As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 3/01/07  Millennium Pharmaceuticals Inc    10-K       12/31/06   11:3.4M                                   Merrill Corp-MD/FA

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K        Annual Report                                       HTML   1.52M 
 2: EX-10.22    Material Contract                                   HTML    580K 
 3: EX-10.26    Material Contract                                   HTML     31K 
 4: EX-10.27    Material Contract                                   HTML      8K 
 5: EX-10.54    Material Contract                                   HTML     21K 
 6: EX-21       Subsidiaries of the Registrant                      HTML      9K 
 7: EX-23.1     Consent of Experts or Counsel                       HTML     11K 
 8: EX-31.1     Certification per Sarbanes-Oxley Act (Section 302)  HTML     13K 
 9: EX-31.2     Certification per Sarbanes-Oxley Act (Section 302)  HTML     13K 
10: EX-32.1     Certification per Sarbanes-Oxley Act (Section 906)  HTML      9K 
11: EX-32.2     Certification per Sarbanes-Oxley Act (Section 906)  HTML     10K 

PART I

Item 1.                        BUSINESS

Overview

We are an innovation-driven, biopharmaceutical company focused on discovering, developing and commercializing medicines to change the lives of patients with cancer and inflammatory diseases. We currently commercialize VELCADE® (bortezomib) for Injection, the U.S. market leader for the treatment of patients with multiple myeloma who have received at least one prior therapy. In addition, VELCADE is the first and only Food and Drug Administration, or FDA, approved therapeutic for the treatment of patients who have received at least one prior therapy for mantle cell lymphoma, or MCL, an aggressive form of non-Hodgkin’s lymphoma, or NHL. We have a development pipeline of nine clinical and preclinical product candidates in our therapeutic focus areas of cancer and inflammation, and we have an oncology-focused discovery organization. Strategic business relationships are a key component of our business. For example, we maintain a significant royalty stake in INTEGRILIN® (eptifibatide) Injection, a market leading cardiovascular product, and receive distribution fees for sales of VELCADE outside of the United States.

Our cancer product, VELCADE, was first approved in the United States in May 2003 and in the European Union in April 2004 for marketing as a treatment for some patients with multiple myeloma, a type of blood cancer, and received approval in the United States in December 2006 for the treatment of some patients with MCL. We began marketing VELCADE in the United States shortly after receiving approval. We sell VELCADE in the United States directly through our oncology sales force. In the first quarter of 2007, our collaborator Ortho Biotech Products, Inc., or OBI, a member of The Johnson & Johnson Family Of Companies, began jointly promoting VELCADE with us to U.S.-based physicians.  VELCADE is sold in the European Union and other areas where marketing approval has been obtained outside of the United States by Ortho Biotech Products, L.P., or OBL, also a member of The Johnson & Johnson Family Of Companies. In 2006, U.S. sales of VELCADE were approximately $220.5 million, which represented approximately 45% of our total revenue for 2006. In 2005, U.S. sales of VELCADE were approximately $192.1 million, which represented approximately 34% of our total revenue for 2005. In 2004, U.S. sales of VELCADE were approximately $143.1 million, which represented approximately 32% of our total revenue for 2004.

In 2005, we refined our business strategy to focus on advancing key growth assets including VELCADE, our clinical and preclinical pipeline of oncology and inflammation molecules and our oncology-focused discovery organization. In 2006, we announced a program to further align resources with our current corporate priorities of advancing VELCADE and accelerating the clinical pipeline. As part of this program, we reduced in-house research and preclinical development technologies and headcount in areas where we believe the work can now be outsourced cost-effectively with reliable quality, and we are scaling back infrastructure supporting these activities.

Our business strategy is to build a portfolio of innovative, new medicines based on our understanding of genomics and particular molecular pathways that affect the establishment and progression of specific diseases. These molecular pathways include the related effects of proteins on cellular performance, reproduction and death. We plan to develop and commercialize many of our products on our own, but expect to seek development and commercial collaborators on favorable terms or when we otherwise believe that doing so would be advantageous to us.

In the near-term, we expect to focus our commercial activities in cancer where we plan to build on our commercial and regulatory experience with VELCADE. We also are working to obtain approval to market VELCADE in the United States and, through OBL, elsewhere for the treatment of multiple myeloma in newly diagnosed, or front-line  patients, and for the treatment of additional cancer types. We believe that,

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if approved, these additional uses of VELCADE would lead to a significant expansion of our business. We also continue to advance a pipeline of novel oncology product candidates. In inflammatory disease, we are advancing novel product candidates in clinical development as potential treatments for serious conditions, some of which are widely prevalent.

In the long-term, we expect to bring new products to market on a regular basis from our pipeline of discovery and development-stage programs. We also expect to continue to evaluate opportunities to in-license and acquire molecules from other companies in order to supplement our pipeline. If we are successful, we would use the revenues from this expanding portfolio of marketed products to broaden the scope of our operations.

We were incorporated in Delaware in 1993. Our principal executive offices are located at 40 Landsdowne Street, Cambridge, Massachusetts 02139.

VELCADE

VELCADE, the first of a new class of medicines called proteasome inhibitors, was the first treatment in more than a decade to be approved in the United States for patients with multiple myeloma. We received accelerated approval based on phase II data from the  FDA on May 13, 2003 to market VELCADE for the treatment of multiple myeloma patients who have received at least two prior therapies and have demonstrated disease progression on their most recent therapy, commonly referred to as third-line and beyond.

In March 2005, we received full approval from the FDA of our supplemental New Drug Application, or sNDA, for VELCADE for the treatment of patients with multiple myeloma who have received at least one prior therapy, commonly referred to as second-line, or relapsed multiple myeloma. This regulatory decision increases the approved market potential of the drug and also marked the completion of the confirmatory studies required by the FDA after it granted accelerated approval in May 2003. VELCADE is the only single-agent therapy that has both demonstrated longer survival in patients in the relapsed multiple myeloma treatment setting and has comparative extension of patient survival data in its FDA approved labeling.

In April 2004, the European Commission granted Marketing Authorization for VELCADE in Europe for the treatment of multiple myeloma patients who have received at least two prior therapies and have demonstrated disease progression on their most recent therapy. Under this Authorization, the European Commission granted us a single license  for marketing VELCADE in the 15 member states of the European Union, plus Norway and Iceland. VELCADE was also approved for marketing in the ten accession member countries when those countries officially joined the European Union on May 1, 2004. Regulatory authorities in a number of other countries, including countries within Latin America and South-East Asia and Japan, have also approved VELCADE. The product is now approved in more than 75 countries. Under our agreement with OBL, we have transferred the licenses to affiliates of OBL on a country-by-country basis. OBL’s affiliates now market VELCADE in these countries.

In April 2005, OBL received approval from the European Commission for VELCADE as a monotherapy for multiple myeloma patients who have received at least one prior therapy and who have already undergone or are unsuitable for bone marrow transplantation. In October 2006, OBL received approval for marketing VELCADE in Japan for relapsed or refractory multiple myeloma in patients who have received at least one prior therapy.

In December 2006, the FDA granted full approval of VELCADE for the treatment of patients with MCL who have received at least one prior therapy, commonly referred to as relapsed, or second-line, MCL. This approval followed the FDA’s decision in November 2004 to grant VELCADE fast track

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designation for MCL due to the high unmet medical need of MCL patients and the strength of clinical trial data for VELCADE in the treatment of MCL.

Multiple myeloma is a cancer of the bone marrow in which some types of white blood cells are overproduced. As a result, there is decreased production of normal red and normal white blood cells, thereby damaging the body’s immune system. The overproduced white blood cells also cause the growth of tumors that spread to multiple sites, causing bone destruction and resulting in pain and bone fractures. In the U.S., multiple myeloma is the second most common hematologic malignancy and although the disease is predominantly a cancer of the elderly (the average age of onset is 68 years of age), recent statistics indicate both increasing incidence and younger age of onset. In the U.S., more than 50,000 individuals have multiple myeloma, over 15,000 new cases are diagnosed each year and more than 11,000 people die from the disease each year.

In the U.S., NHL is the most common hematological cancer and the sixth leading cause of cancer death. The prevalence of NHL in the U.S. is approximately 365,000 patients, of which we estimate approximately 100,000 are patients with follicular or marginal zone lymphoma which are subtypes of NHL, and 10,000 are patients with mantle cell lymphoma. There are approximately 59,000 new cases of NHL diagnosed in the U.S. per year, and 19,000 deaths are attributed to the disease annually. Mantle cell lymphoma is an aggressive, rapidly progressive subtype of NHL. It is not curable with standard treatment. The median life expectancy for a patient with MCL following his or her first relapse is estimated to be one year.

Proteasome inhibition is a novel approach to treating cancer. Proteasomes are enzyme complexes in all cells, both healthy and cancerous, that break down intracellular proteins in a regulated manner. Intracellular proteins form pathways by which cancer cells multiply, spread, interact with other cells and avoid programmed cell death. Inhibition of the proteasome by VELCADE prevents the regulated breakdown of these intracellular proteins, thereby interfering with many of these functions. This disruption of essential pathways in cancer cells can lead to cell death and inhibit tumor growth.

The most commonly reported side effects of VELCADE are asthenic conditions including fatigue, malaise and weakness, nausea, diarrhea, decreased appetite (including anorexia), constipation, thrombocytopenia, peripheral neuropathy, pyrexia, vomiting, anemia, neutropenia and orthostatic hypotension.

Our Development Efforts

VELCADE Development

We believe that VELCADE may have broad applications in the treatment of cancer beyond its currently approved indications. Currently, over 300 company-sponsored, investigator-initiated, or cooperative group-sponsored trials are ongoing or planned with the goal of exploring the potential of the product alone and in combination with other therapies in a variety of cancers. Principal ongoing VELCADE trials are described below:

·                    Three multi-center phase III clinical trials in front-line multiple myeloma patients exploring VELCADE in combination with current standards-of-care in this treatment setting. Enrollment in two of these trials has been completed and in the three trials combined, we expect approximately 2,000 patients will be enrolled. Results from previous phase II trials in this setting of VELCADE in combination with these standards-of-care have shown some of the highest reported response rates in the treatment of the disease, with overall response rates as high as 95 percent and complete and near-complete responses as high as 43 percent. Side effects in those previous phase II trials were manageable and similar to those seen in other VELCADE studies.

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·                    A randomized phase III clinical trial in patients with relapsed follicular or marginal zone lymphoma. We expect to enroll approximately 670 patients in this trial. The trial is evaluating the efficacy and safety of the VELCADE in combination with rituximab, the standard-of-care in this setting, compared to rituximab alone. Results of a phase II trial in this same patient population comparing VELCADE at a once-weekly dose with a once-weekly dose of rituximab versus VELCADE at its standard twice-weekly dose matched with the once-weekly rituximab regimen were presented at the December 2006 American Society of Hematology meeting. In the arm with a once-weekly VELCADE regimen, an overall investigator-assessed response rate of greater than 50 percent with a manageable safety profile was reported.

·                    A randomized phase II clinical trial in patients with relapsed non-small cell lung cancer, or NSCLC, testing VELCADE in combination with pemetrexed, a current standard-of-care. Enrollment of 130 patients has been completed for this trial.

We expect that our ability to expand sales of VELCADE may be dependent on the outcome of these ongoing clinical trials, in particular the three phase III clinical trials in front-line multiple myeloma.

Pipeline Development

In addition to our ongoing clinical trials of VELCADE, we have nine product candidates in clinical and late preclinical development.

In January 2006, as part of our portfolio review process and based on the evaluation of clinical data in the context of additional opportunities in the pipeline, we decided to discontinue development of MLN2704 as well as MLN1202 in rheumatoid arthritis.

In May 2006, we announced positive top-line results from our randomized, double-blinded, placebo-controlled phase II clinical trial of MLN1202 in patients at high risk for atherosclerotic cardiovascular disease. Preliminary analysis showed that MLN1202 was well tolerated and fully met its primary endpoint of a significant and sustained reduction in C-Reactive Protein levels, an inflammatory biomarker associated with atherosclerosis after a single dose of MLN1202. These results were statistically significant relative to the placebo control arm (p = 0.0275). No serious adverse events were observed in patients exposed to MLN1202. We expect these trial results will be submitted for presentation in 2007 at a medical meeting.

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The following chart summarizes the applicable disease indication and the clinical or preclinical trial status of our drug candidates.

Product Description			Disease Indication			Current Trial Status
Cancer
MLN518 is a small molecule inhibitor of the Receptor Tyrosine Kinase, or RTK, including FLT-3, PDGF-R and c-KIT			Acute myeloid leukemia Glioma(1) Renal(1) Prostate(1)			phase I/phase II phase I planned for 2007 phase I/phase II phase I/phase II
MLN8054 is a small molecule inhibitor of Aurora A Kinase			Advanced malignancies			phase I
MLN8237 is a small molecule inhibitor of Aurora A Kinase			Advanced malignancies			preclinical
Inflammatory Diseases
MLN0002 is a humanized monoclonal antibody directed against the alpha4beta7 receptor			Crohn’s disease Ulcerative colitis			preclinical with prior phase II data preclinical with prior phase II data
MLN1202 is a humanized monoclonal antibody directed against CCR2			Multiple sclerosis Atherosclerosis			phase IIa phase IIa-completed
MLN3897 is a small molecule CCR1 inhibitor(2)			Chronic inflammatory diseases such as rheumatoid arthritis			phase II
MLN3701 is a small molecule CCR1 inhibitor, second generation of MLN3897(2)			Chronic inflammatory diseases such as rheumatoid arthritis			phase I
MLN0415 is a small molecule inhibitor of IKKbeta(2)			Chronic inflammatory diseases such as rheumatoid arthritis			phase I
MLN6095 is a small molecule CrTh2 receptor antagonist(2)			Inflammatory diseases			preclinical

(1)          Trials ongoing or planned to be conducted through Cancer Therapy Evaluation Program, a division of the National Cancer Institute.

(2)          In development through our sanofi-aventis inflammatory disease collaboration.

Completion of clinical trials may take several years. The length of time can vary substantially according to the type, complexity, novelty and intended use of a product candidate. The types of costs incurred during a clinical trial vary depending upon the type of product candidate and the nature of the study.

Our Collaborations

We have entered into commercialization and development arrangements with pharmaceutical and biotechnology companies relating to a broad range of products and potential product opportunities. We believe that these collaborations provide us with the opportunity to maximize the value of our internal resources and to reduce our commercialization and development costs and risks while at the same time utilizing the resources of other companies to market and develop our products. Under our collaborations,

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we have in the past and may in the future receive combinations of royalties, distribution fees, license fees, shares of profits and losses and/or milestone and other payments.

Ortho Biotech Collaborations

In June 2003, we entered into an agreement with OBL to collaborate on the commercialization of VELCADE and with  Johnson & Johnson Pharmaceutical Research & Development, L.L.C., or JJPRD, for the continued clinical development of VELCADE. OBL and its affiliate, Janssen-Cilag, have agreed to commercialize VELCADE outside of the United States, and Janssen Pharmaceutical K.K. is responsible for Japan. We receive distribution fees from OBL and its affiliates from sales of VELCADE outside of the United States. We manage the supply chain for VELCADE at the expense of OBL for products sold in the OBL territories. We retain an option to co-promote VELCADE with OBL at a future date in specified European countries.

We are engaged with JJPRD in an extensive global program for further clinical development of VELCADE with the purpose of maximizing the commercial potential of VELCADE. This program is investigating the potential of VELCADE to treat multiple forms of solid and hematological tumors, including continued clinical development of VELCADE for multiple myeloma and NHL. JJPRD was responsible for 40% of the joint development costs through 2005 and is now responsible for 45% of those costs. We are eligible to receive payments from JJPRD or OBL for achieving clinical development milestones, regulatory milestones outside of the United States or agreed-upon sales levels of VELCADE.

Decisions regarding the ongoing development and marketing of VELCADE are generally subject to the oversight of a joint steering committee with equal membership from OBL and us. However, in the event of a dispute, specified development, United States commercialization and specified other decisions are allocated specifically to us, and commercialization decisions outside of the United States and specified other decisions are allocated specifically to OBL.

Unless our agreement with OBL is terminated early due to a material uncured breach by one of the parties or by OBL unilaterally subject to notice obligations, the agreement continues on a country by country basis outside of the United States until no earlier than the expiration of the last to expire patent covering the manufacture, use or sale of the product in the country. Revenues from this alliance, including license fees, reimbursement of development expenses, milestone payments and distribution fees, accounted for approximately 22% of our total revenues in 2006, 10% of our total revenues in 2005 and 17% of our total revenues in 2004.

In October 2006, we announced a two-year agreement with OBI to jointly promote VELCADE in the U.S. Under the terms of the agreement, in the first quarter of 2007, OBI began jointly promoting VELCADE with us to U.S.-based physicians. We have agreed to pay the cost of a portion of the OBI sales effort dedicated to VELCADE and a commission if sales associated with the increased promotional effort exceed pre-specified targets. Both parties are able to terminate the agreement under certain circumstances and subject to fees. We will continue to be responsible for commercialization, manufacturing and distribution of VELCADE in the U.S. We believe this collaboration with the well-established OBI oncology sales force will help us to realize the full potential of the product.

INTEGRILIN Collaborations

We acquired INTEGRILIN as part of our acquisition of COR Therapeutics, Inc., or COR, in February 2002. INTEGRILIN has been marketed in the United States since 1998 and outside of the United States since 1999. From February 2002 through August 31, 2005, we co-promoted INTEGRILIN in the United States in collaboration with Schering Corporation and Schering-Plough Ltd, together referred to as SGP, and shared profits and losses. As of September 1, 2005, we changed our relationship with SGP from a co-promotion to a royalty based arrangement. SGP now exclusively markets INTEGRILIN in the

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United States and specified other areas outside of Europe. GlaxoSmithKline plc, or GSK, markets INTEGRILIN in Europe under a license from us.

In 2006, sales of INTEGRILIN by SGP as reported by SGP were approximately $329 million. Approximately 95% of those sales were made in the United States. In 2006, revenues from this alliance, including license fees, reimbursement of manufacturing-related expenses and royalties accounted for approximately 27% of our 2006 total revenues.

