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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended September 30, 2004

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 $284,000,000, based on the last sales price of the Common Stock as of March 31, 2004. 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 and individuals or entities related to such persons have been excluded. This determination of affiliate status may not be conclusive for other purposes.

As of December 13, 2004, 46,955,561 shares of Common Stock, $.001 par value per share, of the registrant were issued and outstanding.

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, 2004 to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934 and the Exhibit Index beginning on page number 50 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 SANCTURA^™ (trospium chloride tablets) and SANCTURA XR^™ (once-a-day SANCTURA); 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 SANCTURA and SANCTURA XR; the early stage of products under development; uncertainties relating to clinical trials, regulatory approval and commercialization of our products, particularly SANCTURA and SANCTURA XR; risks associated with contractual agreements, particularly for the manufacture and co-promotion of SANCTURA and SANCTURA XR; dependence on third parties for manufacturing and marketing; competition; need for additional funds and corporate partners, including for the development of our products; 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. SANCTURA and SANCTURA XR are registered trademarks of Indevus.

ITEM 1. Business

(a) General Description of Business

Indevus is a biopharmaceutical company engaged in the acquisition, development and commercialization of a diversified portfolio of pharmaceutical product candidates, including multiple compounds in late-stage clinical development. We currently market SANCTURA for overactive bladder (“OAB”), and we have four compounds in clinical development: pagoclone for anxiety disorders, IP 751 for pain and inflammatory disorders, PRO 2000 for the prevention of infection by HIV and other sexually-transmitted pathogens, and aminocandin for systemic fungal infections.

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We seek to acquire, develop and commercialize a portfolio of pharmaceutical products for a range of therapeutic indications, with a primary focus in urology, gynecology and infectious diseases. The key elements of our business strategy include: (1) identifying product candidates with differentiating features and defined specialty markets, (2) acquiring clinical and late pre-clinical stage compounds, including products with clinical data or market experience outside the U.S., (3) defining strategies to take these compounds through clinical testing and to market, (4) adding value to acquired products through pre-clinical development, clinical testing and regulatory review activities, and (5) commercializing products independently or in collaboration with corporate partners in order to help ensure the penetration of target specialty 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. We believe our increased capabilities in sales and marketing, including our specialty sales force which we hired during fiscal year 2004 strengthen our overall ability to acquire later-stage clinical compounds and marketed products and to collaborate with partners seeking both development and commercialization capabilities.

In August 2004, we launched our lead product, SANCTURA, a muscarinic receptor antagonist for the treatment of OAB. In advance of the market launch of SANCTURA, we entered into a co-promotion and licensing agreement for the U.S. commercialization of SANCTURA with PLIVA d.d. (“PLIVA”) through its specialty branded subsidiary, Odyssey Pharmaceuticals, Inc. (“Odyssey”). Under this agreement, we have received $150 million in up-front and milestone payments, and we are entitled to receive an additional $65 million upon the achievement of certain milestones, as well as royalties on net sales of SANCTURA. In addition, PLIVA is funding, for three years, our specialty sales force that is marketing SANCTURA to urology specialists, obstetricians and gynecologists, and other high prescribers who treat this condition.

It is estimated that more than 33 million Americans suffer from OAB. In 2003, the market for drugs to treat OAB was approximately $1.1 billion in the U.S. The currently marketed SANCTURA is a twice-a-day formulation, and we are currently developing a once-a-day formulation, SANCTURA XR, under an agreement with Shire Laboratories, Inc. (“Shire”).

Pagoclone is a GABA (gamma amino butyric acid) receptor agonist for the treatment of anxiety disorders. To date, there have been three Phase II clinical trials of pagoclone that demonstrated statistically significant efficacy, two in panic disorder and one in generalized anxiety disorder (“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 have been granted a U.S. patent for the use of pagoclone to treat stuttering. We are currently analyzing the clinical and the commercial opportunities associated with the drug treatment of stuttering, and we are contemplating a Phase II trial of pagoclone in stuttering in 2005. We have exclusive, worldwide rights to develop and market pagoclone.

IP 751 is a non-psychoactive synthetic derivative of tetrahydrocannabinol (THC). Pre-clinical studies have shown that this novel anti-inflammatory and analgesic compound appears to inhibit inflammatory cytokines, including IL 1-beta and matrix metalloproteinases (MMPs) through a peroxisome proliferators-activated receptor (PPAR)-mediated mechanism. Results of a Phase II clinical trial conducted in Germany and published in the Journal of the American Medical Association in October 2003 showed that treatment with IP 751 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. We have exclusive, worldwide rights to develop and market IP 751. We will focus our internal resources on certain specialty indications, such as interstitial cystitis, a painful bladder disease, and seek a corporate partner for larger indications such as pain and arthritis.

