10-Q 1 a2048380z10-q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------- FORM 10-Q ---------- (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____ to ____ Commission File Number: 000-30289 PRAECIS PHARMACEUTICALS INCORPORATED ------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 04-3200305 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 830 Winter Street, Waltham, MA 02451-1420 ---------------------------------------------------- (Address of principal executive offices and zip code) (781) 795-4100 ----------------- (Registrant's telephone number, including area code) One Hampshire Street, Cambridge, MA 02139-1572 ---------------------------------------------------- (Former name, former address and former fiscal year, if changed since lastreport) 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 [ ] As of April 30, 2001, there were 50,789,215 shares of the registrant's common stock, $0.01 par value, outstanding. PRAECIS PHARMACEUTICALS INCORPORATED FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2001 INDEX

PAGE NUMBER ------ PART I. FINANCIAL INFORMATION 3 Item 1. Financial Statements 3 Condensed Consolidated Balance Sheets - December 31, 2000 and March 31, 2001 (unaudited) 3 Condensed Consolidated Statements of Operations (unaudited) - three months ended March 31, 2000 and 2001 4 Condensed Consolidated Statements of Cash Flows (unaudited) - three months ended March 31, 2000 and 2001 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk 24 PART II. OTHER INFORMATION 26 Item 2. Changes in Securities and Use of Proceeds 26 Item 6. Exhibits and Reports on Form 8-K 26 SIGNATURE 28 EXHIBIT INDEX 29

PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. PRAECIS PHARMACEUTICALS INCORPORATED Condensed Consolidated Balance Sheets (In thousands, except share and per share data)

December 31, March 31, 2000 2001 --------------- ------------- (unaudited) ASSETS Current assets: Cash and cash equivalents ....................... $132,207 $231,639 Marketable securities ........................... -- 58,673 Accounts receivable ............................. 1,079 986 Refundable income taxes ......................... 4,853 4,795 Unbilled revenue ................................ 1,493 1,265 Prepaid expenses and other assets ............... 786 941 -------- -------- Total current assets ...................... 140,418 298,299 Property and equipment, net ......................... 53,821 66,503 Other assets ........................................ 1,332 1,215 -------- -------- Total assets $195,571 $366,017 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ................................ $ 12,834 $ 15,995 Accrued expenses ................................ 7,142 7,775 Deferred revenue ................................ 4,709 3,572 ------- -------- Total current liabilities ................. 24,685 27,342 Deferred revenue .................................... 355 315 Long term debt ...................................... 24,000 26,881 Commitments and contingencies Stockholders' equity: Preferred Stock, $0.01 par value; 10,000,000 shares authorized; no shares issued and outstanding ................................. -- -- Common Stock, $0.01 par value; 200,000,000 shares authorized; 42,284,199 shares in 2000 and 50,771,815 shares in 2001 issued and outstanding ................................. 423 508 Accumulated other comprehensive income .......... -- 12 Additional paid-in capital ...................... 175,937 352,635 Accumulated deficit ............................. (29,829) (41,676) -------- -------- Total stockholders' equity ................ 146,531 311,479 -------- -------- Total liabilities and stockholders' equity ............................. $195,571 $366,017 ======== ========

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 3 PRAECIS PHARMACEUTICALS INCORPORATED Condensed Consolidated Statements of Operations (In thousands, except share and per share data) (unaudited)

Three Months Ended March 31, ---------------------------------------- 2000 2001 ------------------- -------------- Revenues: Corporate collaborations................................ $ 9,001 $ 2,582 --------- ---------- Total revenues.................................... 9,001 2,582 Costs and expenses: Research and development................................ 11,276 12,210 Sales and marketing..................................... 275 3,099 General and administrative.............................. 1,119 1,594 --------- ---------- Total costs and expenses............................ 12,670 16,903 --------- ---------- Operating loss.............................................. (3,669) (14,321) Interest income, net........................................ 1,294 2,474 --------- ---------- Loss before income taxes.................................... (2,375) (11,847) Provision for income taxes.................................. 100 -- --------- ---------- Net loss.................................................... $ (2,475) $ (11,847) ========= ========== Basic and diluted net loss per share........................ $ (0.36) $ (0.26) ========= ========== Weighted average number of basic and diluted shares outstanding............................... 6,844,407 46,049,676 Pro forma basic and diluted net loss per share.............. $ (0.08) $ (0.26) ========= ========== Pro forma weighted average number of basic and diluted common shares outstanding.............. 32,452,257 46,049,676

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 4 PRAECIS PHARMACEUTICALS INCORPORATED Condensed Consolidated Statements of Cash Flows (In thousands) (unaudited)

Three Months Ended March 31, ---------------------------------- 2000 2001 ---------------------------------- OPERATING ACTIVITIES: Net loss ................................................................ $ (2,475) $ (11,847) Adjustments to reconcile net loss to cash used in operating activities: Depreciation and amortization ........................................ 633 312 Stock compensation ................................................... 462 (281) Changes in operating assets and liabilities: Accounts receivable ............................................... 1,777 93 Refundable income taxes ........................................... -- 58 Unbilled revenue .................................................. 1,592 228 Materials inventory ............................................... (5,230) -- Prepaid expenses and other assets ................................. (3,497) (38) Accounts payable .................................................. (1,176) 3,161 Accrued expenses .................................................. (342) 633 Deferred revenue .................................................. (835) (1,177) Advance payments .................................................. 5,230 -- Income taxes payable .............................................. (4,572) -- ------------ --------- Net cash used in operating activities ................................... (8,433) (8,858) INVESTING ACTIVITIES: Purchase of available-for-sale securities ............................... -- (58,661) Purchase of property and equipment ...................................... (493) (12,994) ------------ --------- Net cash used in investing activities ................................... (493) (71,655) FINANCING ACTIVITIES: Net follow-on offering proceeds ......................................... -- 175,892 Proceeds from debt issuance ............................................. -- 2,881 Proceeds from issuance of common stock, options and warrants ............ 716 1,172 Principal repayments of capital lease obligations ....................... (19) -- ------------ --------- Net cash provided by financing activities ............................... 697 179,945 ------------ --------- Net (decrease) increase in cash and cash equivalents .................... (8,229) 99,432 Cash and cash equivalents, beginning of period .......................... 94,525 132,207 ------------ --------- Cash and cash equivalents, end of period ................................ $ 86,296 $ 231,639 ============ =========

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 5 PRAECIS PHARMACEUTICALS INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION The accompanying condensed consolidated financial statements have been prepared by PRAECIS PHARMACEUTICALS INCORPORATED (the "Company") in accordance with generally accepted accounting principles and pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. It is suggested that the financial statements be read in conjunction with the audited financial statements and the accompanying notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. The information furnished reflects all adjustments which, in the opinion of management, are considered necessary for a fair presentation of results for the interim periods. Such adjustments consist only of normal recurring items. It should also be noted that results for the interim periods are not necessarily indicative of the results expected for the full year or any future period. The preparation of these financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES NEW ACCOUNTING PRONOUNCEMENT In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"), ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which is effective for fiscal year 2001. SFAS No. 133 requires all derivatives to be carried on the balance sheet as assets or liabilities at fair value. The Company has entered into an interest rate cap agreement in order to reduce the potential impact of interest rate increases on future income. The accounting for changes in fair value would depend on the hedging relationship and would be reported in the income statement or as a component of comprehensive income. The adoption of SFAS No. 133 during 2001 did not have a material impact on the Company's financial position or results of operations. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the Company's accounts and the accounts of its wholly owned real estate subsidiary. All significant intercompany account balances and transactions between the companies have been eliminated. NET LOSS PER SHARE Basic net loss per share is based on the weighted average number of common shares outstanding. For the three months ended March 31, 2000 and 2001, diluted net loss per common share is the same as basic net loss per common share as the inclusion of weighted average shares of common stock issuable upon exercise of stock options and warrants would be antidilutive. Pro forma net loss per share has been computed as described above and also gives effect, under SEC guidance, to the conversion of preferred shares not included above that automatically converted to common shares upon the closing of the Company's initial public offering in May 2000, using the if-converted method. The reconciliation of the denominators of the historical and pro forma, basic and diluted net loss per share calculations is as follows:

THREE MONTHS ENDED MARCH 31, ------------------------- 2000 2001 -------- ----------- Historical: Weighted average number of common shares outstanding used in computing basic and 6,844,407 46,049,676 diluted net loss per share ............................ ========= ========== Pro forma: Weighted average number of common shares used in computing basic and diluted net loss per share (from above) ................................ 6,844,407 46,049,676 Adjustment to reflect the effect of the assumed conversion of preferred stock from 25,607,850 -- the date of issuance .................................. ---------- ---------- Weighted average number of common shares outstanding used in computing pro forma basic net loss per share............................... 32,452,257 46,049,676 ========== ==========

COMPREHENSIVE INCOME SFAS No. 130 REPORTING COMPREHENSIVE INCOME establishes standards for the reporting and display of comprehensive income and its components in the consolidated financial statements. The Company's accumulated other comprehensive income is comprised primarily of net unrealized gains or losses on available-for-sale securities. Comprehensive net loss is not presented for either the three months ended March 31, 2000 or 2001, as there was no material difference between the reported net loss and the comprehensive net loss. 3. INVESTMENTS Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. The Company's debt securities are classified as available-for-sale and are carried at estimated fair value in cash equivalents and marketable securities. Unrealized gains and losses are reported as accumulated other comprehensive income in stockholders' equity. The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest income. Realized gains and losses on available-for-sale securities are included in interest income and expense. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest income. The Company's cash, cash equivalents and marketable securities as of March 31, 2001 are as follows (in thousands):

GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ---------- ---------- ---------- ----------- Money market funds .................................... $ 86,865 $- $- $86,865 U.S. government agencies .............................. 23,049 4 -- 23,053 Commercial paper ...................................... 180,397 10 (13) 180,394 -------- --- ---- -------- Total ............................................ 290,311 14 (13) 290,312 Less amounts classified as cash and cash equivalents ................................... 231,639 -- -- 231,639 -------- --- ---- -------- Total marketable securities ...................... $ 58,672 $14 $(13) $ 58,673 ======== === ==== ========