Under our revised relationship with SGP, we have incurred lower sales and marketing expenses, including personnel related and promotional expenses, associated with INTEGRILIN. For the period September 1, 2005 through December 31, 2005, revenue from SGP, including license fees, reimbursement of manufacturing-related expenses and royalties accounted for approximately 24% of our total revenues. From January 1, 2005 through September 1, 2005, which was the effective date of our modified relationship with SGP, we recognized approximately $123.5 million of co-promotion revenue from sales of INTEGRILIN by SGP, which accounted for approximately 22% of our total revenue during this period. Co-promotion revenue was 46% of our total revenue in 2004.

INTEGRILIN is a small synthetic peptide administered by injection that prevents the aggregation of platelets by blocking the platelet receptor glycoprotein, or GP, IIb-IIIa. The effects of INTEGRILIN are specific to platelets, avoiding interference with other normal cardiovascular processes. In addition, these effects can be reversed following INTEGRILIN discontinuation when no longer needed. Bleeding is the most common complication encountered during administration of INTEGRILIN therapy. The majority of excess major bleeding events associated with INTEGRILIN are localized at the site of catheter insertion.

INTEGRILIN is approved for marketing in the United States for the treatment of patients with acute coronary syndromes, or ACS, which include unstable angina and non-ST segment elevation myocardial infarction, or heart attack. This patient group includes individuals who are medically managed and those undergoing percutaneous coronary intervention, or PCI, including angioplasty. INTEGRILIN is also approved for use at the time of a PCI, including for patients undergoing intracoronary stenting. This set of indications is broader than the FDA approved indications for the other two GP IIb-IIIa inhibitors approved for marketing in the United States.

SGP

In April 1995, COR entered into a collaboration agreement with SGP to jointly develop and commercialize INTEGRILIN on a worldwide basis. Under our original collaboration agreement with SGP following our acquisition of COR in February 2002, we generally shared any profits or losses from INTEGRILIN sales in the United States with SGP, and we granted SGP an exclusive license to market INTEGRILIN outside the United States and Europe in exchange for royalty obligations.

On September 1, 2005, SGP obtained the exclusive U.S. development and commercialization rights for INTEGRILIN products from us and paid us a nonrefundable upfront payment of approximately $35.5 million. In addition, we are entitled to receive royalties on net product sales of INTEGRILIN in the United States from SGP for so long as SGP is engaged in the commercialization and sale of an INTEGRILIN product in the United States, with the potential of receiving royalties beyond the 2014 patent expiration date. Minimum royalties for 2007 are set at approximately $85.4 million. There are no guaranteed minimum royalty payments beyond 2007. We also receive royalties on net product sales by SGP outside of the United States. SGP’s obligation to pay us royalties in other countries expires on a country by country basis upon the later of fifteen years from the first commercial sale of an INTEGRILIN product in such country and the expiration of the last to expire patent covering such INTEGRILIN product. We are continuing to manage the supply chain for INTEGRILIN at the expense of SGP for products sold in the SGP territories including the U.S.

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GSK License Agreement

In June 2004, we reacquired the rights to market INTEGRILIN in Europe from SGP and concurrently entered into a license agreement granting GSK exclusive marketing rights to INTEGRILIN in Europe. In January 2005, the transition of the INTEGRILIN marketing authorizations for the European Union from SGP to GSK was completed, and GSK began selling INTEGRILIN in the countries of the European Union. GSK also markets INTEGRILIN in other European countries where it has received approval of the transfer from SGP to GSK of the relevant marketing authorizations. Under the terms of the agreement, we have received license fees and are entitled to future royalties from GSK on INTEGRILIN sales in Europe subject to the achievement of specified objectives. We manage the supply chain for INTEGRILIN at the expense of GSK for products sold in the GSK territories.

Under the license agreement with GSK, GSK has significant final decision-making authority with respect to European marketing issues. Our agreement with GSK continues until the later of December 31, 2014, or as long as GSK continues to commercialize INTEGRILIN in any European country.

sanofi-aventis Inflammatory Disease Collaboration

In June 2000, we entered into a broad agreement in the field of inflammatory disease with Aventis, now sanofi-aventis, which includes joint discovery, development and commercialization of small molecule drugs for the treatment of specified inflammatory diseases. This agreement covers a substantial portion of our development program in the inflammatory disease area and provides us with potential access to sanofi-aventis’ large promotional infrastructure in connection with the commercialization of jointly developed products. The discovery phase of this collaboration has concluded. However, we and sanofi-aventis are continuing a limited research program covering two advanced preclinical candidates discovered through the collaboration. The development and commercialization programs continue under the agreement.

As provided in the original agreement, in North America we have agreed to share the responsibility for developing, manufacturing and marketing products and share profits and losses in that territory. Outside of North America, sanofi-aventis is responsible for and will bear the cost of developing, manufacturing and marketing products arising from the alliance. sanofi-aventis is required to pay us a royalty on product sales outside of North America. Under this agreement, sanofi-aventis acquired 4.5 million shares of our common stock over a two-year period through 2001 for $250.0 million.

To date, we and sanofi-aventis have identified a significant number of novel drug targets and associated molecules relevant in inflammatory diseases. During the remaining portion of the development phase of the alliance, we and sanofi-aventis have agreed to focus our joint resources on preclinical and clinical development of candidates identified in the collaboration. As of the end of 2006, the alliance had identified several development candidates, one of which, MLN3897, is now being tested in a phase II clinical trial and two of which, MLN3701 and MLN0415, are now being tested in phase I clinical trials. A fourth product candidate, MLN6095, is now in preclinical testing.

Prosecution of development candidates discovered through the collaboration will continue until marketing approval or termination of development by the parties. Either party may terminate development of a development candidate prior to marketing approval, in which case the other party may continue to develop such candidate subject to payment of royalties to the other party.

Manufacturing

Our strategy with regard to manufacturing is to contract with third parties to meet our needs for commercial supply and, as to most of our compounds, for research, development, preclinical testing and clinical trials. Therefore, we have limited manufacturing capabilities and produce only a small amount of product for research and development and preclinical testing.

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We have established an in-house quality assurance/control program to ensure that our products and product candidates are manufactured in accordance with applicable regulations. We require that our contract manufacturers adhere to current Good Manufacturing Practices, or GMP, except for products and product candidates for toxicology studies and animal studies, which we require to be manufactured in accordance with current Good Laboratory Practices, or GLP. The facilities of our contract manufacturers of marketed products must pass regular post-approval inspections by the FDA and other agencies.

The FDA or other regulatory agencies must approve the processes and the facilities that may be used for the manufacture of any of our potential drug substances and drug products. The manufacture of our products and product candidates is based in part on technology that we believe to be proprietary to our contract manufacturers. In addition, some of our manufacturers may develop process technology related to the manufacture of our compounds that such suppliers own either independently or jointly with us. This could increase our reliance on such manufacturers, require us to obtain a license from such manufacturers in order to have our products manufactured or result in us not benefiting from the potential efficiencies of new process technologies.

We manage the commercial and clinical supply chains for the production of both VELCADE and INTEGRILIN. We rely on third party contract manufacturers for the manufacturing of the active ingredient, formulation, fill/finish and packaging of VELCADE for both commercial purposes and for ongoing clinical trials. We have established long-term supply relationships for the production of commercial supplies of VELCADE. We believe we currently have a sufficient quantity of bortezomib, the active pharmaceutical ingredient necessary to make VELCADE, to meet the anticipated commercial demand for the product for 2007 and to fulfill the needs for our ongoing and planned clinical trials. We work with one manufacturer to manufacture bortezomib and a second manufacturer to complete fill/finish for VELCADE. We are currently developing an additional supplier for bortezomib and have contracted with an additional manufacturer for the fill/finish of VELCADE. We expect that both of these additional manufacturers will provide services to us in the future.

We also rely on third party contract manufacturers for the clinical and commercial production of INTEGRILIN. Two manufacturers provide us with eptifibatide, the raw material necessary to make INTEGRILIN, for both clinical trials and commercial supply. Solvay, S.A., or Solvay, one of the current manufacturers, owns the process technology used by it. Lonza Braine, S.A., or Lonza, is the other current manufacturer of bulk product. We own the process technology used by Lonza for the production of eptifibatide. SGP and GSK have had this proprietary process technology approved in the United States and in the European Union, and, we, GSK or SGP are responsible for submitting that proprietary process technology for approval in other countries, as required. Our supply agreement with Solvay ends in 2007 and our agreement with Lonza expires in 2009. We are exploring several options for additional future supply of eptifibatide. Two approved manufacturers currently perform fill/finish services for INTEGRILIN for us and we have two packaging suppliers for the United States.

Sales and Marketing

We have built a specialized oncology sales force with approximately 100 sales representatives and managers located across the United States. This sales force markets VELCADE in its approved indications to physicians, hospitals and other health care providers. Under our new agreement with OBI to jointly promote VELCADE in the U.S.,  in the first quarter of 2007, OBI began jointly promoting VELCADE to U.S.-based physicians. OBL or its affiliates market VELCADE outside of the United States and pay us distribution fees on product sales. See “Our Collaborations—Ortho Biotech Collaborations.”  All sales of VELCADE in the United States are distributed through a sole-source distribution model, where we sell directly to a third party who in turn distributes to the wholesaler base.

SGP’s sales force markets INTEGRILIN to clinical cardiologists, interventional cardiologists and emergency medicine physicians. GSK markets and sells INTEGRILIN in the European Union and other

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European countries, and SGP sells and markets INTEGRILIN elsewhere outside the United States. See “Our Collaborations—INTEGRILIN Collaborations—SGP Collaboration” and “Our Collaborations—INTEGRILIN Collaborations—GSK License Agreement.”

We have not developed commercialization plans for our product candidates that may receive marketing approval in the future because the manner in which we will commercialize these product candidates will depend in large part on their market potential and our financial resources. We may decide to perform all necessary commercial functions for these products on our own or we may establish co-promotion, collaboration, licensing or other arrangements for the marketing and sale of some products in some or all geographic markets.

Sales of VELCADE, INTEGRILIN and product candidates that may be approved in the future will depend heavily upon the availability of reimbursement from third party payors, such as government and private insurance plans. We meet with administrators of these plans to discuss the potential medical benefits and cost-effectiveness of our products. We believe this approach may assist in obtaining reimbursement authorization for our products from these third party payors. See “Government Regulation—Third Party Reimbursement.”

Competition

We currently face competition, and believe significant long-term competition can be expected, from a range of pharmaceutical and biotechnology companies. This competition may become more intense as we develop additional products. Some competitors, primarily large pharmaceutical companies, have greater resources and experience than we have. Many of these companies have commercial arrangements with other companies in the biotechnology industry to supplement their own research and development capabilities.

The introduction of new products or the development of new processes by competitors or new information about existing products may result in price reductions or product replacements, even for products protected by patents. Other factors that may affect our ability to meet competition include the skill of our employees and our ability to recruit and retain skilled employees, our program of seeking patent protection for our discoveries and advances and our research, development and regulatory affairs capabilities. Many large pharmaceutical and biotechnology companies have significantly larger intellectual property estates than we do, more substantial capital resources than we have and greater capabilities and experience than we do in discovery, research, preclinical and clinical development, sales, marketing, manufacturing and regulatory affairs.

Over the longer term, our and our collaborators’ abilities to successfully market products, expand their usage and bring new products to the marketplace will depend on many factors, including:

·                    the effectiveness and safety of the products;

·                    FDA and foreign regulatory agencies’ approvals of new products and indications;

·                    the degree of patent protection afforded to particular products;

·                    the effects of price control mechanisms; and

·                    reimbursement and treatment guidelines.

We expect traditional chemotherapy treatments and other therapies on the market and in development, including other proteasome inhibitors, to compete with VELCADE. In particular, in December 2005, Celgene Corporation received approval for Revlimid® (lenalidomide) for the treatment of a subset of patients with myelodysplastic syndromes, a group of related blood disorders, and in June 2006 for the treatment of patients with multiple myeloma who have received at least one prior

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therapy. Competition from Revlimid may limit the growth opportunities for future sales of VELCADE. Additionally, in May 2006, the FDA approved the use of Celgene’s Thalomid® (thalidomide) for the treatment of newly diagnosed multiple myeloma. There are also other potentially competitive therapies that are in late-stage clinical development for multiple myeloma. We believe that VELCADE generally competes with other therapies on the basis of efficacy, safety, convenience and price.

Due to the incidence and severity of cardiovascular diseases, the market for therapeutic products that address such diseases is large, and we expect the already intense competition in this field to increase. INTEGRILIN generally competes with other therapies on the basis of efficacy, safety, convenience and price. Two GP IIb-IIIa inhibitors which compete with INTEGRILIN have received regulatory approval in the United States and Europe:

·                    ReoPro® (abciximab), which is produced by Johnson & Johnson and sold by Johnson & Johnson and Eli Lilly & Co.; and

·                    Aggrastat® (tirofiban), which is produced and sold by Merck & Co., Inc. outside of the United States and by Medicure Inc. in the United States.

Sales of INTEGRILIN could also be negatively impacted in the future by other competitive factors including:

·                    expanded use of heparin replacement therapies, such as Angiomax® (bivalirudin) produced and sold by The Medicines Company for patients undergoing PCI;

·                    changing treatment practices for PCI and ACS based on new technologies, including the use of drug-coated stents;

·                    increased use of another class of anti-platelet drugs known as ADP inhibitors in patients whose symptoms make them potential candidates for treatment with INTEGRILIN; and

·                    SGP’s inability to complete clinical trials and develop data to promote increased use of INTEGRILIN in its current indications as well as in new indications.

Drug Research, Discovery and Development

A key element of our overall strategy is to build a sustainable pipeline of innovative new treatments in areas of high unmet medical need—cancer and inflammatory diseases. Our goal is to generate a sufficiently large portfolio of discovery and development programs at various stages of maturity so that we can move new drugs through clinical development and onto the market on a regular basis.

To achieve this goal, we have focused on developing a comprehensive understanding of the mechanisms and pathways that underlie important diseases and identifying appropriate biological targets. Then we seek to identify and optimize small molecule compounds or antibodies that interact with targets in a desired manner. We test these drug candidates in animal models to assess their likely suitability as therapeutic products. For candidates meeting our criteria for clinical development, we then move into human clinical testing to establish the safety and efficacy of these experimental products and to understand therapeutically important differences among people. At any stage of this process, we may encounter unexpected difficulties and may need to delay or terminate programs or go back to repeat several steps with slight variations, in an effort to ensure that we bring the most suitable new drug candidate through clinical testing.

In order to focus our efforts and resources, throughout the discovery and development process we currently rely substantially upon third parties and expect to continue to do so in the future. For example, we rely on third parties to provide us with discovery technology services, produce material for preclinical and clinical testing purposes and perform clinical development activities.

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We believe that our global regulatory affairs experience and expertise is an important part of our ability to move development candidates forward in an efficient manner. If we believe we have established safety and efficacy for a new drug candidate, we submit applications for marketing approval to the appropriate regulatory authorities.

During this process, the expertise of our scientific, clinical and regulatory groups is critical. To augment our internal discovery and development capabilities, we continuously evaluate opportunities to license or acquire rights to drugs or drug candidates that have been developed outside of our company.

We are devoting fewer personnel and resources to research and discovery activities than we have in the past. As a result of this shift, we recorded restructuring charges in 2006 of approximately $20.4 million, in 2005 of approximately $77.1 million and in 2004 of approximately $38.0 and expect to record additional restructuring charges during 2007 of between $15.0 million and $25.0 million.

Our research and development expenses totaled $318.2 million in 2006, $342.2 million in 2005 and $402.6 million in 2004. Our research and development expenses are primarily company-sponsored. Our strategic collaborator-sponsored research and development expenditures totaled $16.3 million in 2006, $23.5 million in 2005 and $37.7 million in 2004. In calculating strategic collaborator-sponsored research and development expenditures, we have included net reimbursement for our research and development efforts, excluding license fees, milestones and royalties.

Patents and Proprietary Rights; Licenses

Patents

Our success depends in part on our ability to obtain and maintain proprietary protection for our products, product candidates, technology and know-how, to operate without infringing the proprietary rights of others and to prevent others from infringing our proprietary rights. We generally seek United States and foreign patent protection for the genes, proteins and the antibody and small-molecule drug leads that we discover as well as possible therapeutic, diagnostic and pharmacogenomic products and processes, drug screening methodologies and other inventions based on such genes, proteins, antibodies and small molecules. We also seek patent protection or rely upon trade secret rights to protect other technologies which may be used to discover and characterize genes, proteins, antibodies and small molecules or may be used to develop and manufacture novel therapeutic, diagnostic and pharmacogenomic products and processes.

We own issued United States patents, granted foreign patents and pending United States and foreign applications for VELCADE. The issued U.S. patents related to VELCADE expire in 2014 with the potential for extension and the issued foreign patents expire in 2015 with extensions issued or pending in a number of countries.

We own issued United States patents, granted foreign patents and pending United States and foreign applications for INTEGRILIN. The issued United States patents that cover INTEGRILIN expire in 2014 and 2015 and the issued foreign patents expire between 2010 and 2012.

We also own issued patents and/or pending United States and foreign patent applications related to MLN0002, MLN1202 and MLN3897. The issued United States patents for MLN0002 expire in 2015 and 2016. The issued United States patents for MLN1202 expire in 2018.

Licenses

We have obtained licenses from various parties for rights to use proprietary technologies and compounds. These licenses generally are for a fixed duration, typically the life of the licensed patents, and require us to use reasonable or diligent efforts to develop and commercialize and to pay ongoing royalties

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on product sales. We are the exclusive licensee of issued United States and foreign patents and/or pending United States and foreign applications relating to our products on the market and in clinical development.

For VELCADE, we are a party to an exclusive worldwide Patent License Agreement with the U.S. Public Health Service, or PHS, dated December 12, 2002. This agreement provides us with the right to use the patents belonging to PHS relating to the formulation of VELCADE. Under this agreement we have obligations to pay PHS up-front royalty payments, royalty milestones, royalties on net sales of VELCADE and sublicensing royalties. The license extends through the expiration of any licensed patents that may result from PHS’ pending applications unless it is terminated earlier by PHS to meet requirements for public use specified by law, or based on a default by us or a failure to meet our obligations under the agreement, in either case, following a cure period. The issued United States patents to which this license relates expire in 2022.