PRO 2000 is a topical microbicide in development for the prevention of the sexual transmission of HIV and other sexually transmitted diseases (“STDs”). A number of pre-clinical and early clinical studies with PRO 2000 have been completed under the sponsorship of government agencies and research organizations in the U.S.,

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Europe, Africa and India. 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 September 2004, the Microbicide Development Program, funded by the United Kingdom Department for International Development, selected PRO 2000 as the sole agent to be tested in a Phase III clinical trial due to start in 2005 in a number of African countries. In addition, an NIH-sponsored Phase II/III clinical trial to assess the safety and effectiveness of PRO 2000 is planned to begin by early 2005 at sites in Africa and the U.S. Enrollment was recently completed in an ongoing Phase II clinical trial in Uganda funded by the European Commission to assess the safety of PRO 2000. 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. Results of a Phase I trial we conducted with intravenously administered aminocandin showed that it was well tolerated and demonstrated a prolonged duration of anti-fungal activity following single-dose therapy. Data from this trial also indicate that intravenous aminocandin may be amenable to a less frequent dosing regimen, unlike the other echinocandins, which generally must be administered every day. Pending the successful completion of an ongoing multiple-dose Phase I trial of this drug, we plan to initiate Phase II trials in 2005. 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 U.S. Sarafem is prescribed to treat certain conditions and symptoms associated with pre-menstrual syndrome.

Our in-licensing and product acquisition strategy is focused on compounds for the medical specialist. We are seeking development-stage and marketed compounds primarily in urology, gynecology and infectious diseases.

Indevus Pharmaceuticals, Inc. is a Delaware corporation. Our principal office is at 99 Hayden Avenue, Suite 200, 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.

(c) Narrative Description of Business

PRODUCTS

The following table summarizes the status of our products and product candidates.

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SANCTURA

General. We launched our lead product, SANCTURA (trospium chloride tablets), a muscarinic receptor antagonist for the treatment of OAB, on August 23, 2004, in conjunction with Odyssey, PLIVA’s U.S. specialty branded subsidiary. SANCTURA was approved by the FDA on May 28, 2004 and is indicated for the treatment of OAB with symptoms of urge urinary incontinence, urgency and urinary frequency. An estimated 33 million Americans suffer from OAB (Urology, Vol. 63. No. 3, March 2004). In 2003, the market for drugs to treat OAB was approximately $1.1 billion in the U.S. (IMS data). SANCTURA has been extensively studied and is currently marketed in most European countries where it is one of the leading treatments for OAB.

SANCTURA 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 OAB symptoms. Current treatments in the U.S. for OAB include compounds in the same class as SANCTURA.

Development Program. On May 28, 2004, the FDA approved the NDA for SANCTURA. The NDA included data from 34 clinical studies conducted in the U.S. and Europe involving approximately 3,000 subjects.

Our development program for SANCTURA has included two randomized, double-blind, placebo-controlled Phase III trials conducted in the U.S. that were submitted in the NDA. A total of 523 patients were studied at 51 sites in the first of these trials, believed to be the first study in the OAB category to pre-specify and to achieve dual primary endpoints, comparing the reduction in the frequency of urination and the reduction in urge urinary incontinence episodes among drug-treated patients versus placebo patients. The three-month trial measured the effects of 20 milligrams (mg) of SANCTURA versus placebo, twice daily, on symptoms of OAB. Patients treated with SANCTURA experienced statistically significantly fewer toilet voids per day at the end of the three-month trial than did patients on placebo. The improvement (decrease) in number of toilet voids for the SANCTURA group compared with the placebo group was observed at each measurement date during the trial (weeks 1, 4 and 12). At week 12, SANCTURA-treated patients had 2.37 (p<0.0001) fewer toilet voids per day, compared to baseline, and placebo patients had 1.29 fewer toilet voids per day compared to baseline. SANCTURA-treated patients also experienced statistically significantly fewer episodes of urge urinary incontinence per day at the end of the three-month trial than did placebo patients. This improvement (decrease) in incontinence episodes for the SANCTURA group was observed beginning at week 1 and continued throughout the study. SANCTURA patients had 59 percent (p<0.0001) fewer incontinence episodes per day at the end of the study, compared to baseline, and placebo patients had 44 percent fewer incontinence episodes at the end of the study, compared to baseline. SANCTURA-treated patients increased their volume voided per void beginning at week 1 and continuing through three months (p<0.0001), with an increase of 32.1 milliliters (mL) at week 12, compared to an increase of 7.7 mL in placebo patients. Treatment with SANCTURA also led to a significant improvement (decrease) in average urgency severity, another key symptom of OAB, beginning at week 1 and continuing through three months (p=0.0001). These findings are consistent with the expected pharmacodynamic effects of SANCTURA and the increase of maximum bladder capacity caused by anticholinergic relaxation of the detrusor muscle. Data from this first U.S. Phase III trial were presented at the annual meeting of the American Urological Association annual meeting in April 2003 and published in the Journal of Urology, May 2004.

