium on urodynamic measurements such as bladder capacity and compliance, maximum detrusor pressure, and residual urine, in addition to urination and incontinence frequency diary data. One trial was a long-term comparative 52-week study on safety, tolerability, and efficacy. In addition to this clinical database, over 10,000 patients have been followed in post-marketing trials.

In September 2002, we announced results from a 523-patient, double-blind, placebo-controlled Phase III clinical trial with trospium that were subsequently presented at the annual meeting of the American Urology Association on April 28, 2003. The trial met both of its primary endpoints, achieving statistically significant reduced frequencies of urination (p£0.0001) and urinary incontinence episodes (p£0.0001) among patients treated with trospium (20 mg twice a day) compared with patients who received placebo. In addition, the trial met all overactive bladder secondary endpoints, including but not limited to, urgency, increased bladder capacity (volume voided) and quality of life. The drug was also well-tolerated, as the incidence of dry mouth and other adverse events observed in this trial suggest a favorable product profile for trospium. Over 400 patients from this trial elected to participate in an ongoing nine-month open label extension of the study. Additional data analyses from this trial presented at the International Continence Society Meeting (October 7-10, 2003) showed that treatment with trospium reduced urgency severity (p<0.0001) and was associated with onset of action beginning as early as three days after initiation of therapy (p=0.05). A presentation of additional data at a sectional meeting of the American Urology Association (October 14, 2003) demonstrated that early patient response to treatment with trospium is an accurate predictor of long-term therapeutic success. As part of our continuing development program, we are conducting additional clinical trials in the United States to explore further certain attributes of trospium.

Madaus AG (“Madaus”), the licensor of trospium, has conducted several trials comparing the safety and efficacy of trospium with its two principal competitors in Europe, tolterodine and oxybutynin. A double-blind, randomized efficacy trial, testing trospium and oxybutynin, was conducted with 358 patients, 268 of whom were treated with trospium (20 mg twice a day) and 90 with oxybutynin (5 mg twice a day) over a 52-week period. Halaska et al. (World Journal of Urology, Vol. 20, 2003, 392-399) reported that there was no significant difference between trospium and oxybutynin in the reduction in urinations and urge incontinence episodes. Among key safety measures, trospium had a statistically and clinically significantly lower incidence of dry mouth (p<0.01) than oxybutynin.

A second double-blind, placebo-controlled randomized efficacy trial, testing trospium and tolterodine, was conducted by Madaus with 180 patients, 57 of whom were treated with trospium (20 mg twice a day), 63 with tolterodine (2 mg twice a day) and 60 with placebo over a three-week period. Junemann et al. (Neurourol Urodyn 19, 2000, 488-90) reported that trospium-treated patients experienced a statistically significant (p<0.01) reduction in frequency of urination compared with placebo-treated patients, whereas the reduction in frequency of urination among tolterodine-treated patients failed to reach statistical significance over placebo patients. There was no statistically significant difference in side effects between trospium patients and tolterodine patients.

Current treatments in the United States include Detrol LA and Ditropan XL, which are once-a-day oral formulations. Our current NDA relates to a twice-a-day oral formulation of trospium. In March 2003, we signed an exclusive agreement with Shire under which Shire is developing extended release formulations of trospium. We have begun pharmacokinetic and safety studies with several once-a-day formulations, and we expect to begin advanced clinical trials with one of these formulations in 2004.

Madaus currently manufactures trospium for the European market to current European manufacturing standards. In order to manufacture the product for sale in the United States, Madaus’ manufacturing must comply with U.S. current Good Manufacturing Practices, (“cGMP”). We are working with Madaus to prepare for an FDA inspection of their German manufacturing plant.

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We are currently evaluating commercial opportunities and strategic alternatives for the commercialization of trospium, and we have engaged in discussions regarding a variety of alternatives, including co-promotion and licensing arrangements, strategic combinations, and other partnering opportunities.

Pagoclone

General. Pagoclone is under development as a treatment for anxiety disorders, including panic and generalized anxiety disorders. Panic disorder is a severe anxiety condition characterized by panic attacks, a discrete period in which there is the sudden onset of intense apprehension, fearfulness or terror. During these attacks, symptoms such as breathing difficulty, sweating, heart palpitations, dizziness or fainting, and fear of losing control are present. GAD is characterized by excessive anxiety and worry most days for at least six months about a variety of events or activities, such as work or family. Patients with GAD experience persistent diffuse anxiety without the specific symptoms that characterize phobic disorders, panic disorders or obsessive-compulsive disorders. There are estimated to be approximately 20 million people in the United States (Drug and Market Development, October 2001) and approximately 60 million worldwide with anxiety disorders (In Vivo, September 2001).

Anxiety disorders, including panic disorder, are believed to be associated with excessive neuronal activity resulting from a decrease in the function of the major inhibitory neurotransmitter called GABA. We believe that pagoclone, a novel GABA modulator and a member of the cyclopyrrolone class of compounds, increases the action of GABA, thus alleviating symptoms of panic and anxiety.

Current pharmacological treatments for panic and anxiety disorders commonly include benzodiazepines, selective serotonin reuptake inhibitors and serotonin agonists. Traditional side effects seen with these classes of anti-anxiety drugs include sedation, lack of mental acuity, withdrawal and rebound anxiety related to the benzodiazepine class of drugs, and agitation, insomnia, nausea, dry mouth, other central nervous system effects and sexual dysfunction related to serotonin and norepinephrine reuptake inhibitors and serotonin agonists. Pre-clinical and clinical data suggest that treatment with pagoclone may have advantages over these treatments because pagoclone appears to be free from these common side effects.