Trademarks

We currently own a number of trademarks and servicemarks including: Millennium, the Millennium “M” logo and design, “Transcending the Limits of Medicine,” VELCADE, INTEGRILIN and “Breakthrough Science. Breakthrough Medicine.” All of these marks are covered by registrations or pending applications for registration in the United States Patent and Trademark Office and in the Patent and Trademark Offices of many other countries.

Government Regulation

Regulatory Compliance

Regulation by governmental authorities in the United States and other countries is a significant factor in the manufacture and marketing of our products and in ongoing research and product development activities. All of our products require regulatory approval by governmental agencies prior to commercialization. In particular, our products are subject to rigorous preclinical and clinical testing and other premarket approval requirements by the FDA and regulatory authorities in other countries. Various statutes and regulations also govern or influence the manufacturing, safety, labeling, storage, record keeping and marketing of our products. The lengthy process of seeking these approvals, and the subsequent compliance with applicable statutes and regulations, require the expenditure of substantial resources. Any failure by us to obtain, any delay in obtaining or any failure to maintain, regulatory approvals could materially adversely affect our business. In addition, recently there has been heightened scrutiny by Congress on the adequacy of the FDA’s drug approval processes and its efforts to assure the safety of marketed drugs, and new legislation addressing drug safety, among other issues, has been proposed. If enacted, any new legislation could result in delays or increased costs for manufacturers and drug sponsors during the period of product development, clinical trials, and regulatory review and approval, as well as increased costs to assure compliance with any new post-approval regulatory requirements.

The activities required before a biopharmaceutical product may be marketed in the United States begin with preclinical testing. Preclinical tests include laboratory evaluation of product chemistry and animal studies to assess the potential safety and efficacy of the product and its formulations. The results of these studies must be submitted to the FDA as part of an Investigational New Drug application, or IND, which must be reviewed by the FDA and become effective before proposed clinical testing can begin.

Typically, clinical testing prior to approval involves a three-phase process.

·                    In phase I, clinical trials are conducted with a small number of subjects to assess the early safety profile and the pattern of drug distribution and metabolism.

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·                    In phase II, clinical trials are conducted in a limited patient population afflicted with a specified disease in order to provide enough data to statistically evaluate the preliminary efficacy, optimal dosages and expanded evidence of safety.

·                    In phase III, large scale, multicenter, comparative clinical trials are conducted with patients afflicted with a target disease in order to provide enough data to statistically evaluate the efficacy and safety of the product, as required by the FDA.

The results of the preclinical and clinical testing of a pharmaceutical product, along with descriptions of the manufacturing process, analytical tests conducted on the chemistry of the product, results of chemical studies and other relevant information, are then submitted to the FDA for review and potential approval to commence commercial sales. For a chemical pharmaceutical product, the submission is in the form of a new drug application, or NDA, and for a biological pharmaceutical product the submission is in the form of a biologic license application, or BLA. In responding to an NDA or a BLA, the FDA may grant marketing approval, request additional information or deny the application if it determines that the application does not provide an adequate basis for approval. We can not assure that any approval required by the FDA will be obtained on a timely basis, if at all.

Among the conditions for an NDA or a BLA approval is the requirement that the applicable manufacturing, clinical, pharmacovigilance, quality control and manufacturing procedures conform on an ongoing basis with current good clinical practices, or GCP, GLP, for specific non-clinical toxicology studies, current GMP and computer information system validation standards. Before approval of a BLA, the FDA will perform a prelicensing inspection of clinical sites, manufacturing facilities and the related quality control records to determine its compliance with these requirements. To assure compliance, applicants must continue to expend time, money and effort in the area of training, production and quality control. After the applicant is licensed for the manufacture of any product, manufacturers are subject to periodic inspections by the FDA. We also face similar inspections coordinated by the EMEA by inspectors from particular European Union member states that conduct inspections on behalf of the European Union.

Regulatory requirements and approval processes in countries outside the United States can be at least as rigorous, costly and uncertain.

We are also subject to various federal and state laws pertaining to health care “fraud and abuse,” including anti-kickback laws and false claims laws. Anti-kickback laws make it illegal for a prescription drug manufacturer to solicit, offer, receive, or pay any remuneration in exchange for, or to induce, the referral of business, including the purchase or prescription of a particular drug. False claims laws prohibit anyone from knowingly and willingly presenting, or causing to be presented for payment to third party payors, including Medicare and Medicaid, claims for reimbursed drugs or services that are false or fraudulent, claims for items or services not provided as claimed, or claims for medically unnecessary items or services.

As a result of gaining approval of and launching VELCADE, we are a participant in the Medicaid rebate program established by the Omnibus Budget Reconciliation Act of 1990, and under amendments of that law that became effective in 1993. Participation in this program includes requirements such as extending comparable discounts under the PHS pharmaceutical pricing program. Under the Medicaid rebate program, we pay a rebate for each unit of our product reimbursed by Medicaid. The amount of the rebate for each product is set by law as a minimum of 15.1% of the average manufacturer price, or AMP, of that product, or if it is greater, the difference between AMP and the best price available from us to any customer. The rebate amount also includes an inflation adjustment if AMP increases faster than inflation. The PHS pricing program extends discounts comparable to the Medicaid rebate to a variety of community health clinics and other entities that receive health services grants from the PHS, as well as hospitals that serve a disproportionate share of poor Medicare and Medicaid beneficiaries. The rebate amount is

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recomputed each quarter based on our reports of our current average manufacturer price and best price for each of our products to the Centers for Medicare & Medicaid Services.

The Medicaid Prescription Drug, Improvement and Modernization Act of 2003, or the MMA has significantly changed how Medicare pays for VELCADE. As of January 1, 2005, Medicare pays for products covered by the Part B benefit based on the average selling price, or ASP, plus 6%. Medicare had previously paid for these products based on 95% of the average wholesale price, or AWP. To date, the change from the AWP to the ASP system has not had a material adverse impact on our ability to obtain adequate reimbursement for our products.

VELCADE is available to authorized users of the Federal Supply Schedule of the General Services Administration. Since 1993, as a result of the Veterans Health Care Act of 1992, or VHC Act, federal law has required that product prices for purchases by the Veterans Administration, the Department of Defense, Coast Guard, and the PHS, including the Indian Health Service, be discounted by a minimum of 24% off the AMP to non-federal customers, the non-federal average manufacturer price, or non-FAMP. Our computation and report of non-FAMP is used in establishing the price, and the accuracy of the reported non-FAMP may be audited by the government under applicable federal procurement laws.

Under the laws of the United States, the countries of the European Union and other nations, we and the institutions where we sponsor research are subject to obligations to ensure the protection of personal information of human subjects participating in our clinical trials. We have instituted procedures that we believe will enable us to comply with these requirements and the contractual requirements of our data sources. The laws and regulations in this area are evolving and further regulation, if adopted, could affect the timing and the cost of future clinical development activities.

We are also subject to regulation under the Occupational Safety and Health Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act, and other current and potential future federal, state, or local regulations. Our research and development activities involve the controlled use of hazardous materials, chemicals, biological materials, and various radioactive compounds. We believe that our procedures comply with the standards prescribed by local, state and federal laws and regulations; however, the risk of injury or accidental contamination cannot be completely eliminated. We conduct our research and manufacturing activities in voluntary compliance with the National Institutes of Health Guidelines for Recombinant DNA Research.

We are subject to the United States Foreign Corrupt Practices Act which prohibits corporations and individuals from engaging in specified activities to obtain or retain business or to influence a person working in an official capacity. Under this act, it is illegal to pay, offer to pay, or authorize the payment of anything of value to any foreign government official, government staff member, political party, or political candidate in an attempt to obtain or retain business or to otherwise influence a person working in an official capacity. Our present and future business has been and will continue to be subject to various other laws and regulations.

Pricing Controls

The levels of revenues and profitability of biopharmaceutical companies may be affected by the continuing efforts of government and third party payors to contain or reduce the costs of health care through various means. For example, in some foreign markets, pricing reimbursement or profitability of therapeutic and other pharmaceutical products is subject to governmental control. In Canada this practice has led in some instances to lower priced products than in the United States. As a result, importation of products from Canada into the United States may result in reduced product revenues. In many foreign markets, including the countries in the European Union, pricing of pharmaceutical products is subject to governmental control.  In the United States there have been, and we expect that there will continue to be, a number of federal and state proposals to implement similar governmental pricing reimbursement and

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pricing controls. While we cannot predict whether any future legislative or regulatory proposals will be adopted, the adoption of such proposals could have a material adverse effect on our business, financial condition and results.

Third Party Reimbursement

In the United States and elsewhere, sales of therapeutic and other pharmaceutical products are dependent in part on the availability of reimbursement to the consumer from third party payors, such as government and private insurance plans. Increasingly, third party payors are challenging the prices charged for medical products and services. As a result, in the future, our products could be considered not cost effective or reimbursement to the consumer could become unavailable or could be insufficient to allow us to sell our products on a competitive and profitable basis.

Employees

As of February 19, 2007, we had approximately 947 full-time employees. We believe that relations with our employees are good.

Available Information

Our Internet website is http://www.millennium.com. We make available free of charge through our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended. We have made these reports available through our website during the period covered by this report and, since November 15, 2002, at the same time that they become available on the Securities and Exchange Commission’s website.

Our code of conduct, the Core Values Handbook, our Board Policies, and the charters of the Audit Committee, Compensation and Talent Committee and Board Governance Committee are all available on the corporate governance section of our website at http://www.millennium.com/investors. Stockholders may request a free copy of any of these documents by writing to Investor Relations, Millennium Pharmaceuticals, Inc., 40 Landsdowne Street, Cambridge, Massachusetts, U.S.A. 02139.

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Item 1A.                RISK FACTORS

This Annual Report on Form 10-K contains forward-looking statements that are based on current expectations, estimates, forecasts and projections about us, our future performance, our business, our beliefs and our management’s assumptions. In addition, we, or others on our behalf, may make forward-looking statements in press releases or written statements, or in our communications and discussions with investors and analysts in the normal course of business through meetings, webcasts, phone calls and conference calls. Words such as “expect,” “anticipate,” “outlook,” “could,” “target,” “project,” “intend,” “plan,” “believe,” “seek,” “estimate,” “should,” “may,” “will,” “assume” or “continue,” and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve important risks, uncertainties and assumptions that are difficult to predict. We describe some of the risks, uncertainties and assumptions that could affect our business, including our financial condition and results of operations, in this “Risk Factors” section. We have based our forward-looking statements on our management’s beliefs and assumptions based on information available to our management at the time the statements are made.

We caution you that actual outcomes and results may differ materially from what is expressed, implied or forecast by our forward-looking statements. Reference is made in particular to forward-looking statements about our growth and future financial and operating results, discovery and development of products, strategic alliances, regulatory approvals, competitive strengths, intellectual property, litigation, mergers and acquisitions, market acceptance or continued acceptance of our products, accounting estimates, financing activities, ongoing contractual obligations and sales efforts. We do not intend to update or revise any forward-looking statements, whether as a result of new information, future events, changes in assumptions or otherwise.

Regulatory Risks

Our business may be harmed if we do not obtain approval to market VELCADE for additional therapeutic uses.

An important part of our strategy to grow our business is to market VELCADE for additional indications. To do so, we will need to successfully conduct clinical trials in accordance with GCP and then apply for and obtain the appropriate regulatory approvals. If we are unsuccessful in our clinical trials, or we experience a delay in obtaining or are unable to obtain authorizations for expanded uses of VELCADE, our revenues may not grow as expected and our business and operating results will be harmed.

We may not be able to obtain approval in additional countries to market VELCADE.

VELCADE is currently approved for marketing in the United States and a total of more than 75 countries including the countries of the European Union. If we or OBL are not able to obtain approval to market VELCADE in additional countries, OBL will lose the opportunity to sell in those countries and we may not be able to earn potential milestone and royalty payments under our agreement with OBL or collect potential distribution fees on sales of VELCADE by OBL in those countries.

We may not be able to obtain marketing approval for products resulting from our development efforts.

The products that we are developing require research and development, extensive preclinical studies and clinical trials and regulatory approval, including the submission of user fees, prior to any commercial sales. This process is expensive and lengthy, and can often take a number of years. In some cases, the length of time that it takes for us to achieve various regulatory approval milestones affects the payments that we are eligible to receive under our strategic alliance agreements.

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We may need to successfully address a number of technological challenges in order to complete development of our products. Moreover, these products may not be effective in treating any disease or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may preclude our obtaining regulatory approval or prevent or limit commercial use. For example, in January 2006, as part of our portfolio review process, based on the evaluation of clinical data in the context of additional opportunities in the pipeline, we decided to discontinue development of MLN2704 as well as MLN1202 in rheumatoid arthritis.

Failure to gain approval for the products we are developing could have a material adverse impact on our business.

If we fail to comply with regulatory requirements, or if we experience unanticipated problems with our approved products, our products could be subject to restrictions or withdrawal from the market.

Any product for which we obtain marketing approval, along with the manufacturing processes, post-approval clinical data, adverse event reporting and promotional activities for such product, is subject to continual review and periodic inspections by the FDA and other regulatory authorities. Later discovery of previously unknown problems or safety issues with our products or manufacturing processes, or failure to comply with regulatory requirements, may result in restrictions on such products or manufacturing processes, withdrawal of the products from the market, the imposition of civil or criminal penalties or a refusal by the FDA and other regulatory authorities to approve pending applications for marketing approval of new drugs or supplements to approved applications. As with any recently approved therapeutic product, we expect that our knowledge of the safety profile for VELCADE will expand after wider usage, and the possibility exists of patients receiving VELCADE treatment experiencing unexpected or more frequently than expected serious adverse events, which could have a material adverse effect on our business.

We are a party to collaborations that transfer responsibility for specified regulatory requirements, such as filing and maintenance of marketing authorizations and safety reporting, to our collaborators. If our collaborators do not fulfill these regulatory obligations, products, including VELCADE or INTEGRILIN, could be withdrawn from the market, which would have a material adverse effect on our business. Additionally, the FDA requires that we, along with our collaborators and third party manufacturers, may not employ, in any capacity, persons who have been debarred under the FDA’s Application Integrity Policy. Employment of such a debarred person (even if inadvertently) may result in delays in the FDA’s review or approval of our products, or the rejection of data developed with the involvement of such person(s).

Some of our products may be based on new technologies, which may affect our ability or the time we require to obtain necessary regulatory approvals.

Products that result from our research and development programs may be based on new technologies, such as proteasome inhibition, and new therapeutic approaches that have not been extensively tested in humans. The regulatory requirements governing these types of products may be more rigorous than for conventional products. As a result, we may experience a longer development or regulatory process in connection with any products that we develop based on these new technologies or new therapeutic approaches.

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Risks Relating to Our Business, Strategy and Industry

Our revenues over the next several years will be materially dependent on the commercial success of VELCADE and INTEGRILIN.

VELCADE was approved by the FDA in May 2003 and commercially launched in the United States shortly after that date. Marketing of VELCADE outside the United States commenced in April 2004. INTEGRILIN has been on the market in the United States since June 1998. Marketing of INTEGRILIN outside the United States commenced in mid-1999.

Our business plan contemplates obtaining marketing authorization to sell VELCADE in many countries for the treatment of all patients with multiple myeloma and both in the United States and abroad for other indications. We will be adversely affected if VELCADE does not receive such approvals, or if such approvals are subject to limitations on the indicated uses for which we may market the product.

We will not achieve our business plan, and we may be forced to scale back our operations and research and development programs, if we do not obtain regulatory approval to sell VELCADE in additional countries or for additional therapeutic uses or the sales of VELCADE or INTEGRILIN do not meet our expectations.

We face substantial competition, and others may discover, develop or commercialize products before or more successfully than we do.

The fields of biotechnology and pharmaceuticals are highly competitive. Many of our competitors are substantially larger than we are, and these competitors have substantially greater capital resources, research and development staffs and facilities than we have. Furthermore, many of our competitors are more experienced than we are in drug research, discovery, development and commercialization, obtaining regulatory approvals and product manufacturing and marketing. As a result, our competitors may discover, develop and commercialize pharmaceutical products before or in a shorter timeframe than we do. In addition, our competitors may discover, develop and commercialize products that make the products that we or our collaborators have developed or are seeking to develop and commercialize non-competitive or obsolete.

With respect to VELCADE, we face competition from Celgene Corporation’s Thalomid and Revlimid. In May 2006, the FDA approved the use of Thalomid for the treatment of newly diagnosed multiple myeloma. Revlimid was approved by the FDA in December 2005 for the treatment of patients with myelodysplastic syndromes and in June 2006 for multiple myeloma patients who have received at least one prior therapy. While Revlimid has limited the growth potential of VELCADE in some indications, as Revlimid only was approved recently, it is difficult for us to determine the sustained level of competition that it may pose for VELCADE. We also face competition for VELCADE from traditional chemotherapy treatments, and there are other potentially competitive therapies for VELCADE, including other proteasome inhibitors, some of which are in late-stage clinical development for the treatment of multiple myeloma. In addition, multiple myeloma therapies in development may reduce the number of patients available for VELCADE treatment through enrollment of these patients in clinical trials of these potentially competing products.

Due to the incidence and severity of cardiovascular diseases, the market for therapeutic products that address these diseases is large, and we expect the already intense competition in this field to increase. The most significant competitors for SGP and GlaxoSmithKline plc, or GSK, in marketing INTEGRILIN are major pharmaceutical companies and biotechnology companies. The two products that compete directly with INTEGRILIN in the GP IIb-IIIa inhibitor market segment are ReoPro® (abciximab), which is produced by Johnson & Johnson and sold by Johnson & Johnson and Eli Lilly and Company, and

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Aggrastat® (tirofiban HCl), which is produced and sold by Merck & Co., Inc. outside of the United States and by Medicure Inc. in the United States.

Sales of INTEGRILIN could also be negatively impacted in the future by other competitive factors, including:

·       expanded use of heparin replacement therapies, such as Angiomax® (bivalirudin), which is produced and sold by The Medicines Company;

·       changing treatment practices for percutaneous coronary intervention and acute coronary syndrome based on new technologies, including the use of drug-coated stents;

·       increased use of another class of anti-platelet drugs known as ADP inhibitors in patients whose symptoms make them potential candidates for treatment with INTEGRILIN; and

·       SGP’s inability to complete clinical trials and develop data to promote increased use of INTEGRILIN in its current indications as well as in new indications.