A nine-month open label period followed the conclusion of this three-month trial. A total of 407 of the original 523 patients opted to continue treatment into the open-label phase of this trial. Two hundred and four patients originally randomized to placebo in the double-blind phase were switched to SANCTURA, while 203 patients continued with SANCTURA treatment. After treatment for up to one year, patients continuing on SANCTURA treatment maintained comparable and sustained efficacy for the entire treatment period. Patients who crossed over from placebo to SANCTURA rapidly experienced a similar degree of efficacy which was also sustained for the entire nine-month period. Regardless of initial treatment, at 12 months the mean reduction in frequency of urination for all patients ranged from 18 to 21 voids per week, and the mean reduction in urge incontinence episodes for patients who switched from placebo to SANCTURA was 72 percent and for patients

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who continued on SANCTURA was 64 percent, compared to baseline. All patients experienced an average increase of 27 to 28 ml in volume voided per void at the end of the study. Treatment with SANCTURA was also well tolerated, and the most frequently reported adverse events were dry mouth at 11.3 percent and constipation at 8.8 percent. Data from this trial were presented at the annual meeting of the American Urogynecological Society in July 2004.

Additional data analyses from this trial presented at the International Continence Society Meeting in October 2003 showed that treatment with SANCTURA 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). Additional data from this trial presented at a sectional meeting of the American Urology Association in October 2003 demonstrated that early patient response to treatment with SANCTURA is an accurate predictor of long-term therapeutic success. Urgency severity is not yet approved in any labeling. Indevus plans to submit a supplemental NDA to provide for inclusion of these data in the SANCTURA package insert.

Our second Phase III trial included a total of 658 patients studied at 52 sites in the U.S. The trial measured the effects of 20 mg of SANCTURA given twice daily versus placebo on symptoms of OAB. Patients treated with SANCTURA experienced statistically significantly fewer toilet voids per day at the end of the 12-week trial than did patients on placebo. The improvement (decrease) in number of toilet voids for the SANCTURA group compared with the placebo group was observed at each follow-up visit during the trial (weeks 1, 4 and 12). SANCTURA-treated patients had fewer toilet voids at week 1 and continuing through three months, with an average of 2.67 (p<0.0001) fewer toilet voids per day at three months compared to baseline, while placebo patients had an average of 1.76 fewer toilet voids per day compared to baseline. SANCTURA-treated patients also experienced statistically significantly fewer episodes of urge urinary incontinence per day at the end of the 12-week trial than did patients on placebo. This improvement (decrease) in incontinence episodes for the SANCTURA group was observed beginning at week 1 and continued throughout the study. Using median percent change, SANCTURA-treated patients had 83 percent (p<0.0001) fewer incontinence episodes per day at the end of the study compared to baseline, and placebo patients had 50 percent fewer incontinence episodes per day compared to baseline. SANCTURA-treated patients increased their volume voided per void beginning at week 1 and continuing through week 12 (p<0.0001), with an increase of 35.6 mL at week 12, compared to an increase of 9.4 mL in placebo patients. In addition to these endpoints, the trial assessed the effect of SANCTURA on daytime sleepiness using the Stanford Sleepiness Scale (SSS). The changes in average SSS scores were minimal and comparable for the SANCTURA and placebo treatment groups at weeks 1, 4 and 12. SANCTURA was well tolerated in this trial as well, as evidenced by its adverse event profile that included the most common adverse events associated with the antimuscarinic class of drugs, dry mouth and constipation. Data from this second U.S. Phase III trial were presented at the annual meeting of the International Continence Society in August 2004.

Across the two U.S. Phase III trials, the most common adverse events considered possibly related to treatment were dry mouth (20.1 percent for SANCTURA vs. 5.8 percent for placebo), constipation (9.6 percent for SANCTURA vs. 4.6 percent for placebo) and headache (4.2 percent for SANCTURA vs. 2.0 percent for placebo). Like other products in this class, SANCTURA is contraindicated in patients with or at risk for urinary retention, gastric retention, uncontrolled narrow-angle glaucoma and in patients who have demonstrated hypersensitivity to the drug or its ingredients.