Development Program. Earlier trials demonstrated that pagoclone reduced the symptoms of GAD and panic attacks, but in June 2002, Pfizer Inc. (“Pfizer”), then our licensee, informed us that its most recent clinical trials with pagoclone in GAD and panic disorder did not achieve the level of efficacy seen in previous trials. Pfizer subsequently elected not to pursue further development of the compound and returned to us exclusive, worldwide development and commercialization rights to pagoclone. We believe that the trials conducted to date with pagoclone suggest an efficacy, safety and tolerability profile which could compete favorably with current drugs on the market to treat GAD and panic disorder, but we believe that pagoclone will require additional testing.

To date, a total of six clinical trials have been conducted with pagoclone in GAD and panic disorder, including three Phase II clinical trials that demonstrated statistically significant efficacy, two in panic disorder conducted by us and one in GAD conducted by Pfizer. Pfizer’s most recent data in two Phase II GAD trials and one Phase III panic disorder trial did not show statistically significant efficacy. In all of the clinical trials, pagoclone was well-tolerated, with no clinically significant differences with respect to adverse events, such as sedation and withdrawal effects as compared with placebo. We believe that the complete data package from the trials, combined with extensive clinical pharmacology, manufacturing process and commercial formulation work completed to date, suggest the potential of pagoclone as a novel anti-anxiety agent which lacks the sedative effects and withdrawal or rebound-anxiety symptoms seen with existing classes of such agents. We are pursuing new worldwide development and commercialization partnerships for pagoclone, and we are planning to initiate an additional clinical trial with pagoclone in 2004 to build upon the findings from the previous trials.

In November 1997, we announced that data from a Phase II clinical trial with 16 patients suffering from panic attacks showed that those who were treated with 0.3 milligrams per day of pagoclone experienced a reduction in the number of their panic attacks compared to those who received placebo. This double-blind,

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placebo controlled crossover study was conducted by a team of researchers in the United Kingdom. Pagoclone produced a significant reduction (40%, p=0.012) in the total number of panic attacks over a two-week treatment period and a reduction (40%, p=0.006) in the average number of panic attacks per day compared to the pre-treatment period. No significant change in the total number of panic attacks was observed during placebo treatment.

In August 1998, we announced results of our Phase II clinical trial showing that treatment with pagoclone statistically significantly reduced the frequency of panic attacks among patients suffering from panic disorder. In addition, pagoclone was well-tolerated by these patients, with no evidence of sedation and no apparent withdrawal symptoms in this study. This double-blind, placebo-controlled, Phase II clinical trial involved 277 patients at six clinical sites in the United States. Patients were enrolled in the study following confirmed diagnoses of panic disorder. The number of attacks experienced by each patient during a two-week screening period prior to enrollment represented the baseline for subsequent comparison of panic attack frequency. Following the screening period, patients were randomized to receive one of three doses of pagoclone orally (.15 milligrams/day, .30 milligrams/day or .60 milligrams/day) or placebo for eight weeks. The primary outcome measurement was the change from baseline in the number of panic attacks seen at the eight week time point. This primary analysis showed that patients in the .15 milligrams/day group experienced a 43% reduction in the number of panic attacks relative to patients on placebo (p=0.141), that patients in the .30 milligrams/day group experienced a 70% reduction relative to patients on placebo (p=0.021), and that patients in the .60 milligrams/day group experienced a 52% reduction (p=0.098) relative to patients on placebo.

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

In December 2001, Pfizer reported that patients treated with pagoclone experienced a statistically significant improvement in symptoms of GAD, compared to patients treated with placebo. In addition, pagoclone was well-tolerated, with no difference from placebo in sedation and no evidence of withdrawal effects. This six-week Phase II clinical trial conducted by Pfizer among 200 patients involved a flexible dose regimen ranging from 0.3 milligrams of pagoclone per day to 1.2 milligrams per day. Entry criteria for patients included Hamilton Anxiety Scale (HAM-A) scores of 20 or higher. Pagoclone patients had a mean 2.3 point lower HAM-A score than placebo patients at week three (p=.033), a mean 3.3 point lower score at week four (p=.006) and a mean 3.2 point lower score at week six (p=.012). At week six, the mean reduction in HAM-A score among pagoclone patients was 11.7 versus 8.5 for placebo. There were no statistically significant differences between pagoclone-treated and placebo-treated patients with respect to side effects, such as sleepiness, as measured by the Stanford Sleepiness Scale, and withdrawal symptoms, as measured by the Rickel’s Withdrawal Symptom Checklist. In addition, there were no clinically significant or laboratory adverse events among patients treated with pagoclone.

Pfizer also conducted two additional GAD trials utilizing a fixed dose paradigm. Pagoclone was given to patients twice a day (n=353) in one study and once a day (n=339) in the second study. Doses of up to 1.2 mg per day were compared to placebo and each study included approximately 80-90 patients per treatment group. No statistically significant difference was observed between any of the doses of pagoclone and placebo in these trials, although there was a trend for the lowest doses of pagoclone to reduce HAM-A scores. We believe that this lack of a dose response is not uncommon with psychiatric agents. We believe that higher doses of many of these agents often do not add benefits and may be harmful. Pagoclone was well-tolerated in these trials.

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Pfizer also conducted a study in panic disorder. Although the patients in the study met the entrance criteria specified by Pfizer, the resulting patent population for this trial had an average number of panic attacks which was substantially lower (3.5 to 4.0 per two week period) than what we believe are usually seen and required to detect efficacy for these agents. We believe that the lack of efficacy found in this trial may have resulted from the inclusion of patients whose disorder was too mild to demonstrate a statistically significant drug effect.