Sales of INTEGRILIN and possibly VELCADE in particular reporting periods may be affected by fluctuations in inventory, allowances and buying patterns.

We distribute VELCADE in the U.S. through a sole-source distribution model, where we sell directly to a third party who in turn distributes to the wholesaler base. Our VELCADE product inventory levels may fluctuate from time to time depending on the consistency of the distribution logistics of this arrangement and the buying patterns of these wholesalers.

Additionally, we make provisions at the time of sale of VELCADE for discounts, rebates, product returns and other allowances based on historical experience updated for changes in facts and circumstances, as appropriate. To the extent these allowances are incorrect, we may need to adjust our estimates, which could have a material impact on the timing and actual amount of revenue we are able to recognize from these sales.

A significant portion of INTEGRILIN domestic pharmaceutical sales is made by SGP to major drug wholesalers. These sales are affected by fluctuations in the buying patterns of these wholesalers and the corresponding changes in inventory levels maintained by them. Inventory levels held by these wholesalers may fluctuate significantly from quarter to quarter. If these wholesalers build inventory levels excessively in any quarter, sales to the wholesalers in future quarters may unexpectedly decrease notwithstanding steady prescriber demand. Because SGP commercializes INTEGRILIN and manages product distribution, we have limited insight into or control over factors affecting changes in distributor inventory levels. If SGP does not appropriately manage this distribution, SGP may not realize sales goals for the product and could reduce the royalty revenue we recognize and thus adversely affect our business.

Because our research and development projects are based on new technologies and new therapeutic approaches that have not been extensively tested in humans, it is possible that our discovery process will not result in commercial products.

The process of discovering drugs based upon genomics and other new technologies is new and evolving rapidly. We focus a portion of our research on diseases that may be linked to a number of genes working in combination or to novel targets. Both we and the general scientific and medical communities have only a limited understanding of the role that genes play in these diseases. To date, we have not commercialized any products discovered through our genomics research, and we may not be successful in doing so in the future. In addition, relatively few products based on gene discoveries have been developed and commercialized by others. Rapid technological development by us or others may result in compounds, products or processes becoming obsolete before we recover our development expenses. Further,

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manufacturing costs or products based on these new technologies may make products uneconomical to commercialize.

If our clinical trials are unsuccessful, or if they experience significant delays, our ability to commercialize products will be impaired.

We must provide the FDA and foreign regulatory authorities with preclinical and clinical data demonstrating that our products are safe and effective before they can be approved for commercial sale. Clinical development, including preclinical testing, is a long, expensive and uncertain process. It may take us several years to complete our testing, and failure can occur at any stage of testing. Interim results of preclinical or clinical studies do not necessarily predict their final results, and acceptable results in early studies might not be seen in later studies. Any preclinical or clinical test may fail to produce results satisfactory to the FDA or other regulatory authorities. Preclinical and clinical data can be interpreted in different ways, which could delay, limit or prevent regulatory approval. Negative or inconclusive results from a preclinical study or clinical trial, adverse medical events during a clinical trial or safety issues resulting from products of the same class of drug could cause a preclinical study or clinical trial to be repeated or prolonged or a program to be terminated, even if other studies or trials relating to the program are successful.

We may not complete our planned preclinical or clinical trials on schedule or at all. We may not be able to confirm the safety and efficacy of our potential drugs in long-term clinical trials, which may result in a delay or failure to commercialize our products. We may have difficulty obtaining a sufficient number of appropriate patients or clinical support to conduct our clinical trials as planned. A number of additional events could delay the completion of our clinical trials, including conditions imposed on us by the FDA or foreign regulatory authorities regarding the scope or design of our clinical trials, lower than anticipated retention rates for patients in our clinical trials, insufficient supply or deficient quality of our product candidates or other materials necessary to conduct our clinical trials or the failure of our third party contractors to comply with regulatory requirements or otherwise meet their contractual obligations to us in a timely manner, or at all. In addition, institutional review boards or regulators, including the FDA, or our collaborators may hold, suspend or terminate our clinical trials for various reasons, including noncompliance with regulatory requirements or if, in their opinion, the participating subjects are being exposed to unacceptable health risks. As a result, we may have to expend substantial additional funds to obtain access to resources or delay or modify our plans significantly. Our product development costs will increase if we experience delays in testing or approvals. Significant clinical trial delays could allow our competitors to bring products to market before we do and impair our ability to commercialize our products or potential products.

If third parties on which we rely for clinical trials do not perform as contractually required or as we expect, we may not be able to obtain regulatory approval for or commercialize our product candidates.

We depend on independent clinical investigators and, in some cases, contract research organizations and other third party service providers to conduct the clinical trials of our product candidates and expect to continue to do so. We rely heavily on these parties for successful execution of our clinical trials, but we do not control many aspects of their activities. Nonetheless, we are responsible for confirming that each of our clinical trials is conducted in accordance with the general investigational plan and protocol. Our reliance on these third parties that we do not control does not relieve us of our responsibility to comply with the regulations and standards of the FDA relating to good clinical practices. Third parties may not complete activities on schedule or may not conduct our clinical trials in accordance with regulatory requirements or the applicable trial plans and protocols. The failure of these third parties to carry out their obligations could delay or prevent the development, approval and commercialization of our product candidates or result in enforcement action against us.

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Because many of the products that we are developing are based on new technologies and therapeutic approaches, the market may not be receptive to these products upon their introduction.

The commercial success of any of our products for which we may obtain marketing approval from the FDA or other regulatory authorities will depend upon their acceptance by the medical community and third party payors and consumers as clinically useful, cost-effective and safe. Many of the products that we are developing are based upon new technologies or therapeutic approaches. As a result, it may be more difficult for us to achieve market acceptance of our products, particularly the first products that we introduce to the market based on new technologies and therapeutic approaches. Our efforts to educate the medical community on these potentially unique approaches may require greater resources than would be typically required for products based on conventional technologies or therapeutic approaches. The safety, efficacy, convenience and cost-effectiveness of our products as compared to competitive products will also affect market acceptance.

Because of the high demand for talented personnel within our industry, we could experience difficulties in recruiting employees necessary for our success and growth.

Because competition for talented employees within our industry is fierce, we may not be successful in hiring, retaining or promptly replacing key management, sales, marketing and technical personnel. Any failure to expeditiously fill our needs for key personnel could have a material adverse effect on our business.

Our strategy of generating growth through license arrangements and acquisitions may not be successful.

An important element of our business strategy is to acquire additional therapeutic agents through license arrangements or acquisitions of other companies. Although we regularly review and engage in discussions with third parties with respect to such transactions, we may be unable to license or acquire other suitable products or product candidates from third parties for a number of reasons. In particular, the licensing and acquisition of pharmaceutical and biological products, including through the acquisition of other companies, is a competitive area. A number of other companies are also pursuing strategies to license or acquire products within our therapeutic focus areas of cancer and inflammation. These other companies may have a competitive advantage over us due to their size, cash resources and greater drug research, discovery and development and commercialization capabilities.

Other factors that may prevent us from licensing or otherwise acquiring suitable products and product candidates include the following:

·       we may be unable to license or acquire the relevant technology on terms that would allow us to make an appropriate return on the product;

·       companies that perceive us to be their competitor may be unwilling to assign or license their product rights to us; or

·       we may be unable to identify suitable products or product candidates within our areas of focus.

In addition, we expect competition for licensing and acquisition candidates in the biotechnology and pharmaceutical fields to increase, which may mean fewer suitable opportunities for us as well as higher prices. If we are unable to successfully obtain rights to suitable products and product candidates, our business, financial condition and prospects for growth could suffer.

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If we fail to successfully manage any acquisitions, our ability to develop our product candidates and expand our product candidate pipeline may be harmed.

Following any future acquisitions, our failure to adequately address the financial, operational or legal risks of these transactions could harm our business. Financial aspects of these transactions that could alter our financial position, reported operating results or stock price include:

·       use of cash resources;

·       higher than anticipated acquisition costs and expenses;

·       potentially dilutive issuances of equity securities;

·       the incurrence of debt and contingent liabilities, impairment losses or restructuring charges;

·       large write-offs and difficulties in assessing the relative percentages of in-process research and development expense that can be immediately written off as compared to the amount that must be amortized over the appropriate life of the asset; and

·       amortization expenses related to other intangible assets.

Operational risks that could harm our existing operations or prevent realization of anticipated benefits from these transactions include:

·       challenges associated with managing an increasingly diversified business;

·       disruption of our ongoing business;

·       difficulty and expense in assimilating the operations, products, technology, information systems or personnel of the acquired company;

·       diversion of management’s time and attention from other business concerns;

·       inability to maintain uniform standards, controls, procedures and policies;

·       the assumption of known and unknown liabilities of the acquired company, including intellectual property claims; and

·       subsequent loss of key personnel.

If we are unable to successfully manage our acquisitions, our ability to develop new products and continue to expand our product pipeline may be limited.

Risks Relating to Our Financial Results and Need for Financing

We have incurred substantial losses and expect to continue to incur losses. We will not be successful unless we reverse this trend.

We have incurred net losses of $44.0 million for the year ended December 31, 2006, $198.2 million for the year ended December 31, 2005 and $252.3 million for the year ended December 31, 2004. We expect to continue to incur operating losses in future periods. Prior to our acquisition of COR Therapeutics, Inc., or COR, in February 2002, substantially all of our revenues resulted from payments from collaborators, and not from the sale of products. As of December 31, 2006, we had an accumulated deficit of $2.5 billion.

We expect to continue to incur significant expenses in connection with our research and development programs and commercialization activities. As a result, we will need to generate significant revenues to help fund these costs and achieve positive net income. Our ability to achieve positive net income would be adversely impacted if our acquired intangible asset, primarily resulting from our acquisition of COR and goodwill became impaired as a result of reduced market capitalization or product failures or withdrawals.

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We cannot be certain whether or when we will become profitable because of the significant uncertainties with respect to our ability to successfully develop products and generate revenues from the sale of approved products and from existing and potential future strategic alliances.

We may need additional financing, which may be difficult to obtain. Our failure to obtain necessary financing or doing so on unattractive terms could adversely affect our business and operations.

We will require substantial funds to conduct research and development, including preclinical testing and clinical trials of our potential products. We will also require substantial funds to meet our obligations to our collaborators, manufacture and market products that are approved for commercial sale, including VELCADE, and meet our debt service obligations. We may also require additional financing to execute on product in-licensing or acquisition opportunities. Additional financing may not be available when we need it or may not be available on favorable terms.

If we are unable to obtain adequate funding on a timely basis, we may have to delay or curtail our research and development programs, our product commercialization activities or our in-licensing or acquisition activities. We could be required to seek funds through arrangements with collaborators or others that may require us to relinquish rights to specified technologies, product candidates or products which we would otherwise pursue on our own.

Our indebtedness and debt service obligations may adversely affect our cash flow and otherwise negatively affect our operations.

At December 31, 2006, we had approximately $349.6 million of outstanding convertible debt, of which $99.6 million matures in the first quarter of 2007, and $76.2 million of capital lease obligations. We will be required to make interest payments on our outstanding convertible notes of approximately $6.0 million for each of the next five years. Additionally, we will be required to make interest payments on our capital lease obligations of approximately $2.4 million for each of the next three years.

We may in the future incur additional indebtedness, including long-term debt, credit lines and property and equipment financings to finance capital expenditures. We intend to satisfy our current and future debt service obligations from cash generated by our operations, our existing cash and investments and, in the case of principal payments at maturity, funds from external sources. We may not have sufficient funds and we may be unable to arrange for additional financing to satisfy our principal or interest payment obligations when those obligations become due. Funds from external sources may not be available on acceptable terms, or at all.

Our indebtedness could have significant additional negative consequences, including:

·       increasing our vulnerability to general adverse economic and industry conditions;

·       limiting our ability to obtain additional financing;

·       requiring the dedication of a substantial portion of our cash flow from operations to service our indebtedness, thereby reducing the amount of our expected cash flow available for other purposes, including capital expenditures and research and development;

·       limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; and

·       placing us at a possible competitive disadvantage to less leveraged competitors and competitors that have better access to capital resources.

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If we do not achieve the anticipated benefits of our restructuring efforts, or if the costs of our restructuring efforts exceed anticipated levels, our business could be harmed.

We recorded restructuring charges of $20.4 million for the year ended December 31, 2006, $77.1 million for the year ended December 31, 2005 and $38.0 million for the year ended December 31, 2004. Costs associated with our restructuring efforts include reducing personnel and infrastructure resulting from the restructured relationship with SGP for INTEGRILIN and reducing our in-house research and development technologies and headcount in areas in which we believe the work can now be outsourced cost effectively. As a result of these efforts, we expect to reduce total research and development and selling, general and administration expenses as compared to prior years. We may not achieve our estimated expense reductions anticipated from restructurings because such savings are difficult to predict and speculative in nature. We continue to evaluate strategic alternatives, including facility consolidation, and as a result, significant additional restructuring charges could occur in future periods.

We received an informal inquiry from the Securities and Exchange Commission regarding stock options that we granted in September 2001. If the Securities and Exchange Commission, or SEC,  does not agree with our conclusion regarding the accounting for such options and determines that we have incorrectly accounted for historical stock option grants, and if the associated expense not previously recorded is material, we likely would be required to restate certain historical financial statements and could become subject to litigation.

During the second quarter of 2006, we received a telephone inquiry from the SEC regarding whether stock options we awarded with a stated grant date of September 26, 2001 were, in fact, granted on that date. We were one of over 30 public companies discussed in a May 2006 third party report concerning the timing of stock option grants from 1997 through 2002. With respect to us, the report referenced option grants we made in September 2001. In September 2006, we met with the SEC to discuss the findings of our review of the September 2001 option grants and other of our historical option grants. We reported to the SEC that our review did not uncover any evidence of fraud with respect to the September 2001 option grants or the other historical option grants that we reviewed. Additionally, we reported to the SEC our conclusion that any additional compensation expense resulting from our review of the September 2001 option grants and other historical option grants was immaterial. We cannot express any view as to how the SEC may assess the information we provided. If it is determined that any of our option grants were incorrectly granted or accounted for, we may be required to record compensation expense relating to those grants, and, if the expense is material, we likely would be required to restate certain of our historical financial statements. Additionally, we could become subject to an enforcement proceeding or other litigation. The effects of such a restatement or litigation could be material.

Risks Relating to Collaborators

We depend significantly on our collaborators to work with us to commercialize and develop products including VELCADE and INTEGRILIN.

Outside of the United States, we commercialize VELCADE through an alliance with OBL. We began jointly promoting VELCADE in the United States in the first quarter of 2007 under a two-year agreement with OBI. On September 1, 2005, we transferred exclusive U.S. commercialization and development rights of INTEGRILIN to SGP and SGP is solely responsible for the commercialization and development of INTEGRILIN outside of Europe. GSK is responsible for marketing and selling INTEGRILIN in Europe. We conduct substantial discovery and development activities through strategic alliances, including with OBL for the ongoing development of VELCADE. We expect to enter into additional alliances in the future, especially in connection with product commercialization. The success of our alliances depends heavily on the efforts and activities of our collaborators.

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Each of our collaborators has significant discretion in determining the efforts and resources that it will apply to the alliance and the degree to which it shares financial and product sales and inventory information. Our existing and any future alliances may not be scientifically or commercially successful.

The risks that we face in connection with these existing and any future alliances include the following:

·       All of our strategic alliance agreements are for fixed terms and are subject to termination under various circumstances, including, in many cases, such as in our collaboration and our joint promotion agreement with OBL and OBI, without cause.

·       Our collaborators may change the focus of their development and commercialization efforts. Pharmaceutical and biotechnology companies historically have re-evaluated their development and commercialization priorities following mergers and consolidations, which have been common in recent years in these industries. The ability of some of our products, including VELCADE and INTEGRILIN, to reach their potential could be limited if our collaborators decrease or fail to increase marketing or spending efforts related to such products.

·       We expect to rely on our collaborators to manufacture many products covered by our alliances.

·       In our strategic alliance agreements, we generally agree not to conduct specified types of research and development in the field that is the subject of the alliance. These agreements may have the effect of limiting the areas of research and development that we may pursue, either alone or in collaboration with third parties.

·       Our collaborators may develop and commercialize, either alone or with others, products that are similar to or competitive with the products that are the subject of the alliance with us.

·       Our collaborators may not properly maintain or defend our intellectual property rights or may use our proprietary information in such a way as to expose us to potential litigation.

We are substantially dependent on SGP for future revenues related to INTEGRILIN.

Under the terms of our revised agreement with SGP effective as of September 1, 2005, SGP began paying us royalties based on net product sales of INTEGRILIN. In 2007, the minimum royalty payment is set at $85.4 million, with some conditions that could reduce this minimum. There are no minimum guaranteed royalty payments beyond 2007. If SGP’s INTEGRILIN sales after 2007 are less than expected, we will receive less royalty revenue than we expect, which would have a material adverse effect on our ability to fund other parts of our business.

We may not be successful in establishing additional strategic alliances, which could adversely affect our ability to develop and commercialize products.

An important element of our business strategy is entering into strategic alliances for the development and commercialization of selected products. In some instances, if we are unsuccessful in reaching an agreement with a suitable collaborator, we may fail to meet all of our business objectives for the applicable product or program. We face significant competition in seeking appropriate collaborators. Moreover, these alliance arrangements are complex to negotiate and time-consuming to document. We may not be successful in our efforts to establish additional strategic alliances or other alternative arrangements. The terms of any additional strategic alliances or other arrangements that we establish may not be favorable to us. Moreover, such strategic alliances or other arrangements may not be successful.

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Risks Relating to Intellectual Property

If we are unable to obtain patent protection for our discoveries, the value of our technology and products will be adversely affected. If we infringe patent or other intellectual property rights of third parties, we may not be able to develop and commercialize our products or the cost of doing so may increase.

Our patent positions, and those of other pharmaceutical and biotechnology companies, are generally uncertain and involve complex legal, scientific and factual questions. Our ability to develop and commercialize products depends in significant part on our ability to:

·       obtain and maintain patents;

·       obtain licenses to the proprietary rights of others on commercially reasonable terms;

·       operate without infringing upon the proprietary rights of others;

·       prevent others from infringing on our proprietary rights; and

·       protect trade secrets.