There were no realized gains or losses on sales of available-for-sale securities in the three months ended March 31, 2001. 4. FOLLOW-ON OFFERING In February 2001, the Company completed a follow-on public offering of its Common Stock. The Company sold 7,587,500 shares of its Common Stock, resulting in net proceeds to the Company of approximately $175.9 million. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS SHOULD BE READ TOGETHER WITH THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND ACCOMPANYING NOTES TO THOSE STATEMENTS INCLUDED ELSEWHERE IN THIS FORM 10-Q. THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, THAT INVOLVE RISKS AND UNCERTAINTIES. ALL STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL INFORMATION PROVIDED HEREIN ARE FORWARD-LOOKING AND MAY CONTAIN INFORMATION ABOUT FINANCIAL RESULTS, ECONOMIC CONDITIONS, TRENDS AND KNOWN UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF A NUMBER OF FACTORS, WHICH INCLUDE THOSE DISCUSSED IN THIS SECTION AND ELSEWHERE IN THIS REPORT AND THE RISKS DISCUSSED IN OUR OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH REFLECT MANAGEMENT'S ANALYSIS, JUDGMENT, BELIEF OR EXPECTATION ONLY AS OF THE DATE HEREOF. PRAECIS UNDERTAKES NO OBLIGATION TO PUBLICLY REISSUE OR MODIFY THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES THAT ARISE AFTER THE DATE HEREOF. OVERVIEW Since our inception, we have been engaged in developing drugs for the treatment of a variety of human diseases. Our lead program is the development of abarelix depot, a drug to treat diseases that respond to the lowering of hormone levels. We have entered into collaborations with Amgen Inc. and Sanofi-Synthelabo S.A. to further develop and commercialize our abarelix products. We are also developing Latranal, a proprietary topical composition for the relief of chronic back pain, and Apan, our proprietary drug candidate for the treatment of Alzheimer's disease. In addition, we have numerous product candidates in the research or preclinical development stage. Since our inception, we have had no revenues from product sales. We have received revenues in the form of signing, performance-based, cost sharing and contract services payments from corporate collaborations. Under these agreements, we could receive additional non-refundable performance-based payments and reimbursement for ongoing development costs, as well as a percentage of future product profits. For the next several years, we expect that our sources of revenue, if any, will consist primarily of interest income and payments from our corporate collaborators. We expect reimbursement for ongoing development costs under our corporate collaborations to diminish over the next several years. Our accumulated deficit as of March 31, 2001 was approximately $41.7 million. At March 31, 2001, we had 113 employees, 89 of whom were engaged in research and development activities, compared to 101 employees at March 31, 2000, 83 of whom were engaged in research and development activities. Substantially all of our expenditures to date have been for drug development and commercialization activities and for general and administrative expenses. Due to the high costs associated with preparing to launch our first product, as well as other research and development and general and administrative expenses, we had net operating losses for 2000 and for the three months ended March 31, 2001. We expect to have net operating losses for 2001 and for the following several years. We do not expect to generate operating income until several years after our receipt of FDA approval to market abarelix depot for the treatment of prostate cancer. We will require regulatory approval to market all of our future products. Under our agreement with Sanofi-Synthelabo, we could receive up to approximately $69.6 million in non-refundable fees and performance-based payments. Of this amount, we are recognizing the $4.7 million initial non-refundable signing fee payment over the period through December 2001, which is the period during which we are obligated to participate on a continuing and substantial basis in the research, development and manufacturing process development of abarelix products. For supply of product to Sanofi-Synthelabo, we are entitled to receive a transfer price that varies based on sales price and volume. Additionally, we are entitled to receive reimbursement for certain ongoing development costs. Through March 31, 2001, we have recognized a total of approximately $33.7 million in non-refundable fees, performance-based payments and reimbursement for ongoing development costs under the Sanofi-Synthelabo agreement. Under our agreement with Amgen for the development and commercialization of abarelix products in the countries not covered by the Sanofi-Synthelabo agreement, we could receive up to $25.0 million in signing and performance-based fees. Of this $25.0 million, we have received $10.0 million to date, which is the minimum amount payable under the agreement. We are recognizing this amount as revenue over the period through December 2001, during which time we are obligated to participate on a continuing and substantial basis in the research, development and manufacturing process development of abarelix products. The remaining $15.0 million is payable upon FDA approval of a new drug application relating to abarelix. Under the agreement, Amgen paid the first $175.0 million of all authorized costs and expenses associated with the research, development and commercialization of abarelix products in the United States. Amgen's initial $175.0 million funding commitment was fulfilled during the third quarter of 2000. Following Amgen's completion of this funding, we became responsible for one-half of all subsequent United States research and development costs for abarelix products. Additionally, we must reimburse Amgen for one-half of the costs associated with establishing a sales and marketing infrastructure for abarelix products in the United States. In general, we will receive a transfer price and royalty based on an equal sharing of the resulting profits on sales of abarelix products in the United States. All program expenses in Amgen's licensed territory outside the United States will be borne by Amgen, and we will receive a royalty on net sales of abarelix products in those territories. Through March 31, 2001, we have recognized approximately $116.0 million of revenues under the Amgen agreement. We have granted Amgen exclusive manufacturing and commercialization rights for abarelix products for all indications in the licensed territories. During the second quarter of 2000, Amgen assumed manufacturing responsibility for abarelix products, with the exception of the depot formulation, pursuant to the terms of the Amgen agreement. Subject to the terms of the agreement, we have retained manufacturing responsibility for the depot formulation of abarelix. In addition, under the terms of the Amgen agreement, during the third quarter of 2000 we transferred to Amgen final decision-making authority as to abarelix for the treatment of endometriosis. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000 Revenues for the three months ended March 31, 2001 decreased 71% to approximately $2.6 million, from approximately $9.0 million for the corresponding period in 2000. The decrease in revenues was the result of decreases in both the amount and rate of reimbursement of abarelix expenses under our corporate collaboration agreements. We anticipate that revenues from corporate collaborations will continue to decrease due to the continuing decline in our reimbursable abarelix expenses. Research and development expenses for the three months ended March 31, 2001 increased 8% to approximately $12.2 million, from approximately $11.3 million for the corresponding period in 2000. The increase in expenses was primarily the result of our responsibility for one-half of the costs associated with the abarelix clinical development program, as well as our increased spending related to the Latranal and Apan clinical development programs and our discovery research initiatives. These increases were partially offset by a decrease in reimbursable abarelix expenses incurred directly by us and decreased spending related to the abarelix clinical development program for endometriosis. In the third quarter of 2000, Amgen completed its initial funding commitment and we became responsible for one-half of all subsequent United States research and development costs for abarelix products through the launch period. Due to our abarelix cost sharing responsibility and increased spending on our other clinical development and research programs, we expect our research and development expenses to continue to increase for the next several years. Sales and marketing expenses for the three months ended March 31, 2001 increased to approximately $3.1 million, from approximately $0.3 million for the corresponding period in 2000. The increase in expenses was due primarily to our responsibility for one-half of the costs associated with the commercialization of abarelix depot in the United States. In the third quarter of 2000, Amgen completed its initial funding commitment and we became responsible for one-half of all subsequent costs associated with establishing a sales and marketing infrastructure in the United States for abarelix through the launch period. Accordingly, we expect our sales and marketing expenses to increase significantly for the remainder of 2001 and thereafter as we and Amgen prepare for the anticipated launch of abarelix depot for the treatment of prostate cancer. General and administrative expenses for the three months ended March 31, 2001 increased 42% to approximately $1.6 million, from approximately $1.1 million for the corresponding period in 2000. The increase was due to an increase in personnel and compensation costs, an increased use of professional services and other costs associated with being a public company. We expect that general and administrative expenses will increase as we hire additional administrative personnel to support continued growth of our research and development initiatives and incur increased operating costs related to our new facility. Net interest income for the three months ended March 31, 2001 increased 91% to approximately $2.5 million, from approximately $1.3 million for the corresponding period in 2000. The increase in interest income was due to higher average cash and investment balances resulting from the proceeds of both our initial public offering in May 2000 and our follow-on public offering in February 2001. This increase was offset slightly by a decrease in average interest rates from the same period last year. The provision for income taxes for the three months ended March 31, 2001 and 2000 was zero and $0.1 million, respectively. We anticipate that we will continue to be in a net operating loss carryforward position during 2001 and therefore, as in 2000, no benefit from the Company's operating losses has been recognized. LIQUIDITY AND CAPITAL RESOURCES We have financed our operations since inception principally through private placements of equity securities and the proceeds from our public offerings. Prior to our initial public offering, we had received aggregate net proceeds of approximately $88.5 million from various private placements of our securities. In May 2000, we completed our initial public offering in which we sold a total of 9,200,000 shares of common stock at a price of $10 per share, raising a total of approximately $84.3 million, net of underwriting discounts and commissions and offering expenses. Additionally, we have received a total of approximately $183.5 million from one-time signing payments and performance-based payments, cost reimbursements and contract service payments under our collaboration agreements. We have also received approximately $21.7 million from interest on invested cash balances, and paid approximately $0.8 million in interest expense associated with building and equipment financing. In February 2001, we completed a follow-on public offering in which we sold a total of 7,587,500 shares of common stock at a price of $24.5625 per share, raising a total of approximately $175.9 million, net of underwriting discounts and commissions and offering expenses. At March 31, 2001, we had cash, cash equivalents and marketable securities of approximately $290.3 million and working capital of approximately $271.0 million, compared to approximately $132.2 million and $115.7 million, respectively, at December 31, 2000. Based upon our existing capital resources, interest income, payments under our collaboration agreements and the line of credit contemplated by the Amgen agreement, which we discuss below, we anticipate that we will be able to maintain currently planned operations for at least the next several years. For the three months ended March 31, 2001, net cash of approximately $8.9 million was used in operating activities, compared to approximately $8.4 million used in operating activities during the corresponding period in 2000. During the three months ended March 31, 2001, our use of cash in operations was due principally to our net loss, partially offset by an increase in accounts payable. Our investing activities during the three months ended March 31, 2001 consisted of the purchase of marketable securities in the aggregate amount of $58.7 million, as well as $13.0 million of additional spending toward the continued build-out of our new corporate headquarters and research facility in Waltham, Massachusetts. Our financing activities for the three months ended March 31, 2001 consisted principally of the proceeds of our follow-on offering, proceeds received from the exercise of common stock options and advances of $2.9 million under an acquisition and construction loan agreement. In July 2000, in connection with our purchase, through our wholly owned real estate subsidiary, of our new corporate headquarters and research facility in Waltham, Massachusetts, the subsidiary entered into an acquisition and construction loan agreement providing for up to $33.0 million in financing for the acquisition of, and improvements to, the new facility. As of March 31, 2001, approximately $26.9 million was outstanding, and approximately $6.1 million was available, under the loan agreement. Advances bear interest at a rate equal to the 30-day LIBOR plus 2.0% (7.08% at March 31, 2001). Interest is payable monthly in arrears. Principal is due and payable in full on July 30, 2003, subject to two, one-year extension options. The loan is secured by the new facility, together with all fixtures, equipment, improvements and other related items, and by all rents, income or profits received by our real estate subsidiary, and is unconditionally guaranteed by us. In addition to this financing, as of March 31, 2001, we had spent approximately $36.2 million of our own funds, and anticipate spending an additional $4.4 million, in connection with the build-out and occupancy of our new facility. We expect to occupy the new facility during May 2001 and intend to sublet a portion of the facility as soon as possible thereafter. In addition, in connection with our move to the new facility, we have consolidated our Provid Research division with our Massachusetts operations and are actively seeking a sublessee for our facility located in New Jersey. Our agreement with Amgen provides that, subject to definitive agreements to be mutually agreed, Amgen will provide us with a line of credit not to exceed $150.0 million through 2002 whereby, subject to various conditions each year, we will be permitted to draw down a maximum of $75.0 million in 2001 and, in 2002, the remaining balance of the line of credit available after all previous drawdowns. For each drawdown in 2002, we must demonstrate a cash flow need reasonably acceptable to Amgen and meet various other specified conditions, including conditions relating to the commercial sale of abarelix. Borrowings will bear interest at market rates and will be secured by various receivables relating to abarelix products. All borrowings under the line of credit must be repaid by 2008. We expect our funding requirements to increase over the next several years as we prepare for a potential commercial launch of abarelix products, continue with current clinical trials for abarelix depot, Latranal and Apan, initiate preclinical trials for additional product candidates, improve and move into our new facility and expand our research and development initiatives. The amount of these expenditures will depend on numerous factors, including: o decisions relating to the abarelix program made by our corporate collaborators; o the cost, timing and outcomes of regulatory reviews; o the development of sales and marketing resources by our corporate collaborators or us; o the establishment, continuation or termination of third-party manufacturing or sales and marketing arrangements; o the progress of our research and development activities; o the scope and results of preclinical testing and clinical trials; o the rate of technological advances; o determinations as to the commercial potential of our products under development; o the status of competitive products; o our ability to defend and enforce our intellectual property rights; o the continued viability and duration of, and timely compliance by our collaborators with, our corporate collaboration agreements or other licensing agreements; o the establishment of additional strategic or licensing arrangements with other companies or acquisitions; o our ability to sublease our current facilities and part of our new facility; and o the availability of other financing. At December 31, 2000, we had provided a valuation allowance of $10.2 million for our deferred tax assets. The valuation allowance represents the excess of the deferred tax asset over the benefit from future losses that could be carried back if, and when, they occur. Due to anticipated operating losses in the future, we believe that it is more likely than not that we will not realize a portion of the net deferred tax assets in the future and we have provided an appropriate valuation allowance. RISK FACTORS THAT MAY AFFECT FUTURE RESULTS THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES WE FACE. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US OR THAT ARE CURRENTLY DEEMED IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS. IF ANY OF THESE RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE MATERIALLY ADVERSELY AFFECTED. BECAUSE WE HAVE NOT YET MARKETED OR SOLD ANY PRODUCTS AND ANTICIPATE SIGNIFICANT INCREASES IN OUR OPERATING EXPENSES OVER THE NEXT SEVERAL YEARS, WE MAY NOT BE PROFITABLE IN THE FUTURE. We cannot assure you that we will be profitable in the future or, if we are profitable, that it will be sustainable. All but one of our potential products are in the research or development stage. We have not yet marketed or sold any products, and we may not succeed in developing and marketing any product in the future. To date, we have derived substantially all of our revenues from payments under our collaboration and license agreements and will continue to do so for at least the next several years. In addition, we expect to continue to spend significant amounts to continue clinical studies, obtain regulatory approval for our existing product candidates and expand our facilities. We also intend to spend substantial amounts to fund additional research and development for other products, enhance our core technologies, and for general and administrative purposes. As of March 31, 2001, we had an accumulated deficit of approximately $41.7 million. We expect that our operating expenses will increase significantly in the near term, primarily due to our obligations under the Amgen agreement following Amgen's fulfillment of its initial funding commitment during the third quarter of 2000, resulting in significant operating losses for 2001 and the next several years. IF OUR CLINICAL TRIALS ARE NOT SUCCESSFUL, OR IF WE ARE OTHERWISE UNABLE TO OBTAIN AND MAINTAIN THE REGULATORY APPROVAL REQUIRED TO MARKET AND SELL OUR POTENTIAL PRODUCTS, WE WOULD INCUR ADDITIONAL OPERATING LOSSES. The development and sale of our product candidates are subject to extensive regulation by governmental authorities. Obtaining and maintaining regulatory approval typically is costly and takes many years. Regulatory authorities, most importantly, the FDA, have substantial discretion to terminate clinical trials, delay or withhold registration and marketing approval in the United States, and mandate product recalls. Failure to comply with regulatory requirements may result in criminal prosecution, civil penalties, recall or seizure of products, total or partial suspension of production or injunction, as well as other actions as to our potential products or against us. Outside the United States, we can market a product only if we receive a marketing authorization from the appropriate regulatory authorities. This foreign regulatory approval process includes all of, and in some cases, additional, risks associated with the FDA approval process. To gain regulatory approval from the FDA and foreign regulatory authorities for the commercial sale of any product, we must demonstrate the safety and efficacy of the product in clinical trials. If we develop a product to treat a long-lasting disease, such as cancer or Alzheimer's disease, we must gather data over an extended period of time. There are many risks associated with our clinical trials. For example, we may be unable to achieve the same level of success in later trials as we did in earlier ones. Additionally, data we obtain from preclinical and clinical activities are susceptible to varying interpretations that could impede regulatory approval. Further, some patients in our prostate cancer and Alzheimer's disease programs have a high risk of death, age-related disease or other adverse medical events not related to our products. These events may affect the statistical analysis of the safety and efficacy of our products. In addition, many factors could delay or result in termination of our ongoing or future clinical trials. For example, a clinical trial may experience slow patient enrollment or lack of sufficient drug supplies. Patients may experience adverse medical events or side effects, and there may be a real or perceived lack of effectiveness of the drug we are testing. Future governmental action or changes in FDA policy may also result in delays or rejection of an application for marketing approval. Accordingly, we may not be able to obtain product registration or marketing approval for abarelix depot, our drug candidate for the treatment of prostate cancer and endometriosis, or for any of our other product candidates, based on the results of our clinical trials, or regulatory approval may be conditioned upon significant labeling requirements which could adversely affect marketability of the product. If we obtain regulatory approval for a product, the approval will be limited to those diseases for which our clinical trials demonstrate the product is safe and effective. To date, none of our product candidates have received regulatory approval for commercial sale. If we are delayed in obtaining or are unable to obtain regulatory approval to market our products, we may exhaust our available resources, including the net proceeds from our initial public offering, which we completed in May 2000, and the net proceeds from our follow-on offering, which we completed in February 2001, significantly sooner than we had planned. If this were to happen, we would need to raise additional funds to complete commercialization of our lead products and continue our research and development programs. We cannot assure you that we would be able to obtain these additional funds on favorable terms, if at all. EVEN IF WE RECEIVE APPROVAL FOR THE MARKETING AND SALE OF OUR PRODUCT CANDIDATES, THEY MAY FAIL TO ACHIEVE MARKET ACCEPTANCE AND, ACCORDINGLY, MAY NEVER BE COMMERCIALLY SUCCESSFUL. Many factors may affect the market acceptance and commercial success of any of our potential products, including: o the extent and success of our marketing and sales efforts, and, in particular, those of our collaborators, relating to the marketing and sales of abarelix products; o the timing of market entry as compared to competitive products; o the effectiveness of our products, including any potential side effects, as compared to alternative treatment methods; o the rate of adoption of our products by doctors and nurses and acceptance by the target population; o the product labeling or product insert required by the FDA for each of our products; o the competitive features of our products as compared to other products, including the frequency of administration of abarelix depot as compared to other products, and doctor and patient acceptance of these features; o the cost-effectiveness of our products and the availability of insurance or other third-party reimbursement, in particular Medicare, for patients using our products; and o unfavorable publicity concerning our products or any similar products. If our products are not commercially successful, we may never become profitable. IF OUR CORPORATE COLLABORATORS REDUCE, DELAY OR TERMINATE THEIR FINANCIAL SUPPORT, WE MAY BE UNABLE TO SUCCESSFULLY DEVELOP, MARKET, DISTRIBUTE OR SELL OUR PRODUCT CANDIDATES. We depend upon our corporate collaborators, in particular Amgen and Sanofi-Synthelabo, to provide substantial financial support for developing our product candidates. We also will rely on them in some instances to help us obtain regulatory approval for our products and to manufacture, market, distribute or sell our products. Despite our collaborative relationships, we have limited control over the amount and timing of resources that our corporate collaborators devote to our programs or potential products. For example, Amgen has final decision-making authority with regard to most of the abarelix program in the Amgen territory, and accordingly, we have limited control over decisions related to that program. Also, the availability of the $150.0 million line of credit that Amgen has agreed to provide us is subject to the execution of mutually acceptable definitive agreements which, for some borrowings thereunder, will include specified conditions relating to the sale of abarelix. In addition, our corporate collaborators may terminate our collaboration agreements in various circumstances. For example, in December 1998, we and Roche Products Inc. mutually terminated our agreement. We and each of Amgen and Sanofi-Synthelabo may mutually terminate our agreement, and, in addition: o Amgen and Sanofi-Synthelabo each may terminate its agreement with us if the results of any clinical trial of abarelix materially harms the product's commercial prospects; o Amgen may terminate its agreement with us at any time upon 90 days' prior written notice; and o Sanofi-Synthelabo may terminate its agreement with us if specified adverse events occur relating to our European patent applications or the related patents which may be issued covering abarelix or our Rel-Ease technology. We cannot assure you that any of our present or future collaborators will meet their obligations to us under the collaboration agreements. If a collaborator terminates its agreement with us or fails to perform, or delays performance of, its obligations, it could delay or prevent the development or commercialization of the potential product or research program. As a result, we could be forced to devote unforeseen additional resources to development and commercialization or to terminate one or more of our drug development programs. Due to increased operating costs and lost revenue associated with the termination of, or non-performance or delay of performance by a corporate collaborator under, a collaboration agreement, we could have to seek funds in addition to the net proceeds of both our initial public offering, which we completed in May 2000, and our follow-on public offering, which we completed in February 2001, to meet our capital requirements. We cannot assure you that we would be able to raise the necessary funds or negotiate additional corporate collaborations on acceptable terms, if at all, and in that event we could have to curtail or cease operations. For instance, if, following the termination of our agreement with Roche, we had been unable to enter into an alternative collaboration for the development and commercialization of our abarelix products in a timely manner, we likely would have needed to delay or cut back our programs for the development of abarelix or other drugs and raise additional funds through one or more equity financings prior to the time we had planned to do so, and possibly on less than favorable terms. IF WE OR OUR CORPORATE COLLABORATORS FAIL TO DEVELOP AND MAINTAIN OUR RELATIONSHIPS WITH THIRD-PARTY MANUFACTURERS, OR IF THESE MANUFACTURERS FAIL TO PERFORM ADEQUATELY, WE MAY BE UNABLE TO COMMERCIALIZE OUR PRODUCT CANDIDATES. Our ability to conduct clinical trials and commercialize our product candidates will depend in part on our ability to manufacture, or arrange for third-party manufacture of, our products on a large scale, at a competitive cost and in accordance with regulatory requirements. We or our corporate collaborators must establish and maintain a commercial scale formulation and manufacturing process for each of our potential products for which we seek marketing approval. We, our corporate collaborators or third-party manufacturers may encounter difficulties with these processes at any time that could result in delays in clinical trials, regulatory submissions or in the commercialization of potential products. We have no experience in large-scale product manufacturing, nor do we have the resources or facilities to manufacture products on a commercial scale. We will continue to rely upon contract manufacturers and, in certain instances, our corporate collaborators, to produce abarelix and other compounds for preclinical, clinical and commercial purposes for a significant period of time. Either we or our corporate collaborators have manufacturing and supply agreements with third parties, and if these agreements are not satisfactory, we may not be able to develop or commercialize potential products as planned. The manufacture of our potential products will be subject to current good manufacturing practices regulations. Third-party manufacturers are subject to regulatory review and may fail to comply with these good manufacturing practices regulations. If we or our corporate collaborators need to replace our current third-party manufacturers, or contract with additional manufacturers, this would necessitate new product testing and facility compliance inspections. This testing and inspection is costly and time-consuming. Any of these factors could prevent, or cause delays in, obtaining regulatory approvals for, and the manufacturing, marketing or selling of, our products and could also result in significantly higher operating expenses. If we fail to meet our manufacturing and supply obligations under our agreements with either Amgen or Sanofi-Synthelabo, they may assume manufacturing responsibility under their agreements to the extent they do not already have this responsibility. In addition, if this occurs, we must pay Sanofi-Synthelabo its incremental costs of assuming manufacturing responsibility. DUE TO OUR INEXPERIENCE AND OUR LIMITED SALES AND MARKETING STAFF, WE WILL DEPEND ON THIRD PARTIES TO SELL AND MARKET OUR PRODUCTS. We have no experience in marketing or selling pharmaceutical products and have a limited marketing and sales staff. To achieve commercial success for any approved product, we must either develop a marketing and sales force or enter into arrangements with others to market and sell our products. We have granted Amgen and Sanofi-Synthelabo exclusive marketing and distribution rights for abarelix products in defined geographic locations. We have limited control over the decisions made by Amgen or Sanofi-Synthelabo or the resources they devote to the marketing and distribution of abarelix products in their respective territories. Moreover, our corporate collaborators may, subject to certain limitations with respect to Sanofi-Synthelabo, market products that compete with our products. Our marketing and distribution arrangements with Amgen and Sanofi-Synthelabo may not be successful, and we may not receive any revenues from these arrangements. Also, we cannot assure you that we will be able to enter into marketing and sales agreements on acceptable terms, if at all, for any other products. BECAUSE WE DEPEND ON THIRD PARTIES TO CONDUCT LABORATORY TESTING AND HUMAN CLINICAL STUDIES AND ASSIST US WITH REGULATORY COMPLIANCE, WE MAY ENCOUNTER DELAYS IN PRODUCT DEVELOPMENT AND COMMERCIALIZATION. We have contracts with a limited number of research organizations to design and conduct our laboratory testing and human clinical studies. If we cannot contract for testing activities on acceptable terms, or at all, we may not complete our product development efforts in a timely manner. To the extent we rely on third parties for laboratory testing and human clinical studies, we may lose some control over these activities. For example, third parties may not complete testing activities on schedule or when we request. In addition, these third parties may not conduct our clinical trials in accordance with regulatory requirements. The failure of these third parties to carry out their contractual duties could delay or prevent the development and commercialization of our product candidates. ALTERNATIVE TREATMENTS ARE AVAILABLE WHICH MAY IMPAIR OUR ABILITY TO CAPTURE MARKET SHARE FOR OUR POTENTIAL PRODUCTS. Alternative products exist or are under development to treat the diseases for which we are developing drugs. For example, the FDA has approved several drugs for the treatment of prostate cancer that respond to changes in hormone levels. Even if the FDA approves abarelix depot for commercialization for the treatment of prostate cancer, it may not compete favorably with existing treatments that already have an established market share. If abarelix depot does not achieve broad market acceptance as a drug for the treatment of prostate cancer, we may not become profitable. WE COULD EXPERIENCE DELAYS IN THE RESEARCH, DEVELOPMENT OR COMMERCIALIZATION OF OUR PRODUCT CANDIDATES AS A RESULT OF CONFLICTS WITH OUR CORPORATE COLLABORATORS OR COMPETITION FROM THEM. An important part of our strategy involves conducting proprietary research programs. We may pursue opportunities that conflict with our collaborators' businesses. Disagreements with our collaborators could develop over rights to intellectual property, including the ownership of technology co-developed with our collaborators. Our current or future collaborators could develop or market products in the future that compete with our products. This could diminish our collaborators' commitment to us, and reduce the resources they devote to developing and commercializing our product candidates. For example, the U.S. subsidiary of Sanofi-Synthelabo has recently entered into a collaboration agreement with Atrix Laboratories, Inc., under which it will exclusively market Leuprogel, Atrix's product in development for the treatment of prostate cancer, in North America. If approved, Leuprogel is likely to compete with abarelix depot as a treatment for advanced stage prostate cancer. Conflicts or disputes with our collaborators, and competition from them, could harm our relationships with our other collaborators, restrict our ability to enter into future collaboration agreements and delay the research, development or commercialization of our product candidates. MANY OF OUR COMPETITORS HAVE SUBSTANTIALLY GREATER RESOURCES THAN WE DO AND MAY BE ABLE TO DEVELOP AND COMMERCIALIZE PRODUCTS THAT MAKE OUR POTENTIAL PRODUCTS AND TECHNOLOGIES OBSOLETE OR NON-COMPETITIVE. A biotechnology company such as ours must keep pace with rapid technological change and faces intense competition. We compete with biotechnology and pharmaceutical companies for funding, access to new technology, research personnel and in product research and development. Many of these companies have greater financial resources and more experience than we do in developing drugs, obtaining regulatory approvals, manufacturing and marketing. We also face competition from academic and research institutions and government agencies pursuing alternatives to our products and technologies. We expect that all of our products under development will face intense competition from existing or future drugs. Our competitors may: o successfully identify drug candidates or develop products earlier than we do; o obtain approvals from the FDA or foreign regulatory bodies more rapidly than we do; o develop products that are more effective, have fewer side effects or cost less than our products; or o successfully market products that compete with our products. The success of our competitors in any of these efforts would adversely affect our ability to develop, commercialize and market our product candidates. IF WE ARE UNABLE TO OBTAIN AND ENFORCE VALID PATENTS, WE COULD LOSE ANY COMPETITIVE ADVANTAGE WE MAY HAVE. Our success will depend in part on our ability to obtain patents and maintain adequate protection of our technologies and potential products. If we do not adequately protect our intellectual property, competitors may be able to use our technologies and erode any competitive advantage we may have. For example, if we lose our patent protection for abarelix, another party could produce and market abarelix in direct competition with us. Some foreign countries lack rules and methods for defending intellectual property rights and do not protect proprietary rights to the same extent as the United States. Many companies have had difficulty protecting their proprietary rights in foreign countries. Patent positions are sometimes uncertain and usually involve complex legal and factual questions. We can protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary technologies are covered by valid and enforceable patents or are effectively maintained as trade secrets. We currently own or have exclusively licensed thirteen issued United States patents. We have applied, and will continue to apply, for patents covering both our technologies and products as we deem appropriate. Others may challenge our patent applications or our patent applications may not result in issued patents. Moreover, any issued patents on our own inventions, or those licensed from third parties, may not provide us with adequate protection, or others may challenge the validity of, or seek to narrow or circumvent, these patents. Third-party patents may impair or block our ability to conduct our business. Additionally, third parties may independently develop products similar to our products, duplicate our unpatented products, or design around any patented products we develop. IF WE ARE UNABLE TO PROTECT OUR TRADE SECRETS AND PROPRIETARY INFORMATION, WE COULD LOSE ANY COMPETITIVE ADVANTAGE WE MAY HAVE. In addition to patents, we rely on a combination of trade secrets, confidentiality, nondisclosure and other contractual provisions, and security measures to protect our confidential and proprietary information. These measures may not adequately protect our trade secrets or other proprietary information. If these