Citicoline

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

We believe that citicoline has multiple acute and longer-term mechanisms of action that diminish the effects of stroke. On an acute basis, citicoline appears to limit infarct size by preventing the accumulation of fatty acids, which would otherwise yield toxic oxidation products, by preventing their release. On a longer-term basis, citicoline is believed to promote the formation of additional membrane elements needed by damaged neurons to restore functional activity by raising blood levels of choline, cytidine and other phospholipid precursors, which are substrates believed to be essential for the formation of the nerve cell membrane. Citicoline also appears to increase levels of acetylcholine, a neurotransmitter believed to be associated with learning and memory functions. Citicoline is currently marketed in many countries in Europe and Asia.

Development Program. We have completed three Phase III clinical trials and one Phase II/III clinical trial with citicoline in North America. We believe that these studies may indicate the effectiveness of citicoline in reducing the disability associated with ischemic stroke utilizing various secondary outcome measures. However, only one of these trials has successfully met its primary outcome objective. Therefore, we believe additional clinical testing is required before an NDA for citicoline can be submitted for review by the FDA.

We submitted an NDA for citicoline to the FDA in December 1997. Data in the NDA included the results of one Phase III clinical trial and one Phase II/III clinical trial conducted by us in the United States, a Japanese Phase III clinical trial conducted by Takeda Chemical Industries, Ltd. (“Takeda”) and supportive clinical and post-marketing data from more than 30 countries where citicoline has already been approved. The NDA was accepted for filing and was assigned priority and fast-track review status. However, based on the results of a subsequent 100-patient Phase III clinical trial which failed to meet its primary endpoint of reducing infarct size (p=.18) among patients taking citicoline versus those taking placebo, we withdrew our NDA in April 1998. Following analysis of the third Phase III clinical trial completed in early 2000, Takeda, then our licensee for citicoline, elected not to pursue further development of citicoline, and returned to us all rights to the compound.

Two meta-analyses of clinical trials, including trials conducted by other companies and researchers abroad and trials conducted in the United States by us, were presented at the 27^th International Stroke Conference in February 2002. These meta-analyses and a published analysis of data pooled from various control trials support the results of the individual studies showing that treatment with citicoline may reduce infarct growth after stroke and reduce rates of death or disability over the long-term.

The first of these studies analyzed seven controlled trials enrolling 1,963 patients who received oral or intravenous citicoline at doses ranging from 500 to 2000 milligrams daily and showed that treatment with citicoline was associated with a significant reduction in rates of death or disability over the long-term. On a combined basis across these trials, 54.6 percent of citicoline patients experienced death or disability, compared with 66.4 percent of placebo patients (p<0.00001).

The second of these studies analyzed data regarding infarct growth following stroke from two clinical trials in a total of 214 patients. Doses of 500 milligrams/day and 2000 milligrams/day were used in these trials. The

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mean volume increase in infarct size was 84.7 percent for the placebo group, 34.0 percent for the 500 milligram group and 1.8 percent for the 2000 milligram group (p=0.015).

We have defined the design and clinical endpoints of our next stroke trial based on discussions with the FDA, and we continue to have discussions with the FDA regarding the number of additional clinical trials that may be necessary to complete development of citicoline sufficient for filing an NDA. Due to the expense of conducting the additional clinical trials necessary to complete development of citicoline, we plan to seek a corporate partnership or project specific funding for the project.

IP 751

General. IP 751 is a non-psychoactive synthetic derivative of tetrahydrocannabinol (THC) in early clinical development to treat pain and inflammatory disorders. IP 751 appears to suppress inflammatory cytokines, including TNF-alpha and IL-beta, and the COX-2 enzyme, which are implicated in pain and inflammation. Unlike most available non-steroidal anti-inflammatory agents (NSAIDS), pre-clinical studies suggest that IP 751 is less likely to produce gastrointestinal ulceration. We believe IP 751 has a broad potential to treat painful inflammatory conditions such as arthritis, post-operative pain, and musculoskeletal injuries. In addition, IP 751 may be useful in treating non-inflammatory conditions such as headache and neuropathic pain.

Development Program. Pre-clinical development of IP 751 has demonstrated that it is active in multiple pre-clinical models of pain and inflammation. An IND for IP 751 has been filed with the FDA, and an initial Phase I clinical trial designed to assess its safety showed that it was well-tolerated, with no clinically significant adverse events and no evidence of psychoactive effects.

In December 2002, we announced results of a Phase II clinical trial showing that patients treated with IP 751 experienced a significant reduction in neuropathic pain. Investigators at the Hannover Medical School in Hannover, Germany reported that patients experienced significantly less pain when treated with IP 751 compared with placebo during the two-week, crossover design trial among 21 patients. In addition, the drug was well-tolerated, with no major adverse psychological or physical effects observed. These results were subsequently published in the Journal of the American Medical Association (JAMA 2003; 290 (13); 1757-1762). Patients in this trial had chronic pain syndromes as a result of previous spinal or peripheral nerve injuries, despite the continuation of standard pain medications. For inclusion in the trial, they had to have experienced pain for at least six months, although the average duration of their pain syndromes was greater than ten years. Patients were randomized to two 7-day treatment periods in a crossover design. They received one of two doses of IP 751 (20 milligrams or 40 milligrams) or placebo twice a day during the first week, then were switched to the other regimen during the second week. The degree of pain measured by visual analog scores (VAS) decreased significantly during treatment with IP 751 when compared with placebo (p=0.02). Additional Phase I and Phase II clinical trials are currently being planned for IP 751.