There is significant uncertainty about the validity and permissible scope of patents in our industry, which may make it difficult for us to obtain patent protection for our discoveries.

The validity and permissible scope of patent claims in the pharmaceutical and biotechnology fields, including the genomics field, involve important unresolved legal principles and are the subject of public policy debate in the United States and abroad. For example, there is significant uncertainty both in the United States and abroad regarding the patentability of gene sequences in the absence of functional data and the scope of patent protection available for full-length genes and partial gene sequences. Moreover, some groups have made particular gene sequences available in publicly accessible databases. These and other disclosures may adversely affect our ability to obtain patent protection for gene sequences claimed by us in patent applications that we file subsequent to such disclosures. There is also some uncertainty as to whether human clinical data will be required for issuance of patents for human therapeutics. If such data are required, our ability to obtain patent protection could be delayed or otherwise adversely affected.

Third parties may own or control patents or patent applications and require us to seek licenses, which could increase our development and commercialization costs, or prevent us from developing or marketing our products.

We may not have rights under some patents or patent applications related to some of our existing and proposed products or processes. Third parties may own or control these patents and patent applications in the United States and abroad. Therefore, in some cases, such as those described below, in order to develop, manufacture, sell or import some of our existing and proposed products or processes, we or our collaborators may choose to seek, or be required to seek, licenses under third party patents issued in the United States and abroad, or those that might issue from United States and foreign patent applications. In such event, we would be required to pay license fees or royalties or both to the licensor. If licenses are not available to us on acceptable terms, we or our collaborators may not be able to develop, manufacture, sell or import these products or processes.

Our MLN0002 and MLN1202 product candidates are humanized monoclonal antibodies. We are aware of third party patents and patent applications that relate to humanized or modified antibodies, products useful for making humanized or modified antibodies and processes for making and using recombinant antibodies.

With respect to VELCADE, on June 26, 2002, Ariad Pharmaceuticals, Inc. sent to us and approximately 50 other parties a letter offering a sublicense for the use of United States Patent No. 6,410,516, which is exclusively licensed to Ariad. If this patent is valid and Ariad successfully sues us

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for infringement, we would require a license from Ariad in order to manufacture and market VELCADE. On May 4, 2006, a federal court jury gave a verdict in favor of Ariad in its patent-infringement lawsuit against Eli Lilly relating to United States Patent No. 6,410,516. We expect that Eli Lilly will challenge this verdict and the validity of the patent with the federal district judge and the U.S. Court of Appeals. In addition, we are also aware that Amgen Inc. has filed a declaratory relief action seeking an invalidity ruling with respect to this patent. However, Ariad’s initial success in its claim against Eli Lilly may increase the possibility that Ariad could sue additional parties, including us, and allege infringement of the patent.

We may become involved in expensive patent litigation or other proceedings, which could result in our incurring substantial costs and expenses or substantial liability for damages or require us to stop our development and commercialization efforts.

There has been substantial litigation and other proceedings regarding the patent and other intellectual property rights in the pharmaceutical and biotechnology industries. We may become a party to patent litigation or other proceedings regarding intellectual property rights. For example, we believe that we hold patent applications that cover genes that are also claimed in patent applications filed by others. Interference proceedings before the United States Patent and Trademark Office may be necessary to establish which party was the first to invent these genes. In addition, from time to time, we receive unsolicited letters purporting to advise us of the alleged relevance of third party patents.

The cost to us of any patent litigation or other proceeding, even if resolved in our favor, could be substantial. Some of our competitors may be able to sustain the cost of such litigation or proceedings more effectively than we can because of their substantially greater financial resources. If a patent litigation or other proceeding is resolved against us, we or our collaborators may be enjoined from developing, manufacturing, selling or importing our products or processes without a license from the other party and we may be held liable for significant damages. We may not be able to obtain any required license on commercially acceptable terms or at all.

Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace. Patent litigation and other proceedings may also absorb significant management time.

Our patent protection for any compounds that we seek to develop may be limited to a particular method of use or indication such that, if a third party were to obtain approval of the compound for use in another indication, we could be subject to competition arising from off-label use.

Although we generally seek the broadest patent protection available for our proprietary compounds, we may not be able to obtain patent protection for the actual composition of any particular compound and may be limited to protecting a new method of use for the compound or otherwise restricted in our ability to prevent others from exploiting the compound. If we are unable to obtain patent protection for the actual composition of any compound that we seek to develop and commercialize and must rely on method of use patent coverage, we would likely be unable to prevent others from manufacturing or marketing that compound for any use that is not protected by our patent rights. If a third party were to receive marketing approval for the compound for another use, physicians could nevertheless prescribe it for indications that are not described in the product’s labeling or approved by the FDA or other regulatory authorities. Even if we have patent protection of the prescribed indication, as a practical matter, we would have little recourse as a result of this off-label use. In that event, our revenues from the commercialization of the compound would likely be adversely affected.

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If we fail to comply with our obligations in our intellectual property licenses with third parties, we could lose license rights that are important to our business.

We are a party to various license agreements. In particular, we license rights to patents for the formulation of VELCADE and issued patents relating to MLN518 and MLN1202. We may enter into additional licenses in the future. Our existing licenses impose, and we expect future licenses will impose, various diligence, milestone payment, royalty, insurance and other obligations on us. If we fail to comply with these obligations, the licensor may have the right to terminate the license, in which event we might not be able to market any product that is covered by the licensed patents.

Competition from generic pharmaceutical manufacturers could negatively impact our products sales.

Competition from manufacturers of generic drugs is a major challenge for us in the U.S. and is growing internationally. Upon the expiration or loss of patent protection for one of our products, or upon the “at-risk” launch (despite pending patent infringement litigation against the generic product) by a generic manufacturer of a generic version of one of our products, we could lose the major portion of sales of that product in a very short period, which could adversely affect our business.

Generic competitors operate without our large research and development expenses and our costs of conveying medical information about our products to the medical community. In addition, the FDA approval process exempts generics from costly and time-consuming clinical trials to demonstrate their safety and efficacy, allowing generic manufacturers to rely on the safety and efficacy data of the innovator product. Generic products, however, need only demonstrate a level of availability in the bloodstream equivalent to that of the innovator product. This means that generic competitors can market a competing version of our product after the expiration or loss of our patent and charge much less. The issued U.S. patents related to VELCADE expire in 2014 with the potential for extension and the issued foreign patents expire in 2015 with extensions issued or pending in a number of countries. However, we may not be granted any such potential or pending extension. The issued United States patents that cover INTEGRILIN expire in 2014 and 2015 and the issued foreign patents expire between 2010 and 2012. Our patent-protected products also can face competition in the form of generic versions of branded products of competitors that lose their market exclusivity.

In addition, third parties could produce counterfeit products labeled as VELCADE, INTEGRILIN or other of our products in the future. Counterfeit products could reduce sales or compromise goodwill associated with our product brands.

Risks Relating to Product Manufacturing, Marketing and Sales

Because we have limited sales, marketing and distribution experience and capabilities, in some instances we are dependent on third parties to successfully perform these functions on our behalf, or we may be required to incur significant costs and devote significant efforts to augment our existing capabilities.

We currently are marketing and selling VELCADE in the United States solely through our cancer-specific sales force and without a collaborator. In the first quarter of 2007, we began jointly promoting VELCADE in the United States with OBI. Our success in selling VELCADE will depend heavily on the performance of these sales forces. In areas outside the United States where VELCADE has received approval, OBL or its affiliates market VELCADE. As a result, our ability to earn revenue related to VELCADE outside of the United States will depend heavily on OBL.

SGP exclusively markets INTEGRILIN in areas outside of Europe, including the United States, and GSK exclusively markets INTEGRILIN in Europe. As a result, except for our minimum royalty payments from SGP in 2007, our success in receiving royalties and milestone payments from sales of INTEGRILIN depends entirely on the marketing efforts of these third parties.

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Depending on the nature of the products for which we obtain marketing approval, we may need to rely significantly on sales, marketing and distribution arrangements with our collaborators and other third parties. For example, some types of pharmaceutical products require a large sales force and extensive marketing capabilities for effective commercialization. If in the future we elect to perform sales, marketing and distribution functions for these types of products ourselves, we would face a number of additional risks, including the need to recruit a large number of additional experienced marketing and sales personnel.

Because we have no commercial manufacturing capabilities, we will continue to be dependent on third party manufacturers to manufacture products for us, or we will be required to incur significant costs and devote significant efforts to establish our own manufacturing facilities and capabilities.

We have no commercial-scale manufacturing capabilities. In order to continue to develop products, apply for regulatory approvals and commercialize products, we will need to develop, contract for or otherwise arrange for the necessary manufacturing capabilities.

We currently rely substantially upon third parties to produce material for preclinical testing purposes and expect to continue to do so in the future. We also currently rely and expect to continue to rely, upon other third parties, potentially including our collaborators, to produce materials required for clinical trials and for the commercial production of our products.

There are a limited number of contract manufacturers that operate under the FDA’s current GMP regulations capable of manufacturing our products. In addition, the FDA will inspect our contract manufacturers prior to granting approval of a new drug application, and will conduct periodic, unannounced inspections to ensure strict ongoing compliance with current GMPs and other applicable regulations. If we are unable to arrange for third party manufacturing of our products, or to do so on commercially reasonable terms, we may not be able to complete development of our products or commercialize them, or we may experience delays in doing so.

Reliance on third party manufacturers entails risks to which we would not be subject if we manufactured products ourselves, including reliance on the third party for regulatory compliance, the possibility of breach of the manufacturing agreement by the third party because of factors beyond our control and the possibility of termination or non-renewal of the agreement by the third party, based on its own business priorities, at a time that is costly or inconvenient for us. Any failure by our third party manufacturers to comply with applicable regulations, including current GMP regulations, could result in sanctions being imposed on the manufacturers or us, including fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing approval of our product candidates, delays, suspension or withdrawal of approvals, seizures or recalls of products, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect our business.

We may in the future elect to manufacture some of our products in our own manufacturing facilities. We would need to invest substantial additional funds and recruit qualified personnel in order to build or lease and operate any manufacturing facilities.

Because we have no commercial manufacturing capability for VELCADE and INTEGRILIN, we are dependent on third parties to produce product sufficient to meet market demand.

We are responsible for managing the supply of material for all clinical and commercial production of VELCADE, including VELCADE that OBL sells or uses in clinical trials, and INTEGRILIN, including INTEGRILIN that SGP and GSK sell or use in clinical trials.

We rely on third party contract manufacturers to manufacture, fill/finish and package VELCADE for both commercial purposes and for all clinical trials. We have established long-term supply relationships for

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the production of commercial supplies of VELCADE. We work with one manufacturer, with whom we have a long-term supply agreement, to complete fill/finish for VELCADE, and have contracted with a second manufacturer who will provide fill/finish services for VELCADE in the future. If any of our current third party manufacturers performing production and fill/finish for VELCADE are unable or unwilling to continue performing these services for us, and we are unable to find a replacement manufacturer or in the future we are otherwise unable to contract with manufacturers to produce commercial supplies of VELCADE in a cost-effective manner, we could run out of VELCADE for commercial sale and clinical trials and our business could be substantially harmed.

We have no manufacturing facilities for INTEGRILIN and, accordingly, rely on third party contract manufacturers for the clinical and commercial production of INTEGRILIN. We have three approved manufacturers, two of which currently provide us with eptifibatide, the active ingredient necessary to make INTEGRILIN. Solvay, one of the current manufacturers, owns the process technology used by it for the production of bulk product. Lonza is the other current manufacturer of eptifibatide, and we own the process technology utilized by it. We have two approved manufacturers that currently perform fill/finish services for INTEGRILIN and two packaging supplier for the United States. If our current manufacturers are unable to continue or decide to discontinue their manufacturing, fill/finish or packaging services and we are unable to secure alternative manufacturers, the supply of INTEGRILIN could be adversely affected which could substantially harm our business.

In order to mitigate the risk of INTEGRILIN supply interruption, we are exploring several options for the long-term supply of eptifibatide. Also, Solvay, the owner of the process technology used by it and by one of our former suppliers of eptifibatide, has raised concerns that the new Millennium process may have been developed using information asserted to be confidential and proprietary to Solvay. If Solvay succeeds in a claim relating to these concerns, our ability to practice our new process could be negatively impacted, which could adversely affect our ability to obtain INTEGRILIN from suppliers using the new process or the cost of manufacturing eptifibatide and negatively impact our business. We are in discussions with Solvay regarding its concern..

If we fail to obtain an adequate level of reimbursement for our products by third party payors, there may be no commercially viable markets for our products.

The availability and levels of reimbursement by governmental and other third party payors affect the market for any pharmaceutical product or health care service. These third party payors continually attempt to contain or reduce the costs of health care by challenging the prices charged for medical products and services. In some foreign countries, particularly the countries of the European Union, the pricing of prescription pharmaceuticals is subject to governmental control. We may not be able to sell our products as profitably as we expect if we are required to sell our products at lower than anticipated prices or reimbursement is unavailable or limited in scope or amount.

In particular, third party payors could lower the amount that they will reimburse hospitals or doctors to treat the conditions for which the FDA has approved VELCADE or INTEGRILIN. If they do, pricing levels or sales volumes of VELCADE or INTEGRILIN may decrease. In addition, if we fail to comply with the rules applicable to the Medicaid and Medicare programs, we could be subject to the imposition of civil or criminal penalties or exclusion from these programs.

In foreign markets, a number of different governmental and private entities determine the level at which hospitals will be reimbursed for administering VELCADE and INTEGRILIN to insured patients. If these levels are set, or reset, too low, it may not be possible to sell VELCADE or INTEGRILIN at a profit in these markets.

In both the United States, on federal and state levels, and foreign jurisdictions, there have been a number of legislative and regulatory proposals to change the health care system. For example, the

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Medicare Prescription Drug and Modernization Act of 2003 and its implementing regulations impose new requirements for the distribution and pricing of prescription drugs which may affect the marketing of our products. These new requirements have created uncertainty among oncologists and could impact sales levels of VELCADE as oncologists adapt to the new reimbursement model. Further proposals are also likely. The current uncertainty and the potential for adoption of additional proposals could affect the timing of product revenue, our ability to raise capital, obtain additional collaborators and market our products.

In addition, we believe that the increasing emphasis on managed care in the United States has and will continue to put pressure on the price and usage of our present and future products, which may adversely affect product sales. Further, when a new therapeutic product is approved, the availability of governmental or private reimbursement for that product is uncertain, as is the amount for which that product will be reimbursed. We cannot predict the availability or amount of reimbursement for our product candidates, and current reimbursement policies for VELCADE or INTEGRILIN could change at any time.

We face a risk of product liability claims and may not be able to obtain insurance.

Our business exposes us to the risk of product liability claims that is inherent in the manufacturing, testing and marketing of human therapeutic products. In particular, VELCADE and INTEGRILIN are administered to patients with serious diseases who have a high incidence of mortality. Although we have product liability insurance that we believe is appropriate, this insurance is subject to deductibles, co-insurance requirements and coverage limitations and the market for such insurance is becoming more restrictive. We may not be able to obtain or maintain adequate protection against potential liabilities. If we are unable to obtain insurance at acceptable cost or otherwise protect against potential product liability claims, we will be exposed to significant liabilities, which may materially and adversely affect our business and financial position. These liabilities could prevent or interfere with our product commercialization efforts.

We face a risk of government enforcement actions in connection with marketing activities.

Because we are a company operating in a highly regulated industry, for many reasons, regulatory authorities could take enforcement action against us including seizure of allegedly misbranded product, cessation of promotional activities, injunction or criminal prosecution against us and our officers or employees.

For example, we face the potential of FDA enforcement action for allegations of off-label promotion of VELCADE. Some physicians prescribe VELCADE for uses not approved by the FDA or comparable regulatory agencies outside the United States. For example, VELCADE is not approved for front-line treatment of multiple myeloma. However, we are aware that the oncology physician community is using VELCADE for this purpose. Although physicians may lawfully prescribe VELCADE for off-label uses, any promotion by us of off-label uses would be unlawful. Although we have policies and procedures in place designed to help assure ongoing compliance with regulatory requirements regarding off-label promotion, regulatory authorities could take enforcement action against us if they believe we are promoting, or have promoted, VELCADE for off-label use.

Additionally, the Department of Justice can bring civil or criminal actions against companies that promote drugs for unapproved uses, based on the False Claims Act and other federal laws governing reimbursement for such products under the Medicare, Medicaid and other federally supported healthcare programs.  Monetary penalties in such cases have often been in excess of $100 million.  Civil penalties can include costly mandatory compliance programs and exclusion from federal healthcare programs.

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Guidelines and recommendations can affect the use of our products.

Government agencies promulgate regulations and guidelines directly applicable to us and to our products. In addition, professional societies, practice management groups, private health and science foundations and organizations involved in various diseases from time to time may also publish guidelines or recommendations to the health care and patient communities. Recommendations of government agencies or these other groups or organizations may relate to such matters as usage, dosage, route of administration and use of concomitant therapies. Recommendations or guidelines suggesting the reduced use of our products or the use of competitive or alternative products that are followed by patients and health care providers could result in decreased use of our products.

Risks Relating to Holding Our Common Stock

The trading price of our common stock could be subject to significant fluctuations.

The trading price of our common stock has been quite volatile, and may be volatile in the future. During 2006, our common stock traded as high as $12.08 per share and as low as $7.83 per share. Factors such as announcements of our or our competitors’ operating results, data from our or our competitors’ clinical trial results, changes in our prospects, market conditions for biopharmaceutical stocks in general and analyst recommendations or commentary concerning our or our competitors’ products or business could have a significant impact on the future trading prices of our common stock.

In particular, the trading price of the common stock of many biopharmaceutical companies, including ours, has experienced extreme price and volume fluctuations, which have at times been unrelated to the operating performance of such companies whose stocks were affected. Some of the factors that may cause volatility in the price of our securities include:

·       product revenues and the rate of revenue growth;

·       introduction or success of competitive products;

·       clinical trial results and regulatory developments;

·       quarterly variations in financial results and guidance to the investment community with respect to future financial results;

·       business and product market cycles;

·       fluctuations in customer requirements;

·       availability and utilization of manufacturing capacity;

·       timing of new product introductions; and

·       our ability to develop and implement new technologies.