measures do not adequately protect our rights, third parties could use our technology, and we could lose any competitive advantage we may have. In addition, others may independently develop similar proprietary information or techniques, which could impair any competitive advantage we may have. IF OUR TECHNOLOGIES, PROCESSES OR POTENTIAL PRODUCTS CONFLICT WITH THE PATENTS OF COMPETITORS, UNIVERSITIES OR OTHERS, WE COULD HAVE TO ENGAGE IN COSTLY LITIGATION AND BE UNABLE TO COMMERCIALIZE THOSE PRODUCTS. Our technologies, processes or potential products may give rise to claims that they infringe other patents. A third party could force us to pay damages, to stop our use of the technologies or processes, or to stop our manufacturing or marketing of the affected products by bringing a legal action against us for infringement. In addition, a third party could require us to obtain a license to continue to use the technologies or processes or manufacture or market the affected products, and we may not be able to do so. We believe that significant litigation will continue in our industry regarding patent and other intellectual property rights. If we become involved in litigation, it could consume a substantial portion of our resources. Even if legal actions were meritless, defending a lawsuit could take significant time, be expensive and divert management's attention from other business concerns. IF THIRD PARTIES TERMINATE OUR LICENSES, WE COULD EXPERIENCE DELAYS OR BE UNABLE TO COMPLETE THE DEVELOPMENT AND COMMERCIALIZATION OF OUR POTENTIAL PRODUCTS. We license some of our technology from third parties. Termination of our licenses could force us to delay or discontinue some of our development and commercialization programs. For example, if Advanced Research and Technology Institutes, Inc., the assignee of Indiana University Foundation, terminated our abarelix license, we could have to discontinue development and commercialization of our abarelix products. We cannot assure you that we would be able to license substitute technology in the future. Our inability to do so could impair our ability to conduct our business because we may lack the technology, or the necessary rights to technology, required to develop and commercialize our potential products. OUR REVENUES WILL DIMINISH IF WE FAIL TO OBTAIN ACCEPTABLE PRICES OR ADEQUATE REIMBURSEMENT FOR OUR PRODUCTS FROM THIRD-PARTY PAYORS. The continuing efforts of government and third-party payors to contain or reduce the costs of health care may limit our commercial opportunity. If government and other third-party payors do not provide adequate coverage and reimbursement for our products, physicians may not prescribe them. If we are unable to offer physicians comparable or superior financial motivation to use our products, we may not be able to generate significant revenues. In some foreign markets, pricing and profitability of prescription pharmaceuticals are subject to government control. In the United States, we expect that there will continue to be federal and state proposals for similar controls. In addition, increasing emphasis on managed care in the United States will continue to put pressure on the pricing of pharmaceutical products. Cost control initiatives could decrease the price that any of our collaborators or we receive for any products in the future. Further, cost control initiatives could impair or diminish our collaborators' ability or incentive to commercialize our products, and our ability to earn revenues from this commercialization. Our ability to commercialize pharmaceutical products, alone or with collaborators, may depend in part on the availability of reimbursement for our products from: o government and health administration authorities; o private health insurers; and o other third-party payors, including Medicare and Medicaid. We cannot predict the availability of reimbursement for newly approved health care products. Third-party payors, including Medicare, are challenging the prices charged for medical products and services. Government and other third-party payors increasingly are limiting both coverage and the level of reimbursement for new drugs and, in some cases, refusing to provide coverage for a patient's use of an approved drug for purposes not approved by the FDA. Third-party insurance coverage may not be available to patients for any of our products. WE MAY BE UNABLE TO SUBLEASE OUR CURRENT FACILITIES OR FIND SUITABLE TENANTS FOR A PORTION OF OUR NEW FACILITY. In July 2000, we purchased, through our wholly owned real estate subsidiary, a new facility in Waltham, Massachusetts, and executed a 15-year lease with this subsidiary. We intend to sublease a portion of our new facility to third parties and expect to sublease our current facility in Cambridge, Massachusetts. In addition, in connection with our move to the new facility, we have consolidated the Provid Research division with our Massachusetts operations and are seeking a sublease for our Provid facility located in New Jersey. We may not be able to find suitable sub-tenants to occupy these spaces in a timely manner, if at all. If we are unable to find suitable sub-tenants in a timely manner, we may experience greater than anticipated operating expenses in the future. IF WE LOSE OUR KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN ADDITIONAL SKILLED PERSONNEL, WE MAY BE UNABLE TO PURSUE OUR PRODUCT DEVELOPMENT AND COMMERCIALIZATION EFFORTS. We depend substantially on the principal members of our management and scientific staff, including Malcolm L. Gefter, Ph.D., our Chief Executive Officer, President and Chairman of the Board. We do not have employment agreements with any of our executive officers. Any officer or employee can terminate his or her relationship with us at any time and work for one of our competitors. The loss of these key individuals could result in competitive harm because we could experience delays in our product research, development and commercialization efforts without their expertise. Recruiting and retaining qualified scientific personnel to perform future research and development work also will be critical to our success. Competition for skilled personnel is intense and the turnover rate can be high. We compete with numerous companies and academic and other research institutions for experienced scientists. This competition may limit our ability to recruit and retain qualified personnel on acceptable terms. Failure to attract and retain qualified personnel would prevent us from successfully developing our products or core technologies and launching our products commercially. Our planned activities may require the addition of new personnel, including management, and the development of additional expertise by existing management personnel. The inability to retain these personnel or to develop this expertise could result in delays in the research, development and commercialization of our potential products. WE MAY HAVE SUBSTANTIAL EXPOSURE TO PRODUCT LIABILITY CLAIMS AND MAY NOT HAVE ADEQUATE INSURANCE TO COVER THOSE CLAIMS. We may be held liable if any product we develop, or any product made by others using our technologies, causes injury. We have only limited product liability insurance coverage for our potential products in clinical trials. We intend to expand our product liability insurance coverage of any of our products for which we obtain marketing approval. However, this insurance may be prohibitively expensive or may not fully cover our potential liabilities. Our inability to obtain adequate insurance coverage at an acceptable cost could prevent or inhibit the commercialization of our products. If a third party sues us for any injury caused by products made by us or using our technologies, our liability could exceed our total assets. WE USE HAZARDOUS CHEMICALS AND RADIOACTIVE AND BIOLOGICAL MATERIALS IN OUR BUSINESS AND ANY CLAIMS RELATING TO THE HANDLING, STORAGE OR DISPOSAL OF THESE MATERIALS COULD BE TIME CONSUMING AND COSTLY. Our research and development processes involve the controlled use of hazardous materials, including chemicals and radioactive and biological materials. The health risks associated with accidental exposure to abarelix include temporary impotence or infertility and harmful effects on pregnant women. Our operations also produce hazardous waste products. We cannot completely eliminate the risk of accidental contamination or discharge from hazardous materials and any resultant injury. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of hazardous materials. Compliance with environmental laws and regulations is necessary and expensive. Current or future environmental regulations may impair our research, development or production efforts. We may be required to pay fines, penalties or damages in the event of noncompliance or the exposure of individuals to hazardous materials. Some of our collaborators also work with hazardous materials in connection with our collaborations. We have agreed to indemnify our collaborators in some circumstances against damages and other liabilities arising out of development activities or products produced in connection with these collaborations. IF WE ENGAGE IN AN ACQUISITION, WE WILL INCUR A VARIETY OF COSTS AND MAY NEVER REALIZE THE ANTICIPATED BENEFITS OF THE ACQUISITION. If appropriate opportunities become available, we may attempt to acquire businesses, products or technologies that we believe are a strategic fit with our business. We currently have no commitments or agreements for any acquisitions, nor are there any negotiations with respect to any specific transaction. If we do undertake any transaction of this sort, the process of integrating an acquired business, product or technology may result in unforeseen operating difficulties and expenditures and may absorb significant management attention that would otherwise be available for the ongoing development of our business. Moreover, we may fail to realize the anticipated benefits of any acquisition. Future acquisitions could dilute your ownership interest in us and could cause us to incur debt, expose us to future liabilities and result in amortization expenses related to goodwill and other intangible assets. THE MARKET PRICE OF OUR COMMON STOCK MAY EXPERIENCE EXTREME PRICE AND VOLUME FLUCTUATIONS. The market price of our common stock may fluctuate substantially due to a variety of factors, including, but not limited to: o announcement of FDA approval or disapproval of our product candidates; o the willingness of collaborators to commercialize our product candidates and the timing of commercialization; o announcements of technological innovations or new products by us or our competitors; o the success rate of our discovery efforts and clinical trials leading to performance-based payments and revenues under our collaboration agreements; o loss of corporate collaborators, failure or delay by our corporate collaborators in performing their obligations or disputes with our corporate collaborators; o developments or disputes concerning patents or proprietary rights, including announcements of claims of infringement, interference or litigation against us or our licensors; o announcements concerning our competitors, or the biotechnology or pharmaceutical industry in general; o public concerns as to the safety of our products or our competitors' products; o changes in government regulation of the pharmaceutical or medical industry; o changes in the reimbursement policies of third-party insurance companies or government agencies; o actual or anticipated fluctuations in our operating results; o changes in financial estimates or recommendations by securities analysts; o sales of large blocks of our common stock; o changes in accounting principles; and o the loss of any of our key scientific or management personnel. In addition, the stock market has experienced extreme price and volume fluctuations. The market prices of the securities of biotechnology companies, particularly companies like ours without current product revenues and earnings, have been highly volatile, and may continue to be highly volatile in the future. This volatility has often been unrelated to the operating performance of particular companies. In the past, securities class action litigation has often been brought against companies that experience volatility in the market price of their securities. Whether or not meritorious, litigation brought against us could result in substantial costs and a diversion of management's attention and resources. WE EXPECT THAT OUR QUARTERLY RESULTS OF OPERATIONS WILL FLUCTUATE, AND THIS FLUCTUATION COULD CAUSE OUR STOCK PRICE TO DECLINE. Our quarterly operating results have fluctuated in the past and are likely to do so in the future. These fluctuations could cause our stock price to decline. Some of the factors that could cause our operating results to fluctuate include: o the delay or failure of any of our corporate collaborators to meet their payment or other obligations, or termination of any of our agreements with them; o the timing of development and commercialization of our abarelix products leading to performance-based payments and revenues under our agreements with our corporate collaborators; o the timing and level of expenses, and of expense reimbursement payments, related to the development and commercialization of our abarelix products, or to our other research and development programs; and o the timing of our commercialization of other products resulting in revenues. Due to the possibility of fluctuations in our revenues and expenses, we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance. FUTURE SALES OF OUR COMMON STOCK MAY CAUSE OUR STOCK PRICE TO DECLINE. If our stockholders sell substantial amounts of our common stock in the public market, or the perception that such sales may occur exists, the market price of our common stock could decline. The 9,200,000 shares of common stock sold in our initial public offering in May 2000 are all freely tradeable in the public market. Additionally, all of the 8,337,500 shares sold in our follow-on public offering in February 2001 to purchasers other than our affiliates are freely tradeable in the public market. Any shares of common stock held by our affiliates may generally only be sold in compliance with Rule 144 under the Securities Act. As of March 31, 2001, approximately 2.2 million outstanding shares of common stock were held by our affiliates. In addition, in connection with our follow-on public offering, holders of approximately 2.4 million shares of common stock outstanding as of March 31, 2001 have agreed not to offer, sell, contract to sell or otherwise dispose of their shares of common stock through May 15, 2001 without the prior written consent of the underwriters for the offering. Substantially all of our remaining outstanding shares of common stock may be freely sold without volume restrictions pursuant to Rule 144(k) or Rule 701 under the Securities Act. One of our stockholders, which until recently was one of our affiliates, owned approximately 7.3 million shares of common stock immediately after completion of our initial public offering in May 2000. This stockholder sold approximately 3.7 million of these shares in market transactions subject to the volume limitations and other requirements of Rule 144 from late October 2000 through the end of 2000. This stockholder sold an additional 750,000 shares as part of our follow-on public offering. The remaining approximately 2.9 million shares held by this stockholder became eligible for resale without volume restrictions under Rule 144(k) on April 16, 2001, upon the expiration of the 60-day lock-up agreement executed by this stockholder in connection with our follow-on public offering. ANTI-TAKEOVER PROVISIONS IN OUR CHARTER AND BY-LAWS, OUR RIGHTS AGREEMENT AND UNDER DELAWARE LAW MAY MAKE AN ACQUISITION OF US MORE DIFFICULT, EVEN IF AN ACQUISITION WOULD BE BENEFICIAL TO OUR STOCKHOLDERS. Provisions in our certificate of incorporation and by-laws may delay or prevent an acquisition of us or a change in our management. Also, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which may prohibit or delay large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us. In addition, the rights issued under our rights agreement may be a substantial deterrent to a person acquiring 10% or more of our common stock without the approval of our board of directors. These provisions in our charter and by-laws, rights agreement and under Delaware law could reduce the price that investors might be willing to pay for shares of our common stock in the future and result in the market price being lower that it would be without these provisions. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. Some of the securities that we invest in may have market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. To minimize this risk in the future, we maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including commercial paper, money market funds and government and non-government debt securities. Our investments are also subject to interest rate risk and will decrease in value if market interest rates increase. A hypothetical 100 basis point increase in interest rates would result in an approximate $0.4 million decrease in the fair value of our investments as of March 31, 2001. However, due to the conservative nature of our investments and relatively short duration, interest rate risk is mitigated. As of March 31, 2001, approximately 99% of our total portfolio will mature in one year or less, with the remainder maturing in less than two years. In connection with the purchase of our new facility in July 2000, our wholly owned real estate subsidiary executed an acquisition and construction loan agreement that provides for up to $33.0 million in borrowings at a floating interest rate indexed to 30-day LIBOR. Concurrent with that transaction, the subsidiary also entered into an interest rate cap agreement which limits exposure to interest rate increases above a certain threshold. Due to the decrease in interest rates since we entered into this interest rate cap, we believe that there is not material market risk exposure with respect to this item which would require additional disclosure. With regard to borrowings under the loan agreement, we believe that we have mitigated our risk to significant adverse fluctuations in interest rates and we do not believe that a 10% change in interest rates would have a material impact on our results of operations or cash flows. PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. (d) On February 8, 2000, we filed a Registration Statement on Form S-1 (Registration No. 333-96351) with the Securities and Exchange Commission to register under the Securities Act 8,000,000 shares of our common stock (plus an additional 1,200,000 shares subject to an over-allotment option granted to the underwriters). The Registration Statement was declared effective by the Securities and Exchange Commission on April 26, 2000. From April 26, 2000 through March 31, 2001, we used approximately $36.2 million of the net proceeds from our initial public offering for the purchase and build-out of our new facility. Due to unanticipated construction costs, we expect that the total amount of net proceeds from our initial public offering which will be used for the purchase and build-out of our new facility will exceed our original estimates by approximately $10.0 million. Pending use of the remaining net proceeds of our initial public offering, we have invested these funds in short-term, interest-bearing, investment-grade securities. Our management will continue to have broad discretion over the actual use of these proceeds. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits

EXHIBIT NUMBER EXHIBIT 3.1 Amended and Restated Certificate of Incorporation (2) 3.2 Amended and Restated By-Laws (2) 4.1 Specimen certificate representing shares of common stock (1) 4.2 Specimen certificate representing shares of common stock (including Rights Agreement Legend)(5) 4.3 Warrant to purchase Common Stock dated as of May 13, 1997 (1) 4.4 Amendment dated as of January 30, 2001 between the Registrant and Sanofi-Synthelabo Inc. (formerly Sylamerica, Inc.) to the Warrant for the Purchase of Shares of Common Stock issued by the Registrant to Sylamerica, Inc. (3) 4.5 Rights Agreement between the Registrant and American Stock Transfer & Trust Company, as Rights Agent (4) 4.6 Form of Certificate of Designations of Series A Junior Participating Preferred Stock (attached as Exhibit A to the Rights Agreement filed as Exhibit 4.5 hereto) (4) 4.7 Form of Rights Certificate (attached as Exhibit B to the Rights Agreement filed as Exhibit 4.5 hereto) (4) 10.1 Executive Management Bonus Plan, as amended and Restated as of January 30, 2001 (5) 10.2 Waiver and Amendment dated as of January 26, 2001 between the Registrant and Sanofi-Synthelabo Inc. (formerly Sylamerica, Inc.) to the Stock and Warrant Purchase Agreement dated as of May 13, 1997 by and between Sylamerica, Inc. and the Registrant (3)