PRO 2000

General. PRO 2000 is under development as a topical microbicide to prevent the sexual transmission of HIV and certain other sexually-transmitted disease-causing viruses and bacteria. HIV infection usually leads to AIDS, a life-threatening impairment of the immune system. The World Health Organization estimates that 4.7 million new adult HIV infections occurred worldwide in 2000 with the majority of the infections arising from heterosexual intercourse. Other sexually-transmitted diseases (“STDs”) such as genital herpes, chlamydia and gonorrhea can lead to serious complications, especially in women, and can increase the risk of HIV infection. The Kaiser Family Foundation and the World Health Organization have estimated that there are approximately 15 million new STD cases each year in the United States and more than 340 million worldwide. Topical microbicides represent a new class of protective substances that are designed to be applied vaginally before sexual contact. Topical microbicides have the potential to offer a female-controlled supplement or alternative to condoms, the only products currently known to prevent HIV transmission and to reduce the risk of infection by other STDs.

We believe that PRO 2000 may block infection by HIV and other sexually-transmitted pathogens by preventing their attachment and entry into cells. Laboratory studies have shown that the drug is active against

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HIV, herpes simplex virus, chlamydia and the bacteria that causes gonorrhea. In government-sponsored tests, vaginally applied PRO 2000 was shown to be efficacious in a mouse model for genital herpes infection and a monkey model for vaginal HIV infection.

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

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

In September 2001, we were awarded a grant by the CONRAD Program under its Global Microbicide Project for two toxicity studies performed by us with PRO 2000. These animal studies have been completed and will support the ongoing PRO 2000 clinical program.

In June 2003, we announced the initiation of a Phase II clinical trial in Africa funded by the European Commission. This trial is assessing the safety of PRO 2000 in approximately 100 sexually active female volunteers. An NIH-sponsored Phase II clinical trial that may extend to a Phase III clinical trial to determine the safety and efficacy of PRO 2000 in blocking male to female HIV transmission is planned to begin in 2004 in Africa and India. The study is expected to involve approximately 10,000 women who have not been infected with HIV but who are at risk for acquiring HIV by virtue of living in countries where the risk of such infection is high.

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

Aminocandin

General. Aminocandin is a member of a new class of anti-fungal compounds, known as echinocandins, in development for the treatment of a broad spectrum of systemic, invasive fungal infections. Echinocandins are the first new class of anti-fungal agents to be developed and introduced in approximately 30 years. They are designed to be fungicidal, that is, to destroy fungi rather than simply to inhibit their growth, and to have broad-spectrum activity against multiple fungi that cause serious systemic infections. Examples of such infections include aspergillosis, blastomycosis, candidiasis, coccidioidomycosis, cryptococcosis and zycomycosis.

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Three classes of antifungals, polyenes, azoles and echinocandins, are currently available for systemic fungal infections. In patients treated with these agents, treatment failures are primarily due to anti-fungal resistance and adverse events. Polyenes act by binding to fungal cell membranes and causing the fungus to leak electrolytes. A polyene known as amphotericin has been the standard for treating serious fungal infections for over 40 years and remains the first-line anti-fungal for many infections. Although this agent has a broad spectrum of fungicidal activity, its dose-limiting nephrotoxicity and adverse events often limit its clinical application. Azoles, including fluconozole, itraconazole and voriconazole, are the most commonly prescribed anti-fungal agents. They inhibit the synthesis of ergosterol by blocking the enzymatic activity of 14-alpha-demethylase. Azoles do not actually kill the fungus, but rather inhibit the spread of the fungus, allowing the body’s immune system to control the infection. Prolonged use of azoles leads to fungal resistance to these drugs, and many fungal types do not respond to azoles.

The echinocandins function by inhibiting a key component of the cell wall of fungi, and lack cross-resistance with older antifungal agents. Cancidas^® (caspofungin, Merck & Co.) is available in the United States for the treatment of esophageal candidiasis and is also approved for the treatment of aspergillosis in patients intolerant or refractory to other therapies. Fujisawa filed an NDA for micafungin in 2002 for a range of indications. Vicuron Pharmaceuticals filed an NDA for anidulafungin in 2003 based on clinical data in esophageal candidiasis, invasive candidemia/candidiasis and aspergillosis.

Aminocandin has shown in vitro and in vivo activity against a number of candida and aspergillus fungal species. According to reports from Datamonitor, Inc., an industry market research firm, the worldwide market for anti-fungal agents is currently valued in excess of $4 billion, of which approximately $2.5 billion relates to systemic, fungal infections.

Development Program. We expect to initiate Phase I clinical testing of the intravenous formulation of aminocandin in early 2004. We believe that aminocandin also has the potential to be delivered orally, unlike the currently approved drugs or those under development in its class that can be delivered only intravenously. We plan to pursue technological solutions related to an oral formulation in parallel with an intravenous clinical program. An oral fungicidal agent would be useful in preventing serious fungal infections in patients at risk and would allow for convenient and extended outpatient therapy.

AGREEMENTS

Trospium. In November 1999, we entered into an agreement with Madaus under which we licensed exclusive rights to develop and market trospium in the United States. In exchange for these rights, we have agreed to pay Madaus potential regulatory and sales milestone payments and royalties on net sales or, if sublicensed by us, we would pay to Madaus a portion of receipts from the sublicense in lieu of royalty payments. We are responsible for all clinical development and regulatory activities and costs related to the compound in the United States. In December 2002, we entered into a manufacturing agreement with Madaus whereby Madaus will produce and sell to us commercial quantities in bulk form.