In February 2004, we announced a 90-day extension to the original FDA Prescription Drug User Fee Act (PDUFA) action date based on our submission of a second clinical trial to determine if SANCTURA has any clinically significant effect on cardiac electrophysiology, as measured by the QT interval of cardiac muscle contractility. Our previously submitted NDA contained a placebo-controlled study, designed with FDA input and considered the current standard at the time, concluding that SANCTURA did not prolong the QT interval.

In November 2002, the FDA issued a preliminary concept paper concerning the clinical evaluation of QT interval prolongation for non-antiarrhythmia drugs which stipulated that QT interval studies should have larger sample sizes than previously required, should include a greater number of ECG readings than previously

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required, and should include a positive control, such as the drug moxifloxacin, which causes a predictable increase in the QT interval. In late 2003, we became aware that a competitive OAB product with a pending NDA received an approvable letter, requiring the sponsor to perform a QT study. A second competitive OAB product also received an approvable letter with a requirement to perform additional unspecified clinical studies. Although we believe that our first QT study of SANCTURA, completed in 2001, demonstrated no effect on the QT interval, we decided to perform a second QT study with the new standard as described in the November 2002 FDA concept paper. FDA was consulted on the study design, the study was completed in late 2003, and the final study report was submitted to FDA. The study demonstrated that both SANCTURA and placebo had no significant effect on the QT interval while moxifloxacin, the positive comparator, had an expected increase in QT interval. Thus, the study concluded that SANCTURA has no significant effect on the QT interval. There was an incidental finding of more non-specific T-wave inversion in the SANCTURA treatment group than the placebo and active comparator group. These findings were asymptomatic, of unknown clinical significance and were not observed in the two U.S. Phase III trials involving 591 OAB patients receiving SANCTURA. As a result of the submission of this new QT study, the FDA established a 90-day extension to the original PDUFA date of February 27, 2004, moving that date to May 28, 2004, on which the FDA approved the SANCTURA NDA.

Our current formulation of SANCTURA is twice-a-day. In March 2003, we signed an exclusive agreement with Shire under which Shire is developing extended release formulations of SANCTURA. We have completed pharmacokinetic and safety studies with several once-a-day formulations, and we expect to begin Phase II clinical trials with a lead formulation, to be known as SANCTURA XR, in the first half of calendar year 2005, to be followed by the initiation of a Phase III clinical program with this formulation planned later in 2005.

Madaus currently manufactures SANCTURA in Germany. In order to manufacture the product for sale in the U.S., Madaus’ manufacturing must comply with U.S. current Good Manufacturing Practices, (“cGMP”). The FDA conducted a pre-approval inspection at the Madaus manufacturing facility in early February 2004. No significant issues were noted by the inspector, and as a result, Madaus initiated and continues manufacturing of SANCTURA for use in the U.S.

Commercialization. On April 6, 2004, we entered a co-promotion and licensing agreement with PLIVA through its specialty branded subsidiary, Odyssey, for the U.S. commercialization of SANCTURA. The agreement provides for payments to Indevus from PLIVA that include $30 million received by us upon signing and $120 million received by us upon the approval of SANCTURA by the FDA on May 28, 2004. In addition, we could receive up to $45 million in future payments contingent upon the achievement of certain milestones related to the development of SANCTURA XR, as well as a payment of $20 million related to the achievement of a long-term commercialization milestone in 2013.

For the first six months following the approval of SANCTURA, we received a commission based on net sales of SANCTURA. During this period, we were responsible for funding our own sales force and certain advertising and promotional costs and PLIVA and Indevus co-promoted SANCTURA through a joint sales force of approximately 500 sales representatives. We established a sales force initially numbering approximately 280 representatives promoting SANCTURA to urology specialists, obstetricians and gynecologists, and certain primary care physicians. Pursuant to the terms of our agreement, we have exercised our right to convert the agreement into a royalty-bearing structure. The conversion became effective on November 29, 2004.

Under the royalty-bearing structure, we receive royalties from PLIVA based on net sales of SANCTURA, and PLIVA is responsible for promotional, advertising and sales-force related costs. We also transferred to PLIVA approximately 200 of our sales representatives who were promoting SANCTURA to primary care physicians and certain other specialists. We have retained a specialty sales force of approximately 85 sales representatives who continue to promote SANCTURA to urology specialists, obstetricians and gynecologists, and other high prescribers. This specialty sales force is subsidized by PLIVA for three years.

Under our agreement with PLIVA, we are responsible for funding the development of the once-a-day formulation of SANCTURA. We purchase commercial quantities of SANCTURA in bulk form from Madaus and

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supply the finished product to PLIVA, who is responsible for product distribution and records revenue for sales of the product.