---------------- (1) Incorporated by reference to Registration Statement on Form S-1 (Registration No. 333-96351) initially filed with the Securities and Exchange Commission on February 8, 2000 and declared effective on April 26, 2000. (2) Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended March 31, 2000 filed with the Securities and Exchange Commission on June 7, 2000. (3) Incorporated by reference to Registration Statement on Form S-1 (Registration No. 333-54342) initially filed with the Securities and Exchange Commission on January 26, 2001 and declared effective on February 14, 2001. (4) Incorporated by reference to Registration Statement on Form 8-A filed with the Securities and Exchange Commission on January 26, 2001. (5) Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 2000 filed with the Securities and Exchange Commission on March 29, 2001. (b) Reports Submitted on Form 8-K On January 11, 2001, we filed a Current Report on Form 8-K to file under Item 5 (Other Events) a copy of our Press Release dated January 11, 2001. On January 26, 2001, we filed a Current Report on Form 8-K announcing under Item 5 (Other Events) the adoption of a shareholder rights plan and the filing of a Registration Statement on Form S-1. On February 22, 2001, we filed an Amended Current Report on Form 8-K/A amending, under Item 5 (Other Events), certain information appearing in our Current Report on Form 8-K filed on January 26, 2001 relating to our shareholder rights plan. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. PRAECIS PHARMACEUTICALS INCORPORATED Date: May 9, 2001 By /s/ Kevin F. McLaughlin ------------------------------------- Kevin F. McLaughlin Chief Financial Officer, Senior Vice President, Treasurer and Secretary (Duly Authorized Officer and Principal Financial and Accounting Officer) EXHIBIT INDEX