In March 2003, we signed an exclusive agreement with Shire under which Shire will develop extended release formulations of trospium enabling trospium to be constituted as a once-a-day formulation. The agreement includes potential future development and commercialization milestone payments from us to Shire, as well as royalties based on potential future sales of extended release trospium. We will be responsible for all development costs and the commercialization of extended release formulations of trospium under this agreement.

Pagoclone. In February 1994, we licensed from Aventis, S.A. (“Aventis”) exclusive, worldwide rights for the manufacture, use and sale of pagoclone under patent rights and know-how related to the drug, except that we granted Aventis an option to sublicense from us, under certain conditions, rights to market pagoclone in France. In exchange, we paid Aventis a license fee and agreed to make milestone payments based on clinical and

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regulatory developments, and to pay royalties based on net sales or, if sublicensed by us, we would pay to Aventis a portion of receipts from the sublicensee in lieu of royalty payments. Under the terms of our agreement with Aventis, we are responsible for all costs of developing, manufacturing, and marketing pagoclone.

In December 1999, we entered into an agreement with Pfizer under which we licensed to Pfizer exclusive, worldwide rights to develop and commercialize pagoclone. Under the Pfizer agreement we received $16,750,000, including an up-front payment of $13,750,000, and were entitled to receive additional payments contingent upon the achievement of clinical and regulatory milestones, as well as royalties on net sales. In addition, under the Pfizer agreement, Pfizer was responsible for conducting and funding all further clinical development, regulatory review, manufacturing and marketing of pagoclone on a worldwide basis. In June 2002, Pfizer elected not to pursue further development of the compound and returned to us exclusive, worldwide development and commercialization rights to pagoclone. We are pursuing new development and commercialization partnerships for pagoclone.

Citicoline. In January 1993, we entered into an agreement with Ferrer Internacional, S.A. (“Ferrer”), subsequently amended, granting us the exclusive right to make, use and sell any products or processes developed under patent rights relating to certain uses of citicoline in exchange for an up-front license fee and royalties based on sales. Our license includes patent and know-how rights in the United States and know-how rights in Canada, and is for a period co-extensive with Ferrer’s license from Massachusetts Institute of Technology (“MIT”). The Ferrer agreement provides that Ferrer may terminate the agreement under certain circumstances, including our insolvency or bankruptcy, in the event more than 50% of our ownership is transferred to a non-affiliated third party or in the event FDA approval of citicoline is not obtained by January 31, 2002. The Ferrer agreement provides for such date to be extended for up to two years if we provide information to Ferrer which tends to establish that we have carried out the steps for obtaining such approval and if such approval has not been obtained for reasons beyond our control. We have been providing such information to Ferrer, and the Ferrer agreement is currently extended to January 31, 2004 and may be extended further, conditional upon approval by Ferrer. The Ferrer agreement requires us to use diligent efforts to obtain regulatory approval.

In June 1998, we licensed to Ferrer worldwide rights, except in the United States and Canada, to our patent relating to the use of citicoline in the protection of brain tissue from cerebral infarction following ischemic stroke. In exchange, we will be entitled to royalties from Ferrer on certain exports to, and sales of, the solid oral form of citicoline in certain countries upon its approval in each country.

In December 1999, we entered into an agreement under which we licensed to Takeda exclusive rights to commercialize citicoline in the United States and Canada. Under the Takeda agreement, we received $13,000,000 in licensing and other payments, and were entitled to receive additional payments contingent upon the achievement of regulatory milestones in the United States and Canada, as well as royalties on net sales. In December 2000, Takeda notified us of its decision not to participate in the further development of citicoline, thereby terminating the Takeda agreement. Consequently, we have reacquired all rights to this compound.

IP 751. In June 2002, we licensed exclusive, worldwide rights to IP 751 from Manhattan Pharmaceuticals, Inc., (formerly known as Atlantic Technology Ventures, Inc.) (“Manhattan”), in exchange for an up-front licensing payment, potential development milestones and royalty payments In August 2003, we also entered into an agreement with Sumner Burstein, Ph.D., the individual owner of intellectual property rights related to IP 751 under which this individual granted to us an exclusive worldwide license to these rights in exchange for up-front, milestone and royalty payments. In August 2003, we also entered into a renegotiated agreement with Manhattan whereby we acquired all remaining intellectual property rights to IP 751 and our potential financial obligations to Manhattan related to IP 751, in exchange for a combination of cash and equity payments from us to Manhattan. We are responsible for the clinical development, regulatory review activities and commercialization of this compound. The effect of these transactions was to enable us to license rights to IP 751 directly from the owner of these rights.

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PRO 2000. In June 2000, we licensed exclusive, worldwide rights from Paligent, Inc. (formerly HeavenlyDoor.com and Procept, Inc.) (“Paligent”) to develop and market PRO 2000, in exchange for an up-front payment, future milestone payments, and royalties on net sales. We are responsible for all remaining development and commercialization activities for PRO 2000.

In April 2003, we amended the terms of the PRO 2000 licensing agreement. Paligent agreed to relinquish a potential future $500,000 milestone payment and provide us with an option to acquire all rights to PRO 2000 by a certain future date in exchange for an immediate $500,000 payment and an optional buyout payment by us.

Aminocandin. We licensed exclusive, worldwide rights to aminocandin from Aventis in April 2003. In exchange for these rights and for Aventis’ inventory of aminocandin, we made an up-front payment to Aventis and are obligated to pay potential milestones and royalties on future sales. Under the Aventis agreement, we are responsible for all development and commercialization activities for both intravenous and oral formulations of aminocandin. Aventis has agreed to manufacture the key component of aminocandin, using its proprietary fermentation technology.