The price of our common stock may also be affected by the estimates and projections of the investment community and our ability to meet or exceed the financial projections we provide to the public. The price may also be affected by general economic and market conditions, and the cost of operations in our product markets. While we cannot predict the individual effect that these factors may have on the price of our securities, these factors, either individually or in the aggregate, could result in significant variations in price during any given period of time. We can not assure you that these factors will not have an adverse effect on the trading price of our common stock.

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We have anti-takeover defenses that could delay or prevent an acquisition and could adversely affect the price of our common stock.

Provisions of our certificate of incorporation and bylaws and of Delaware law could have the effect of delaying, deferring or preventing an acquisition of our company. For example, we have divided our board of directors into three classes that serve staggered three-year terms, we may issue shares of our authorized “blank check” preferred stock and our stockholders are limited in their ability to call special stockholder meetings. In addition, we have issued preferred stock purchase rights that would adversely affect the economic and voting interests of a person or group that seeks to acquire us or a 15% or greater interest in our common stock without negotiations with our board of directors.

Item 1B.               UNRESOLVED STAFF COMMENTS

There were no unresolved comments from the Staff of the U.S. Securities and Exchange Commission at December 31, 2006.

Item 2.                        PROPERTIES

We lease a total of approximately 1,200,000 square feet of office and laboratory space. This table contains information about our current materially important leased properties:

 

In connection with our 2003 and 2005 restructuring initiatives and resulting consolidation of facilities, we have sublet and are seeking to sublease certain of our leased facilities as shown in the table above. We plan to sublease those facilities through the end of our lease terms. In November 2006, we entered into a Deed of Surrender with Granta Park Limited for our 91,900 square feet of leased property in Cambridge, England. Under the terms of the Deed, we have been released from all further obligations arising under the lease for that property in consideration of a one-time payment and our return of the property to the landlord.

We believe that our leased and occupied facilities will be adequate to meet our requirements for the near term.

Item 3.                        LEGAL PROCEEDINGS

We are not a party to any material legal proceedings.

Item 4.                        SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of our security holders, through solicitation of proxies or otherwise, during the last quarter of the year ended December 31, 2006.

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OUR EXECUTIVE OFFICERS

Deborah Dunsire, M.D.   Chief Executive Officer and President (since July 2005)
Age 44

Prior to joining Millennium, Dr. Dunsire was Head of North American Oncology Operations (2000 to July 2005) and Vice President, Oncology Business Unit (1996 to 2000) of Novartis, a pharmaceutical company. Prior to that she held various positions with Sandoz, a pharmaceutical company (1988 to 1996) in the areas of product management, scientific development and clinical research.

Christophe Bianchi, M.D.   Executive Vice President, Commercial Operations (since February 2006)
Age 45

Prior to joining Millennium, Dr. Bianchi was Vice President, Business Unit Head, Oncology of sanofi-aventis US (formerly sanofi-synthelabo USA), a biopharmaceutical company (2004 to January 2006). Previously, he was Vice President, Internal Medicine and Central Nervous System Business Unit at sanofi-synthelabo (2001 to 2004). He served as President Europe, Senior Vice President Global Marketing and Business Development of Sangstat Pharmaceuticals, a biopharmaceutical company (2000 to 2001). Dr. Bianchi held various positions with Rhone-Poulenc Rorer, a biopharmaceutical company (1989 to 1999), where his last position was Vice President of Global Marketing.

Marsha H. Fanucci   Senior Vice President and Chief Financial Officer (since July 2004)
Age 53

Ms. Fanucci was Senior Vice President, Finance and Corporate Strategy of Millennium (October 2003 to July 2004), Vice President, Finance and Corporate Strategy (July 2003 to October 2003) and Vice President, Corporate Development (July 2000 to July 2003). Prior to joining Millennium, she was Vice President, Corporate Development and Strategy of Genzyme Corporation, a biotechnology company (August 1998 to June 2000).

Stephen M. Gansler   Senior Vice President, Human Resources (since February 2006)
Age 52

Prior to joining Millennium, Mr. Gansler was Vice President, Human Resources of Synta Pharmaceuticals, Inc., a biotechnology company (2005 to February 2006). He was Senior Vice President, Human Resources of Covanta Energy Corporation, a provider of waste-to-energy services (2001 to 2004). Prior to that, Mr. Gansler held Vice President of Human Resources positions at Johnson & Johnson, a diversified health care company (1981 to 2001) and was a member of the management board of a number of Johnson & Johnson companies.

Laurie B. Keating   Senior Vice President, General Counsel (since September 2004) and Assistant Secretary (since August 2006)
Age 53

Ms. Keating also served as Secretary of Millennium (September 2004 to August 2006). Prior to joining Millennium, Ms. Keating was Vice President of Operations and Finance (September 2003 to September 2004), member of the Board of Directors (June 2001 to present) and Chief Executive Officer (June 2001 to September 2003) of Hydra Biosciences, Inc., a biopharmaceutical company. Previously she held a variety of senior executive positions at high technology companies, including serving as Senior Vice President, General Counsel and Secretary of Iomega Corporation.

Anna Protopapas   Senior Vice President, Corporate Development (since March 2005)
Age 42

Ms. Protopapas was Vice President, Corporate Development of Millennium (March 2001 to March 2005), Senior Director, Corporate Development (April 1999 to March 2001) and Director, Corporate

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Development (October 1997 to April 1999). Prior to joining Millennium, Ms. Protopapas held a variety of marketing and business development roles in companies outside of the life sciences field.

Robert I. Tepper, M.D.   President, Research and Development (since December 2002)
Age 51

Dr. Tepper was Executive Vice President, Discovery of Millennium (June 2001 to December 2002) and Chief Scientific Officer (March 1999 to December 2002); Senior Vice President (June 2000 to June 2001); Chief Scientific Officer, Pharmaceuticals (November 1997 to March 1999); Vice President, Biology (January 1996 to November 1997) and Director, Biology (August 1994 to January 1996).

 

PART II

Item 5.                        MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Price of and Dividends on Millennium’s Common Stock and Related Stockholder Matters

Our common stock is traded on the NASDAQ Global Select Market under the symbol “MLNM.”  Prior to July 2006, our common stock traded on the NASDAQ National Market. The following table reflects the range of the reported high and low last sale prices of our common stock for the periods indicated.

 

On February 23, 2007, the closing price per share of our common stock was $11.26, as reported on the NASDAQ Global Select Market and we had approximately 887 stockholders of record.

We have never declared or paid any cash dividends on our common stock. We anticipate that, in the foreseeable future, we will retain any earnings for use in the operation of our business and will not pay any cash dividends.

Recent Sales of Unregistered Securities; Uses of Proceeds from Registered Securities

None.

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Item 7.                        MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our management’s discussion and analysis of our financial condition and results of our operations contains forward-looking statements, including statements about our growth and future operating results, discovery and development of products, strategic alliances and intellectual property. For this purpose, any statement that is not a statement of historical fact should be considered a forward-looking statement. We often use the words “expect,” “anticipate,” “intend,” “plan,” “believe,” “may,” “will” and similar expressions to help identify forward-looking statements.

Actual results may differ from those indicated by such forward-looking statements as a result of various important factors, including, without limitation, those factors discussed in this annual report under the heading “Risk Factors.”

Overview

We are an innovation-driven biopharmaceutical company focused on discovering, developing and commercializing medicines to change the lives of patients with cancer and inflammatory diseases. We currently commercialize VELCADE, the U.S. market leader for the treatment of patients with multiple myeloma who have received at least one prior therapy. In addition, VELCADE is the first and only FDA approved therapeutic for the treatment of patients who have received at least one prior therapy for mantle cell lymphoma, or MCL. We have a development pipeline of nine clinical and preclinical product candidates in our therapeutic focus areas of cancer and inflammatory diseases, and we have an oncology-focused drug discovery organization. Strategic business relationships are a key component of our business.

In November 2006, we completed a sale of $250.0 million of 2.25% convertible senior notes due November 15, 2011, or the 2.25% notes, which resulted in net proceeds to us of approximately $242.2 million. The 2.25% notes are convertible into shares of our common stock at an initial conversion price equal to $15.47 per share, subject to adjustment, unless previously repurchased by us under certain circumstances. Under the terms of the 2.25% notes, we are required to make semi-annual interest payments on the outstanding principal balance of the 2.25% notes on May 15 and November 15 of each year. We expect to use the net proceeds from the 2.25% notes primarily to acquire therapeutic agents, which may be in development or already marketed, through license arrangements or acquisitions of other companies, and any balance for general corporate purposes, including working capital.

In 2005 we refined our business strategy to focus on advancing key growth assets including VELCADE, our clinical and preclinical pipeline of oncology and inflammation molecules and our oncology-focused discovery organization. In 2006, we announced a program to further align resources with our current corporate priorities of advancing VELCADE and accelerating the clinical pipeline. As part of this program, we reduced in-house research and preclinical development technologies and headcount in areas where we believe the work can now be outsourced cost-effectively, and we also scaled back infrastructure supporting these activities. We recorded restructuring charges of approximately $5.2 million related to the 2006 program for the year ended December 31, 2006. We recorded total restructuring charges of approximately $20.4 million under all restructuring initiatives primarily related to facilities charges for the year ended December 31, 2006. We expect total restructuring charges in 2007, under all restructuring initiatives, to be within the range of $15.0 million to $25.0 million.  We are still evaluating the need or opportunity for further facilities consolidation associated with the 2006 restructuring initiative and the total future restructuring charges for facility consolidation are dependent upon the nature and timing of the final decisions we make. As we continue to evaluate strategic alternatives, including potential facilities consolidation in connection with our programs, we may incur significant restructuring charges in future periods.

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In October 2006, we announced a two-year agreement with Ortho Biotech Inc., or OBI, to jointly promote VELCADE in the U.S. In the first quarter of 2007, OBI and we began to jointly promote VELCADE to U.S.-based physicians who treat multiple myeloma patients.

On September 1, 2005, Schering-Plough Ltd. and Schering Corporation, together referred to as SGP, obtained the exclusive U.S. development and commercialization rights for INTEGRILIN from us. Our restructured relationship with SGP has been, and we expect it to continue to be, at least financially equivalent to the former co-promotion arrangement that we had with SGP prior to September 1, 2005, taking into account the expected future revenues and anticipated costs savings. Strategically, our goal in restructuring the relationship was to increase the near term certainty of revenues from INTEGRILIN through the guaranteed minimum royalties for 2006 and 2007, while eliminating the need to further invest our resources into INTEGRILIN sales and marketing and development activities. In addition, the restructured relationship allows us to focus on our key growth assets, including VELCADE, our product candidate pipeline and our oncology-focused discovery organization.

Our business strategy is to build a portfolio of new medicines based on our understanding of genomics and particular molecular pathways that affect the establishment and progression of specific diseases. These molecular pathways include the related effects of proteins on cellular performance, reproduction and death. We plan to develop and commercialize many of our products on our own, but expect to seek development and commercial collaborators on favorable terms or when we otherwise believe that doing so would be advantageous to us.

In the near term, we expect to focus our commercial activities in cancer where we plan to build on our commercial and regulatory experience with VELCADE. We also are working to obtain approval to market VELCADE in the United States and, through Ortho Biotech Products, L.P., or OBL, elsewhere for the treatment of multiple myeloma in newly diagnosed, or front-line patients, and for the treatment of additional cancer types. We believe, if approved, these additional uses of VELCADE would lead to a significant expansion of our cancer business. In inflammatory disease, we are advancing novel product candidates in clinical development as potential treatments for serious and widely prevalent conditions.

In the long term, we expect to bring new products to market on a regular basis from our pipeline of discovery and development-stage programs. We also expect to continue to evaluate opportunities to in-license and acquire molecules from other companies in order to supplement our pipeline. If we are successful, we will use the revenues from this expanding portfolio of marketed products to broaden the scope of our operations.

VELCADE

VELCADE, the first of a new class of medicines called proteasome inhibitors, was the first treatment in more than a decade to be approved in the United States for patients with multiple myeloma. We received accelerated approval based on phase II data from the FDA on May 13, 2003 to market VELCADE for the treatment of multiple myeloma patients who have received at least two prior therapies and have demonstrated disease progression on their most recent therapy, commonly referred to as third-line and beyond.

In December 2006, the FDA granted full approval of VELCADE for the treatment of patients with MCL who have received at least one prior therapy, commonly referred to as relapsed, or second-line MCL. This approval followed the FDA’s decision in November 2004 to grant VELCADE fast track designation for MCL due to the high unmet medical need of MCL patients and the strength of clinical trial data for VELCADE in the treatment of MCL. In April 2006, we initiated a phase III trial of VELCADE in combination with rituximab in the relapsed follicular and marginal zone non-Hodgkin’s lymphoma setting.

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In March 2005, we received full approval from the FDA of our supplemental New Drug Application, or sNDA, for VELCADE for the treatment of patients with multiple myeloma who have received at least one prior therapy, commonly referred to as second-line or relapsed multiple myeloma. This regulatory decision increases the approved market potential of the drug and also marked the completion of the confirmatory studies required by the FDA after it granted accelerated approval in May 2003. VELCADE is the only single-agent therapy that has both demonstrated longer survival in patients with multiple myeloma and the extension of patient survival on its FDA approved labeling.

In April 2004, the European Commission granted Marketing Authorization for VELCADE in Europe for the treatment of multiple myeloma patients who have received at least two prior therapies and have demonstrated disease progression on their most recent therapy. Under this Authorization, the European Commission granted us a single license for marketing VELCADE in the 15 member states of the European Union, plus Norway and Iceland. VELCADE was also approved for marketing in the ten accession member countries when those countries officially joined the European Union on May 1, 2004. Regulatory authorities in a number of other countries, including countries within Latin America and South-East Asia and Japan have also approved VELCADE. The product is now approved in more than 75 countries. Under our agreement with OBL, we have transferred the licenses to affiliates of OBL. OBL’s affiliates now market VELCADE in these countries.

In April 2005, OBL received approval from the European Commission for VELCADE as a monotherapy for multiple myeloma patients who have received at least one prior therapy and who have already undergone or are unsuitable for bone marrow transplantation. In October 2006, OBL received approval for marketing VELCADE in Japan for relapsed or refractory multiple myeloma in patients who have received at least one prior therapy.

Our Alliances

VELCADE

Ortho Biotech Collaborations

In October 2006, we announced a two-year agreement with Ortho Biotech Inc., or OBI, to jointly promote VELCADE in the U.S. In the first quarter of 2007, OBI and we began to jointly promote VELCADE to U.S.-based physicians who treat multiple myeloma patients. We will pay the cost of a portion of the OBI sales effort dedicated to VELCADE and a commission if sales associated with the increased effort exceed specified targets. Both parties are able to terminate the agreement under certain circumstances and subject to termination fees. We will continue to be responsible for manufacturing and distribution of VELCADE in the U.S. We believe this collaboration, with the well-established OBI oncology sales force, will help us to realize the full potential of VELCADE in the U.S. market. Our current agreement with OBL, a member of the Johnson Family Of Companies and an affiliate of OBI, for the promotion of VELCADE outside the U.S. remains unchanged.

In June 2003, we entered into an agreement with OBL to collaborate on the commercialization of VELCADE and with Johnson & Johnson Pharmaceutical Research & Development, L.L.C., or JJPRD, for the continued clinical development of VELCADE. OBL and its affiliate, Janssen-Cilag, are commercializing VELCADE outside of the United States, and Janssen Pharmaceutical K.K. is responsible for Japan. We receive distribution fees included in royalties from OBL and its affiliates from sales of VELCADE outside of the United States. We manage the supply chain for VELCADE at the expense of OBL for products sold in the OBL territories. We retain an option to co-promote VELCADE with OBL at a future date in specified European countries.

We are engaged with JJPRD in an extensive global program for further clinical development of VELCADE with the purpose of maximizing the commercial potential of VELCADE. This program is

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investigating the potential of VELCADE to treat multiple forms of solid and hematological tumors, including continued clinical development of VELCADE for multiple myeloma and non-Hodgkin’s lymphoma, or NHL. JJPRD was responsible for 40% of the joint development costs through 2005 and is now responsible for 45% of those costs. We are eligible to receive payments from JJPRD or OBL for achieving clinical development milestones, regulatory milestones outside of the United States or agreed-upon sales levels of VELCADE.

INTEGRILIN

Through August 31, 2005, we co-promoted INTEGRILIN in the United States in collaboration with SGP and shared profits and losses. As of September 1, 2005, SGP markets INTEGRILIN in the United States and specified other areas outside of the European Union. GlaxoSmithKline plc, or GSK, markets INTEGRILIN in the European Union under a license from us.

SGP Collaboration

In April 1995, COR entered into a collaboration agreement with SGP to jointly develop and commercialize INTEGRILIN on a worldwide basis. We acquired COR in February 2002. Under our original collaboration agreement with SGP, we generally shared any profits or losses from INTEGRILIN sales in the United States included in co-promotion revenue with SGP and we granted SGP an exclusive license to market INTEGRILIN outside the United States and the European Union in exchange for royalty obligations.

On September 1, 2005, SGP obtained the exclusive U.S. development and commercialization rights for INTEGRILIN products from us and paid us a nonrefundable upfront payment of approximately $35.5 million. In addition, we are entitled to receive royalties on net product sales of INTEGRILIN in the United States from SGP for so long as SGP is engaged in the commercialization and sale of an INTEGRILIN product in the United States, with the potential of receiving royalties beyond the 2014 patent expiration date. Minimum royalty payments for 2007 are set at approximately $85.4 million. There are no guaranteed minimum royalty payments beyond 2007. We also receive royalties on net product sales by SGP outside of the United States. SGP’s obligation to pay us royalties in other countries expires on a country by country basis upon the later of fifteen years from the first commercial use of an INTEGRILIN product in such country and the expiration of the last to expire patent covering such INTEGRILIN product. We are continuing to manage the supply chain for INTEGRILIN at the expense of SGP for products sold in the SGP territories including the U.S. We receive payments as a result of managing the supply chain and record those payments as strategic alliance revenue.