EXHIBIT NUMBER EXHIBIT 3.1 Amended and Restated Certificate of Incorporation (2) 3.2 Amended and Restated By-Laws (2) 4.1 Specimen certificate representing shares of common stock (1) 4.2 Specimen certificate representing shares of common stock (including Rights Agreement Legend)(5) 4.3 Warrant to purchase Common Stock dated as of May 13, 1997 (1) 4.4 Amendment dated as of January 30, 2001 between the Registrant and Sanofi-Synthelabo Inc. (formerly Sylamerica, Inc.) to the Warrant for the Purchase of Shares of Common Stock issued by the Registrant to Sylamerica, Inc. (3) 4.5 Rights Agreement between the Registrant and American Stock Transfer & Trust Company, as Rights Agent (4) 4.6 Form of Certificate of Designations of Series A Junior Participating Preferred Stock (attached as Exhibit A to the Rights Agreement filed as Exhibit 4.5 hereto) (4) 4.7 Form of Rights Certificate (attached as Exhibit B to the Rights Agreement filed as Exhibit 4.5 hereto) (4) 10.1 Executive Management Bonus Plan, as amended and Restated as of January 30, 2001 (5) 10.2 Waiver and Amendment dated as of January 26, 2001 between the Registrant and Sanofi-Synthelabo Inc. (formerly Sylamerica, Inc.) to the Stock and Warrant Purchase Agreement dated as of May 13, 1997 by and between Sylamerica, Inc. and the Registrant (3)

---------------- (1) Incorporated by reference to Registration Statement on Form S-1 (Registration No. 333-96351) initially filed with the Securities and Exchange Commission on February 8, 2000 and declared effective on April 26, 2000. (2) Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended March 31, 2000 filed with the Securities and Exchange Commission on June 7, 2000. (3) Incorporated by reference to Registration Statement on Form S-1 (Registration No. 333-54342) initially filed with the Securities and Exchange Commission on January 26, 2001 and declared effective on February 14, 2001. (4) Incorporated by reference to Registration Statement on Form 8-A filed with the Securities and Exchange Commission on January 26, 2001. (5) Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 2000 filed with the Securities and Exchange Commission on March 29, 2001.