Sarafem. In June 1997, we entered into an agreement with Lilly, under which we sublicensed to Lilly exclusive, worldwide rights under an MIT patent that was licensed exclusively by MIT to us and which is directed to the use of fluoxetine to treat certain conditions and symptoms associated with PMS. In July 2000, Lilly received approval for fluoxetine to treat a severe form of PMS and is marketing the drug under the trade name Sarafem. Lilly’s composition of matter patent on fluoxetine expired in July 2001. The Lilly agreement provided for milestone payments and royalties based on net sales of fluoxetine attributable to the approved indication in the United States up to an annual maximum limit. In December 2002, we entered into a renegotiated licensing agreement with Lilly providing us an initial payment upon the signing of the agreement and future royalty payments from Lilly based on net sales of Sarafem in the United States from October 1, 2002 until the expiration of our patent related to Sarafem. In addition, the agreement includes other potential milestone payments to us from Lilly. In January 2003, Galen Holdings PLC announced the completion of the acquisition of the sales and marketing rights to Sarafem from Lilly. Pursuant to our agreement with Lilly, the remaining milestone payments were accelerated and received by us from Lilly.

MANUFACTURING AND MARKETING

General. Our ability to conduct clinical trials on a timely basis, to obtain regulatory approvals and to commercialize our products will depend in part upon our ability to manufacture our products, either directly or through third parties, at a competitive cost and in accordance with applicable FDA and other regulatory requirements, including cGMP regulations. We have no manufacturing facilities and limited marketing capabilities. In general, we intend to seek corporate collaborations in which a third party assumes responsibility and funding for manufacturing and marketing products.

To the extent we enter into collaborative arrangements with pharmaceutical and other companies for the manufacturing or marketing of products, these collaborators are generally expected to be responsible for funding or reimbursing us all or a portion of the development costs, including the costs of clinical testing necessary to obtain regulatory clearances, and for commercial-scale manufacturing and marketing. These collaborators are expected to be granted exclusive or semi-exclusive rights to sell specific products in exchange for license fees, milestone payments, royalties, equity investments or other financial consideration. Accordingly, we will be dependent on such third parties for the manufacturing and marketing of products subject to the collaboration. There can be no assurance we will be able to obtain or retain third-party manufacturing and marketing collaborations on acceptable terms, or at all, which may delay or prevent the commercialization of products under development. Such collaborative arrangements could result in lower revenues and profit margins than if we marketed a product ourself. In the event we determine to establish our own manufacturing or marketing capabilities, we would require substantial additional funds.

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Trospium. We are responsible for all clinical development, regulatory activities and costs related to trospium in the United States, as well as the commercialization and marketing of trospium in the United States either independently or through marketing partners. We have entered into an agreement with Madaus under which we anticipate that Madaus will manufacture the product for commercial use, provided that it can deliver acceptable product to satisfy the U.S. regulatory and market requirements. Although Madaus manufactures the product for sale in Europe, it has not yet been inspected for compliance with cGMP requirements. We are working with Madaus to prepare for an FDA inspection of their German manufacturing plant in which the FDA will assess whether Madaus’ manufacturing facility complies with cGMP, as it must if it is to manufacture the product for sale in the United States. Failure to meet cGMP requirements in a timely manner could cause a material delay in FDA approval, if any, and commercialization of trospium. While we may seek a second source of supply for trospium if Madaus is unable to meet all regulatory requirements or provide the necessary quantities of trospium in a timely manner, this could also cause a material delay in FDA approval, if any, and commercialization of trospium.

Pagoclone. We are responsible for the clinical development, regulatory review activities, manufacturing and marketing of pagoclone, either independently or through a corporate partner.

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

IP 751. We are responsible for the clinical development, regulatory review activities, manufacturing and marketing of this compound, either independently or through a corporate partner.

PRO 2000. We are responsible for providing adequate amounts of PRO 2000 for use in government-sponsored clinical trials. We will be dependent upon third-party contractors for the manufacture and delivery of these supplies. We intend to seek a partner for commercial manufacture, marketing and distribution of the product.

Aminocandin. We are responsible for all development and commercialization activities for both intravenous and oral formulations of aminocandin. Aventis has agreed to manufacture the key component of aminocandin, using its proprietary fermentation technology.

COMPETITION

General. The pharmaceutical industry is characterized by rapidly evolving technology and intense competition. Many companies, including major pharmaceutical companies and specialized biotechnology companies, are engaged in marketing or development of products and therapies similar to those being pursued by us. Many of our competitors have substantially greater financial and other resources, larger research and development staffs and significantly greater experience in conducting clinical trials and other regulatory approval procedures, as well as in manufacturing and marketing pharmaceutical products, than we have. In the event we or our licensees market any products, we or they will compete with companies with well-established distribution networks and market position. Additional mergers and acquisitions in the pharmaceutical industry may result in even more resources being concentrated in our competitors.

There can be no assurance that currently marketed products, or products under development or introduced by others, will not adversely affect sales of any products developed by us, render our products or potential products obsolete or uneconomical, or result in treatments or cures superior to any therapy developed by us, or that any therapy developed by us will be preferred to any existing or newly developed products or technologies.

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Other companies may succeed in developing and commercializing competing products earlier than we may or products which are safer and more effective than those we have or are developing. Advances in current treatment methods may also adversely affect the market for such products. The approval and introduction of therapeutic or other products that compete with products being developed by us could also adversely affect our ability to attract and maintain patients in clinical trials for the same indication or otherwise to complete our clinical trials successfully or on a timely basis. Further, certain of our agreements eliminate or provide for reduced royalties in the event of generic competition. We expect technological developments in our fields of product development to occur at a rapid rate and expect competition to intensify as advances in these fields are made.