GSK License Agreement

In June 2004, we reacquired the rights to market INTEGRILIN in Europe from SGP and concurrently entered into a license agreement granting GSK exclusive marketing rights to INTEGRILIN in Europe. In January 2005, the transition of the INTEGRILIN marketing authorizations for the European Union from SGP to GSK was completed, and GSK began selling INTEGRILIN in the countries of the European Union. GSK also markets INTEGRILIN in other European countries where it has received approval of the transfer from SGP to GSK of the relevant marketing authorizations. Under the terms of the agreement, we have received license fees and are entitled to future royalties from GSK on INTEGRILIN sales in Europe subject to the achievement of specified objectives. We manage the supply chain for INTEGRILIN at the expense of GSK for products sold in the GSK territories. We receive payments as a result of managing the supply chain and record those payments as strategic alliance revenue.

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sanofi-aventis Inflammatory Disease Collaboration

In June 2000, we entered into a broad agreement in the field of inflammatory disease with Aventis, now sanofi-aventis, which includes joint discovery, development and commercialization of small molecule drugs for the treatment of specified inflammatory diseases. This agreement covers a substantial portion of our development program in the inflammatory disease area and provides us with potential access to sanofi-aventis’ large promotional infrastructure in connection with the commercialization of jointly developed products. The discovery phase of this collaboration has concluded. However, we and sanofi-aventis are continuing a limited research program covering two advanced preclinical candidates discovered through the collaboration. The development and commercialization programs continue under the agreement.

As provided in the original agreement, in North America, we have agreed to share the responsibility for and cost of developing, manufacturing and marketing products arising from the alliance. Outside of North America, sanofi-aventis is responsible for and will bear the cost of developing, manufacturing and marketing products arising from the alliance. sanofi-aventis is required to pay us a royalty on product sales outside of North America. Under this agreement, sanofi-aventis acquired 4.5 million shares of our common stock over a two-year period through 2001 for $250.0 million.

To date, we and sanofi-aventis have identified a significant number of novel drug targets and associated molecules relevant in inflammatory diseases. During the remaining portion of the development phase of the alliance, we and sanofi-aventis have agreed to focus our joint resources on preclinical and clinical development of candidates identified in the collaboration. As of the end of 2006, the alliance had identified several development candidates, one of which, MLN3897, is now being tested in a phase II clinical trial and two of which, MLN3701 and MLN0415, are now being tested by us in phase I clinical trials. A fourth candidate, MLN6095, is now in preclinical testing.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operations are based on our  consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, inventory, intangible assets, goodwill, restructuring and stock-based compensation expense. We base our estimates on historical experience and on various other factors that we believe are appropriate under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements included in this report, we believe the following accounting policies are most critical to aid in fully understanding and evaluating our reported financial results.

Revenue

We recognize revenue from the sale of our products, our strategic alliances and royalties and distribution fees based on net sales of licensed products. We recognized revenue from our co-promotion collaboration through August 31, 2005. We divide our revenue arrangements with multiple elements into separate units of accounting if specified criteria are met, including whether the delivered element has stand-alone value to the customer and whether there is objective and reliable evidence of the fair value of the undelivered items. We allocate the consideration we receive among the separate units based on their respective fair values, and we apply the applicable revenue recognition criteria to each of the separate

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units. We classify advance payments received in excess of amounts earned as deferred revenue until earned.

We recognize revenue from the sale of VELCADE in the United States when delivery has occurred and title has transferred. During the fourth quarter of 2004, we began distributing VELCADE through a sole-source open access distribution model in which we sell directly to an independent third party who in turn distributes to the wholesaler base. In April 2006, our sole-source distributor added a second distribution site to its network in order to improve access to the product for physicians in the western United States. Under our agreement with our sole-source distributor, inventory levels are contractually limited to no more than three weeks. VELCADE product inventory levels held by the sole-source distributor and wholesalers may fluctuate from time to time within our desired range of one to two weeks of inventory in the distribution channel. For example, during the second quarter of 2006, inventory levels rose by less than a week to the higher end of our one to two week desired range.

We record allowances as a reduction to product sales for product returns, chargebacks and discounts at the time of sale. We estimate VELCADE product returns based on historical return patterns. We expect VELCADE returns to be, and returns have been, generally low because the shelf life for the product is 18 months in the United States, and we expect, and have experienced, that wholesalers will not stock significant inventory due to the relatively high cost of the product. We consider several factors in our estimation process, including our internal sales forecasts, inventory levels as provided by wholesalers and third party market research data.  As we continually monitor actual product returns and inventory levels in the domestic distribution channel, we have reduced and may, from time to time in the future, reduce our product returns estimate. Doing so results in increased product sales at the time the return estimate is changed. If circumstances change or conditions become more competitive in the market for therapeutic products that address multiple myeloma, we may take actions to increase our product return estimates. Doing so would result in an incremental reduction of product sales at the time the return estimate is changed. Our accruals for rebates, chargebacks, and other discounts were immaterial at December 31, 2006.

Through August 31, 2005, we recognized co-promotion revenue based on SGP’s reported shipments of INTEGRILIN to wholesalers. Co-promotion revenue included our share of the profits from the sales of INTEGRILIN and reimbursements of our manufacturing-related costs, development costs and advertising and promotional expenses. We communicated with SGP to calculate our share of the profits from the sales of INTEGRILIN on a monthly basis. The calculation included estimates of the amount of advertising and promotional expenses and other costs incurred on a monthly basis. Adjustments to our estimates were based upon actual information that we received subsequent to our reporting deadlines. Our estimates were adjusted on a monthly basis and historically the adjustments were not significant due to frequent communication with SGP.

We recognize nonrefundable upfront licensing fees and guaranteed, time-based payments that, in either case, require continuing involvement in the form of research and development, manufacturing or other commercialization efforts by us as strategic alliance revenue:

·       ratably over the development period if development risk is significant;

·       ratably over the manufacturing period or estimated product useful life if development risk has been substantially eliminated; or

·       based upon the level of research services performed during the period of the research contract.

When the period of deferral cannot be specifically identified from the contract, management estimates the period based upon other critical factors contained within the contract. We continually review these estimates, which could result in a change in the deferral period and might impact the timing and the amount of revenue recognized.

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Milestone payments are recognized as strategic alliance revenue when the substantive performance obligations, as defined in the contract, are achieved. Performance obligations typically consist of significant milestones in the development life cycle of the related product candidate, such as initiation of clinical trials, filing for approval with regulatory agencies and approvals by regulatory agencies. Reimbursements of research and development costs are recognized as strategic alliance revenue as the related costs are incurred.

We are entitled to receive royalty payments under license agreements with a number of third parties that sell products based on technology we have developed or to which we have rights. These license agreements provide for the payment of royalties to us based on sales of the licensed product and we record royalty revenues based on estimates of sales from interim data provided by licensees. Beginning September 1, 2005, upon closing the amended collaboration agreement with SGP, we began recording royalty revenues as a separate line item in our statement of operations. For all of our royalty arrangements, we perform an analysis of historical royalties we have been paid, adjusted for any changes in facts and circumstances, as appropriate. Differences between actual royalty revenues and estimated royalty revenues are adjusted for in the period which they become known, typically the following quarter. These adjustments have not been, and we do not expect them to be, significant. To the extent we do not have sufficient ability to accurately estimate royalty revenue, we record royalties on a cash basis.

Inventory

Inventory consists of currently marketed products. VELCADE inventories primarily represent raw materials used in production, work in process and finished goods inventory on hand, valued at cost. INTEGRILIN inventories include raw materials used in production and work in process, valued at cost, to supply GSK and limited amounts of work in process, valued at cost, to supply SGP. We review inventories periodically for slow-moving or obsolete status based on sales activity, both projected and historical. Our current sales projections provide for full utilization of the inventory balance. If product sales levels differ from projections or a launch of a new product is delayed, inventory may not be fully utilized and could be subject to impairment, at which point we would adjust inventory to its net realizable value.

Intangible Assets

We have acquired significant intangible assets that we value and record. Those assets that do not yet have regulatory approval and for which there are no alternative uses are expensed as acquired in-process research and development, and those that are specifically identified and have alternative future uses are capitalized. We use a discounted cash flow model to value intangible assets at acquisition. The discounted cash flow model requires assumptions about the timing and amount of future cash inflows and outflows, risk, the cost of capital, and terminal values. Each of these factors can significantly affect the value of the intangible asset. We engage independent valuation experts who review our critical assumptions for significant acquisitions of intangibles. We review intangible assets for impairment on a periodic basis using an undiscounted net cash flows approach when impairment indicators arise. If the undiscounted cash flows of an intangible asset are less than the carrying value of an intangible asset, we would write down the intangible asset to the discounted cash flow value. Where we cannot identify cash flows for an individual asset, our review is applied at the lowest group level for which cash flows are identifiable.

Goodwill

On October 1, 2006, we performed our annual goodwill impairment test and determined that no impairment existed on that date. However, since the date of acquisition of COR, which generated a significant amount of goodwill, we have experienced a significant decline in market capitalization due to a decline in stock price. We continually monitor business and market conditions, including the restructured relationship with SGP, to assess whether an impairment indicator exists. If we were to determine that an

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impairment indicator exists, we would be required to perform an impairment test, which could result in a material impairment charge to our statement of operations.

Restructuring

In accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” our facilities related expenses and liabilities under all of our restructuring plans included estimates of the remaining rental obligations, net of estimated sublease income, for facilities we no longer occupy. We validated our estimates and assumptions with independent third parties having relevant expertise in the real estate market. We review our estimates and assumptions on a regular basis until the outcome is finalized, and make whatever modifications we believe necessary, based on our best judgment, to reflect any changed circumstances. It is possible that such estimates could change in the future resulting in additional adjustments, and the effect of any such adjustments could be material.

Stock-Based Compensation Expense

We adopted Statement of Financial Accounting Standards, or SFAS, No. 123 (revised 2004), “Share Based Payment,” or SFAS 123R, effective January 1, 2006 under the modified prospective method. SFAS 123R requires the recognition of the fair value of stock-based compensation expense in our operations, and accordingly the adoption of SFAS 123R fair value method has had and will continue to have a significant impact on our results of operations, although it will have no impact on our overall financial position. Option valuation models require the input of highly subjective assumptions, including stock price volatility and expected term of an option. In determining our volatility, we have considered implied volatilities of currently traded options to provide an estimate of volatility based upon current trading activity in addition to our historical volatility. After considering other such factors as our stage of development, the length of time we have been public and the impact of having a marketed product, we believe a blended volatility rate based upon the most recent three-year and four-year periods of historical performance, as well as the implied volatilities of currently traded options, best reflects the expected volatility of our stock going forward. Changes in market price directly affect volatility and could cause stock-based compensation expense to vary significantly in future reporting periods.

We use historical data to estimate option exercise and employee termination behavior, adjusted for known trends, to arrive at the estimated expected life of an option. We update these assumptions on a quarterly basis to reflect recent historical data. Additionally, we are required to estimate forfeiture rates to approximate the number of shares that will vest in a period to which the fair value is applied. We will continually monitor employee exercise behavior and may further adjust the estimated term and forfeiture rates in future periods. Increasing the estimated life would result in an increase in the fair value to be recognized over the requisite service period, generally the vesting period. Estimated forfeitures will be adjusted to actual forfeitures upon the vest date of the cancelled options as a cumulative catch up adjustment on a quarterly basis. Doing so could cause future expenses to vary at each reporting period.

In March 2006, we revised our annual merit compensation program to include the availability of both stock options and restricted stock to certain employees. For the year ended December 31, 2006, we recognized total stock-based compensation expense under SFAS 123R of $42.1 million. As of December 31, 2006, the total remaining unrecognized compensation cost related to nonvested stock option awards amounted to approximately $15.6 million, including estimated forfeitures, which will be amortized over the weighted-average remaining requisite service periods of approximately one and one half years. As of December 31, 2006, the total remaining unrecognized compensation cost related to nonvested restricted stock awards amounted to approximately $7.6 million, including estimated forfeitures, which will be amortized over the weighted-average remaining requisite service periods of approximately one and three quarter years.

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During the second quarter of 2006, we received a telephone inquiry from the Securities ad Exchange Commission, or SEC, regarding whether stock options we awarded with a stated grant date of September 26, 2001 were, in fact, granted on that date. We were one of more than 30 companies discussed in a May 2006 third party report concerning the timing of stock option grants from 1997 through 2002. With respect to us, the report referenced option grants dated September 26, 2001. During the second quarter of 2006, we initiated a review of our September 26, 2001 grants, as well as other historical grants. We completed this review during the third quarter of 2006 and met with the SEC to discuss our findings. We reported to the SEC that our review did not uncover any evidence of fraud with respect to the September 26, 2001 options grants or the other historical option grants that we reviewed. Additionally, we reported to the SEC our conclusion that any additional compensation expense resulting from the grants we reviewed was immaterial. The SEC staff advised us at our meeting that they would communicate with us after they had evaluated the results of our review and the documentation we provided.

Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” or SFAS No. 157. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 codifies the definition of fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. SFAS No. 157 is effective for fiscal years beginning after December 15, 2006. We do not currently believe that adoption will have a material impact on our results of operations, financial position or cash flows.

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109.” This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. The interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The interpretation is effective for fiscal years beginning after December 15, 2006. Although we have not completed our evaluation of the interpretation, we do not currently believe that adoption will have a material impact on our results of operations, financial position or cash flows.

Reclassifications

We have reclassified certain prior year amounts within the consolidated statements of cash flows to conform to the current year presentation related to equity adjustments from foreign currency translation.

We have reclassified certain prior year amounts included in accrued expenses of the consolidated balance sheets to accounts payable to conform to the current year presentation related to uninvoiced receipts in the normal course of business. This reclassification has no impact on previously reported net loss or current liabilities in any period presented.

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Results of Operations

Note 1: Upon adoption of SFAS 123R on January 1, 2006, the Company began recording stock-based compensation expense in its consolidated statements of operations. No stock-based compensation expense was recognized under SFAS 123R in any prior period. Stock-based compensation expense is allocated in the consolidated statements of operations expense lines as follows:

 

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Revenues

Total revenues decreased 13% to $486.8 million in 2006 compared to 2005 and increased 25% in 2005 to $558.3 million from $448.2 million in 2004. The decrease in 2006 was primarily related to lower revenue received from our collaborators, which consists of revenue under strategic alliances, royalties, and in 2005, co-promotion revenue. The decrease in revenue received from our collaborations was primarily the result of the restructured relationship with SGP, including a one-time sale of existing INTEGRILIN inventory to SGP during the third quarter of 2005. Additionally, we recognized lower license fees from GSK in 2006. This decrease was offset in part by increased distribution fees recognized from OBL on sales of VELCADE outside of the United States. The increase in 2005 was primarily due to the net effect of the restructured SGP collaboration relationship and increased net product sales of VELCADE.

Net product sales of VELCADE increased 15% to $220.5 million in 2006 and 34% to $192.1 million in 2005 from $143.1 million in 2004. The increase in 2006 was primarily due to price increases of the product and our ability to maintain the product’s market leadership in the relapsed multiple myeloma treatment setting despite new competition in 2006. The increase in 2005 was primarily due to growth in the second-line treatment setting as a result of the March 2005 FDA market approval of our sNDA filing. Reserves for product returns, chargebacks and discounts represented approximately 5.4% to 6.5% of gross product sales in 2006 and 2005. Net product sales from VELCADE represented approximately 45% of our 2006 total revenues, 34% of our 2005 total revenues and 32% of our 2004 total revenues.

Total revenues related to VELCADE, including net product sales of the product by us in the U.S. and revenues from OBL included in strategic alliance revenue and royalties more fully described below, were approximately $327.2 million in 2006, $248.6 million in 2005 and $221.0 million in 2004.

As of September 1, 2005, we are no longer reporting co-promotion revenue due to our restructured relationship with SGP. Co-promotion revenue from INTEGRILIN represented approximately 22% of our 2005 total revenues and 46% of our 2004 total revenues.

In 2006, the first full year of our modified relationship with SGP, total revenues related to INTEGRILIN were approximately $142.0 million, including $85.4 million in royalties we received from SGP for sales of INTEGRILIN in the United States. In 2005 and 2004, total revenues related to INTEGRILIN, including co-promotion revenue and revenues from SGP and GSK included in strategic alliance revenues and royalties more fully described below, were approximately $287.9 million and $206.3 million, respectively.

Revenue under strategic alliances decreased 36% to $131.7 million in 2006 and increased 107% to $204.5 million in 2005 from $98.9 million in 2004. The decrease in 2006 was primarily due to the one-time sale of existing INTEGRILIN inventory to SGP in 2005, as well as lower license fees recognized from GSK. The increase in 2005 was primarily due to the reimbursement of manufacturing-related expenses, including the September 1, 2005 one-time sale of the existing raw materials and finished goods INTEGRILIN inventory to SGP of approximately $71.4 million.

We expect revenue under strategic alliances to fluctuate in future periods depending on the level of revenues earned for ongoing development efforts, the timing of milestones achieved and the number of alliances we may enter into in the future with major biopharmaceutical companies.

Beginning September 1, 2005, in connection with the closing of our transaction with SGP, we now record royalty revenue. Royalty revenue may include royalties earned upon sales of INTEGRILIN in the United States and other territories around the world as provided by SGP, royalties earned upon sales of INTEGRILIN in Europe as provided by GSK, distribution fees earned upon sales outside of the United States of VELCADE as provided by OBL and any royalties earned under certain of our early discovery alliances. We recorded $134.7 million and $38.2 million of royalty revenue in 2006 and 2005, primarily consisting of  royalties from SGP and OBL.

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We recognize revenues from activities outside of the U.S., including royalties, distribution fees, milestones from OBL, SGP and GSK for sales of VELCADE and INTEGRILIN and for cost reimbursement of product sold to these parties. Without taking into account revenues we receive for development costs or milestones, our revenues for these activities outside of the U.S. were $113.5 million in 2006, $62.2 million in 2005 and $64.9 million in 2004.