Pagoclone

General. Pagoclone is under development as a treatment for anxiety disorders. Clinical targets to date have included 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 U.S. (Drug and Market Development, October 2001) and approximately 60 million worldwide with anxiety disorders (In Vivo, September 2001).

Anxiety disorders 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, serotonin/norepinephrine 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. 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 Inc. (“Pfizer”), then our licensee. 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 planning additional clinical development with pagoclone to begin in 2005.

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, 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

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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 U.S. 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. Pfizer also conducted a study with pagoclone in panic disorder. 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. Based on these findings, Pfizer subsequently elected not to pursue further development of the compound and returned to us exclusive, worldwide development and commercialization rights to pagoclone.

We have been carefully analyzing clinical and regulatory strategies to maximize the commercial potential of pagoclone. Although GAD is a large potential commercial opportunity, there are several mitigating factors that we have been considering: (1) additional Phase III trials in GAD are large and expensive; (2) it will be necessary

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to out-license pagoclone to a larger company with a substantial primary care sales force to successfully launch the product; and (3) the available patent coverage for GAD is limited to 2012 assuming a Waxman-Hatch extension. These factors limit the commercial possibilities for pagoclone in GAD. We have recently been granted a new method of use patent in the U.S. that covers the use of pagoclone as a therapeutic agent for stuttering. Stuttering is a disease of uncertain etiology that affects approximately three million children and adults in the U.S. The therapy of stuttering consists mainly of behavioral modification and speech therapy. There are currently no drugs approved in the U.S. for the therapy of stuttering.

In the course of clinical trials for GAD and panic with pagoclone, we observed three patients who entered these trials with a secondary diagnosis of stuttering. These patients were noted to have a dramatic reduction in stuttering while receiving pagoclone. On discontinuation of study drug, stuttering returned to positive levels. These patients represented a small sample of the study and additional testing is necessary to determine whether pagoclone would be effective among a larger group of patients who stutter.

We are currently evaluating the clinical and regulatory pathway to study pagoclone in stuttering and the commercial opportunity in the U.S., where full-term pagoclone patent coverage exists, and in Europe, where patents were not filed but where ten years of data exclusivity is usually granted for the approval of a new chemical entity. We are contemplating initiating a Phase II study in stuttering during 2005 pending future evaluation of clinical and commercial factors. Given the substantial preclinical, clinical and manufacturing database that has been generated by us, our licensor, Aventis, and our former partners, Warner-Lambert and Pfizer, we believe pagoclone is a highly leveraged commercial opportunity. Should it be demonstrated to be safe and effective in stuttering, we believe we could form a specialty sales force that could successfully introduce the product to pediatric and adult neurologists in the U.S. We expect to seek a partner to commercialize the product outside the U.S.

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 IL-1 beta and matrix metalloproteinases (MMPs) through a peroxisome proliferators-activated receptor (PPAR)-gamma-mediated mechanism, which are implicated in pain and inflammation. Pre-clinical studies suggest that IP 751 may lack the gastrointestinal ulceration associated with NSAIDs (non-steroidal anti-inflammatory agents) and the cardiovascular effects seen with COX-2 (cyclooxygenase-2) inhibitors. 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, as well as other specialty focused indications.

Development Program. Pre-clinical development of IP 751 has demonstrated that it is active in multiple pre-clinical models of pain and inflammation. 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

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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 preclinical, Phase I and Phase II clinical trials are currently being planned for IP 751.

An IND for IP 751 was filed in March, 2000. We are currently completing manufacturing process activities related to IP 751 in advance of future clinical trials. The broad scope of therapeutic targets for IP 751 offers the potential for corporate partnering activities focused on those indications requiring large trials and significant financial resources. While we believe that larger clinical indications may ultimately represent significant value for the product, consistent with our business model we are focusing our internal efforts on specialty disease states, such as interstitial cystitis, a painful bladder disease, that can be targeted for commercialization with a specialty sales force. We are currently defining the optimal preclinical and clinical proof of principle pathways for this and other specialty indications which we would seek to retain for self-marketing in the U.S. In parallel, we are seeking a partner to maximize the overall potential of IP 751 for the larger clinical indications.