Trospium. Current therapy for overactive bladder includes anticholinergics, such as Detrol and Detrol LA (tolterodine) by Pfizer, Ditropan and Ditropan XL (oxybutynin) by Johnson & Johnson, Inc. and Oxytrol (oxybutynin transdermal patch) by Watson Pharmaceuticals. We are aware of other companies evaluating specific antimuscaranics and antispasmodics in pre-clinical and clinical development for overactive bladder, including Vesicare^® (solifenacin) by Yamanouchi Pharma America and Enablex^® (darifenacin) by Novartis AG. Certain products currently on the market for the treatment of overactive bladder are available in once-a-day formulations unlike the twice-a-day formulation of trospium which is the subject of our pending NDA.

Pagoclone. Current pharmacological treatments for anxiety and panic disorders generally include benzodiazepines, such as Valium^® (diazepam, Roche) and Xanax^® (alprazolam, Pharmacia and Upjohn), serotonin agonists such as BuSpar, and selective serotonin reuptake inhibitors such as Paxil^® (paroxetine, Glaxo SmithKline), Zoloft^® (sertraline, Pfizer), Prozac^® (fluoxetine, Eli Lilly), and Effexor^® (venlafaxine, Wyeth). Traditional side effects seen with these classes of anti-anxiety drugs include sedation, lack of mental acuity, withdrawal and rebound anxiety related to the benzodiazepine class of drugs, and agitation, insomnia, nausea, dry mouth, other central nervous system effectsand sexual dysfunction related to serotonin and norepinephrine reuptake inhibitors. We are aware of competitors which market certain prescription drugs for indications other than anxiety and which are planning to seek an expansion of labeling to include anxiety as an indication. In addition, we are aware that other companies are developing compounds for anxiety that are in pre-clinical or clinical development.

Citicoline. Activase^® (alteplase), marketed by Genentech, Inc., is the first and only therapy to be approved for the management of stroke. A genetically engineered version of naturally occurring tissue plasminogen activator (t-PA), Activase is indicated for the treatment of acute ischemic stroke within three hours of symptom onset. Although t-PA improves clinical outcome, intracranial hemorrhage, a serious side effect, occurs in six percent of the t-PA-treated patients. Several other companies have later stage programs in stroke treatment including Ancrod (Arvin, BASF/Abbott/Knoll), NXY-059 (Cerovive, AstraZeneca), Abciximab (ReoPro, Johnson & Johnson), Pro-urokinase (PROACT, Abbott), and BAY-x-3702 (Repinotan, Bayer). However, to date, none of these has shown unequivocal safety and efficacy in clinical trials. Further, each of these competing compounds under development exhibits a relatively short therapeutic window and potentially dose-limiting toxicity. A number of additional compounds have produced unsatisfactory results in clinical trials, and have been terminated or are likely to have their development discontinued. Based on existing clinical data on citicoline, we believe that citicoline may be an attractive post-stroke therapy, particularly in patients with moderate to severe strokes, due to its potentially broader, 24-hour post-stroke therapeutic window and that it may be used as combination therapy with other compounds in development or on the market.

IP 751. A variety of treatments are currently prescribed for pain and inflammatory disorders, including opioids, NSAIDs (non-steroidal anti-inflammatories) / COX-II inhibitors and combinations of these drugs. The most prevalent types of pain are related to the back, post-operative recovery, osteoarthritis, diabetic neuropathy, rheumatoid arthritis and cancer. NSAIDs, the global leaders in pain treatment, include Celebrex^® (celecoxib) promoted by Pfizer, Vioxx^® (rofecoxib), marketed by Merck, and Bextra^® (valdecoxib), promoted by Pfizer. The principal marketed opioids include oxycontin and morphine. A key unmet need in the area of pain management is the reduction of side effects experienced with existing treatments, including gastrointestinal bleeding, ulceration, cardiovascular effects, tolerance and physical or psychological dependence. Unlike most available NSAIDS, pre-clinical studies suggest that IP 751 is less likely to produce gastrointestinal ulceration.

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PRO 2000. We are not aware of any comparable product to prevent sexually-transmitted infections having been approved for use anywhere in the world. Approximately 60 new substances are being evaluated for this indication, but we believe only a few have reached the stage of development of PRO 2000. These include BufferGel by Reprotect, LLC, Savvy by Biosyn, Inc., Emmelle by ML Laboratories, PLC, Carraguard by The Population Council, and cellulose sulfate gel by the Contraceptive Research and Development Program.

Aminocandin. There are several new echinocandins approved or under development for the treatment of any or all of esophageal candidiasis, invasive candidemia/candidiasis, or aspergillosis. These drugs or formulations include, Merck’s Cancidas (caspofungin), Fujisawa’s micafungin, and Vicuron Pharmaceuticals’ anidulafungin.

PATENTS AND PROPRIETARY RIGHTS

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

There can be no assurance that patent applications filed by us or others, in which we have an interest as assignee, licensee or prospective licensee, will result in patents being granted or that, if granted, any of such patents will afford protection against competitors with similar technology or products, or could not be circumvented or challenged. In addition, certain products we are developing are not covered by any patents and, accordingly, we will be dependent on obtaining market exclusively under the Waxman-Hatch Act for such products. If we are unable to obtain strong proprietary rights protection of our products after obtaining regulatory clearance, competitors may be able to market competing generic products by obtaining regulatory clearance, by demonstrating equivalency to our product, without being required to conduct the lengthy clinical tests required of us. Certain of our agreements provide for reduced royalties, or forego royalties altogether, in the event of generic competition.