Cost of Sales

Cost of sales decreased 68% to $45.4 million in 2006 and increased 101% to $141.3 million in 2005 from $70.3 million in 2004. Cost of sales includes manufacturing-related expenses associated with the sale of VELCADE, as well as costs associated with managing the INTEGRILIN supply chain on behalf of SGP. The decrease in 2006 and the 2005 increase was primarily due to the one-time sale of existing INTEGRILIN inventory to SGP in 2005 on September 1, 2005.

Research and Development

Research and development expenses decreased 7% to $318.2 million in 2006 and 15% to $342.2 million in 2005 from $402.6 million in 2004. The decreases in both 2006 and 2005 were primarily a result of cost reductions associated with our 2005 strategy refinement and restructuring efforts combined with the decreased spending in our discovery organization. Research and development expenses in 2006 include stock-based compensation expense of approximately $23.3 million related to the adoption of SFAS 123R on January 1, 2006.

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In addition to our ongoing clinical trials of VELCADE, we have a number of drug candidates in clinical and late preclinical development. In January 2006, as part of our portfolio review process, based on the evaluation of recent clinical data in the context of additional opportunities in the pipeline, we decided to discontinue development of MLN2704 as well as MLN1202 in rheumatoid arthritis. The following chart summarizes the applicable disease indication and the clinical or preclinical trial status of our pipeline of drug candidates as of February 2007.

(1)          Trials being conducted or planned to be conducted through Cancer Therapy Evaluation Program, a division of the National Cancer Institute.

(2)          In development through our sanofi-aventis inflammatory disease collaboration.

Completion of clinical trials may take several years or more and the length of time can vary substantially according to the type, complexity, novelty and intended use of a product candidate. The types of costs incurred during a clinical trial vary depending upon the type of product candidate and the nature of the study.

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We estimate that clinical trials in our areas of focus are typically completed over the following timelines:

 

Upon successful completion of phase III clinical trials of a product candidate, we intend to submit the results to the FDA to support regulatory approval. However, we cannot be certain that any of our product candidates will prove to be safe or effective, will receive regulatory approvals, or will be successfully commercialized. Our clinical trials might prove that our product candidates may not be effective in treating the disease or have undesirable or unintended side effects, toxicities or other characteristics that require us to cease further development of the product candidate. The cost to take a product candidate through clinical trials is dependent upon, among other things, the disease indications, the timing, the size and dosing schedule of each clinical trial, the number of patients enrolled in each trial and the speed at which patients are enrolled and treated. We could incur increased product development costs if we experience delays in clinical trial enrollment, delays in the evaluation of clinical trial results or delays in regulatory approvals.

Some products that are likely to result from our research and development projects are based on new technologies and new therapeutic approaches that have not been extensively tested in humans. The regulatory requirements governing these types of products may be more rigorous than for conventional products. As a result, it is difficult to estimate the nature and length of the efforts to complete such products as we may experience a longer regulatory process in connection with any products that we develop based upon these new technologies or therapeutic approaches. In addition, ultimate approval for commercial manufacturing and marketing of our products is dependent on the FDA or applicable approval body in the country for which approval is being sought, adding further uncertainty to estimated costs and completion dates. Significant delays could allow our competitors to bring products to market before we do and impair our ability to commercialize our product candidates.

Due to the variability in the length of time necessary to develop a product, the uncertainties related to the estimated cost of the projects and ultimate ability to obtain governmental approval for commercialization, accurate and meaningful estimates of the ultimate cost to bring our product candidates to market are not available.

We budget and monitor our research and development costs by type or category, rather than by project on a comprehensive or fully allocated basis. Significant categories of costs include personnel, clinical, third party research and development services and laboratory supplies. In addition, a significant portion of our research and development expenses is not tracked by project as it benefits multiple projects or our technology platform. Consequently, fully loaded research and development cost summaries by project are not available.

Given the uncertainties related to development, we are currently unable to reliably estimate when, if ever, our product candidates will generate revenue and cash flows. We do not expect to receive net cash inflows from any of our major research and development projects until a product candidate becomes a profitable commercial product.

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Selling, General and Administrative

Selling, general and administrative expenses decreased 14% to $155.6 million in 2006 compared to 2005 and decreased eight percent to $180.6 million in 2005 from $196.6 million in 2004. The decrease in both 2006 and 2005 was primarily the result of reduced sales and marketing expenses associated with the transfer of the U.S. commercialization rights for INTEGRILIN to SGP as of September 1, 2005. Selling, general and administrative expenses in 2006 include stock-based compensation expense of approximately $18.9 million related to the adoption of SFAS 123R on January 1, 2006.

Restructuring

In October 2006, we announced a program to further align resources with our current corporate priorities of advancing VELCADE and accelerating the clinical pipeline by lowering investment in discovery and supporting areas. As part of our program, we are reducing in-house research and development technologies and headcount in areas where the work can now be outsourced effectively, and we also scaled back infrastructure supporting these activities.

During the fourth quarter of 2005, we announced a 2005 strategy refinement focused on advancing key growth assets, including VELCADE, our clinical and preclinical pipeline of oncology and inflammation molecules and our oncology-focused discovery organization. As part of our refined strategy, we took a series of steps, building on our restructured relationship with SGP, which together reduced research and development and selling, general and administrative expenses in 2006. We reduced the size of our company from approximately 1,500 employees at the end of 2004 to approximately 1,100 at the end of 2005, by managing attrition, eliminating INTEGRILIN sales and marketing positions, and reducing the number of positions in our inflammation discovery and business support groups.

In December 2002 and June 2003, we took steps as part of our 2003 restructuring plan to focus our resources on drug development and commercialization. Our restructuring plan included consolidation of research and development facilities, overall headcount reduction and streamlining of discovery and development projects.

During 2006, we recorded a total of $20.4 million of restructuring charges under all of our restructuring initiatives. We recorded restructuring charges of approximately $5.2 million under the 2006 restructuring program primarily related to employee termination benefits. Costs of termination benefits relate to severance packages, outplacement services and career counseling for employees affected by restructuring. We also recorded restructuring charges in 2006 of approximately $1.2 million under the 2005 restructuring plan, primarily related to the impairment charges for leasehold improvements that were abandoned at facilities, offset by a credit resulting from the earlier than anticipated sublease of one of the vacated buildings at a higher rate per square foot than we had originally estimated. We recorded restructuring charges of approximately $14.0 million in 2006 under the 2003 restructuring plan, primarily related to the lease termination payment for our vacated facility in Cambridge, England.

During 2005, we recorded a total of $77.1 million of restructuring charges for our 2005 and 2003 restructuring plans. We recorded restructuring charges of approximately $42.5 million under the 2005 restructuring plan, primarily related to the remaining rental obligation, net of sublease income, of vacated facilities, the impairment charges for leasehold improvements that were abandoned at such facilities and employee termination benefits for the employees affected by the transfer of the U.S. commercialization rights to INTEGRILIN to SGP, as well as the headcount reductions within inflammation discovery and business support groups. We recorded approximately $34.6 million of restructuring charges in 2005 under our 2003 restructuring plan. This charge included $30.6 million of additional facilities expense reflecting changes in our estimates of the length of time it would take to sublease certain vacated properties based upon our continuing review of current real estate market conditions.

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We estimate that of the remaining restructuring liabilities under all restructuring initiatives at December 31, 2006, we will pay approximately $25.5 million in 2007 and $42.0 million thereafter through 2014.

We expect to record additional restructuring charges in 2007 of between $15.0 million to $25.0 million.  These charges relate to certain facilities that we decided to abandon in November 2006, but will not be vacated until 2007, as well as net present value adjustments on facilities charged to restructuring in prior years. In connection with the decision to abandon the facilities in 2007, we revised the useful lives of the leasehold improvements at these facilities in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”  We recorded additional amortization expense of approximately $3.8 million in research and development expense related to our decision.

We are still evaluating the need or opportunity for further facilities consolidation associated with the 2006 restructuring initiative and the total future restructuring charges for facility consolidation are dependent upon the nature and timing of the final decisions we make. As we continue to evaluate strategic alternatives, including potential facilities consolidation in connection with our programs, significant restructuring charges could occur in future periods.

Amortization of Intangibles

Amortization of intangible assets of $34.0 million in 2006 was relatively unchanged from 2005 of $34.0 million and increased one percent from 2004 to 2005. Amortization in 2006, 2005 and 2004 primarily related to specifically identified intangible assets from the COR acquisition. We will continue to amortize the specifically identified intangible assets from our COR acquisition through 2015. We expect to incur amortization expense of approximately $34.0 million for each of the next five years.

Investment Income

Investment income increased 6% to $31.0 million in 2006 compared to 2005 and increased 159% to $29.1 million in 2005 from $11.2 million in 2004. The increase in 2006 was primarily attributable to a higher average balance of invested funds combined with a $3.1 million gain recognized in December 2006 upon the settlement of the class action lawsuit of WorldCom, Inc. and an additional realized gain of approximately $2.9 million in October 2006 upon the final settlement and receipt of the escrowed portion of the TransForm Pharmaceuticals, Inc., or TransForm, sales proceeds. The increase in 2005 was primarily attributable to the realized gain of approximately $10.5 million recognized upon the sale of our cost method investment in TransForm combined with the lower realized losses recognized in 2005 as compared to 2004.

Interest Expense

Interest expense increased 6% to $11.1 million in 2006 from the 2005 expense of $10.4 million and decreased 2% in 2005 from the 2004 expense of $10.7 million. The increase in 2006 is primarily due to increased interest expense under our 2.25% notes combined with the amortization of deferred financing costs incurred in connection with the sale of our 2.25% notes.

Other income

We recorded other income of approximately $22.9 million in 2006 upon the receipt of $19.5 million in connection with the termination of the support agreement that we entered into in connection with a proposed acquisition of AnorMED, Inc. in October 2006 and the recognition of a deferred gain of $3.4 million in July 2006 from the sale of assets to GeneLogic, Inc. in 2004.

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Gain on Sale of Equity Interest in Joint Venture

Through our acquisition of LeukoSite, we became a party to a joint venture partnership, Millennium and ILEX Partners, L.P., or M&I, for development of Campath® (alemtuzumab) humanized monoclonal antibody. We sold our equity interest in M&I and in consideration for the sale, during the first quarter of 2004, we recorded the final $40.0 million gain related to our sale of this equity interest based upon the achievement of predetermined 2004 sales targets of Campath. We will be entitled to additional payments from ILEX’s successor, Genzyme Corporation, if sales of Campath in the United States exceed specified annual thresholds. However, we currently do not expect that these thresholds will be achieved and, therefore, we are unlikely to receive future additional payments related to Campath.

Liquidity and Capital Resources

We require cash to fund our operating expenses, to make capital expenditures, acquisitions and investments and to pay debt service, including principal and interest and capital lease payments. We have and may in the future lose money in these investments and our ability to liquidate these investments is in some cases very limited. We may also owe our partners milestone payments and royalties. We also have committed to fund development costs incurred by some of our collaborators.

We have funded our cash requirements primarily through the following:

·       product sales of VELCADE;

·       payments from our strategic collaborators, including equity investments, license fees, milestone payments and research funding;

·       our co-promotion relationship with SGP for the sale of INTEGRILIN through August 31, 2005;

·       royalty payments related to the sales of our products; and

·       equity and debt financings in the public markets.

In the future, we expect to continue to fund our cash requirements from some or all of these sources as well as from sales of other products, subject to receiving regulatory approval. We are entitled to additional committed research and development funding under some of our strategic alliances. We believe the key factors that could affect our internal and external sources of cash are:

·       revenues from sales of VELCADE, INTEGRILIN and other products and services for which we may obtain marketing approval in the future or which are sold by companies that may owe us royalty, milestone, distribution or other payments on account of such products;

·       the success of our clinical and preclinical development programs;

·       our ability to enter into additional strategic collaborations and to maintain existing collaborations as well as the success of such collaborations; and

·       the receptivity of the capital markets to financings by biopharmaceutical companies generally and to financings by our company specifically.

As of December 31, 2006, we had $894.3 million in cash, cash equivalents and marketable securities. This excludes $7.6 million of interest-bearing marketable securities classified as restricted cash on our balance sheet as of December 31, 2006, which primarily serve as collateral for letters of credit securing leased facilities.

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Our significant capital resources and sources and uses of cash are as follows:

 

 

Cash Flows

The principal use of cash in operating activities in both 2006 and 2005 was to fund our net loss. In December 2006, we achieved a $25.0 million milestone related to sales of VELCADE outside of the United States, which we collected in January 2007. In September 2005, we received approximately $85.5 million from SGP, consisting of the upfront license fee associated with the U.S. commercialization rights for INTEGRILIN, as well as payment for the one-time sale of existing INTEGRILIN raw materials and finished goods inventory. In January 2005, we paid SGP approximately $49.3 million for advances SGP had made to COR for inventory purchases in prior years. Cash flows from operations can vary significantly due to various factors including changes in accounts receivable, as well as changes in accounts payable and accrued expenses. The average collection period of our accounts receivable can vary and is dependent on various factors, including the type of revenue and the payment terms related to those revenues.

The principal use of cash in investing activities in 2006 was to invest in marketable securities, partially offset by the receipt of approximately $2.9 million in October 2006 upon the final settlement of the escrowed portion of the sale proceeds from TransForm. Investing activities provided cash of $33.0 million in 2005, primarily from the sales and maturities of marketable securities. In April 2005, we received proceeds of approximately $10.6 million upon the sale of our cost method investment in TransForm.

Financing activities provided cash of $264.6 million in 2006, primarily from the sale of our 2.25% notes in November 2006, and $13.7 million in 2005, primarily from the purchases of common stock by our employees. We used cash of approximately $5.9 million in 2006 to pay off our 4.5% convertible senior notes in accordance with the payment terms. We also used cash in financing activities to make principal payments on our capital leases in all periods presented.

We believe that our existing cash and cash equivalents and the anticipated cash payments from our product sales, current strategic alliances and royalties will be sufficient to support our expected operations, fund our debt service and capital lease obligations and fund our capital commitments for at least the next several years.

Contractual Obligations

Our major outstanding contractual obligations relate to our facilities leases, convertible notes, and capital lease financings.

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As of December 31, 2006, our convertible notes aggregated to $349.6 million in principal amount outstanding, of which $99.6 million is classified as short term and mature in January and March 2007. All three issues of notes require semi-annual interest payments through maturity. All required interest payments have been made to date. As of December 31, 2006, these notes consisted of:

·       $250.0 million of the 2.25% notes due November 15, 2011;

·       $83.3 million of principal of 5.5% convertible subordinated notes which were due and paid on January 15, 2007. These notes were convertible into Millennium common stock at any time prior to maturity at a price equal to $42.07 per share, or the 5.5% notes; and

·       $16.3 million of principal of 5.0% convertible subordinated notes due March 1, 2007, that are convertible into Millennium common stock at any time prior to maturity at a price equal to $34.21 per share, or the 5.0% notes.

In November 2006, we completed a sale of the 2.25% notes, which resulted in net proceeds of approximately $242.2 million. The notes bear interest at the rate of 2.25% per year on the principal amount accruing from November 15, 2006 and payable semiannually in arrears in cash on May 15 and November 15 of each year, beginning May 15, 2007. The 2.25% notes are convertible into our common stock based upon a conversion rate of 64.6465 shares of common stock per $1,000 principal amount of the notes, which is equal to an initial conversion price of approximately $15.47 per share, subject to adjustment. The 2.25% notes are convertible only in the following circumstances:

·       if the closing price of our common stock exceeds 120% of the conversion price within a specified period;

·       if specified distributions to holders of our common stock are made or specified corporate transactions occur;

·       if the average trading price per $1,000 principal amount of the 2.25% notes is less than 98% of the average conversion value of the 2.25% notes within a specified period, which we refer to as the parity trigger; or

·       during the last three months prior to maturity of the 2.25% notes.

Upon conversion, we have the right to deliver shares of our common stock, cash or a combination of cash and shares of our common stock to satisfy our conversion obligation.

The parity trigger represents an embedded derivative that requires bifurcation and separate accounting under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.”  At issuance and as of December 31, 2006, we estimated that the value of the parity trigger was not material to our consolidated results of operations and financial position.

In January 2007, we repaid our 5.5% notes in full for approximately $83.3 million in accordance with the payment terms.

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Below is a table which presents our contractual obligations and commercial commitments as of December 31, 2006:

 

In addition to the amounts reflected in the table above, in the future we may owe royalties and other contingent payments to our collaborators, licensors and other parties based on the achievement of product sales and specified other objectives and milestones.

As of December 31, 2006, we had net operating loss carryforwards of approximately $1.4 billion to offset future federal taxable income, expiring in 2007 through 2026, and $0.4 billion to offset future state taxable income expiring in 2007 through 2011. We also have federal and net state tax credits of approximately $104.3 million to offset federal and state income taxes, both of which expire beginning in 2007.  Due to the degree of uncertainty related to the ultimate use of the operating loss carryforwards and tax credits, we have fully reserved these tax benefits.

Item 7A.                QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We manage our fixed income investment portfolio in accordance with our Policy for Securities Investments, or Investment Policy, that has been approved by our Board of Directors. The primary objectives of our Investment Policy are to preserve principal, maintain a high degree of liquidity to meet operating needs, and obtain competitive returns subject to prevailing market conditions. Investments are made primarily in investment-grade corporate bonds with effective maturities of three years or less, asset-backed debt securities and U.S. government agency debt securities. These investments are subject to risk of default, changes in credit rating and changes in market value. These investments also are 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 $11.0 million decrease in the fair value of our investments as of December 31, 2006. However, due to the conservative nature of our investments and relatively short effective maturities of debt instruments, interest rate risk is mitigated. Our Investment Policy specifies credit quality standards for our investments and limits the amount of exposure from any single issue, issuer or type of investment. We do not own derivative financial instruments in our investment portfolio as of December 31, 2006.

As of December 31, 2006, the fair value of our 2.25% notes, 5.0% notes and 5.5% notes approximates their carrying value. The interest rates on our convertible notes and capital lease obligations are fixed and therefore not subject to interest rate risk.

We receive distribution fees from OBL based on worldwide sales of VELCADE outside of the U.S. As a result, our financial position, results of operations and cash flows can be affected by fluctuations in foreign currency exchange rates, primarily EURO. Movement in foreign currency exchange rates could cause royalty revenue to vary significantly in future periods.

As of December 31, 2006, we did not have any financing arrangements that were not reflected in our balance sheet.

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