PRO 2000

General. PRO 2000 is under development as a topical vaginal 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 5 million new adult HIV infections occurred worldwide in 2004 with the majority of the infections arising from heterosexual intercourse. Other STDs, such as genital herpes, chlamydia and gonorrhea, can lead to serious complications, especially in women, and can increase the risk of HIV infection. The Kaiser Family Foundation and the World Health Organization have estimated that there are approximately 15 million new STD cases each year in the U.S. and more than 340 million worldwide. Topical microbicides represent a new class of protective substances that are designed to be applied vaginally before sexual contact. Topical microbicides have the potential to offer 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 HIV, herpes simplex virus, chlamydia and the bacterium that causes gonorrhea. In government-sponsored tests, vaginally applied PRO 2000 was shown to be efficacious in mouse models for genital herpes infection and gonorrhea, 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 U.S., Europe, Africa and India. 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 U.S. and South Africa. This study was designed to assess safety and acceptability in healthy, sexually active women and HIV-infected, sexually abstinent women. The results were presented at the International Congress of Sexually Transmitted Infections in June 2001 (Mayer et al., The Safety and Tolerability of PRO 2000 Gel, a Novel Topical Microbicide, in Sexually Active HIV- and Abstinent HIV+ Women). No serious side effects were reported in this trial, and the investigators concluded that PRO 2000 was safe and

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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 to subsidize 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 Uganda funded by the European Commission. This trial is designed to assess the safety of PRO 2000 in approximately 200 sexually active female volunteers. Enrollment in this trial is completed.

An NIH-sponsored Phase II/III clinical trial to assess the safety and effectiveness of PRO 2000 in blocking male to female HIV transmission is planned to begin in late 2004 at sites in Africa and the U.S. The study is expected to involve approximately 3,200 HIV-uninfected women, most of whom are at risk for acquiring HIV by virtue of living in regions where the infection rate is high. The trial will also evaluate effectiveness against other STDs. In connection with this trial, the HIV Prevention Trials Network (HPTN) provided funding through Family Health International (FHI) to reimburse certain costs related to supplies of PRO 2000.

PRO 2000 is also being tested by the Microbicides Development Programme (MDP), an international partnership to develop and test vaginal microbicides. MDP was established in February 2002 with funding of approximately $22.7 million from the United Kingdom’s Department for International Development (DFID). The program is administered by Clinical Trials Unit of the Medical Research Council (MRC) and Imperial College in London, and involves researchers in the U.K., Cameroon, South Africa, Tanzania, Uganda and Zambia. In September 2004, the MDP selected PRO 2000 as the sole agent to be tested in a Phase III clinical trial due to start in 2005 in a number of African countries. An estimated 12,000 women will be recruited and supported for nine months or longer in connection with these trials. In a statement, the MDP explained that PRO 2000 had been shown in laboratory studies to be substantially more effective in blocking HIV infection than another microbicide known as Emmelle. Two doses of PRO 2000 (0.5 percent and 2 percent) are to be tested in order to provide information about the relationship between dose and protection.

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. The echinocandins function by inhibiting a key component of the cell wall of fungi, and lack cross-resistance with older antifungal agents. 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.

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

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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.

Aminocandin has shown in vitro and in vivo activity against a number of candida and aspergillus fungal species. The worldwide market for anti-fungal agents that target invasive fungal infections is currently estimated at $3.5 billion (visiongain, 2004 report).

Development Program. Results of a Phase I clinical trial of the intravenous formulation of aminocandin completed in June 2004 showed that it was well tolerated among healthy volunteers and demonstrated a prolonged duration of anti-fungal activity following single-dose administration. The trial was designed to test the safety and tolerance of rising single doses of intravenously administered aminocandin among approximately 40 healthy volunteers. Secondary objectives included the pharmacokinetic assessment of aminocandin in plasma and urine, and the determination of in vitro fungicidal activity of the serum collected from the volunteers.

Dose levels achieved during this trial were approximately seven-fold higher than the anticipated clinical dose and were all well tolerated. Of particular note was the absence of infusion-related histamine reactions, a recognized effect of other drugs in the echinocandin class, and the lack of a significant infusion-associated rise in plasma histamine levels, even at the highest doses and concentrations of administered drug. Furthermore, following single intravenous doses, significant fungicidal activity was observed in patients’ serum samples for up to one week. These results indicate the possibility that the compound might be amenable to a longer dosing regimen than other echinocandins which are generally once-a-day drugs.

A multi-dose Phase I trial of aminocandin was initiated in October 2004 to test the safety, tolerability and pharmacokinetics of rising multiple doses among 32 healthy volunteers. In this trial, the in vitro activity of aminocandin will be evaluated in serum samples from trial subjects challenged with certain species of the fungi candida and aspergillus. Ascending rising doses of the drug will be tested, and escalation to the next higher dose will be based on safety as well as systemic and local tolerance. Results of this trial will help optimize the dosing level and regimen for further clinical testing, including Phase II clinical trials expected to begin in 2005.