Trospium. There are no existing U.S. composition of matter patents covering the use of orally-administered trospium to treat overactive bladder. We intend to rely on the provisions of the Waxman-Hatch Act to obtain a period of market exclusivity in the United States if the FDA approves trospium in the United States for the intended indication, although there is no assurance that market exclusivity will be granted. The Waxman-Hatch Act establishes a period of time from the date of FDA approval of certain new drug applications during which we would have market exclusivity. The applicable period is five years in the case of drugs containing an active ingredient not previously approved. We intend to seek more extensive market exclusivity protection for trospium through the development of a once-a-day formulation of the drug. If successful in achieving the intended performance specifications for the once-a-day formulations, we will seek patent protection with respect to such formulations, which if granted, is likely to include a term of up to twenty years, although we cannot provide any assurance that any patent on such once-a-day formulations, if granted, can or will preclude eventual market erosion from new technologies or competing products.

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Pagoclone. We licensed from Aventis rights under United States and foreign patents and patent applications covering compositions of matter, processes, and metabolites of pagoclone. A U.S. composition of matter patent was issued in October 1990 and four related U.S. patents were issued in February and March 1996 and February and October 1997.

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

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

In May 2000, we were awarded a U.S. patent, including claims directed to a composition of matter, for a “hyperhydrated” form of citicoline. It is believed that solid forms of citicoline, including tablets, have greater stability when this hyperhydrated form of citicoline is present. We are also pursuing foreign counterparts of this patent in many countries. In addition to any proprietary rights provided by these patents, we intend to rely on the provisions of the Waxman-Hatch Act to obtain a period of marketing exclusivity in the United States if the FDA approves citicoline for marketing in the United States, although there is no assurance market exclusivity will be granted.

IP 751. In June 2002, we licensed exclusive, worldwide rights to IP 751 from Manhattan, in exchange for an up-front licensing payment, development milestones and royalty payments. In August 2003, we entered into an agreement with Sumner Burstein, Ph.D., the individual owner of certain intellectual property rights related to IP 751, under which this individual granted to us an exclusive worldwide license to these rights in exchange for up-front, milestone and royalty payments. In August 2003, we also entered into a renegotiated agreement with Manhattan whereby all remaining rights to IP 751 owned by Manhattan were assigned to us and whereby our financial obligations to Manhattan related to the future development of IP 751 were terminated, in exchange for a combination of cash and equity payments from us to Manhattan. The Manhattan patent portfolio includes patents and patent applications covering the composition of matter, formulations and uses of IP 751. The Manhattan patent portfolio also includes patent coverage for certain cannabinoid analogs and their uses. Foreign counterpart patent applications to cannabinoid drugs and their analogs were filed recently on behalf of Manhattan. We are responsible for the clinical development, regulatory review activities and commercialization of this compound.

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

Aminocandin. We hold an exclusive, worldwide license from Aventis to patents and patent applications related to aminocandin. The patent portfolio for aminocandin includes five sets of patents and patent applications that cover composition of matter, methods and processes of manufacture and compounds related to aminocandin.

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GOVERNMENT REGULATION

Therapeutic. Prior to commercialization, our products will require, prior to commercialization, regulatory clearance by the FDA and by comparable agencies in most foreign countries. The nature and extent of regulation differs with respect to different products. In order to test, produce and market certain therapeutic products in the United States, mandatory procedures and safety standards, approval processes, and manufacturing and marketing practices established by the FDA must be satisfied.

An IND is required before human clinical use in the United States of a new drug compound or biological product can commence. The IND includes results of pre-clinical (animal) studies evaluating the safety and efficacy of the drug and a detailed description of the clinical investigations to be undertaken.

Clinical trials are normally done in three phases, although the phases may overlap. Phase I trials are concerned primarily with the safety and pharmacokinetics of the product. Phase II trials are designed primarily to demonstrate effectiveness and safety in treating the disease or condition for which the product is indicated. These trials typically explore various doses and regimens. Phase III trials are expanded clinical trials intended to gather additional information on safety and effectiveness needed to clarify the product’s benefit-risk relationship, discover less common side effects and adverse reactions, and generate information for proper labeling of the drug, among other things. The FDA receives reports on the progress of each phase of clinical testing and may require the modification, suspension or termination of clinical trials if an unwarranted risk is presented to patients. When data is required from long-term use of a drug following its approval and initial marketing, the FDA can require Phase IV, or post-marketing, studies to be conducted.

With certain exceptions, once successful clinical testing is completed, the sponsor can submit an NDA for approval of a drug. The process of completing clinical trials for a new drug is likely to take a number of years and require the expenditure of substantial resources. There can be no assurance that the FDA or any foreign health authority will grant an approval on a timely basis, or at all. The FDA may deny an NDA, in its sole discretion, if it determines that its regulatory criteria have not been satisfied or may require additional testing or information. Among the conditions for marketing approval is the requirement that the prospective manufacturer’s quality control and manufacturing procedures conform to cGMP regulations. In complying with standards set forth in these regulations, manufacturers must continue to expend time, money and effort in the area of production, quality control and quality assurance to ensure full technical compliance. Manufacturing facilities, both foreign and domestic, also are subject to inspections by, or under the authority of, the FDA and by other federal, state, local or foreign agencies.

Even after initial FDA or foreign health authority approval has been obtained, further studies, including Phase IV, or post-marketing studies, may be required to provide additional data on safety and will be required to gain approval for the use of a product as a treatment for clinical indications other than those for which the product was initially tested. Also, the FDA or foreign regulatory authority will require post-marketing reporting to monitor the side effects of the drug. Results of post-marketing programs may l