We believe that aminocandin may have 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 and feasibility studies 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.

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AGREEMENTS

SANCTURA. In November 1999, we entered into an agreement with Madaus under which we licensed exclusive rights to develop and market SANCTURA in the U.S. 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 royalties on net sales received from the sublicencee, in lieu of royalty payments. We are responsible for all clinical development and regulatory activities and costs related to the compound in the U.S. 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 SANCTURA enabling SANCTURA 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 SANCTURA. We will be responsible for all development costs and the commercialization of extended release formulations of SANCTURA under this agreement.

On April 6, 2004, we entered into a co-promotion and licensing agreement with PLIVA through its specialty branded subsidiary, Odyssey, for the U.S. commercialization of SANCTURA for OAB. The agreement provides for payments to Indevus from PLIVA that include $30 million received by us upon signing and $120 million received by us upon the approval of SANCTURA by the FDA in May 2004. In addition, we could receive up to $45 million in future payments contingent upon the achievement of certain milestones related to the development of SANCTURA XR, as well as a payment of $20 million related to the achievement of a long-term commercialization milestone in 2013.

For the six months following the approval of SANCTURA, called the co-promotion period, we received a commission based on net sales of SANCTURA, a portion of which funded our own sales force and certain advertising and promotional costs. We are co-promoting SANCTURA with PLIVA through a joint sales force of approximately 500 sales representatives. We established a sales force initially numbering approximately 280 representatives promoting SANCTURA to urology specialists, obstetricians and gynecologists, and certain primary care physicians.

Under our agreement with PLIVA, at any time beginning six months after the approval of SANCTURA, each company had the right to convert the agreement into a royalty-bearing structure, whereby we would receive royalties from PLIVA based on net sales of SANCTURA, and PLIVA would be responsible for promotional, advertising and sales force-related costs. On September 27, 2004, we formally notified PLIVA of our election to terminate the initial six-month co-promotion period of the agreement, thereby converting the agreement into a royalty-bearing structure. The conversion became effective on November 29, 2004. We transferred to PLIVA approximately 200 of our sales representatives who were promoting SANCTURA to primary care physicians and certain other specialists. We have retained a specialty sales force of approximately 85 sales representatives who continue to promote SANCTURA to urology specialists, obstetricians and gynecologists, and other high prescribers. This specialty sales force is subsidized by PLIVA for three years.

Under our agreement with PLIVA, we supply the finished SANCTURA product to PLIVA, who is responsible for product distribution. We are responsible for funding the development of SANCTURA XR under our agreement with PLIVA.

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 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 payments. Under the terms of our agreement with Aventis, we are responsible for all costs of developing, manufacturing, and marketing pagoclone.

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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.

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 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 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.

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. In September 2004, we exercised this option and made a $500,000 buyout payment to Paligent for the acquisition of all rights to PRO 2000.

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.

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.

Effective January 22, 2004, we entered into a new agreement with Ferrer superseding our January 1993 agreement and covering the development, manufacture, and marketing of citicoline in the U.S. and Canada. Under the terms of the new agreement, we have granted Ferrer exclusive rights to our patents and know-how related to citicoline. In exchange, Ferrer agreed to assume all future development, manufacturing, and commercialization costs of citicoline. Indevus will receive 50% of all milestone payments made to Ferrer by a third party and royalties on net sales of the product. On October 26, 2004, IVAX Corporation announced a licensing agreement between Grupo Ferrer and IVAX for citicoline. Under the terms of this agreement, IVAX will be responsible for fulfilling the requirements for FDA approval of citicoline for acute stroke and for commercializing citicoline in the U.S.

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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 which is marketed under the trade name Sarafem. Lilly’s composition of matter patent on fluoxetine expired in July 2001. The Lilly agreement provided for milestone payments and royalties based on net sales of fluoxetine attributable to the approved indication in the U.S. up to an annual maximum limit. In December 2002, 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 U.S. 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, in some cases, for 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, in some cases, for the 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 additional marketing capabilities, we may require substantial additional funds.

SANCTURA. Pursuant to our April 6, 2004 agreement with PLIVA, we and PLIVA are co-promoting SANCTURA through a joint sales force of approximately 500 sales representatives. For the six months following the approval of SANCTURA on May 28, 2004, we established a sales force initially numbering approximately 280 representatives promoting SANCTURA to urology specialists, obstetricians and gynecologists, and certain primary care physicians. During that period, we were responsible for funding our sales force and certain advertising and promotional costs.

Pursuant to the terms of our agreement, we exercised our right to convert the agreement into a royalty-bearing structure effective November 29, 2004. Under this royalty-bearing structure, PLIVA is responsible for all advertising and promotional costs. We transferred to PLIVA a majority of our sales force who are promoting SANCTURA to primary care physicians and certain other specialists. We have retained a specialty sales force of approximately 85 sales representatives who continue to promote SANCTURA to urology specialists, obstetricians and gynecologists, and other high prescribers. This specialty sales force is subsidized by PLIVA for three years.

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In December 2002, we entered into a manufacturing agreement with Madaus, whereby Madaus produces and sells to us commercial quantities of SANCTURA in bulk form. We supply the finished product to PLIVA, and under our agreement with PLIVA, PLIVA is responsible for product distribution.

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

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. 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.

SANCTURA. Current therapy for OAB includes anticholinergics, such as Detrol and Detrol LA (tolterodine) by Pfizer, Ditropan and Ditropan XL (oxybutynin) by Johnson & Johnson, Inc., Oxytrol (oxybutynin transdermal patch) by Watson Pharmaceuticals, and generic oxybutynin. Vesicare^® (solifenacin) by Yamanouchi Pharma America and Glaxo Smith Kline was approved by the FDA in November 2004. We are aware of other companies evaluating specific antimuscaranics and antispasmodics in pre-clinical and clinical development or under regulatory review for OAB, including Enablex^® (darifenacin) by Novartis AG. Certain products currently on the market for the treatment of OAB are available in once-a-day formulations, unlike our currently marketed twice-a-day formulation of SANCTURA. We are currently developing SANCTURA XR, a once-a-day formulation of SANCTURA, under an agreement with Shire Laboratories.

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Pagoclone. According to the National Center for Stuttering, current treatment programs for this condition include speech therapies that are physical, psychological and nutritional, designed to reduce the tension on the vocal chords.

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, serotonin/norepinephrine reuptake inhibitors such as Effexor (venlafaxine, Wyeth) and selective serotonin reuptake inhibitors such as Paxil^® (paroxetine, Glaxo SmithKline), Zoloft^® (sertraline, Pfizer), Lexapro^™ (escitalopram, Forest) and Prozac^® (fluoxetine, Eli Lilly). 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. 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.

IP 751. Current treatments for interstitial cystitis are aimed at relieving symptoms and include Elmiron (pentosan polysulfate sodium), approved by the FDA in 1996. As a first line of defense against mild discomfort, physicians may recommend aspirin and ibuprofen. Some patients have experienced improvement by taking antidepressants or antihistamines. In patients with severe pain, narcotic analgesics or longer acting narcotics may be necessary.

A variety of treatments are currently prescribed for pain and inflammatory disorders, including opioids, NSAIDs (non-steroidal anti-inflammatories), COX-2 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, 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. Pre-clinical studies suggest that IP 751 may lack the gastrointestinal ulceration seen with NSAIDs and the cardiovascular effects seen with COX-2 inhibitors. We believe IP 751 has a broad potential to treat painful inflammatory conditions such as arthritis, post-operative pain, and musculoskeletal injuries.

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. Cancidas^® (caspofungin, Merck & Co.) is available in the U.S. 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 received an approvable letter in May 2004 from the FDA for anidulafungin and is pursuing the approval of this compound for both esophageal candidiasis and invasive candidemia/candidiasis.

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

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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.

SANCTURA. There are no existing U.S. composition of matter patents covering the use of orally-administered SANCTURA to treat OAB. The Waxman-Hatch Act provides for a period of market exclusivity in the U.S. for SANCTURA for five years following the date of FDA approval, May 28, 2004. This is the exclusivity period provided for drugs containing an active ingredient not previously approved by the FDA. We intend to seek more extensive market exclusivity protection for SANCTURA through the development of SANCTURA XR, the once-a-day formulation of the drug. We expect to seek patent protection with respect to SANCTURA XR, which if granted, is likely to include a term of up to twenty years. However, 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.

Pagoclone. We licensed from Aventis rights under U.S. 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. A Notice of Allowance was issued in November 2004 for a pagoclone patent covering methods and compositions for alleviating stuttering.

IP 751. In June 2002, we licensed exclusive, worldwide rights to IP 751 from Manhattan. 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 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. The IP 751 patent portfolio includes patents and patent applications covering compositions of matter, formulations and uses of IP 751 and analogs.

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 were 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 been issued in South Africa. Composition and use claims are under review in several other territories, including Europe, Canada and Japan.

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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.

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 in 1997, except in the U.S. 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.

GOVERNMENT REGULATION

Therapeutic. Prior to commercialization, our products will require 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 U.S., 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 U.S. 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.